Washington, D.C. 20549
RADIAN GROUP INC.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):
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 are not guarantees of future performance, and 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:
For more information regarding these risks and uncertainties as well as certain additional risks that we face, you should refer to the Summary of Risk Factors, to the more detailed discussion of our Risk Factors included in Item 1A, 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.
General
Overview
We are a diversified mortgage and real estate services business. We provide mortgage insurance and other products and services to the real estate and mortgage finance industries through our two business segments—Mortgage Insurance and Services. homegenius. While we manage and report on these two segments separately, we take an enterprise approach under our “One Radian” strategy, which leverages the value of our employees across our diversified businesses to better serve our customers.
Our Mortgage Insurance segment provides credit-related insurance coverage, principally through privateaggregates, manages and distributes U.S. mortgage insurance, as well as other credit risk management solutions toon behalf of mortgage lending institutions and mortgage credit investors. We provideinvestors, principally through private mortgage insurance on residential first-lien mortgage loans, and also provides other credit risk management, contract underwriting and fulfillment solutions to our mortgage insurancecustomers. Our homegenius segment offers an array of title, real estate and technology products and services mainly through our wholly-owned subsidiary, Radian Guaranty. Our Services segment is primarily a fee-for-service business that offers a broad array ofto consumers, mortgage real estate and title services to market participants across thelenders, mortgage and real estate value chain. These services include technology and turn-key solutions, which provide information and other resources used to originate, evaluate, acquire, securitize, service and monitor residential real estate and loans secured by residential real estate. These services are primarily provided to mortgage lenders, financial institutions, investors, and government entities. In addition, we provide title insurance to mortgage lenders as well as directly to borrowers. Our mortgage services include transaction management services such as loan review, RMBS securitization and distressed asset reviews, review and valuation services related to single family rental properties, servicer and loan surveillance and underwriting. Our real estate services include software as a service solutions and platforms, as well as managed services, such as REO asset management, real estate valuation servicesGSEs and real estate brokerage services. Our title services provide a comprehensive suitebrokers and agents. See Notes 1 and 4 of title insurance products, title settlement services and both traditional and digital closing services. We provideNotes to Consolidated Financial Statements for further details of our Services offerings primarily throughbusinesses, including the renaming of the homegenius segment in 2021 to align with updates to our subsidiaries, including Clayton, Green River Capital, Radian Settlement Services and Red Bell. In 2018, we also acquired the businesses of EnTitle Direct (in March 2018) and Independent Settlement Services (in November 2018), as well as the assets of Five Bridges (in December 2018), to enhance our Services offerings.brand strategy.
Radian Group serves as the holding company for our insurance and other subsidiaries, through which we offer our products and services, and does not have any operations of its own.
2018 Highlights. Below are highlights of our key accomplishments that furthered our strategic objectives and contributed to our financial and operating results during 2018.
Wrote $56.5 billion of NIW on a Flow Basis, the highest flow volume in Radian’s 40-year history
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– | Represents a 5% increase over 2017 |
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– | Grew primary IIF by 10%, from $200.7 billion at December 31, 2017 to $221.4 billion at December 31, 2018 |
Earned pretax income of $684.2 million in 2018, compared to $346.7 million in 2017
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• | Grew adjusted pretax operating income to $745.5 million, an increase of 21% compared to $617.2 million for 2017 (1)
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Improved composition of mortgage insurance portfolio
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– | 94% of our primary RIF consists of business written after 2008, including HARP loans |
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– | Increased risk-based pricing granularity and our volume of higher value products |
Took steps to optimize our capital and liquidity position
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– | Repurchased over 3 million shares of Radian Group’s common stock |
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– | Added $450 million to Radian Group liquidity as a result of Radian Guaranty’s return of $450 million in capital to Radian Group in December 2018 |
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– | See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Radian Group—Short-Term Liquidity Needs”
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Expanded our risk distribution strategy to optimize the amounts and types of capital and risk distribution deployed against insured risk in order to: (i) support our overall capital plans; (ii) lower our cost of capital; and (iii) reduce portfolio risk and financial volatility through economic cycles
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– | Executed the mortgage insurance industry’s first simultaneous insurance-linked note and excess-of-loss reinsurance placement totaling $455 million |
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– | See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Other 2018 Developments—Reinsurance”
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Increased excess of Available Assets over Minimum Required Assets under PMIERs to $567 million, or 19% of Minimum Required Assets
Finalized a settlement with the IRS regarding the IRS Matter
Launched our new branding to reflect One Radian, beginning the process to unite all of our businesses under one brand
Aligned our sales team to provide integrated enterprise solutions to our customers
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(1) | Adjusted pretax operating income is a non-GAAP measure. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Consolidated—Use of Non-GAAP Financial Measures” for the definition and reconciliation of this measure to the most comparable GAAP measure, pretax income.
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For additional information regarding these items as well as other factors impacting our business and financial results in 2018, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Business Strategy. Radian’s objectives include driving strong growth, increasing value creation and providing attractive stockholder returns. Consistent with these objectives, our business strategy, as highlighted below, is focused on growing our businesses and diversifying our revenue sources, while at the same time enhancing our operations and developing a one-company market view by integrating our product and services offerings more effectively.
Write high-quality and profitable NIW to drive future earnings, in a manner that enhances the long-term economic value of our insured mortgage portfolio
Leverage our core competencies and increase our competitive differentiation in order to:
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– | Grow our traditional mortgage insurance business in innovative ways |
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– | Expand our presence in the mortgage and real estate value chain beyond traditional mortgage insurance |
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– | Enhance our value to customers with increased diversification of services delivered by our integrated team |
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– | Maintain strong comprehensive enterprise risk management based on sound data and analytics |
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– | Enhance the quality, efficiency and performance of our operations and delivery of products and services |
Manage our capital and financial flexibility to optimize stockholder value
Drive positive operating leverage by maintaining accretive revenue growth and effective expense management
We utilize various tools to assess the long-term economic value of our portfolio in order to identify opportunities to optimize stockholder value. For our Mortgage Insurance business, we evaluate the long-term economic value of our existing and future insured portfolio by using a measure that incorporates expected lifetime returns for our insurance policies, taking into consideration projected premiums, credit losses, investment income, operating expenses and taxes. These lifetime cash flows are then offset by the estimated cost of required capital, derived from our average cost of capital, to arrive at an estimated long-term economic value of our portfolio. We use this economic value to assist us in evaluating various portfolio strategies.
A key element of our business strategy is to use our Services segment to diversify our business and revenue streams by increasing our participation in multiple facets of the residential real estate and mortgage finance markets. In 2017, we undertook a strategic review of our Services business and made several decisions with respect to the business strategy that are designed to reposition this business to drive future growth and profitability. Following this strategic review, we committed to a restructuring plan and are focusing our efforts on offering mortgage, real estate and title services that we believe will satisfy demand in the market, diversify our revenue sources, strengthen our existing mortgage insurance customer relationships, attract new customers and differentiate us from our mortgage insurance peers. See “Services—Services Business Overview.”
Through the combination of our Mortgage Insurance and Services business segments, our broad array of capabilities within the primary stages of the mortgage value chain are illustrated below.
Corporate Background. Radian Group has been incorporated as a business corporation under the laws of the State of Delaware since 1991. Our principal executive offices are located at 1500 Market Street, Philadelphia, Pennsylvania 19102,550 East Swedesford Road, Suite 350, Wayne, PA 19087, and our telephone number is (215) 231-1000.
AdditionalAvailable Information.
Our website address is www.radian.biz.www.radian.com. Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, as well as any amendments to those reports, are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC.
In addition, our guidelines of corporate governance, code of business conduct and ethics (which includes the code of ethics applicable to our chief executive officer, principal financial officer and principal accounting officer) and the governing charters for each standing committee of Radian Group’s board of directors are available free of charge on our website, as well as in print, to any stockholder upon request.
The public may read materials we file with the SEC, including reports, proxy and information statements, and other information, on the Internet site maintained by the SEC. The address of that site is www.sec.gov.
The above references to our website and the SEC’s website do not constitute incorporation by reference of the information contained on the websites and such information should not be considered part of this document.
Operating EnvironmentBusiness Strategy
As a sellerWe are strategically focused on supporting the American dream of affordable and sustainable homeownership by delivering innovative solutions combined with superior levels of service to our customers across the residential mortgage credit protection and other creditreal estate spectrum through our two business segments. In pursuing these objectives, we expect to increase value creation for our stakeholders.
Consistent with these objectives, our business strategy, as highlighted below, is focused on growing our businesses, diversifying our revenue sources and seeking to optimize our capital and liquidity, while maintaining an emphasis on risk management, solutions, as well as a providerhuman capital management and long-term profitability. To help achieve these objectives, we seek to continuously improve and leverage our operational excellence and the strength of mortgage, real estateour “One Radian” brand.
A key element of our business strategy is to complement and title services, the demand fordiversify our productsbusiness and services is largely drivenrevenue streams by the macroeconomic environment generally, and more specifically by the healthincreasing our participation in multiple facets of the housing, mortgage finance and relatedresidential real estate markets.
Mortgage Insurance. Our mortgage insurance business is impacted by specific macroeconomic conditions and events that impact the mortgage origination environment and the credit performance of our portfolio of insured loans. The improvement in macroeconomic conditions since the financial crisis of 2007-2008, together with tighter credit requirements on new loans and an improvement in loan servicing, has contributed to the positive credit trends in our mortgage insurance portfolio, including a
lower level of new defaults and higher cure rates. Although this more restrictive credit environment has improved overall credit quality, it also has made it more challenging for many first-time home buyers to finance a home. In response, lenders and the GSEs recently have expanded their mortgage lending products, including to accommodate higher LTVs and debt-to-income ratios to address first-time home buyer demand and affordability considerations.
Among other factors, private mortgage insurance industry volumes are impacted by total mortgage origination volumes and the mix between mortgage originations that are for purchased homes versus refinancings of existing mortgages. Generally, mortgage insurance penetration in the overall insurable mortgage market has been three to five times higher for purchase originations than for refinancings. As a result, despite an overall reduction in mortgage origination volume in 2018 compared to 2017 due to reduced refinancings, the private mortgage insurance market was larger in 2018 compared to 2017. Industry forecasts for 2019 project a mortgage origination market comparable to the market in 2018; however, purchase loan volume is expected to continue to increase, which is a favorable trend for private mortgage insurance. Given our expected mortgage insurance penetration rates, we expect the private mortgage insurance market in 2019 to be comparable to 2018. Based on industry forecasts and our projections, we currently expect our NIW for 2019 to be in the range of $50 billion.
The environment for private mortgage insurers is highly competitive. We compete with other private mortgage insurers primarily on the basis of price, underwriting guidelines, overall service, customer relationships, perceived financial strength and reputation. In addition to other private mortgage insurers, we compete with governmental agencies, principally the FHA and the VA. See “Mortgage Insurance—Competition.”
Services. The macroeconomic conditions and other events that impact the housing, mortgage finance and related real estate markets also affect the demand for our mortgage, real estate and title services offered through our Services business segment. Sales volume in our Services business varies based on the overall activity in the housing and mortgage finance markets while also building competitive differentiation within our Mortgage business. Under our homegenius brand, we are focused on growing our homegenius businesses to meet increased market demand for digital products and the health of related industries. While non-GSE or “private label” securitization remains limited comparedservices across our title, real estate and technology business platforms. See “homegenius—homegenius Business Overview” for additional information about our homegenius business. With respect to the pre-financial crisis market, this market continuedour Mortgage business, we continue to expand in 2018 dueseek and develop new and innovative opportunities to larger institutions re-entering the market, suggesting increased potential growth in 2019. Similarly, the single-family rental market continued to experience strong demand in 2018, driven in partbuild upon our core mortgage credit risk competencies by early refinance activity in the rising interest rate environment, as well as a GSE program that drove volume, but was later suspended at the end of 2018. While regulatory demands onexpanding our mortgage market participants continue to be significant followingpresence and further diversifying our revenue streams.
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| Radian’s Long-Term Strategic Objectives |
■Grow and diversify our Mortgage and homegenius businesses through innovative business models that leverage the strength of our One Radian brand and the value of operating excellence to: ▪Continue to grow the economic value of our insured mortgage portfolio by writing profitable NIW ▪Leverage our industry knowledge, core competencies and strong market position to develop opportunities to expand our mortgage market presence ▪Build the homegenius brand and continue to position our title, real estate and technology products and services for long-term growth in revenues and value contribution ▪Continue to expand our Mortgage and homegenius market presence by leveraging the value of our One Radian enterprise sales relationships and our multi-channel marketing model ▪Further utilize the quality, performance and scale of our operations and delivery of products and services as a strategic and competitive differentiator ■Maintain strong comprehensive enterprise risk management and risk/return discipline based on sound data and analytics ■Optimize our capital and liquidity position to ensure ongoing compliance with PMIERs, build strategic financial flexibility to support our growth and diversification plans and increase stockholder value ■Strengthen our One Radian team by building upon our inclusiveness and diversity, developing our talent for future success, fostering a culture based on our values and mission and utilizing data and analytics to adapt for the future |
In our mortgage insurance business, we evaluate the financial crisis, regulatory enforcement actions on mortgage industry participants have been less frequent, reducing the demandprojected long-term economic value of our insured portfolio by using a measure that incorporates expected lifetime returns for our servicing quality control services as target customers form alternativeinsurance policies, taking into consideration projected premiums, credit losses, investment income, operating expenses, taxes and an assumed cost of capital. This projected economic value is then discounted to arrive at an estimated present value of the long-term economic value of our insured portfolio. We use this economic value to assist us in evaluating various portfolio strategies on how bestand identify opportunities to manage risk in the current and projected environment. Post-financial crisis, REO inventory levels also continue to decline due to lower delinquencies and foreclosure activity, reducing demand for our REO asset management services. Further, as the mortgage market continues to develop post-financial crisis, alternatives for managing costs have become more critical to the overall value proposition for market participants. As a result, we have observed increasing market trends towards use of non-appraisal valuation alternatives, which we expect will continue to grow.create stockholder value. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Overview—Business Strategy.” We believeOperations—Mortgage Insurance Portfolio” for more information about our insured portfolio.
2021 Highlights
Below are highlights of key accomplishments that the combinationcontributed to our financial and operating results during 2021 in support of our mortgage insurance business with our unique set of diversified mortgage, real estate and title services provides us with an opportunity to become increasingly more relevant to our customers and that this combination serves as a competitive differentiator for us compared to other private mortgage insurance companies.
Regulatory Environment
Our subsidiaries are subject to comprehensive regulations and other requirements. State insurance regulators impose various capital requirements on our mortgage insurance subsidiaries, including Risk-to-capital, other risk-based capital measures and surplus requirements. In addition, the GSEs, as the largest purchasers of conventional mortgage loans and therefore the primary beneficiaries of most of our mortgage insurance, impose eligibility requirements, or PMIERs, that private mortgage insurers must satisfy to be approved to insure loans purchased by the GSEs. The PMIERs aim to ensure that approved insurers will possess the financial and operational capacity to serve as strong counterparties to the GSEs throughout various market conditions. The PMIERs are comprehensive, covering virtually all aspects of the business and operations of a private mortgage insurer. The PMIERs financial requirements require that a mortgage insurer’s Available Assets meet or exceed its Minimum Required Assets. Radian Guaranty currently is an approved mortgage insurer under the PMIERs and is in compliance with the PMIERs financial requirements. See “Regulation.”
Changes in the charters or business practices of the GSEs, including the GSEs’ interpretation and application of the PMIERs, can have a significant impact on our business. On September 27, 2018, the GSEs updated their eligibility requirements by issuing PMIERs 2.0, which will become effective on March 31, 2019. Radian expects to comply with PMIERs 2.0 and to maintain a significant excess of Available Assets over Minimum Required Assets (PMIERs “cushion”) as of the effective date. If applied as of December 31, 2018, the changes under PMIERs 2.0 would not have resulted in a material change in Radian Guaranty’s Minimum Required Assets, but would have reduced Radian Guaranty’s Available Assets and therefore
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| Key Accomplishments for 2021 |
■Delivered strong financial results, driven by improved credit performance in our Mortgage segment and accelerating revenue growth in our homegenius segment ▪Earned consolidated pretax income of $764.8 million and net income of $600.7 million, or $3.16 net income per diluted share, in 2021, compared to consolidated pretax income of $479.4 million and net income of $393.6 million, or $2.00 net income per diluted share, in 2020, aided by significant improvement in our provision for losses from $485.1 million in 2020 to $20.9 million in 2021 ▪Adjusted pretax operating income(1) was $757.7 million, or $3.15 per diluted share, in 2021 compared to $432.1 million, or $1.74 per diluted share, in 2020 ▪Wrote $91.8 billion of NIW, the second highest annual volume in our 45-year history, contributing to our IIF of $246.0 billion at December 31, 2021 ▪Increased homegenius revenues by 45.5%, from $102.4 million in 2020 to $149.1 million in 2021 ▪Book value per share at December 31, 2021 was $24.28, an increase of 8.6% compared to $22.36 at December 31, 2020 |
■Executed on our strategic plan to grow and diversify our businesses by leveraging our One Radian model and strengthening our operations ▪Rebranded our suite of title, real estate and technology products and services as homegenius ▪Grew our title revenues in 2021 by 72.6%, closing 58 thousand title orders in 2021 ▪Increased our revenue from real estate services, which include asset management and valuation products and services, 26.1% from 2020 ▪Developed several new technology products, including a property intelligence platform and a smart workflow system for real estate brokers, agents and lenders |
■Maintained a strong risk culture, as demonstrated by ongoing risk distribution strategies, disciplined and granular risk-based pricing and expanded use of data and analytics to inform decision making ▪Executed two insurance-linked note reinsurance transactions in 2021, providing Radian Guaranty with approximately $1 billion of additional credit-risk protection, enhancing our PMIERs Cushion and improving our risk profile ▪Continued to monitor and grow the economic value of our insured mortgage portfolio by leveraging granular, risk-adjusted pricing and new technologies to identify strategies to maximize the economic value of projected NIW ▪Expanded our risk informed underwriting program to cover a majority of mortgage insurance applications, leveraging analytics to identify efficiency opportunities ▪Continued to enhance our risk analytics, including customer and servicer segmentation, loss mitigation reporting, servicer dashboards and underwriting surveillance |
■Further strengthened our capital and liquidity profile, while enhancing financial flexibility and returning value to stockholders ▪Resumed our share repurchase program, repurchasing 17.8 million shares in 2021 for a total of $399.1 million, at an average share price of $22.48, including commissions ▪Increased our quarterly cash dividend by 12% from $0.125 to $0.14 per share, beginning with the dividend declared in the second quarter of 2021 ▪Increased the excess of Available Assets over Minimum Required Assets under PMIERs by $738.6 million to $2.1 billion at December 31, 2021, or 62% more than the Minimum Required Assets under PMIERs ▪Maintained available holding company liquidity of $604.9 million at December 31, 2021 ▪Entered into a new, five-year $275 million unsecured revolving credit facility in December 2021 |
■Continued to prioritize the well-being and development of our people, by fostering and promoting initiatives to employ diverse talent and ensure an inclusive workforce that can work safely and flexibly ▪Developed and deployed a new people plan, including the creation of employee and leader profiles to serve as guideposts for capabilities to build throughout our workforce ▪Completed talent reviews and succession planning for leaders throughout the Company ▪Supported an organizational effectiveness assessment and internal realignment to ensure our businesses are well positioned to focus and deliver on key priorities ▪Implemented a diversity, equity and inclusion (“DEI”) roadmap, including DEI training for all employees, expansion of our employee resource group program and completion of a pay equity analysis ▪Ensured thoughtful business resiliency and safety controls for our employees through our COVID crisis management team, with active communications and strong support for remote working arrangements |
would have reduced Radian Guaranty’s PMIERs cushion. The reduction in Radian Guaranty’s Available Assets(1)Adjusted pretax operating income is primarily due to the elimination in PMIERS 2.0 of any credit for future premiums for insurance policies written prior to and including 2008, which is permitted under the current PMIERs. We expect the GSEs to continue to update the PMIERs periodically in the future, including potentially if and when the CCF is finalized.a non-GAAP measure. See “Regulation” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—LiquidityResults of Operations—Consolidated—Use of Non-GAAP Financial Measures” for the definition and Capital Resources—reconciliation of this measure to the most comparable GAAP measure, consolidated pretax income.Radian Group—Short-Term Liquidity Needs—Capital Support
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for Subsidiaries.”further information on our results of operations and other details related to our Mortgage and homegenius businesses.
Mortgage Insurance
Mortgage Insurance Business Overview
Overview
Our Mortgage Insurance segment provides credit-related insurance coverage, principally through private mortgage insurance, as well as other credit risk management solutions, to mortgage lending institutions and mortgage credit investors. Private mortgage insurance plays an important role in the U.S. housing finance system because it promotes affordable home ownershiphome-ownership and helps protect mortgage lenders and investors, andas well as other beneficiaries such as the GSEs, by mitigating default-related losses on residential mortgage loans. Generally, these loans are made to home buyers who make down payments of less than 20% of the purchase price for their home or, in the case of refinancings, have less than 20% equity in their home. Private mortgage insurance also facilitates the sale of these loans in the secondary mortgage market, most of which are currently sold to the GSEs.
See “ItemThe performance of our Mortgage business is particularly influenced by macroeconomic conditions and specific events that impact the housing finance and real estate markets, including events that impact mortgage originations and the credit performance of our mortgage insurance portfolio, most of which are beyond our control, including housing prices, inflationary pressures, unemployment levels, interest rate changes, the availability of credit and other national and regional economic conditions. In Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, see “Results of Operations—KeyMortgage” and “Key Factors Affecting Our Results—Mortgage.”
Our Mortgage Insurance.”business is subject to comprehensive regulation by federal and state regulatory authorities and the GSEs. As the largest purchasers of conventional mortgage loans, and therefore, the main beneficiaries of private mortgage insurance, the GSEs impose eligibility requirements, known as PMIERs, that private mortgage insurers must satisfy in order to be approved to insure loans purchased by the GSEs. These requirements and practices, as well as those of the federal regulators that oversee the GSEs and lenders, impact the operating results and financial performance of private mortgage insurers. See “Regulation” for a comprehensive description of the significant state and federal regulations and other requirements of the GSEs that are applicable to our businesses.
Mortgage Insurance Products
Primary Mortgage Insurance. Insurance
We generally provide Primary Mortgage Insurance on an individual loan basis as each mortgage is originated, but we also can provide Primary Mortgage Insurance on individual loans in an aggregate group of mortgages after they have been originated. We primarily write insurance in a “first loss” position, where we are responsible for the first losses incurred on an insured loan subject to a policy limit. See “—Mortgage Insurance Portfolio Characteristics—Mortgage Loan Characteristics.”
The terms of our Primary Mortgage Insurance coverage are set forth in a Master Policy that we enter into with each of our customers. Among other things, our Master Policies set forth the applicable terms and conditions of our mortgage insurance coverage, including among others: loan eligibility requirements; premium payment requirements; coverage terms, including cancellation of coverage; provisions for policy administration; mortgage servicing standards and requirements; exclusions or reductions in coverage under certain circumstances; insurance rescission and rescission relief provisions; claims payment and settlement procedures; and dispute resolution procedures. Our Master Policy forms, which are updated periodically, including in response to requirements issued by the GSEs, are filed in each of the jurisdictions in which we conduct business. Our Master Policy form was last updated on a broad basis in 2020, when most private mortgage insurers adopted a uniform master policy. See “—Defaults and Claims—Claims Management—Rescissions.”
Primary Mortgage Insurance provides protection against mortgage defaults at a specified coverage percentage. When there is a valid claim under primary mortgage insurance,Primary Mortgage Insurance, the maximum liability is determined by multiplying the claim amount, which consists of the unpaid loan principal, plus past due interest and certain expenses associated with the default, by the coverage percentage. Claims may be settled for the maximum liability or for other amounts. See “—Defaults and Claims—Claims Management” below.
We mainly provide primary mortgage insurance on an individual loan basis as each mortgage is originated, but we also can provide primary mortgage insurance on individual loans in an aggregate group of mortgages after they have been originated. We primarily write insurance in a “first loss” position, where we are responsible for the first losses incurred on an insured loan subject to a policy limit. See “—Mortgage Insurance Portfolio—Mortgage Loan Characteristics.”
The terms of our primary mortgage insurance coverage are set forth in a master insurance policy that we enter into with each of our customers. Our Master Policies are filed in each of the jurisdictions in which we conduct business. Among other things, our Master Policies set forth the terms and conditions of our mortgage insurance coverage, including: loan eligibility requirements; premium payment requirements; coverage term; provisions for policy administration, servicing standards and requirements; exclusions or reductions in coverage; claims payment and settlement procedures; and dispute resolution procedures. Although the mortgage insurancePrimary Mortgage Insurance we write protects the lenders from a portion of losses resulting from loanmortgage defaults, it generally does not provide protection against property loss or physical damage. Among other exclusions, our Master Policies contain an exclusion against physical damage, including damage caused by hurricanes or other severe weather events or natural disasters. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Operating Environment—Hurricanes.”
We wrote $56.5$91.8 billion and $53.9$105.0 billion of first-lien primary mortgage insurancePrimary Mortgage Insurance in 20182021 and 2017,2020, respectively. Substantially all of our primary mortgage insurancePrimary Mortgage Insurance written during 20182021 and 20172020 was written on a Flow Basis. The combination ofAfter taking into consideration insurance cancellations and other adjustments within our existing portfolio, our 2021 NIW and a higher Persistency Rate resulted in an increase in IIF from $200.7of $246.0 billion at December 31, 20172021, compared to $221.4$246.1 billion at December 31, 2018.2020. Our total direct primary mortgage insurancePrimary Mortgage Insurance RIF was $56.7$60.9 billion at December 31, 2018,2021, compared to $51.3$60.7 billion at December 31, 2017.2020.
Other Mortgage Insurance Products. We also have other mortgage insurance products that had RIF of $0.5 billion at December 31, 2018, as described below:
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• | Part of our business strategy includes leveraging our core expertise in credit risk management and expanding our presence in the mortgage finance industry. We are currently participating in Front-end and Back-end credit risk transfer programs developed by Fannie Mae and Freddie Mac as part of theirI. Item 1. Business |
initiativeGSE Credit Risk Transfer. Part of our business strategy includes leveraging our core expertise in credit risk management to expand our presence in the mortgage finance industry, including by pursuing alternatives to traditional mortgage insurance execution to expand our insured portfolio of mortgage credit. We have in the past and may in the future participate in credit risk transfer programs developed by the GSEs as part of their programs to further distribute mortgage credit risk and increase the role of private capital in the mortgage market. AsThese programs transfer additional credit risk, on an excess of December 31, 2018, theloss basis, to insurance and reinsurance providers on pools of mortgage loans, which may contain loans that are already covered by private mortgage insurance. Our total RIF under the Front-end and Back-endthese credit risk transfer transactions was $196.8 million. We$417.7 million as of December 31, 2021, compared to $392.0 million as of December 31, 2020.
Given the remote nature of this risk, we will onlynot experience claims under these Front-end and Back-end credit risk transfer transactions ifunless the borrower’s equity in the home, any existing primaryprivate mortgage insurance (if applicable)applicable and which could be provided by us) and the GSEs’ retained risk are first depleted. In participatingThrough our participation in these GSE transactions, we assume incrementaladditional types of risk (beyond that which we typically cover in our traditional mortgage insurance business) associated with the risk of defaults caused by physical damage, including natural disasters such as hurricanes and wildfires, which isgenerally are not covered by the underlying primaryprivate mortgage insurance. WeIn addition to the projected returns we may achieve on this business, we regularly evaluate this risk,exposure, including the geographic diversity of the loans included in these transactions and our remotethe protection provided by the GSEs’ first-loss risk position, in assessing our participation in these transactions. See “Item 7. Management’s DiscussionBased on our view of the projected returns on this business, including consideration of the collateral and Analysiscapital required by the GSEs to support this RIF, we discontinued our participation in the GSEs’ credit risk transfer transactions in 2021, but we could resume our participation in these transactions in the future.
Pool Mortgage Insurance. Prior to 2008, we wrote Pool Mortgage Insurance on a limited basis. At December 31, 2021, our total direct first-lien Pool Mortgage Insurance RIF was $245.5 million, as compared to $281.0 million at December 31, 2020, and represented less than 1% of Financial Conditionour total direct first-lien insurance RIF. With respect to our Pool Mortgage Insurance, an aggregate exposure limit, or “stop loss” (usually between 1% and Results10%), is generally applied to the initial aggregate loan balance on a group or “pool” of Operations—Overview—Business Strategy.”
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• | Poolmortgages. In addition, an insured pool of mortgages may contain mortgages that are already covered by Primary Mortgage Insurance.Prior to 2008, we wrote Pool Insurance on a limited basis. At December 31, 2018, Pool Insurance made up only $324.6 million of our total direct first-lien insurance RIF, as compared to $339.0 million at December 31, 2017. With respect to our Pool Insurance, an aggregate exposure limit, or “stop loss” (usually between 1% and 10%), is generally applied to the initial aggregate loan balance on a group or “pool” of mortgages. In addition, an insured pool of mortgages may contain mortgages that are already covered by primary mortgage insurance. In these transactions, Pool Mortgage Insurance is secondary to any primary mortgage insurance that exists on mortgages within the pool. Our Pool Insurance policies are privately negotiated and are separate from the Master Policies that we use for our primary mortgage insurance.
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• | Non-Traditional Risk. In the past, we provided other forms of credit enhancement on residential mortgage assets. Our non-traditional products included mortgage insurance on second-lien mortgage loans and we also provided mortgage insurance on an international basis. As of December 31, 2018, we have terminated all of our international mortgage insurance. Our total amount of non-traditional risk was $15.2 million at December 31, 2018, which consisted entirely of second-lien RIF, as compared to $24.4 million at December 31, 2017.
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Premium Rates
Primary Mortgage Insurance that exists on mortgages within the pool. Our Pool Mortgage Insurance policies are privately negotiated and are separate from the Master Policies that we use for our Primary Mortgage Insurance.. A
Pricing
Primary Mortgage Insurance Premiums
We apply premium rate is determined whenrates to our insurance coverage at the time coverage is requested on a mortgage,by our lender customers, which is generally near the time of loan origination. Premiums for our mortgage insurance products are generally established based on performance models that consider a broad range of borrower, loan and property characteristics as well as current and projected market and economic conditions. Our premium rates are generally subject to regulation, and in most states where our insurance subsidiaries are licensed, the formulations by which we derive our premiums must be filed, and in some cases approved, before their use. See “Regulation—State Regulation—State Insurance Regulation.Regulation.”
We establishhave developed our premium levelspricing strategy to bemanage the risk/return profile and maximize the long-term economic value of our insured portfolio by balancing credit risk, profitability and volume considerations in light of the current and projected competitive within the mortgage insurance industry and to achieve an overall risk-adjusted rate of return on capital given our modeled performance expectations. Our actual returns may differ from our expectations based on changing market conditions and other factors. Among other factors, we setenvironment. Consistent with this strategy, our premium rates are based on assumptions about policy performance,a broad range of factors including without limitation, our expectations about competitive and assumptions about: (i) the likelihoodeconomic conditions and cost of default; (ii) how long the policy will remain in place; (iii) the costs of acquiring and maintaining the insurance; (iv) taxes; and (v) the capital, that is required to support the insurance. Our performance assumptions for claim frequency and policy life are developed based on data regarding our own historical experience, as well as data generated from independent, third-party sources.other factors and risk attributes that we consider in developing our assumptions about loan and policy performance.
Premiums on our mortgage insurance products generally are generally paid eitherwritten on either: (i) a recurring basis, which can be monthly installment basis (“or annual premiums, pursuant to our Monthly Premiums”)and Other Recurring Premium Policies or in(ii) as a single payment (“Single Premiums”)premium generally paid at the time of loan origination. There areorigination pursuant to our Single Premium Policies. We also alternativeoffer products (“Other Premiums”) where premiums may beare paid on an annual installment basis or as a combination of an up-front premium at origination, plus a monthly installment. In addition, Other Premiums may be paid after loan origination orpremiums may include a refundable component. Some programs, subject toWhile the majority of our policies terminate when certain conditions,criteria, such as prescribed LTV levels, are met, some of our products provide coverage for the life of the loan, while others terminate whensubject to certain criteria are met.conditions. There are many factors that influence the types of premiums we receive, including:including, among others: (i) the percentagepreference of mortgage originations derived from refinancing transactions versus new home purchases; (ii) the customers with whom we do business (e.g., mix of Single Premium Policies and policies with Monthly and Other Premiums varies by customer); and (iii)business; (ii) the relative premium levels we and our competitors set for the various forms of premiums offered.offered; and (iii) the percentage of mortgage originations derived from new home purchases versus refinancing transactions, as refinances have historically been more likely to be written as Single Premium Policies.
Mortgage insurance premiums can be funded through a number of methods, and while the coverage remains for the benefit of the insured lender or third-party beneficiary, the premiums may be paid by the borrower or by the lender. Borrower-paid mortgage insurance premiumsMonthly and Other Recurring Premiums are generally paid either through separate escrowed amounts or financedto us as a componentpart of the borrower’s monthly mortgage loan amount. payment, while borrower-paid premiums under our Single Premium Policies are paid to us at the time of closing on the home purchase.
Lender-paid mortgage insurance premiums are paid by the lender and are typically passed through to
the borrower in the form of additional origination fees or a higher interest rate on the mortgage note. Our
The premium rates on a majority of our Monthly and Other Premiums are generallyRecurring Premium Policies were established as either: (i) a fixed percentage of the loan’s amortizing balance over the life of the policy or (ii) as a fixed percentage of the initial loan balance for a set period of time (typically 10 years), after which the premium generally declines to a lower fixed percentage for the remaining life of the policy. The premium rates on the remaining Monthly and Other Recurring Premium Policies within our insured portfolio were established as a fixed percentage of the loan’s amortizing balance over the life of the policy.
The impact of market conditions on our returns will vary based on, among other factors, whether the insurance is borrower-paid or lender-paid, and whether the payments are made monthly orHistorically, premiums in a single premium payment at the time of origination. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results—Mortgage Insurance—Premiums.” A change in capital requirements on insured loans can also affect our returns. See “Regulation—GSE Requirements—PMIERs—Private Mortgage Insurer Eligibility Requirements.”
As the mortgage insurance industry migrates away fromwere primarily established through filed rate-cards. Beginning on a predominantly rate-card-based pricing model,broad basis in 2019, the mortgage insurance industry began to widely use various pricing methodologies are being deployed with differing degrees of risk-based granularity, which maygranularity. Although these more recent pricing frameworks are based upon the same general risk attributes that historically have been a part of mortgage insurance pricing, they are incorporating into the underlying pricing tools more granular risk-based pricing factors based on multiple loan, borrower and property attributes.
The shift away from a predominantly rate-card based pricing model and the increase in “black box” pricing frameworks throughout the mortgage insurance industry provides a more dynamic pricing capability that allows for more frequent pricing changes that can be implemented quickly and has contributed to a reduction in overall pricing transparency. Further, in addition to the growing proliferation of black box pricing, industry pricing practices in recent years have also lead toincluded an increased frequencyuse of customized rate plans for certain customers, pursuant to which rates may be awarded to customers for only a limited period of time. With the increased prevalence of granular, “black box” pricing changes. We currently use proprietary risk and customer analytics, as well as a digitalthe greater uniformity of master policy terms throughout the industry, pricing delivery platform, to deliver loan level pricing electronically to ourhas become the predominant competitive market factor for private mortgage insurance and an increasing number of customers including Radian’s RADAR Rates as further discussed below. Our pricing options vary in the levelare making their choice of granularity and we deliver them to our customersmortgage insurance providers primarily based on their business needs and loan origination process. In January 2019, we broadly introduced RADAR Rates asthe lowest price available for any particular loan.
Overall, our newest pricing option that is powered by Radian’s proprietary RADAR risk model and analyzes credit risk inputs to customize a rate quote to a borrower’s individual risk profile, loan attributes and property characteristics. Our strategy is to consistently apply an approach to pricing that is customer-centric flexible and customizable based onflexible; therefore, we offer a spectrum of risk-based pricing solutions for our customers. This approach represents a continuation of our strategy to pursue multiple pricing delivery options that are best suited to a lender’s loan origination process as well asand balanced with our own objectives for managing our volume of NIW and the risk and return profile ofeconomic value derived from our insuredmortgage insurance portfolio. See “Item 1A. Risk Factors—Our mortgage insurance business faces intense competition.”
GSE Credit Risk Transfer Transactions. CreditPremiums
Premium rates for credit risk transfer premium ratestransactions are established through a sealed-bid auction process in which we and other potential insurers/reinsurers provide their desired allocation of the offering(s) at a specified premium rate. Radian evaluatesrate to the GSE. We evaluate each transaction, and determines itsif we choose to participate, we develop our bid based on performance models that consider a broad range of borrower, loan and property characteristics as well as market and forecasted future economic conditions. TheAfter completion of the auction process, the GSEs set a uniform premium based on an assessment of the bids received and, based on their desired counterparty exposure, assign allocations to insurers/reinsurers.reinsurers up to their requested bid amounts, if the pricing is at or above their specified premium rate. As noted above, we discontinued our participation in these transactions in 2021, but we could resume our participation in these transactions in the future.
Underwriting
Mortgage loan applications are underwritten to determine whether they are eligible for our mortgage insurance. We perform this function directly or, alternatively, we delegate to our insured lenders the ability to underwrite the mortgage loans based on compliance with our underwriting guidelines.
Delegated UnderwritingUnderwriting. . Through our delegated underwriting program, we approve insured lenders to underwrite mortgage loan insurance applications based on our mortgage insurance underwriting guidelines. Each lender participating in the delegated underwriting program must be approved by our risk management group. Utilization of our delegated underwriting program enables us to meet lenders’ demands for immediate mortgage insurance coverage and increases the efficiency of the underwriting process. We use quality control sampling and performance monitoring to manage the risks associated with delegated underwriting. Under the terms of the program, we have certain rights to rescind coverage if there has been a deviation from our underwriting guidelines. For a discussion of these limited Rescission rights, see “—Defaults and Claims—Claims Management—Rescissions.Rescissions.” As of December 31, 2018, 63%2021 and 2020, 69% and 67% of our total first-lien IIF had been originated on a delegated basis, compared to 66% as of December 31, 2017.respectively.
Non-Delegated UnderwritingUnderwriting.. In addition to our delegated underwriting program, Approved insured lenders may also submit mortgage loan applications to us andso that we willmay perform the mortgage insurance underwriting. In general,Some customers prefer our non-delegated underwriting program because we are less likely to exercise our Rescission rights with respect toassume responsibility for underwriting errors related to loans that we underwrite for mortgage insurance. As a result, following a period of high Rescissions after the financial crisis, many lenders have chosen to have us perform the mortgage insurance and, subject to the terms of our Master Policies, generally have less ability to rescind coverage if there is an underwriting error. We leverage loan application data and analytics to categorize mortgage insurance applications based on credit risk and underwriting complexity to improve efficiency in our process and to ensure a heightened focus on the higher risk, complex applications. We use quality control sampling, loan performance monitoring and training to manage the risks associated with our non-delegated underwriting program. As of December 31, 2021 and 2020, 26% and 28% of our total first-lien IIF had been originated on a non-delegated basis. Given the professional resources we need to maintain to underwrite mortgage loans, an increase in non-delegated underwriting demand generally increases our operating costs to support this program.basis, respectively.
Contract Underwriting. We also provide third partythird-party contract underwriting services to our mortgage insurance customers throughpursuant to which we underwrite the mortgage loan for compliance with investor guidelines, which if necessary, may be separate from or in addition to underwriting for our Services segment. See “Services—Services Business Overview—Services Offered—Mortgage Services.” During 2018, mortgage loansinsurance eligibility. Generally, we offer limited indemnification to our contract underwriting customers. To manage the risks associated with contract underwriting, we train our underwriters, require them to complete continuing education and routinely audit performance to monitor the accuracy and consistency of underwriting practices. As of both December 31, 2021 and 2020, 5% of our total first-lien IIF had been underwritten through contract underwriting accounted for 3.8% of insurance certificates issued on a Flow Basis, as compared to 5.4% in 2017.underwriting.
Mortgage Insurance Portfolio Characteristics
Direct Risk in Force
Exposure in our mortgage insurance business is measured by RIF, which for primary insurancePrimary Mortgage Insurance is equal to the underlying loan unpaid principal balance of the loan multiplied by our insurance coverage percentage.
Our total direct primary mortgage insurance RIF was $56.7 billion at December 31, 2018. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance—NIW, IIF, RIF”Insurance Portfolio—Insurance and Risk in Force” for additional information about the composition of our primaryPrimary RIF. See “—Mortgage Insurance Business Overview—Mortgage Insurance Products” for additional information regarding other mortgage insurance RIF.
We analyze our mortgage insurance portfolio in a number of ways to identify any concentrations or imbalances in risk dispersion. We believe that, among other factors, the credit performance of our mortgage insurance portfolio is affected significantly by:
■general economic conditions (in particular, interest rates, home prices and unemployment);
■the age and performance history of the loans insured;
■the geographic dispersion and other characteristics of the properties securing the insured loans, such as the primary purpose of the properties, and the condition of local housing markets;markets, including whether the properties are increasing or decreasing in value over time;
■the quality of loan underwriting at loan origination; and servicing; and
■the number of borrowers and credit characteristics of the borrowerborrower(s) and the characteristics of the loans insured.insured, including the amount of the loan compared to the value of the home.
Direct Primary RIF by Year of Policy Origination and Persistency Rate
The following table showsPersistency Rate is the measure that assesses the amount of time that our direct primary mortgage insurance RIF by year of origination and selected information related to that risk as of December 31, 2018:
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| | December 31, 2018 |
| ($ in millions) | RIF | | Number of Defaults | | Delinquency Rate | | Percentage of Reserve for Losses | | Average FICO (1) at Origination (2) | | Original Average LTV (2) |
| 2008 and prior | $ | 5,749 |
| | 13,095 |
| | 8.8 | % | | 70.3 | % | | 698 |
| | 89.9 | % |
| 2009 | 199 |
| | 156 |
| | 3.1 |
| | 0.7 |
| | 752 |
| | 88.5 |
|
| 2010 | 170 |
| | 67 |
| | 1.7 |
| | 0.3 |
| | 765 |
| | 91.7 |
|
| 2011 | 465 |
| | 141 |
| | 1.4 |
| | 0.6 |
| | 763 |
| | 91.9 |
|
| 2012 | 2,094 |
| | 457 |
| | 1.1 |
| | 1.8 |
| | 763 |
| | 91.8 |
|
| 2013 | 3,504 |
| | 892 |
| | 1.4 |
| | 3.7 |
| | 758 |
| | 92.2 |
|
| 2014 | 3,464 |
| | 1,174 |
| | 1.8 |
| | 4.7 |
| | 747 |
| | 92.3 |
|
| 2015 | 5,806 |
| | 1,366 |
| | 1.3 |
| | 5.9 |
| | 749 |
| | 92.0 |
|
| 2016 | 9,544 |
| | 1,649 |
| | 1.0 |
| | 6.1 |
| | 750 |
| | 91.8 |
|
| 2017 | 11,958 |
| | 1,586 |
| | 0.8 |
| | 4.9 |
| | 748 |
| | 92.3 |
|
| 2018 | 13,775 |
| | 510 |
| | 0.2 |
| | 1.0 |
| | 746 |
| | 92.5 |
|
| Total | $ | 56,728 |
| | 21,093 |
| (3) |
|
| | 100.0 | % | | | | |
| | | | | | | | | | | | |
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(1) | Represents the borrower’s credit score at origination. In circumstances where there is more than one borrower, the FICO score for the primary borrower is utilized. |
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(2) | Average FICO at origination and original average LTV are weighted averages based on the unpaid principal balances of the underlying mortgage loans in our portfolio at December 31, 2018. |
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(3) | Includes 2,627 defaults at December 31, 2018 in the FEMA Designated Areas associated with Hurricanes Harvey and Irma, both of which occurred during the third quarter of 2017. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance—NIW, IIF, RIF—Provision for Losses.”
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is remaining in force. The amount of time that our insurance certificates remain in force which is affected by loan repayments and terminations of our insurance, has a significant impact on our revenues and our results of operations. Our Persistency Rate is one key measure for assessing the impact that insurance terminations resulting in certificate cancellations haveBecause premiums on our IIF. Because our insurance premiumsRecurring Premium Policies are earned over time, higher Persistency Rates on Monthly Premium Policiesthese policies increase the premiums we receive and generally result in increased profitability and returns. Conversely, assuming all other factors remain constant, higher Persistency Rates on Single Premium business lower the overall returns from our insured portfolio, as the premium revenue for our Single Premium Policies is the same regardless of the actual life of the insurance policy and we are required to maintain regulatory capital and Available Assets supporting the insurance for the life of the policy.
The Persistency Rate reflects the impact that certificate cancellations have on our IIF and the future premiums that we expect to earn over time. Provided that all required premiums are paid, coverage for a loan under our Master Policy generally will be cancelled on the first of our primary mortgage insurance was 83.1% at December 31, 2018, comparedthe following to 81.1% at December 31, 2017. Historically,occur: (i) the loan insured under the certificate is paid in full; (ii) we settle a claim with respect to the certificate; (iii) we act upon the insured’s or its servicer’s instruction to cancel coverage under the certificate, including as may be required by the HPA or pursuant to GSE guidelines; (iv) the term of coverage expires under the premium plan or upon the terms specified in the certificate; or (v) we cancel, rescind or deny coverage under the certificate.
Loan payoff following a refinance will result in cancellation of coverage and, as a result, historically there is a close correlation between interest rates and Persistency Rates. LowerRates, with lower interest rate environments generally increaseincreasing refinancings that result inincrease the cancellation rate of our insurance.insurance and therefore lower our Persistency Rate. See “Item“Regulation— Federal Regulation—Mortgage Insurance Cancellation” for more information regarding cancellation and termination requirements for borrower-paid private mortgage insurance meeting certain criteria under the HPA. Additionally, in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—ResultsOperations, see “Key Factors Affecting Our Results—Mortgage—IIF and Related Drivers” and “Mortgage Insurance Portfolio—Insurance and Risk in Force” for more information.
Geographic Dispersion
Radian Guaranty is authorized to write mortgage insurance in all 50 states, the District of Operations—Mortgage Insurance—NIW, IIF, RIF” for the details regarding our Persistency Rates.
A higher Persistency Rate results in our IIF remaining in place forColumbia and Guam. We have a longer period of time. Our IIF is one of the primary drivers of future premiums that we expect to earn over time. We expect our IIF to generate substantial income in future periods, due to the high credit quality of our currentgeographically diversified mortgage insurance portfolio and our expected Persistency Rate over multiple years. See “Item 7. Management’s Discussionwe proactively monitor the portfolio for concentration risks at both the state level and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results—Mortgage Insurance—IIF; Persistency Rate; Mix of Business” for more information.
Geographic Dispersion
The following table shows,metropolitan area level known as of December 31, 2018 and 2017, the percentage of our direct primary mortgage insurance RIF and the associated percentage of our mortgage insurance reserve for losses (by location of property) for the top 10 states in the U.S. (as measured by our direct primary mortgage insurance RIF as of December 31, 2018):
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| | December 31, |
| | 2018 | | 2017 |
| Top Ten States | RIF | | Reserve for Losses | | RIF | | Reserve for Losses |
| California | 12.3 | % | | 7.1 | % | | 12.4 | % | | 6.7 | % |
| Texas | 8.9 |
| | 6.6 |
| | 8.3 |
| | 5.5 |
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| Florida | 7.0 |
| | 11.8 |
| | 6.8 |
| | 12.2 |
|
| Illinois | 5.2 |
| | 4.9 |
| | 5.4 |
| | 4.7 |
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| Georgia | 4.0 |
| | 3.9 |
| | 4.0 |
| | 3.3 |
|
| Virginia | 3.5 |
| | 1.6 |
| | 3.5 |
| | 1.7 |
|
| Arizona | 3.2 |
| | 1.6 |
| | 3.1 |
| | 1.4 |
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| Colorado | 3.1 |
| | 1.0 |
| | 3.0 |
| | 0.9 |
|
| Maryland | 3.0 |
| | 3.6 |
| | 2.9 |
| | 3.4 |
|
| New Jersey | 3.0 |
| | 7.7 |
| | 3.3 |
| | 10.8 |
|
| Total | 53.2 | % | | 49.8 | % | | 52.7 | % | | 50.6 | % |
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The following table shows, as of December 31, 2018 and 2017, the percentage of our direct primary mortgage insurance RIF and the associated percentage of our mortgage insurance reserve for losses (by location of property) for the top 15 Core Based Statistical Areas referred to as “CBSAs,” in the U.S. (as measured by our direct primary mortgage insurance RIF as(“CBSAs”). As of December 31, 2018):2021, three states with the highest amounts of RIF accounted for 24.7% of our RIF, with the highest state concentration being 9.3% in California.
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| | December 31, |
| | 2018 | | 2017 |
Top Fifteen CBSAs (1) | RIF | | Reserve for Losses | | RIF | | Reserve for Losses |
| Chicago, IL-IN-WI | 4.9 | % | | 4.7 | % | | 5.2 | % | | 4.5 | % |
| New York, NY-NJ-PA | 4.0 |
| | 16.6 |
| | 4.2 |
| | 18.9 |
|
| Washington, DC-MD-VA | 3.7 |
| | 2.7 |
| | 3.6 |
| | 2.9 |
|
| Dallas, TX | 3.4 |
| | 2.1 |
| | 3.1 |
| | 1.6 |
|
| Los Angeles - Long Beach, CA | 3.4 |
| | 1.8 |
| | 3.5 |
| | 1.8 |
|
| Atlanta, GA | 3.2 |
| | 2.9 |
| | 3.2 |
| | 2.5 |
|
| Phoenix/Mesa, AZ | 2.4 |
| | 1.1 |
| | 2.3 |
| | 1.0 |
|
| Philadelphia, PA-NJ-DE-MD | 2.3 |
| | 3.0 |
| | 2.4 |
| | 3.5 |
|
| Miami, FL | 2.2 |
| | 4.4 |
| | 2.1 |
| | 4.6 |
|
| Houston, TX | 2.2 |
| | 2.5 |
| | 2.1 |
| | 2.1 |
|
| Minneapolis-St. Paul, MN-WI | 2.0 |
| | 0.7 |
| | 2.0 |
| | 0.7 |
|
| Denver, CO | 1.8 |
| | 0.5 |
| | 1.8 |
| | 0.4 |
|
| Riverside-San Bernardino, CA | 1.8 |
| | 1.4 |
| | 1.8 |
| | 1.3 |
|
| Boston, MA-NH | 1.7 |
| | 1.5 |
| | 1.8 |
| | 1.6 |
|
| Seattle, WA | 1.6 |
| | 0.7 |
| | 1.5 |
| | 1.0 |
|
| Total | 40.6 | % | | 46.6 | % | | 40.6 | % | | 48.4 | % |
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(1) | CBSAs are metropolitan areas and include a portionPart I. Item 1. Business |
Mortgage Loan Characteristics
In addition to geographic dispersion, other factors also contribute significantly to our overall risk diversification and the credit quality of our RIF, including product distribution, underwriting and our risk management practices. We consider a number of borrower, loan and property characteristics in evaluating the credit quality of our portfolio and developing our pricing and risk management strategies.
LTV. An important indicator of claim incidence in our mortgage insurance business is the relative amount of a borrower’s equity that exists in a home. Generally, absent other mitigating factors such as high FICO scores and other credit factors, loans with higher LTVs at inception (i.e., smaller down payments) are more likely to result in a claim than lower LTV loans. The average original LTV of our primary NIW in 2018 was 92.5%, compared to 92.2% and 91.4% in 2017 and 2016, respectively.
Loan Grade/FICO Score. The risk of claim on non-prime loans is significantly higher than that on prime loans. We use our proprietary models to classify a loan as either prime or non-prime on the basis of a borrower’s FICO score, the level of loan file documentation and other factors. In general we consider a loan to be a prime loan if the borrower’s FICO score is 620 or higher and the loan file meets “fully documented” standards of our credit guidelines and/or the GSE guidelines for fully documented loans. Substantially all of our NIW after 2008 has been on prime loans.
Loans that we categorize as Alt-A and A minus and below are considered non-prime loans due to lower FICO scores, reduced loan file documentation, and/or the presence of other risk characteristics.
Loan Size. Relatively higher-priced properties with larger mortgage loan amounts generally have experienced wider fluctuations in value than more moderately priced residences and have been more likely to result in a claim. The average loan size of our direct primary mortgage IIF as of December 31, 2018, 2017 and 2016 was $216.5 thousand, $210.0 thousand and $203.2 thousand, respectively.
Loan Purpose, Property Type and Occupancy. We consider other factors, including property type, occupancy type and loan purpose in assessing our risk of loss. In general, it has been our experience that our risk of claim is lower on loans secured by single family detached housing than loans on other types of properties, and is higher on non-owner occupied homes purchased for investment purposes than on either primary or second homes. Loan purpose may also impact our risk of loss. For example, cash-out refinance loans, where a borrower receives cash in connection with refinancing a loan, have been more likely to result in a claim than new purchase loans or loans that are refinanced only to adjust rate and term.
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Mortgage Insurance Portfolio—Insurance and Risk in Force—Geographic Dispersion” for additional information about the geographic dispersion of our direct Primary Mortgage Insurance. Also, in Item 1A. Risk Factors, see “The credit performance of our mortgage insurance portfolio is impacted by macroeconomic conditions and specific events that affect the ability of borrowers to pay their mortgages” and “Climate change and extreme weather events could adversely affect our businesses, results of operations and financial condition.”
Mortgage Loan Characteristics
Factors that contribute significantly to our overall risk diversification and the credit quality of our RIF include, among others, geographic dispersion, as discussed above, as well as our mix of mortgage insurance products, underwriting and our risk management practices. In evaluating the credit quality of our portfolio and developing our pricing and risk management strategies, we consider a number of borrower, loan and property characteristics in assessing our risk of loss, including LTV and FICO score, as well as a number of other loan and property characteristics, including, without limitation, debt-to-income ratio, average loan size, property type, occupancy type, loan purpose and number of borrowers. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Mortgage Insurance—NIW, IIF, RIF”Insurance Portfolio” for additional information about the credit quality and characteristics of our direct primary mortgage insurance.Primary Mortgage Insurance.
Defaults and Claims
Defaults. Defaults
In our Mortgage Insurance segment, the default and claim cycle begins with the receipt of a default notice from the loan servicer. We consider a loan to be in default for financial statement and internal tracking purposes upon receipt of notification by servicers that a borrower has missed two monthly payments. Defaults also can occur due to a variety of specific events affecting borrowers, including death or illness, divorce or other family problems, unemployment, factors impacting regional economic conditions (e.g., regional economic disruptions or disaster related events such as epidemics/pandemics, hurricanes, floods, wildfires or other natural disasters),tornados and wildfires) or other events. Regional economic disruptions derived from natural disasters may be exacerbated by climate change and related environmental factors, which could increase the frequency, scope and intensity of such disasters.
The default rate in our mortgage insurance business can beis subject to seasonality. Historically, our mortgage insurance business experiences a fourth quarter seasonal increase in the number of defaults and a first quarter seasonal decline in the number of defaults and increase in the number of Cures. While historically this has been the case, macroeconomic factors in any given period may influence the default rate in our mortgage insurance business more than seasonality.
Currently, a segment of U.S. residential mortgage loans may be subject to, or eligible for, certain types of relief as a result of the legislative response to COVID-19, including the CARES Act. Upon request by borrowers of federally or GSE-backed mortgage loans who attest to financial hardship related to the pandemic, the CARES Act requires mortgage servicers to provide these borrowers with up to 180 days forbearance on their mortgage payments, which may be extended for an additional 180 days upon request. The permissible forbearance period of 12 months under the CARES Act has been lengthened by various federal agencies and the length of the period varies depending on the agency, type of mortgage at issue and the date when the borrower initially requested the forbearance. The CARES Act does not provide a defined end date for when the 180-day forbearance must initially be offered. It is possible that the ability to request an initial forbearance may cease when the COVID-19 National Emergency ends. COVID-19 was most recently declared a continuing national emergency on February 24, 2021.
As COVID-19 forbearances end, federal law requires servicers to discuss forbearance and loss mitigation options with their borrowers and afford additional protections to borrowers before their loans fromare referred to foreclosure. Additionally, the CARES Act provided a temporary foreclosure and eviction moratorium for residential mortgagors with certain federally or GSE-backed mortgages. After being extended multiple times, these moratoriums have expired; however, the existence of these moratoriums significantly impacted the claims process in 2020 and 2021 by preventing the procedural steps necessary for a claim under our origination years after 2008 possess significantly improved credit characteristics comparedinsurance policies to our portfolio originatedbe filed, as discussed below under “—Claims.” See “Regulation—Federal Regulation—CARES Act.” While the CARES Act and related federally mandated borrower relief has provided critical support to the housing finance system throughout the pandemic, the ultimate performance of loans that remain in forbearance is not yet known. See “Item 1A. Risk Factors—An extension in the years prior to and including 2008, including higher average FICO scores for the borrowersperiod of these insured mortgages. In addition, refinancings under the HARP programs have positively impacted the overall credit quality and composition of our mortgage insurance portfolio because the refinancing generally results in terms under whichtime that a borrower has a greater ability to pay and more financial flexibility to cover the loan obligations. Our portfolio of business written after 2008 is now the predominant portion of our total primary RIF. The sum of our policies written after 2008 through 2018 and our HARP refinancings accounted for approximately 94% of our total primary RIF at December 31, 2018, compared to 92% at December 31, 2017.
The following table shows the states that have generated the highest number of primary insurance defaults (measured as of December 31, 2018)remains in our insured portfolio anddefaulted loan inventory may increase the corresponding percentageseverity of total defaults as of the dates indicated:claims that we ultimately are required to pay.”
|
| | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2018 | | 2017 | | 2016 |
| States with highest number of defaults: | | | | | | | | | |
Florida (1) | 2,023 |
| | 9.6 | % | | 5,337 |
| | 19.1 | % | | 2,666 |
| | 9.2 | % |
Texas (1) | 1,779 |
| | 8.4 |
| | 2,885 |
| | 10.3 |
| | 1,897 |
| | 6.5 |
|
| New York | 1,241 |
| | 5.9 |
| | 1,588 |
| | 5.7 |
| | 2,211 |
| | 7.6 |
|
| Illinois | 1,230 |
| | 5.8 |
| | 1,283 |
| | 4.6 |
| | 1,534 |
| | 5.3 |
|
| California | 1,214 |
| | 5.8 |
| | 1,264 |
| | 4.5 |
| | 1,426 |
| | 4.9 |
|
______________________
| |
(1) | Certain areas within these states are FEMA Designated Areas associated with Hurricanes Harvey and Irma and, as a result, defaults in these states are elevated at December 31, 2017. |
Claims. Defaulted loans that fail to become current, or “cure,” may result in a claim under our mortgage insurance policies. Mortgage insurance claim volume is influenceddetermined by the circumstances surrounding the default. The rate at which defaults cure, or do not go to claim, depends in large part on a borrower’s financial resources and circumstances (including whether the borrower is eligible for a loan modification), local housing prices and housing supply (i.e., whether borrowers are able to cure defaults by selling the property in full satisfaction of all amounts due under the mortgage), interest rates, unemployment, inflationary pressures and regionalother factors impacting economic conditions.
In our first-lien primary insurancePrimary Mortgage Insurance business, in order to submit a claim, the insured must first either acquire title to the property (typically through a foreclosure proceeding) before submittingor we must approve a claim.third-party sale of the property. The time for a lender to acquire title to a property through foreclosure varies depending on the state, and in particular whether a state requires a lender to proceed through the judicial system in order to complete the foreclosure. FollowingClaim activity is not spread evenly throughout the financial crisis,coverage period of a book of business. Historically, except for periods of economic distress, we have experienced relatively few claims during the time betweenfirst two years following issuance of a default and a request for
In recent years, the average time for us to receive a claim paymenthas increased largely as a result of foreclosure delays due to, among other factors, increased scrutiny within the mortgage servicing industryCOVID-19-related relief programs discussed above. For example, payment and foreclosure process. These delaysforbearance programs instituted at the federal and state levels in response to the COVID pandemic have been improving ascaused defaulted loans to remain in our defaulted loan inventory for a protracted period of time. See “Item 1A. Risk Factors—An extension in the economy recovers fromperiod of time that a loan remains in our defaulted loan inventory may increase the financial crisis. severity of claims that we ultimately are required to pay.”
For Pool Mortgage Insurance, which represents less than 1% of our RIF at December 31, 2018,2021, our policies typically require the insured to not only acquire title but also to actively market and ultimately liquidate the real estate asset before filing a claim, which generally lengthens the time between a default and a claim submission.
Claim activity is not spread evenly throughout the coverage period of a book of business. Historically, for prime business relatively few claims are received during the first two years following issuance of a policy.
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance—NIW, IIF, RIF—Provision for Losses” for various claims paid tables, including Direct Claims Paid by Origination Year.
The following table shows the states with the highest direct claims paid (measured as of December 31, 2018) for the periods indicated:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
| States with highest direct claims paid (first-lien): | | | | | |
| New Jersey | $ | 37.2 |
| | $ | 54.7 |
| | $ | 46.1 |
|
| Florida | 22.5 |
| | 45.7 |
| | 59.4 |
|
| New York | 20.4 |
| | 34.2 |
| | 26.6 |
|
| Illinois | 13.8 |
| | 23.4 |
| | 32.3 |
|
| California | 8.9 |
| | 16.3 |
| | 23.1 |
|
In addition to claim volume, Claim Severity is another significant factor affecting losses. We calculate the Claim Severity by dividing the claim paid amount by the original coverage amount. Factors that impact the severity of a claim include, but are not limited to, the size of the loan, the amount of mortgage insurance coverage placed on the loan, the amount of time between default and claim during which we are expected to cover certain interest (capped at two years under our Prior Master Policy and capped at three years under our 2014 and 2020 Master Policy)Policies) and expenses, and the impact of our Loss Mitigation and other loss management activities with respect to the loan. Pre-foreclosure
Home price appreciation as well as pre-foreclosure sales, acquisitions and other early workout efforts help to reduce overall Claim Severity, as do actions we may take to reduce a claim payment due to servicer negligence, as discussed below in “Claims“—Claims Management.” See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance—Mortgage—Year Ended December 31, 2021 Compared to Year Ended December 31, 2020—NIW, IIF, RIF—Provision for Losses.”
Claims Management
Our claims management process is focused on promptly analyzing and processing claims to ensure that we pay valid claims are paid in a timely and accurate manner. In addition,accordance with our policies. Our mortgage insurance claims management department pursues opportunities to mitigate losses both before and after claims are received.
Claims. In our traditional mortgage insurance business, upon receipt of a valid claim, we generallyhave a range of settlement options for calculating the claim amount (also referred to as calculated loss), as set forth in our Master Policies. Most frequently, we settle a valid claim with the “Percentage Option” by paying the maximum liability and allowing the insured lender to keep title to the property. For this purpose, the maximum liability is determined by multiplying (x) the claim amount (which consists of the unpaid loan principal, plus past due interest for a period of time specified in our Master Policies, plus certain expenses associated with the default, and minus certain deductions) by (y) the applicable coverage percentage. We also have the following threealternative settlement options:
| |
(1) | Percentage Option: Pay the maximum liability and allow the insured lender to keep title to the property. The maximum liability is determined by multiplying (x) the claim amount (which consists of the unpaid loan principal, plus past due interest for a period of time specified in our Master Policies and certain expenses associated with the default) by (y) the applicable coverage percentage;(i)Approved Sale Option: Subject to any reduction provided for elsewhere in our policy, we may pay the claim amount (not to exceed the lender’s entire loss or our maximum liability under the Percentage Option) by taking into account the net proceeds received by the lender following an approved sale such as a “short sale” or “deed-in-lieu” transaction; (ii)Acquisition Option: Subject to any reduction provided for elsewhere in our policy, we may pay the entire claim amount (as described above but without application of the coverage percentage) upon the conveyance to us of good and marketable title to the property; or (iii)Anticipated Loss Option: In certain circumstances, as outlined in our Master Policies, the settlement is primarily based on the claim amount minus the net proceeds we reasonably anticipate would be generated if the property, in its original condition on the effective insurance commitment date, reasonable wear and tear excepted, were sold to a third party for fair market value. |
| |
(2) | Approved Sale Option: Pay the amount of the claim required to make the lender whole (not to exceed our maximum liability), following an approved sale; or |
| |
(3) | Acquisition Option: Pay the full claim amount and acquire title to the property. |
Approved sales in which the underlying property has been sold for less than the outstanding loan amount are commonly referred to as “short sales.” Although short sales may have the effect of reducing our ultimate claim obligation, in many cases, a short sale will result in the payment of a claim in an amount that is equal to the maximum liability amount. amount under the Percentage Option.
Under our Master Policies, we retain the right to consent prior to the consummation of any short sales.sale. We have entered into agreements with each of the GSEs pursuant to which we delegateddelegate to the GSEs our prior consent rights with respect to short sales on loans owned by
the GSEs, as long as the short sales meet theapplicable GSE guidelines and processes for short sales and subject to certain other factors set forth in these agreements.
We also provide for limited delegation authority to certain loan servicers for short sales under specific circumstances. For loans that are not owned by the GSEs and for which we have not granted specific delegation authority to the loan servicer, we perform an individual analysis of each proposed short sale and provide our consent to these sales when appropriate. Historically, we have consented to a short sale only after reviewing various factors, including among other items, the sale price relative to market and the ability of the borrower to contribute to any shortfall in the sale proceeds as compared to the outstanding loan amount.
After a claim is received, our loss management specialists may focus on:
■a review to determine compliance with applicable loan origination programs and our mortgage insurance policy requirements, including: (i) whether the loan qualified for insurance at the time the certificate of coverage was issued,issued; (ii) whether the insured has satisfied its obligation in meeting all necessary conditions in order for us to pay a claim, including submitting all necessary documentation in connection with the claim (commonly referred to as “claim perfection”); and (iii) whether the loan was appropriately serviced in accordance with the standards set forth in our Master Policies;
■analysis and prompt processing to ensure that valid claims are paid in an accurate and timely manner;
■responses to loss mitigation opportunities presented by the insured; and
■management and disposal of acquired real estate.
Radian Guaranty has entered into a Factored Claim Administration Agreement with Fannie Mae that applies to certain loans owned by Fannie Mae that were insured under the 2014our Master PolicyPolicies for which a claim is submitted on or after October 1, 2018. Pursuant to the agreement, for the loans subject to the agreement, Radian Guaranty will determine the amount of covered expenses forming part of a loss (other than unpaid principal balance and delinquent interest) using pre-negotiatedprenegotiated expense factors. The expense factors are based on certain characteristics of each covered loan, including the applicable loanunpaid principal balance at the time of default, property type and property.location, and property disposition.
Claim Denials.
We have the legal right under our Master Policies to deny a claim under certain conditions, such as when the loan servicer does not produce documents necessary to perfect a claim including(e.g., evidence that the insured has acquired title to the property,property) within the time period specified in our Master Policies. Most often, a Claim Denial is the result of a servicer’s failure to provide the loan origination file or other critical servicing documents for review.
If, after requests by us, the loan origination file or other servicing documents are not provided to us, we generally deny the claim. If we deny a claim, we may continue to allow the insured the ability to perfect the claim for a limited period of time, as specified in our Master Policies. If the insured successfully perfects the claim on a timely basis, we will process the claim, including, as appropriate, by conducting a review of the loan file to ensure appropriatethat underwriting and loan servicing. servicing were conducted properly.
If, after completion of this process, we determine that the claim was not perfected, other conditions precedent to coverage have not been met, or any exclusions apply, the insurance claim is denied and we consider the Claim Denial to be final and resolved. Although we may make a final determination internally with respect to a Claim Denial, it is possible that after we have a denied coverage a legal challenge to our decision to deny coverage may be brought within a period of time specified under the terms of our Master Policies.
Rescissions.
Mortgage insurance master policies generally protect mortgage insurers from the risk of material misrepresentations and fraud in the origination of an insured loan by establishing the right, under certain conditions, to unilaterally rescind coverage. Under the terms of our Master Policies, we have the legal right, under certain conditions, to unilaterally rescind coverage on our mortgage insurance policies. If we rescind coverage based on a determination that a loan did not qualify for insurance, we provide the insured with a period of time to challenge, or rebut, our decision.
Typicaltypical events that may give rise to our right to rescind coverage include: (i) we insureinsured a loan under one of our Master Policies in reliance upon an application for insurance that contains a material misstatement, misrepresentation or omission, whether intentional or otherwise, or that was issued as a result of an act of fraud or (ii) we find that there was negligence in the origination of a loan that we insured. We also have rights of Rescission arising from a breach of the insured’s representations and warranties that are contained in an endorsement to our Master Policies that isor endorsements thereto and are required with our delegated underwriting program.
If we rescind coverage based on a determination that a loan did not qualify for insurance, we provide the insured with a period of time to challenge, or rebut, our decision. If a rebuttal to our Rescission is received and the insured provides additional information supporting the continuation (i.e., non-rescission) of coverage, we have the claim re-examined internally by a separate, independent investigator. If the additional information supports the continuation of coverage, the insurance is reinstated and if there is a claim, it proceeds to the claim is paid. After completion of this process,next step in our claims review process. Otherwise, if we determine that the loan did not qualify for coverage, the insurance certificate is rescinded (and we issue a premium refund under the total premiums paid are refunded)terms of our Master Policies), and we consider the Rescission to be final and resolved. Although we may make a final determination internally with respect to a Rescission, it is possible that a legal challenge to our decision to rescind coverage may be brought after we have rescinded coverage during a period of time that is specified under the terms of our Master Policies.
In 2012, we began offering a limited rescission waiver program under our Prior Master Policy for our delegated underwriting customers, in which we agree not to rescind coverage due to non-compliance with our underwriting guidelines so
Part I Item 1. Business
long as the borrower makes 36 consecutive payments (commencing with the initial required payment) from his or her own funds. This program does not restrict our rights to rescind coverage in the event of fraud or misrepresentation in the origination of the loans we insure.Following the financial crisis, the FHFA and the GSEs identified minimum standards and specific requirements to be included by allfor private mortgage insurers in theirinsurer master policies, for new mortgage insurance applications received on or after October 1, 2014. Among others, these included specific requirements relatedincluding rescission relief principles that limit the right to loss mitigation and claims processing activities thatrescind coverage when certain conditions are met. These rescission relief principles have limited the potential for Loss Mitigation Activity throughout the private mortgage insurance industry. Radian Guaranty incorporated
In accordance with these principles into its 2014 Master Policy. Radian Guaranty also offers 12-month and 36-month rescission relief programs in accordance with the specified terms and conditions set forth in the 2014 Master Policy. Loans that were already insured prior to the October 1, 2014 effective date of theprinciples, we have incorporated provisions into our 2014 Master Policy and 2020 Master Policy that generally provide rescission relief based on the number of months that borrowers remain current on their mortgage loans. As a consequence, our rights to conduct Loss Mitigation Activity involving rescission as a remedy generally are more limited under these more recent Master Policies as compared to our Prior Master Policy, but our more recent Master Policies continue to be subject toinclude certain life-of-loan reservation of rescission rights specified in the termsMaster Policy, including fraud and conditionscertain patterns of Radian Guaranty’s Prior Master Policy.
The FHFA andfraud. See “Item 1A. Risk Factors—Changes in the charters, business practices or role of the GSEs in the U.S. housing market generally, could significantly impact our businesses.”
Claim Curtailments
We depend on third-party servicing of the loans that we insure. Servicers are responsible for being the primary contact with borrowers regarding their loans, and we generally do not have proposed revised GSE Rescission Relief Principles to,first-party contact with borrowers. Dependable loan servicing is necessary for, among other things, further limittimely billing and premium payments to us and effective loss mitigation opportunities for delinquent or near-delinquent loans. As such, proper loan servicing is critical to the circumstances under whichperformance of our insured mortgage insurers may rescind coverage. We areportfolio, especially when borrowers experience difficulty paying their mortgages.
Our Master Policies require servicers to service our insured loans in a reasonable, prudent manner consistent with the highest standards of servicing in use in the process of incorporating these principles into a new master policy, whichresidential mortgage industry, and we expect will be effective during the second half of 2019. We currently are in discussions with the GSEs regarding the form of this new master policy, including as it relates to these proposed principles, which if adopted, are likely to further reduce our ability to rescind insurance coverage in the future, potentially resulting in higher losses than would be the case under our existing Master Policies.
Claim Curtailments. We also have rights under our Master Policies to curtail, and in some circumstances, deny claims due to servicer negligence. Examples of servicer negligence may include, without limitation:
■a failure to report information to us on a timely basis as required under our Master Policies;
■a failure to pursue loss mitigation opportunities presented by borrowers, realtors and/or any other interested parties;
■a failure to pursue loan modifications and/or refinancings through programs available to borrowers or an undue delay in presenting claims to us (including as a result of improper handling of foreclosure proceedings), which increases the interest or other components of a claim we are required to pay; and
■a failure to initiate and diligently pursue foreclosure or other appropriate proceedings within the timeframe specified in our Master Policies.
Although we could seek post-claim recoveries from the beneficiaries of our policies if we later determine that a claim was not valid, because our loss mitigation process is designed to ensure compliance with our policies prior to payment of a claim, historically we have not sought recoveries from the beneficiaries of our mortgage insurance policies once a claim payment has been made.
Customers
The principal customers of our mortgage insurance business are mortgage originators such as mortgage bankers, commercial banks, savings institutions, credit unions and community banks. Sources of primary NIW by type of mortgage originator for the year ended December 31, 2018 are shown in the chart below.
Our largest single mortgage insurance customer (including branches and affiliates) measured by primary NIW, accounted for 4.7% of NIW during 2018, compared to 6.8% and 5.7% in 2017 and 2016, respectively. No customer had earned premiums that accounted for more than 10% of our consolidated revenues in 2018, 2017 or 2016.
Since 2009, we have taken steps to diversify our customer base. As a result of these efforts, the percentage of NIW generated by our top 10 customers has decreased from 62.3% in 2009 to 29.1% in 2018. Since 2010, we have added over 1,000 net new customers and significantly increased the amount of business derived from mid-sized mortgage banks. See “Item 1A. Risk Factors—Our NIW and franchise value could decline if we lose business from significant customers.”
Competition
We operate in the highly competitive U.S. mortgage insurance industry. Our competitors primarily include other private mortgage insurers and federal and state governmental agencies, principally the FHA and VA.
In addition to Radian Guaranty, the private mortgage insurers that are currently approved and eligible to write business for the GSEs are:
Arch U.S. MI;
Essent Guaranty Inc.;
Genworth Financial Inc.;
Mortgage Guaranty Insurance Corporation;
NMI Holdings, Inc.; and
United Guaranty Corp. (acquired by Arch Capital Group LLC in December 2016).
We compete directly with other private mortgage insurers primarily on the basis of price, underwriting guidelines, overall service, customer relationships, perceived financial strength (including comparative credit ratings) and reputation. Overall
service competition is based on, among other things, effective and timely delivery of products, timeliness of claims payments, customer service, timely and accurate servicing of policies, training, loss mitigation efforts and management and field service expertise. We also believe that service includes our ability to offer services to customers through our Services business that complement our mortgage insurance products.
Pricing has always been and continues to be competitive in the mortgage insurance industry, as industry participants compete for market share and customer relationships. We monitor various competitive and economic factors while seeking to increase the long-term value of our portfolio by balancing both profitability and volume considerations in developing our pricing and origination strategies. We have taken a disciplined approach to establishing our premium rates and writing a mix of business that we expect to produce our targeted level of returns on a blended basis and an acceptable level of NIW. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Competition and Pricing—Radian's Pricing.”As demonstrated by our strong NIW generated in 2018, we believe we remain well positioned to compete for the high-quality business being originated today, while at the same time maintaining projected returns on NIW within our targeted ranges. Based on publicly available information, we estimate that our share of NIW within the private mortgage insurance market (excluding HARP refinancings) was approximately 19% for 2018.
Certain of our private mortgage insurance competitors are subsidiaries of larger corporations, may have access to greater amounts of capital and financial resources than we do at a lower cost of capital (including off-shore reinsurance vehicles) and currently have better financial strength ratings than we have. As a result, they may be better positioned to compete outside of traditional mortgage insurance, including in the private label securitization market or if the GSEs expand their use of, or pursue alternative forms of, credit enhancement outside of private mortgage insurance in its traditional form. In addition, because of tax advantages associated with being off-shore, certain of our competitors have been able to reinsure to their offshore affiliates and achieve higher after-tax rates of return on the NIW they write compared to on-shore mortgage insurers such as Radian Guaranty, which could allow these off-shore competitors to leverage reduced pricing to gain market share, while continuing to achieve acceptable returns on NIW.
We also compete with governmental agencies, principally the FHA and the VA. We compete with the FHA and VA on the basis of loan limits, pricing, credit guidelines, terms of our insurance policies and loss mitigation practices. Beginning in 2008, the FHA, which historically had not been a significant competitor, substantially increased its share of the mortgage insurance market which peaked at approximately 74% in 2009. Since then, the private mortgage insurance industry generally had been recapturing market share from the FHA, primarily due to: (i) improvements in the financial strength of private mortgage insurers; (ii) the development of new products and marketing efforts directed at competing with the FHA; (iii) increases in the FHA’s pricing; (iv) the U.S. government’s pursuit of legal remedies against FHA-approved lenders related to loans insured by the FHA; and (v) various policy changes at the FHA, including the general elimination of the premium cancellation provision. We believe that we are well-positioned to effectively compete with the FHA based on our current pricing strategies. In addition, we believe that better execution for borrowers with higher FICO scores, lender preference and the inability to cancel FHA insurance for certain loans are factors that continue to provide a competitive advantage for private mortgage insurers. The FHA’s share of the total insured mortgage market (which includes FHA, VA and private mortgage insurers) was 31% in 2018, compared to 35% in 2017. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results—Mortgage Insurance—NIW; Origination Market; Penetration Rate.” If the FHA reduces its pricing in the future, it could have a negative effect on our ability to compete with the FHA.
We also have faced increasing competition from the VA. Based on publicly available information, the VA’s share of the total insured mortgage market was 25% in 2018. We believe that the VA’s market share has generally been increasing because the VA offers 100% LTV loans and charges a one-time funding fee that can be included in the loan amount with no additional monthly expense, and because of an increase in the number of borrowers that are eligible for the VA’s program.
In addition, as market conditions change, alternatives to traditional private mortgage insurance may become more prevalent, which could reduce the demand for private mortgage insurance in its traditional form, including structures commonly referred to as “investor paid mortgage insurance” in which affiliates of traditional mortgage insurers directly insure the GSEs against loss. For additional information about these structures, see “Regulation—Federal Regulation—Housing Finance Reform.” It is difficult to predict what other types of credit risk transfer transactions and other structures might be used by the GSEs in the future. If any of the credit risk transfer transactions and structures that are being developed were to displace primary loan level, standard levels of mortgage insurance, the amount of insurance we write may be reduced.
See “Item 1A. Risk Factors—Our mortgage insurance business faces intense competition.”
Services
Acquisition of Clayton and Other Acquisitions
On June 30, 2014, we acquired Clayton, a leading provider of services and solutions to the mortgage and real estate industries. Since then, we have strategically acquired additional companies and businesses to enhance the mortgage, real estate and title services offered through our Services business. These acquisitions comprise:
•Red Bell, a real estate brokerage, valuation and technology company, in March 2015;
•ValuAmerica, a title insurance agency and appraisal management company, in October 2015;
•EnTitle Direct, a national title insurance and settlement services company, in March 2018;
Independent Settlement Services, a technology-driven national appraisal and title management services company, in November 2018; and
The assets of Five Bridges, a provider of consumer and real estate analytics through a cloud-based portal that provides customers with valuation and risk management tools, in December 2018.
Serviceshomegenius Business Overview
Overview
Our Services segment offers a broad array of services to market participants across the mortgage and real estate value chain. These services comprise mortgage services, real estate services and title services, including technology and turn-key solutions, that provide information and other resources used to originate, evaluate, acquire, securitize, service and monitor residential real estate and loans secured by residential real estate. These services are primarily provided to mortgage lenders, financial institutions, investors and government entities. In addition, we provide title insurance to mortgage lenders as well as directly to borrowers.
Our mortgage services help loan originators and investors evaluate, acquire, surveil and securitize mortgages. These services include loan review, RMBS securitization and distressed asset reviews, review and valuation services related to single family rental properties, servicer and loan surveillance and underwriting. Our real estate services help lenders, investors and real estate agents evaluate, manage, monitor and sell properties. These real estate services include software as a service solutions and platforms, as well as managed services, such as REO asset management, real estate valuation services and real estate brokerage services. Our title services provide a comprehensive suite of title insurance products, title settlement services and both traditional and digital closing services.
A key element of our overall business strategy is to use our Serviceshomegenius segment to diversify our business and revenue streams by increasing our participation in multiple facets of the residential real estate and mortgage finance markets. In 2017, we undertook a strategic reviewOur homegenius businesses are comprised of our Services businesstitle, real estate and made several decisions with respect to the business strategy to repositiontechnology products and services. Through this business segment, we offer an array of products and services to drive future growthmarket participants across the real estate value chain, including consumers, mortgage lenders, mortgage and profitability. Following this strategic review, we committed to a restructuring planreal estate investors, GSEs and have refined our Services business strategy to focus on a more limited set of services. See “Item 7. Management’s Discussionreal estate brokers and Analysis Financial Condition and Results of Operations-Overview-Business Strategy.”agents. We believe that the combination of our mortgage insurance business with our unique set of diversified mortgage, real estatehomegenius products and title services provides us with an opportunity to become increasingly more relevant to our customers and is a competitive differentiator for us compared to other private mortgage insurance companies.
The macroeconomic conditions and other events that impact the housing, mortgage finance and related real estate markets affect the demand for the products and services we offer through our homegenius business. Sales volume in our homegenius business varies based on the overall activity in the housing and mortgage finance markets and the health of related industries. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results—homegenius” for additional information.
Services Offered
Mortgage Services. Our mortgage services loan review and surveillance products help customers understand risk associated with originating, buying, selling and servicing pools of loans. In this business, we primarily provide loan-level due diligence for various asset classes (residential, single family rental and non-residential) and securitizations, including single family rental and other private label securitizations and securitizations of GSE loans, with offerings focused on credit underwriting, regulatory compliance, compliance with representation and warranties and collateral valuation. Our engagements may take place, among other contexts, prior to or after the sale of a pool of loans, in connection with securitizations, transactions involving warehouse lines of credit, GSE credit risk transfer transactions and transactions involving master servicing rights. We utilize skilled professionals and proprietary technology to deliver customized solutions that help our clients identify and understand areas of risk and opportunity across the residential home mortgage spectrum.
As part of our underwriting services, we offer contract underwriting services and compliance reviews to verify that loan file documentation conforms to specified guidelines and regulatory requirements. In our contract underwriting business we underwrite our customers’ mortgage loan application files for secondary market compliance (e.g., for sale to the GSEs), and may concurrently assess the file for mortgage insurance eligibility. Generally, we offer limited indemnification to our contract underwriting customers. We train our underwriters, require them to complete continuing education and routinely audit their performance to monitor the accuracy and consistency of underwriting practices.Title Services
We offer a full range of services to support the single family rental asset class. Our comprehensive single family rental services provide a centralized, single point of contact for facilitating the valuation, diligence and underwriting services needed to support single family rental securitizations, multi-borrower transactions and warehouse facilities.
Our surveillance services utilize data, technology and skilled professionals to provide ongoing, independent monitoring of mortgage servicer and loan performance. We offer risk management and servicing oversight solutions, including RMBS and single family rental securitization surveillance, regulatory and operational loan level oversight and asset representation review services in connection with securitizations. RMBS surveillance services monitor the servicers of mortgage loans underlying outstanding RMBS. Regulatory and operational loan level oversight provides regular monitoring of servicing operations to measure and assess compliance with applicable policies and regulations. Our asset representation review services provide targeted loan and receivable oversight for ABS issuers and their investors, including on asset classes other than mortgage loans, in the event of certain default triggers within the ABS.
Real Estate Services. Our real estate services provide data, analytics, process technologies, REO asset management and residential property valuation services to financial institutions, the GSEs, and private investment funds to support the acquisition, sale and management of real estate properties.
Our real estate services include: full appraisal products; property inspection/condition reports; appraisal review products; hybrid/ancillary appraisal products; automated valuation products; broker price opinions (BPOs); asset watch; and rental analysis. These valuation services primarily are provided to originators, owners, purchasers and servicers of, and to investors in, performing and non-performing mortgage loans and REO properties.
We further provide asset management services that include turn-key and component solutions for REO asset management, single family rental services and transition financing services management. These services are designed to support the management of the entire REO disposition process, including management of the eviction and redemption process, as well as property preservation and repairs.
Title Services. We also offer a comprehensive suite of insurance and non-insurance title, closing and settlement services for purchase, refinance and home equity transactions to mortgage lenders, mortgage investors and GSEs as well as directly to consumers for residential mortgage loans. We offer
Title insurance is a contract of indemnity for losses stemming from a covered defect in title to real property, such as adverse ownership interests, liens, or other encumbrances, that predates the policy and is not otherwise excluded or excepted from coverage. Our title policies are issued following a determination of insurability, which is based on a title search that may include review of the public land records, court filings, maps, surveys, previously issued title policies, and any other documentation that may contain information concerning interests in real property.
There are two types of title insurance policies. Lenders’ policies insure the validity and priority of the insured mortgage and typically provide coverage up to the outstanding mortgage loan balance, until the loan is paid off. Owners’ policies are issued directly to the real estate purchaser and provide coverage to the owner in an amount equal to the purchase price of the property. Both types of policies are issued for a one-time premium paid at closing of the home purchase. Premium amounts vary across jurisdictions and also depend on the amount of coverage given and the type of policy being issued.
Losses on policies occur in the form of claims payouts and/or the cost of defending or establishing title. Title claims may arise from a number of factors, such as well astitle search and examination errors, fraud, forgery, incorrect legal descriptions, and failure to pay off existing liens. Title insurers are also responsible for the cost of defending the insured in litigation alleging covered title defects, regardless of the merits of the allegations.
In addition to title insurance, we offer a full complement of title services that include tax and title data services; centralizedreports; recording services; document retrieval; default curative title services; deed reports;reports and property reports. Our closing and settlement services include electronic execution of some or all mortgage loan closing documents in a secure digital environment (eClosing), including full eClosing, hybrid eClosing and remote eClosing, as well as traditional signing services.
Real Estate Services
We provide real estate services, including real estate asset management and real estate valuation services, to our customers. Our asset management solutions help real estate investors and lenders improve execution on their real estate properties. Through these asset management services, we manage properties owned primarily by financial institutions and mortgage investors by overseeing the REO disposition process. We conduct this work primarily by engaging third-party independent contractors to perform the eviction and redemption process, as well as property preservation and repairs on behalf of our customers. In addition, we offer a web-based asset management workflow solution to assist in managing REO assets, rental properties, due diligence for bulk acquisitions of multiple properties, loss mitigation efforts and short sales.
We also offer a full range of services that serve the single-family rental asset class. This asset class primarily involves the securitization of a single loan backed by multiple rental properties owned primarily by large institutional investors. Our comprehensive single family rental services provide a centralized, closingsingle point of contact for facilitating the property valuation and settlementdiligence services needed to support single family rental warehouse lending and securitization activity. Our warehouse lending valuation and diligence reviews also serve institutional iBuyers, who use technology to value, purchase and thereafter securitize, rent or sell homes.
Through our licensed real estate broker subsidiary, Red Bell, we also provide a suite of real estate valuation products and services to lenders, servicers, investors and GSEs, including broker price opinions (i.e., price estimates provided by real estate brokers familiar with the particular market) and various valuations that utilize technology, including hybrid appraisals (where licensed appraisers complement their efforts by accessing technology enabled valuation services), automated valuation services (enabling a qualified user to obtain an estimated value based on a technology driven analysis of data and information about comparable transactions) and interactive valuation services (where a qualified user can utilize their knowledge and preferences as inputs to technology tools to obtain a valuation estimate).
Technology Services
In addition to the services described above, we are developing a growing suite of real estate technology products and services that are designed to facilitate real estate transactions and are provided as proprietary SaaS solutions.
These digital services and local closingsolutions, which will be offered primarily through our licensed real estate broker subsidiary, Red Bell, include:
■geneuity, a SaaS smart workflow system that integrates features such as task management, pipeline tracking, contacts, document storage, e-signature and settlement services.communication into a single platform enabling real estate brokers and agents to manage real estate transactions more efficiently;
Services ■geniusprice technology, a SaaS property intelligence platform that combines predictive modeling, artificial intelligence, automation and imaging review capabilities with a real estate broker’s access to local data to create price estimates and property condition reports; and
■homegenius connect, a service that helps match interested homebuyers with local real estate agents.
Revenue Drivers
ForOur homegenius segment is dependent upon overall activity in the most significant revenue driversmortgage, real estate and mortgage finance markets, as well as the overall health of the related industries. Due, in part, to the transactional nature of the business, revenues for our Services business, see “Item 7. Management’s Discussionhomegenius segment are subject to fluctuations from period to period, including seasonal fluctuations that reflect the activities in these markets. Sales volume is also affected by the number of competing companies and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results—Services.”alternative products offered in the market.
Fee-for-Service Contracts
Our Services segment isWe earn net premiums on title insurance written by Radian Title Insurance. For our other homegenius offerings, we primarily a fee-for-service business. Our services revenue is generated under three basic types of contracts:
Fixed-Price Contracts. Underuse fixed-price contracts, pursuant to which we agree to perform the specified services and deliverables for a pre-determined per-unit or per-file price or day rate. We use fixed-price contracts inprice. To a lesser extent, for a portion of our REO management services and our real estate valuation and componentbrokerage services, our loan review, underwriting and due diligence services as well as our title and closing services. We also use fixed-pricewe utilize percentage-of-sale contracts, in our surveillance business for our servicer oversight services and RMBS surveillance services, and in our asset management business activities.
Time-and-Expense Contracts. Under a time-and-expense contract, we are paid a fixed hourly rate, and we are reimbursed for billable out-of-pocket expenses as work is performed. These contracts are used in our loan review, underwriting and due diligence services.
Percentage-of-Sale Contracts. Under percentage-of-sale contracts,under which we are paid a contractual percentage of the sale proceeds upon the sale of each property. These contracts are only used for a portion of our REO management services and our real estate brokerage services. In addition, through the use of our proprietary technology, property leads are sent to select clients. Upon the client’s successful closing on the property, we recognize revenue for these transactions based on a percentage of the sale.
In most cases, our contracts with our clients do not include minimum volume commitments and can be terminated at any time by our clients. Although some of our contracts and assignments are recurring in nature, and include repetitive monthly assignments, a significant portion of our engagementscurrent homegenius revenues are transactional in nature and may be performed in connection with securitizations, loanreal estate purchases and sales loan purchases or other transactions.
We expect our revenue from our technology products and services to grow in future periods, which would result in a higher percentage of total revenues being recurring in nature. Due to the transactional nature of our current business, our Serviceshomegenius segment revenues may fluctuate from period to period as transactions are commenced or completed. In addition, our segment revenues are impacted by the origination volumesvolume of our customers,real estate transactions in the marketplace, which may fluctuate from period to period. See “Item 1A. Risk Factors—We face risks associated with our homegenius business.”
TitleFor additional information on the most significant factors affecting our homegenius business, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results—homegenius.”
All Other
All Other Overview
All Other activities include: (i) income (losses) from assets held by Radian Group, our holding company; (ii) related general corporate operating expenses not attributable or allocated to our reportable segments; (iii) income and expenses related to Clayton for all periods prior to our sale of this business in the first quarter of 2020; (iv) the income and expenses related to our traditional appraisal services, which we wound down beginning in the fourth quarter of 2020; and (v) certain other immaterial activities, including investments in new business opportunities.
See Note 4 of Notes to Consolidated Financial Statements for additional information regarding the basis of our segment reporting, including the related allocations and the impacts of the sale of Clayton and subsequent organizational changes made in the first quarter of 2020, as well as the wind down of our traditional appraisal business, announced in the fourth quarter of 2020. See Note 7 of Notes to Consolidated Financial Statements for additional information on the Clayton sale and the related financial impacts.
Competition
Mortgage
We operate in the highly competitive U.S. mortgage insurance industry. Our competitors primarily include other private mortgage insurers and federal and state governmental agencies, principally the FHA and VA.
Including us, there are currently six active participants in the private mortgage industry that are approved and eligible to write business for the GSEs. The other participants are:
■Arch Capital Group Ltd. (includes both Arch Mortgage Insurance PremiumsCompany and United Guaranty Residential Insurance Company);
■Enact Holdings, Inc. (formerly Genworth Mortgage Holdings, Inc.);
■Essent Group Ltd.;
■MGIC Investment Corporation; and
■NMI Holdings, Inc.
We compete directly with other private mortgage insurers primarily on the basis of price, underwriting guidelines, overall service, customer relationships, perceived financial strength (including comparative credit ratings) and reputation. Overall customer service competition in our mortgage insurance business is based on, among other things, effective and timely delivery of products, timeliness of claims payments, customer service, timely and accurate administration of policies, training, loss mitigation efforts and management and field service expertise.
For Radian, customer service also includes our ability to offer products and services through our homegenius business that are relevant to our mortgage insurance customers and complement our mortgage insurance products.
Pricing has always been competitive in the mortgage insurance industry, but as discussed above under “Mortgage—Pricing,” with the increased prevalence of granular, “black box” pricing and custom rate cards throughout the industry and the greater uniformity of master policy terms throughout the industry, pricing has become the predominant competitive market factor for private mortgage insurance. We monitor various competitive and economic factors while seeking to enhance the long-term value of our portfolio by balancing credit risk, profitability, and volume and capital considerations in developing our pricing strategies.
We take a disciplined approach to establishing our premium rates and seek to write a mix of business that we expect to produce our desired level of NIW while managing the risk/return profile and maximizing the long-term economic value of our insured mortgage portfolio, taking into consideration the competitive environment. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results—Mortgage—Premiums.” Based on publicly available information, we estimate that our share of NIW within the private mortgage insurance market was approximately 16% for 2021.
Certain of our private mortgage insurance competitors currently have better financial strength ratings than we have and/or are subsidiaries of larger corporations, which may give them a competitive advantage.
Private mortgage insurance competes for a share of the insurable mortgage market with the single-family mortgage insurance programs of the FHA and VA. Private mortgage insurance execution competes with the programs offered by the FHA on the basis of loan limits, pricing, credit guidelines, terms of our insurance policies and loss mitigation practices.
Since the 2007-2008 financial crisis, the private mortgage insurance industry has improved its share of the insurable, low down payment market, primarily due to: (i) improvements in the financial strength of private mortgage insurers; (ii) the development of new products, pricing delivery tools and marketing efforts directed at competing with FHA programs and execution; (iii) increases in the FHA’s pricing; (iv) the U.S. government’s pursuit of legal remedies against FHA-approved lenders related to loans insured by the FHA; and (v) various policy changes at the FHA, including the general elimination of the premium cancellation provision that exists for borrower-paid private mortgage insurance.
We believe that better execution for borrowers with higher FICO scores, lender preference and the inability to cancel FHA insurance for certain loans have provided a competitive advantage for private mortgage insurers. The FHA’s share of the total insured mortgage market (which includes FHA, VA and private mortgage insurers) was reported to be 25% in 2021, compared to 24% in 2020. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results—Mortgage—NIW and Related Drivers.”
If the competitive position of the FHA is enhanced, it could have a negative effect on our ability to compete with the FHA. See “Regulation—Federal Regulation—Housing Finance Reform and the GSEs’ Business Practices”for a discussion of several recent developments that could enhance the FHA’s competitive position relative to private mortgage insurance.
We also have faced increasing competition from the VA. Based on publicly available information, the VA’s share of the total insured mortgage market was 31% in 2021, compared to 32% in 2020. We believe that the VA remains a strong participant in the overall market because the VA offers 100% LTV loans and charges a one-time funding fee that can be included in the loan amount with no separate monthly expense, and because of an increase in the number of borrowers that are eligible for the VA’s program.
In addition, as market conditions change, alternatives to traditional private mortgage insurance may become more prevalent, which could reduce the demand for private mortgage insurance. These alternatives have included structures commonly referred to as “investor paid mortgage insurance” in which affiliates of traditional mortgage insurers that are not subject to the feesPMIERs directly insure the GSEs against loss. For additional information about these structures, see “Regulation—Federal Regulation—Housing Finance Reform and the GSEs’ Business Practices.”
It is difficult to predict what other types of credit risk transfer transactions and structures or other forms of credit enhancement, including GSE-sponsored alternatives to traditional mortgage insurance, might be used in the future. If any of these alternatives were to displace standard primary loan level private mortgage insurance, the amount of insurance we write may be reduced and our future prospects could be negatively impacted.
See “Item 1A. Risk Factors—Our mortgage insurance business faces intense competition.”
homegenius
We believe our homegenius business is uniquely positioned as a provider of an array of products and services to participants across the real estate value chain. While we are not aware of any other single company that provides a comparable range of services to the residential mortgage and real estate industries, our homegenius business has multiple strong competitors within each of its individual lines of business.
Significant competitors for our homegenius business include:
Title Services – Blend Labs, Inc.; Fidelity National Title Insurance Company; First American Financial Corporation; First National Title Insurance Company; Mortgage Connect, LP; National Title Insurance Company; North American Title Insurance Company; Old Republic Title Insurance Group, Inc.; OS National LLC; Selene Title LLC; ServiceLink IP Holding Company, LLC; Spruce Title Company; Stewart Title Guaranty Company; Summit Title Services, LLC; Westcor Land Title Insurance Company; and WFG National Title Insurance Company.
Real Estate Services – Black Knight, Inc.; ClearCapital.com, Inc.; CoreLogic, Inc.; Covius Holdings, Inc.; Equator, an Altisource Business Unit; First American Financial Corporation; First American Mortgage Solutions, LLC.; HouseCanary, Inc.; Keystone Asset Management; Pro Teck Valuation Intelligence; Res.Net; ServiceLink IP Holding Company, LLC; SingleSource Property Solutions, LLC (Resolute Diligence Solutions); VRM Mortgage Services; and Xome Inc.
In addition, we believe that our technology services discussed above,and products currently under development will compete with offerings from various real estate SaaS companies. Across all business lines in our homegenius segment, we earn net premiumscompete on title insurance written by EnTitle Insurance.the basis of industry expertise, price, technology, data access, service levels and relationships.
Customers
Mortgage
The principal customers of our mortgage insurance business are mortgage originators such as mortgage banks, commercial banks, savings institutions, credit unions and community banks.
We actively monitor our customer concentration and regularly engage in efforts to diversify our customer base. Our largest single mortgage insurance customer (including branches and affiliates) measured by NIW, accounted for 13.9% of NIW during 2021, compared to 13.3% and 7.2% in 2020 and 2019, respectively. The percentage of NIW generated by our top 10 customers was 38.3% in 2021. No single customer contributed earned premiums that accounted for more than 10% of our consolidated revenues in 2021, 2020 or 2019. See “Item 1A. Risk Factors—Our NIW and franchise value could decline if we lose business from significant customers.”
homegenius
We have a broad range of customers forin our Serviceshomegenius segment, including many of our Mortgage customers, due to the breadth ofproducts and services we are able to offer across the mortgage and real estate value chain. Our principal third-party customers (non-affiliated) are:
Banks,■Mortgage originators such as mortgage banks, commercial banks, savings institutions, credit unions independent mortgage banksand community banks;
■Aggregators, issuers and investors in RMBS, whole loans and other originators of mortgage loans;
RMBS/ABS issuers, securitization trusts,mortgage-related debt instruments, including the GSEs, private equity, hedge funds, real estate investment trusts and investment banks and other investors in mortgage-related debt instruments, whole loans and other securities;banks;
Owners of single■Single family rental homes;warehouse lenders, owner/operators, builders, capital markets institutional investors and securitization issuers;
■Mortgage servicers;
■Real estate brokers and agents; and
Regulators and rating agencies involved in the mortgage, real estate and housing finance markets.
■Consumers.
Our customers include many of the largest financial institutions and participants in the mortgage sector and, as such, our services revenue is concentrated among our largest customers. For the year ended December 31, 2018,2021, the top 10 Serviceshomegenius customers generated approximately 42%57.9% of the Serviceshomegenius segment’s services revenue. See “—Services Business Overview—
Sales and MarketingServices Revenue Drivers.”
Competition
We believe our Services business is uniquely positioned as a single providerOur sales and marketing efforts are focused on establishing, building and maintaining valuable customer relationships. Given the range of an array of services to participantssolutions we offer across the residential mortgage and real estate, value chain.we believe we have significant opportunity to expand our sales to our existing customer base as well as to new customers. We are not awarehave a core team of any other mortgage insurance company that provides a comparable range of services to the residential mortgage and real estate industries. However, our Services business has multiple competitors within each of its individual lines of business. Our competitors mainly include small privately-held companies and subsidiaries of large publicly-traded companies.account managers who sell all
Significant competitors include:
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• | - American Mortgage Consultants, Inc., Digital Risk, LLC, Opus Capital Markets Consultants, LLC, FTI Consulting, Inc., Pentalpha Surveillance LLC, TENA Companies, Inc., Adfitech Inc. and Navigant Consulting, Inc.GlossaryPart I. Item 1. Business |
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• | Real Estate Services - ClearCapital.com, Inc., CoreLogic, Inc., Pro Teck Valuation Services, First American Financial Corporation, Black Knight, Inc., VRM Mortgage Services, Fidelity National Financial, Inc. and ServiceLink
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• | Title Services - First American Financial Corporation, Fidelity National Financial, Inc., Stewart Information Services Corporation, Old Republic Title Insurance Group, Inc., Westcor Land Title Insurance Company and WFG National Title Insurance Company
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Across all business lines, we compete on the basis of industry expertise, price, technology, service levels and relationships.
We believe that combining our mortgage insurance franchise with our diversified set of mortgage and real estate products and solutions across our businesses, as well as sales teams with subject matter expertise in particular services provides us with an opportunityand the related needs of the customers we serve.
Marketing and communications activities include direct marketing; print and digital advertising; digital marketing including email, web, content and social media; public relations and thought leadership; brand strategy and expression; event marketing including customer meetings, conferences and trade shows and other targeted initiatives designed to become increasingly relevantgenerate new sales opportunities, drive customer adoption of our services and retain our existing customers. We continue to adapt our customers and enhances our ability to compete in the insured market by differentiating us from other mortgage insurance competitors.
Enterprise Sales and Marketing
Our enterprise sales and marketing team is centralizedefforts based on the current environment to create a unified focus on selling all of our mortgage insuranceoffer tools and mortgagetechniques to connect virtually and real estate productsengage with current and services across our customer base. Our Enterprisepotential customers.
All sales and marketing team offers a coordinated sales effort under single management and is supported by dedicated business unit and account management teams organized in various geographic regions across the U.S., as well as a telesales team located in our corporate headquarters in Philadelphia. At the enterprise level, we have a senior sales executive dedicated to each of the following areas: credit unions, banking institutions, investment bankers/private equity and fund managers, mortgage bankers, GSEs and servicers. We expect that our enterprise approach to selling the complementary products and services of our Mortgage Insurance and Services businesses will strengthen our relationships with our customers, attract new customers and enhance our ability to compete.
Our Mortgage Insurance dedicated business unit sales team includes a business development group that is focused on developing new mortgage insurance relationships and an account management group that is responsible for supporting our existing mortgage insurance relationships.
Our Services dedicated business unit sales team includes a title services sales team focused on developing new title services relationships and expanding and supporting existing customer relationships, and a mortgage and real estate services team responsible for selling other services offered by our Services business.
All sales efforts are supported by functional areas that provide additional touch points for our telesales teamcustomers. For example, our Inside Sales Teamthat serves customers using any and all of our products and services, and is responsible for managing and growing customer relationships and promoting increased customer adoption.
All sales personnel are compensated by salary,adoption and other incentive-based pay, which may be tied to the achievement of certain business objectivesour Client Success, Customer Service and sales goals or the promotion of certain products.
Customer Support
We have developed training programs for our customers to help their employees develop the knowledge and skills to respond to changing market demands. Our learning solutions are provided to customers to promote the role of private mortgage insurance in the marketplaceTraining Teams provide customized service as well as educational sessions to promote Radian’s specificour customers.
We expect that our approach to selling our products across our mortgage and offerings. We offer training in three format options: instructor-led classroom sessions, instructor-led webinarsreal estate services businesses will strengthen our relationships with customers, attract new customers and self-directed on-demand learning.enhance our ability to compete.
Sale of Financial Guaranty Business
Radian completed the sale of Radian Asset Assurance Inc. to Assured Guaranty Corp. on April 1, 2015 and exited the financial guaranty business. Radian Asset Assurance provided direct insurance and reinsurance on credit-based structured finance and public finance risks.
Investment Policy and Portfolio
Our investment portfolio is our primary source of claims paying resources.resources and also contributes to our earnings. We seek to manage our investment portfolio within our targeted risk and return tolerances based on our current liability projections and business and economic outlook to maintain sufficient liquidity levels to satisfy our current and future operating requirements and other financial needs.
We have developed anOur investment strategy that uses an asset allocation methodology that considerstakes into consideration regulatory constraints, our business environment and consolidated risks as well as current investment conditions. With respect to our fixed income investments, the following internal investment policy guidelines, among others, are applied at the time of investment:investment and continually monitored.
At least 75% of our fixed income portfolio, based on market value, must consist of investment securities that are assigned a quality designation of NAIC 1 by the NAIC or equivalent ratings by a nationally recognized statistical ratings organization (“NRSRO”) (i.e., “A-” or better by S&P and “A3” or better by Moody’s);
A maximum of 25% of our fixed income portfolio, based on market value, may consist of investment securities that are assigned a quality designation of NAIC 2 by the NAIC or equivalent ratings by a NRSRO (i.e., “BBB+” to “BBB-” by S&P and “Baa1” to “Baa3” by Moody’s); and
A maximum of 10% of our fixed income portfolio, based on market value, may consist of investment securities that are assigned quality designations NAIC 3 through 6 or equivalent ratings by a NRSRO (i.e., “BB+” and below by S&P and “Ba1” and below by Moody’s).
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| Internal investment policy guidelines |
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| NAIC Designation | Ratings Equivalent | Internal Policy |
| 1 | “A-” and above | At least 75% of the portfolio Fair Value |
| 2 | “BBB+” to “BBB-” | Not more than 25% of portfolio Fair Value |
| 3 to 6 | “BB+” and below | Not more than 10% of portfolio Fair Value |
Our portfolio has been constructed to maximize long-term expected returns while maintaining an acceptable risk level. Our investment objectives are to utilize appropriate risk management oversight to optimize after-tax returns, while preserving capital. We targetcalibrate the level of our short-term investments to managebased on our overall investment portfolio duration, risk appetite and expected short-term cash requirements.
Our investment policies and strategies are subject to change, depending on regulatory, economic and market conditions and our then-existing or anticipated financial condition and operating requirements, including our current and future tax positions. The investments held at our insurance subsidiaries are also subject to insurance regulatory requirements applicable to such insurance subsidiaries.
Oversight responsibility of our investment portfolio rests with management, and allocations are set by periodic asset allocation studies, calibrated by risk return and after-tax return considerations. The risks we consider include, among others, duration, convexity, liquidity, market, sector, structural, interest rate and credit risks. As of December 31, 2018,2021, we internally manage 6.8%managed 8.0% of the investment portfolio (the portion of the portfolio largely consisting of U.S. Treasury obligations,securities, money market funds, equities and certain exchange-traded funds), with the remainder primarily managed by three external managers. External managers are selected by management based primarily upon the selected allocations, as well astheir ability to meet our investment goals and objectives, based upon factors such as historical returns and the stability of their management teams. Management’s selections of external managers are presented to, approved and approvedmonitored by the Finance and Investment Committee of Radian Group’sour board of directors.
At December 31, 2018,2021, our investment portfolio had a cost basis of $5.3$6.3 billion and a carrying value of $5.2 billion, which includes $0.6 billion of investments maturing within one year or less. Our investment portfolio did not include any direct residential real estate or whole mortgage loans at December 31, 2018.$6.6 billion. At December 31, 2018, 97.1%2021, 95.5% of our investment portfolio was rated investment grade. For additional information about our investment portfolio, see the information that follows, as well as Notes 5 and 6 of Notes to Consolidated Financial Statements.
Investment Portfolio Diversification
The composition of our investment portfolio, presented as a percentage of overall fair value at December 31, 2018, was as follows:
______________________
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(1) | Primarily consists of taxable state and municipal investments. |
As of December 31, 2018, we did not have any investment in any person (including affiliates thereof) that exceeded 10% of our total stockholders’ equity.
Investment Portfolio Scheduled Maturity
The weighted-average duration of the assets in our investment portfolio as of December 31, 20182021 was 4.04.5 years. We seek to manageFor additional information about our investment portfolio, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Investment Portfolio,” as well as Notes 5 and 6 of Notes to maintain sufficient liquidity within our risk and return tolerances and to satisfy our operating and other financial needs based on our current liabilities and business outlook. The following table shows the scheduled maturities of the securities held in our investment portfolio at December 31, 2018:Consolidated Financial Statements.
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| | Fair Value | | Percent |
| ($ in millions) | | | |
| Short-term investments | $ | 538.8 |
| | 10.4 | % |
Due in one year or less (1) | 87.3 |
| | 1.7 |
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Due after one year through five years (1) | 1,118.8 |
| | 21.6 |
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Due after five years through ten years (1) | 1,125.5 |
| | 21.7 |
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Due after ten years (1) | 517.3 |
| | 10.0 |
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RMBS (2) | 353.2 |
| | 6.8 |
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CMBS (2) | 591.4 |
| | 11.4 |
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Other ABS (2) | 704.7 |
| | 13.6 |
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Other investments (3) | 144.0 |
| | 2.8 |
|
Total (4) | $ | 5,181.0 |
| | 100.0 | % |
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(1) | Actual maturities may differ as a resultPart I. Item 1. Business |
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(2) | RMBS, CMBS and other ABS are shown separately, as they are not due at a single maturity date. |
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(3) | No stated maturity date. |
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(4) | Includes $27.9 million of securities loaned to third-party Borrowers under securities lending agreements, classified as other assets in our consolidated balance sheets. See Note 6 of Notes to Consolidated Financial Statements for more information. |
Investment Portfolio by Rating
The following chart provides the ratings of our investment portfolio, presented as a percentage of overall fair value, as of December 31, 2018:
Enterprise Risk Management
Risk Philosophy, Vision and Appetite
As a financial services organization, risk management is a critical part of our business. Our ERM vision is to remain one of the housing industry’s leading risk management organizations by providing solutions that effectively identify, assess and profitably manage risks across the entire mortgage life-cycle. The following goals guide our strategy and actions as a risk management organization:
■Embed and continually reinforce a disciplined, corporate-wide risk culture that utilizes an understanding of risk/return tradeoffstrade-offs to drive quality decisions utilizing a disciplined approach designed toand achieve long-term, through-the-cycle profitability;
■Maintain credit, underwriting, pricing and risk/return disciplines based on sound data and analytics and continuous feedback throughout the organization;
■Proactively monitor origination, portfoliobusiness, counterparty, economic, housing and marketregulatory trends to identify and mitigate emerging risks;
■Continually refine analytical and technological capabilities, processes and systems to effectively identify, assess and manage risks; and
■Develop and leverage tools and capabilities to analyze the risk/return trade-offs of corporate strategy and business decisions in order to inform and optimize capital allocation.allocation within our risk appetite in support of our corporate strategy.
Our risk appetite, or the amount of risk we are willing to take on in pursuit of value, is driven by our business strategy, which is established by executive management and overseen by Radian’sour board of directors. Risk appetite is defined as the amount of risk, on a broad level, that an organization is willing to take on in pursuit of value. Based on our risk appetite, management then determines our risk tolerances. Risk tolerances represent the typical measures of risk used to monitor exposure in a particular risk category or for a specific initiative, compared with the stated risk appetite. The illustration below depicts our framework for developing risk appetite and tolerance.
We define our risk appetite qualitatively through the following key risk categories where strategic execution can take place. We develop risk appetite statements that are designed to achieve the following:
Define the risk Radian is willing to acceptoccurs: credit; financial; strategic; operational and manage in pursuit of long-term value on a risk-adjusted basis;
Incorporate risk management into our strategic planning process;
Enhance risk understandingregulatory and awareness at the board and executive management levels;
Develop risk tolerances for business units within the context of the defined risk appetite; and
Improve the quality of decision-making on significant business decisions.
Risk Categories
Our key risk categories are:
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• | Credit: The risk of default or failure to fulfill a financial obligation in a timely manner;
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• | Financial: The risk of market forces on the ability to meet financial obligations;
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• | Strategic: The risk of failure to properly respond to changes in the business environment;
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• | Operational: The risk that business practices, processes, policies and systems are not adequate to meet enterprise objectives; and
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• | Regulatory and Compliance: The risk of non-compliance with laws, rules, regulations and prescribed practices in any jurisdiction in which the business operates.
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compliance. We do not identifytreat reputational risk as a distinct category of risk. Rather,risk; rather, we view reputational risk as pervasive throughout our entire risk portfolio, as each risk on its own can impact our reputation if not mitigated or managed properly.
Risk Governance
Our ERM program is subject to a comprehensive governance structure, as illustrated in the following chart and further described below.
Board of Directors. The fullDirectors
Our board of directors is responsible for the general oversight of risks. Our board of directors seeks to understand and oversee the most critical risks relating to our business, allocates responsibilities for the oversight of risks among the full board and its committees, and reviews the systems and processes that management has in place to manage the current risks, facing Radian, as well as those that could arise in the future.
The full board of directors oversees our strategic risks, regulatory risks, risks related to our information technology activities and cyber security risks. As noted above, the board conducts certain aspects of its risk oversight function through the following board committees: Audit Committee; Credit Management Committee; Finance and Investment Committee; Governance Committee; and Compensation and Human Resources Committee.
Each Committee Chair provides regular reports to the full board regarding the Committee’s specific risk oversight responsibilities. The board regularly meets with management to receive reports derived fromfrom: (i) our ERM function regarding the most significant risks we are facing, and the steps being taken to assess, manage and mitigate those risks; and (ii) the Company’sour information security function regarding cybersecurity risks and the Company’sour efforts to mitigate such risks.risks; and (iii) our compliance programs and our efforts to embed a culture of compliance throughout the organization to encourage ethical behavior and mitigate risks of regulatory non-compliance. The full board further considers current and potential future strategic risks facing the company as part of its annual strategic planning session with management.
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Integrated ERM Framework.Framework
We have adopted an integrated approach to risk management, which includes:includes, among other things: (i) a centralized ERM function that resides within the office of our Chief Financial OfficerGeneral Counsel and is responsible for overseeing the process for risk identification, assessment, management and mitigation across the organization;organization and (ii) various management committees that oversee specific risks; (iii) business units that manage specific risks associated with their business activities; and (iv) an internal audit function that performs periodic, independent reviews and tests compliance with risk management policies, procedures and standards across the company.
The various management committees include, but are not limited to, a Pricing and Credit Committee, a Capital and Liquidity Review Committee and a Model Governance Committee (collectively “ALCO”), an Information Security and Resilience Committee, a Regulatory Compliance Council, a Mortgage Insurance Reserve Committee, a Title Insurance Underwriting Committee, a Title Insurance Claims Committee and an Enterprise Data Governance Committee.Company.
Our integrated ERM framework is designed to identify the risks we are facing, and to assess, manage and mitigate those risks. Our ERM process is designed to provide executive management with the ability to identify and evaluate the most significant concernsrisks we face and to calibrate the risk mitigation strategies to account for challenges in the current business environment, as well as external factors that may negatively impact our operations. The risks that fall under the program span the entire spectrumIn practice, our ERM function represents a cross-functional and enterprise-wide effort, consisting of organizational risks and include risks that may not be easily quantifiable or measurable. These include critical risks that fall into our credit, financial, operational, regulatory and compliance, and strategic risk categories. Enterprise level risk reviews are conducted for both our Mortgage Insurance and Services businesses.
Our ERM process is illustrated in the following chart:
Our ERM program takes a holistic approach to managing risks that we face in our businesses. A cross-functional team, guided by subject matter experts and experienced managers, followsthat utilizes a
systematic method to identify, evaluate and monitor both known and emerging risks. Our ERM program is a dynamic process, which includes ongoing analysis and ranking of the most significant risks and the alignment of risk management activities with business strategies. Risk assessments and mitigation plans are developed to address these risks. These assessments and plans are subject to review and modification to account for changes in markets and the regulatory environment, as well as other internal or external factors. Risk scoring and validation of
the effectiveness of risk management plans through management reporting facilitate program sustainability and promote accountability for risk management activities throughout the company.Company.
AnAs part of our ERM Council, consisting of mid-senior level employees, meets at least quarterly to review the organization’s top risks, as well as any risks that may have been upgraded or downgraded during the review cycle. The output (reports, dashboards, etc.) from the ERM Council is consolidatedprogram, our mortgage insurance and presented to an ERM Executive Steering Committee (consisting of executive management) at least quarterly. The ERM Executive Steering Committee, alongtitle insurance businesses employ comprehensive risk management functions, which, in conjunction with the ERM Council, is responsible for assistingoversight of the Risk Committee of our board of directors, in the fulfillment of its risk oversight responsibilities.
Radian currently employs more than 60 dedicated risk management professionals and has developed and established credit, portfolio, and counterparty risk policies, enterprise risk management policies, proceduresare responsible for monitoring compliance with theseour risk-related policies, managing our insured portfolios and comprehensive capabilitiescommunicating credit related issues to management, our board of directors and tools to identify, communicate, and mitigate credit and risk-related issues.our customers.
Mortgage Insurance Risk Management
Our mortgage insurance business employs a comprehensive risk management function, which is responsible for establishing our credit and counterparty risk policies, monitoring compliance with our policies, managing our insured portfolio and communicating credit related issues to management, the Credit Management Committee of Radian Group’s board of directors and to our customers.
Risk Origination and Servicing. We believe that understanding our business partners and customers is a key component of managing risk. Accordingly, we assign individual risk managers to specific customershave a Counterparty Risk Management team that leverages our Customer and Servicer Segmentation Framework so that theywe can more effectively perform ongoing monitoring of loan performance, underwriting quality and the risk profile and mix of business of a customer’s mortgage insurance applications. This also allows us to address specific needs of individual customers. The risk managers are located across the country, and their direct interaction with our customers and their access to local markets improves our ability to observe business patterns and manage risk trends. This oversight provides us with the ability to review and study best practices throughout the industry and develop robust data management analysis. The risk managers leverage a suite of customer-level reports to monitorCounterparty Risk Management team monitors trends at the customer level, identifyidentifies customers who may exceed certain risk tolerances and shareshares meaningful performance data with our customers.customers to help them improve. The risk managers areteam is also responsible for lender corrective action in the event we discover credit performance issues, such as high early payment default levels.
Portfolio Management. We have developed risk and capital allocation models thatto support our mortgage insurance business. These models provide robust analysis tocomprehensive analytics that help us establish portfolio limits for product type, loan attributes, geographic concentrations and counterparties. We proactively monitor market concentrations across these and other attributes. We also identify, evaluate and negotiate potential transactions for terminating insurance risk and for distributing risk to others,third parties, including through reinsurance arrangements. See “—Ceded ReinsuranceRisk Distribution” below for more information about the use of reinsurance as a risk management tool in our mortgage insurance business.
As part of our portfolio management function, we monitor and analyze the performance of various risks in our mortgage insurance portfolio. We use this information to develop our mortgage credit risk and counterparty risk policies, and as a component of our default and prepayment analytics.
The portfolio management group analyzes the current composition of our mortgage insurance portfolio, and assesses risks to the portfolio from the market (e.g., the effects of changes in home prices and interest rates) as well as risks from particular lenders, products and geographic locales.
Credit Policy. We have developed and maintain mortgage-related credit risk policies. These policies that reflect our tolerance levels regarding counterparty, portfolio and operational risks involving mortgage collateral. OurBased on our policies and risk tolerances, our credit policy function develops and updates our mortgage insurance eligibility requirements and guidelines through regular monitoring of competitor offerings, customer input regarding lending needs, analysis of historical performance and portfolio trends, quality assurance results and underwriter experience and observations and risk tolerances. The credit policy function also maintains the policies for loan and lender-level exceptions to published guidelines and under-performing lenders, which are administered by mortgage insurance underwriters and risk managers.observations. The credit policy function works closely with our mortgage insurance underwriters to ensure that underwriting decisions align with risk tolerances and principles.
Quality Assurance. Our Quality assurance is a key element ofAssurance function supports our credit analytics function and as part of our quality control program, we auditby auditing individual loan files to examine underwriting decisions for compliance with agreed-upon underwriting guidelines. These audits are conducted across loans submitted through our delegated and non-delegated underwriting channels. Our quality assurance team also audits both our customers and our underwriters to ensuremonitor quality in our NIW. Observations and trends derived from our quality assurance process serve as critical inputs into portfolio monitoring, eligibility and guideline
updates and customer surveillance, while also providing valuable feedback to our customers and our underwriters regarding the quality of their mortgage insurance underwriting decisions.
Loss Mitigation. We have a dedicated loss mitigation group that works with servicers to identify and pursue loss mitigation opportunities for loans in both our performing and non-performing (defaulted) portfolios. This includes regular surveillance and benchmarking of servicer performance with respect to default reporting, borrower retention efforts, foreclosure alternatives and foreclosure processing. Through this process, we seek to hold servicers accountable for their performance and communicate to servicers identified best practices for servicer performance. See “Mortgage—Defaults and Claims—Claims Management” above for more information.
Risk Modeling.We have expertise in the development and deployment of integrated credit and interest rate Our risk models. Usingmodeling team uses analytical techniques we have developedto develop and maintain economic scenario generation models and loan level default and prepayment models for a wide range of risk management applications, including portfolio analysis, credit decision making, forecasting and loss reserving.
Ceded Reinsurance.Risk Distribution. Radian’s reinsurance programs represent a component ofIn our long-term risk distribution strategy. Wemortgage insurance business, we use reinsurance as a capital and risk management tool into lower the risk profile and financial volatility of our mortgage insurance business.portfolio through economic cycles. We have entered intodistributed risk through third-party reinsurance transactions as part of our capital and risk management activities, including quota share and excess-of-loss reinsurance programs that are utilized to proactively manage Radian Guaranty’sarrangements, including through the capital position under the PMIERs financial requirements, and manage the mix of business in our portfolio. During 2018,markets using mortgage insurance-linked notes transactions. In recent years, we have expanded our risk distribution strategy in an effort to optimize the amounts and types of capital and risk distribution deployed against insured risk. The objectives of our risk distribution strategy include: (i) supporting our overall capital plans; (ii) loweringplan by reducing our cost of capital;capital, increasing capital efficiency and (iii)enhancing our projected returns on capital and (ii) reducing portfolio risk and financial volatility through economic cycles. For additional information regarding our third-party quota share reinsurance programs, see Note 8 of Notes to Consolidated Financial Statements.
Title Insurance Risk Management
We take a prudent approach to assessing and managing risk in our title insurance business through the use of well-trained underwriters, stringent underwriting guidelines and the imposition of per file risk limits and third-party reinsurance on a per policy basis, over certain policy limits.
Underwriting and Quality Assurance. Our agents, underwriters and title examiners receive training and feedback in the examining and underwriting of residential and commercial title insurance for both refinance and purchase transactions. Specific title commitments are selected for further review to ensure that underwriting decisions comply with agreed-upon underwriting guidelines and that the policies are within single risk limits.
Credit Policy. We have developed and maintain policies for our title insurance business, which reflect our risk tolerance levels. Risk limits are imposed on selected loan types and reinsurance is currently required on all policies with loan amounts above a specified amount.
Ceded Reinsurance. In our title insurance business, we use reinsurance as part of our capital and risk management activities, including a loss portfolio transfer reinsurance agreement that transfers a portion of the risk associated with the legacy title insurance in our portfolio (insurance written prior to the acquisition of our title insurance subsidiary) to a third party up to a specified dollar limit. We also currently maintain an excess of loss policy with a third-party reinsurer that covers losses on our entire title insurance legacy portfolio above a specified limit.
Cybersecurity Risk Management
Information security is a significant operational risk for financial institutions such as Radian and includes the risk of loss resulting from cyber-attacks. In an effort to mitigate this risk, Radian has builtwe have an Information Security Program that is dedicated to protecting our corporate data as well as data entrusted to us by our customers and partners. At the core of our program is a defense-in-depth strategy, which utilizes multiple layers of security controls to protect data and solutions. Radian utilizes
We use the National Institute of Standards and Technology Cybersecurity Framework (the “NIST CSF”), as a guideline to manage our cybersecurity-related risk. The NIST CSF outlines 98 information security measures and controls over five functions: Identify, Protect, Detect, Respond and Recover. We have developed key security services, including but not limited to, Enterprise Data Protection, Vulnerability Management and Application Security, Managed Threat Detection and Incident Response. We test our incident response readiness and reporting through table toptabletop exercises, external and internal penetration testing and other meanscontinuous internal security testing in our efforts to ensure that risks and incidents are identified, escalated and communicated for appropriate remediation activities to appropriate personnel. reduce risk to an acceptable level.
Our commitment to growing and maintaining our Information Security Program extends across the organization. Our core Information Security Team is comprised of industry-certified practitioners who are committed to adopting security technologies and practices that meet regulatory standards.all business lines. We have an Information Security and Resilience Committee comprised of companyCompany executives, cross-functional Incident Response teams and strong governance mechanisms designed to ensure compliance with our security policies and protocols. Additionally, our full board of directors is actively engaged in the Information Security Program’s oversight and receives regular updates and reporting from the Company’s Chief Information Security Officer on information security strategies, defense initiatives, event preparedness and continuous improvement efforts. While we have an Information Security Program in place in order to attempt to prevent, detect and respond to unauthorized use or disclosure of confidential information, including non-public personal information, there can be no assurance that such use or disclosure will not occur. See “Item 1A. Risk Factors—TheWe could incur significant liability or reputational harm if the security of our information technology systems may be compromised andis breached, including as result of a cyberattack, or we otherwise fail to protect confidential information, including non-public personalpersonally identifiable information that we maintain could be improperly disclosed..”
Human Capital Management
For nearly 45 years at Radian, our products and services have responsibly helped millions of families achieve their dream of homeownership. This company-wide commitment to affordable and sustainable homeownership, along with our support of our customers and the communities where we live and work, defines who we are as an enterprise and aligns with our core organizational values: Deliver the Brand Promise, Innovate for the Future, Create Shareholder Value, Our People are the Difference, Do What’s Right and Partner to Win.
We value our employees by supporting a healthy work-life balance and a team-oriented, One Radian environment. We strive to offer competitive compensation and benefits programs as well as development opportunities, while fostering a community where everyone feels included and empowered to do their best work and is encouraged to give back to their communities to make a social impact. As of December 31, 2021, we had approximately 1,800 employees of Radian Group and its subsidiaries.
COVID-19 Response
In response to the COVID-19 pandemic, we took a number of actions to focus on protecting and supporting our workforce. We seamlessly transitioned to a work-from-home virtual workforce model and throughout 2021 continued to offer the flexibility of remote work options for most employees and safe in-office opportunities for those employees with a desire to work outside their homes. Those activities requiring in-office work were supported by limited staff in office environments that comply with CDC guidelines and applicable state and local requirements. These efforts were further supported through regular COVID-19 testing regimes. In order to promote our company culture and encourage frequent communication and camaraderie, we established frequent virtual connections through weekly CEO messages, CEO and senior management roundtables and employee surveys to encourage feedback.
We continue to reinforce our employee health and wellness benefits and mental health program resources by implementing benefit program changes to accommodate COVID-19-related leaves and hardships, amending our savings and retirement plans to comply with legislation that allows for greater flexibility in response to the pandemic and providing access to third-party caregiver and household support services.
During the second quarter of 2021, in response to Radian’s transition to a mainly virtual work environment and employees voicing their preference for increased flexibility and opportunities to work remotely, we made the decision to exit, and to actively market for sublease, all office space in our former corporate headquarters in downtown Philadelphia. As part of this change, we entered into two new leases with overall reduced square footage, including our new corporate headquarters in Wayne, Pennsylvania and a Cherry Hill, New Jersey location.
Compensation and Benefits Program
Our compensation programs are designed to attract, retain and reward talented individuals who possess the skills and qualities necessary to support our business objectives, demonstrate our values, assist in the achievement of our strategic goals and create long-term value for our stockholders. Our compensation programs include base salary, annual incentive bonuses and for certain employees, other performance-related cash-incentives such as commissions and long-term equity incentive awards.
Our annual short-term incentive or bonus program is designed and approved by the Compensation and Human Capital Management Committee of our board of directors to incent achievement of our financial objectives and execution of our strategic plan in alignment with our organizational values. Compliance with our values and efforts to advance our human capital management efforts are considered as part of our employees’ performance evaluations and are taken into consideration in determining each employee’s annual short-term incentive award.
In addition to our cash and equity compensation programs, we offer employees a comprehensive benefits package, including, among others, life and health (medical, dental and vision) insurance, paid time off, paid parental leave and caregiver leave, a 401(k) plan with an employer matching contribution and tuition reimbursement. In addition, in order to support our employees and advance our mission to promote affordable, sustainable homeownership, we offer all eligible employees the opportunity to save on Radian mortgage insurance with partial reimbursement of their mortgage insurance expense. We are exploring alternatives to expand upon this employee affinity program in 2022.
Diversity, Equity and Inclusion
At Radian, we are committed to an inclusive and diverse workplace, as represented by our theme We Are Many, We Are One Radian. We believe that an equitable and inclusive environment with diverse teams produces more creative solutions, results in better, more innovative products and services and is crucial to our efforts to attract and retain key talent.
In 2019, we established a Diversity, Equity and Inclusion (“DEI”) Council that is sponsored by our CEO, led by senior management and consists of leaders and employees from across the Company to advance the program and its efforts. In 2020, we created a framework for and launched Radian’s Employee Resource Group (“ERG”) program, which is an important aspect of Radian’s DEI efforts because it not only creates inclusive communities where employees feel support, but it enriches our overall company culture. These ERGs have taken root throughout 2021, and Radian currently has three active ERGs: TrueColors, which brings together our LGBTQIA+ employees and allies; Women Heard as our Women’s group; and Vibrant Crossroads, which highlights intersectionality and multiculturalism.
We are committed to providing equal employment opportunities and promoting inclusive hiring practices, developing targeted recruitment strategies and improving internal reporting capabilities. In 2020, we trained all managers on unconscious bias and, in 2021, we hired a recruiter dedicated to DEI and deployed mandatory DEI training for all employees. We also completed a pay equity analysis in partnership with an external expert to ensure an objective review of our pay practices. We are committed to enhancing our DEI maturity, and have developed our DEI Roadmap to execute our multi-year DEI strategy. Our roadmap commits us to progress, and we report on this progress to our workforce on a quarterly basis.
In terms of gender equality, Radian has been making strides in advancing women in the workplace and in December 2021 was recognized by the Bloomberg Gender Equality Index for the fourth consecutive year. At December 31, 2021, women represented 59.9% of our workforce, 44.4% of the direct reports to our Chief Executive Officer and 40.5% of our senior management team comprising officers at the Assistant Vice President level and above. In addition, based on the number of women on Radian Group’s board of directors, Radian was awarded a ‘W’ by 2020 Women on Boards for being a ‘winning company’ and was named one of the Forum of Executive Women’s 2021 Champions of Board Diversity.
Finally, we know that advancing a culture of inclusion takes every single employee. For 2022 goal setting, all employees have been asked to include a DEI goal in their goal plan. By focusing all employees on the importance of our DEI efforts, we can continue to advance a culture of inclusion and respect.
Talent Development and Employee Engagement
We invest in our people to provide opportunities for career growth. Talent development, annual performance reviews that are focused in part on living our company values and succession planning are all important aspects of this investment. These processes help management identify and nurture top talent for leadership opportunities and support the growth and development of knowledge and skills of Radian employees, managers and leaders.
In order to measure engagement and culture across the organization, we use employee experience surveys. Our most recent employee experience survey was conducted in 2021 with a 70% employee participation rate (versus a benchmark of 65%) and responses revealed an Engaged-to-Disengaged Ratio of 21.5 to 1 (versus a benchmark of 2.1 to 1). In addition to our experience surveys, we frequently use employee pulse surveys to gather employee feedback.
Community Involvement
Radian’s financial strength and growth depend on the well-being of our employees, and therefore, the communities in which they live and we operate. Our Corporate Citizenship Program was developed to encourage and support the generosity and community involvement of our employees. Since its inception, the program – through both company and employee contributions – has provided significant financial support to charities across the country. The program consists of three pillars: charitable contributions, matching gifts and community connection.
Following the onset of the COVID-19 pandemic, we implemented a number of initiatives to help alleviate the impact of the COVID-19 pandemic, including doubling our matching gift program for employees and passing on some of our savings from reduced travel and entertainment expenses to organizations supporting essential workers. Our community-based program, Radian Connected, provides opportunities for employee engagement and community involvement, including volunteerism and opportunities for learning and skill development, as well as social opportunities to network and build stronger working relationships. We believe that this commitment to our communities helps in our efforts to attract and retain employees.
Regulation
We are subject to comprehensive regulation by both federal and state regulatory authorities. Set forth below is a description of significant state and federal regulations and other requirements of the GSEs that are applicable to our businesses. The descriptions below are qualified in their entirety by reference to the full text of the laws and regulations discussed. In Item 1A. Risk Factors, see “—Our insurance subsidiaries are subject to comprehensive state insurance regulations and other requirements, which we may fail to satisfy.satisfy”and “—Legislation and administrative and regulatory changes and interpretations could impact our businesses.businesses.”
State Regulation
Overview of State Insurance Regulation and Our Insurance Subsidiaries
We and our insurance subsidiaries are subject to comprehensive regulation by the insurance departments in the various states where they are licensed to transact business. Insurance laws vary from state to state, but generally grant broad supervisory powers to agencies or officials to examine insurance companies and enforce rules or exercise discretion affecting almost every significant aspect of the insurance business. These regulations principally are designed for the protection of policyholders, rather than for the benefit of investors.
Insurance regulations address, among other things, the licensing of companies to transact business, claims handling, reinsurance requirements, premium rates and policy forms offered to customers, financial statements, periodic reporting, permissible investments and adherence to financial standards relating to surplus, dividends and other measures of solvency intended to assure the satisfaction of obligations to policyholders.
Our insurance subsidiaries’ premium rates and policy forms are generally subject to regulation in every state in which they are licensed to transact business. These regulations are intended to protect policyholders against excessive, inadequate or unfairly discriminatory rates and to encourage competition in the insurance marketplace. In most states where our insurance subsidiaries are licensed, premium rates and policy forms must be filed with the state insurance regulatory authority and, in some states, must also be approved before their use.
With respect to mortgage insurance, premium rates may be subject to actuarial justification, generally on the basis of the mortgage insurer’s loss experience, expenses and future projections. In addition, states may considerassess how rates are being charged to various customers based on whether they are “similarly situated” and also may evaluate general default experience in the mortgage insurance industry in assessing the premium rates charged by mortgage insurers. In many states, the filed forms allow for a deviation from the filed rates within a certain range to take into consideration various factors linked to the credit being insured.
As to title insurance, formspremium rates and ratespolicy forms must be filed with state insurance regulatory authorities and, in mostsome states, must also be approved prior to usage. Formsbefore their use. Policy forms require approval to ensure that the coverage and exceptions conform to state insurance regulations. RatesPremium rates subject to approval often must be supported by actuarial data or a study of financial impact of the premium rate on the company.Company. In September of 2017, the New York State Department of Financial Services (“DFS”) issued 11 NYCRR 228 (“Regulation 208”) which regulates title insurance marketing practices, expenses and transaction related charges in the state of New York. Regulation 208 limits or bans title underwriters and agents from charging consumers certain title- and closing-related fees, and Regulation 208 contains strict rules around marketing expenses aimed at restricting or stopping certain marketing practices in the title industry. While Regulation 208
currently is one of the most strict title marketing regulations, a number of other states impose similar restrictions on such activity, either through regulations that are specific to title marketing or through broader state insurance anti-inducement and anti-rebating laws. Radian Settlement Services and Radian Title Insurance have adjusted their transaction fees and marketing practices and expenses to comply with Regulation 208 and other similar state laws.
Each insurance subsidiary is required by the insurance regulatory authority of its state of domicile, and the insurance regulatory authority of each other jurisdiction in which it is licensed to transact business, to make various filings with those insurance regulatory authorities and with the NAIC, including quarterly and annual financial statements prepared in accordance with statutory accounting principles.SAP. In addition, our insurance subsidiaries are subject to examination by the insurance regulatory authority of their state of domicile, as well as each of the states in which they are licensed to transact business.
Radian Group is an insurance holding company and our mortgage insurance subsidiaries and title insurance company belong to an insurance holding company system. All states regulate insurance holding company systems, including the non-insurer holding company within that system. These laws generally require each insurance subsidiary within an insurance holding company system to register with the insurance regulatory authority of its domiciliary state, and to furnish to the regulators in these states applicable financial statements, statements related to intercompany transactions and other information concerning the holding company and its affiliated companies within the holding company system that may materially affect the operations, management or financial condition of insurers or the holding company system.
We are subject to the insurance holding company laws of Pennsylvania and Ohio because all of our mortgage insurance subsidiaries are domiciled in Pennsylvania and EnTitleRadian Title Insurance is domiciled in Ohio. These insurance holding company laws regulate, among other things, certain transactions between Radian Group, our insurance subsidiaries and other parties affiliated with us.affiliates. The holding company laws of Pennsylvania and Ohio also govern certain transactions involving Radian Group’s common stock, including transactions that constitute a “change of control” of Radian Group and, consequently, a “change of control” of its insurance subsidiaries. Specifically, no person may, directly or indirectly, seek to acquire “control” of Radian Group or any of its mortgage insurance subsidiaries unless that person filesreceived prior approval after filing a statement and other documents with the Pennsylvania Insurance CommissionerDepartment and, receives prior approval fromin the Commissioner.case of a change of control involving Radian Group or Radian Title Insurance, the Ohio Department of Insurance. Under Pennsylvania’s and Ohio’s insurance statutes, “control” is defined broadly and is “presumed to exist if any person, directly or indirectly, owns, controls, holds with power to vote or holds proxies representing 10% or more of the voting securities” of a holding company of a Pennsylvania domesticor Ohio domiciled insurer. The statute further defines “control” as the “possession, direct or indirect, of the power to direct or cause the direction of the management and policies of” an insurer.
In addition, material transactions between us or our affiliates and our insurance subsidiaries or among our insurance subsidiaries are subject to certain conditions, including that they be “fair and reasonable.” These conditions generally apply to all persons controlling, or who are under common control with, us or our insurance subsidiaries. Certain transactions between us or our affiliates and our insurance subsidiaries may not be entered into unless the Pennsylvania Insurance CommissionerDepartment or Ohio Department of Insurance, as applicable, is given 30 days’ prior notificationnotice and does not disapprove the transaction during that 30-day period.
Pennsylvania and Ohio regulations also require that we identify the material risks within the insurance holding company system that could pose enterprise risk to the insurer. Among other things, Pennsylvania and Ohio require that insurers domiciled in their states maintain a risk management framework and conduct an Own Risk and Solvency Assessment (“ORSA”) annually in accordance with applicable NAIC requirements.
All of ourOur two principal mortgage insurance subsidiaries are domiciled in Pennsylvania. Listed below are our principal insurance companies as of December 31, 2018:2021 are:
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• | Radian Guaranty.Radian Guaranty – Radian Guaranty is our primary mortgage insurance company. Radian Guaranty is a direct subsidiary of Radian Group. Radian Guaranty is our only mortgage insurance company, that is eligible to provide mortgage insurance on GSE loans. It is a monoline insurer, restricted to writing first-lien residential mortgage guaranty insurance. In addition to Pennsylvania, Radian Guaranty is authorized to write mortgage guaranty insurance (or in states where there is no specific authorization for mortgage guaranty insurance, the applicable line of insurance under which mortgage guaranty insurance is regulated) in each of the other 49 states, the District of Columbia and Guam. |
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• | Radian Reinsurance. Radian Reinsurance is a licensed affiliated reinsurer that primarily provides reinsurance to Radian Guaranty. Radian Reinsurance is a direct wholly-owned subsidiary of Radian Group. Radian Guaranty is our only mortgage insurance company that is currently eligible to provide first-loss mortgage insurance on GSE loans. It is a monoline insurer, restricted by the laws of certain states to writing first-lien residential mortgage guaranty insurance. Radian Guaranty is authorized to write mortgage guaranty insurance (or in states where there is no specific authorization for mortgage guaranty insurance, the applicable line of insurance under which mortgage guaranty insurance is regulated) in all 50 states, the District of Columbia and Guam.
Radian Reinsurance – Radian Reinsurance is a direct wholly-owned subsidiary of Radian Group and is a licensed credit insurer in Pennsylvania. We have used Radian Reinsurance to participate in the credit risk transfer programs developed by Fannie Mae and Freddie Mac, and therefore, Radian Reinsurance currently provides mortgage credit risk insurance on GSE loans through these programs. See “Mortgage—Mortgage Insurance Products—Other Mortgage Insurance Products—GSE Credit Risk Transfer” for more information about these programs. We also use Radian Reinsurance to participate in the Front-end and Back-end credit risk transfer programs developed by Fannie Mae and Freddie Mac. See “Mortgage Insurance—Mortgage Insurance Business Overview—Mortgage Insurance Products—Other Mortgage Insurance Products—GSE Credit Risk Transfer” for more information about these programs. |
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• | Radian Insurance. Radian Insurance is our insurance subsidiary that insures our remaining second-lien mortgage loan risk. Radian Insurance is a direct subsidiary of Radian Group. Previously, Radian Insurance also insured our Hong Kong insurance portfolio. As of December 31, 2018, we had no remaining RIF in Hong Kong.
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In addition, we have the following mortgage insurance subsidiaries, eachsubsidiaries: Radian Insurance, a direct wholly-owned subsidiary of Radian Group that insures a small amount of second-lien mortgage loan risk written prior to the financial crisis; and Radian Mortgage Assurance, a direct wholly-owned subsidiary of Radian Group which had no RIF as of December 31, 2018: Radian Investor Surety Inc., Radian Mortgage Guaranty Inc., Radian Guaranty Reinsurance and Radian Mortgage Assurance.2021.
As part of our title services business, we offer title insurance through EnTitleRadian Title Insurance, which we acquired in March 2018. Radian Title Insurance is an Ohio domiciled title insurance underwriter and settlement services company that is licensed to issue title insurance policies in 3941 states and the District of Columbia. EnTitleRadian Title Insurance is aan indirect subsidiary of Radian Group and is wholly owned subsidiary of EnTitle Direct, which we acquired on March 27, 2018. As an insurance company, EnTitle Insurance is subject to comprehensive regulation by the insurance departments in the various states where it is licensed to transact business and subject to examination by the insurance regulatory authority of its state of domicile, the Ohio Department of Insurance.Radian Title Services Inc.
Mortgage Insurance Capital Requirements and Dividends
Under state insurance regulations, Radian Guaranty is required to maintain minimum surplus levels and, in certain states, a minimumStatutory RBC Requirement that is based on maximum ratio of statutory capital relative to the level of net RIF relative to statutory capital, or Risk-to-capital. Sixteen states currently impose a Statutory RBC Requirement. The most common Statutory RBC Requirement is that a mortgage insurer’s Risk-to-capital may not exceed 25 to 1. In1, while in certain of theother RBC States, Radian Guaranty must satisfy a MPP Requirement. The statutory capital requirements for the non-RBC States are de minimis (ranging from $1 million to $5 million); however, the insurance laws of these states generally grant broad supervisory powers to state agencies or officials to enforce rules or exercise discretion affecting almost every significant aspect of the insurance business, including the power to revoke or restrict an insurance company’s ability to write new business. Unless an RBC State grants a waiver or other form of relief, if a mortgage insurer, such as Radian Guaranty, is not in compliance with the Statutory RBC Requirement of that state, it may be prohibited from writing new mortgage insurance business in that state. Radian Guaranty’s domiciliary state, Pennsylvania, is not one of the RBC States. In 2018 and 2017, the RBC States accounted for approximately 55.0% and 55.1%, respectively, of Radian Guaranty’s total primary NIW. As of December 31, 2018,2021, Radian Guaranty’s Risk-to-capital was 13.911.1 to 1, and Radian Guaranty was in compliance with all applicable Statutory RBC Requirements.
The See Note 16 of Notes to Consolidated Financial Statements for more information on statutory capital requirements, including potential changes under consideration by the NAIC is in the process of reviewingto the minimum capital and surplus requirements for mortgage insurers and considering changes toincluded in the Model Act. In May 2016, a working group of state regulators released an exposure draft of a risk-based capital framework to establish capital requirements for mortgage insurers. The process for developing this framework is ongoing. While the timing andultimate outcome of this process remains uncertain, in the event the NAIC adopts changes to the Model Act we expect thatand new capital framework remains uncertain, including the capital
form of requirements in states that adopt the new Model Act may increase as a result of the changes. While we cannot provide any assurance, based on the current exposure draft, we do not believe that the capital requirements thatand how they may be adopted under the new Model Act are likely to exceed those of the PMIERs financial requirements.implemented and potentially enforced. See “Item 1A. Risk Factors—Our insurance subsidiaries are subject to comprehensive state insurance regulations and other requirements, which we may fail to satisfy.satisfy.”
Under Pennsylvania’s insurance laws, dividends and other ordinary distributions may only be paid out of an insurer’s positive unassigned surplus measured as of the end of the prior fiscal year, unless the Pennsylvania Insurance CommissionerDepartment approves the payment of dividends or other distributions from another source. While all proposed dividends and distributions to stockholders must be filed with the Pennsylvania Insurance Department prior to payment, if a Pennsylvania domiciled insurer had positive unassigned surplus as of the end of the prior fiscal year, then unless the prior approval of the Pennsylvania Insurance Commissioner is obtained, such insurer could only pay dividends or other distributions during any 12-month period in an aggregate amount less than or equal to the greater of: (i) 10% of the preceding year-end statutory policyholders’ surplus; or (ii) the preceding year’s statutory net income.
At December 31, 2018, although2021, Radian Guaranty and Radian Reinsurance had statutory policyholders' surplus of $814.1 million and $356.2 million, respectively, both companies hada negative unassigned surplus balances,balance of $562.8 million, primarily due to the need for mortgage guaranty insurers to establish and maintain contingency reserves. Radian Guaranty and Radian Reinsurance had negative unassigned surplus at December 31, 2018 of $701.9 million and $84.8 million, respectively, thereforereserves, as further discussed below. Therefore, no ordinary dividends or other ordinary distributions can be paid by these subsidiaries in 2019Radian Guaranty without prior approval from the Pennsylvania Insurance Commissioner. Because they also had negative unassigned surplus positions at December 31, 2017 and December 31, 2016, neither Radian Guaranty nor Radian Reinsurance was able to pay any ordinary dividends in 2018 or 2017. Due in part to the need to set aside contingency reserves, which are not included in an insurer’s statutory surplus as discussed below, we do not expect that Radian Guaranty or Radian Reinsurance will have positive unassigned surplus, and therefore we expect that they will not have the ability to pay ordinary dividends, for the foreseeable future. During the fourth quarter of 2018, the Pennsylvania Insurance Department approved a $450 million distribution of capital from Radian Guaranty to Radian Group, which was paid on December 21, 2018. See Note 19 of Notes to Consolidated Financial Statements for a discussion of this distribution of capital and another Extraordinary Distribution that was paid from Radian Guaranty to Radian Group in 2017 in connection with the reallocation of capital among our mortgage insurance subsidiaries.
All of our other mortgage insurance subsidiaries also had negative unassigned surplus at December 31, 2018. Therefore, no ordinary dividends or other distributions can be paid by these subsidiaries in 2019 without approval from the Pennsylvania Insurance Commissioner.Department.
For statutory reporting, mortgage insurance companies are required annually to set aside contingency reserves in an amount equal to 50% of earned premiums. SuchThe contingency reserve, which is designed to be a reserve against catastrophic losses, essentially restricts dividends and other ordinary distributions by mortgage insurance companies as such amounts cannot be released into surplus for a period of 10 years, except when loss ratios exceed 35%, in which case the amount above 35% can be released under certain circumstances. The
In light of Radian Guaranty’s negative unassigned surplus and the ongoing need to set aside contingency reserves, we do not anticipate that Radian Guaranty will be permitted under applicable insurance laws to pay ordinary dividends to Radian Group for the next several years. However, under Pennsylvania’s insurance laws, an insurer may request to pay an Extraordinary Distribution, subject to the approval of the Pennsylvania Insurance Department. See Note 16 of Notes to Consolidated Financial Statements for more information on contingency reserve which is designed to be a reserve against catastrophic losses, essentially restricts dividendsrequirements and otherstatutory dividend restrictions, as well as additional information about distributions by mortgage insurance companies. We classify the contingency reserves of capital paid from our mortgage insurance subsidiaries asin recent years and the approval in February 2022 of a statutory liability. At December 31, 2018,$500 million return of capital from Radian Guaranty andto Radian Reinsurance had contingency reserves of $2.1 billion, and $293.5 million, respectively.Group.
Title Insurance Capital Requirements and Dividends
EnTitleRadian Title Insurance is required to maintain Statutory Premium Reserves (“SPR”), calculated as a percentage of gross premiumpremiums collected. The SPR requirements are set by each state, with the most common being 7%. The SPR is then recovered based on a release schedule, amortized over twenty20 years. In addition to the SPR, EnTitleRadian Title Insurance is subject to periodic reviews of certain financial performance ratios, and the states in which it is licensed can impose capital requirements on EnTitleRadian Title Insurance based on the results of those ratios.
Under Ohio’s insurance laws, dividends and other ordinary distributions may only be paid out of an insurer’s positive unassigned surplus measured as of the end of the prior fiscal year, unless the Ohio Department of Insurance approves the payment of dividends or other ordinary distributions from another source. While all proposed dividends and distributions to stockholders must be filed with the Ohio Department of Insurance prior to payment, if an Ohio domiciled insurer had positive unassigned surplus, as of the end of the prior fiscal year, then unless the prior approval of the Ohio Department of Insurance is obtained, such insurer could onlycan pay dividends or other distributions during any 12-month period in an aggregate amount less than or equal to the greater of: (i) 10% of the preceding year-end statutory policyholders’ surplus;surplus or (ii) the preceding year’s statutory net income. EnTitleincome, in each case without the prior approval of the Ohio Department of Insurance. Radian Title Insurance had negative unassigned surplus at December 31, 20182021 of $23.9$13.8 million, therefore it is unable to pay ordinary dividends or other ordinary distributions in 2019 without prior approval from the Ohio Department of Insurance.
In September of 2017, the New York State Department of Financial Services (“DFS”) issued 11 NYCRR 228 (“Regulation 208”) which regulates title insurance marketing practices, expenses and transaction related charges in the state of New York. Regulation 208 limits or bans title underwriters and agents from charging consumers certain title and closing related fees, and contains strict rules around marketing expenses aimed at restricting or stopping certain marketing practices in the title industry. Radian Settlement Services and EnTitle Insurance have adjusted their transaction fees and marketing practices and
expenses to comply with Regulation 208. Regulation 208 also requires that title insurance underwriters retroactively affirm that they and their agents have not charged fees over the past six years in excess of those amounts which are now limited or expenses which are now banned. If a title insurance underwriter cannot affirm that it or its agents did not charge fees in excess of those allowed under Regulation 208 over the last six years, it will need to submit a reduced rate filing to come into compliance. On February 13, 2019, EnTitle Insurance submitted its reduced rate filing to comply with Regulation 208. DFS approved EnTitle’s reduced rate filing on February 15, 2019.
Mortgage, Real Estate and TitleOther Services
CertainIn addition to our insurance subsidiaries, certain of our Servicesother subsidiaries are subject to regulation and oversight by the states where they conduct their businesses, including requirements to be licensed and/or registered in the states in which they conduct operations.
Our real estate brokerage businesses providebusiness conducted through Red Bell provides services in all 50 states and the District of Columbia, and theyRed Bell and theirits designated brokersbroker in each state are required to hold licenses and conduct their brokerage business in conformity with the applicable license laws and administrative regulations of the states in which they are conducting their business. As a licensed real estate brokerage, Red Bell receives residential real estate information from various multiple listing services (“MLS”) through agreements with these MLS providers, which it uses to broker real estate transactions and provide valuation products and services, pursuant to the terms of these agreements. These MLS agreements withinclude restrictions on the permitted use of the MLS providers.information obtained through these agreements and impose requirements on the business of real estate brokerages in order to maintain eligibility to continue to receive the MLS information. If these agreements were to terminate or Red Bell otherwise were to lose access to this information, it could negatively impact Red Bell’s ability to conduct its business.
Radian Mortgage Capital LLC (“RMC”) is an indirect wholly-owned subsidiary of Radian Group that has been formed as a vehicle for exploring opportunities to leverage our industry knowledge and customer relationships to opportunistically expand our channels for aggregating, managing and distributing mortgage credit risk, including potentially purchasing residential mortgage loans and issuing residential mortgage-backed securities. RMC is not yet conducting business, but is licensed in 14 states and positioned to purchase and hold residential mortgages on a nationwide basis. See “Item 1A. Risk Factors—Investments to grow our existing businesses, pursue new lines of business or new products and services within existing lines of business subject us to additional risks and uncertainties.”
Radian Lender Services LLC provides third-party underwriting and loan processing services to lenders. This entity and its employees that provide our contract underwriting and loan processing services are eligible to provide these services in compliance with the SAFE Act for underwriting in all 50 states and the District of Columbia and in compliance with loan processing requirements in 45 states and the District of Columbia. See “—Federal Regulation—The SAFE Act.”
Radian Settlement Services and its affiliatessubsidiaries provide title and escrow services and these entities are required to hold the applicable required licenses in the jurisdictions where they operate their business. Title insurance agency and escrow licensing is primarily regulated by states in which the services are being offered, with licensing and registration typically within the jurisdiction of each state’s department of insurance. Radian Settlement Services is domiciled and licensed in Pennsylvania as a resident title insurance agency and, together with its affiliates,subsidiaries, is licensed in 3243 additional states.
Radian SettlementValuation Services and its affiliates also serve as an appraisal management company. In 2018, Radian acquired Independent Settlement Services, a national appraisal and title management services company. Radian Settlement Services and its affiliates are licensed to provide appraisal management services in 42 states and Independent Settlement ServicesLLC is licensed as an appraisal management company, licensed in 45 states.all 50 states and the District of Columbia, that supports certain valuation services provided by Red Bell. Real estate appraisal management statutes and regulations vary from state to state, but generally grant broad supervisory powers to agencies or officials to examine companies and enforce rules. While these businesses are generally state regulated, the Dodd-Frank Act established minimum requirements to be implemented by states regarding the registration and supervision of appraisal management companies. Most states have based their legislation on model legislation developed by the Appraisal Institute for the registration and oversight of appraisal management companies. Radian Settlement Services’ affiliate, ValuEscrow, Inc., is a California licensed escrow company, and is required to maintain all applicable licenses and fidelity certifications to operate in California.
Radian Clayton Services LLC provides third party underwriting services to lenders, including services that may be deemed loan origination activities as defined by the SAFE Act (discussed below) and state law equivalents. This entity and its employees that provide our contract underwriting services are compliant with the SAFE Act in all 50 states and the District of Columbia. See “—Federal Regulation—The SAFE Act.”
CybersecurityInformation Security
The DFS issued cybersecurity regulations known as “Part 500” that became effective March 1, 2017 and apply to all financial institutions and insurance companies licensed under the New York Banking, Insurance, and Financial Services Laws, including Radian Guaranty and certain of our other subsidiaries. The regulations require covered entities to, among other things: establish a cybersecurity program; adopt a written cybersecurity policy; designate a Chief Information Security Officer responsible for implementing, overseeing and enforcing the cybersecurity program and policy; and have policies and procedures designed to ensure the security of information systems and nonpublic information accessible to, or held by, third-parties, along with a variety of other requirements to protect the confidentiality, integrity and availability of information systems. Also in 2017, the NAIC issued an Insurance Data Security Model Law, which was modelled after Part 500, and which several states have adopted. The stated intention of that Model Law is that if a covered insurance company is compliant with Part 500, it also would be in compliance with the NAIC Insurance Data Security Model Law.
Privacy
In June of 2018, theThe State of California enacted the California Consumer Privacy Act (“CCPA”), which became effective in 2020 and applies to any company that does business in California and meets certain threshold requirements. The CCPA will become effective January 1, 2020, and the legislation requires the California Attorney General to adopt implementing regulations by July 1, 2020. While we are continuing to evaluate the applicability of the CCPA to our businesses, weWe believe Radian Group and certain of its affiliates may meet the CCPA threshold requirements, and therefore, may be deemed covered businesses under the CCPA.
The CCPA creates a new privacy framework for covered businesses that collect, sell or disclose personal information of California consumers. The definition of protected “personal information” underCompanies subject to the CCPA is broad, and the CCPA creates five new
categories ofare required to establish procedures to enable them to comply with a California consumer’s data privacy rights, for California consumers:including by disclosing the right to (1) know what personal information is being collected about them, whether their personal information is sold or disclosed and to whom; (2) access a copy of their personal information; (3) delete their personal information from business servers and service providers, unless it is necessary to maintain the information under enumerated exceptions; (4) opt outprivacy practices of the sale of their personal informationentity and responding to third parties; and (5) have equal access and service if they exercise their rights.consumer requests within prescribed timeframes. The CCPA provides a private right of action for data breaches, including statutory or actual damages, and public enforcement by the California Attorney General for other violations. Compliance
On November 3, 2020, California voters approved a ballot initiative known as Proposition 24, which created a new privacy law known as the California Privacy Rights Act (“CPRA”). The CPRA is designed to enhance certain of the privacy protections for California consumers that were created by the CCPA. Although most of the CPRA’s provisions will not go into effect until January 1, 2023, the CPRA is an expansive privacy law which will create additional compliance obligations for covered entities.
We have put policies and procedures in place to comply with the CCPA will require the development of new policies, procedures and operational changes. It is reasonably possible that the CCPA will promptCCPA. In addition to California, other state and federal regulatorsstates have started to move forward with new privacy regulations thatand federal regulators have proposed draft federal privacy legislation, all of which, to the extent they are adopted, could impose additional compliance obligations on covered entities beyond those currently in effect and could impact our businesses or those of our customers.
GSE Requirements
PMIERs - Private Mortgage Insurer Eligibility Requirements. As the largest purchasers of conventional mortgage loans, and therefore, the main beneficiaries of private mortgage insurance, the GSEs impose eligibility requirements The earliest that private mortgage insurers must satisfy in orderthese other laws are scheduled to be approved to insure loans purchased by the GSEs. The PMIERs initially became effective December 31, 2015, and aim to ensure that approved insurers will possess the financial and operational capacity to serve as strong counterparties to the GSEs throughout various market conditions. The PMIERs are comprehensive, covering virtually all aspects of the business and operations of a private mortgage insurer of GSE loans, including internal risk management and quality controls, the relationship between the GSEs and the approved insurer and the approved insurer’s financial condition. The PMIERs contain extensive requirements related to the conduct and operations of our mortgage insurance business, including operational requirements in areas such as claim processing, loss mitigation, document retention, underwriting, quality control, reporting and monitoring, among others. In addition, the PMIERs prohibit private mortgage insurers from engaging in certain activities such as insuring loans originated or serviced by an affiliate (except under certain circumstances) and require private mortgage insurers to obtain the prior consent of the GSEs before taking certain actions, which may include enteringgo into various intercompany agreements and commuting or reinsuring risk, among others. Radian Guaranty currentlyeffect is an approved mortgage insurer under the PMIERs and is in compliance with the PMIERs financial requirements.
The PMIERs financial requirements require that a mortgage insurer’s Available Assets meet or exceed its Minimum Required Assets. The PMIERs financial requirements include increased financial requirements for defaulted loans, as well as loans with a higher likelihood of default and/or certain credit characteristics, such as higher LTVs and lower FICO scores, and for loans originated after January 1, 2016 that are insured under lender-paid mortgage insurance policies not subject to automatic termination under the HPA. Therefore, if our mix of business includes a higher percentage of loans that are subject to these increased financial requirements, it increases the Minimum Required Assets and/or the amount of Available Assets that Radian Guaranty is required to hold. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Operating Environment.”2023.
The GSEs have significant discretion under the PMIERs and may amend the PMIERs at any time, although the GSEs have communicated that for material changes, including material changes affecting Minimum Required Assets, they will generally provide written notice 180 days prior to the effective date and engage in a discussion and comment process with the private mortgage insurers regarding the proposed changes prior to finalizing them. On September 27, 2018, the GSEs issued PMIERs 2.0, which will become effective on March 31, 2019. PMIERs 2.0 eliminates any credit for future premiums for insurance policies written prior to and including 2008, which is permitted under the current PMIERs. In addition, among other changes, defaulted loans in FEMA-declared major disaster areas will require a reduced level of Minimum Required Assets under PMIERs 2.0, subject to certain requirements. Radian Guaranty expects to comply with PMIERs 2.0 as of the effective date.
We have entered into reinsurance transactions as part of our capital and risk management activities, including to manage Radian Guaranty’s capital position under the PMIERs financial requirements. The initial and ongoing credit that we receive under the PMIERs financial requirements for these transactions is subject to the periodic review of the GSEs.
Although we expect Radian Guaranty to retain its eligibility status with the GSEs and to continue to comply with the PMIERs financial requirements, including as they may be updated, we cannot provide assurance that this will occur. See “Item 1A. Risk Factors—Radian Guaranty may fail to maintain its eligibility status with the GSEs.”
Other GSE Business Practices and Requirements. The GSEs, acting independently or through their conservator, the FHFA, have the ability to change their business practices and requirements in ways that impact our business. Examples of more recent changes or proposed changes in the GSEs’ business practices and requirements are:
the GSEs’ proposal of new minimum requirements for master insurance policies to revise the GSE Rescission Relief Principles to, among other things, further limit the circumstances under which mortgage insurers may rescind insurance coverage;
the changes to the PMIERs under PMIERs 2.0 that become effective on March 31, 2019; and
changes to underwriting standards on mortgages they purchase, including for example, the GSEs’ decision to expand credit in 2017 by purchasing a larger portion of loans with debt-to-income ratios greater than 45%.
For information on additional potential changes in GSE business practices and requirements that could impact our business, see “Item 1A. Risk Factors—Changes in the charters, business practices, or role of the GSEs in the U.S. housing market generally, could significantly impact our mortgage insurance business.”
Federal Regulation
CARES Act
Since the outbreak of the pandemic, there have been a number of governmental efforts to implement programs designed to assist individuals and businesses impacted by the COVID-19 virus, including the CARES Act that was enacted on March 27, 2020. The CARES Act provided a temporary foreclosure and eviction moratorium for residential mortgagors with certain federally- or GSE-backed mortgages. After being extended multiple times, the GSEs’ moratorium on single-family real estate owned (REO) evictions expired on September 30, 2021. The GSEs’ moratoriums on most single-family foreclosures also were
extended multiple times before expiring December 31, 2021, which was the expiration date of the foreclosure moratorium imposed by the CFPB.
In addition, under the CARES Act, upon request by borrowers of federally-backed mortgage loans who attest to financial hardship related to the pandemic, mortgage servicers are required to provide these borrowers with up to 180 days forbearance on their mortgage payments, which may be extended for an additional 180 days upon request, without requiring validation by the borrowers of their hardship. The CARES Act provides no end date for when the 180 days forbearance must initially be offered. The permissible forbearance period of 12 months under the CARES Act has been lengthened by various federal agencies and the length of the period varies depending on the agency and type of mortgage at issue. For example, the GSEs extended the allowable forbearance period from 12 months to 18 months for those borrowers who were in an active COVID-19-related forbearance program as of February 28, 2021.
The GSEs have announced that, at the end of a forbearance plan, the homeowner may not be required to pay back their reduced or suspended mortgage payments in one lump sum, but may be eligible for a number of different options offered by their mortgage servicer, including repayment plans, resuming normal payments or lowering the monthly loan payment through a modification. For additional information on the potential impacts of the CARES Act on the GSEs, loan servicers and our PMIERs financial requirements, in Item 1A. Risk Factors, see “—Radian Guaranty may fail to maintain its eligibility status with the GSEs, and the additional capital required to support Radian Guaranty’s eligibility could reduce our available liquidity,” “—Changes in the charters, business practices or role of the GSEs in the U.S. housing market generally, could significantly impact our businesses,” and “—Our business depends, in part, on effective and reliable loan servicing.”
GSE Requirements for Mortgage Insurance Eligibility
As the largest purchasers of conventional mortgage loans, and therefore, the main beneficiaries of private mortgage insurance, the GSEs impose eligibility requirements that private mortgage insurers must satisfy in order to be approved to insure loans purchased by the GSEs. The PMIERs initially became effective December 31, 2015 and aim to ensure that approved insurers will possess the financial and operational capacity to serve as strong counterparties to the GSEs throughout various market conditions. The PMIERs are comprehensive, covering virtually all aspects of the business and operations of a private mortgage insurer of GSE loans, including internal risk management and quality controls, the relationship between the GSEs and the approved insurer and the approved insurer’s financial condition. The PMIERs contain extensive requirements related to the conduct and operations of our mortgage insurance business, including operational requirements in areas such as claim processing, loss mitigation, document retention, underwriting, quality control, reporting and monitoring, among others. Radian Guaranty currently is an approved mortgage insurer under the PMIERs.
The PMIERs’ financial requirements require that a mortgage insurer’s Available Assets meet or exceed its Minimum Required Assets. The PMIERs’ financial requirements include increased financial requirements for defaulted loans, as well as for performing loans with a higher likelihood of default and/or certain credit characteristics, such as higher LTVs and lower FICO credit scores. With respect to defaulted loans, the PMIERs recognize that loans that have become non-performing as a result of a FEMA Declared Major Disaster generally have a higher likelihood of curing following the conclusion of the event and therefore applies a Disaster Related Capital Charge to reduce the Minimum Required Asset factor for these loans.
In 2020, in response to the COVID-19 pandemic, the GSEs issued guidelines (“National Emergency Guidelines”) that became effective June 30, 2020 and, among other things, adopted the COVID-19 Amendment to the PMIERs to apply the Disaster Related Capital Charge nationwide to certain non-performing loans that we refer to as COVID-19 Defaulted Loans, which comprise non-performing loans that either: (i) have an Initial Missed Payment occurring during the COVID-19 Crisis Period or (ii) are subject to a forbearance plan granted in response to a financial hardship related to COVID-19 (which is assumed under the COVID-19 Amendment to be the case for any loan that has an Initial Missed Payment occurring during the COVID-19 Crisis Period and is subject to a forbearance plan), the terms of which are materially consistent with the terms of forbearance plans offered by the GSEs.
Under the COVID-19 Amendment, the Disaster Related Capital Charge applies for three calendar months beginning with the month the loan becomes non-performing (i.e., missed two monthly payments), or if greater, the period of time that the loan is subject to a forbearance plan, repayment plan or loan modification trial period granted in response to a financial hardship related to COVID-19. After being extended once in December 2020, the COVID-19 Crisis Period expired as of March 31, 2021. As a result, as of April 1, 2021, the Disaster Related Capital Charge is no longer applied to all new defaults, and instead is applied only to new defaults if they are subject to a COVID-19 forbearance plan, regardless of whether the forbearance plan was entered into before or after the expiration of the COVID-19 Crisis Period.
The Disaster Related Capital Charge will continue to be applied to these COVID-19 Defaulted Loans for as long as they remain in the COVID-19 forbearance plan, repayment plan or loan modification trial period. Further, if the National Emergency Guidelines and the COVID-19 Amendment are terminated, the Disaster Related Capital Charge would then be applied to defaulted loans in accordance with the PMIERs’ provision pertaining to loans that have become non-performing as a result of a FEMA Declared Major Disaster, to the extent these provisions are still applicable in the state where the property is located. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Mortgage.”
In addition to the increased financial requirements for defaulted loans and certain performing loans, the PMIERs financial requirements also impose limitations on the credit that is granted for certain Available Assets. For example, the PMIERs limit the amount of credit given to surplus notes issued by a mortgage insurer to 9% of Minimum Required Assets. In addition, the PMIERs prohibit Radian Guaranty from engaging in certain activities such as insuring loans originated or serviced by an affiliate (except under certain circumstances) and require Radian Guaranty to obtain the prior consent of the GSEs before taking many actions, which may include, among other things, entering into various intercompany agreements, settling loss mitigation disputes with customers and commuting risk.
The GSEs have significant discretion under the PMIERs and may amend the PMIERs at any time, although the GSEs have communicated that for material changes, including large-scale material changes affecting Minimum Required Assets, they will generally provide written notice 180 days prior to the effective date and engage in a discussion and comment process with the private mortgage insurers regarding the proposed changes prior to finalizing them. The most recent large-scale revisions to PMIERs, or PMIERs 2.0, became effective on March 31, 2019, and the PMIERs were further updated in June 2020 to specifically address the COVID-19 pandemic.
It is possible that the GSEs may seek to amend PMIERs 2.0 in the future to align the financial requirements of the PMIERs with the capital requirements for the GSEs set forth in the ECF. The ECF was finalized in December 2020, but further potential changes have since been publicly proposed and are under evaluation by the FHFA. See “—Housing Finance Reform and the GSEs’ Business Practices” below for additional information on the ECF.
As part of our capital and risk management activities, including to manage Radian Guaranty’s capital position under the PMIERs financial requirements, we have distributed risk through third party quota share and excess-of-loss reinsurance arrangements, including through the capital markets using insurance-linked-notes transactions. The initial and ongoing credit that we receive under the PMIERs financial requirements for these risk distribution transactions is subject to the periodic review of the GSEs and could be influenced by the ECF which, as finalized in December 2020, provides the GSEs with a reduced amount of credit for their own credit risk transfer activities.
See “Item 1A. Risk Factors—Radian Guaranty may fail to maintain its eligibility status with the GSEs, and the additional capital required to support Radian Guaranty’s eligibility could reduce our available liquidity.”
Housing Finance Reform and the GSEs’ Business Practices
Legislative Reform
The federal government plays a significant role in the U.S. housing finance system through, among other things, the involvement of the FHFA and GSEs, the FHA and the VA. The GSEs’ charters, which cannot be altered outside of federal legislation, generally prohibit them from buying low down payment mortgage loans without certain forms of credit enhancement, the primarymost common form of which has been private mortgage insurance. There has been ongoing debate about the roles that the federal government and private capital should play in the housing finance system, and in recent years, there generally has been broad policy consensus that there is a need to increase the role of private capital. As a significant source of private capital in the existing housing finance system, private mortgage insurance is well-positioned in recent legislative proposals to continue to be able to provide the type of coverage that has become the predominant form of credit enhancement for satisfying the requirements currently memorialized in rules implementing the GSE charters, sometimes referred to as “standard coverage.” However, to the extent new legislative action alters the existing GSE charters without explicit preservation of the role of private mortgage insurance for high-LTV loans, our business could be adversely affected. Furthermore, should legislative or administrative action, such as the imposition of higher guarantee fees or loan level price adjustments, changes to loan limits, or significantly tightening the credit underwriting standards for the GSEs, it is possible that non-GSE executions, including the “private label” secondary market or loans insured by the FHA, VA, or U.S. Department of Agriculture (“USDA”) would result in better execution or price to consumers. In such a scenario, our business could be adversely impacted.
Since FHFA was appointed as conservator of the GSEs in September 2008, there has been a wide range of legislative proposals to reform the U.S. housing finance market, including proposals for GSE reform ranging from some that advocate nearly complete privatization and elimination of the role of the GSEs to others that support a system that combines a federal role with private capital. RecentWhile many legislative proposals have focused on making the federal guaranty of mortgage backed securities explicit, with some models proposing the repurposing of the GSEs to have them compete with other secondary market guarantorsbeen debated and other models proposingoccasionally advanced through various legislative procedures, no reform proposal has reached an advanced legislative stage. As a broad implementation of the multiple issuer structure that exists with Ginnie Mae backed loans. In addition, the Trump administration and U.S. Treasury have stated that they are seeking to advance housing financeconsequence, most reform particularly if the U.S. Congress does not take action to end the current conservatorship of the GSEs. Under current law, the FHFA has significant discretionrelated actions with respect to the future statehousing finance system have occurred administratively through regulatory actions.
Administrative Reform
The executive branch of the GSEs,government (the “Administration”), typically through its Departments and regulatory agencies, offers perspectives on the future of housing finance in the U.S., including objectives for future strategic direction and areas of focus. As a result, a change in Administrations can significantly alter the ability to placestrategic direction of housing finance in the GSEs into receivership without further legislative action. The termU.S.
Although many Departments or agencies impact housing finance in some manner, the most prominent and directly impactful are the FHFA, HUD, the U.S. Department of the most recentTreasury (“Treasury”) and the CFPB. In June 2021, following a Supreme Court decision that determined that the FHFA director may be removed by the President other than for cause, President Biden removed the FHFA director appointed by President Trump and appointed Sandra Thompson as acting director of the FHFA. Since assuming the role of acting director of the FHFA, ended in January 2019Ms. Thompson has taken a number of actions that represent a reversal of the previous FHFA leadership’s primary focus on preparing the GSEs to exit from conservatorship by increasing the GSEs’ overall capital levels and anreducing their credit risk profile. In contrast, the FHFA under acting director was appointed, pendingThompson has been focused on increasing the U.S. Senate’s confirmationaccessibility and affordability of mortgage credit, in particular to low- and moderate-income borrowers and underserved communities, in addition to ensuring the safety and soundness of the Administration’s nominee to leadGSEs. The Supreme Court’s decision providing that the FHFA. With new leadership at FHFA we believe theredirector may be an increasedremoved by the President without cause creates a higher likelihood that the Administration could take action to reformdirection of the FHFA and its oversight over the GSEs through current authoritiesmay be impacted by elections and the then political leanings of the director underAdministrations in power than previously was the case.
Senior Preferred Stock Purchase Agreements. The Housing and Economic Recovery Act of 2008 and through Executive Order.
The U.S. Treasury currently owns the preferred stock of the GSEs pursuant to the terms of PSPAs, and therefore, has significant influence over the fate and direction of the GSEs. Prior to a senior preferred stock purchase agreement and was prohibited from selling its stake inDecember
2017 amendment to the GSEs until January 1, 2018. On December 21, 2017, the FHFA and the Treasury Department reached an agreementPSPAs, which allowed each GSE to reinstateretain a $3 billion capital reserve, for the GSEs were required under the senior preferred stock purchase agreement, allowingPSPAs to sweep all profits to Treasury. In September 2019, Treasury and the FHFA further amended the PSPAs to suspend the quarterly “net worth sweep” and allow the GSEs to build a limited amountcapital reserve of reservesup to allow for income fluctuations. Beyond this $3$45 billion capital buffer, the GSEs are required under the senior preferred stock purchase agreements to sweep all profitscollectively, and in January 2021, prior to the U.S. Treasury. It is possible thatchange in Administration, the U.S. Treasury could further amend the terms of the senior preferred stock purchase agreementPSPAs were amended again to permitallow the GSEs to continue to retain capital up to the amounts prescribed in newly revised GSE capital requirements, pursuant to the ECF and as discussed below.
As part of the January 2021 amendment to the PSPAs, the Trump appointed leadership in Treasury and FHFA also agreed that the GSEs must restrict their acquisition of higher-risk single-family mortgage loans, including in particular the acquisition of investor loans and single-family mortgage loans with two or more higher risk characteristics (i.e., LTVs greater than 90%, debt-to-income ratios greater than 45% and FICO credit scores less than 680), to their then current levels. The January 2021 PSPA amendment further retain profitsrestricted the quality of loans that may be purchased by the GSEs by limiting the GSEs’ purchases to, among other enumerated types, loans that meet the QM definition. In September 2021, the Biden appointed leadership in Treasury and recapitalize which could,the FHFA suspended the limitations on GSE purchases of loans deemed higher risk, set forth in turn, affect the prospects for comprehensive housing finance reform legislation. In June 2018,January 2021 amendments to the PSPAs.
Enterprise Capital Framework. Throughout 2020, under the Trump appointed leadership, the FHFA released a proposed ruleadvanced certain initiatives to establish a CCF that would
apply minimumdevelop new capital and liquidity requirements for the GSEs, ifwhich were viewed as critical to any future release of the CCF is finalized. This rule proposes both risked-based capital requirements and would reviseGSEs from conservatorship. In December 2020, the minimum leverage capital requirementFHFA finalized a new ECF for the GSEs. Under thisGSEs and also proposed rule, these requirements would only take affect oncenew liquidity requirements.
Among other things, as compared to the GSEs exit conservatorship, althoughprior version of the ECF, the ECF finalized in the absence of greater transparency we believe the CCF provides a reasonable basis for understanding how the GSEs are currently conducting their operations, including their decisions with respect to capital allocation and pricing. If the CCF is finalized, it is reasonably possible that the GSEs will seek to more closely align2020: (i) significantly increased the capital requirements of the PMIERsGSEs; (ii) decreased the capital credit provided to the GSEs for credit risk transfer transactions, which have been a significant component of the GSEs capital and risk management strategy for the past several years; and (iii) reduced the overall capital relief extended to the GSEs for loans with private mortgage insurance.
In December 2020, the CCF,FHFA also proposed new liquidity requirements for the GSEs, which could resultimpose a mix of new cash-flow based requirements and long-term liquidity and funding requirements. The liquidity requirements were proposed to be effective in September 2021, but to date have not been adopted. Under acting director Thompson, the FHFA evaluated the ECF that was finalized in 2020 for further changes, and in September 2021 proposed changes that would have the effect of reducing the GSEs’ total capital requirements from those finalized, including by giving greater credit to credit risk transfer. In December 2021, the FHFA also issued a proposed rule that would require the GSEs to submit annual capital plans to the PMIERs.FHFA and to provide the agency with advance notification of certain capital activities.
In the absence of comprehensive housing finance reform legislation, the FHFA has made changes toThe ECF and proposed new liquidity requirements could significantly alter the business practices and operations of the GSEs. AsThere are many considerations related to financial, underwriting, risk management, counterparty and operational areas that likely will need to be addressed by the GSEs in order to come into compliance with the ECF new capital requirements and the proposed liquidity requirements, regardless of the form ultimately adopted, which could have a mechanismmaterial effect on the conventional mortgage market and potentially our business with the GSEs.
Access and Affordability. The Biden Administration has proposed a housing plan focused on: (i) increasing access to sustainable homeownership and making housing more affordable for implementing changes,low- and moderate-income borrowers; (ii) ensuring the housing finance system is equitable, by identifying and eliminating discriminatory or unfair practices in the housing system; (iii) increasing the supply, lowering the cost and improving the quality of housing, including through investments in resilience, energy efficiency, and accessibility of homes; and (iv) providing financial assistance to help Americans buy or rent safe, quality housing, including down payment assistance.
Since assuming leadership over the FHFA usesin June 2021, in addition to amending the annual processPSPAs and proposing revisions to the ECF, the Biden appointed FHFA leadership team has instituted changes to further advance mortgage access and affordability, including the following actions:
■In August 2021, entered into a memorandum of releasingunderstanding with HUD to collaborate in addressing fair housing and fair lending;
■In August 2021, cancelled a strategic plan for conservatorship and setting goals50-basis point adverse market fee on refinance transactions;
■In October 2021, raised the area median income limitations from 80% to 100% for the GSEs’ special refinance programs aimed at supporting low- and moderate-income borrowers’ ability to take advantage of the low interest rate environment; and
■In October 2021, announced that “desktop appraisals,” which represent an alternative to traditional home appraisals, would be incorporated into the GSEs’ guidelines for many new purchases beginning in early 2022.
In addition to these actions, the FHFA has requested the GSEs (the “Scorecard”) to meet as partproduce three-year plans focused on equitable housing.
Radian Guaranty and other private mortgage insurance companies have been engaged in discussions with the GSEs regarding how the industry may support the GSEs to advance these objectives. Depending on the outcome of its ongoing regulation.such dialogue, one or both of the GSEs, together or in conjunction with one or more private mortgage insurers, could implement further initiatives in pursuit of housing policy objectives that could require changes to the GSEs’ business practices and impact our
businesses. See “Item 1A. Risk Factors—Changes in the charters, business practices, or role of the GSEs in the U.S. housing market generally, could significantly impact our businesses.”
New Products. In October 2020, the FHFA leadership released for comment a proposed rule regarding the process for how it will consider and approve new GSE activities and products. Among other things, the 2019 Scorecard includes goalsproposed rule would redefine criteria for determining what constitutes a new activity that requires prior notice to increase access to single-family mortgage creditthe FHFA and for creditworthy borrowersdetermining whether the activity constitutes a “new product” that requires public notice and to finalize post-financial crisis loss mitigation activities. In addition,comment, describing a new product as “any new activity that FHFA determines merits public notice and comment on matters of compliance with the 2019 Scorecard calls forapplicable sections of [a GSE’s] authorizing statute, safety and soundness, or public interest.” Given the size and market influence of the GSEs, this new proposed rule is generally viewed as important to transfer a meaningful portion of credit risk, also known as “credit risk transfer,” to the private sector. The mandate for meaningful credit risk transfer builds upon the goals set in each of the last three years forensure that the GSEs are not otherwise encroaching on areas that may be more appropriately served by private capital.
It is difficult to transfer portionspredict what types of their mortgage credit risk tonew products and activities may be proposed in the private sectorfuture and, if applicable, whether they may be approved by experimenting with different forms of transactions and structures. In response to this mandate, the GSEs have engaged in Front-end, Back-end and otherFHFA. For example, if any existing or future credit risk transfer transactions and structures were to transfer a portiondisplace primary loan level or standard levels of credit risk. From 2013 through June 2018 the GSEs transferred risk on over $2.5 trillion of unpaid principal balance, and we expect these credit risk transfer transactions to continue. We have participated in both the Front-end and Back-end credit risk transfer programs developed by Fannie Mae and Freddie Mac. For more information about these programs, see “Mortgage Insurance—Mortgage Insurance Business Overview—Mortgage Insurance Products—Non-Traditional Risk.”
In addition, alternatives to traditional mortgage insurance, the amount of mortgage insurance we write may be introduced that compete with private mortgage insurance. reduced, which could negatively impact our franchise value, results of operations and financial condition.
In 2018, Freddie Mac and Fannie Mae announced the launch of limited pilot programs, Integrated Mortgage Insurance (“IMAGIN���)IMAGIN and Enterprise-Paid Mortgage Insurance (“EPMI”),EPMI, respectively, as alternative ways for lenders to obtain credit enhancement and sell to the GSEs loans with LTVs greater than 80%. to the GSEs. These investor-paid mortgage insurance programs, in which insurance iswas acquired directly by each GSE through entities that were not subject to compliance with the PMIERs, have many of the same features as private mortgage insurance and represent an alternative to traditional private mortgage insurance products that are provided to individual lenders. ParticipantsThese programs experienced limited volumes and in June 2021 were discontinued for new business, although they could be relaunched in the future. Further, the proposed rule regarding new products states that it is intended to apply to any future pilot programs, so it is unclear whether the same standards and procedures proposed in the new rule also would apply to existing pilots such as IMAGIN and EPMI if they are not subjectrelaunched.
COVID-19. In addition to compliancethe matters discussed above, the future of the GSEs is likely to continue to be impacted by the ongoing COVID-19 pandemic. In light of the COVID-19 pandemic, the FHFA has adjusted its oversight over the GSEs to ensure the GSEs are able to support borrowers impacted by the pandemic and protect the ongoing functioning of the housing finance system.
In response to the pandemic, the FHFA and the GSEs temporarily suspended all foreclosures and evictions; temporarily instituted mortgage forbearance; temporarily streamlined the appraisal, employment verification and loan closing processes to address frictions in the mortgage origination process created by social distancing and stay-at-home orders; implemented a four-month limit on servicer advance obligations for loans in forbearance; adopted the COVID-19 Amendment to the PMIERs effective June 30, 2020; and provided that loans in COVID-19 forbearance will remain in mortgage-backed securities pools for at least the duration of the forbearance. To assist borrowers exiting COVID-19 forbearance plans, the GSEs have also provided options to address forborne payments, which include payment deferral, borrower repayment plans and loan modifications. The GSEs have updated servicer guidelines regarding options specific to COVID-19-related forbearance, including borrower eligibility for these programs.
In June 2021, the CFPB issued a final rule amending Regulation X, which provides servicers with the PMIERs, which may createoption to provide certain streamlined loan modification options to borrowers based on the evaluation of an incomplete loss mitigation application for those with COVID-19-related hardships. This rule also addresses temporary servicer communication requirements for borrowers approaching the end of a competitive disadvantage for private mortgage insurers if these pilot programs are expanded.COVID-19 forbearance plan.
It is difficultAs the situation continues to predict what other typesevolve, the actions or potential inactions of credit risk transfer transactionsthe FHFA and other structures might be used by the GSEs in response to COVID-19 are likely to continue to have a significant impact on the future. If anyoverall functioning of the credit risk transfer transactions and structures that are being developed were to displace primary loan level, standard levels of mortgage insurance, the amount of insurance we write may be reduced. However, the GSEs also have solicited comments regarding the possibility of including additional mortgage insurance in excess of standard coverage amounts through a concept known as “deeper cover mortgage insurance,” which could increase the amount of insurance we write. As a result, it is difficult to predict the impact of any credit risk transfer products and transactions implemented by the GSEs.
housing finance system. In Item 1A. Risk Factors, see “—Changes in the charters, business practices or role of the GSEs in the U.S. housing market generally, could significantly impact our mortgage insurance business.businesses” and “—Our mortgage insurance business faces intense competition.”
HUD/FHA
Private mortgage insurance competes for a share of the insurable mortgage market with the single-family mortgage insurance programs of the FHA. As such, the FHA, is one of our biggest competitors. We compete with the FHAincluding on the basis of loan limits, pricing, credit guidelines, terms of our insurance policies and loss mitigation practices.
Since 2013, the loan limits for FHA-insured loans and the loan limits for GSE conforming loans have been substantially the same. It is possible that, in the future, Congress could impose different loan limits for FHA loans than for GSE conforming loans as it has done in the past, which could impact the competitiveness of private mortgage insurance in relation to FHA programs.
Beginning in 2008, the FHA, which historically had not been a significant competitor, substantially increased its market share of the insured mortgage market. Since then,financial crisis, the private mortgage insurance industry generally had been recapturinghas improved its share of the insurable, low down payment market, share from the FHA, primarily due to: (i) improvements in the financial strength of private mortgage insurers; (ii) the development of new products, pricing delivery tools and marketing efforts directed at competing with the FHA;FHA programs and execution; (iii) increases in the FHA’s pricing; (iv) the U.S. government’s pursuit of legal remedies against FHA-approved lenders related to loans insured by the FHA; and (v) various policy changes at the FHA, including the general elimination of the premium cancellation provision that still exists for borrower-paid private mortgage insurance.
As discussed above, the Biden Administration has been pursuing actions that will further its stated objective of increasing access to affordable mortgages for low- and moderate-income borrowers. In January 2015,this regard, the Biden Administration may choose to reduce the FHA’s annual or upfront premiums and/or eliminate the life-of-loan premium requirement for FHA
insured loans. It is uncertain if and when the FHA reducedmay change its annual mortgage insurance premium by 50 basis points to approximately 85 basis points for loans entering the origination process on or after January 26, 2015, including
refinancings. The FHA’s upfront mortgage insurance premium was not changed. Reductionspricing and what form this price reduction could take; however, any change in the FHA’s annual premiums or changespricing that would improve FHA execution compared to its policies may impact our competitivenessexecution through the GSEs with the FHA.
Given that FHA and GSE reform have significant impacts on each other, as well as on borrower access to credit and the housing market more broadly, policymakers may consider both GSE reform and FHA reform together. It is unclear whether FHA reform legislation will be adopted and, if so, what provisions it might ultimately contain. If legislative changes to the FHA and GSEs are not made contemporaneously, there is a possibility that the relative competitiveness of private mortgage insurance could negatively impact our NIW volume.
As last reported in November 2021, the FHA’s Mutual Mortgage Insurance (MMI) Fund had a combined capital ratio for fiscal year 2021 of 8.03%, above the 2% ratio that the FHA is required to maintain. While this would suggest that it may be disadvantaged.more likely that the FHA will lower pricing, the pandemic has had a significant negative impact on the FHA’s insured portfolio, including a significant increase in the total percentage of severely delinquent loans, making it more difficult to predict any future pricing actions the FHA may pursue.
In addition, in 2019, HUD issued a Memorandum of Understanding (“MOU”) with the Department of Justice (“DOJ”) that provides guidance on the process for enforcing the False Claims Act (“FCA”), and revisions of annual and loan-level certifications which became effective January 1, 2020. The MOU provides that alleged violations of the FCA will be primarily addressed through HUD administrative proceedings and only referred to the DOJ under certain circumstances. While we do not believe the MOU has had a significant impact on the pool of lenders doing business with the FHA, it could make the FHA more attractive to lenders who previously reduced their business with the FHA because of concerns regarding the DOJ’s pursuit of legal remedies against FHA lenders.
The Dodd-Frank Act
The Dodd-Frank Act mandates significant rulemaking by several regulatory agencies to implement its provisions. The Dodd-Frank Act established the CFPB to regulate the offering and provision of consumer financial products and services under federal law, including residential mortgages, and transferred authority to the CFPB to enforce many existing consumer related federal laws, including the Truth in Lending Act (“TILA”) and RESPA.
Among the most significant provisions for private mortgage insurers under the Dodd-Frank Act are the ability to repay mortgage provisions (“Ability to Repay Rule”), including a related safe harbor set forth in the QM Rule (defined below), the securitization risk retention provisions and the expanded mortgage servicing requirements under TILAthe Truth in Lending Act and RESPA.
Qualified Mortgage Requirements - Requirements—Ability to Repay Requirements. Requirements
The Ability to Repay Rule requires mortgage lenders to make a reasonable and good faith determination that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan. The Dodd-Frank Act provides that a creditor may presume that a borrower will be able to repay a loan if the loan has certain low-risk characteristics that meet the definition of a qualified mortgage (“QM Rule”). This QM presumption is generally rebuttable, however, loans that are deemed to have the lowest risk profiles are granted a safe harbor from liability (“QM Safe Harbor”) related to the borrower’s ability to repay the loan.
In adoptingimplementing the QM Rule, the CFPB established rigorous underwriting and product feature requirements for the loans to be deemed qualified mortgages. Within those regulations,mortgages (“Original QM Definition”), including that the borrower does not exceed a 43% debt-to-income ratio after giving effect to the loan. As part of the Original QM Definition, the CFPB also created a special exemption for Fannie Mae and Freddie Mac for a period ending upon the earlier ofGSEs, which is generally referred to as the end of conservatorship or January 10, 2021, which“QM Patch,” that allows any loan that meets the GSE underwriting and product guidelinesfeature requirements to be deemed to be a qualified mortgage. mortgage, or QM, regardless of whether the loan exceeds the 43% debt-to-income ratio.
In January 2019,December 2020, the CFPB released a five year reviewfinalized two new definitions of QM. One of these new QM definitions (the “New General QM Definition”) is intended to replace the underwriting focused approach of the Qualified MortgageOriginal QM Definition, including the 43% debt-to-income ratio limitation, with a new pricing-based approach to QM. Under the New General QM Definition, certain underwriting considerations are retained, but QM status generally is achieved if the loan is priced at no greater than 2.25% above the Average Prime Offer Rate (“APOR”). Loans priced at or less than 1.5% above APOR are subject to the QM Safe Harbor, while all other QM loans would receive the general rebuttable presumption that the loans met the ability to repay standard.
Separately, the CFPB created another new QM definition (“Seasoned QM”) for first-lien, fixed-rate loans that meet certain performance requirements over a 36-month seasoning period and Abilityare held in the lender’s portfolio until the end of the seasoning period. Both new QM definitions became effective on March 1, 2021. The New General QM Definition originally had a mandatory compliance date of July 1, 2021, after which the Original QM Definition and QM Patch would no longer apply. In April 2021, the CFPB issued a new rule delaying the mandatory compliance deadline for the New General QM Definition until October 1, 2022, thereby preserving the Original QM Definition and QM Patch until such date.
On April 8, 2021, the GSEs announced that for loan applications received on or after July 1, 2021, they will only purchase loans satisfying the New General QM Definition. As a result, even though the CFPB has delayed the mandatory compliance date for the New General QM Definition until October 1, 2022, for GSE-acquired loans with applications received on or after July 1, 2021, the QM Patch is effectively limited to Repay rule, as requiredloans that satisfy the New General QM Definition. This decision by the Dodd-Frank Act. While this report provided observations onGSEs reduced the impactnumber of loans that otherwise would have been designated QM compared to those receiving QM designation under the QM rule on the market based on CFPB research, it didPatch, although not include any policy recommendations or propose amending the current rules.materially.
The QM Rule requires that points and fees paid at or prior to closing cannot exceed 3% of the total loan amount, with higher points and fees thresholds provided for loan amounts below $100,000.$114,847. Any mortgage insurance premiums paid by the borrower at or before the time of loan closing that is not refundable on a pro-rata basis must be applied toward the 3% points and fee calculation. Additionally, any refundable borrower-paid insurancecalculation, unless such premiums paid at closingare in excess of 175 basis points must be included inthe FHA upfront premium amount and are automatically refundable on a lender’s QM 3% points and fees calculation.pro-rata basis. There are no similar restrictions on the points and fees associated with FHA premiums, and thus FHA has a market advantage for smaller balance loans where the 3% cap is more easily reached.
The Dodd-Frank Act also granted the FHA, VA and the U.S. Department of AgricultureUSDA flexibility to establish their own definitions of qualified mortgages for their insurance guaranty programs. Both the FHA and VA have created their own definition of qualified mortgages that differ from both the CFPB’s Original QM Definition and New General QM Definition. For example, the FHA’s QM Safe Harbor definition currently applies to loans priced at or less than APOR plus the sum of 115 basis points and the current underwriting and product guidelines atFHA’s annual mortgage insurance premium rate, which is effectively broader than the GSEs that are subject toQM Safe Harbor adopted under the special exemption.New General QM Definition. These alternate definitions of qualified mortgages are more favorable to lenders and mortgage holders than the CFPBCFPB’s Original QM Rule that applies to the GSEsDefinition and the markets in which we operate,New General QM Definition that apply to loans purchased by the GSEs, which could drive business to these agencies and have a negative impact on our mortgage insurance business.
For more information regarding the CFPB’s proposed New General QM Definition and the risks it may present for us, see “Item 1A. Risk Factors—A decrease in the volume of mortgage originations could result in fewer opportunities for us to write new mortgage insurance business and conduct our homegenius business.”
Qualified Residential Mortgage Regulations - Regulations—Securitization Risk Retention Requirements.Requirements
The Dodd-Frank Act requires securitizers to retain at least 5% of the credit risk associated with mortgage loans that they transfer, sell or convey, unless the mortgage loans are qualified residential mortgages (“QRMs”) or are insured by the FHA or another federal agency.agency (the “QRM Rule”). Under applicable federal regulations, a QRM is generally defined as a mortgage meeting the requirements of a qualified mortgage under the CFPB’s QM Rule described above. Because of the capital support provided by the U.S. government to the GSEs, the GSEs currently satisfy the proposed risk retention requirements of the Dodd-Frank Act while they are in conservatorship, so sellers of loans to the GSEs currently are not subject to the risk retention requirements referenced above. This means that securitizers would not be required to retain risk under the final QRM ruleRule on loans that are guaranteed by the GSEs while in conservatorship.
The final ruleQRM Rule requires the agencies that implemented the rule to review the QRM definition no later than four years after its effective date (i.e.(i.e., December 2018) and every five years thereafter, and allows each agency to request a review of the definition at any time.
Mortgage Servicing Rules. Among its products and services, our Services business provides services to financial institutions that are focused on evaluating compliance with and establishing processes and procedures to implement national
and state servicing standards, including On December 20, 2019, the CFPB’s mortgage servicing regulations. The Dodd-Frank Act amended and expanded upon mortgage servicing requirements under TILA and RESPA. The CFPB amended Regulation Z (promulgated under TILA) and Regulation X (promulgated under RESPA) to conform these regulations to the new statutory requirements. Among other things, the rules include new or enhanced requirements for handling loans that are in default. Complying with the mortgage servicing rules has been challenging and costly for many loan servicers. Since the final rules were adopted in 2014, the CFPB has clarified those rules through subsequent rulemakings and provided guidance on how servicers must apply them in certain circumstances. In October 2017 the CFPB issued an interim final rule that amended provisionsOffice of the Regulation X mortgage servicing rules that it had previously issued in 2016. Along with itsComptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the SEC, the FHFA and HUD announced the commencement of a review of the Qualified MortgageQRM Rule. In December 2021, following completion of this review, the agencies released the findings of this review and Abilitydetermined not to Repay Rule in January of 2019, the CFPB also provided an assessment of the mortgage servicing rules. The CFPB offered observations regarding the impact of the rules on foreclosure avoidance and servicing costs, but again offered no specific proposed action regarding the rules going forward.
Other. In additionpropose any changes to the foregoing, thedefinition of qualified residential mortgage at this time.
Other
The Dodd-Frank Act establishes a Federal Insurance Office within the U.S. Department of the Treasury (the “FIO”). While the FIO does not have a general supervisory or regulatory authority over the business of insurance, the director of this office performs various functions with respect to insurance, such as serving as a non-voting member of the Financial Stability Oversight Council. It is difficult to predict whether legislators or other executive agencies will pursue the development and implementation of federal standards for the mortgage insurance industry. However, toindustry outside of the extent these recommendations are acted upon by legislators or other executive action, aFHFA. Any divergence from the current system of state regulation could significantly change compliance burdens and possibly impact our financial condition.
In addition, Section 1473 of the Dodd-Frank Act establishes minimum requirements to be implemented by states regarding the registration and supervision of appraisal management companies (“AMCs”), including Radian Valuation Services. In 2015, six federal regulatory agencies (the Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation, National Credit Union Administration, CFPB and the FHFA) approved final rules creating federal minimum requirements for state registration and supervision of AMCs.
All AMCs subject to state registration, including Radian Valuation Services, must satisfy certain minimum standards, including requirements to: (i) establish and comply with processes and controls designed to ensure that an AMC only engages an appraiser who has the appropriate education, expertise and experience necessary to competently complete a particular appraisal assignment and (ii) establish and comply with processes and controls reasonably designed to ensure that the AMC conducts its appraisal management services in accordance with applicable appraisal independence standards and regulations.
RESPA
Settlement service providers in connection with the origination or refinance of a federally regulated mortgage loan are subject to RESPA and Regulation X. Under the Dodd-Frank Act, the authority to implement and enforce RESPA was transferred to the CFPB. RESPA authorizes the CFPB, the U.S. Department of Justice, state attorneys general and state insurance commissioners to bring civil enforcement actions, and also provides for criminal penalties and private rights of action.
Mortgage insurance, title insurance and other products and services provided by Radian’s affiliates are considered settlement services for purposes of RESPA. The anti-referral fee and anti-kickback provisions of Section 8 of RESPA generally provide, among other things, that settlement service providers are prohibited from paying or accepting anything of value in connection with the referral of a settlement service or sharing in fees for those services. RESPA also prohibits requiring the use of an affiliate for settlement services and requires certain information to be disclosed if an affiliate is used to provide the settlement services. In addition to mortgage insurance, through our Serviceshomegenius business, we offer a broadan array of both settlement and non-settlement services to our customers, including real estate, valuation, hybrid appraisal, title and closing services. To the extent products and services, provided by our Services businessmany of which are considered settlement services for purposes of RESPA, and therefore, are subject to the anti-referral fee, anti-kickback and required use provisions of RESPA may apply which could impact how these products and services are marketed and sold.RESPA.
In the past, we and other mortgage insurers have faced lawsuits alleging, among other things, that our captive reinsurance arrangements constituted unlawful payments to mortgage lenders under RESPA. We also have been subject to lawsuits alleging that our Pool Mortgage Insurance and contract underwriting services violated RESPA. In addition, we and other mortgage insurers have been subject to inquiries and investigative demands from state and federal governmental agencies, including the CFPB, requesting information relating to captive reinsurance.
In April 2013, we reached a settlement with the CFPB that concluded its investigation with respect to Radian Guaranty without any findings of wrongdoing. As part of the settlement, Radian Guaranty paid a civil penalty and agreed that it would not enter into any new captive reinsurance agreement or reinsure any new loans under any existing captive reinsurance agreement for a period of 10 years ending in 2023. In June 2015, Radian Guaranty executed a Consent Order with the Minnesota Department of Commerce that resolved the Minnesota Department of Commerce’s outstanding inquiries related to captive reinsurance arrangements involving mortgage insurance in Minnesota without any findings of wrongdoing. As part of the Consent Order, Radian Guaranty paid a civil penalty and agreed not to enter into new captive reinsurance arrangements until June 2025. We have not entered into any new captive reinsurance arrangements since 2007. In addition, under the PMIERs, the GSEs prohibit private mortgage insurers from entering into captive insurance arrangements.
The CFPB amended Regulations X and Z to establish significant new disclosure requirements and forms in Regulation Z for most closed-end consumer credit transactions secured by real property through a regulation known as the “TRID rule.” The TRID rule became effective October 3, 2015, and mandates that a series of enhanced disclosures be provided to consumers in connection with the origination of most types of residential mortgage loans. Implementation of the TRID rule resulted in an increased burden on loan originators to comply. In addition, difficulties implementing the new disclosure rules and uncertainty with respect to certain aspects of the TRID rule, including uncertainty as to whether a closed loan fully complies with the TRID
rule requirements, negatively impacted the purchase of loans in the secondary market by private investors. In July 2016, the CFPB issued proposed amendments to the TRID rule to formalize CFPB guidance and provide greater clarity and certainty for market participants, and finalized these amendments in the form of new TRID rules in July of 2017, known as “TRID 2.0.” Mandatory compliance with TRID 2.0 became effective in October 2018. We believe that the guidance that has been provided by the CFPB, together with TRID 2.0, will reduce the uncertainty and remove certain impediments to originating new loans that followed the implementation of the original TRID rule.
Homeowner Assistance Programs
The Emergency Economic StimulusAmerican Rescue Plan Act of 2008 (“EESA”) included2021 authorizes approximately $9.9 billion to fund a Homeowner Assistance Fund for “the purpose of preventing homeowner mortgage delinquencies, defaults, foreclosures, loss of utilities or home energy services, and displacements of homeowners experiencing financial hardship after January 21, 2020.” Since the enactment of this legislation, Treasury has issued guidance on this program and announced expected allocations by state, with a statutory minimum requirement of $50 million for each state, the District of Columbia and Puerto Rico. According to “maximizethe guidance issued by Treasury, eligible use of these funds may include mortgage payment assistance, assistance for housing-related costs related to homeownersa period of forbearance, delinquency, or default, facilitating mortgage interest reductions, assistance with insurance payments, including mortgage insurance, utility and encourage mortgage servicers to take advantage of available programs (including the Hope for Homeowners program) to minimize foreclosures.” In 2008, the U.S. Treasury announced the Homeowner Affordability and Stability Plan to restructure or refinance mortgages to avoid foreclosures through: (i) refinancing mortgage loans through HARP; (ii) modifying first- and second-lien mortgage loans through HAMPtax payments, among others. See “—Housing Finance Reform and the Second Lien Modification Program; and (iii) offering other alternativesGSEs’ Business Practices—Administrative Reform—COVID-19” above for additional information on efforts to foreclosure through the Home Affordable Foreclosure Alternatives Program. HAMP expired in December 2016 and was replaced with the “Flex Modification” program that will offer payment relief similar to HAMP. Refinancing under the HARP program expired on December 31, 2018. The GSEs have since established high LTV streamlined refinance programs in coordination with FHFA to continue providing refinancing options to avoid foreclosure. These programs began enrolling participants in November 2018.
In response to the extensive damage caused by hurricanes during 2017 and 2018, we are supporting the disaster relief policies issuedsupport borrowers impacted by the GSEs that provide various forms of assistance to accommodate the financial needs of homeowners in the affected areas, including temporary suspension of foreclosures, penalty waivers, and forbearance or modification plans that provide more flexible mortgage payment terms.pandemic.
The SAFE Act
The SAFE Act and its state law equivalents require mortgage loan originators to be licensed with state agencies in the states in which they operate and/or registered with the Nationwide Mortgage Licensing System and Registry (the “Registry”). The Registry is a database established by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators that tracks the licensing and eligibility requirements of loan originators. Among other things, the database was established to support the licensing of mortgage loan originators by each state.
As part of this licensing and registration process, loan originators who are employees of institutions other than depository institutions or certain of their subsidiaries that, in each case, are regulated by a federal banking agency, must generally be licensed under the SAFE Act guidelines enacted by each state in which they engage in loan origination activities and registered with the Registry. Additionally, most states define underwriting and loan processing as a clerical and administrative duty, performed under the supervision of a licensed mortgage loan originator. The entity and its employees that provide our contract underwriting and loan processing services are compliant with the SAFE Act for underwriting in all 50 states and the District of Columbia and compliant for loan processing in 45 states and the District of Columbia.
Mortgage Insurance Cancellation
The HPA imposes certain cancellation and termination requirements for borrower-paid private mortgage insurance with respect to “residential mortgage transactions” as defined in the HPA, and requires certain disclosures to borrowers regarding their rights under the law. The HPA also requiresSpecifically, provided that certain disclosures for loans covered by lender-paid private mortgage insurance. Specifically,conditions are satisfied, the HPA provides that private mortgage insurance on most loans originated on or after July 29, 1999 may be cancelled at the request of the borrower once the LTVprincipal balance of the mortgage is first scheduled to reach 80% of the home’s original value based on the loan’s initial amortization schedule, or reaches 80% of the home’s original value based on actual payments.
In addition, provided that certain conditions are satisfied. Undersatisfied, the HPA provides that private mortgage insurance on borrower-paidmost loans is subject to servicer-initiated automatic termination once the principal balance of the mortgage insurance must be canceled automatically on the date the LTV is first scheduled to
reach 78% of the home’s original value based on the loan’s initial amortization schedule (or, if the loan is not current on that date, on the date that the loan becomes current). The HPA further provides that private mortgage insurance on most loans is subject to final termination following the date that is the midpoint of the loan’s amortization period (or, if the loan is not current on that date, on the date that the loan becomes current).
The HPA also establishes special rules for the termination of private mortgage insurance in connection with loans that are “high risk.” The HPA does not define “high risk” loans, but leaves that determination to the GSEs for loans up to the GSE conforming loan limits and to lenders for any other loan. For “high risk” loans privateoriginated in excess of conforming loan limits, provided that certain conditions are satisfied, the servicer is required to initiate termination once the principal balance of the mortgage insurance must be terminated on the date that the LTV is first scheduled to reach 77% of the unpaid principal balance. In no case, however, mayhome’s original value based on the loan’s initial amortization schedule. It is the servicer’s obligation to verify the date when a loan meets all HPA requirements for termination of borrower-paid private mortgage insurance be required beyondand to promptly instruct the midpointprivate mortgage insurer to terminate coverage.
Although not provided in the HPA, the GSEs’ guidelines also currently provide that when certain conditions are satisfied, borrowers can request cancellation of borrower-paid mortgage insurance for most loans when the LTV, based upon the current value of the amortization periodhome, is: either 75% or less or 80% or less, depending on the seasoning of the loan ifand other factors. The GSEs may change these guidelines in the borrower is current onfuture, including by expanding their mortgage insurance cancellation requirements, which could negatively impact our businesses. In Item 1A. Risk Factors, see “—Changes in the payments required by the termscharters, business practices or role of the mortgage.GSEs in the U.S. housing market generally, could significantly impact our businesses.” and “—Our mortgage insurance business faces intense competition.”
The Fair Credit Reporting Act (the “FCRA”)
The FCRA imposes restrictions on the permissible use of credit report information and disclosures that must be made to consumers when information from their credit reports is used. The FCRA has been interpreted by some Federal Trade Commission staff to require mortgage insurance companies to provide “adverse action” notices to consumers in the event an
application for mortgage insurance is declined or a higher premium is charged based on the use, wholly or partly, of information contained in the consumer’s credit report.
Privacy and Information Security - Gramm-Leach-Bliley Act of 1999 (the “GLBA”) and Other Regulatory Requirements
As part of our business, we, and certain of our subsidiaries, maintain large amounts of confidential information, including non-public personal information on consumers and our employees. We and our customers are subject to a variety of privacy and information security laws and regulations. The GLBA imposes privacy requirements on financial institutions, including obligations to protect and safeguard consumers’ nonpublic personal information and records, and limitations on the re-use of such information. The GLBA is enforced by state insurance regulators and by federal regulatory agencies.
In addition, many states have enacted privacy and data security laws that impose compliance obligations beyond the GLBA, including obligations to providesuch as: requiring notification in the event that a security breach results in a reasonable belief that unauthorized persons may have obtained access to consumer nonpublic personal information.information; imposing additional restrictions on the sale and use of consumers’ personal information; affording consumers new rights of both access and deletion of their personal information; and creating new private rights of action for data breaches. See “—State Regulation—Privacy.”
Federal and state agencies have increased their focus on compliance obligations related to privacy, data security and cybersecurity. The CFPB, Office of the Comptroller of the Currency and non-governmental regulatory agencies, such as the Financial Industry Regulatory Authority (FINRA)(“FINRA”), have announced new compliance measures and enforcement efforts designed to monitor and regulate the protection of personal consumer data, including with respect to: the development and delivery of financial products and services; underwriting; mortgage servicing; credit reporting; digital payment systems; and vendor management. For information regarding the New York Department of Financial ServicesDFS’ cybersecurity regulations and the California Consumer Privacy Act, under “—State Regulation” above, see “—State Regulation—Cybersecurity.Information Security” and “—Privacy.”
Asset Backed SecuritizationsFair Lending and Fair Servicing
Our ServicesThe federal Fair Housing Act, part of the Civil Rights Act of 1968, makes it unlawful for any person whose business providesincludes engaging in residential real estate related transactions to: (i) discriminate in housing-related lending activities against any person on a prohibited basis, or (ii) for any person to discriminate in the sale or rental of housing “or in the provision of services or facilities in connection therewith,” to issuersany person because of a prohibited basis.
Similarly, the Equal Credit Opportunity Act and investorsRegulation B make it unlawful for a creditor to discriminate in asset backed securitizationsany aspect of a credit transaction against an applicant on a prohibited basis during any aspect of a consumer or business credit transaction or make any oral or written statement to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.
These laws seek to address discrimination in lending and similar transactions. other housing related activity by prohibiting discrimination that is intentional or where a facially neutral policy or practice has a “disparate impact;” that is, that it disproportionately excludes or burdens persons on a prohibited basis without a need to demonstrate intentional discrimination.
In September 2020, HUD issued a Final Rule (2020 Rule) which modified the requirements for demonstrating disparate impact claims. In June 2021, HUD published a notice of proposed rulemaking (“NPRM”) proposing to rescind its 2020 Rule, which was criticized as making it more difficult to bring disparate impact claims, and restore HUD’s prior interpretation of the disparate impact rule. To this end, the Biden Administration has indicated that it intends to focus heavily on discriminatory and unfair housing practices.
As a result, regulations impactingprovider of products and services that support residential real estate transactions and the asset backed securitization marketmortgage production and financing process, fair lending and servicing laws may impact the way we deliver or conduct our Services business directly, or indirectly through the regulation of our Services customers.
In August 2014, the SEC adopted final rules under Regulation AB that substantially revised the offering process, disclosureproducts and reporting requirements for offerings of ABS. The Regulation AB II rules implement several key areas of reform. Specifically, Regulation AB II introduces several new requirements relatedservices, including in response to public offerings of ABS, including the following that are significant for our Services business:
Asset-level disclosure requirements for ABS backed by residential mortgage loans, commercial mortgage loans, automobile loans or leases, re-securitizations of ABS backed by any of those asset types, and debt securities; and
A requirement that the transaction documents provide for the appointment of an “asset representations manager” to review the pool assets when certain trigger events occur.
In June 2015 the final credit rating agency reform rules issued by the SEC became effective. These rules for nationally recognized statistical ratings organizations (“NRSRO”) include requirements that are applicable to providers of third-party due diligence services (such as our Services business) for both publicly and privately issued Exchange Act ABS. Among other things, the NRSRO rules require that any issuer or underwriter of registered or unregistered ABS that are to be rated by a NRSRO furnish a form filed on the SEC’s EDGAR system that describes the findings and conclusions of any third-party due diligence report obtained by the issuer or underwriter. In addition, the rule requires that a due diligence firm (such as our Services business) that is engaged to perform services in connection with any rated ABS issuance furnish a form that describes the scope of due diligence services performed and a summary of their findings and conclusions; this form is required to be posted on the ABS issuer’s password-protected website.customer requirements.
Mortgage Insurance Tax Deduction
In 2006, Congress enacted the private mortgage insurance tax deduction in order to foster homeownership. The deduction was enacted on a temporary basis and it expired at the end of 2011. Since 2011, the private mortgage insurance tax deduction has been extended foursix times, most recently for insurance premiums paid through December 31, 2017. It has not yet been extended for the 2018 tax year, and it is unclear if and when it may be extended. There continue to be legislative efforts to make this tax deduction permanent, but to date this has not been enacted.2021. It is difficult to predict whether the deduction will be extended in the future.
Federal Consumer Protection Laws
As certain of our current and potential future business activities are directed at consumers or affect the provision of real estate and mortgage related services provided to consumers by others, we may be subject to a number of federal consumer protection laws, including, laws that could apply to us more directly. In addition to the laws and regulations discussed elsewhere in this Regulation section, these laws may include:
■The Truth in Lending Act and Regulation Z, requiring disclosures of mortgage loan costs and other notices to consumers;
■The Equal Credit Opportunity Act and Regulation B, prohibiting discrimination based on age, race and other characteristics in the extension of credit;
■The Fair Housing Act, prohibiting discrimination based on race, sex, national origin and other characteristics in connection with purchasing a home, obtaining a mortgage or other housing-related activities;
■The Fair Debt Collection Practices Act, regulating debt collection communications and other activities;
■Prohibition on Unfair, Deceptive or Abusive Acts or Practices, prohibiting unfair, deceptive or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service;
■CAN-SPAM Act, regulating commercial and marketing email including the right of recipients to have the sender stop sending emails; and
■The Telephone Consumer Protection Act, regulating and restricts certain marketing related phone calls, text messages and facsimiles.
We may also be required to comply with state laws similar to these federal consumer protection laws which, to the extent applicable to our businesses.
Basel III
Over the past few decades, the Basel Committee on Banking Supervision (the “Basel Committee”) has established international benchmarks for assessing banks’ capital adequacy requirements (“Basel III”). Included within those benchmarks
are capital standards related to residential lending and securitization activity and importantly for private mortgage insurers, the capital treatment of mortgage insurance on those loans. These benchmarks are then interpreted and implemented via rulemaking by U.S. banking regulators. In July 2013, the U.S. banking regulators promulgated regulations, referred to as the “U.S. Basel III Rules,” to implement significant elements of the Basel framework. The U.S. Basel III Rules, among other things, revise and enhance the U.S. banking agencies’ general risk-based capital rules. Today, the U.S. Basel III Rules assign a 20%, 50% or 100% risk weight to loans secured by one-to-four-family residential properties. Generally, under the U.S. Basel III Rules in place today, the explicit government guarantees (FHA/VA/USDA) receive a 0% risk weight, and Fannie Mae and Freddie Mac related loans receive a 20% risk weight. Non-government related mortgage exposures secured by a first lien on a one-to-four family residential property that are prudently underwritten and that are performing according to their original terms receive a 50% risk weighting. All other one-to-four family residential mortgage loans are assigned a 100% risk weight.
In December 2014, the Basel Committee issued a proposal for further revisions to Basel III. It proposed adjustments to the risk weights for residential mortgage exposures that take into account LTV ratio and the borrower’s ability to service a mortgage, which were not previously addressed by Basel III. The proposed LTV ratio did not take into consideration any credit enhancement, including private mortgage insurance, but in March 2015, the U.S. banking regulators clarified that for purposes of the U.S. Basel III Rules, calculation of LTV ratios can account for credit enhancement such as private mortgage insurance in determining whether a loan is made in accordance with prudent underwriting standards for purposes of receiving the preferred 50% risk weight. The comment period for this proposal closed in March 2015, and in December 2015, the Basel Committee released a second proposal which retained the LTV provisions of the initial draft, but not the provisions pertaining to a borrower’s ability to service a mortgage (the “2015 Basel Committee Proposal”). The comment period for the 2015 Basel Committee Proposal closed in March 2016. To date, federal regulators have not adopted or implemented any new regulations, including based on these proposals, that update or modify the U.S. Basel III Rules.
The revised and final recommendations from the Basel Committee with respect to Basel III were published in December 2017 (the “2017 Basel Committee III Recommendations”), and finalized risk weighting guidelines for residential mortgage exposures. These rules recognize guarantees provided by sovereign governments (such as FHA, VA, USDA and Ginnie Mae) as off-setting the capital requirements, resulting in a 0% risk weight. While the 2017 Basel Committee III Recommendations include consideration of LTV ratios, including the impact of credit enhancement provided by third-party private mortgage insurance and the GSEs on LTV ratios, the credit enhancement provided by third-party private mortgage insurance and the GSEs would have higher risk weightings than the explicitly government guaranteed products, putting loans insured by private mortgage insurance at a disadvantage. It remains unclear whether new guidelines will be proposed or finalized in the U.S. in response to the most recent 2017 Basel III Committee Recommendations.
See “Item 1A. Risk Factors—The implementation of the Basel III guidelines may discourage the use of mortgage insurance.”
Employees
At December 31, 2018, we had 1,942 employees employed by Radian Group and its subsidiaries. Management considers employee relations to be good.
Item 1A. Risk Factors.
Radian Guaranty may fail to maintain its eligibility status with the GSEs.
In order to be eligible to insure loans purchased by the GSEs, mortgage insurers such as Radian Guaranty must meet the GSEs’ eligibility requirements, or PMIERs. The PMIERs are comprehensive, covering virtually all aspects of the business of a private mortgage insurer, including internal risk management and quality controls, the relationship between the GSEs and the approved insurer and the approved insurer’s financial condition, as well as extensive requirements related to the conduct and operations of a mortgage insurer’s business. If Radian Guaranty is unable to satisfy the requirements set forth in the PMIERs, Freddie Mac and/or Fannie Mae could restrict it from conducting certain types of business with them or take actions that may include not purchasing loans insured by Radian Guaranty.
The PMIERs financial requirements currently require that a mortgage insurer’s Available Assets meet or exceed its Minimum Required Assets. At December 31, 2018, Radian Guaranty was in compliance with the PMIERs financial requirements and had Available Assets under the PMIERs of $3.5 billion, which resulted in an excess or “cushion” of $567 million over its Minimum Required Assets of $2.9 billion. Radian Guaranty’s ability to continue to comply with the PMIERs financial requirements could be impacted by: (i) the product mix of our NIW and factors affecting the performance of our mortgage insurance portfolio, including our level of defaults, prepayments, the losses we incur on new or existing defaults and
Part 1 Item 1A. Risk Factors
the credit characteristics of our mortgage insurance; (ii) the amount of credit that we receive under the PMIERs financial requirements for our third-party reinsurance transactions (which is subject to initial and ongoing review by the GSEs), including the credit received for our quota share and excess-of-loss reinsurance programs; and (iii) potential updates to the PMIERs, including an increase in the capital requirements under the PMIERs financial requirements.
Under the PMIERs financial requirements there are increased financial requirements for loans with a higher likelihood of default and/or certain credit characteristics, such as higher LTVs and lower FICO scores, as well as for loans originated after January 1, 2016 that are insured under lender-paid mortgage insurance policies not subject to automatic termination under the HPA. Therefore, if our mix of business includes more loans that are subject to these increased financial requirements, it increases the amount of Available Assets that Radian Guaranty is required to hold. Depending on the circumstances, we may limit the type and volume of business we are willing to write for certain of our products based on the increased financial requirements associated with certain loans. This could reduce the amount of NIW we write, which could reduce our revenues. Additionally, as we have experienced in the past, our insured loans may experience increased delinquencies in the future. Increases in delinquencies, including as a result of natural disasters, would subject Radian Guaranty to an increase in Minimum Required Assets under the PMIERs, and therefore, could impact our compliance with the PMIERs or negatively impact our results of operations.
The GSEs may amend the PMIERs at any time, although the GSEs have communicated that for material changes, including material changes affecting Minimum Required Assets, they will generally provide written notice 180 days prior to the effective date. The GSEs also have broad discretion to interpret the PMIERs, which could impact the calculation of Radian Guaranty’s Available Assets and/or Minimum Required Assets. On September 27, 2018, the GSEs issued PMIERs 2.0, which will become effective on March 31, 2019. Radian expects to comply with PMIERs 2.0 and to continue to maintain a significant excess of Available Assets over Minimum Required Assets as of the effective date. If applied as of December 31, 2018, the changes under PMIERs 2.0 would not have resulted in a material change in Radian’s Minimum Required Assets, but would have reduced Radian’s PMIERs cushion. The reduction in Radian Guaranty’s PMIERs cushion is primarily due to a reduction in Available Assets of approximately $215 million as a result of the elimination in PMIERS 2.0 of any credit for future premiums for insurance policies written prior to and including 2008, which is permitted under the current PMIERs. If Radian Guaranty’s Available Assets and Minimum Required Assets were calculated as if the PMIERs 2.0 requirements were in effect, Radian Guaranty’s Available Assets at December 31, 2018 would have resulted in an excess or “cushion” of approximately $340 million, or 12%, over its Minimum Required Assets. We expect the GSEs to continue to update the PMIERs periodically in the future, including if and when the CCF is finalized.
Compliance with the PMIERs financial requirements could impact our holding company liquidity. If additional cash from Radian Group is required to support Radian Guaranty’s compliance with the PMIERs financial requirements, it will leave less liquidity to satisfy Radian Group’s other obligations. Depending on the amount of liquidity that is utilized from Radian Group, we may be required (or may decide) to seek additional capital by incurring additional debt, issuing additional equity, or selling assets, which we may not be able to do on favorable terms, if at all.
In addition to the PMIERs financial requirements, the PMIERs contain requirements related to the operations of our mortgage insurance business, including extensive operational requirements in areas such as claim processing, loss mitigation, document retention, underwriting, quality control, reporting and monitoring, among others. These increased operational requirements have resulted in additional expenses and have required substantial time and effort from management and our employees, which we expect will continue.
The PMIERs prohibit Radian Guaranty from engaging in certain activities such as insuring loans originated or serviced by an affiliate (except under certain circumstances) and require Radian Guaranty to obtain the prior consent of the GSEs before taking many actions, which may include entering into various intercompany agreements and commuting or reinsuring risk, among others. These restrictions could prohibit or delay Radian Guaranty from taking certain actions that would be advantageous to it or its affiliates.
Although we expect Radian Guaranty to retain its eligibility status with the GSEs and to continue to comply with the PMIERs financial requirements, including as updated by PMIERs 2.0 or in the future, we cannot provide assurance that this will occur. Loss of Radian Guaranty’s eligibility status with the GSEs would have an immediate and material adverse impact on the franchise value of our mortgage insurance business and our future prospects, as well as a material negative impact on our future results of operations and financial condition.
Part 1 Item 1A. Risk Factors
Our insurance subsidiaries are subject to comprehensive state insurance regulations and other requirements, which we may fail to satisfy.
We and our insurance subsidiaries are subject to comprehensive, detailed regulation by the insurance regulators in the states where they are licensed to transact business. These regulations are principally designed for the protection of our insurance policyholders rather than for the benefit of our investors. Insurance laws vary from state to state, but generally grant broad supervisory powers to examine insurance companies and enforce rules or exercise discretion affecting almost every significant aspect of the insurance business, including the power to revoke or restrict an insurance company’s ability to write new business. Among other matters, the state insurance regulators impose various capital requirements on our insurance subsidiaries.
State insurance capital requirements for our mortgage insurance subsidiaries include Risk-to-capital ratios, other risk-based capital measures and surplus requirements that may limit the amount of insurance that our mortgage insurance subsidiaries write. Similarly, our title insurance subsidiary is required to maintain statutory premium reserves that vary by state and is subject to periodic reviews of certain financial performance ratios, and the states in which it is licensed can impose additional capital requirements based on the results of those ratios. Our failure to maintain adequate levels of capital, among other things, could lead to intervention by the various insurance regulatory authorities, which could materially and adversely affect our business, business prospects and financial condition.
If Radian Guaranty is not in compliance with a state’s applicable Statutory RBC Requirement, it may be prohibited from writing new business in that state until it is back in compliance or it receives a waiver of, or similar relief from, the requirement. As of December 31, 2018, Radian Guaranty was in compliance with all applicable Statutory RBC Requirements. In states that do not have a Statutory RBC Requirement, it is not clear what actions the applicable state regulators would take if a mortgage insurer fails to meet the Statutory RBC Requirement established by another state. If Radian Guaranty were to fail to meet the Statutory RBC Requirement in one or more states, it could be required to suspend writing business in some or all of the states in which it does business. In addition, the GSEs and our mortgage lending customers may decide not to conduct new business with Radian Guaranty (or may reduce current business levels) or impose restrictions on Radian Guaranty while it was not in compliance. The franchise value of our mortgage insurance business likely would be significantly diminished if we were prohibited from writing new business or restricted in the amount of new business we could write in one or more states.
Radian Group also may be required to provide capital support for Radian Guaranty and its affiliated insurers if additional capital is required by those subsidiaries pursuant to future changes to insurance laws and regulations. The NAIC is in the process of reviewing the minimum capital and surplus requirements for mortgage insurers and considering changes to the Model Act. In the event the NAIC adopts changes to the Model Act, we expect that the capital requirements in states that adopt the new Model Act may increase as a result of the changes. Although the outcome of this process remains uncertain, we believe that if changes are made to the Model Act it will not result in financial requirements that require greater capital than the level currently required under the PMIERs financial requirements.
The mortgage insurance industry has always been highly competitive with respect to pricing. Our mortgage insurance subsidiaries’ premium rates and policy forms are generally subject to regulation in every state in which they are licensed to transact business. These regulations are intended to protect policyholders against the adverse effects of excessive, inadequate or unfairly discriminatory rates and to encourage competition in the insurance marketplace. In most states where our insurance subsidiaries are licensed, premium rates and policy forms must be filed with the state insurance regulatory authority and, in some states, must be approved, before their use. We may be subject to regulatory inquiries or examinations with respect to our mortgage insurance premium rates and policy forms.
Our title insurance business is subject to extensive rate regulation by the applicable state agencies in the states in which it operates. Title insurance rates are regulated differently in various states, with some states requiring the subsidiaries to file and receive approval of rates before such rates become effective and some states promulgating the rates that can be charged. In general, premium rates are determined on the basis of historical data for claim frequency and severity as well as related production costs and other expenses.
Given that the premium rates for our insurance subsidiaries are highly regulated, we could lose business opportunities and fail to successfully implement our business strategies if we are unable to respond to competitor pricing actions and our customers’ demands in a timely and compliant manner.
The credit performance of our mortgage insurance portfolio is impacted by macroeconomic conditions and specific events that affect the ability of borrowers to pay their mortgages.
As a seller of mortgage credit protection, our results are subject to macroeconomic conditions and specific events that impact the housing finance and real estate markets, including events that impact mortgage originations and the credit
Part 1 Item 1A. Risk Factors
performance of our mortgage insurance portfolio. Many of these conditions are beyond our control, including , housing prices, unemployment levels, interest rate changes, the availability of credit and other factors that may be derived from national and regional economic conditions. In general, a deterioration in economic conditions increases the likelihood that borrowers will be unable to satisfy their mortgage obligations. A deteriorating economy can adversely affect housing values, which in turn can influence the willingness of borrowers to continue to make mortgage payments despite having the financial resources to do so.
Mortgage defaults also can occur due to a variety of specific events affecting borrowers, including death or illness, divorce or other family problems, unemployment, or other events. In addition, factors impacting regional economic conditions, acts of terrorism, war or other severe conflicts, event-specific economic depressions or other catastrophic events such as natural disasters could result in increased defaults due to the impact of such events on the ability of borrowers to satisfy their mortgage obligations and the value of affected homes.
Unfavorable macroeconomic developments and the other factors cited above could have a material negative impact on our results of operations and financial condition.
The length of time that our mortgage insurance policies remain in force could decline and result in a decrease in our future revenues.
As of December 31, 2018, 70% of our total primary IIF consists of policies for which we expect to receive premiums in the future, typically through Monthly Premium Policies. As a result, most of our earned premiums are derived from insurance that was written in prior years. The length of time that this insurance remains in force, which we refer to as the Persistency Rate, is a significant driver of our future revenues, with a lower overall Persistency Rate generally reducing our future revenues. The factors affecting the length of time that our insurance remains in force include:
prevailing mortgage interest rates compared to the mortgage rates on our IIF, which affects the incentive for borrowers to refinance (i.e., lower current interest rates make it more attractive for borrowers to refinance and receive a lower interest rate);
applicable policies for mortgage insurance cancellation, along with the current value of the homes underlying the mortgages in our IIF;
the credit policies of lenders, which may make it more difficult for homeowners to refinance loans; and
economic conditions that can affect a borrower’s decision to pay off a mortgage earlier than required.
If these or other factors cause a decrease in the length of time that our Monthly Premium Policies (or other policies for which we expect to receive premiums in the future) remain in force, our future revenues could be negatively impacted, which could negatively impact our results of operations and financial condition.
Our Loss Mitigation Activity is not expected to mitigate mortgage insurance losses to the same extent as in prior years; Loss Mitigation Activity could continue to negatively impact our customer relationships.
As part of our claims management process we pursue opportunities to mitigate losses both before and after we receive claims, including processes to ensure claims are valid. Following the financial crisis, our Loss Mitigation Activities, such as Rescissions, Claim Denials and Claim Curtailments, increased significantly in response to the poor underwriting, servicer negligence and general non-compliance with our insurance policies that was prevalent in the period leading up to the financial crisis. These Loss Mitigation Activities materially mitigated our paid losses during this period and resulted in a significant reduction in our loss reserves. Following the financial crisis, mortgage underwriting and servicing have generally improved, and the amount of Loss Mitigation Activity required with respect to the claims we have received in more recent periods has significantly decreased. As a result, our future Loss Mitigation Activity is not expected to mitigate our paid losses to the same extent as it did in the years following the financial crisis.
In addition, under our 2014 Master Policy, for NIW after October 1, 2014, our rights to conduct Loss Mitigation Activity generally are more limited than under our prior master insurance policies. Radian Guaranty offers 12-month and 36-month rescission relief programs in accordance with the specified terms and conditions set forth in our 2014 Master Policy. Further, the FHFA and the GSEs have proposed revised GSE Rescission Relief Principles to, among other things, further limit the circumstances under which mortgage insurers may rescind coverage. We are in the process of incorporating these principles into a new master policy, which we expect will be effective during the second half of 2019. We currently are in discussions with the GSEs regarding the form of this new master policy, including as it relates to these proposed principles, which if adopted, are likely to further reduce our ability to rescind insurance coverage in the future. A reduction in the Loss Mitigation rights available under our master policy could result in higher losses than would have been the case under our existing Master Policies.
Part 1 Item 1A. Risk Factors
Our Loss Mitigation Activities and claims paying practices have resulted in disputes with certain of our customers and in some cases, damaged our relationships with customers, resulting in a loss of business. While we have resolved many of these disputes, a risk remains that our Loss Mitigation Activities or claims paying practices could continue to have a negative impact on our relationships with customers or potential customers. Further, disputes with our customers that are not resolved could result in additional arbitration or judicial proceedings beyond those we are currently facing. See “Item 3. Legal Proceedings.” To the extent that past or future Loss Mitigation Activities or claims paying practices impact our customer relationships, our competitive position could be adversely affected, resulting in the potential loss of business and impacting our results of operations.
Changes in the charters, business practices, or role of the GSEs in the U.S. housing market generally, could significantly impact our mortgage insurance business.
Our current business model is highly dependent on the GSEs as the GSEs are the primary beneficiaries of most of our mortgage insurance policies. The GSEs’ federal charters generally require credit enhancement for low down payment mortgage loans (i.e., a loan amount that exceeds 80% of a home’s value) in order for such loans to be eligible for purchase by them. Lenders generally have used private mortgage insurance to satisfy this credit enhancement requirement. As a result, low down payment mortgages purchased by the GSEs generally are insured with private mortgage insurance. In order to be eligible to insure loans purchased by the GSEs, mortgage insurers such as Radian Guaranty must meet the GSEs’ eligibility requirements, or PMIERs.
The GSEs’ business practices may be impacted by their results of operations, by administrative policy decisions (such as a desire to increase the competitiveness of private capital executions in the secondary mortgage market) as well as by legislative or regulatory changes. Since September 2008, the GSEs have been operating under the conservatorship of the FHFA. With respect to loans purchased by the GSEs, changes in the business practices of the GSEs, which can be implemented by the GSEs acting independently or through their conservator, the FHFA, could negatively impact our mortgage insurance business and financial performance, including changes to:
eligibility requirements for a mortgage insurer to become and remain an approved eligible insurer for the GSEs;
underwriting standards on mortgages they purchase;
policies or requirements that may result in a reduction in the number of mortgages they acquire;
the national conforming loan limit for mortgages they acquire;
the level of mortgage insurance required, including expanding the loans that are eligible for reduced insurance coverage;
the terms on which mortgage insurance coverage may be canceled before reaching the cancellation thresholds established by law;
the terms required to be included in master policies for the mortgage insurance policies they acquire, including limitations on our ability to mitigate losses on insured mortgages that are in default;
the amount of loan level price adjustments (based on risk) or guarantee fees (which may result in a higher cost to borrowers) that the GSEs charge on loans that require mortgage insurance; and
the degree of influence that the GSEs have over a mortgage lender’s selection of the mortgage insurer providing coverage.
The FHFA has called for the GSEs to transfer a meaningful portion of credit risk, known as a “credit risk transfer,” to the private sector. This mandate builds upon the goals set in each of the last three years for the GSEs to increase the role of private capital by experimenting with different forms of transactions and structures.From 2013 through June 2018 the GSEs transferred risk on over $2.5 trillion of unpaid principal balance, and we expect these credit risk transfer transactions to continue. We have been participating in these credit risk transfer programs developed by Fannie Mae and Freddie Mac. Additional information about these programs may be found in Item 1. Business, see “Regulation—Federal Regulation—Housing Finance Reform” and “Mortgage Insurance—Mortgage Insurance Business Overview—Mortgage Insurance Products—Other Mortgage Insurance Products—GSE Credit Risk Transfer.”
It is difficult to predict what other types of credit risk transfer transactions and structures may be used in the future . If any of the credit risk transfer transactions and structures were to displace primary loan level or standard levels of mortgage insurance, the amount of insurance we write may be reduced, which could negatively impact our franchise value, results of operations and financial condition. As a result, the impact of any credit risk transfer products and transactions or other
Part 1 Item 1A. Risk Factors
structures implemented by the GSEs is uncertain and hard to predict. For example, in 2018, Freddie Mac and Fannie Mae announced the launch of limited pilot programs, IMAGIN and EPMI, respectively, as alternative ways for lenders to sell to the GSEs loans with LTVs greater than 80%. These investor-paid mortgage insurance programs, in which insurance is acquired directly by each GSE, have many of the same features and represent an alternative to traditional private mortgage insurance products that are provided to individual lenders. Participants in IMAGIN and EPMI are not subject to compliance with the PMIERs, which may create a competitive disadvantage for private mortgage insurers if these pilot programs are expanded. See “Item 1. Business—Regulation—Federal Regulation—Housing Finance Reform”
Since the FHFA was appointed as conservator of the GSEs, there has been a wide range of legislative proposals to reform the U.S. housing finance market, including proposals for GSE reform ranging from some that advocate nearly complete privatization and elimination of the role of the GSEs to others that support a system that combines a federal role with private capital. In addition, the Trump administration and U.S. Treasury have stated that they are seeking to advance housing finance reform, particularly if the U.S. Congress does not take action to end the current conservatorship of the GSEs. Under current law, the FHFA has significant discretion with respect to the future state of the GSEs, including the ability to place the GSEs into receivership without further legislative action. The term of the most recent director of the FHFA ended in January 2019 and an acting director was appointed, pending the U.S. Senate’s confirmation of the Administration’s nominee to lead the FHFA. With new leadership at FHFA, we believe there may be an increased likelihood that the Administration could take action to reform the GSEs through current authorities of the director under The Housing and Economic Recovery Act of 2008 and through Executive Order.
The future structure of the residential housing finance system remains uncertain, including whether comprehensive housing reform legislation will be adopted and, if so, what form it may ultimately take. It is difficult to predict the impact of any changes on our business. See “Item 1. Business—Regulation—Federal Regulation—Housing Finance Reform.” Although we believe that traditional private mortgage insurance will continue to play an important role in any future housing finance structure, developments in the practices of the GSEs, including potentially new federal legislation that reduces the level of private mortgage insurance coverage used by the GSEs as credit enhancement, or even eliminates the requirement, may diminish the franchise value of our mortgage insurance business and materially and adversely affect our business prospects, results of operations and financial condition.
A decrease in the volume of mortgage originations could result in fewer opportunities for us to write new mortgage insurance business.
The amount of new business we write depends, among other things, on a steady flow of low down payment mortgages that benefit from our mortgage insurance. The volume of low down payment mortgage originations is impacted by a number of factors, including:
restrictions on mortgage credit due to changes in lender underwriting standards, capital requirements affecting lenders, regulatory requirements, and the health of the private securitization market;
mortgage interest rates;
the health of the domestic economy generally, as well as specific conditions in regional and local economies;
housing affordability;
tax laws and policies and their impact on, among other things, deductions for mortgage insurance premiums, mortgage interest payments and real estate taxes;
demographic trends, including the rate of household formation;
the rate of home price appreciation;
government housing policy encouraging loans to first-time homebuyers; and
the practices of the GSEs, including the extent to which the guaranty fees, loan level price adjustments (based on risk), credit underwriting guidelines and other business terms provided by the GSEs affect the cost of mortgages and lenders’ willingness to extend credit for low down payment mortgages.
If the overall volume of new mortgage originations declines, we could experience a reduced opportunity to write new insurance business and likely will be subject to increased competition, which could negatively affect our business prospects, results of operations and our financial condition.
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Our NIW and franchise value could decline if we lose business from significant customers.
Our mortgage insurance business depends on our relationships with our customers. Our customers place insurance with us directly on loans that they originate and they also do business with us indirectly through purchases of loans that already have our mortgage insurance coverage. Our relationships with our customers may influence both the amount of business they do with us directly and also their willingness to continue to approve us as a mortgage insurance provider for loans that they purchase. The loss of business from significant customers could have an adverse effect on the amount of new business we are able to write, and consequently, our franchise value.
During 2018, our top 10 mortgage insurance customers (measured by NIW) were responsible for 29.1% of our primary NIW, as compared to 32.4% in 2017. If we were to lose a significant customer, it is unlikely that the loss could be completely offset by other customers in the near-term, if at all. Some of our lending customers may decide to write business only with a limited number of mortgage insurers or only with certain mortgage insurers, based on their views with respect to an insurer’s pricing, service levels, underwriting guidelines, loss mitigation practices, financial strength or other factors. Alternatively, certain other lending customers have chosen for risk management purposes to diversify the mortgage insurers with which they do business, which has negatively affected our level of NIW and market share with those customers. Given that many of our customers currently give us a significant portion of their total mortgage insurance business, it is possible that if there is further diversification it could have a negative impact on our NIW if we are unable to mitigate the market share loss through new customers or increases in business with other customers. Further, we actively engage with our customers to ensure that we are receiving an appropriate mix of business from such customers at acceptable projected returns, and depending on the circumstances, we could take action with respect to customers (e.g., limiting the type of business we accept from them or instituting pricing changes that impact them) that could result in customers reducing the amount of business they do with us or deciding not to do business with us altogether. Any significant loss in our market share could negatively impact our mortgage insurance franchise, results of operations and financial condition.
Our mortgage insurance business faces intense competition.
The U.S. mortgage insurance industry is highly competitive. Our competitors primarily include other private mortgage insurers and governmental agencies, principally the FHA and VA.
We currently compete with other private mortgage insurers that are eligible to write business for the GSEs on the basis of price, underwriting guidelines, customer relationships, reputation, perceived financial strength (including based on comparative financial strength credit ratings) and overall service. Overall service competition is based on, among other things, effective and timely delivery of products, timeliness of claims payments, customer service, timely and accurate servicing of policies, training, loss mitigation efforts and management and field service expertise. We also believe that service includes our ability to offer services to customers through our Services business that complement our mortgage insurance products. For more information about our competitive environment, including pricing competition, see “Item 1. Business—Mortgage Insurance—Competition.”
In developing our pricing and origination strategies, we monitor various competitive and economic factors while seeking to increase the long-term value of our portfolio by balancing both profitability and volume considerations. Pricing strategies continue to evolve in the mortgage insurance industry and mortgage insurers are migrating toward offering various pricing methodologies with increasing degrees of risk-based granularity. Our strategy is to consistently apply an approach to pricing that is customer-centric based on a lender’s loan origination process, flexible and customizable, as well as balanced with our objectives for managing the risk and return profile of our insured portfolio. Although we believe we are well-positioned to compete effectively, our pricing strategy may not be successful. Despite our pricing actions, we may experience returns below our targeted returns and we may lose business to other competitors. There can be no assurance that pricing competition will not intensify further, which could result in a decrease in our projected returns.
Certain of our private mortgage insurance competitors are subsidiaries of larger corporations, may have access to greater amounts of capital and financial resources than we do at a lower cost of capital (including off-shore reinsurance vehicles) and currently have better financial strength ratings than we have. As a result, they may be better positioned to compete outside of traditional mortgage insurance, including in the private label securitization market or if the GSEs expand their use of, or pursue alternative forms of, credit enhancement outside of private mortgage insurance in its traditional form. In addition, because of tax advantages associated with being off-shore, certain of our competitors have been able to reinsure to their offshore affiliates and achieve higher after-tax rates of return on the NIW they write compared to on-shore mortgage insurers such as Radian Guaranty, which could allow these off-shore competitors to leverage reduced pricing to gain market share, while continuing to achieve acceptable returns on NIW.
We also compete with governmental entities, such as the FHA and VA, primarily on the basis of loan limits, pricing, credit guidelines, terms of our insurance policies and loss mitigation practices. These governmental entities typically do not have the
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same capital requirements or business objectives that we and other private mortgage insurance companies have, and therefore, may have greater financial flexibility in their pricing guidelines and capacity that could put us at a competitive disadvantage. If these entities lower their pricing or alter the terms and conditions of their mortgage insurance or other credit enhancement products in furtherance of political, social or other goals rather than a profit motive, we may be unable to compete in that market effectively, which could have an adverse effect on our business, financial condition and operating results.
Beginning in 2008, the FHA, which historically had not been a significant competitor, substantially increased its share of the mortgage insurance market, including by insuring a number of loans that would meet our current underwriting guidelines, sometimes at a lower monthly cost to the borrower than a loan that carries our mortgage insurance. The FHA may continue to maintain a strong market position and could increase its market position. Factors that could cause the FHA to remain a significant competitor include:
governmental policy, including decreases in the pricing of FHA insurance or changes in the terms of FHA insurance such as the current life-of-loan coverage requirement;
capital constraints of the private mortgage insurance industry;
the tightening by private mortgage insurers of underwriting guidelines based on credit risk concerns;
business changes by the GSEs, including underwriting changes, a reduction in loan limits or increases in the loan level price adjustments (based on risk) charged by the GSEs on loans that require mortgage insurance and changes in the amount of guarantee fees for the loans that they acquire (which may result in higher cost to borrowers); and
the perceived operational ease of using FHA insurance compared to the products of private mortgage insurers.
Other private mortgage insurers may seek to compete for market share from the FHA or other mortgage insurers by reducing pricing, which could, in turn, improve their competitive position in the industry and negatively impact our level of NIW.
We have faced increasing competition from the VA. Based on publicly available information, the VA accounted for 25% of the insurable mortgage market in 2018. We believe that the VA’s market share has generally been increasing because the VA offers 100% LTV loans and charges a one-time funding fee that can be included in the loan amount with no additional monthly expense, and because of an increase in the number of borrowers that are eligible for the VA’s program.
In addition, as market conditions change, alternatives to traditional private mortgage insurance may become more prevalent, which could reduce the demand for private mortgage insurance in its traditional form, including:
structures, such as the limited pilot programs IMAGIN and EPMI launched in 2018 by Freddie Mac and Fannie Mae, respectively, that are commonly referred to as “investor paid mortgage insurance” in which affiliates of traditional mortgage insurers directly insure the GSEs against loss;
lenders and other investors holding mortgages in their portfolio and self-insuring;
lenders using pass-through vehicles that take on the risk of loss for loans ultimately sold to the GSEs;
structured risk transfer transactions in the capital markets;
risk sharing, risk transfer or using other risk mitigation techniques in conjunction with reduced levels of private mortgage insurance coverage;
lenders originating mortgages using “piggyback” structures to avoid private mortgage insurance, such as a first-lien mortgage with an 80% LTV and a second mortgage with a 10%, 15% or 20% LTV, which could become more attractive given that interest on piggyback loans remains tax deductible while the tax deduction for mortgage insurance premiums has not been extended beyond the 2017 tax year; and
other potential forms of credit enhancement that do not involve private mortgage insurance.
See “—Changes in the charters, business practices, or role of the GSEs in the U.S. housing market generally, could significantly impact our mortgage insurance business.”
Managing the competitive environment is extremely challenging given the multitude of factors discussed above. If we do not appropriately manage the strategic decisions required in this environment, our franchise value, business prospects, results of operations and financial condition could be negatively impacted.
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Our business depends, in part, on effective and reliable loan servicing.
We depend on third-party servicing of the loans that we insure. Dependable servicing is necessary for timely billing and effective loss mitigation opportunities for delinquent or near-delinquent loans. Changes in the servicing industry, challenging economic and market conditions or periods of economic stress and high mortgage defaults could negatively affect the ability of servicers to effectively service the loans that we insure. Further, servicers are required to comply with more burdensome requirements, procedures and standards for servicing residential mortgages than in the past, such as the CFPB’s mortgage servicing rules. While these requirements are intended to improve servicing performance, they also impose a high cost of compliance on servicers that may impact their financial condition and their operating effectiveness. If we experience a disruption in the servicing of mortgage loans covered by our insurance policies, this, in turn, could contribute to a rise in defaults and/or claims among those loans, which could have a material adverse effect on our business, financial condition and operating results.
An extension in the period of time that a loan remains in our delinquent loan inventory may increase the severity of claims that we ultimately are required to pay.
High levels of defaults and corresponding delays in foreclosures could delay our receipt of claims, resulting in an increase in the period of time that a loan remains in our delinquent loan inventory, and as a result, the Claim Severity. Following the financial crisis, the average time that it took for us to receive a claim increased. This was, in part, due to loss mitigation protocols that were established by servicers and also to a significant backlog of foreclosure proceedings in many states, and especially in those states that impose a judicial process for foreclosures. Generally, foreclosure delays do not stop the accrual of interest or affect other expenses on a loan, and unless a loan is cured during such delay, once title to the property ultimately is obtained and a claim is filed, our paid claim amount may include additional interest and expenses, increasing the Claim Severity. While foreclosure timelines have improved in recent years, a portion of our portfolio originated in the years prior to and including 2008 consists of severely delinquent loans. Further, another period of significant economic stress and a high level of defaults could once again delay claims and result in higher levels of Claim Severity. Higher levels of Claim Severity would increase our incurred losses and could negatively impact our results of operations and financial condition.
Our success depends on our ability to assess and manage our underwriting risks; the premiums we charge may not be adequate to compensate us for our liability for losses and the amount of capital we are required to hold against our insured risks. We expect to incur future provisions for losses beyond what we have reserved for in our financial statements.
The estimates and expectations we use to establish premium rates are based on assumptions made at the time our insurance is written.Our mortgage insurance premiums are based on, among other items, the amount of capital we are required to hold against our insured risks and our estimates of the long-term risk of claims on insured loans. Our premium rates are established based on performance models that consider a broad range of borrower, loan and property characteristics, as well as market and economic conditions. Our assumptions may ultimately prove to be inaccurate.
If the risk underlying a mortgage loan we have insured develops more adversely than we anticipated, we generally cannot increase the premium rates on this in-force business, or cancel coverage or elect not to renew coverage, to mitigate the effects of such adverse developments. Similarly, we cannot adjust our premiums if the amount of capital we are required to hold against our insured risks increases from the amount we were required to hold at the time a policy was written. As a result, if we are unable to compensate for or offset the increased capital requirements in other ways, the returns on our business may be lower than we assumed or expected. Our premiums earned and the associated investment income on those premiums may ultimately prove to be inadequate to compensate for the losses that we may incur and may not provide an adequate return on increased capital that may be required. As a result, our results of operations and financial condition could be negatively impacted.
Additionally, in accordance with industry practice, we do not establish reserves in our mortgage insurance business until we are notified that a borrower has failed to make at least two monthly payments when due. Because our mortgage insurance reserving does not account for the impact of future losses that we expect to incur with respect to performing (non-defaulted) loans, our obligation for ultimate losses that we expect to incur at any period end is not reflected in our financial statements, except to the extent that a premium deficiency exists. As a result, our losses can be more severe in periods of high defaults given that we generally are not permitted to establish reserves in anticipation of such defaults.
If the estimates we use in establishing loss reserves are incorrect, we may be required to take unexpected charges to income, which could adversely affect our results of operations.
We establish loss reserves in our mortgage insurance business to provide for the estimated cost of future claims on defaulted loans. Setting our loss reserves requires significant judgment by management with respect to the likelihood,
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magnitude and timing of each potential loss, including an estimate of the impact of our Loss Mitigation Activities with respect to defaulted loans. The models, assumptions and estimates we use to establish loss reserves may not prove to be accurate, especially in the event of an extended economic downturn or a period of extreme market volatility and uncertainty. Because of this, claims paid may be substantially different than our loss reserves and these reserves may be insufficient to satisfy the full amount of claims that we ultimately have to pay. Changes to our estimates could adversely impact our results of operations and financial condition.
A portion of the defaulted loans in our portfolio originated in the years prior to and including 2008 have been in default for an extended period of time. While these loans are generally assigned a higher loss reserve based on our belief that they are more likely to result in a claim, we also assume, based on historical trends, that a significant portion of these loans will cure or otherwise not result in a claim. Given the significant period of time that these loans have been in default, it is possible that the ultimate cure rate for these defaulted loans will be less than our current estimates of Cures for this inventory of defaults.
If our estimates are inadequate, we may be required to increase our reserves, which could have a material adverse effect on our results of operations and financial condition.
Our delegated underwriting program may subject our mortgage insurance business to unanticipated claims.
In our mortgage insurance business, we permit lenders to obtain mortgage insurance for residential mortgage loans originated and underwritten by them using Radian’s pre-established underwriting guidelines. Once we accept a lender into our delegated underwriting program, we generally insure a mortgage loan originated by that lender based on our expectation that the lender has followed our specified underwriting guidelines in accordance with the endorsement. Under this program, a lender could commit us to insure a material number of loans with unacceptable risk profiles before we discover the problem and terminate that lender’s delegated underwriting authority or pursue other rights that may be available to us, such as our rights to rescind coverage or deny claims.
We face risks associated with our contract underwriting business.
We provide third-party contract underwriting services for both our mortgage insurance and Services customers. We provide these customers with limited indemnification rights with respect to those loans that we simultaneously underwrite for both secondary market compliance and for potential mortgage insurance eligibility. In addition, in certain circumstances, we may also offer limited indemnification when we underwrite a loan only for secondary market compliance. In addition to indemnification, we typically have limited loss mitigation defenses available to us for loans that we have underwritten through our contract underwriting services. As a consequence, our results of operations could be negatively impacted if we are required to indemnify our customers for material underwriting errors in our contract underwriting services.
The current financial strength ratings assigned to our mortgage insurance subsidiaries could weaken our competitive position.
Radian Guaranty has been assigned a rating of Baa2 by Moody’s and a rating of BBB+ by S&P. While Radian Guaranty’s financial strength ratings currently are investment grade, these ratings are below the ratings assigned to certain other private mortgage insurers. We do not believe our ratings have had a material adverse effect on our relationships with existing customers. However, if financial strength ratings become a more prominent consideration for lenders, we may be competitively disadvantaged by customers choosing to do business with private mortgage insurers that have higher financial strength ratings. In addition, the current PMIERs and PMIERs 2.0 will not include a specific ratings requirement with respect to eligibility, but if this were to change in the future, we may become subject to a ratings requirement in order to retain our eligibility status under the PMIERs.
The GSEs currently consider financial strength ratings, among other items, to determine the amount of collateral that an insurer must post when participating in the credit risk transfer transactions currently being conducted by the GSEs. As a result, the returns that we are able to achieve when participating in these transactions are dependent, in part, on our financial strength ratings. We currently use Radian Reinsurance to participate in the GSEs’ credit risk transfer transactions. Radian Reinsurance has been assigned a rating of BBB+ by S&P. Market participants with higher ratings than us generally have the ability to price more aggressively, and therefore, are better positioned than us to compete in these transactions.
We believe that financial strength ratings remain a significant consideration for participants seeking to secure credit enhancement in the non-GSE mortgage market, which includes most non-qualified mortgage loans. While this market has remained limited since the financial crisis, we view this market as an area of potential future growth and our ability to participate in this market could depend on our ability to secure higher ratings for our mortgage insurance subsidiaries. In addition, if legislative or regulatory changes were to alter the current state of the housing finance industry such that the GSEs
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no longer operate in their current capacity or loans purchased by the GSEs were no longer automatically deemed qualified mortgages under the QM Rule, we may be forced to compete in a new marketplace in which financial strength ratings may play a greater role. If we are unable to compete effectively in the current or any future markets as a result of the financial strength ratings assigned to our mortgage insurance subsidiaries, the franchise value and future prospects for our mortgage insurance business could be negatively affected.
Our success depends, in part, on our ability to manage risks in our investment portfolio.
Our investment portfolio is an important source of revenue and is our primary source of claims paying resources. Although our investment portfolio consists mostly of highly-rated fixed income investments, our investment strategy is affected by general economic conditions, which may adversely affect the markets for credit and interest-rate-sensitive securities, including the extent and timing of investor participation in these markets, the level and volatility of interest rates and credit spreads and, consequently, the value of our fixed income securities, and as such, we may not achieve our investment objectives. Volatility or lack of liquidity in the markets in which we hold positions has at times reduced the market value of some of our investments, and if this worsens substantially it could have a material adverse effect on our liquidity, financial condition and results of operations.
Although in recent years our portfolio yield has been increasing, interest rates and investment yields on our investments continue to be below historical averages, which has reduced the investment income we generate. For the significant portion of our investment portfolio held by our insurance subsidiaries, to receive full capital credit under insurance regulatory requirements and under the PMIERs, we generally are limited to investing in highly-rated investments that are unlikely to increase our investment returns. Because we depend on our investments as a source of revenue, a prolonged period of lower than expected investment yields would have an adverse impact on our revenues and could potentially adversely affect our results of operations. Further, future updates to the NAIC Model Act or PMIERs could impact our investment choices, which could negatively impact our investment strategy.
In addition, we structure our investment portfolio to satisfy our expected liabilities, including claim payments in our mortgage insurance business. If we underestimate our liabilities or improperly structure our investments to meet these liabilities, we could have unexpected losses resulting from the forced liquidation of investments before their maturity, which could adversely affect our results of operations.
Radian Group’s sources of liquidity may be insufficient to fund its obligations.
Radian Group serves as the holding company for our operating subsidiaries and does not have any operations of its own. As of December 31, 2018, Radian Group had available, either directly or through unregulated subsidiaries, unrestricted cash and liquid investments of $714.1 million. This amount excludes certain additional cash and liquid investments that have been advanced to Radian Group from our subsidiaries for corporate expenses and interest payments. Total liquidity, which includes our undrawn $267.5 million unsecured revolving credit facility entered into in October 2017, was $981.6 million as of December 31, 2018.
Radian Group’s principal liquidity demands for the next 12 months are expected to include: (i) the payment of corporate expenses, including taxes; (ii) the payment of $159 million principal amount of our outstanding Senior Notes due 2019; (iii) interest payments on our outstanding debt obligations; and (iv) the payment of dividends on our common stock. Radian Group’s liquidity demands for the next 12 months or in future periods could also include: (i) the potential use of up to $100 million to repurchase Radian Group common stock pursuant to the existing share repurchase authorization; (ii) capital support for Radian Guaranty and our other insurance subsidiaries; (iii) repayments, repurchases or early redemptions of portions of our debt obligations; and (iv) potential investments to support our business strategy.
In addition to existing available cash and marketable securities, Radian Group’s principal sources of cash to fund future short-term liquidity needs include payments made to Radian Group under tax- and expense-sharing arrangements with our subsidiaries. Radian Group has expense-sharing arrangements in place with its principal operating subsidiaries that require those subsidiaries to pay their allocated share of certain holding-company-level expenses, including interest payments on most of our outstanding senior notes. The expense-sharing arrangements between Radian Group and our insurance subsidiaries, as amended, have been approved by the Pennsylvania Insurance Department, but such approval may be modified or revoked at any time.
The Services segment has not generated sufficient cash flows to pay dividends to Radian Group. Additionally, while cash flow is expected to be sufficient to pay the Services segment’s direct operating expenses, it has not been sufficient to satisfy its obligations to reimburse Radian Group for its allocated operating expense and interest expense under tax- and expense-sharing arrangements. We do not expect the Services segment will be able to bring its reimbursement obligations current for the
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foreseeable future. In the event the cash flow from operations of the Services segment is not adequate to fund all of its needs, Radian Group may provide additional funds to the Services segment in the form of a capital contribution or an intercompany note. Further, in light of Radian Guaranty’s negative unassigned surplus related to operating losses in prior periods, we do not anticipate that Radian Guaranty will be permitted under applicable insurance laws to pay ordinary dividends to Radian Group for the foreseeable future.
In addition to our short-term liquidity needs discussed above, Radian Group’s liquidity demands beyond the next 12 months are expected to include: (i) the repayment of our outstanding debt obligations; and (ii) potential additional capital contributions to our subsidiaries. We expect to meet the long-term liquidity needs of Radian Group with a combination of: (i) available cash and marketable securities; (ii) private or public issuances of debt or equity securities, which we may not be able to do on favorable terms, if at all; (iii) cash received under tax- and expense-sharing arrangements with our subsidiaries; (iv) to the extent available, dividends from our subsidiaries; and (v) any amounts that Radian Guaranty is able to successfully redeem under the Surplus Note.
As of December 31, 2018, certain of our subsidiaries have incurred federal NOLs that could not be carried-back and utilized on a separate company tax return basis. As a result, we are not currently obligated under our tax-sharing agreement to reimburse these subsidiaries for their separate company federal NOL carryforward. However, if in a future period, one of these subsidiaries utilizes its share of federal NOL carryforwards on a separate entity basis, then Radian Group may be obligated to fund such subsidiary’s share of our consolidated tax liability to the IRS. Certain subsidiaries, including Clayton, currently have federal NOLs on a separate entity basis that are available for future utilization. However, we do not expect to fund material obligations related to these subsidiary NOLs.
In light of Radian Group’s short- and long-term needs, it is possible that our sources of liquidity could be insufficient to fund our obligations and could exceed available holding company funds. If this were to occur, we may need or otherwise may decide to increase our available liquidity by incurring additional debt, by issuing additional equity or by selling assets, any of which we may be unable to do on favorable terms, if at all.
Our revolving credit facility contains restrictive covenants that could limit our operating flexibility. A default under our credit facility could trigger an event of default under the terms of our senior notes. We may not have access to funding under our credit facility when we require it.
Radian Group is a party to a $267.5 million unsecured revolving credit facility with a syndicate of bank lenders. Radian Group’s obligations under the credit facility are guaranteed by Clayton and may in the future be guaranteed by other subsidiaries of Radian Group. As of December 31, 2018, no borrowings were outstanding under the credit facility.
The credit facility contains certain restrictive covenants that, among other things, provide certain limitations on our ability to incur additional indebtedness, make investments, create liens, transfer or dispose of assets, merge with or acquire other companies and pay dividends. The credit facility also requires us to comply with certain financial covenants and further provides that (i) Radian Group must be rated by S&P or Moody’s and (ii) Radian Guaranty must remain eligible under the PMIERs to insure loans purchased by the GSEs. A failure to comply with these covenants or the other terms of the credit facility could result in an event of default, which could (i) result in the termination of the commitments by the lenders to make loans to Radian Group under the credit facility and (ii) enable the lenders to declare, subject to the terms and conditions of the credit facility, any outstanding obligations under the credit facility to be immediately due and payable.
Further, the occurrence of an event of default under the terms of our credit facility may trigger an event of default under the terms of our senior notes. An event of default occurs under the terms of our senior notes if a default (i) in any scheduled payment of principal of other indebtedness by Radian Group or its subsidiaries of more than $100 million principal amount occurs, after giving effect to any applicable grace period or (ii) in the performance of any term or provision of any indebtedness of Radian Group or its subsidiaries in excess of $100 million principal amount that results in the acceleration of the date such indebtedness is due and payable, subject to certain limited exceptions. See Note 12 of Notes to Consolidated Financial Statements for more information on the carrying value of our senior notes.
If the commitments of the lenders are terminated or we are unable to satisfy certain covenants or representations, we may not have access to funding in a timely manner, or at all, when we require it. If funding is not available under the credit facility when we require it, our ability to continue our business practices or pursue our current strategy could be limited. If the indebtedness under the credit facility or our senior notes is accelerated, we may not be able to repay our debt or borrow sufficient funds to refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms or on terms that are acceptable to us. If there were to be an event of default under our credit facility or senior notes for any reason, our cash flows, financial results or financial condition could be materially and adversely affected.
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Our reported earnings are subject to fluctuations based on changes in our trading securities and short-term investments that require us to adjust their fair market value.
We have significant holdings of trading securities, equity securities and short-term investments that we carry at fair value. Because the changes in fair value of these financial instruments are reflected on our statements of operations each period, they affect our reported earnings and can create earnings volatility. Among other factors, interest rate changes, market volatility and declines in the value of underlying collateral will impact the value of our investments, potentially resulting in unrealized losses that could negatively impact our results of operations.
Our information technology systems may fail or become outmoded, be temporarily interrupted or otherwise cause us to be unable to meet our customers’ demands.
Our business is highly dependent on the effective operation of our information technology systems, which are vulnerable to damage or interruption from power outages, computer and telecommunications failures, computer viruses, cyber-attacks, security breaches, catastrophic events and errors in usage. Although we have disaster recovery and business continuity plans in place, we may not be able to adequately execute these plans in a timely fashion.
Additionally, our ability to meet the needs of our customers depends on our ability to keep pace with technological advances and to invest in new technology as it becomes available or otherwise upgrade our technological capabilities. We rely on e-commerce and other technologies to provide our products and services to our customers, and they generally require that we provide an increasing number of our products and services electronically. Accordingly, we may not satisfy our customers’ requirements if we fail to invest sufficient resources or are otherwise unable to maintain and upgrade our technological capabilities. Further, customers may choose to do business only with business partners with which they are technologically compatible and may choose to retain existing relationships with mortgage insurance or mortgage and real estate services providers rather than invest the time and resources to on-board new providers. As a result, technology can represent a potential barrier to signing new customers.
Because we rely on our information technology systems for many critical functions, including connecting with our customers, if such systems were to fail, experience a prolonged interruption, or become outmoded, we may experience a significant disruption in our operations and in the business we receive, which could have a material adverse effect on our business, financial condition and operating results.
In addition, we are in the process of implementing a major technology project to improve our operating systems, including a new platform for our mortgage insurance underwriting, policy administration, claims management and billing processes. The implementation of these technological improvements is complex, expensive, time consuming and, in certain respects, depends on the ability of third parties to perform their obligations in a timely manner. If we fail to timely and successfully implement the new technology systems and business processes, or if the systems do not operate as expected, it could have an adverse impact on our business, business prospects and results of operations.
The security of our information technology systems may be compromised and confidential information, including non-public personal information that we maintain, could be improperly disclosed.
Our information technology systems may be vulnerable to physical or electronic intrusions, computer viruses or other attacks, including cyberattacks. As part of our business, we, and certain of our subsidiaries and affiliates, maintain large amounts of confidential information, including non-public personal information on borrowers, consumers and our employees. Breaches in security could result in the loss or misuse of this information, which could, in turn, result in potential regulatory actions or litigation, including material claims for damages, as well as interruption to our operations and damage to our customer relationships and reputation. While we have information security policies, controls and systems in place in order to attempt to prevent, detect and respond to unauthorized use or disclosure of confidential information, including non-public personal information, there can be no assurance that such use or disclosure will not occur. Any cybersecurity or other compromise of the security of our information technology systems, or unauthorized use or disclosure of confidential information, could subject us to liability, regulatory scrutiny and action, damage to our reputation and customer relationships and could have a material adverse effect on our business prospects, financial condition and results of operations.
We are subject to litigation and regulatory proceedings.
We operate in highly regulated industries that are subject to a heightened risk of litigation and regulatory proceedings. We often are a party to material litigation and also are subject to legal and regulatory claims, assertions, actions, reviews, audits, inquiries and investigations. Increased scrutiny in the current regulatory environment could lead to new regulations and practices, new interpretations of existing regulations, as well as additional regulatory proceedings. Additional lawsuits, legal
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and regulatory proceedings and other matters may arise in the future. The outcome of existing and future legal and regulatory proceedings and other matters could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief which could require significant expenditures or have a material adverse effect on our business prospects, results of operations and financial condition. See “Item 3. Legal Proceedings.”
Legislation and administrative and regulatory changes and interpretations could impact our businesses.
Our businesses are subject to and may be impacted by many federal and state lending, insurance and consumer laws and regulations and may be affected by changes in these laws and regulations or the way they are interpreted or applied. In particular, our businesses may be significantly impacted by the following:
legislation, administrative or regulatory action impacting the charters or business practices of the GSEs;
reform of the U.S. housing finance system;
legislation and regulation impacting the FHA and its competitive position versus private mortgage insurers;
state insurance laws and regulations that address, among other items, licensing of companies to transact business, claims handling, reinsurance requirements, premium rates, policy forms offered to customers and requirements for Risk-to-capital, minimum policyholder positions, reserves (including contingency reserves), surplus, reinsurance and payment of dividends;
the application of state, federal or private sector programs aimed at supporting borrowers and the housing market;
the application of RESPA, the FCRA and other laws to our businesses;
the interpretation and application of the TRID rules requiring enhanced disclosures to consumers in connection with the origination of residential mortgage loans;
new federal standards and oversight for mortgage insurers, including as a result of the recommendation of the Federal Insurance Office of the U.S. Treasury that federal standards and oversight for mortgage insurers be developed and implemented;
the implementation of new regulations under, or the potential repeal or amendment of provisions of, the Dodd-Frank Act, including changes in the QM Rule; and
the implementation in the U.S. of the Basel III capital adequacy guidelines.
See “Item 1. Business—Regulation.”
Any of the items discussed above could adversely affect our results of operations, financial condition and business prospects. In addition, our businesses could be impacted by new legislation or regulations, as well as changes to existing legislation or regulations or the way they are interpreted or applied, that are not currently contemplated and which could occur at any time.
The implementation of the Basel III guidelines may discourage the use of mortgage insurance.
Over the past few decades, the Basel Committee has established international benchmarks for assessing banks’ capital adequacy requirements (“Basel III”). Included within those benchmarks are capital standards related to residential lending and securitization activity and, importantly for private mortgage insurers, the capital treatment of mortgage insurance on those loans. These benchmarks are then interpreted and implemented via rulemaking by U.S. banking regulators.
In July 2013, the U.S. banking regulators promulgated regulations, referred to as the “U.S. Basel III Rules,” to implement significant elements of the Basel framework. The U.S. Basel III Rules, among other things, revise and enhance the U.S. banking agencies’ general risk-based capital rules. Today, the U.S. Basel III Rules assign a 20%, 50% or 100% risk weight to loans secured by one-to-four-family residential properties. Generally, under the U.S. Basel III Rules in place today, the explicit government guarantees (FHA/VA/USDA) receive a 0% risk weight, and Fannie Mae and Freddie Mac related loans receive a 20% risk weight. Non-government related mortgage exposures secured by a first lien on a one-to-four family residential property that are prudently underwritten and that are performing according to their original terms receive a 50% risk weighting. All other one-to-four family residential mortgage loans are assigned a 100% risk weight.
In December 2014, the Basel Committee issued a proposal for further revisions to Basel III. It proposed adjustments to the risk weights for residential mortgage exposures that take into account LTV ratio and the borrower’s ability to service a mortgage, which were not previously addressed by Basel III. The proposed LTV ratio did not take into consideration any credit enhancement, including private mortgage insurance, but in March 2015, the U.S. banking regulators clarified that for purposes of the U.S. Basel III Rules, calculation of LTV ratios can account for credit enhancement such as private mortgage insurance in
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determining whether a loan is made in accordance with prudent underwriting standards for purposes of receiving the preferred 50% risk weight. The comment period for this proposal closed in March 2015, and in December 2015, the Basel Committee released a second proposal referred to as the 2015 Basel Committee Proposal, which retained the LTV provisions of the initial draft, but not the provisions pertaining to a borrower’s ability to service a mortgage.mortgage (the “2015 Basel Committee Proposal”). The comment period for the 2015 Basel Committee Proposal closed in March 2016. To date, federal regulators have not adopted or implemented any new regulations, including based on these proposals, that update or modify the U.S. Basel III Rules.
The revised and final recommendations from the Basel Committee with respect to Basel III referred to as the 2017 Basel Committee III Recommendations, were published in December 2017 (the “2017 Basel Committee III Recommendations”), and included finalized risk weighting guidelines for residential mortgage exposures. These rules recognize guarantees provided by sovereign governments (such as FHA, VA, USDA and Ginnie Mae) as off-setting the capital requirements, resulting in a 0% risk weight. While the 2017 Basel Committee III Recommendations include consideration of LTV ratios, including the impact of credit enhancement provided by third-party private mortgage insurance and the GSEs on LTV ratios, the credit enhancement provided by third-party private mortgage insurance and the GSEs would have higher risk weightings than the explicitly government guaranteed products, putting loans insured by private mortgage insurance at a disadvantage. It remains unclear whether new guidelines will be proposed or finalized in the U.S. in response to the most recent 2017 Basel III Committee Recommendations.
If
Item 1A. Risk Factors
Index to Risk Factors
Risks Related to the federal regulators decideCOVID-19 Pandemic
The COVID-19 pandemic adversely impacted us and, in the future, could again adversely affect our business, results of operations or financial condition.
The onset of the COVID-19 pandemic created periods of significant economic disruption, high unemployment, volatility and disruption in financial markets and required adjustments in the housing finance system and real estate markets. Uncertainty regarding the pandemic’s scope, severity and duration, and its resulting impact on the economy, continues to changepersist as the current U.S. Basel III Rulespandemic evolves, and it is difficult to predict the ultimate impact of the COVID-19 pandemic on our business.
In 2020, in response to the final 2017 Basel III Committee Recommendationspandemic, among other things, we raised additional capital, aligned our business with the temporary origination and servicing guidelines announced by the GSEs, and activated our business continuity program by transitioning to a work-from-home virtual workforce model with the exception of certain essential activities. Further, as a result of the COVID-19 pandemic and its impact on the economy, including the significant increase in unemployment and the implementation of mortgage forbearance programs by the GSEs, we experienced a material increase in new defaults in 2020 which resulted in a significant increase in our loss reserves and had a negative effect on our results of operations. If we experience another period of increased defaults stemming from the pandemic in future periods, our loss reserves may again increase which would negatively impact our results of operations and financial condition.
The COVID-19 pandemic may again impact our business in various ways, including the following, which are further described in the remainder of our risk factors in this report:
■We may be required to maintain more capital against COVID-19-related defaults under the PMIERs, in which case Radian Group may choose or be required to contribute additional capital to Radian Guaranty to remain in compliance with the PMIERs financial requirements;
■As a result of COVID-19-related relief programs, we anticipate that defaults related to the pandemic, if not cured, could remain in our defaulted loan inventory for a protracted period of time, potentially resulting in higher levels of claims and Claim Severity for those loans that ultimately result in a claim;
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■Our access to the reinsurance and capital markets may be limited and the terms on which we are able to access such markets may be negatively impacted;
■The GSEs’ business practices have changed in response to the COVID-19 pandemic, with the primary objectives of supporting borrowers impacted by the pandemic and protecting the ongoing functioning of the housing finance system. In response to the ongoing pandemic, the FHFA and GSEs are likely to continue to take actions that impact the housing finance system. Because traditional mortgage insurance is an important component of this system, these actions have had, and may continue to have, a significant impact on our mortgage insurance operations and performance; and
■Volatility in the financial markets may impact the performance of our investment portfolio and could increase the risk that we will not achieve our investment objectives.
Although we are uncertain of the ultimate magnitude or duration of the business and economic impacts of the COVID-19 pandemic, their long-term effect on our businesses will depend on, among other things: the extent, evolution and duration of the pandemic; the severity of and the number of people infected with the virus and the widespread availability of anti-viral treatments and vaccines, especially as new strains of COVID-19 have been discovered; the wider economic effects of the pandemic and the scope and duration of governmental and other third-party measures restricting day-to-day life and business operations; the impact of economic stimulus efforts to support the economy through the pandemic; and governmental and GSE programs implemented to assist borrowers experiencing a COVID-19-related hardship, including forbearance programs. Due to the unprecedented and continually evolving social and economic impacts associated with the COVID-19 pandemic on the U.S. and global economies generally, and in particular on the U.S. housing, real estate and housing finance markets, there is significant uncertainty regarding the ultimate impact on our business, business prospects, operating results and financial condition and our estimates or predictions regarding such impact may be materially wrong.
Risks Related to Regulatory Matters
Radian Guaranty may fail to maintain its eligibility status with the GSEs, and the additional capital required to support Radian Guaranty’s eligibility could reduce our available liquidity.
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 PMIERs are comprehensive, covering virtually all aspects of the business of a private mortgage insurer, including internal risk management and quality controls, the relationship between the GSEs and the approved insurer and the approved insurer’s financial condition. In addition, the PMIERs contain requirements related to the operations of our mortgage insurance business, including extensive operational requirements in areas such as claim processing, loss mitigation, document retention, underwriting, quality control, reporting and monitoring, among others. These extensive operational requirements have resulted in additional expenses and require substantial time and effort from management and our employees. If Radian Guaranty is unable to satisfy the requirements set forth in the PMIERs, including the financial requirements discussed below, the GSEs could restrict it from conducting certain types of business with them or take actions that may include not purchasing loans insured by Radian Guaranty.
The PMIERs include financial requirements incorporating a risk-based framework that requires a mortgage insurer’s Available Assets to meet or exceed its Minimum Required Assets. The PMIERs financial requirements include increased financial requirements for defaulted loans, as well as for performing loans with a higher likelihood of default and/or certain credit characteristics, such as higher LTVs and lower FICO credit scores. Radian Guaranty’s ability to continue to comply with the PMIERs financial requirements could be impacted by, among other factors: (i) the volume and product mix of our NIW; (ii) factors affecting the performance of our mortgage insurance portfolio, including the level of new defaults and prepayments; (iii) for existing defaults, the aging of these existing defaults and whether they are subject to, and remain in, mortgage forbearance programs, and the ultimate losses we incur on new or existing defaults; (iv) the application of the Disaster Related Capital Charge (as discussed below) under the PMIERs; (v) the amount of credit that we receive under the PMIERs financial requirements for our third-party reinsurance transactions (which is subject to initial and ongoing review by the GSEs); and (vi) potential amendments or updates to the PMIERs. If our mix of business includes more loans that are subject to the increased financial requirements under the PMIERs, we may limit the type and volume of business we are willing to write for certain of our products based on the increased financial requirements associated with certain loans. This could reduce the amount of NIW we write, which could reduce our future revenues.
As a result of the COVID-19 pandemic and its impact on the economy beginning in March 2020, we experienced a material increase in new defaults in 2020, substantially all of which related to defaults of loans subject to mortgage forbearance programs implemented in response to the COVID-19 pandemic. The overall volume of pandemic-related new defaults resulted in a corresponding significant increase in Radian Guaranty’s Minimum Required Assets, which negatively impacted Radian Guaranty’s PMIERs Cushion beginning in 2020. Since then, Radian Guaranty’s Minimum Required Assets have been decreasing as the economy has been recovering, the rate of new defaults has largely returned to pre-pandemic levels and many pandemic-related defaulted loans have cured. However, Radian’s Minimum Required Assets remain elevated compared to pre-pandemic levels and the amount of Minimum Required Assets that Radian Guaranty is and will be required to maintain, will depend on the number, timing and duration of defaults, including those defaulted loans participating in mortgage forbearance programs. This, in turn, will depend on the scope, severity, evolution and duration of the pandemic, its resulting impact on the economy, including unemployment and housing prices, and the effectiveness of current and any future
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government and GSE programs to provide economic and individual relief and long-term assistance to homeowners, all of which will likely have an impact on the ability of borrowers to remain current on their mortgage payments and, if they have entered into forbearance or other relief programs, to resume making payments upon the expiration of the forbearance period. See “Item 1. Business—Regulation—Federal Regulation—CARES Act” and “Item 1. Business—Regulation—Federal Regulation—GSE Requirements for Mortgage Insurance Eligibility” for information regarding forbearance programs for borrowers experiencing financial hardship related to the pandemic.
The PMIERs apply a 0.30 multiplier to the Minimum Required Asset factor for loans that have become non-performing as a result of a “FEMA Declared Major Disaster” event, including as a result of participation in a mortgage forbearance program. This effectively reduces the Minimum Required Asset amount for these loans by 70%. Under National Emergency Guidelines issued by the GSEs, the PMIERs were amended so that the Disaster Related Capital Charge applies nationwide to all non-performing loans that are subject to a COVID-19 forbearance plan. For more information about the application of the Disaster Related Capital Charge see “Item 1. Business—Regulation—Federal Regulation—GSE Requirements for Mortgage Insurance Eligibility.”
The application of the Disaster Related Capital Charge has materially reduced the total amount of Minimum Required Assets that Radian Guaranty is required to hold against COVID-19 Defaulted Loans. While we expect that application of the Disaster Related Capital Charge will continue to materially reduce Radian Guaranty’s Minimum Required Assets for loans subject to a COVID-19 forbearance plan, the benefit that Radian Guaranty currently is receiving from the Disaster Related Capital Charge is expected to diminish over time. The reduction of this benefit could be accelerated if the GSEs were to terminate the COVID-19 Amendment to the PMIERs issued under their National Emergency Guidelines.
As the benefits of the Disaster Related Capital Charge diminish, or if existing and future new defaults materially increase Radian Guaranty’s Minimum Required Assets, we may be required or otherwise choose to: (i) contribute capital to Radian Guaranty; (ii) alter our strategy with respect to our NIW; or (iii) seek additional capital relief through reinsurance or otherwise, which may not be available on acceptable terms or on terms that would be approved by the GSEs.
The GSEs may amend the PMIERs at any time and also have broad discretion to interpret the PMIERs, which could impact the calculation of Radian Guaranty’s Available Assets and/or Minimum Required Assets. The most recent large-scale revisions to PMIERs, or PMIERs 2.0, became effective on March 31, 2019 and the PMIERs were further updated as part of the COVID-19 Amendment under the National Emergency Guidelines. We expect the GSEs to continue to update the PMIERs in the future, including potentially to align the PMIERs 2.0 financial requirements with the increased capital requirements for the GSEs under the ECF and/or the proposed new liquidity requirements for the GSEs. See “Item 1. Business—Regulation—Federal Regulation—GSE Requirements for Mortgage Insurance Eligibility” and “Item 1. Business—Regulation—Federal Regulation—Housing Finance Reform and the GSEs’ Business Practices” for additional information on the ECF and proposed GSE liquidity requirements.
Compliance with the PMIERs financial requirements could impact our holding company liquidity if additional capital support for Radian Guaranty is required for it to maintain this compliance. The amount of capital that Radian Group could be required to contribute to Radian Guaranty for this purpose is uncertain, but could be significant and, under extreme economic scenarios, could exhaust Radian Group’s available liquidity. See “—Radian Group’s sources of liquidity may be insufficient to fund its obligations.” Further, if Radian Guaranty becomes capital constrained, it may be more difficult for Radian Guaranty to return capital to Radian Group, which would compound the negative liquidity impact to Radian Group of the contributions it may be required to make to Radian Guaranty and leave less liquidity to satisfy Radian Group’s other obligations. Depending on the amount of liquidity that is utilized from Radian Group, we may be required (or may decide) to seek additional capital by incurring additional debt, issuing additional equity or selling assets, which we may not be able to do on favorable terms, if at all.
The PMIERs prohibit Radian Guaranty from engaging in certain activities such as insuring loans originated or serviced by an affiliate (except under certain circumstances) and require Radian Guaranty to obtain the prior consent of the GSEs before taking many actions, which may include, among other things, entering into certain intercompany agreements, settling loss mitigation disputes with customers and commuting risk. These restrictions could prohibit or delay Radian Guaranty from taking certain actions that would be advantageous to it or to Radian Group.
Although we expect Radian Guaranty to retain its eligibility status with the GSEs and to continue to comply with the PMIERs financial requirements, including as potentially updated in the future, we cannot provide assurance that this will occur. Loss of Radian Guaranty’s eligibility status with the GSEs would have an immediate and material adverse impact on the franchise value of our Mortgage business and our future prospects, as well as a material negative impact on our future results of operations and financial condition.
Our insurance subsidiaries are subject to comprehensive state insurance regulations and other requirements, which we may fail to satisfy.
We and our insurance subsidiaries are subject to comprehensive, detailed regulation by the insurance regulators in the states where they are domiciled or licensed to transact business. These regulations are principally designed for the protection of our insurance policyholders rather than for the benefit of our investors. Insurance laws vary from state to state, but generally grant broad supervisory powers to examine insurance companies and enforce rules or exercise discretion affecting almost
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every significant aspect of the insurance business, including the power to revoke or restrict an insurance company’s ability to write new business.
Among other matters, the state insurance regulators impose various capital requirements on our insurance subsidiaries. State insurance capital requirements for our mortgage insurance subsidiaries include Risk-to-capital ratios, other risk-based capital measures and surplus requirements that may limit the amount of insurance that our mortgage insurance subsidiaries write or the ability of our insurance subsidiaries to distribute capital to Radian Group. Similarly, our title insurance subsidiary is required to maintain statutory premium reserves that vary by state and are subject to periodic reviews of certain financial performance ratios, the results of which could result in additional capital requirements in states where it is licensed. See “Item 1. Business—Regulation—State Regulation” for more information on existing regulatory requirements and potential changes to the capital and surplus requirements under the Model Act that the NAIC has been reviewing for many years.
Among other things, our failure to maintain adequate levels of capital in our mortgage insurance and title insurance subsidiaries could lead to intervention by the various insurance regulatory authorities, which could materially and adversely affect our business, business prospects and financial condition. In addition, the GSEs and our mortgage lending customers may decide not to conduct new business with Radian Guaranty (or may reduce current business levels) or impose restrictions on Radian Guaranty if it is not in compliance with applicable state insurance requirements. The franchise value of our mortgage insurance business likely would be significantly diminished if we were prohibited from writing new business or restricted in the amount of new business we could write in one or more states. For additional information about statutory surplus and other state insurance requirements, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Mortgage,” as well as Note 16 of Notes to Consolidated Financial Statements.
The mortgage insurance industry has always been highly competitive with respect to pricing. Our mortgage insurance subsidiaries’ premium rates and policy forms are generally subject to regulation in every state in which they are licensed to transact business. These regulations are intended to protect policyholders against the adverse effects of excessive, inadequate or unfairly discriminatory rates and to encourage fair competition in the insurance marketplace. We may be subject to regulatory inquiries or examinations with respect to our mortgage insurance premium rates and policy forms. Similarly, our title insurance business is subject to extensive rate regulation by the applicable state agencies in the states in which it operates. Given that the premium rates for our insurance subsidiaries are highly regulated, we could lose business opportunities and fail to successfully implement our business strategies if our rates are deemed non-compliant or are subject to investigation, if new rates and policy forms are not approved as may be required, or if we are otherwise unable to respond to competitor pricing actions and our customers’ demands in a timely and compliant manner.
Changes in the charters, business practices or role of the GSEs in the U.S. housing market generally, could significantly impact our businesses.
Our current business structure is highly dependent on the GSEs, as the GSEs are the primary beneficiaries of most of our mortgage insurance policies. Changes in the business practices of the GSEs, which can be implemented by the GSEs acting independently or through their conservator, the FHFA, could negatively impact our businesses and financial performance. Examples of potential changes that could impact our business, may include, without limitation:
■eligibility requirements for a mortgage insurer to become and remain an approved eligible insurer for the GSEs;
■underwriting standards on mortgages they purchase;
■policies or requirements that may result in a reduction in the number of mortgages they acquire;
■the national conforming loan limit for mortgages they acquire;
■the level of mortgage insurance they require;
■the terms on which mortgage insurance coverage may be canceled before reaching the cancellation thresholds established by law;
■the terms required to be included in master policies for the mortgage insurance policies that cover the loans they acquire, including limitations on our ability to mitigate losses on insured mortgages that are in default;
■the amount of loan level price adjustments or guarantee fees, which often result in a higher cost to borrowers, that the GSEs charge on loans that require mortgage insurance; and
■the degree of influence that the GSEs have over a mortgage lender’s selection of the mortgage insurer providing coverage.
In addition, the GSEs’ business practices have changed in response to the COVID-19 pandemic, primarily to support borrowers impacted by the pandemic and protect the ongoing functioning of the housing finance system. As the COVID-19 pandemic continues to evolve, the actions or potential inactions of the FHFA and GSEs in response to COVID-19 may continue to have a significant impact on the overall functioning of the housing finance system. Because traditional mortgage insurance is an important component of this system and because our businesses depend on the health of the housing finance
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system and housing markets in particular, these actions have impacted, and may continue to impact, our business operations and performance.
The structure of the residential housing finance system could be altered in the future, including as a result of comprehensive housing reform legislation. Since the FHFA was appointed as conservator of the GSEs, there has been a wide range of legislative proposals to reform the U.S. housing finance market. In conjunction with these proposals, there has been ongoing debate about the roles that the federal government and private capital should play in the housing finance system. To the extent new legislative action alters the existing GSE charters without explicit preservation of the role of private mortgage insurance for high-LTV loans, our business could be adversely affected. See “Item 1. Business—Regulation—Federal Regulation—Housing Finance Reform and the GSEs’ Business Practices” for a discussion of the future of housing finance in the U.S., including potential objectives for future reform.
In December 2020, the FHFA finalized the ECF, which establishes new increased capital requirements for the GSEs, and the FHFA also has proposed new liquidity requirements for the GSEs. In September 2021, the FHFA proposed further amendments to the ECF, and it is uncertain if and when these proposed amendments may be incorporated into the ECF and the form that they may take. See “Item 1. Business—Regulation—Federal Regulation—Housing Finance Reform and the GSEs’ Business Practices” for further information about the requirements established by the ECF, the September 2021 proposed amendments to the ECF and the proposed new liquidity requirements for the GSEs. Taken together, compliance with the increased capital requirements imposed by the ECF and the proposed new GSE liquidity requirements could significantly alter the business practices and operations of the GSEs, including potentially resulting in an increase in GSE pricing and a decrease in their use of credit risk transfer. An increase in GSE pricing could make alternatives to the GSEs such as FHA insured loans or the private securitization market more attractive, which could reduce the GSEs’ market position and reduce the number of loans available for private mortgage insurance. Further, the GSEs may seek to amend the PMIERs financial requirements in the future, including potentially to align with the ECF and the GSE liquidity requirements, once finalized. It remains uncertain if, when and how the PMIERs ultimately may be amended; however, changes to the PMIERs to align with the ECF could include: (i) an increase in the level of Radian Guaranty’s required capital and (ii) a decrease in the amount of PMIERs’ capital relief that Radian Guaranty receives for existing or future reinsurance or insurance-linked notes transactions.
The GSEs have in the past and may in the future pursue new products and activities in pursuit of their business strategies, including credit risk transfer transactions and structures that compete with private mortgage insurance. In 2018, Freddie Mac and Fannie Mae launched pilot programs, IMAGIN and EPMI, respectively, as alternative ways for lenders to obtain credit enhancement and sell loans with LTVs greater than 80% to the GSEs. These programs were discontinued in 2021, but could be relaunched in the future. If these programs or any future credit risk transfer transactions and structures were to materially displace primary loan level or standard levels of mortgage insurance, the amount of mortgage insurance we write may be reduced, which could negatively impact our franchise value, results of operations and financial condition. The FHFA previously released for comment a proposed rule regarding the process for how it will consider and approve new GSE activities and products; however, this proposed rule has not been finalized. In addition, the proposed rule is intended to apply to any future pilot programs, and therefore, it is not certain whether the same standards and procedures proposed in the new rule also would apply to pilots such as IMAGIN and EPMI if they are relaunched in the future. See “Item 1. Business—Regulation—Federal Regulation—Housing Finance Reform and the GSEs’ Business Practices” for further discussion of IMAGIN and EPMI and additional information about the proposed rule discussed above.
Since assuming leadership over the FHFA in June 2021, the Biden Administration appointed FHFA leadership has taken actions that represent a reversal of the previous FHFA leadership’s primary focus on preparing the GSEs to exit from conservatorship by increasing the GSEs’ overall capital levels and reducing their credit risk profile. In contrast, the current FHFA leadership has been focused on increasing the accessibility and affordability of mortgage credit, in particular to low- and moderate-income borrowers and underserved communities. Radian Guaranty and other private mortgage insurance companies have been engaged in discussions with the GSEs regarding how the industry may support the GSEs to advance these objectives. In addition, in furtherance of these policy objectives, Radian Guaranty and/or one or more of the mortgage insurers may pursue initiatives outside of their customary business activities, the success of which may be measured based on how well the initiative was able to advance accessibility and affordability of mortgage credit rather than by traditional profitability and return measures. In addition, the FHFA has required the GSEs to prepare and file three-year Equitable Housing Finance Plans that describe each GSE’s planned efforts to advance equity in housing finance. The action plans, when finalized, may include methods to reduce mortgage costs for historically underserved borrowers, including mortgage insurance costs. To implement these plans or to otherwise support the FHFA’s mandate regarding increasing the accessibility and affordability of mortgage credit, the GSEs may pursue new products and activities, or alter existing policies and practices in ways that could require changes to the GSEs’ business practices, including in ways that could negatively impact Radian Guaranty’s IIF, results of operations or financial condition.
Although we believe that traditional private mortgage insurance will continue to play an important role in any future housing finance structure, developments in the practices of the GSEs, including potentially new federal legislation, changes to existing statutes, rules or regulations, or changes in the GSEs’ business practices that reduce the level of private mortgage insurance coverage used by the GSEs as credit enhancement, or even eliminate the requirement, may diminish the franchise value of our mortgage insurance business and materially and adversely affect our business prospects, results of operations and financial condition.
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Legislation and administrative and regulatory changes and interpretations could impact our businesses.
Our businesses are subject to and may be impacted by many federal and state lending, insurance and consumer laws and regulations. See “Item 1. Business—Regulation” for a discussion of significant state and federal regulations and other requirements of the GSEs that are applicable to our businesses. Changes in these laws and regulations or the way they are interpreted or applied, as well as changes in other laws and regulations that may affect corporations more generally, could adversely affect our results of operations, financial condition and business prospects. In addition, our businesses could be impacted by new legislation or regulations, including changes that are not currently contemplated and which could occur at any time. While we have established policies and procedures to comply with applicable laws and regulations, many such laws and regulations are complex, and it is not possible to predict the eventual scope, duration or outcome of any reviews or investigations nor is it possible to predict their effect on us or the industries in which we participate.
Risks Related to our Mortgage and homegenius Business Operations
Our success depends on our ability to assess and manage our underwriting risks; the premiums we charge may not be adequate to compensate us for our liability for losses and the amount of capital we are required to hold against our insured risks. We expect to incur losses for future defaults beyond what we have reserved for in our financial statements.
The estimates and expectations we use to establish premium rates in our mortgage insurance business are based on assumptions made at the time our insurance is written. Our mortgage insurance premium rates are based on, among other items, our expectations about competitive and economic conditions and our cost of capital, as well as a broad range of other factors and risk attributes that we consider in developing our assumptions about the credit performance of the loans we insure and the economic benefits we expect to receive from our insurance policies. Our assumptions may ultimately prove to be inaccurate, especially in a period of high market volatility and economic uncertainty, or if there is a change in law or the GSEs’ business practices that alter the performance of the loans we have insured in ways that are inconsistent with our assumptions, including the amount of premium we expect to receive from such insurance. The risk of inaccurate or unreliable data may have an adverse impact on our ability to effectively perform critical business operations, such as servicing, loss management, external reporting or data-driven internal analysis. The premium structure we apply is subject to approval by state regulatory agencies, which can delay or limit our ability to increase our premiums if further filings or approvals are necessary to institute pricing adjustments.
If the risk underlying a mortgage loan that we have insured develops more adversely than we anticipated, we generally cannot increase the premium rates on this in-force business, or cancel coverage or elect not to renew coverage, to mitigate the effects of such adverse developments. Similarly, we cannot adjust our premiums if the amount of capital we are required to hold against our insured risks increases from the amount we were required to hold at the time a policy was written or if the premiums we expected to receive from such insurance are less than anticipated due to a change in the GSEs’ business practices or otherwise. As a result, if we are unable to compensate for or offset the increased capital requirements in other ways, the returns on our business may be lower than we assumed or expected. Our premiums earned and the associated investment income on those premiums may ultimately prove to be inadequate to compensate for the losses that we may incur and may not provide an adequate return on increased capital that may be required. As a result, our results of banking organizationsoperations and financial condition could be negatively impacted.
Additionally, in accordance with industry practice, we do not establish reserves in our mortgage insurance business until we are notified that a borrower has failed to make at least two monthly payments when due. Because our mortgage insurance reserving does not account for the impact of future losses that we expect to incur with respect to performing (non-defaulted) loans, our obligation for ultimate losses that we expect to incur at any period end is not reflected in our financial statements, except if a premium deficiency exists. A premium deficiency reserve would be recorded if the present value of expected future losses and expenses exceeds the present value of expected future premiums and already established loss reserves on the applicable loans. As future defaults are not currently reflected in our mortgage insurance loss reserves, our loss reserves could increase significantly in future periods if we experience a high volume of new defaults in future periods, which would negatively impact our results of operations and financial condition.
If the estimates we use in establishing loss reserves are incorrect, we may be required to take unexpected charges to income, which could adversely affect our results of operations.
We establish loss reserves in our mortgage insurance business to provide for the estimated cost of future claims on defaulted loans. Setting our loss reserves requires significant judgment by management with respect to the residential mortgageslikelihood, magnitude and timing of each potential loss, including an estimate of the impact of our Loss Mitigation Activities with respect to defaulted loans. The models, assumptions and estimates we insureuse to establish loss reserves may not prove to be accurate, especially in the event of an extended economic downturn or a period of market volatility and economic uncertainty, such as we have experienced due to the COVID-19 pandemic. Because of this, claims paid may be substantially different than our loss reserves and these reserves may be insufficient to satisfy the full amount of claims that we ultimately have to pay. Changes to our loss reserve estimates could adversely impact our results of operations and financial condition. In addition, although the rate of new defaults has largely returned to pre-pandemic levels and many pandemic-related defaulted loans have cured,
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Part I. Item 1A. Risk Factors |
many defaulted loans in our insured portfolio remain in COVID-19 mortgage forbearance programs that are guaranteedexpected to expire in the near future. Forbearance for federally-insured mortgages (including those delivered to or purchased by the GSEs) allows for mortgage payments to be suspended for up to 18 months, subject to certain limitations such as when the forbearance plan was initiated. Historically, forbearance plans have reduced the frequency of our losses on affected loans. However, given the uncertainty regarding the long-term economic impact of COVID-19, it is difficult to predict the likelihood of default on loans that remain in COVID-19 related forbearance. Whether a defaulted loan will cure, including through modification, when forbearance ends will depend on the economic circumstances of the borrower at that time. The GSEs have introduced specific loan workout options for borrowers whose COVID-19 forbearance plans end. If a servicer is unable to contact a borrower to determine a loan workout option, the forbearance plan will end and the loan may remain in default. If a greater number of defaulted loans in COVID-19 forbearance programs ultimately result in claims than we anticipate, we may be required to increase our loss reserves.
We anticipate that defaults related to the pandemic, if not cured, could remain in our defaulted loan inventory for a protracted period of time, resulting in a higher likelihood of claim and higher levels of Claim Severity for those loans that ultimately result in a claim. See “—An extension in the period of time that a loan remains in our defaulted loan inventory may increase the severity of claims that we ultimately are required to pay.”
A portion of the defaulted loans in our portfolio originated in the years prior to and including 2008 have been in default for an extended period of time. While these loans are generally assigned a higher loss reserve based on our belief that they are more likely to result in a claim, we also assume, based on historical trends, that a significant portion of these loans will cure or otherwise not result in a claim. Given the significant period of time that these loans have been in default, it is possible that the ultimate cure rate for these defaulted loans will be less than our current estimates of Cures for this inventory of defaults.
If our loss reserve estimates are inadequate, we may be required to increase our reserves, which could have a material adverse effect on our results of operations and financial condition.
Our Loss Mitigation Activity is not expected to mitigate mortgage insurance losses to the same extent as in prior years; Loss Mitigation Activity could continue to negatively impact our customer relationships.
As part of our claims management process we pursue opportunities to mitigate losses both before and after we receive claims, including processes to ensure claims are valid. Following the financial crisis, our Loss Mitigation Activities, such as Rescissions, Claim Denials and Claim Curtailments, increased significantly in response to the poor underwriting, servicer negligence and other instances of non-compliance with our insurance policies that was prevalent in the period leading up to the financial crisis. These Loss Mitigation Activities materially mitigated our paid losses for loans originated and serviced during this period and resulted in a significant reduction in our loss reserves. Following the financial crisis, mortgage underwriting and servicing have generally improved, and the amount of Loss Mitigation Activity required with respect to the claims on loans originated and serviced in more recent periods has significantly decreased. As a result, our future Loss Mitigation Activity is not expected to mitigate our paid losses to the same extent as it did in the years following the financial crisis. In addition, we have incorporated provisions into our 2014 Master Policy and 2020 Master Policy that generally provide rescission relief based on the number of months that borrowers remain current on their mortgage loans, and Radian Guaranty has entered into a Factored Claim Administration Agreement with Fannie Mae for certain loans that predetermines the amount of covered expenses forming part of a loss using prenegotiated expense factors. As a consequence, our rights to conduct Loss Mitigation Activity generally are more limited for loans covered by more recent Master Policies and for more recent defaults as compared to the past.
Our Loss Mitigation Activities and claims paying practices have resulted in disputes with certain of our customers and in some cases, damaged our relationships with customers, resulting in a loss of business. While we have resolved all material disputes, a risk remains that our Loss Mitigation Activities or claims paying practices could continue to have a negative impact on our relationships with customers or potential customers. Further, disputes with our customers that are not resolved could result in additional arbitration or judicial proceedings, requiring significant legal expenses. To the extent that past or future Loss Mitigation Activities or claims paying practices impact our customer relationships, our competitive position could be adversely affected, resulting in the potential loss of business and impacting our results of operations.
Reinsurance may not be available, affordable or adequate to protect us against losses.
We use reinsurance as a capital and risk management tool. We have distributed risk through third-party quota share and excess-of-loss reinsurance arrangements, as well as through the capital markets using mortgage insurance-linked notes transactions.
The availability and cost of reinsurance are subject to market conditions beyond our control, including factors that impact the demand of investors for mortgage credit. No assurance can be given that reinsurance will remain available to us in amounts that we consider sufficient and at rates and upon terms that we consider acceptable. Accordingly, we may be forced to incur additional expenses for reinsurance or may not be able to obtain sufficient reinsurance on acceptable terms, which could cause us to increase the amount of risk we retain, negatively affect the returns we are able to achieve on the business we write and adversely affect our ability to write future business. Further, reinsurance does not relieve us of our direct liability to policyholders, therefore, if the reinsurer is unable or unwilling to meet its obligations to us, we remain liable to make claims
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payments to our policyholders. As a result, our reinsurance arrangements do not fully eliminate our obligation to pay claims, and we have assumed counterparty credit risk with respect to our inability to recover amounts due from reinsurers.
We use reinsurance to manage Radian Guaranty’s capital position under the PMIERs financial requirements. Among other benefits, our risk distribution transactions reduce our required capital, including by significantly reducing our Required Minimum Assets under the PMIERs. The initial and ongoing credit that we receive under the PMIERs financial requirements for these risk distribution transactions is subject to the periodic review of the GSEs and could be influenced by the ECF, which, in the form finalized in December 2020, significantly increases the capital requirements for the GSEs and provides the GSEs with a reduced amount of credit for their own credit risk transfer activities. Although the FHFA has since proposed further amendments to the ECF in September 2021, including to provide more credit for risk transfer transactions, it is uncertain if and when these proposed amendments may be incorporated into the ECF and the form that they may ultimately take. See “—Changes in the charters, business practices or role of the GSEs in the U.S. housing market generally, could significantly impact our businesses.” If the GSEs revise the PMIERs in the future to align with a form of the ECF that provides less capital relief for credit risk transfer transactions, such alignment could reduce the credit that Radian Guaranty receives for reinsurance under the PMIERs, which could negatively impact our strategic approach to risk management and risk distribution.
If we are unable to obtain sufficient reinsurance on acceptable terms or to collect amounts due from our reinsurers, or if we receive less PMIERs capital relief for our reinsurance transactions, it could have a material adverse effect on our business, financial condition and results of operations.
An extension in the period of time that a loan remains in our defaulted loan inventory may increase the severity of claims that we ultimately are required to pay.
High levels of defaults and corresponding delays in foreclosures could delay our receipt of claims, resulting in an increase in the period of time that a loan remains in our defaulted loan inventory, and as a result, the Claim Severity. Generally, foreclosure delays do not stop the accrual of interest or affect other expenses on a loan, and unless a loan is cured during such delay, once title to the property ultimately is obtained and a claim is filed, our paid claim amount may include additional interest and expenses, increasing the Claim Severity.
In response to the COVID-19 pandemic, numerous federal and state regulatory agencies have instituted borrower relief programs, including mortgage payment forbearance and foreclosure and eviction moratoriums, with the objective of supporting borrowers through the economic hardship resulting from the pandemic and allowing borrowers to remain in their homes. After being extended multiple times, the foreclosure and eviction moratoriums have now expired; however, the existence of these moratoriums significantly impacted the claims process in 2020 and 2021 by preventing the procedural steps necessary for the filing of a claim under our insurance policies. Further, when loans subject to COVID-19 mortgage forbearance programs reach the end of their forbearance period, federal law requires servicers to discuss forbearance and loss mitigation options with their borrowers and afford additional protections to borrowers before their loans are referred to foreclosure, which further extends the period in which these loans remain in defaulted status. As a result of COVID-19-related relief programs, defaults related to the pandemic, if not cured, may remain in our defaulted loan inventory for a protracted period of time, which could result in higher levels of Claim Severity for those loans that ultimately result in a claim. Higher levels of Claim Severity would increase our incurred losses and could negatively impact our results of operations and financial condition.
If the length of time that our mortgage insurance policies remain in force declines, it could result in a decrease in our future revenues.
Most of our primary IIF consists of policies for which we expect to receive premiums in the future, typically through Monthly Premium Policies, and as a result, a significant portion of our earned premiums are derived from insurance that was written in prior years, often with premium rates that are greater than those prevailing in the market today. The length of time that this insurance remains in force, which we refer to as the Persistency Rate, is a significant driver of our future revenues, with a lower overall Persistency Rate generally reducing our future revenues. As a result, the ultimate profitability of our mortgage insurance business is affected by the impact of mortgage prepayment speeds on the mix of business we write.
Prevailing mortgage interest rates compared to the mortgage rates on our IIF and the level of home price appreciation occurring since origination of the loan affect the incentive for borrowers to refinance and therefore our Persistency Rate, with lower current interest rates and a greater level of home price appreciation making it more attractive for borrowers to refinance. Borrowers with significant equity may be able to refinance their loans without requiring mortgage insurance. The impact of the COVID-19 pandemic, including the government stimulus efforts in response to the pandemic, has resulted in a historically low interest rate environment, which in combination with the significant level of home price appreciation that has occurred over recent years, has led to elevated policy cancellations associated with a high level of refinance activity. The increase in policy cancellations associated with this high level of refinance activity has reduced our Persistency Rate compared to historic levels, and in turn, limited the growth of our IIF, which is one of the primary drivers of future premiums that we expect to earn over time. If the length of time that our mortgage insurance policies remain in force continues to remain low for a protracted period of time or further declines, and such decline is not offset by a sufficient level of NIW, it could result in a further decrease in our future revenues, particularly from our Recurring Premium Policies.
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Other factors affecting the length of time that our insurance remains in force include:
■the HPA requirement that servicers cancel mortgage insurance when a borrower’s LTV ratio meets or is scheduled to meet certain levels, generally based on the original value of the home and subject to various conditions;
■the GSEs’ mortgage insurance cancellation guidelines, which apply more broadly than the HPA, and also consider a home’s current value. For example, borrowers may request cancellation of mortgage insurance based on the home’s current value if certain LTV and seasoning requirements are met and the borrowers have an acceptable payment history. For loans seasoned between two and five years, the LTV ratio must be 75% or less, and for loans seasoned more than five years, the LTV ratio must be 80% or less. For more information about the GSEs’ guidelines and business practices and how they may change, see “—Changes in the charters, business practices or role of the GSEs in the U.S. housing market generally, could significantly impact our businesses.”
■the credit policies of certain lenders, which may make it more difficult for homeowners to refinance loans; and
■economic conditions that can affect a borrower’s decision to pay off a mortgage earlier than required, including the strength of the housing market, which impacts a borrower’s prospects for selling their existing home and finding a suitable and affordable new home.
If these or other factors cause a decrease in the length of time that our Recurring Premium Policies, for which we expect to receive premiums in the future, remain in force, our future revenues could be negatively impacted, which could negatively impact our results of operations and financial condition.
Our delegated underwriting program may subject our mortgage insurance business to unanticipated claims.
In our mortgage insurance business, we permit lenders to obtain mortgage insurance for residential mortgage loans originated and underwritten by them using Radian’s pre-established underwriting guidelines. Once we accept a lender into our delegated underwriting program, we generally insure a mortgage loan originated by that lender based on our expectation that the lender has followed our specified underwriting guidelines. Under this program, a lender could commit us to insure a material number of loans with unacceptable risk profiles before we discover the problem and are able to terminate that lender’s delegated underwriting authority or pursue other rights that may be available to us, such as our rights to rescind coverage or deny claims.
Our mortgage insurance business faces intense competition.
The U.S. mortgage insurance industry is highly competitive. Our competitors primarily include other private mortgage insurers and governmental agencies, principally the FHA and VA.
We currently compete with other private mortgage insurers that are eligible to write business for the GSEs primarily on the basis of price, underwriting guidelines, overall service, customer relationships, perceived financial strength (including comparative credit ratings) and reputation. Overall service competition is based on, among other things, effective and timely delivery of products, responsiveness to compliance audits, timeliness of claims payments, customer service, timely and accurate administration of policies, training, loss mitigation efforts and management and field service expertise. We also believe that our service proposition to customers includes our ability to offer services to customers through our homegenius business that are relevant to our mortgage insurance customers and complement our mortgage insurance products. For more information about our competitive environment, including pricing competition, see “Item 1. Business—Competition.”
Pricing strategies continue to evolve in the mortgage insurance industry. In recent years, mortgage insurers generally have migrated away from a predominantly rate-card-based pricing model and toward the use of proprietary, “black box” pricing frameworks that use a spectrum of filed rates to allow for formulaic, risk-based pricing based on multiple loan, borrower and property attributes that may be quickly adjusted within certain parameters. The shift toward the use of these granular risk-based pricing methodologies has contributed to a pricing environment that is more dynamic with more frequent pricing changes that can be implemented quickly, as well as an overall reduction in pricing transparency. As a result, we may not be aware of rate changes in the industry until we observe that our volume of NIW has changed. Further, in addition to the growing proliferation of black box pricing, industry pricing practices in recent years have also included an increased use of customized rate plans for certain customers, pursuant to which rates may be awarded to customers for only a limited period of time. The evolution of pricing strategies throughout the industry has resulted in greater volatility in our NIW and a reduction in industry pricing, including our pricing, due to the heightened competition inherent in the use of these pricing tools as compared to prior periods when standard rate cards were most prevalent.
With the increased prevalence of granular, “black box” pricing and the greater uniformity of master policy terms throughout the industry, pricing has become the predominant competitive market factor for private mortgage insurance and an increasing number of customers are making their choice of mortgage insurance providers primarily based on the lowest price available for any particular loan. Our approach to pricing is customer-centric and flexible, as we offer a spectrum of risk-based pricing solutions for our customers that are designed to be balanced with our objectives for managing our volume of NIW and the risk/return profile of our insured portfolio. Although we believe we are well-positioned to compete effectively, our pricing strategy may not be successful and we may lose business to other competitors.
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The reduction in our premium rates due to heightened competition is expected to decrease the premium yield of our insured portfolio over time as older vintage insured loans with higher premium rates run-off and are replaced with insured loans with premium rates that are generally lower. It is possible that pricing competition could further intensify, which could result in a decrease in our projected returns. Despite our pricing actions, we may experience returns below our targeted returns. Our increased use of reinsurance over the past several years has helped to mitigate the negative effect of declining premium rates on our expected returns. However, reinsurance may not always be available or available on terms attractive to us. See “—Reinsurance may not be available, affordable or adequate to protect us against losses.”
Certain of our private mortgage insurance competitors may have access to greater amounts of capital and financial resources than we do at a lower cost of capital (including through affiliated off-shore reinsurance vehicles) and some competitors currently have better financial strength ratings than we have. As a result, they may be better positioned to compete outside of traditional mortgage insurance, including by participating in alternative forms of credit enhancement that the GSEs may pursue outside of private mortgage insurance in its traditional form. In addition, because of tax advantages associated with being off-shore, which may become more pronounced if tax laws change in the future, certain of our competitors have been able to reinsure to their offshore affiliates and achieve higher after-tax rates of return on the NIW they write compared to mortgage insurers such as Radian Guaranty that do not have access to offshore affiliates. This tax structuring benefit could allow these off-shore competitors to leverage reduced pricing to gain market share, while continuing to achieve acceptable returns on NIW.
We also compete with governmental entities, such as the FHA and VA, primarily on the basis of loan limits, pricing, credit guidelines, terms of our insurance policies and loss mitigation practices. These governmental entities typically do not have the same capital requirements or business objectives that we and other private mortgage insurance companies have, and therefore, may have greater financial flexibility in their pricing guidelines and capacity that could put us at a competitive disadvantage. If these entities lower their pricing or alter the terms and conditions of their mortgage insurance or other credit enhancement products in furtherance of political, social or other goals rather than a profit motive, we may be unable to compete in that market effectively, which could have an adverse effect on our business, financial condition and operating results. See “Item 1. Business—Regulation—Federal Regulation—Housing Finance Reform and the GSEs’ Business Practices” for further discussion of factors that could impact the FHA’s competitive position relative to private mortgage insurance.
In addition, as market conditions change, alternatives to private mortgage insurance may become more prevalent, which could reduce the demand for private mortgage insurance in its traditional form. For example, alternatives to private mortgage insurance could include: investors using risk mitigation and credit risk transfer techniques other than private mortgage insurance (or accepting credit risk without credit enhancement); lenders and other investors holding mortgages in portfolio and self-insuring; and/or lenders originating mortgages using “piggyback” structures to avoid private mortgage insurance. See “—Changes in the charters, business practices or role of the GSEs in the U.S. housing market generally, could significantly impact our businesses” for risks related to changes in the GSEs’ business practices that could impact our competitive position, including the use of alternatives to traditional mortgage insurance to satisfy their charter requirements related to credit risk.
The competitive environment is extremely challenging given the multitude of factors discussed above. This environment, as well as potential further changes to this evolving environment, could negatively impact our franchise value, business prospects, results of operations and financial condition.
Our NIW and franchise value could decline if we lose business from significant customers.
Our mortgage insurance business depends on our relationships with our customers. Our customers place insurance with us directly on loans they originate and they also do business with us indirectly through purchases of loans that already have our mortgage insurance coverage. Our relationships with our customers may influence both the amount of business they conduct with us directly and their willingness to continue to approve us as a mortgage insurance provider for loans that they purchase. The loss of business from significant customers could have an adverse effect on the amount of new business we are able to write, and consequently, our franchise value.
If we were to lose a significant customer, including as a result of customer consolidation, it is unlikely that the loss could be completely offset by other customers in the near-term, if at all. Lending customers may decide to write business only with a limited number of mortgage insurers or only with certain mortgage insurers, based on their views with respect to an insurer’s information security and other compliance programs, pricing levels and pricing delivery methods, service levels, underwriting guidelines, loss mitigation practices, financial strength or other factors. With respect to pricing, industry pricing practices in recent years have also included an increased use of customized rate plans for many customers, pursuant to which rates may be awarded to customers for only a limited period of time. This has led to greater volatility in our customer relationships as we may retain, gain or lose customers based on the competitiveness of our proposed pricing levels over the proposed period, regardless of the other factors cited above that may influence a lender’s decision whether to continue or commence doing business with us. See “—Our mortgage insurance business faces intense competition.”
Our lending customers also may choose for risk management purposes to diversify the mortgage insurers with which they do business. Given that many of our customers currently give us a significant portion of their total mortgage insurance business, it is possible that further diversification could have a negative impact on our NIW if we are unable to mitigate the
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market share loss through new customers or increases in business with other customers. Further, we actively engage with our customers to ensure that we are receiving an appropriate mix of business at acceptable projected returns, and depending on the circumstances, we could take action with respect to customers (e.g., limiting the type of business we accept from them or instituting pricing changes that impact them) that could result in customers reducing the amount of business they do with us or deciding not to do business with us altogether. Finally, although we develop our product offerings and strategies to be complementary to our customers, we currently offer and may offer in the future, products that could be viewed as competitive to products offered by certain of our customers, which could influence a customer’s decision as to whether to do business with us. Any significant loss in our market share could negatively impact our mortgage insurance franchise, results of operations and financial condition.
The current financial strength ratings assigned to our mortgage insurance subsidiaries could weaken our competitive position and potential downgrades by rating agencies to these ratings and the ratings assigned to Radian Group could adversely affect the Company.
Radian Guaranty has been assigned a rating of Baa1 by Moody’s, a rating of BBB+ by S&P and a rating of A- by Fitch. While Radian Guaranty’s financial strength ratings currently are investment grade, certain of these ratings are below the ratings assigned to some of our competitors. We do not believe our ratings have had a material adverse effect on our relationships with existing customers. However, if financial strength ratings become a more prominent consideration for lenders, we may be competitively disadvantaged by customers choosing to do business with private mortgage insurers that have higher financial strength ratings. In addition, while the current PMIERs do not include a specific ratings requirement with respect to eligibility, if this were to change in the future, we may become subject to a ratings requirement in order to retain our eligibility status under the PMIERs. The ECF, in the form finalized in December 2020, generally provides more capital credit for transactions with more highly rated counterparties, which if translated to the PMIERs in the future, could potentially become a competitive disadvantage for us.
The GSEs currently consider financial strength ratings, among other items, to determine the amount of collateral that an insurer must post when participating in their credit risk transfer transactions. As a result, the returns that we are able to achieve if and when we participate in these transactions are dependent, in part, on our financial strength ratings. Further, a downgrade in our financial strength ratings could result in increased scrutiny of our financial condition by the GSEs and/or our customers, potentially resulting in a decrease in the amount of our NIW. Market participants with higher ratings than us are assigned lower collateral requirements by the GSEs for these transactions and generally have a lower cost of capital, which may give them a competitive advantage, including the ability to price more aggressively for these transactions.
We believe that financial strength ratings remain a significant consideration for participants seeking to secure credit enhancement in the non-GSE mortgage market, which includes most non-QM loans. While this market has remained limited since the financial crisis, we view this market as an area of potential long-term future growth, and our ability to successfully insure loans in this market could depend on our ability to secure higher ratings for our mortgage insurance subsidiaries. In addition, if legislative or regulatory changes were to alter the current state of the housing finance industry such that the GSEs no longer operate in their current capacity, we may be forced to compete in a new marketplace in which financial strength ratings may play a greater role.
The rating agencies continually review the financial strength ratings assigned to Radian Group and its mortgage insurance subsidiaries, and the ratings are subject to change. Downgrades to the ratings of our mortgage insurance subsidiaries and Radian Group could adversely affect our cost of funds, liquidity, access to capital markets and competitive position. In December 2021, S&P announced a proposed change to its rating methodologies for insurers, including mortgage insurers. It is uncertain whether it will be adopted in its current form, whether it will prompt similar moves at other rating agencies, or what impact the proposed change would have on us and on the way external parties evaluate the different rating levels. If we are unable to compete effectively in the current or any future markets as a result of the financial strength ratings assigned to our mortgage insurance subsidiaries, the franchise value and future prospects for our mortgage insurance business could be negatively affected.
Our business depends, in part, on effective and reliable loan servicing.
We depend on third-party servicing of the loans that we insure. Dependable servicing is necessary for timely billing and premium payments to us and effective loss mitigation opportunities for delinquent or near-delinquent loans. Servicers are required to comply with a multitude of legal and regulatory requirements, procedures and standards for servicing residential mortgages, such as the CFPB’s mortgage servicing rules. While these requirements are intended to ensure a high level of servicing performance, they also impose a high cost of compliance on servicers that may impact their financial condition and their operating effectiveness. The COVID-19 pandemic has placed additional burdens on many servicers. Challenging economic and market conditions or periods of economic stress and high mortgage defaults such as we have experienced due to the COVID-19 pandemic make it more difficult for servicers to effectively service the loans that we insure. Further, the various servicing-related requirements imposed by the CARES Act, the GSEs, the FHA, CFPB and other federal and state governmental and regulatory bodies and agencies to address the impact of the COVID-19 pandemic on mortgage borrowers heighten the burdens placed on servicers in the current environment and the potential scrutiny they face for their actions, which could influence their approach to the loans they are servicing.
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Part I. Item 1A. Risk Factors |
Information with respect to the mortgage loans we insure is based in large part on information reported to us by third parties, including the servicers and originators of the mortgage loans, and information provided may be subject to lapses or inaccuracies in reporting from such third parties. In many cases, we may not be aware that information reported to us is incorrect until such time as a claim is made against us under the relevant insurance policy. We do not receive monthly information from servicers for single premium policies, and may not be aware that the mortgage loans insured by such policies have been repaid. We periodically attempt to determine if coverage is still in force on such policies by asking the last servicer of record or through the periodic reconciliation of loan information with certain servicers. It may be possible that our reports continue to reflect, as active, policies on mortgage loans that have been repaid.
Our policies allow us to cancel coverage on loans that are not delinquent if the premiums are not paid within a grace period. However, in response to the COVID-19 pandemic, many states have enacted moratoriums on the cancellation of insurance due to non-payment. The specific provisions of the moratoriums vary from state to state. In the event a borrower fails to make mortgage payments, including as the result of a forbearance program, servicers often are required to advance such amounts, including principal and interest on the mortgage and amounts to cover taxes and insurance, for a period of time, including with respect to loans purchased by the GSEs. These required “advances” may increase the financial strain on servicers, which could negatively impact their financial condition or otherwise disrupt their operations; although currently, in response to the pandemic, the FHFA and GSEs have implemented a four-month limit on servicer advance obligations for loans in forbearance which has reduced this financial burden. If we experience a disruption in the servicing of mortgage loans covered by our insurance policies or a failure by servicers to appropriately report the status of a loan, including whether the loan is subject to a COVID-19-related forbearance program, this, in turn, could impact the amount of assets Radian Guaranty is required to hold under the PMIERs or ultimately contribute to a rise in claims among those loans, which could have a material adverse effect on our business, financial condition and operating results.
Under the terms of our 2014 Master Policy and 2020 Master Policy, mortgage insurance premiums are not required to be paid following an event of default. However, if a defaulted loan then cures, all mortgage insurance premiums must be brought current for our insurance coverage to continue, including all premiums that were not paid during the period following the event of default and through the date of cure. Because premiums must be brought current upon a cure, mortgage servicers typically continue to pay mortgage insurance premiums while loans remain in default, understanding that Radian Guaranty will refund these premiums if the loans fail to cure and ultimately go to claim. If we fail to receive mortgage insurance premiums following mortgage defaults, Radian Guaranty’s cash flow could be materially reduced, potentially requiring Radian Guaranty to liquidate investments at a loss to pay future claims or otherwise requiring us to alter our investment strategy.
We face risks associated with our contract underwriting business.
We provide third-party contract underwriting services for our mortgage insurance customers. Generally, we offer limited indemnification to our contract underwriting customers. In addition to indemnification, we typically have limited loss mitigation defenses available to us for loans that we have underwritten through our contract underwriting services. As a consequence, our results of operations could be negatively impacted if we are required to indemnify our customers for material underwriting errors in our contract underwriting services.
A decrease in the volume of mortgage originations could result in fewer opportunities for us to write new mortgage insurance business and conduct our homegenius business.
The amount of new mortgage insurance business prospects.we write and real estate transactions we support through our homegenius title, real estate and technology products and services depends, among other things, on a steady flow of low down payment mortgages that benefit from our mortgage insurance and the volume of real estate transactions that require our services or products. The volume of mortgage originations is impacted by a number of factors, including:
■restrictions on mortgage credit due to changes in lender underwriting standards, capital requirements affecting lenders, regulatory requirements such as the QM designation for mortgage loans and the health of the private securitization market;
■mortgage interest rates;
■the level of consumer confidence and the health of the domestic economy generally, as well as specific conditions in regional and local economies;
■housing supply and affordability;
■tax laws and policies and their impact on, among other things, deductions for mortgage insurance premiums, mortgage interest payments and real estate taxes;
■demographic trends, including the rate of household formation;
■the rate of home price appreciation;
■government housing policy encouraging loans to first-time homebuyers; and
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Part I. Item 1A. Risk Factors |
■the practices of the GSEs, including the extent to which the guaranty fees, loan level price adjustments, credit underwriting guidelines and other business terms provided by the GSEs affect the cost of mortgages and lenders’ willingness to extend credit for low down payment mortgages.
The U.S. housing and real estate markets generally have been strong in recent years, with markets supported by low interest rates, favorable demographics supporting growth in the population of first-time homebuyers and a relatively constrained supply of homes available for sale. While we expect demographic trends to continue to be favorable to housing and real estate, rising interest rates and the potential for economic uncertainty, as well as the persistent effects of the COVID-19 pandemic, could affect the number of new mortgages available for us to insure and real estate transactions available for our services.
If the overall volume of new mortgage originations declines, we would likely be subject to increased competition and we could experience a reduced opportunity to write new insurance business and provide our homegenius products and services, which could negatively affect our business prospects, results of operations and financial condition.
We are exposed to risks associated with our homegenius business that could negatively affect our results of operations and financial condition.
Our homegenius business exposes us to certain risks that may negatively affect our results of operations and financial condition, including, among others, the following:
■Our homegenius business is driven primarily by digital products and services, including software as a service solutions and proprietary technology platforms that depend on our ability to develop, launch and implement new and innovative technologies and digital solutions. As a result, this business is particularly exposed to challenges associated with new and rapidly evolving technologies and business environments, customer acceptance of our digital product and service offerings, the costs associated with the development and launch of these technologies and products, our failure to successfully integrate new technologies into our existing systems and the risk that our digital product and services offerings fail to operate as expected or planned or that expose us to additional cybersecurity or third party risks;
■Our homegenius business depends on our relationships with our customers. Our homegenius revenue is dependent on a limited number of large customers that represent a significant proportion of our homegenius total revenues. The loss or reduction of business from one or more of these significant customers could adversely affect the level of our homegenius revenues. In addition, Radian Guaranty does business with many of these significant customers. In the event of a dispute between a significant customer and either of our business segments, the overall customer relationship for Radian could be negatively impacted;
■Due to the transactional nature of our business, our homegenius segment revenues are subject to fluctuation from period to period and are difficult to predict;
■The services we offer through our homegenius business are influenced by the level of overall activity in the mortgage, real estate and mortgage finance markets generally. If real estate transaction volumes decline, we could experience less demand for our real estate and title services;
■Red Bell is a licensed real estate brokerage and provides real estate brokerage services in all 50 states and the District of Columbia. As a licensed real estate brokerage, Red Bell receives residential real estate information from various multiple listing services. Red Bell receives this information, which it uses in its business to broker real estate transactions and provide valuation products and services that comprise many of our homegenius product offerings, pursuant to the terms of agreements with the MLS providers. If these agreements were to terminate or Red Bell otherwise were to lose access to this information, it could negatively impact Red Bell’s ability to conduct its business and our future real estate strategies. In addition to MLS data, we depend on access to data from a variety of other external sources to maintain our databases and grow our businesses. If we were to lose access to one or more of these data sources, the quality, pricing and availability of our homegenius products and services may be negatively impacted;
■By their nature, title claims are often complex, vary greatly in dollar amounts and are affected by economic and market conditions and the legal environment existing at the time of settlement of the claims. Estimating future title loss payments is difficult because of the complex nature of title claims, the long periods of time over which claims are administered and paid, significantly varying dollar amounts of individual claims and other factors. From time to time, we could experience large losses or an overall worsening of our loss payment experience in regard to the frequency or severity of claims that require us to record additional charges to our claims loss reserve. These loss events are unpredictable and may require us to increase our title loss reserves and could adversely affect the financial performance of our homegenius business; and
■Our homegenius business operates in a highly competitive environment. Our competitors vary in size and in the scope and breadth of the services they offer, and many have substantial resources. We expect that the markets in which we compete will continue to attract new competitors and technologies. There can be no assurance that our homegenius business will be able to compete successfully.
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Part I. Item 1A. Risk Factors |
Any of these factors could negatively effect on our homegenius business and could have a material adverse effect on our results of operations and financial condition.
We rely upon proprietary technology and information, and if we are unable to protect our intellectual property rights, it could have a material adverse effect on us.
Our success depends, in part, upon our intellectual property rights. We rely primarily on a combination of patents, copyrights, trade secrets, trademarks, nondisclosure and other contractual restrictions on copying, distribution and creation of derivative products to protect our proprietary technology and information. This protection is limited, and our intellectual property could be used by others without our consent. In addition, patents may not be issued with respect to our pending or future patent applications, and our patents may not be upheld as valid or may not prevent the development of competitive products. Any infringement, disclosure, loss, invalidity of or failure to protect our intellectual property could have a material adverse effect on our business, financial condition and results of operations. Moreover, litigation may be necessary to enforce or protect our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could be time-consuming, result in substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to the Economic Environment
The credit performance of our mortgage insurance portfolio is impacted by macroeconomic conditions and specific events that affect the ability of borrowers to pay their mortgages.
Mortgage defaults occur due to a variety of specific events affecting individual borrowers, including death or illness, divorce or other family related factors, and unemployment, among other events. While mortgage defaults can and do occur in any economic environment, there is a high correlation between the overall health of the economy and the performance of our mortgage insurance portfolio. As a result, our results are particularly influenced by macroeconomic conditions and specific events that impact the housing finance and real estate markets, including events that impact mortgage originations and the credit performance of our mortgage insurance portfolio, most of which are beyond our control, including housing prices, inflationary pressures, unemployment levels, interest rate changes, the availability of credit and other national and regional economic conditions. These conditions may be created or exacerbated by acts of terrorism, war or other conflicts, event-specific economic depressions, severe weather events and natural disasters, which may continue to increase in severity and frequency due to climate change, and other catastrophic events such as the COVID-19 pandemic or other future epidemics or pandemics. In general, challenging economic conditions increase the likelihood that borrowers will not have sufficient income to satisfy their mortgage obligations.
In addition, a deteriorating economy also can adversely affect housing values, which in turn can influence the willingness of borrowers to continue to make mortgage payments despite having the financial resources to do so. In addition, a decline in home values typically makes it more difficult for borrowers to sell or refinance their homes, increasing the likelihood that a default will result in a claim. Declining housing values may impact the effectiveness of our loss mitigation actions. The amount of the loss we could suffer depends in part on whether the home of a borrower who defaults on a mortgage can be sold for an amount that will cover the unpaid principal balance, interest and the expenses of the sale. Any of these events may have a material adverse effect on our business, results of operations and financial condition.
As discussed above under “—Radian Guaranty may fail to maintain its eligibility status with the GSEs, and the additional capital required to support Radian Guaranty’s eligibility could reduce our available liquidity,” the COVID-19 pandemic produced periods of significant economic disruption, including high unemployment, and volatility and disruption in financial markets, that resulted in an elevated number of mortgage defaults, including defaults derived from mortgage forbearance programs that were instituted to support borrowers experiencing COVID-19 related hardships. Uncertainty regarding the pandemic’s scope, severity and duration, and its resulting impact on the economy, continues to persist as the pandemic evolves, and it is difficult to predict the ultimate impact that the COVID-19 pandemic may have on the credit performance of our mortgage insurance portfolio.
Unfavorable macroeconomic developments, including the ongoing economic uncertainty related to the COVID-19 pandemic and the other factors cited above, may again have a material negative impact on our results of operations and financial condition.
Our success depends, in part, on our ability to manage risks in our investment portfolio.
Our investment portfolio is an important source of revenue and is our primary source of claims paying resources. Although our investment portfolio consists primarily of highly-rated fixed income investments, our investment strategy is affected by general economic conditions, which may adversely affect the markets for credit and interest-rate-sensitive securities, including the extent and timing of investor participation in these markets, the level and volatility of interest rates and credit spreads and, consequently, the value of our fixed income securities, and as such, we may not achieve our investment objectives. Volatility or lack of liquidity in the markets in which we invest has at times reduced the market value of some of our investments, including most recently as a result of the disruption in the financial markets due to the COVID-19 pandemic. The value of our investment portfolio may also be adversely affected by ratings downgrades, bankruptcies and credit spreads
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Part I. Item 1A. Risk Factors |
widening in distressed industries. In addition, when the credit environment deteriorates, the risk of impairments of our investments increases. If the financial markets experience disruption and volatility, it could have a material adverse effect on our liquidity, financial condition and results of operations.
Interest rates and investment yields on our investments continue to be low compared to historical averages, which has reduced the investment yield on our investment portfolio. For the significant portion of our investment portfolio held by our insurance subsidiaries, to receive favorable treatment under insurance regulatory requirements and full credit as Available Assets under the PMIERs, we generally are limited to investing in investment grade fixed income investments that are unlikely to increase our overall investment yields. Because we depend on our investments as a source of revenue, a prolonged period of lower than expected investment yields would have an adverse impact on our revenues and could adversely affect our results of operations. Further, future updates to the Model Act or PMIERs, including potentially to align with the ECF or proposed liquidity requirements for the GSEs, could restrict our investment choices, which could negatively impact our investment strategy.
In addition, we structure our investment portfolio to satisfy our expected liabilities, including claim payments in our mortgage insurance business. If we underestimate our future claim payments or other liabilities or improperly structure our investments to meet these liabilities, we could have unexpected losses resulting from the forced liquidation of investments before their maturity, which could adversely affect our results of operations.
Climate change and extreme weather events could adversely affect our businesses, results of operations and financial condition.
Our businesses, results of operations and financial performance could be adversely impacted by climate change and extreme weather events, especially if these occurrences negatively impact the overall real estate market and the broader economy. Climate change may increase the frequency and severity of natural disasters such as hurricanes, tornadoes, floods and forest fires and drive other ecologically related changes such as rising sea waters, which in turn could negatively affect regional economies in ways that impact home values or unemployment, and therefore, the credit performance of the mortgages we insure in affected areas. Further, climate change and natural disasters may impact the value of and cause volatility in our investment portfolio, and we might not achieve our investment objectives. Climate change and the frequency, severity, duration, and geography of severe weather events and other ecological related changes are inherently uncertain, and we cannot predict the ultimate impact these events may have on our business and financial condition.
Our reported earnings, stockholders’ equity and book value per share are subject to fluctuations based on changes in our investments that require us to adjust their fair market value.
We have significant holdings of trading securities, equity securities and short-term investments that we carry at fair value. Because the changes in fair value of these financial instruments are reflected on our statements of operations each period, they affect our reported earnings and can create earnings volatility. In addition, we increase or decrease our stockholders’ equity by the amount of change in the unrealized gain or loss (the difference between the fair value and the amortized cost) of our available for sale securities portfolio, net of related tax, under the category of accumulated other comprehensive income (loss). As a result, a decline in the fair value of our available for sale portfolio may result in a decline in reported stockholders’ equity, as well as book value per common share. Among other factors, interest rate changes, market volatility and declines in the value of underlying collateral will impact the value of our investments, potentially resulting in unrealized losses that could negatively impact our results of operations and stockholders’ equity. These negative impacts will occur even though the securities are not sold. Also, in the event there are credit loss related impairments, the credit loss component and subsequent recoveries, if any, are recognized in earnings.
The discontinuance of LIBOR may adversely affect us.
In 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that after 2021, it would no longer compel banks to submit rate quotations required to calculate LIBOR. The FCA no longer publishes one-week and two-month U.S. dollar LIBOR rates and plans to cease publishing all other LIBOR tenors (overnight, one-month, three-month, six-month and 12-month) on June 30, 2023. In addition, the U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a committee consisting of representatives of large U.S. financial institutions, has recommended replacing U.S. dollar LIBOR with a rate based on the Secured Overnight Financing Rate, or SOFR. SOFR is the rate charged on overnight repurchase obligations collateralized by Treasury securities, and is compiled by the New York Federal Reserve Bank. It is not presently known whether SOFR or any other alternative reference rates will attain broad market acceptance as replacements of LIBOR. There remains uncertainty as to how the financial services industry will address the discontinuance of LIBOR in financial instruments that are indexed to LIBOR. Further, various financial instruments indexed to LIBOR could experience different outcomes based on their contractual terms, ability to amend those terms, market or product type, legal or regulatory jurisdiction, and other factors. Alternative reference rates that replace LIBOR may not yield the same or similar economic results over the lives of the financial instruments, which could adversely affect the value of and return on these instruments.
The discontinuation of LIBOR may have an adverse effect on the premium rates we are required to pay in connection with certain of our excess-of-loss reinsurance agreements associated with our existing insurance-linked notes transactions,
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Part I. Item 1A. Risk Factors |
which are tied to LIBOR, or may negatively impact the value of other assets or liabilities whose value is tied to LIBOR or to a LIBOR alternative, including floating rate bonds that we hold in our investment portfolio. The discontinuation of LIBOR also could increase the cost of borrowings under our credit facility, which currently uses LIBOR as a benchmark for establishing the interest rate. Although our insurance-linked notes transactions and our credit facility provides for a transition from LIBOR upon the occurrence of specified events, there is substantial uncertainty as to the effect of such replacement. Furthermore, in addition to potential impacts on our investment portfolio and our cost of debt, the discontinuation of LIBOR may impact other aspects of our business, such as our insurance products, the pricing we charge and the models we use to support our business decisions. It is possible that the discontinuance of LIBOR, including the implementation of alternative benchmark rates to LIBOR, could have an adverse effect on our business, results of operations or financial condition.
Risks Related to Liquidity and Financing
Radian Group’s sources of liquidity may be insufficient to fund its obligations.
Radian Group serves as the holding company for our operating subsidiaries and does not have any operations of its own. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Liquidity Analysis—Holding Company” for more information on our available liquidity and short-term and long-term liquidity demands.
As discussed above under “—Radian Guaranty may fail to maintain its eligibility status with the GSEs, and the additional capital required to support Radian Guaranty’s eligibility could reduce our available liquidity,” the COVID-19 pandemic produced periods of significant economic disruption that resulted in an elevated number of mortgage defaults, including defaults derived from mortgage forbearance programs that were instituted to support borrowers experiencing COVID-19 related hardships. Uncertainty regarding the pandemic’s scope, severity and duration, and its resulting impact on the economy, continues to persist as the pandemic evolves, and it is difficult to predict the ultimate impact that the COVID-19 pandemic may have on the credit performance of our mortgage insurance portfolio. If additional capital support for Radian Guaranty is required to maintain compliance with the PMIERs financial requirements, we may be required or otherwise choose to contribute capital to Radian Guaranty. The amount that Radian Group could be required to contribute to Radian Guaranty could be significant and, under extreme economic scenarios, exhaust Radian Group’s available liquidity. See “—Radian Guaranty may fail to maintain its eligibility status with the GSEs, and the additional capital required to support Radian Guaranty’s eligibility could reduce our available liquidity” above for additional information.
In addition to available cash and marketable securities, Radian Group’s most significant near-term sources of cash to fund future liquidity needs include: (i) payments made to Radian Group by its subsidiaries under expense- and tax-sharing arrangements; and (ii) net investment income earned on its cash and marketable securities. Radian Group’s expense-sharing arrangements with its principal operating subsidiaries require those subsidiaries to pay their allocated share of certain holding-company-level expenses, including interest payments on Radian Group’s outstanding senior notes. The expense-sharing arrangements between Radian Group and our mortgage insurance subsidiaries, as amended, have been approved by the Pennsylvania Insurance Department, but such approval may be modified or revoked at any time.
In light of Radian Guaranty’s negative unassigned surplus related to operating losses in prior periods, the ongoing need to set aside contingency reserves, and the current ongoing economic uncertainty related to the COVID-19 pandemic, which could increase losses in future periods, we do not anticipate that Radian Guaranty will be permitted under applicable insurance laws to pay ordinary dividends to Radian Group for the next several years. See Note 16 of Notes to Consolidated Financial Statements for additional information on contingency reserve requirements.
In light of Radian Group’s short- and long-term needs, it is possible that our sources of liquidity could be insufficient to fund our obligations. If this were to occur, we may choose not to pursue certain actions, such as issuing dividends or repurchasing shares of our common stock, or we may elect to reduce the levels of these activities to preserve our available liquidity. In addition, we may seek to increase our available liquidity, which we may be unable to do on favorable terms, if at all.
Our revolving credit facility contains restrictive covenants that could limit our operating flexibility. A default under our credit facility could trigger an event of default under the terms of our senior notes. We may not have access to funding under our credit facility when we require it.
Radian Group is a party to a $275.0 million unsecured revolving credit facility with a syndicate of bank lenders. As of December 31, 2021, no borrowings were outstanding under the credit facility.
The credit facility contains customary representations, warranties, covenants, terms and conditions. Our ability to borrow under the credit facility is conditioned on the satisfaction of certain financial and other restrictive covenants, including covenants related to minimum net worth and statutory capital, a maximum debt-to-capitalization level, repayment or refinancing of a portion of our senior debt maturities prior to their maturity, and limitations on our ability to incur additional indebtedness, make investments, create liens, transfer or dispose of assets and merge with or acquire other companies. The credit facility also requires that Radian Guaranty remain eligible under the PMIERs to insure loans purchased by the GSEs. A failure to comply with these covenants or the other terms of the credit facility could result in an event of default, which could: (i) result in the termination of the commitments by the lenders to make loans to Radian Group under the credit facility and (ii)
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Part I. Item 1A. Risk Factors |
enable the lenders to declare, subject to the terms and conditions of the credit facility, any outstanding obligations under the credit facility to be immediately due and payable.
Further, the occurrence of an event of default under the terms of our credit facility may trigger an event of default under the terms of our senior notes. An event of default would occur under the terms of our senior notes if a default: (i) in any scheduled payment of principal of other indebtedness by Radian Group or its subsidiaries of more than $100 million principal amount occurs, after giving effect to any applicable grace period or (ii) in the performance of any term or provision of any indebtedness of Radian Group or its subsidiaries in excess of $100 million principal amount occurs that results in the acceleration of the date such indebtedness is due and payable, subject to certain limited exceptions. See Note 12 of Notes to Consolidated Financial Statements for more information on the carrying value of our senior notes.
If the commitments of the lenders under the credit facility are terminated or we are unable to satisfy certain covenants or representations, we may not have access to funding in a timely manner, or at all, when we require it. If funding is not available under the credit facility when we require it, our ability to continue our business practices or pursue our current strategy could be limited. If the indebtedness under the credit facility or our senior notes is accelerated, we may not be able to repay our debt or borrow sufficient funds to refinance it.
Risks Related to Information Technology and Cybersecurity
Our information technology systems may fail or become outmoded, be temporarily interrupted or otherwise cause us to be unable to meet our customers’ demands.
Our business is highly dependent on the effective operation of our information technology systems, which are vulnerable to damage or interruption from power outages, computer and telecommunications failures, computer viruses, cyber-attacks and security incidents or breaches, catastrophic events and errors in usage. Although we have disaster recovery and business continuity plans in place, we may not be able to adequately execute these plans in a timely fashion.
Additionally, our ability to meet the needs of our customers depends on our ability to keep pace with technological advances and to invest in new technology as it becomes available or to otherwise upgrade our technological capabilities. We rely on e-commerce and other technologies to provide our products and services to our customers, and they generally require that we provide an increasing number of our products and services electronically. Accordingly, we may not satisfy our customers’ requirements if we fail to invest sufficient resources or are otherwise unable to maintain and upgrade our technological capabilities. Further, customers may choose to do business only with business partners with which they are technologically compatible and may choose to retain existing relationships with mortgage insurance or mortgage and real estate services providers rather than invest the time and resources to on-board new providers. As a result, technology can represent a potential barrier to signing new customers.
Because we rely on our information technology systems for many critical functions, including connecting with our customers, if such systems were to fail, experience a prolonged interruption or become outmoded, we may experience a significant disruption in our operations and in the business we receive, which could have a material adverse effect on our business, financial condition and operating results.
We could incur significant liability or reputational harm if the security of our information technology systems is breached, including as result of a cyberattack, or we otherwise fail to protect confidential information, including personally identifiable information that we maintain.
We rely on information technology systems to process, transmit, store and protect the electronic information, financial data and proprietary models that are critical to our business. Furthermore, a significant portion of the communications between us and our employees, customers, business partners and service providers depends on information technology and electronic information exchange.
Our reliance on information technology has been further accelerated by the widespread transition to work-from-home measures following the outbreak of COVID-19. In response to the COVID-19 pandemic, in order to protect our employees and in response to governmental and other third-party measures restricting interpersonal contact, travel and business operations, we activated our business continuity program by transitioning to a work-from-home virtual workforce model. Remote working arrangements may increase the risk of cyber-security attacks or data security incidents.
Our information technology systems may be vulnerable to physical or electronic intrusions, malware or other attacks, including cyberattacks. In recent years, cyberattacks such as distributed denial of service attacks, hacking, malware, ransomware, phishing or other forms of social engineering and insider threats designed to obtain confidential information, destroy data, disrupt or degrade service, sabotage systems or to cause other damage have grown in volume and level of sophistication. Security incidents have from time to time occurred and may occur in the future. Although to date security incidents have not had a material impact on us, the risks of cyberattacks and information security incidents and breaches continue to increase in businesses such as ours due to, among other things, the proliferation of new technologies and the use of digital channels to conduct our business, including connectivity with customer devices that are beyond our security control systems and the use of portable computers or mobile devices which can be stolen, lost or damaged. Globally, attacks are
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Part I. Item 1A. Risk Factors |
expected to continue accelerating in both frequency and sophistication with increasing use by actors of tools and techniques that could hinder our ability to identify, investigate and recover from incidents.
As part of our business, we, and certain of our subsidiaries, affiliates and third-party vendors, maintain large amounts of confidential information, including personally identifiable information on borrowers, consumers and our employees. If the security of our information technology or the technology of our third-party vendors is breached, including as a result of a cyberattack, it could result in the loss or misuse of this information, which could, in turn, result in potential regulatory actions or litigation, including material claims for damages, as well as interruption to our operations and damage to our customer relationships and reputation. While we have information security policies, controls and systems in place in order to attempt to prevent, detect and respond to unauthorized use or disclosure of confidential information, including personally identifiable information, there can be no assurance that such use or disclosure will not occur. Any cybersecurity event or other compromise of the security of our information technology systems, or unauthorized use or disclosure of confidential information, could subject us to liability, regulatory scrutiny and action, damage our reputation and negatively affect our ability to attract and maintain customers, and could have a material adverse effect on our business prospects, financial condition and results of operations.
Risks Related to Us and Our Subsidiaries Generally
We may not continue to pay dividends at the same rate we are currently paying them, or at all, and any decrease in or suspension of payment of a dividend could cause our stock price to decline.
Effective February 9, 2022, Radian Group’s board of directors authorized an increase in the Company’s quarterly dividend from $0.14 per share to $0.20 per share, effective for the quarterly dividend payable on March 3, 2022. The payment of future cash dividends is subject to the determination each quarter by our board of directors that the dividend remains in the best interests of the Company and our stockholders, which determination will be based on a number of factors, including, among others, economic conditions, our earnings, financial condition, actual and forecasted cash flows, capital resources, capital requirements and alternative uses of capital, including potential investments to support our business strategy and possible acquisitions or investments in new businesses. Any decrease in the amount of the dividend, or suspension or discontinuance of payment of a dividend, could cause our stock price to decline.
We are subject to litigation and regulatory proceedings.
We operate in highly regulated industries that are subject to a heightened risk of litigation and regulatory proceedings. From time to time we are a party to material litigation and also are subject to legal and regulatory claims, assertions, actions, reviews, audits, inquiries and investigations. Additional lawsuits, legal and regulatory proceedings and inquiries and other matters may arise in the future. The outcome of existing and future legal and regulatory proceedings and inquiries and other matters could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief which could require significant expenditures or have a material adverse effect on our business prospects, results of operations and financial condition. See “Item 3. Legal Proceedings” and Note 13 of Notes to Consolidated Financial Statements.
We rely on our management team and our business could be harmed if we are unable to retain qualified personnel or successfully develop and/or recruit their replacements.
Our success depends, in part, on the skills, working relationships and continued services of our management team and other key personnel, any of whom could terminate his or her relationship with us at any time. Competition for personnel is intense and has increased in light of evolving labor and employment trends, including but not limited to the increase in employee resignations throughout the United States, as well as the increase in remote, hybrid or other alternative flexible work arrangements. The COVID-19 pandemic and the resulting increase in work from home arrangements within many industries, including ours, has increased the likelihood that highly skilled individuals may seek to change employers in pursuit of greater opportunities or greater benefits. In this environment, it may be more difficult to retain key personnel or to attract new resources who now may have greater optionality among potential employers given the ability to work from home. The unexpected departure of key personnel could adversely affect the conduct of our business. In such event, we would be required to obtain other personnel to manage and operate our business. In addition, we will be required to replace the knowledge and expertise of our workforce as our workers retire. In either case, there can be no assurance that we wouldwill be able to develop or recruit suitable replacements for the departing individuals, that replacements could be hired, if necessary, on terms that are favorable to us, or that we can successfully transition such replacements in a timely manner. Failure to effectively implement our succession planning efforts and to ensure effective transfers of knowledge and smooth transitions involving members of our management team and other key personnel could adversely affect our business and results of operations. Without a properly skilled and experienced workforce, our costs, including costs associated with a loss of productivity and costs to replace employees, may increase, and this could negatively impact our earnings.
WeInvestments to grow our existing businesses, pursue new lines of business or new products and services within existing lines of business subject us to additional risks and uncertainties.
In support of our growth and diversification strategy, we may make investments to grow our existing businesses, pursue new lines of business or new business initiatives, acquire other companies or engage in otherproducts and services within existing lines of business. We may do this through strategic initiatives, each of which may result in additional risks
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Part I. Item 1A. Risk Factors |
transactions, including investments and uncertainties.
In support of our growth strategy, we may make strategic investments, acquisitions, or pursue other strategic initiatives thattransformative actions and initiatives. These activities expose us to additional risks and uncertainties that include, without limitation:
■the use of capital and potential diversion of other resources, such as the diversion of management’s attention from our core businesses and potential disruption of those businesses;
■the assumption of liabilities in connection with any strategic investment,transaction, including any acquired business;
■our ability to comply with additional regulatory requirements associated with new products, services, lines of business or other business or strategic initiatives;
■our ability to successfully integrate or develop the operations of any new business initiative or acquisition;
the possibility that ■new business initiatives may be disruptive to, or competitive with, our existing customers;
■we may fail to realize the anticipated benefits of an acquisition or othera strategic investmenttransaction or initiative, including expected synergies, cost savings or sales or growth opportunities, within the anticipated timeframe or at all;
■new business initiatives may expose us to liquidity risk, risks associated with the use of financial leverage, and market risks, including risk resulting from changes in the fair values of assets in which we invest. Further, new business initiatives may increase our exposure to interest rate risk and may involve changes in our investment, financing and hedging strategies;
the possibility that ■we may fail to achieve forecasted results for a strategic investment, acquisitiontransaction or other initiative that could result in lower or negative earnings contribution and/or impairment charges associated with intangible assets acquired.
Part 1 Item 1A. Risk Factors
We face risks associated with■the risk of reputational harm if the strategic transaction or initiative fails to increase our Services business.market value.
We expanded
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
In addition to leases of other properties and facilities to support our business to include our Services segment through our 2014 acquisition of Clayton and our subsequent acquisitions of Red Bell, ValuAmerica, EnTitle Direct, Independent Settlement Services andoperations, the assets of Five Bridges. Our Services business exposes us to certain risks that may negatively affect our results of operations and financial condition, including, among others, the following:
Our Services revenue is dependent on a limited number of large customers that represent a significant proportion of our Services total revenues. The loss or reduction of business from one or more of these significant customers could adversely affect our revenues and results of operations. In addition, Radian Guaranty does business with many of these significant customers. In the event of a dispute between a significant customer and either of our business segments, the overall customer relationship for Radian could be negatively impacted.
While Clayton is not a defendant in litigation arising out of the financial crisis involving the issuance of RMBS in connection with which it has provided services, it has in the past, and may again in the future, receive subpoenas from various parties to provide documents and information related to such litigation, and there can be no assurance that Clayton will not be subject to future claims against it, whether in connection with such litigation or otherwise. It is possible that our exposure to potential liabilities resulting from our Services business, some of which may be material or unknown, could exceed amounts we can recover through indemnification claims.
A significant portion of our Services engagements are transactional in nature and may be performed in connection with securitizations, loan sales, loan purchases or other transactions. Due to the transactional nature of our business, our Services segment revenues are subject to fluctuation from period to period and are difficult to predict.
Sales of our mortgage, real estate and title services are influenced by the level of overall activity in the mortgage, real estate and mortgage finance markets generally, and are specifically dependent on the mortgage loan origination volumes of our customers which may fluctuate from period to period. If mortgage origination volumes decline we could experience less demand for our mortgage, real estate and title services.
Red Bell is a licensed real estate brokerage and provides real estate brokerage services in all 50 states and the District of Columbia. As a licensed real estate brokerage, Red Bell receives residential real estate information from various multiple listing services (“MLS”). Red Bell receives this information, which it uses in its business to broker real estate transactions and provide valuation products and services, pursuant to the terms of agreements with the MLS providers. If these agreements were to terminate or Red Bell otherwise were to lose access to this information, it could negatively impact Red Bell’s ability to conduct its business.
By their nature, title claims are often complex, vary greatly in dollar amounts and are affected by economic and market conditions and the legal environment existing at the time of settlement of the claims. Estimating future title loss payments is difficult because of the complex nature of title claims, the long periods of time over which claims are paid, significantly varying dollar amounts of individual claims and other factors. From time to time, we could experience large losses or an overall worsening of our loss payment experience in regard to the frequency or severity of claims that require us to record additional charges to our claims loss reserve. These loss events are unpredictable and could adversely affect the financial performance of our Services business.
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Item 1B. | Unresolved Staff Comments. |
None.
At our corporate headquarters, located at 1500 Market Street, West Tower, in Philadelphia, Pennsylvania weCompany currently leaseleases approximately 174,00065,000 square feet of office and storage space.
In connection withspace at our mortgage insurance operations, we lease office space in: Worthington, Ohio; Dayton, Ohio; Plano, Texas; St. Louis, Missouri;corporate headquarters, located at 550 East Swedesford Road, Suite 350, in Wayne, Pennsylvania. This property is used by both our reportable segments and New York. In addition, we lease office space for our Services operations in various cities in California, Connecticut, Colorado, Florida, Maryland, Ohio, Pennsylvania, Texas and Utah.
We currently have two co-location agreements with TierPoint that support data center space and services at their Norristown, Pennsylvania and Philadelphia, Pennsylvania locations. These agreements expire in March 2020. TierPoint serves as a production and disaster recovery location.corporate functions.
We believe our existing properties are well utilized, suitable and adequate for their intended use. Despite nearly all of our present circumstances.employees currently working remotely during the COVID-19 pandemic, the longer-term strategy is for our current sites and offices to be re-occupied with more flexible work arrangements for our employees.
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Item 3. | Legal Proceedings. |
Item 3. Legal Proceedings
We are routinely involved in a number of legal actions and regulatory claims, assertions, actions,proceedings, including reviews, audits inquiries and investigationsinquiries by various regulatory entities, involving compliance with laws oras well as litigation and other regulations,disputes arising in the outcomeordinary course of which are uncertain.our business. These legal proceedings could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief that could require significant expenditures or have other effects on our business. In accordance with applicable accounting standards and guidance, we establish accruals only when we determine both that it is probable that a loss has been incurred and the amount of the loss is reasonably estimable. We accrue the amount that represents our best estimate of the probable loss; however, if we can only determine a range of estimated losses, we accrue an amount within the range that, in our judgment, reflects the most likely outcome, and if none of the estimates within the range is more likely, we accrue the minimum amount of the range.
In the course of our regular review of pending legal and regulatory matters we determine whether it is reasonably possible that a potential loss may have a material impact on our liquidity, results of operations or financial condition. If we determine such a loss is reasonably possible, we disclose information relating to such potential loss, including an estimate or range of loss or a statement that such an estimate cannot be made. On a quarterly basis, we review relevant information with respect to loss contingencies and update our accruals, disclosures and estimates of reasonably possible losses or range of losses based on such reviews. We are often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the court on motions or appeals, analysis by experts, and the progress of settlement negotiations. In addition, we generally make no disclosures for loss contingencies that are determined to be remote. For matters for which we disclose an estimated loss, the disclosed estimate reflects the reasonably possible loss or range of loss in excess of the amount accrued, if any.
Loss estimates are inherently subjective, based on currently available information, and are subject to management’s judgment and various assumptions. Due to the inherently subjective nature of these estimates and the uncertainty and unpredictability surrounding the outcome of legal and other proceedings, actual results may differ materially from any amounts that have been accrued.
As previously disclosed, we contested adjustments resulting from the examination by the IRS of our 2000 through 2007 consolidated federal income tax returns. The IRS opposed the recognition of certain tax losses and deductions that were generated through our investment in a portfolio of non-economic REMIC residual interests and proposed denying the associated tax benefits of these items. In July 2018, we finalized a settlement with the IRS related to the adjustments we had been contesting. This settlement with the IRS resolved the issues and concluded all disputes related to the IRS Matter. In 2018, under the terms of the settlement, Radian utilized its “qualified deposits” with the U.S. Treasury to settle its $31 million obligation to the IRS, and in 2019, the Company expects the IRS to refund to Radian the remaining $58 million that was previously on deposit.
On December 22, 2016, Ocwen Loan Servicing, LLC and Homeward Residential, Inc. (collectively, “Ocwen”) filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania against Radian Guaranty (the “Complaint”) alleging breach of contract and bad faith claims and seeking monetary damages and declaratory relief. Ocwen has also initiated similar legal proceedings against several other mortgage insurers. On December 17, 2016, Ocwen separately filed a parallel arbitration petition against Radian Guaranty before the American Arbitration Association (“AAA”) asserting substantially the same allegations (the “Arbitration”). Ocwen’s filings together listed 9,420 mortgage insurance certificates issued under multiple insurance policies, including Pool Insurance policies, as subject to the dispute. On June 5, 2017, Ocwen filed an amended complaint and an amended petition (collectively, the “Amended Filings”) with both the court and the AAA, respectively, together listing 8,870 certificates as subject to the dispute. On April 11, 2018, the parties entered into a confidential agreement with respect to all certificates subject to the dispute. The confidential agreement resolved certain categories of claims involved in the dispute and, on April 12, 2018, the parties filed a stipulation of voluntary dismissal of the federal court proceeding and the trial judge issued an Order dismissing all claims and counterclaims subject to the parties’ agreement. Radian Guaranty was not required to make any payment in connection with this confidential agreement. Pursuant to the confidential agreement, the parties: (1) dismissed the federal court proceeding; (2) narrowed the scope of the dispute to Ocwen’s breach of contract claims seeking payment of insurance benefits on approximately 2,500 certificates that Ocwen was previously pursuing through the
Part I Item 3. Legal Proceedings
Amended Filings; and (3) agreed to resolve the remaining dispute through the Arbitration. Radian Guaranty believes that Ocwen’s allegations and claims in the legal proceedings described above are without merit and legally deficient, and plans to defend these claims vigorously. We are not able to estimate a reasonably possible loss, if any, or range of loss in this matter because of the current preliminary stage of the Arbitration.
On August 31, 2018, Nationstar Mortgage LLC d/b/a Mr. Cooper (“Nationstar”) filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania against Radian Guaranty (the “Complaint”) alleging breach of contract, bad faith, and unjust enrichment claims and seeking monetary damages and declaratory relief. The Complaint lists 3,014 mortgage insurance certificates issued under multiple insurance policies as subject to disputes involving insurance coverage decisions. The Complaint further lists 2,231 mortgage insurance certificates issued under multiple insurance policies as subject to disputes involving premium refund requests. Radian Guaranty believes that Nationstar’s allegations and claims in the legal proceedings described above are without merit and legally deficient, and plans to defend these claims vigorously. We are not able to estimate a reasonably possible loss, if any, or range of loss in this matter because of the preliminary stage of the litigation.
We also are periodically subject to reviews and audits, as well as inquiries, information-gathering requests and investigations. In connection with these matters, from time to time we receive requests and subpoenas seeking information and documents related to aspects of our business. In March 2017, Green River Capital received a letter from the staff of the SEC stating that it is conducting an investigation captioned, “In the Matter of Certain Single Family Rental Securitizations,” and that it is requesting information from market participants. The letter requested that Green River Capital provide information regarding broker price opinions that Green River Capital provided on properties included in single family rental securitization transactions. In February 2019, we were advised by the SEC staff that the investigation has been closed.
The legal and regulatory matters discussed above could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief that could require significant expenditures or have other effects on our business. Management believes, based on current knowledge and after consultation with counsel, that the outcome of such actions will not have a material adverse effect on our consolidated financial condition. However, theThe outcome of litigation and other legal and regulatory matters and proceedings is inherently uncertain, and it is possible that any one or more of thethese matters currently pending or threatened could have an unanticipated adverse effect on our liquidity, financial condition or results of operations for any particular period. See Note 13 of Notes to Consolidated Financial Statements for additional information regarding legal proceedings and regulatory matters.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 4. | Mine Safety Disclosures.
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Not applicable.
PART II
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Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “RDN.” At February 25, 2019,23, 2022, there were 213,657,506175,525,591 shares of our common stock outstanding and 4959 holders of record.
In 2018During the first quarter of 2021 and 2017,each quarter of 2020, we declared quarterly cash dividends on our common stock equal to $0.0025$0.125 per share. On May 4, 2021, Radian Group’s board of directors authorized an increase to our quarterly dividend from $0.125 to $0.14 per share, beginning with the dividend declared in the second quarter of 2021. On February 9, 2022, Radian Group’s board of directors authorized an increase to our quarterly cash dividend from $0.14 to $0.20 per share. We presently expect to continue to declare a regular quarterly dividend on our common stock. For information on Radian Group’s ability to pay dividends, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Reference is made to the information in Item 12 of this report under the caption “Equity Compensation Plans,” which is incorporated herein by this reference.
Issuance of Unregistered Securities
On March 21, 2016, March 22, 2016 and March 24, 2016, we issued 11,914,620; 4,673,478 and 393,690 shares of Radian Group common stock, respectively, in separately negotiated transactions with certain holdersDuring the last three years, no equity securities of the Convertible Senior Notes due 2017 and 2019. These issuancesCompany were made in connection with, and as partial consideration for, the purchases of aggregate principal amounts of $30.1 million and $288.4 million of our Convertible Senior Notes due 2017 and 2019, respectively, for cash or a combination of cash and shares of Radian Group common stock.
In all cases, the sharessold that were issued to “qualified institutional buyers” within the meaning of Rule 144A promulgatednot registered under the Securities Act and were offered and sold in reliance on the exemption from registration afforded by Section 4(a)(2) of the Securities Act and corresponding provisions of state securities laws. See Notes 12 and 15 of Notes to Consolidated Financial Statements for additional information on the individual transactions.Act.
Issuer Purchases of Equity Securities
The following table provides information about purchases of Radian Group common stock by us (and our affiliated purchasers) during the three months ended December 31, 2018.2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Share repurchase program | | | | | | | | |
| | | | | | | | |
| ($ in thousands, except per-share amounts) | | 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) |
| Period: | | | | | | | | |
| 10/1/2021 to 10/31/2021 | | 1,966,569 | | | $ | 23.72 | | | 1,964,061 | | | $ | 95,484 | |
| 11/1/2021 to 11/30/2021 | | 3,790,848 | | | 21.68 | | | 3,788,714 | | | 13,401 | |
| 12/1/2021 to 12/31/2021 | | 655,036 | | | 20.96 | | | 639,560 | | | — | |
| Total | | 6,412,453 | | | | | 6,392,335 | | | |
(1)Includes 20,118 shares tendered by employees as payment of taxes withheld on the vesting of certain RSUs granted under the Company’s equity compensation plans.
(2)On August 14, 2019, Radian Group’s board of directors approved a share repurchase program authorizing the Company to spend up to $200 million, excluding commissions, to repurchase Radian Group common stock. Since then, Radian Group’s board of directors has authorized several increases to the program along with extensions of the program’s expiration date. Most recently, in August 2021, Radian Group’s board of directors approved a $200 million increase to this program, bringing the cumulative authorization to repurchase shares up to $675 million, excluding commissions, and extended the expiration of this program to August 31, 2022. During the three months ended December 31, 2021, the Company purchased 6.4 million shares at an average price of $22.23, including commissions. No purchase authority remains available under this program. See Note 14 of Notes to Consolidated Financial Statements for additional information.
Item 6. [Reserved]
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| | | | | | | | | | | | | |
| Issuer Purchases of Equity Securities |
| ($ in thousands, except per-share amounts) | | | | | | | |
| Period | Total Number of Shares Purchased (1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (2) |
| Share repurchase program | | | | | | | |
| 10/1/2018 to 10/31/2018 | — |
| | $ | — |
| | — |
| | $ | 100,000 |
|
| 11/1/2018 to 11/30/2018 | 2,329 |
| | $ | 19.30 |
| | — |
| | $ | 100,000 |
|
| 12/1/2018 to 12/31/2018 | 11,792 |
| | $ | 15.19 |
| | — |
| | $ | 100,000 |
|
| Total | 14,121 |
| | | | — |
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| | | | | | | | |
______________________
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(1) | Represents shares tendered by employees as payment |
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(2) | On August 16, 2018, Radian Group’s board of directors approved a new share repurchase program that authorizes the Company to repurchase up to $100 million of its common stock. As of December 31, 2018, the full purchase authority of up to $100 million remained available under this program, which expires on July 31, 2019. See Note 15 of Notes to Consolidated Financial Statements for additional information. |
Part II Item 6. Selected Financial Data
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Item 6. | Selected Financial Data. |
The information in the following table should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in Item 8 and the information included in Item 7. “Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations.”Operations
|
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| (In millions, except per-share amounts and ratios) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| Consolidated Statements of Operations | | | | | | | | | |
| Net premiums earned—insurance | $ | 1,014.0 |
| | $ | 932.8 |
| | $ | 921.8 |
| | $ | 915.9 |
| | $ | 844.5 |
|
Services revenue (1) | 145.0 |
| | 155.1 |
| | 168.9 |
| | 157.2 |
| | 78.0 |
|
| Net investment income | 152.5 |
| | 127.2 |
| | 113.5 |
| | 81.5 |
| | 65.7 |
|
| Net gains (losses) on investments and other financial instruments | (42.5 | ) | | 3.6 |
| | 30.8 |
| | 35.7 |
| | 80.0 |
|
| Total revenues | 1,273.0 |
| | 1,221.6 |
| | 1,238.5 |
| | 1,193.3 |
| | 1,072.7 |
|
| Provision for losses | 104.6 |
| | 135.2 |
| | 202.8 |
| | 198.6 |
| | 246.1 |
|
Cost of services (1) | 98.1 |
| | 104.6 |
| | 114.2 |
| | 93.7 |
| | 44.7 |
|
| Other operating expenses | 280.8 |
| | 267.3 |
| | 244.9 |
| | 242.4 |
| | 251.2 |
|
| Restructuring and other exit costs | 6.1 |
| | 17.3 |
| | — |
| | — |
| | — |
|
| Interest expense | 61.5 |
| | 62.8 |
| | 81.1 |
| | 91.1 |
| | 90.5 |
|
| Impairment of goodwill | — |
| | 184.4 |
| | — |
| | — |
| | — |
|
| Amortization and impairment of acquired intangible assets | 12.4 |
| | 27.7 |
| | 13.2 |
| | 13.0 |
| | 8.6 |
|
| Pretax income from continuing operations | 684.2 |
| | 346.7 |
| | 483.7 |
| | 437.8 |
| | 407.2 |
|
| Income tax provision (benefit) | 78.2 |
| | 225.6 |
| | 175.4 |
| | 156.3 |
| | (852.4 | ) |
| Net income from continuing operations | 606.0 |
| | 121.1 |
| | 308.3 |
| | 281.5 |
| | 1,259.6 |
|
Income (loss) from discontinued operations, net of tax (2) | — |
| | — |
| | — |
| | 5.4 |
| | (300.1 | ) |
| Net income | 606.0 |
| | 121.1 |
| | 308.3 |
| | 286.9 |
| | 959.5 |
|
Diluted net income per share from continuing operations (3) | $ | 2.77 |
| | $ | 0.55 |
| | $ | 1.37 |
| | $ | 1.20 |
| | $ | 5.44 |
|
Diluted net income per share (3) | $ | 2.77 |
| | $ | 0.55 |
| | $ | 1.37 |
| | $ | 1.22 |
| | $ | 4.16 |
|
| Cash dividends declared per share | $ | 0.01 |
| | $ | 0.01 |
| | $ | 0.01 |
| | $ | 0.01 |
| | $ | 0.01 |
|
Weighted average shares outstanding-diluted (3) | 218.6 |
| | 220.4 |
| | 229.3 |
| | 246.3 |
| | 233.9 |
|
Part II Item 6. Selected Financial Data
|
| | | | | | | | | | | | | | | | | | | |
| (In millions, except per-share amounts and ratios) | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | | | | | | | | | |
| Consolidated Balance Sheets | | | | | | | | | |
| Total investments | $ | 5,153.0 |
| | $ | 4,643.9 |
| | $ | 4,462.4 |
| | $ | 4,298.7 |
| | $ | 3,629.3 |
|
Assets held for sale (2) | — |
| | — |
| | — |
| | — |
| | 1,736.4 |
|
| Total assets | 6,314.7 |
| | 5,900.9 |
| | 5,863.2 |
| | 5,642.1 |
| | 6,842.3 |
|
| Unearned premiums | 739.4 |
| | 723.9 |
| | 681.2 |
| | 680.3 |
| | 644.5 |
|
| Reserve for losses and LAE | 401.4 |
| | 507.6 |
| | 760.3 |
| | 976.4 |
| | 1,560.0 |
|
Senior notes (4) | 1,030.3 |
| | 1,027.1 |
| | 1,069.5 |
| | 1,219.5 |
| | 1,192.3 |
|
Liabilities held for sale (2) | — |
| | — |
| | — |
| | — |
| | 947.0 |
|
| Stockholders’ equity | 3,488.7 |
| | 3,000.0 |
| | 2,872.3 |
| | 2,496.9 |
| | 2,097.1 |
|
| Book value per share | $ | 16.34 |
| | $ | 13.90 |
| | $ | 13.39 |
| | $ | 12.07 |
| | $ | 10.98 |
|
| Selected Ratios—Mortgage Insurance | | | | | | | | | |
Loss ratio (5) | 10.4 | % | | 14.6 | % | | 22.2 | % | | 21.7 | % | | 29.1 | % |
Expense ratio—net premiums earned basis (5) | 23.9 | % | | 24.7 | % | | 22.7 | % | | 23.7 | % | | 28.2 | % |
| Risk-to-capital-Radian Guaranty only | 13.9 | :1 | | 12.8 | :1 | | 13.5 | :1 | | 14.3:1 |
| | 17.9:1 |
|
| Risk-to-capital-Mortgage Insurance combined | 12.8 | :1 | | 12.1 | :1 | | 13.6 | :1 | | 14.6:1 |
| | 20.3:1 |
|
| Other Data—Mortgage Insurance | | | | | | | | | |
| Primary NIW | $ | 56,547 |
| | $ | 53,905 |
| | $ | 50,530 |
| | $ | 41,411 |
| | $ | 37,349 |
|
| Direct primary IIF | 221,443 |
| | 200,724 |
| | 183,450 |
| | 175,584 |
| | 171,810 |
|
| Direct primary RIF | 56,728 |
| | 51,288 |
| | 46,741 |
| | 44,627 |
| | 43,239 |
|
Persistency Rate (12 months ended) (6) | 83.1 | % | | 81.1 | % | | 76.7 | % | | 78.8 | % | | 84.2 | % |
Persistency (quarterly, annualized) (6) | 85.5 | % | | 79.4 | % | | 76.8 | % | | 81.8 | % | | 83.3 | % |
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(1) | Primarily represents the activity of Clayton, acquired June 30, 2014. |
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(2) | Radian completed the sale of its former financial guaranty subsidiary, Radian Asset Assurance, to Assured on April 1, 2015, pursuant to the Radian Asset Assurance Stock Purchase Agreement. Until the April 1, 2015 sale date, the operating results of Radian Asset Assurance were classified as discontinued operations for all periods presented in our consolidated statements of operations. |
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(3) | Diluted net income per share and average share information calculated in accordance with the accounting standard regarding earnings per share. See Note 3 of Notes to Consolidated Financial Statements. |
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(4) | Includes Senior Notes and Convertible Senior Notes. |
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(5) | Calculated using amounts determined under GAAP, using provision for losses to calculate the loss ratio and policy acquisition costs and other operating expenses to calculate the expense ratio, as percentages of net premiums earned—insurance. |
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(6) | Based on loan level detail for the fourth quarter of each year shown. The Persistency Rate on a quarterly, annualized basis may be impacted by seasonality or other factors, and may not be indicative of full-year trends. In Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, see “Key Factors Affecting Our Results—Mortgage Insurance—IIF; Persistency Rate; Mix of Business” and “Results of Operations—Mortgage Insurance—NIW, IIF, RIF” for additional information about the Persistency Rate.
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in Item 8.8 of this Annual Report on Form 10-K. Certain terms and acronyms used throughout this report are defined in the Glossary of Abbreviations and Acronyms included as part of this report.
Some of the information included in this discussion and analysis or included elsewhere in this report, including information with respect to our projections, plans and our strategy for our business, includesare forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under “Cautionary Note Regarding Forward-Looking Statements—Safe Harbor Provisions” and in the Risk Factors detailed in Item 1A of this Annual Report on Form 10-K.
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IItemndex to Management’s Discussion and Analysis
of Financial Condition and Results of Operations
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Overview
We are a diversified mortgage and real estate services business with two reportable business segments—Mortgage Insurance and Services. homegenius.
Our Mortgage Insurance segment provides credit-related insurance coverage, principally through privateaggregates, manages and distributes U.S. mortgage insurance, as well as other credit risk management solutions, toon behalf of mortgage lending institutions and mortgage credit investors. We provideinvestors, principally through private mortgage insurance on residential first-lien mortgage loans, and also provides other credit risk management, contract underwriting and fulfillment solutions to our mortgage insurancecustomers. Our homegenius segment offers an array of title, real estate and technology products and services mainly through our wholly-owned subsidiary, Radian Guaranty. Our Services segment is primarily a fee-for-service business that offers a broad array ofto consumers, mortgage real estate and title services to market participants across thelenders, mortgage and real estate value chain, as further detailed in “Results of Operations—Services.” These services, comprising mortgage services, real estate services and title services, are provided primarily through our subsidiaries, including Clayton, Green River Capital, Radian Settlement Services and Red Bell. In 2018, we also acquired the businesses of Entitle Direct and Independent Settlement Services, as well as the assets of Five Bridges, to enhance our Services offerings. Of the combined total of our net premiums earned and services revenue for the years ended December 31, 2018, 2017 and 2016, our Services segment provided 13%, 15% and 16%, respectively.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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(1) | Includes net premiums earned and services revenue on a segment basis, and excludes net investment income, net gain on investments and other financial instruments and other income. |
Operating Environment
As a seller of mortgage credit protection and mortgage and other credit risk management solutions, as well as a provider of mortgage, real estate and title services, our results are subject to macroeconomic conditions and other events that impact the housing financeinvestors, GSEs and real estate markets, including events that specifically impact the mortgage origination environment, the credit performance of our underlying insured assetsbrokers and our future business opportunities.agents.
Recently, mortgage originations for home purchases have increased and become a larger proportion of total mortgage originations, as refinancing activity has declined due to rising interest rates. During 2017 and 2018, we have benefited from this trend because mortgage insurance penetration in the insurable mortgage market is generally three to five times higher for purchase originations than for refinancings. Additionally, mortgage insurance penetration on purchase transactions has gradually increased over the past few years. The increase in home purchase transactions and the higher mortgage insurance penetration for purchase originations resulted in a larger mortgage insurance market in 2018 as compared to 2017.
Mortgage Market Credit Characteristics. Loans originated for the private mortgage insurance market since 2008 consist primarily of high credit quality loans with significantly better credit performance than the loans originated during 2008 and prior periods. Significant contributors to the improved loan quality include the greater risk discipline of loan originators and the private mortgage insurance providers, the Qualified Mortgage (QM) loan requirements under the Dodd Frank Act, including the GSE safe harbor, and the loan-level criteria of the PMIERs financial requirements.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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(1) | For the PMIERs, in circumstances where there is more than one borrower, the lowest of the borrowers’ FICO scores is used. |
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(2) | Seasoning factors are designed to adjust claim rate estimates for an expected loss pattern based on origination vintage. |
Following the 2007-2008 financial crisis, the more restrictive credit environment resulted in an overall improvement in credit quality. More recently, with access to credit expanding and purchase volume becoming a larger proportion of total originations compared to refinancings, Radian Guaranty and the rest of the private mortgage insurance industry have been experiencing a shift in the mix of mortgage lending products toward higher LTVs and higher debt-to-income ratios. In part, this is because in general, borrowers who purchase a home with mortgage insurance tend to have higher LTVs than borrowers who refinance with mortgage insurance. Additional factors contributing to the increase in the industry’s NIW on mortgage loans with LTVs greater than 95% include: (i) GSE program enhancements and guideline changes, including Fannie Mae’s HomeReady program and Freddie Mac’s Home Possible and Home Possible Advantage programs, which are designed to make home ownership more affordable for low- to moderate-income borrowers and (ii) recent lender response to market demands, particularly in light of increasing demand from first-time home buyers. As a result of these factors, home purchases by first-time home buyers, who traditionally require mortgage loans with higher LTVs and may have higher debt-to-income ratios, continue to be an increasingly significant portion of the total market. Further, due in part to changes in GSE guidelines that increased acceptable debt-to-income limits, beginning in late 2017, the private mortgage industry observed a material increase in the volume of loans to borrowers with debt-to-income ratios greater than 45%, and Radian Guaranty imposed certain credit overlays and pricing changes to address this trend. These higher levels have continued during 2018. We believe that these trends toward higher LTVs and debt-to-income ratios have not materially impacted the overall credit quality of our portfolio. See “Results of Operations—Mortgage Insurance—NIW, IIF, RIF” for additional information regarding our portfolio mix and the mortgage industry.
Hurricanes. We insure mortgages for homes in areas that have been or in the future may be impacted by natural disasters such as hurricanes, floods and wildfires, including Hurricanes Harvey and Irma in 2017 and Hurricanes Florence and Michael in 2018. Although the number of incremental defaults associated with areas that have been impacted by recent natural disasters, including the hurricanes in 2017 and 2018, became somewhat elevated, consistent with our past experience, these incremental defaults did not result in a material increase in our incurred losses or paid claims, given the limitations on our coverage related
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
to property damage. However, the future reserve impact of incremental defaults from these or other natural disasters may differ from our previous experience due to overall economic conditions, the pace of economic recovery in the affected areas or other factors. See Note 114 of Notes to Consolidated Financial Statements. See “Results of Operations—Mortgage Insurance—NIW, IIF, RIF—Provision for Losses” for more information on defaults. See “Liquidity and Capital Resources—Radian Group—Short-Term Liquidity Needs—Capital Support for Subsidiaries”Statements for additional information about our reportable segments, including the renaming of the homegenius segment in 2021 to align with updates to our brand strategy. See “Key Factors Affecting Our Results” for information about current business conditions and other factors that affect the performance of our Mortgage and homegenius businesses.
COVID-19 Impacts
The onset of the COVID-19 pandemic created periods of significant economic disruption, high unemployment, volatility and disruption in financial markets and required adjustments in the housing finance system and real estate markets. In addition, the pandemic has resulted in travel restrictions, temporary business shutdowns, and stay-at-home, quarantine, and similar orders, all of which contributed to a rapid and significant rise in unemployment that peaked in the second quarter of 2020.
Many of these restrictions have been lifted and businesses have been reopening, but numerous limitations, such as extensive health and safety measures and overall supply constraints and labor shortages, continue to limit operations. Further, while unemployment levels have declined from their peak, they continue to remain elevated compared to pre-pandemic levels, and may remain elevated or may rise depending on the pandemic’s scope, severity and duration, and its resulting impact of increased defaults on our PMIERs Minimum Required Assets.
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. Radian Guaranty currently is an approved mortgage insurer under the PMIERs and is in compliance with the PMIERs financial requirements. The GSEs have significant discretion under the PMIERs and may amend the PMIERs at any time. On September 27, 2018, the GSEs issued PMIERs 2.0, which will become effective on March 31, 2019. Based on Radian’s financial position at December 31, 2018, Radian expects to comply with PMIERs 2.0 and maintain a significant excess of Available Assets over Minimum Required Assets as of the effective date.economy. See “Item 1. Business—Regulation—GSE Requirements,” “Liquidity and Capital Resources—Radian Group—Short-Term Liquidity Needs” and Note 1 of Notes to Consolidated Financial Statements and “Item 1A. Risk Factors—The COVID-19
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Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
pandemic adversely impacted us and, in the future, could again adversely affect our business, results of operations or financial condition.”
As a result of the COVID-19 pandemic and its impact on the economy, including the significant increase in unemployment, we experienced a material increase in new defaults in 2020, substantially all of which related to defaults of loans subject to forbearance programs implemented in response to the COVID-19 pandemic. Beginning in the second quarter of 2020, the increase in the number of new mortgage defaults resulting from the COVID-19 pandemic had a negative effect on our results of operations and our reserve for losses. However, more recent trends in Cures have been more favorable than original expectations, resulting in favorable loss reserve development in 2021. See Note 11 for details on reserve development trends.
Our primary default rate was 2.9% at December 31, 2021, down from a peak of 6.5% at June 30, 2020 reflecting the material increase in new defaults in the three months ended June 30, 2020. Favorable trends in the number of new defaults and Cures were the primary drivers of the decline in our default inventory and default rate, compared to their peaks at June 30, 2020.
The number, timing and duration of new defaults and, in turn, the number of defaults that ultimately result in claims will depend on a variety of factors, including the scope, severity and duration of the COVID-19 pandemic, the resulting impact on the economy, including with respect to unemployment and housing prices, and the effectiveness of forbearance and other government efforts such as financial stimulus programs, to provide long-term economic and individual relief to assist homeowners. Consequently, the number and rate of total defaults is difficult to predict and will depend on the foregoing and other factors, including the number and timing of Cures and claims paid and the net impact on IIF from our Persistency Rate and future NIW. See “Item 1A. Risk Factors” for additional information.discussion of these factors and other risks and uncertainties.
Tax CutsIncreases in new defaults may affect our ability to remain compliant with the PMIERs financial requirements. Once two missed payments have occurred on an insured loan, the PMIERs characterize the loan as “non-performing” and Jobs Act. Onrequire us to establish an increased Minimum Required Asset factor for that loan regardless of the reason for the missed payments. During the COVID-19 Crisis Period, pursuant to the COVID-19 Amendment to the PMIERs, a Disaster Related Capital Charge that effectively reduces the Minimum Required Asset factor by 70% has been applied nationwide to all COVID-19 Defaulted Loans. For more information about the application of the Disaster Related Capital Charge see “Item 1. Business—Regulation—Federal Regulation—GSE Requirements for Mortgage Insurance Eligibility” for more information. The reduction in Radian Guaranty’s Minimum Required Assets from this Disaster Related Capital Charge was approximately $300 million as of December 22, 2017, the TCJA was signed into law, significantly changing the U.S. tax system. It included, among other items, the following provisions that impacted Radian:
Reduction of net deferred tax assets of $102.631, 2021, compared to approximately $650 million at December 31, 2017, due2020. Inclusive of this benefit in both periods, Radian Guaranty’s PMIERs Cushion increased to the lower statutory tax rate resulting in an increased tax provision;
Significant reduction in our annualized effective tax rate and future cash tax payments due to the reduction in the statutory federal tax rate from 35% to 21% (excluding the impact of Discrete Items), effective January 1, 2018;
A material reduction in cash tax payments in 2018 due to the repeal of the corporate alternative minimum tax;
Reduced deductibility of certain executive compensation; and
Potential impacts of state tax changes that could be prompted in response to the TCJA.
For periods beginning January 1, 2018, the TCJA had a significant favorable impact on our net income, diluted earnings per share and cash flows, primarily due to the reduction in the federal corporate tax rate. The TCJA also significantly increased the economic value of our existing mortgage insurance portfolio$2.1 billion as of December 31, 2017, due2021, from $1.3 billion as of December 31, 2020. While we expect Radian Guaranty to the increase in expected future net cash flows from our IIF.
Services. The macroeconomic conditions and other events that impact the housing, mortgage finance and related real estate markets also affect the demand for our mortgage, real estate and title services offered through our Services business segment. As described in “—Key Factors Affecting our Results—Services,” revenues for our Services segment are subject to fluctuations from period to period, in part due to the combination of the transactional nature of our business and the overall activity in the housing and mortgage finance markets.
Our mortgage services business is dependent on customer activity and general secondary market dynamics including volume, types of transactions, and scopes of review. For example, while non-GSE or “private label” securitization activity remains limited compared to the pre-financial crisis market, this market continued to expand in 2018 due to larger institutions re-entering the market, suggesting increased potential growth in 2019. Similarly, the single family rental market continued to experience strong demand in 2018, driven in part by early refinance activity in the rising interest rate environment, as well as a GSE program that drove volume, but was later suspended at the end of 2018. While regulatory demands on mortgage market participants continue to be significant following the financial crisis, regulatory enforcement actions on mortgage industry participants have been less frequent, reducing the demand for our servicing quality control services as target customers form alternative strategies on how best to manage risk in the current and projected environment.
Radian’s real estate services consist primarily of home property valuation services, which include appraisals, broker price opinions and automated valuations, and REO services that include property preservation and software as a service (“SaaS”) technology products. These products and services are fundamentally volume driven and therefore sensitive to variances in macro level home sales, home price appreciation, interest rates, home default rates and GSE guidelines. Since the financial crisis, REO inventory levels continue to decline due to lower delinquencies and foreclosure activity, reducing demand for our REO asset management services. Further, as alternatives for managing costs have become more critical to the overall value proposition for market participants, we have observed increasing market trends toward the use of non-appraisal valuation alternatives, which we expect will continue to grow.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Radian’s title services comprise a suite of title, closing and settlement services for residential mortgage loans, including our recent entry into the title insurance businessmaintain its eligibility status with the acquisition of Entitle Insurance in 2018. General marketplace competition in the real estate title industry, coupled with housing and mortgage banking related conditions such as new home sales, the sizes of the real estate purchase and refinance markets and interest rate fluctuations, could limit or create volatility in the timing and amount of potential revenue growth of this business.
See Notes 4 and 7 of Notes to Consolidated Financial Statements and “Item 1. Business—Services—Services Business Overview” for additional information regarding the Services segment.
Competition and Pricing
Competitive Environment. In our mortgage insurance business, our primary competitors include other private mortgage insurers and governmental agencies, principally the FHA and the VA. We currently compete with other private mortgage insurers on the basis of price, underwriting guidelines, overall service, customer relationships, perceived financial strength (including based on comparative financial strength credit ratings) and reputation, as well as the breadth and quality of the services offered through our Services business that complement our mortgage insurance products. We compete with the FHA and VA, primarily on the basis of loan limits, pricing, credit guidelines, terms of our insurance policies and loss mitigation practices. For additional information, see “Item 1. Business—Mortgage Insurance—Competition.”
Pricing is highly competitive in the mortgage insurance industry, with industry participants competing for market share and customer relationships. As a result of this competitive environment, recent industry pricing trends have included: (i) increases in the use of a spectrum of filed rates to allow for pricing based on more granular loan, borrower and property attributes, including granular pricing through the use of a “Black Box” framework, as further discussed below; (ii) the use of customized rates (often discounted from our published rate cards), including in response to requests for pricing bids by certain lenders; and (iii) other pricing changes that include, among other things, reductions in published rates.
The mortgage insurance industry is migrating away from a predominantly rate-card-based pricing model, to one where a variety of pricing methodologiesGSEs, there are being deployed with differing degrees of risk-based granularity, which may also lead to an increase in the frequency of pricing changes. By the end of 2018 all private mortgage insurers, including Radian, were either piloting or had broadly launched a “Black Box” framework. Currently, these frameworks continue to leverage the same general risk attributes as mortgage insurance pricing historically, and incorporate more granular risk-based pricing factors. Radian’s proprietary “Black Box” framework, RADAR Rates, became broadly available to customers in January 2019. See “Item 1. Business—Mortgage Insurance—Mortgage Insurance Business Overview—Premium Rates” above and “—Radian’s Pricing,” below.
As market conditions change, alternatives to traditional mortgage insurance may be introduced that compete with private mortgage insurance. In 2018, Freddie Mac and Fannie Mae announced the launch of limited pilot programs, Integrated Mortgage Insurance (“IMAGIN”) and Enterprise-Paid Mortgage Insurance (“EPMI”), respectively, as alternative ways for lenders to sell loans with LTVs greater than 80% to the GSEs. These investor-paid mortgage insurance programs,possible scenarios in which insurance is acquired directly by each GSE, have manythe number of the same features and represent an alternativenew defaults could impact Radian Guaranty’s ability to traditional private mortgage insurance products that are provided to individual lenders. Under the IMAGIN and EPMI programs, which are forward insurance arrangements (forward commitments to insure future loan originations), insurance is provided by a third party which, in turn, cedes the risk to a panel of reinsurers. The reinsurers participating in IMAGIN and EPMI are not subject to compliancecomply with the PMIERs which may create a competitive disadvantage for private mortgage insurers if these pilot programs are expanded.
In their current forms, these programs have not had a material impact on our financial performance or business prospects, in part due to the limited nature of the pilots and their current focus on lender-paid Single Premium Policies as well as the operational changes required for lenders to switch from traditional mortgage insurance execution to this new form of execution. The financial impact of these programs has been further mitigated as a result of the shift away from lender-paid singles and the increasing use of our borrower-paid Single Premium Policies. We believe there are significant challenges to the long-term sustainability of the IMAGIN and EPMI programs, including for example that the IMAGIN structure relies on a reinsurance market that, in contrast to traditional mortgage insurance, may not be committed to serving the first-loss mortgage insurance market through various economic and credit cycles. However, if these pilot programs or other alternatives to traditional private mortgage insurance were to expand and become broadly accepted alternatives to traditional private mortgage insurance, they could reduce the demand for private mortgage insurance in its traditional form.requirements. See “Item 1A. Risk FactorsFactors——Our mortgage insurance business faces intense competitionRadian Guaranty may fail to maintain its eligibility status with the GSEs, and the additional capital required to support Radian Guaranty’s eligibility could reduce our available liquidity.”
Part II Item 7. Management’s DiscussionIn response to the COVID-19 pandemic, we raised additional capital, temporarily suspended purchases under our share repurchase program, aligned our business with the temporary origination and Analysis of Financial Conditionservicing guidelines announced by the GSEs, and Results of Operations
Radian’s Pricing. As we continually evaluatemade adjustments to our pricing based on many factors,and our underwriting guidelines to account for the increased risk and uncertainty associated with the COVID-19 pandemic. In addition, we design our pricing strategies to grow the long-term economic value of our mortgage insurance portfolio and to align with our overall strategic objectives. During 2018, we madetook a number of pricing changes consistentactions to focus on protecting and supporting our workforce, while continuing to serve our customers effectively and support our communities. We activated our business continuity program by transitioning to a work-from-home virtual workforce model with these objectives, including:
implementing rate reductionscertain essential activities supported by limited staff in office environments that comply with CDC guidelines and applicable state and local requirements. Based on our borrower-paid Single Premium Policies in order to shift our NIW toward more profitable borrower-paid Single Premium Policies;
increasing risk-based granularity of our pricing across most products, including the use of rate adjustors related to multi-borrower loans and loans with a debt-to-income ratio greater than 45%; and
introducing our proprietary RADAR Rates, which became available to customers beginning in January 2019, subject to regulatory approval.
Our borrower-paid Single Premium Policies provide us with an increased return on required capital compared to lender-paid Single Premium Policies. Under the Homeowners Protection Act, most borrower-paid Single Premium Policies must be cancelled once the mortgage’s scheduled LTV has declined to 78%. As a result of this automatic cancellation feature and other factors, over the life of the loans, the Minimum Required Assets under the PMIERs are lower than for lender-paid Single Premium Policies. In the nine months since we implemented our pricing strategy for borrower-paid Single Premium Policies, we successfully increased our NIW for borrower-paid Single Premium Policies from 5% of total NIW for the three-month period ended March 31, 2018 to 12% of total NIW for the three-month period ended December 31, 2018, and our NIW for lender-paid Single Premium Policies decreased from 16% to 5% for the same periods.
We currently employ proprietary risk and customer analytics, as well as a digital pricing delivery platform, to deliver loan level pricing electronically to our customers. In January 2019, we broadly introduced RADAR Rates as our newest pricing option that is powered by Radian’s proprietary RADAR risk model and analyzes credit risk inputs to customize a rate quotesuccessful transition to a borrower’s individual risk profile, loan attributesvirtual work environment, we made the decision to reduce our office space and property characteristics. The granularity ofexit our pricing is tailored to the business needs of our customers and their risk profiles. This framework represents a continuation of our strategy to consistently apply an approach to pricing that is customer-centric, flexible and customizable based on a lender’s loan origination process, as well as balanced with our own objectives for managing the risk and return profile of our mortgage insurance portfolio. We expect that RADAR Rates, which leverages our proprietary risk model, will enhance our ability to continue to build a high quality mortgage insurance portfolio.
We target a blended return on required capital on new business on an unlevered basis (i.e., after-tax underwriting returns plus projected investment income) within the mid-teens range. This projected return incorporates the impact of our Single Premium QSR Program, as well as PMIERs 2.0, which will become effective on March 31, 2019, but does not include the impact of other factors, such as our Excess-of-Loss Program and leverage. See “—Operating Environment—PMIERs,” above. Our pricing actions are expected to gradually affect our results over time, as existing IIF cancels and is replaced with NIW at current pricing. As an example, assuming our current NIW levels, mix and persistency levels remain constant, we estimate that it would take approximately three years for approximately one-half of our IIF to reflect our current pricing structure. See “Results of Operations—Mortgage Insurance—NIW, IIF, RIF” for additional information.
Business Strategy
Radian is focused on a number of strategic objectives, as describedformer corporate headquarters in “Radian’s Long-Term Strategic Objectives” in “Item 1. Business—General.” In developing our strategies for our mortgage insurance business, we monitor various competitive and economic factors while seeking to increase the long-term value of our portfolio by balancing both profitability and volume considerations in developing our pricing and origination strategies. We take a strategic, risk-based approach to establishing our premium rates and writing a mix of business that we expect to grow the economic value of our mortgage insurance portfolio and produce our targeted level of returns on a blended basis, while providing an acceptable level of NIW. See “—Competition and Pricing—Radian’s Pricing,” and “Results of Operations—Mortgage Insurance—NIW, IIF, RIF.”
Our growth strategy includes leveraging our core expertise in mortgage credit risk management and expanding our presence in the mortgage finance industry, including by participating in certain credit risk transfer programs developed by the GSEs. As part of their initiative to distribute mortgage risk and increase the role of private capital in the mortgage market, Fannie Mae and Freddie Mac have established Front-end credit risk transfer programs that provide the GSEs with credit risk coverage on a Flow Basis that is incremental to primary mortgage insurance, as well as Back-end programs that provide the GSEs with credit risk coverage on existing pools of loans. Since 2016, we have participated in the Front-end programs and Back-end programs through Radian Reinsurance. Our participation in these programs is subject to pre-established credit parameters. Our total RIF under the Front-end and Back-end credit risk transfer programs was $196.8 million at December 31, 2018 and $100.4 million at December 31, 2017. We expect to continue to participate in these and other similar programs in the
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
future, subject to availability and our evaluation of risk-adjusted returns. We will only experience claims under these Front-end and Back-end credit risk transfer transactions if the borrower’s equity, any existing primary mortgage insurance (if applicable) and the GSEs’ retained risk are depleted. The GSEs retain the first losses on these credit risk transfer transactions, ranging from 35 to 60 basis points. Generally, Radian would then be responsible to cover the next layer of losses, which ranges in size from approximately 225 to 325 basis points. In participating in these GSE transactions, we assume incremental risk (beyond that which we typically cover in our traditional mortgage insurance business) associated with the risk of defaults caused by physical damage, including natural disasters such as hurricanes and wildfires, which is not covered by the underlying primary mortgage insurance. We regularly evaluate this risk, including the geographic diversity of the loans included in these transactions and our remote risk position, in assessing our participation in these transactions.
We have been focused on repositioning our Services business by implementing our restructuring plan and using the mortgage, real estate and title services offered through our Services segment to complement our Mortgage Insurance business, as well as by investing in new products and services to innovate and provide integrated solutions for our clients. Our strategy is designed to satisfy demand in the market, grow our fee-based revenues, strengthen our existing customer relationships, attract new customers and differentiate us from other mortgage insurance companies.
Other 2018 Developments
Capital and Liquidity Actions. On August 9, 2017, Radian Group’s board of directors authorized the Company to repurchase up to $50 million of its common stock through July 31, 2018. We completed this program during the first half of 2018 by purchasing 3.0 million shares at an average price of $16.56 per share, including commissions.
On August 16, 2018, Radian Group’s board of directors approved a new share repurchase program that authorizes the Company to repurchase up to $100 million of its common stock. As of December 31, 2018, the full purchase authority of up to $100 million remained available under this program, which expires on July 31, 2019.Philadelphia. See Note 159 of Notes to Consolidated Financial Statements for additional detailsinformation on our share repurchase program.lease right-of-use assets.
Radian Group’s liquidity increasedIn order to support our communities during this unprecedented time, we have, among other things, pledged financial support to certain charitable organizations focused on assisting first responders, health care workers and their families. Further actions to respond to the COVID-19 pandemic and comply with governmental regulations and government and GSE programs adopted in response to the pandemic may be necessary as a result of Radian Guaranty’s return of $450 millionconditions continue to evolve.
Despite the risks and uncertainties posed by COVID-19, we believe that the steps we have taken in capital to Radian Group in December 2018,recent years, such as approved by the Pennsylvania Insurance Department. This distribution of capital is part ofimproving our long-term capital plan, which is designed to improvedebt maturity profile, enhancing our financial flexibility, implementing greater risk-based granularity into our pricing methodologies and capital position. A portionincreasing our use of the proceeds is expected to be used for the payment of $159 million principal amount of our outstanding Senior Notes due 2019. See Note 12 of Notes to Consolidated Financial Statements.
Reinsurance. Radian’s reinsurance programs represent a component of our long-term risk distribution strategy. From timestrategies to time, we have entered into reinsurance transactions as part of our strategy to manage our capital position andlower the risk profile which includes managing Radian Guaranty’s capital position under the PMIERs financial requirements. We have recently expanded our risk distribution strategy in an effort to optimize the amounts and types of capital and risk distribution deployed against insured risk, including by accessing both the capital and the reinsurance markets to distribute risk. We expect the expansion of our risk distribution strategy to: (i) support our overall capital plans; (ii) lower our cost of capital; and (iii) reduce portfolio risk and financial volatility through economic cycles.
As part of our risk distribution strategy, in November 2018, Radian Guaranty entered into a fully collateralized reinsurance agreement with Eagle Re, an unaffiliated special purpose reinsurer domiciled in Bermuda. This reinsurance agreement provides for up to $434.0 million of aggregate excess-of-loss reinsurance coverage for the applicable percentage of mortgage insurance losses on new defaults on an existing portfolio, of eligible Monthly Premium Policies issued between January 1, 2017 and January 1, 2018, with an initial RIF of $9.1 billion. Eagle Re financed its coverage by issuing mortgage insurance-linked notes. In addition, Radian Guaranty entered into a separate excess-of-loss reinsurance agreement for up to $21.4 million of coverage, representing a pro rata share of the credit risk alongside the risk assumed by Eagle Re on those Monthly Premium Policies. These two reinsurance agreements reduced net RIF and PMIERs Minimum Required Assets by a total of $455.4 million, thus reducing the capital required to be held at Radian Guaranty and supporting Radian Guaranty’s $450 million return of capital to Radian Group in December 2018. For additional information about our reinsurance see Note 8 in Notes to Consolidated Financial Statements and “Results of Operations—Mortgage Insurance—Net Premiums Written and Earned.” See “Liquidity and Capital Resources—Radian Group—Short-Term Liquidity Needs” for additional information on the PMIERs.
IRS Matter. Radian finalized a settlement with the IRS which resolved the issues and concluded all disputes related to the IRS Matter. During the second quarter of 2018, we recorded tax benefits of $73.6 million, which includes both the impact of the settlement with the IRS as well as the reversal of certain previously accrued state and local tax liabilities. In 2018, under the terms of the settlement, Radian utilized its “qualified deposits” with the U.S. Treasury to settle its $31 million obligation to the IRS, and in 2019,has helped position the Company expectsto better withstand the IRS to refund to Radiannegative effects from macroeconomic stresses such as those that resulted from the remaining $58 million that was previously onCOVID-19 pandemic.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
deposit. During the year ended December 31, 2018, the settlement and related tax benefits resulted in an increase to Radian’s net income per share of $0.34 and an increase in book value per share of $0.34. See Note 10 of Notes to Consolidated Financial Statements for additional information.
Services Acquisitions. During 2018, Radian made three acquisitions that, although the purchase prices were not material to Radian, were consistent with our strategic direction, including growth, diversification and enhancing the core product offerings of our Services business.
During the first quarter of 2018, Radian acquired EnTitle Direct, the owner of EnTitle Insurance, a national title insurance and settlement services company. EnTitle Insurance is qualified to write title insurance business in 39 states and the District of Columbia. By adding the capabilities of EnTitle Insurance to the title and settlement services that we already were offering through our existing title agency, Radian Settlement Services, we have expanded the geographic reach of our title services and are positioned to provide title insurance and settlement services to our customers across the country.
In November 2018, Radian acquired Independent Settlement Services. Independent Settlement Services is a technology-driven national appraisal and title management services company that provides real estate information and valuation solutions in all 50 states, as well as proprietary technology that provides lenders, appraisers, servicing firms, due diligence firms and appraisal-management companies with a fully-automated platform to manage the ordering and delivery of products and services.
In December 2018, Radian acquired the assets of Five Bridges, a developer of proprietary software, data analytics and predictive models leveraging artificial intelligence, machine learning and traditional econometric techniques. With the assets acquired from Five Bridges, we expect to provide consumer and real estate analytics to customers, with a primary focus on valuation and risk management tools that span the entire loan life cycle, from underwriting and origination to servicing, secondary market purchase, and securitization.
Restructuring and Other Exit Costs. As a result of the Company’s continued implementation of its 2017 plan to restructure the Services business, restructuring charges were recognized in 2018. In the third quarter of 2018, as a result of our periodic review of long-lived assets for impairment, we also incurred other exit costs associated with impairment of internal-use software. See Notes 1 and 7 of Notes to Consolidated Financial Statements for additional details.
Key Factors Affecting Our Results
Mortgage Insurance
Our Mortgage Insurance segment provides credit-related insurance coverage, principally through private mortgage insurance, as well as other credit risk management solutions, to mortgage lending institutions and investors nationwide. The chart below highlightsfollowing sections discuss certain key drivers affecting our Mortgage Insurance revenue. The following sections discuss these revenue drivers,and homegenius businesses, as well as other key factors affecting our results.
IIF
Persistency Rate
Premium rates and mix of business
Size of mortgage origination market and market demand for low down payment loans
Level of mortgage originations for purchase transactions
Penetration percentage of private mortgage insurance in overall mortgage market and legislative, regulatory and administrative changes impacting the demand for private mortgage insurance
Radian’s market share of the private mortgage insurance market
The level of reinsurance we cede to third parties
Levels of GSE credit risk transfer
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• | Part II. Item 7. Management’s Discussion and Analysis of the primary driversFinancial Condition and Results of our future premiums that we expect to earn over time. Although not reflected in the current period financial statements, nor in our reportedOperations |
78IIF and Related Drivers
Part II Item 7. Management’s Discussion and Analysisthe primary drivers of Financial Condition and Results of Operations
our 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 expected persistencyPersistency Rate over multiple years. Additionally, as a result of the TCJA, the economic value of our existing IIF increased significantly as of December 31, 2017, due to the increase in expected future net cash flows associated with the reduction in expected tax payments.
Based on the current composition of our mortgage insurance portfolio, with Monthly Premium Policies comprising a larger proportion of our total portfolio than Single Premium Policies, an increase or decrease in IIF generally has a corresponding impact on premiums earned. Cancellations of our insurance policies as a result of prepayments and other reductions of IIF, such as Rescissions of coverage and claims paid, generally have a negative effect on premiums earned.earned over time. See “Results of Operations—Mortgage Insurance—NIW, IIF, RIF”“Mortgage Insurance Portfolio—Insurance and Risk in Force” for more information about the levels and characteristics of our NIW, IIF and RIF.IIF.
The ultimate profitability of our Mortgage Insurancemortgage insurance business is affected by the impact of mortgage prepayment speeds on the mix of business we write. The measure for assessing the impact of policy cancellations on our IIF is our Persistency Rate, defined as the percentage of IIF that remains in force over a period of time. Assuming all other factors remain constant, over the life of the policies, prepayment speeds have an inverse impact on IIF and the expected revenue from our Monthly Premium Policies. Slower loan prepayment speeds, demonstrated by a higher Persistency Rate, result in more IIF remaining in place, providing increased revenue from Monthly Premium Policies over time as premium payments continue and we recover more of our policy acquisition costs.continue. Earlier than anticipated loan prepayments, demonstrated by a lower Persistency Rate, reduce IIF and the revenue from our Monthly Premium Policies. PrepaymentAmong other factors, prepayment speeds may be affected by changes in interest rates amongand other macroeconomic factors. An increasingA rising interest rate environment generally will reduce refinancing activity and result in lower prepayments, whereas a declining interest rate environment generally will increase the level of refinancing activity and therefore increase prepayments.
In contrast to Monthly Premium Policies, when Single Premium Policies are cancelled by the insured because the loan has been paid off or otherwise, after consideration of any refunds owed to the borrower, we accelerate the recognition of any remaining unearned premiums.premiums, net of any refunds that may be owed to the borrower. Although these cancellations reduce IIF, assuming all other factors remain constant, the profitability of our Single Premium business increases when Persistency Rates are lower. As a result, we believe that writing a mix of Single Premium Policies and Monthly Premium Policies has the potential to moderate the overall impact on our results if actual prepayment speeds are significantly different from expectations. However, the impact of this moderating effect may depend onbe affected by the amount of reinsurance we obtain on portions of our portfolio, with the Single Premium QSR Program currently reducing the proportion of retained Single Premium Policies in our portfolio.
NIW and Related Drivers
NIW increases our IIF and our premiums written and earned. NIW is affected by the overall size of the mortgage origination market, the penetration percentage of private mortgage insurance into the overall mortgage origination market and our market share of the private mortgage insurance market. The overall mortgage origination market is influenced by macroeconomic factors such as household formation, household composition, home affordability, interest rates, housing markets in general, credit availability and the impact of all of our third-party quota share reinsurance programs reduced our retained RIF on Single Premium Policies as avarious legislative and regulatory actions that may influence the housing and mortgage finance industries. The penetration percentage of total RIF from 29.7%private mortgage insurance is mainly influenced by: (i) the competitiveness of private mortgage insurance for GSE conforming loans compared to 17.2% at December 31, 2018.FHA and VA insured loans and (ii) the relative percentage of mortgage originations that are for purchased homes versus refinances. We believe, for example, that better execution for borrowers with higher FICO scores, lender preference and the inability to cancel FHA insurance for certain loans are factors that currently provide a competitive advantage for private mortgage insurers. See “Overview—Business Strategy“Mortgage Insurance Portfolio—New Insurance Written.” for more information.
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• | NIW; Origination Market; Penetration Rate. NIW increases our IIF and our premiums written and earned. NIW is affected by the overall size of the mortgage origination market, the penetration percentage of private mortgage insurance into the overall mortgage origination market and our market share of the private mortgage insurance market. The overall mortgage origination market is influenced by macroeconomic factors such as household formation, household composition, home affordability, interest rates, housing markets in general, credit availability and the impact of various legislative and regulatory actions that may influence the housing and mortgage finance industries. The penetration percentage of private mortgage insurance is mainly influenced by: (i) the competitiveness of private mortgage insurance for GSE conforming loans compared to FHA and VA insured loans and (ii) the relative percentage of mortgage originations that are for purchased homes versus refinances. We believe, for example, that better execution for borrowers with higher FICO scores, lender preference and the inability to cancel FHA insurance for certain loans are factors that continue to provide a competitive advantage for private mortgage insurers. See “Results of Operations—Mortgage Insurance—NIW, IIF, RIF.”
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Private mortgage insurance penetration in the insurable market tends to behas generally been significantly higher on new mortgages for purchased homes than on the refinance of existing mortgages, because average LTVs are typically higher on home purchases and therefore these lower down payment loans are more likely to require mortgage insurance. Radian Guaranty’s share of the private mortgage insurance market is influenced by competition in that market. See “Item 1. Business—Mortgage Insurance—Competition” and “Results of Operations—Mortgage Insurance—NIW, IIF, RIF.Competition.”
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following charts provide a historical perspective on certain key market drivers, including:
•■the mortgage origination volume from home purchases and refinancings; and
•■private mortgage insurance penetration as a percentage of the mortgage origination market; andmarket.
•the composition of the insured mortgage market between private mortgage insurance and FHA insurance.
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(1) | Based on actual dollars generated in the credit enhanced market, as reported by the U.S. DepartmentPart II. Item 7. Management’s Discussion and Urban DevelopmentAnalysis of Financial Condition and industry publicly reported information. Mortgage originations are based upon the averageResults of Mortgage Bankers Association, Freddie Mac and Fannie Mae January 2019 Financial Forecasts.Operations |
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(2) | Excluding HARP originations.Mortgage origination market (1) |
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| Origination Market ($ in billions) | Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 |
| ¢ | Refinance | $120 | $193 | $350 | $435 | $412 | $699 | $773 | $876 | $858 | $645 | $579 | $472 |
| ¢ | Purchase | $230 | $365 | $371 | $319 | $284 | $353 | $466 | $444 | $354 | $492 | $505 | $454 |
| Total | $350 | $558 | $721 | $754 | $696 | $1,052 | $1,239 | $1,320 | $1,212 | $1,137 | $1,084 | $926 |
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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(1) | Based on actual dollars generated in thePrivate mortgage insurance penetration of mortgage origination market based on industry publicly reported information and the most recent available reporting by the U.S. Department of Housing and Urban Development.(1) |
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| Market
Penetration (%) | Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 |
| ò | Purchase (2) | 23.5% | 23.2% | 25.1% | 24.1% | 22.7% | 24.3% | 26.9% | 27.0% | 27.2% | 26.2% | 26.6% | 26.3% |
| ò | Overall (2) | 17.0% | 17.3% | 16.4% | 14.5% | 13.5% | 14.0% | 14.6% | 13.4% | 12.2% | 13.9% | 13.7% | 14.0% |
| ò | Refinance (2) | 4.6% | 6.1% | 7.1% | 7.5% | 7.2% | 8.9% | 7.1% | 6.5% | 6.1% | 4.5% | 2.5% | 2.1% |
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• | Premiums. The premium rates we charge for our insurance are based on a number of borrower, loan and property characteristics. The mortgage insurance industry is highly competitive and private mortgage insurers compete with each other and with the FHA and VA with respect to price and other factors. We expect price competition to continue throughout the mortgage insurance industry and future price changes from private mortgage insurers or the FHA could impact our future premium rates or our ability to compete.
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(1)Based on actual dollars generated in the credit enhanced market as reported by HUD and publicly reported industry information. Mortgage originations are based upon the average of originations reported by the Mortgage Bankers Association, Freddie Mac and Fannie Mae in their most recent published industry reports.
(2)Excluding originations under HARP.
Premiums
The premium rates we charge for our insurance are based on a number of borrower, loan and property characteristics. The mortgage insurance industry is highly competitive and private mortgage insurers compete with each other and with the FHA and VA with respect to price and other factors. We expect price competition to continue throughout the mortgage insurance industry and future price changes from private mortgage insurers or the FHA could impact our future premium rates or our ability to compete.
Our pricing is risk-based and is intended to generally align with the capital requirements under the PMIERs, while also considering pricing trends within the private mortgage insurance industry. As a result, our pricing is expected to generate relatively consistent returns across the credit spectrum and to provide relatively stable expected loss ratios regardless of further credit expansion or contraction. In developing our pricing strategies, we monitor various competitive and economic factors while seeking to increasemaximize the long-term economic value of our portfolio by balancing bothcredit risk, profitability and volume considerations in developing our pricing and origination strategies. We continued to generate strong NIW in 2018, and believe we remain well positioned to compete for the high-quality business being originated today, while at the same time maintaining projected returns on NIW within our targeted ranges.
Our pricing actions gradually affect our results over time, as existing IIF cancels and is replaced with NIW at current pricing. See “Liquidity and Capital Resources—Radian Group—Short-Term Liquidity Needs—Capital Support for Subsidiaries” and “Results of Operations—Mortgage Insurance—NIW, IIF, RIF” for additional information.
Premiums on our mortgage insurance products are generally paid either on a monthly installment basis (“Monthly Premiums”) or in a single payment (“Single Premiums”) at the time of loan origination. See “Item 1. Business—Mortgage Insurance—Mortgage Insurance Business Overview—Premium Rates—Primary Mortgage Insurance.” Our expected premium yield on our Single Premium Policies is lower than on our Monthly Premium Policies because our premium rates are generally lower for our Single Premium Policies. However, as discussed above, the ultimate profitability of Single Premium Policies may be higher or lower than expected due to prepayments. See “—IIF; Persistency Rate; Mix of Business.”
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Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
considerations, and aim to achieve an overall risk-adjusted rate of Contents
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
return on capital given our modeled performance expectations. Our actual portfolio returns will depend on a number of factors, including economic conditions, the mix of NIW that we are able to write, our pricing, the amount of reinsurance we use and the level of capital required under the PMIERs financial requirements.
Rescissions, whichOur pricing actions gradually affect our results over time, as existing IIF cancels and is replaced with NIW at current pricing. See “Liquidity and Capital Resources—Mortgage” and “Mortgage Insurance Portfolio—New Insurance Written” for additional information.
As described above, premiums on our mortgage insurance products are discussed in further detail below, resultgenerally paid either on an installment basis, pursuant to Monthly Premium Policies, or in a full refundsingle payment at the time of loan origination, pursuant to Single Premium Policies. See “Item 1. Business—Mortgage—Pricing—Primary Mortgage Insurance Premiums.” Our expected premium yield on our Single Premium Policies is lower than on our Monthly Premium Policies because our premium rates for the life of the inception-to-date premiums received,policy are generally lower for our Single Premium Policies. However, as discussed above, the ultimate profitability of Single Premium Policies may be higher or lower than expected due to the impact of prepayment speeds. See “—IIF and therefore, premiums earned are negatively affected by any increases in our accrual for estimated Rescission refunds. Additionally, premiums ceded to third-party reinsurance counterparties decrease premiums written and earned.Related Drivers” above.
Approximately 66%78.6% of the loans in our total primary mortgage insurancePrimary Mortgage Insurance portfolio at December 31, 2018 have2021 are Monthly Premium Policies that provide a level monthly premium for the first 10 years of the policy, followed by a reducedlower level monthly premium thereafter. If a loan isFor loans that have been refinanced under HARP, the initial 10-year period is reset. Due to the borrower’s abilityGenerally, a borrower is able to cancel the policy generally when the LTV reaches 80% of the original value, and the automatic cancellation of the policy automatically cancels on the date the LTV is scheduled to reach 78% of the original value,value. As a result, the volume of loans that remain insured after 10 years and would be subject to the premium reset is generally not material in relation to the total loans originated. However, to the extent the volume of loans resetting from year to year varies significantly, the trend in earned premiums may also vary.
Losses
Incurred losses represent the estimated future claim payments on newly defaulted insured loans as well as any change in our claim estimates for existing defaults, including changes in the estimates we use to determine our expected losses, and estimates with respect to the frequency, magnitude and timing of anticipated losses on defaulted loans. Other factors influencing incurred losses include:
■The mix of credit characteristics in our total direct RIF (e.g., loans with higher risk characteristics, or loans with layered risk that combine multiple higher-risk attributes within the same loan, generally result in more delinquencies and claims). See “Mortgage Insurance Portfolio—Insurance and Risk in Force;”
■The average loan size (relatively higher priced properties with larger average loan amounts may result in higher incurred losses);
■The percentage of coverage on insured loans (higher percentages of insurance coverage generally correlate with higher incurred losses) and the presence of structural mitigants such as deductibles or stop losses;
■Changes in housing values (declines in housing values generally make it more difficult for borrowers to sell a home to avoid default or for the property to be sold to mitigate a claim, and also may negatively affect a borrower’s willingness to continue to make mortgage payments when the home value is less than the mortgage balance; conversely, increases in housing values tend to reduce the level of defaults as well as make it more likely that foreclosures will result in the loan being satisfied);
■The distribution of claims over the life cycle of a portfolio (historically, claims are relatively low during the first two years after a loan is originated and then increase over a period of several years before declining; however, several factors can impact and change this cycle, including the economic environment, the quality of the underwriting of the loan, characteristics of the mortgage loan, the credit profile of the borrower, housing prices and unemployment rates); and
■Our ability to mitigate potential losses through Rescissions, Claim Denials, cancellations and Claim Curtailments on claims submitted to us. These actions all reduce our incurred losses. However, if these Loss Mitigation Activities are successfully challenged at rates that are higher than expected or we agree to settle disputes related to our Loss Mitigation Activities, our incurred losses will increase. We may enter into specific agreements that govern activities such as claims decisions, claim payments, Loss Mitigation Activities and insurance coverage. As our portfolio originated through 2008 has become a smaller percentage of our overall insured portfolio, there has been a decrease in the amount of Loss Mitigation Activity with respect to the claims we receive, and we expect this trend to continue, particularly given the limitations on our Loss Mitigation Activities imposed in both the 2014 Master Policy and 2020 Master Policy. See Note 2 of Notes to Consolidated Financial Statements for additional information on Loss Mitigation Activities and “Item 1A. Risk Factors—Our Loss Mitigation Activity is not expected to mitigate mortgage insurance losses to the same extent as in prior years; Loss Mitigation Activity could continue to negatively impact our customer relationships.”
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• | . Incurred losses represent the estimated future claim payments on newly defaulted insured loans as well as any change in our claim estimates for existing defaults, including changes in the estimates we use to determine our expected losses,GlossaryPart II. Item 7. Management’s Discussion and estimates with respect to the frequency, magnitudeAnalysis of Financial Condition and timingResults of anticipated losses on defaulted loans. Other factors influencing incurred losses include:Operations |
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– | The mix of credit characteristics in our total direct RIF (e.g., loans with higher risk characteristics, or loans with layered risk that combine multiple higher-risk attributes within the same loan, generally result in more delinquencies and claims). See “Results of Operations—Mortgage Insurance—NIW, IIF, RIF.
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– | The average loan size (relatively higher priced properties with larger average loan amounts may result in higher incurred losses). |
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– | The percentage of coverage on insured loans (higher percentages of insurance coverage generally correlate with higher incurred losses) and the presence of structural mitigants such as deductibles or stop losses. |
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– | Changes in housing values (declines in housing values generally make it more difficult for borrowers to sell a home to avoid default or for the property to be sold to mitigate any claim, and also may negatively affect a borrower’s willingness to continue to make mortgage payments when the home value is less than the mortgage balance; conversely, increases in housing values tend to reduce the level of defaults as well as make it more likely that foreclosures will result in the loan being satisfied). |
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– | The distribution of claims over the life cycle of a portfolio (historically, claims are relatively low during the first two years after a loan is originated and then increase over a period of several years before declining; however, several factors can impact and change this cycle, including the economic environment, the quality of the underwriting of the loan, characteristics of the mortgage loan, the credit profile of the borrower, housing prices and unemployment rates). |
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– | Our ability to mitigate potential losses through Rescissions, Claim Denials, cancellations and Claim Curtailments on claims submitted to us. These actions all reduce our incurred losses. However, if these Loss Mitigation Activities are successfully challenged at rates that are higher than expected or we agree to settle disputes related to our Loss Mitigation Activities, our incurred losses will increase. We may enter into specific agreements that govern activities such as claims decisions, claim payments, Loss Mitigation Activities and insurance coverage. As our portfolio originated prior to and including 2008 has become a smaller percentage of our overall insured portfolio, there has been a decrease in the amount of Loss Mitigation Activity with respect to the claims we receive, and we expect this trend to continue, particularly given the limitations on our Loss Mitigation Activities imposed in the 2014 Master Policy. See Note 11 of Notes to Consolidated Financial Statements for additional information on Loss Mitigation Activities and “Item 1A. Risk Factors—Our Loss Mitigation Activity is not expected to mitigate mortgage insurance losses to the same extent as in prior years; Loss Mitigation Activity could continue to negatively impact our customer relationships.”
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• | Other Operating Expenses. Our other operating expenses are affected by the amount of our NIW, as well as the amount of RIF. Our other operating expenses may also be affected by the impact of performance on our incentive
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GlossaryWhen we enter into a quota share reinsurance agreement, the reinsurer receives a premium and, in exchange, agrees to insure an agreed upon portion of incurred losses. These arrangements reduce our earned premiums but also reduce our net RIF, which provides capital relief, including under the PMIERs financial requirements. Our incurred losses are reduced by any incurred losses ceded in accordance with the reinsurance agreement, and we often receive ceding commissions from the reinsurer as part of the transaction, which, in turn, reduce our reported operating expenses and policy acquisition costs.Part II Item 7. Management’s DiscussionOur Excess-of-Loss Program primarily accesses the capital markets (through the Eagle Re Issuers’ issuance of mortgage insurance-linked notes). Our Excess-of-Loss Program reduces our earned premiums, but also reduces our net RIF, PMIERs financial requirements and Analysisincurred losses, which are allocated in accordance with the structure of the transaction. The Eagle Re Issuers are special purpose VIEs that are not consolidated in our consolidated financial statements because we do not have the unilateral power to direct those activities that are significant to their economic performance.
Our use of risk distribution structures has reduced our required capital and enhanced our projected return on capital, and we expect these structures to provide a level of credit protection in periods of economic stress. As of December 31, 2021, 73% of our primary RIF is subject to a form of risk distribution and our estimated reinsurance recoverables related to our mortgage insurance portfolio was $66.7 million. See Note 8 of Notes to Consolidated Financial ConditionStatements for more information about our reinsurance arrangements, including the total assets and Resultsliabilities of Operations
the Eagle Re Issuers.
Investment income is determined primarily by the investment balances held and the average yield on our overall investment portfolio.
Other Operating Expenses
Our other operating expenses are affected by the amount of our NIW, as well as the amount of IIF. Our other operating expenses may also be affected by the impact of performance on our incentive compensation programs, as a result of our pay-for-performance and risk-based approach to compensation that is based on the level of achievement of both short-term and long-term goals.
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• | Third-Party Reinsurance. We use third-party reinsurance in our mortgage insurance business to manage capital and risk in an effort to optimize the amounts and types of capital and risk distribution deployed against insured risk. See “Overview—Other 2018 Developments—Reinsurance”and “—IIF; Persistency Rate; Mix of Business.” Currently Radian participates in quota share and excess-of-loss reinsurance programs. When we enter into a quota share reinsurance agreement, the reinsurer receives a premium and, in exchange, agrees to insure an agreed upon portion of incurred losses. These arrangements have the impact of reducing our earned premiums but also reduce our net RIF, which provides capital relief, including under the PMIERs financial requirements. Our incurred losses are reduced by any incurred losses ceded in accordance with the reinsurance agreement, and we often receive ceding commissions from the reinsurer as part of the transaction, which reduces our operating expenses and policy acquisition costs. Our Excess-of-Loss Program accesses both the capital and the reinsurance markets to distribute risk, and includes reinsurance through a variable interest entity funded by mortgage insurance-linked notes, as well as separate excess-of-loss reinsurance with a third-party reinsurer. Our Excess-of-Loss Program reduces our net RIF and our incurred losses are reduced by any incurred losses allocated in accordance with the structure of the transaction. While these arrangements have the impact of reducing our earned premiums, they also provide capital relief, including under the PMIERs financial requirements. See Note 8 of Notes to Consolidated Financial Statements for more information about our reinsurance arrangements.homegenius Premiums We earn net premiums on title insurance through Radian Title Insurance. Demand for title insurance may be impacted by general marketplace competition in the real estate title industry, coupled with housing market related conditions such as new home sales, the sizes of the real estate purchase and refinance markets and interest rate fluctuations. |
Services Revenue
Our Serviceshomegenius segment offers a broad array of services to market participants acrossis dependent upon overall activity in the mortgage, and real estate value chain. These services comprise mortgage services, real estate services and title services, including technology and turn-key solutions, that provide information and other resources used to originate, evaluate, acquire, securitize, service and monitor residential real estate and loans secured by residential real estate. These services primarily are provided to mortgage lenders, financial institutions, investors and government entities. In addition, we provide title insurance to mortgage lendersfinance markets, as well as directlythe overall health of the related industries. Due, in part, to borrowers.
Ourthe transactional nature of the business, revenues for our homegenius segment are subject to fluctuations from period to period, including seasonal fluctuations that reflect the activities in these markets. Sales volume is also affected by the number of competing companies and alternative products offered in the market. We believe the diversity of services we offer has the potential to produce fee income from the homegenius segment throughout various mortgage services help loan originatorsfinance environments and investors evaluate, acquire, surveileconomic cycles, although market conditions can significantly impact the mix and securitize mortgages. These services include loan review, RMBS securitization and distressed asset reviews, review and valuation services related to single family rental properties, servicer and loan surveillance and underwriting. Our real estate services help lenders, investors and real estate agents evaluate, manage, monitor and sell properties. These real estate services include software as a service solutions and platforms, as well as managed services, such as REO asset management, real estate valuation services and real estate brokerage services. Our title services provide a comprehensive suiteamount of title insurance products, title settlement services and both traditional and digital closing services.fee income we generate in any particular period. See “Item 1. Business—Services—Customers,” “Item 1. Business—Services—Serviceshomegenius—homegenius Business Overview,” and Note 1 of Notes to Consolidated Financial StatementsOverview” for additionalmore information regarding the Services segment.
In contrast toon our Mortgage Insurance business, the Services segment is primarily a fee-for-service business without significant balance sheet risk. Key factors impacting results for our Services business include:homegenius services.
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• | Services Revenue. Our Services segment is dependent upon overall activity in the mortgage, real estate and mortgage finance markets, as well as the overall health of the related industries. Due, in part, to the transactional nature of its business, revenues for our Services segment are subject to fluctuations from period to period, including seasonal fluctuations that reflect the activities in these markets. Sales volume is also affected by the number of competing companies and alternative products offered in the market. We believe the diversity of services we offer has the potential to produce fee income from the Services segment throughout various mortgage finance environments, although market conditions can significantly impact the mix and amount of fee income we generate in any particular period. In addition, see Note 2 of Notes to Consolidated Financial Statements for information on revenue recognition policies for our Services segment.
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The Serviceshomegenius segment is dependent on a limited number of large customers that represent a significant portion of its revenues. An unexpected loss of a major customer could significantly impact the level of Services revenue. Access to Radian Guaranty’s mortgage insurance customer base provides additional opportunities to expand the Services segment’s existing customers. Generally, our contracts do not contain volume commitments and may be terminated by clients at any time. While access to Radian Guaranty’s mortgage insurance customer base provides additional opportunities to expand the homegenius segment’s existing customers, an unexpected loss of a major customer could significantly impact the level of homegenius revenue. Access to Radian Guaranty’s mortgage insurance customer base provides additional opportunities to expand the homegenius segment’s existing customers.
RevenueOur homegenius revenue is primarily generated under fixed-price contracts. Under fixed-price contracts, we agree to perform the specified services and deliverables for a predetermined per-unit price. To the Services segment also includes inter-segment revenuesextent our actual direct and allocated indirect costs decrease or increase from services performedthe estimates upon which the price was negotiated, we will generate more or less profit, respectively, or could incur a loss. See Note 2 of Notes to Consolidated Financial Statements for more information on revenue recognition policies for our Mortgage Insurancehomegenius segment.
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Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Cost of Services
Our cost of services is primarily affected by our level of services revenue and the number of employees providing products and services for our homegenius businesses. Our cost of services primarily consists of employee compensation and related payroll benefits, and to a lesser extent, other costs of providing services such as travel and related expenses incurred in providing client services, costs paid to outside vendors, data acquisition costs and other compensation-related expenses to maintain software application platforms that directly support our businesses. The level of these costs may fluctuate as market rates of compensation change, or if there is decreased availability or a loss of qualified employees.
Operating Expenses
Our operating expenses primarily consist of salaries and benefits not classified as cost of services because they are related to employees, such as sales and corporate employees, who are not directly involved in providing client services. Operating expenses also include other selling, general and administrative expenses, depreciation and allocations of corporate general and administrative expenses.
See “Item 1. Business—homegenius—homegenius Business Overview” and Note 41 of Notes to Consolidated Financial Statements for additional information.information regarding the homegenius segment.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Services revenue is generated under three basic types of contracts:
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– | Fixed-Price Contracts. Under fixed-price contracts, we agree to perform the specified services and deliverables for a pre-determined per-unit or per-file price or day rate. To the extent our actual direct and allocated indirect costs decrease or increase from the estimates upon which the price was negotiated, we will generate more or less profit, respectively, or could incur a loss.
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– | Time-and-Expense Contracts. Under a time-and-expense contract, we are paid a fixed hourly rate, and we are reimbursed for billable out-of-pocket expenses as work is performed. To the extent our actual direct labor costs decrease or increase in relation to the fixed hourly billing rates provided in the contract, we may generate more or less profit, respectively. However, because these contracts are generally short-term in nature, the risk is limited to the periods covered by the contracts. These contracts are used for our loan review, underwriting and due diligence services.
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– | Percentage-of-Sale Contracts. Under percentage-of-sale contracts, we are paid a contractual percentage of the sale proceeds upon the sale of each property. To the extent the sale of a property is delayed or not consummated, or the sales proceeds are significantly less than originally estimated, we may generate less profit than anticipated, or could incur a loss. See “Item 1. Business—Services—Services Business Overview” for more information on our Services revenue.
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• | Cost of Services. Our cost of services is primarily affected by our level of services revenue. Our cost of services primarily consists of employee compensation and related payroll benefits, including the cost of billable labor assigned to revenue-generating activities and, to a lesser extent, other costs of providing services such as travel and related expenses incurred in providing client services, costs paid to outside vendors, data acquisition costs and other compensation-related expenses to maintain software application platforms that directly support our businesses. The level of these costs may fluctuate if market rates of compensation change, or if there is decreased availability or a loss of qualified employees.
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• | Gross Profit on Services. In addition to the key factors affecting Services revenue and cost of services described above, our gross profit on services may fluctuate from period to period due to a shifting mix of services we provide resulting from changes in the relative demand for those services in the marketplace. Shifts in the business mix of our Services business can impact our gross profit because each product and service generally produces a different level of gross margin. These individual gross margins in turn can be impacted in any given period by factors such as the implementation of new regulatory requirements, our operating capacity, competition or other environmental factors.
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• | Premiums. We earn net premiums on title insurance, effective with our acquisition of EnTitle Direct in the first quarter of 2018. By adding the capabilities of its subsidiary, EnTitle Insurance, to the title and settlement services that we already were offering through our existing title agency, Radian Settlement Services, we have expanded the geographic reach of our title services and are positioned to provide title insurance and settlement services to our customers across the country.
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• | Operating Expenses. Our operating expenses primarily consist of salaries and benefits not classified as cost of services because they are related to employees, such as sales and corporate employees, who are not directly involved in providing client services. Operating expenses also include other selling, general and administrative expenses, depreciation, and allocations of corporate general and administrative expenses.
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Other Factors Affecting Consolidated Results
TheIn addition, the following items also may impact our consolidated results in the ordinary course. The items listed are not representative of all potential items impacting our consolidated results. See “Item 1A. Risk Factors” for additional information on the risks affecting our business.
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• | Investment Income. Investment income is determined primarily by the investment balances held and the average yield on our overall investment portfolio.
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• | Net Gains (Losses) on Investments.Net Gains (Losses) on Investments and Other Financial Instruments. The recognition of realized investment gains or losses can vary significantly across periods, as the activity is highly discretionary based on the timing of individual securities sales due to such factors as market opportunities, our tax and capital profile and overall market cycles. Unrealized gains and losses arise primarily from changes in the market value of our investments that are classified as trading or losses can vary significantly across periods as the activity is highly discretionary based on such factors as market opportunities, our tax and capital profile and overall market cycles that impact the timing of the sales of securities. Unrealized investment gains and losses arise primarily from changes in the market value of our investments that are classified as trading securities or, effective with our implementation of the update to the standard for the accounting of financial |
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
instruments effective January 1, 2018, equity securities. These unrealized gains and losses are generally the result of changes in interest rates or credit spreads andvaluation adjustments may not necessarily result in realized economic gains or losses.
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• | Impairment of Goodwill or Other Acquired Intangible Assets. The periodic review of goodwill and other acquired intangible assets for potential impairment may impact consolidated results. Our goodwill and other acquired intangible assets primarily relate to the acquisition of Clayton, and their valuationLoss on Extinguishment of Debt. Gains or losses on early extinguishment of debt and losses incurred to purchase our debt prior to maturity are discretionary activities that are undertaken in order to take advantage of market opportunities to strengthen our financial and capital positions. Impairment of Goodwill or Other Acquired Intangible Assets. The periodic review of goodwill and other acquired intangible assets for potential impairment may impact consolidated results. Our goodwill and other acquired intangible assets analysis is based on management’s assumptions, which are inherently subject to risks and uncertainties. In 2017, we recorded total impairment charges of $200.2 million related to the goodwill and other acquired intangible assets of the Services segment. See Note 7 of Notes to Consolidated Financial Statements for additional information. |
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• | Tax Cuts and Jobs Act. The enactment of the TCJA resulted in a material reduction of our net deferred tax assets at December 31, 2017, because deferred tax assets and liabilities are measured using the enacted tax rates that are expected to apply to taxable income in the periods in which the deferred tax assets or liabilities are expected to be realized or settled. See Note 10 of Notes to Consolidated Financial Statements for additional information on the TCJA.
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The TCJA, excluding the impact of Discrete Items, has had a significant favorable impact on the Company’s net income, diluted earnings per share and cash flows for 2018, as compared to the tax laws in effect in 2017, primarily due to the reduction in the federal corporate tax rate from 35% to 21%, which was effective on January 1, 2018. See “Results of Operations—Consolidated—Income Tax Provision” and Note 10 of Notes to Consolidated Financial Statements for additional information on the TCJA.information.
Future policy changes or interpretations could have a positive or negative impact on our financial performance depending on how the changes would influence the economy, including business and consumer sentiment and the key factors influencing our performance.
Mortgage Insurance Portfolio Key Metrics—Consolidated
The following key metrics are used by management in evaluating our performance and measuring the overall growth in value generated for our stockholders. See “Results of Operations—Consolidated,” for additional information on our operating results.
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| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Diluted net income per share | $ | 2.77 |
| | $ | 0.55 |
| | $ | 1.37 |
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Adjusted diluted net operating income per share (1) | 2.69 |
| | 1.82 |
| | 1.56 |
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| Book value per share at December 31 | 16.34 |
| | 13.90 |
| | 13.39 |
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| Return on equity | 18.7 | % | | 4.1 | % | | 11.5 | % |
Adjusted net operating return on equity (1) | 18.2 | % | | 13.7 | % | | 13.1 | % |
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(1) | See “Results of Operations—Consolidated—IIF by origination vintage Use of Non-GAAP Financial Measures”.(1)
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| | Insurance in Force as of: |
| Vintage written in:
($ in billions) | December 31, 2021 | December 31, 2020 | December 31, 2019 |
| ¢ | 2021 | $87.4 | 35.5 | % | $— | — | % | $— | — | % |
| ¢ | 2020 | 74.3 | 30.2 | | 98.8 | 40.2 | | — | — | |
| ¢ | 2019 | 24.0 | 9.8 | | 44.6 | 18.1 | | 67.3 | 28.0 | |
| ¢ | 2018 | 12.4 | 5.0 | | 23.5 | 9.5 | | 42.9 | 17.8 | |
| ¢ | 2017 | 11.5 | 4.7 | | 21.2 | 8.6 | | 37.9 | 15.8 | |
| ¢ | 2016 | 10.1 | 4.1 | | 17.5 | 7.1 | | 29.5 | 12.2 | |
| ¢ | 2009 - 2015 | 14.9 | 6.1 | | 25.7 | 10.5 | | 44.0 | 18.3 | |
| ¢ | 2008 & Prior (2) | 11.4 | 4.6 | | 14.8 | 6.0 | | 19.0 | 7.9 | |
| Total | $246.0 | 100.0 | % | $246.1 | 100.0 | % | $240.6 | 100.0 | % |
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Diluted Net Income Per Share. (1)Policy years represent the original policy years and have not been adjusted to reflect subsequent refinancing activity under HARP.
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Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
(2)Adjusted to reflect subsequent refinancing activity under HARP, this percentage would decrease to 3.0%, 3.7%, and 4.7% as of December 31, 2021, December 31, 2020 and December 31, 2019, respectively.
New Insurance Written
A key component of our current business strategy is to write NIW that we believe will generate future earnings and economic value while effectively maintaining the portfolio’s health, balance and profitability. Consistent with this objective, we wrote $91.8 billion of primary new mortgage insurance in 2021, compared to $105.0 billion of NIW in 2020. The changesNIW written in diluted net income per share across all periods presented are primarily2021 was Radian’s second highest volume in its history.
Our 2021 NIW, offset by cancellations and amortization within our existing portfolio, resulted in IIF of $246.0 billion at December 31, 2021, compared to $246.1 billion at December 31, 2020, as shown in the chart above. Our NIW decreased by 12.6% in 2021 as compared to 2020, due to the changes in net income. The change in net income from 2016 to 2017 waslower refinance activity and lower private mortgage insurance penetration on refinances as well as lower market share, partially offset by increased purchase originations.
Among other factors, private mortgage insurance industry volumes are impacted by total mortgage origination volumes and the mix between mortgage originations that are for home purchases versus refinancings of existing mortgages. Historically, the penetration rate for private mortgage insurance was generally three to five times higher for purchase transactions than for refinancings. However, with significant home price appreciation in the past year, penetration on purchase transactions has increased while penetration on refinancings has decreased, and the penetration rate for private mortgage insurance has shifted to six to ten times higher for purchase transactions than for refinancings.
According to industry estimates, total mortgage origination volume was slightly lower in 2021 as compared to 2020 due to lower refinance activity, partially offset by a strong purchase market. Although it is difficult to project future volumes, recent market projections for 2022 estimate total mortgage originations of approximately $3.0 trillion, which would represent a decline in the total annual mortgage origination market of approximately 31% as compared to 2021, with a private mortgage insurance market of $500 to $550 billion. This outlook anticipates a decrease in average diluted sharesrefinance originations in 2022 resulting from 229.3 million sharesexpected increases in 2016interest rates. While expectations for refinance volume vary, there is consensus around a large purchase market driven by increased home sales, which is a positive for mortgage insurers given the higher likelihood that purchase loans will utilize private mortgage insurance as compared to 220.4 million sharesrefinance loans. If refinance volume declines, we would expect the Persistency Rate for 2017.our portfolio to increase, benefiting the size of our IIF portfolio. See “Results of Operations—Consolidated—Net Income”“Item 1A. Risk Factors” for more informationinformation.
Our total mix of Single Premium Policies decreased to 7.2% of our NIW for 2021, compared to 12.3% for 2020. Borrower-paid Single Premium Policies were 96.3% of our total direct Single Premium NIW for 2021 compared to 90.2% for 2020. We expect our production level for Single Premium Policies to fluctuate over time based on the changes in net income.various factors, which include risk/return considerations and market conditions.
The decreasefollowing table provides selected information as of and for the periods indicated related to our mortgage insurance NIW. For direct Single Premium Policies, NIW includes policies written on an individual basis (as each loan is originated) and on an aggregated basis (in which each individual loan in average diluted sharesa group of loans is insured in a single transaction, typically after the loans have been originated).
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Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| NIW | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| ($ in millions) | | 2021 | | 2020 | | 2019 |
| NIW | | $ | 91,830 | | | $ | 105,024 | | | $ | 71,327 | |
| Primary risk written | | $ | 22,591 | | | $ | 24,540 | | | $ | 17,163 | |
| Average coverage percentage | | 24.6 | % | | 23.4 | % | | 24.1 | % |
| | | | | | | |
| NIW by loan purpose | | | | | | |
| Purchases | | 80.5 | % | | 64.8 | % | | 81.1 | % |
| Refinances | | 19.5 | % | | 35.2 | % | | 18.9 | % |
| | | | | | |
| Total borrower-paid | | 99.2 | % | | 98.2 | % | | 96.7 | % |
| | | | | | |
| NIW by premium type | | | | | | |
| Direct Monthly and Other Recurring Premiums | | 92.8 | % | | 87.7 | % | | 83.5 | % |
Direct single premiums (1) | | 7.2 | % | | 12.3 | % | | 16.5 | % |
| | | | | | | |
NIW by FICO score (2) | | | | | | |
| >=740 | | 58.6 | % | | 66.0 | % | | 63.3 | % |
| 680-739 | | 34.2 | % | | 30.8 | % | | 31.9 | % |
| 620-679 | | 7.2 | % | | 3.2 | % | | 4.8 | % |
| | | | | | |
| | | | | | | |
| NIW by LTV | | | | | | |
| 95.01% and above | | 12.0 | % | | 9.2 | % | | 16.7 | % |
| 90.01% to 95.00% | | 40.7 | % | | 37.1 | % | | 37.7 | % |
| 85.01% to 90.00% | | 28.3 | % | | 29.4 | % | | 28.0 | % |
| 85.00% and below | | 19.0 | % | | 24.3 | % | | 17.6 | % |
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(1)Borrower-paid Single Premium Policies were 6.9%, 11.1% and 14.2% of NIW for 2017the periods indicated, respectively. See “Item 1. Business—Regulation—Federal Regulation—GSE Requirements for Mortgage Insurance Eligibility” for additional information.
(2)For loans with multiple borrowers, the percentage of NIW by FICO score represents the lowest of the borrowers’ FICO scores.
Insurance and Risk in Force
Our IIF is the primary driver of the future premiums that we expect to earn over time. IIF at December 31, 2021 was flat as compared to 2016the same period last year, as the positive impact from our NIW in 2021 was offset primarily by cancellations of existing policies associated with refinancings, as reflected in our Persistency Rates and further discussed below.
Historically, there is primarily duea close correlation between interest rates and Persistency Rates. Lower interest rate environments generally increase refinancings, which increase the cancellation rate of our insurance and negatively affect our Persistency Rates. As shown in the table further below, our 12-month Persistency Rate at December 31, 2021 increased as compared to the full-year impact of the series of capital and liquidity actions completedsame period in 2016, which included: (i) the purchases of portions of our Convertible Senior Notes due 2017 and 2019, and (ii) the purchase of 9.4 million shares of Radian Group common stock. In addition, in January 2017, we settled our obligations with respect2020 but remains lower than Persistency Rates experienced prior to the remaining $68.0 million aggregate principal amount of our Convertible Senior Notes due 2019 which, as of the settlement date, resulted in a decrease of an additional 6.4 million diluted shares for purposes of determining diluted net income per share.
Adjusted diluted net operating income per share. pandemic. The increase in adjusted diluted net operating income per share for 2018,our Persistency Rate in 2021 was primarily attributable to the decline in refinance activity as compared to 2017, is primarily duethe prior year. As refinance activity began to moderate in the second half of 2021, those trends contributed to the increase in our Mortgage Insurance segment’s adjusted pretax operating income, which increased to $772.6 million in 2018, from $651.0 million in 2017. The increase in adjusted diluted net operating income
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
per share for 2018Persistency Rate at December 31, 2021 as compared to 2017 was alsothe same period in 2020, as well as growth in our IIF in the second half of 2021.
The net change in our IIF during 2021 reflects a 5.8% increase in Monthly Premium Policies in force, offset by a 21.1% decline in Single Premium Policies in force. Single Premium Policy cancellations were the primary driver of the decrease in unearned premiums on our consolidated balance sheet at December 31, 2021 as compared to December 31, 2020.
We continue to believe that the long-term housing market fundamentals and outlook remain positive, including low interest rates, demographics supporting growth in the population of first-time homebuyers and a relatively constrained supply of homes available for sale. However, our earnings in future periods are subject to elevated risks and uncertainties related to macroeconomic conditions and specific events that impact the housing finance and real estate markets, including housing prices, inflationary pressures, unemployment levels, interest rate changes and the availability of credit, as well as the potential impact of the unprecedented and continually evolving social and economic impacts associated with the COVID-19 pandemic.
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Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
For additional information about the COVID-19 pandemic, see “Overview—COVID-19 Impacts,” Note 1 of Notes to Consolidated Financial Statements and “Item 1A. Risk Factors—The credit performance of our mortgage insurance portfolio is impacted by macroeconomic conditions and specific events that affect the reductionability of borrowers to pay their mortgages.”
Historical loan performance data indicates that credit scores and underwriting quality are key drivers of credit performance. As of December 31, 2021, our portfolio of business written subsequent to 2008, including refinancings under HARP, represented approximately 97.0% of our total primary RIF. Loan originations after 2008 have consisted primarily of high credit quality loans with significantly better credit performance than loans originated during 2008 and prior periods. However, the impact to our future losses from, among other things, the COVID-19 pandemic remains uncertain, although trends in the company’s federal statutory tax rate from 35% to 21%, which was effective on January 1, 2018.2021 have been positive.
The increasefollowing table illustrates the trends of our cumulative incurred loss ratios by year of origination and development year.
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Cumulative incurred loss ratio by vintage (1) |
| | | | | | | | | | |
| Vintage | Dec
2012 | Dec
2013 | Dec
2014 | Dec
2015 | Dec
2016 | Dec
2017 | Dec
2018 | Dec
2019 | Dec 2020 (2) | Dec 2021 (2) |
| 2012 | 2.0% | 3.2% | 3.6% | 2.7% | 2.9% | 2.8% | 2.8% | 2.8% | 3.2% | 3.0% |
| 2013 | | 2.5% | 4.0% | 3.4% | 3.7% | 3.5% | 3.4% | 3.3% | 4.2% | 4.1% |
| 2014 | | | 2.7% | 4.1% | 4.9% | 5.0% | 5.1% | 5.2% | 6.9% | 6.8% |
| 2015 | | | | 2.1% | 4.8% | 5.2% | 5.0% | 4.7% | 7.4% | 6.8% |
| 2016 | | | | | 2.9% | 5.0% | 4.8% | 4.7% | 9.7% | 8.0% |
| 2017 | | | | | | 4.7% | 5.1% | 6.1% | 14.3% | 11.9% |
| 2018 | | | | | | | 3.0% | 6.4% | 22.8% | 19.0% |
| 2019 | | | | | | | | 2.8% | 35.6% | 23.5% |
| 2020 | | | | | | | | | 25.6% | 14.9% |
| 2021 | | | | | | | | | | 7.9% |
(1)Represents inception-to-date losses incurred as a percentage of net premiums earned.
(2)Losses incurred in adjusted diluted net income per share for 2017, compared to 2016, is primarily2020 and 2021 across all vintages were elevated due to the increaseimpact of the COVID-19 pandemic.
Throughout this report, unless otherwise noted, RIF is presented on a gross basis and includes the amount ceded under reinsurance. RIF and IIF for direct Single Premium Policies 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).
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Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following tables provide selected information as of and for the periods indicated related to mortgage insurance IIF and RIF.
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| IIF and RIF | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| ($ in millions) | | 2021 | | 2020 | | 2019 |
| Primary IIF | | $ | 245,972 | | | $ | 246,144 | | | $ | 240,558 | |
| Primary RIF | | $ | 60,913 | | | $ | 60,656 | | | $ | 60,921 | |
| Average coverage percentage | | 24.8 | % | | 24.6 | % | | 25.3 | % |
| | | | | | |
| | | | | | |
| Persistency Rate (12 months ended) | | 64.3 | % | | 61.2 | % | | 78.2 | % |
Persistency Rate (quarterly, annualized) (1) | | 71.7 | % | | 60.4 | % | | 75.0 | % |
| | | | | | | |
| Total borrower-paid RIF | | 90.6 | % | | 86.3 | % | | 78.9 | % |
| | | | | | |
| Primary RIF by Premium Type | | | | | | |
| Direct Monthly and Other Recurring Premiums | | 83.9 | % | | 79.1 | % | | 72.4 | % |
Direct single premiums (2) | | 16.1 | % | | 20.9 | % | | 27.6 | % |
| | | | | | | |
Primary RIF by FICO score (3) | | | | | | |
| >=740 | | 56.9 | % | | 57.5 | % | | 56.9 | % |
| 680-739 | | 35.0 | % | | 34.6 | % | | 34.2 | % |
| 620-679 | | 7.6 | % | | 7.3 | % | | 8.2 | % |
| <=619 | | 0.5 | % | | 0.6 | % | | 0.7 | % |
| | | | | | | |
| Primary RIF by LTV | | | | | | |
| 95.01% and above | | 15.1 | % | | 14.4 | % | | 14.2 | % |
| 90.01% to 95.00% | | 48.9 | % | | 49.3 | % | | 51.3 | % |
| 85.01% to 90.00% | | 27.7 | % | | 28.0 | % | | 27.9 | % |
| 85.00% and below | | 8.3 | % | | 8.3 | % | | 6.6 | % |
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(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 were 8.5%, 9.4% and 9.1% of primary RIF for the periods indicated, respectively.
(3)For loans with multiple borrowers, the percentage of primary RIF by FICO score represents the lowest of the borrowers’ FICO scores.
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Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following table shows our direct Primary Mortgage Insurance RIF by year of origination and selected information related to that risk as of December 31, 2021 and 2020.
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| Year of origination - RIF | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | December 31, | | | | |
| | | 2021 | | 2020 | | | | |
| ($ in millions) | | RIF | | Number of Defaults | | Delinquency Rate | | Percentage of Reserve for Losses | | RIF | | Number of Defaults | | Delinquency Rate | | Percentage of Reserve for Losses | | | | |
| 2008 and prior | | $ | 2,865 | | | 7,385 | | | 9.3 | % | | 24.5 | % | | $ | 3,733 | | | 12,046 | | | 12.1 | % | | 26.2 | % | | | | |
| 2009-2015 | | 3,904 | | | 3,719 | | | 4.4 | | | 13.7 | | | 6,840 | | | 7,948 | | | 5.7 | | | 14.3 | | | | | |
| 2016 | | 2,684 | | | 2,255 | | | 4.3 | | | 8.5 | | | 4,616 | | | 5,243 | | | 6.2 | | | 9.6 | | | | | |
| 2017 | | 2,998 | | | 3,399 | | | 5.7 | | | 12.2 | | | 5,495 | | | 7,652 | | | 7.5 | | | 13.1 | | | | | |
| 2018 | | 3,158 | | | 4,342 | | | 6.8 | | | 16.4 | | | 5,973 | | | 9,974 | | | 9.0 | | | 16.7 | | | | | |
| 2019 | | 5,892 | | | 4,078 | | | 3.7 | | | 15.0 | | | 10,832 | | | 9,741 | | | 5.3 | | | 15.5 | | | | | |
| 2020 | | 17,789 | | | 2,938 | | | 1.1 | | | 8.3 | | | 23,167 | | | 2,933 | | | 0.9 | | | 4.6 | | | | | |
| 2021 | | 21,623 | | | 945 | | | 0.3 | | | 1.4 | | | — | | | — | | | — | | | — | | | | | |
| Total | | $ | 60,913 | | | 29,061 | | | | | 100.0 | % | | $ | 60,656 | | | 55,537 | | | | | 100.0 | % | | | | |
Geographic Dispersion
The following table shows, as of December 31, 2021 and 2020, the percentage of our direct Primary Mortgage Insurance RIF and the associated percentage of our mortgage insurance reserve for losses (by location of property) for the top 10 states in the U.S. (as measured by our direct Primary Mortgage Insurance RIF as of December 31, 2021).
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| Top 10 U.S. states - RIF | | | | | | | | | | |
| | | | | | | | | | |
| | | December 31, |
| | 2021 | | 2020 | | |
| Top 10 States | | RIF | | Reserve for Losses | | RIF | | Reserve for Losses | | |
| California | | 9.3 | % | | 11.0 | % | | 9.9 | % | | 11.2 | % | | |
| Texas | | 8.5 | | | 9.7 | | | 8.7 | | | 10.0 | | | |
| Florida | | 6.9 | | | 10.8 | | | 7.5 | | | 11.4 | | | |
| Illinois | | 4.6 | | | 5.3 | | | 4.4 | | | 4.9 | | | |
| New York | | 4.4 | | | 7.7 | | | 3.8 | | | 7.0 | | | |
| Virginia | | 3.8 | | | 2.7 | | | 3.8 | | | 2.6 | | | |
| New Jersey | | 3.8 | | | 5.1 | | | 3.4 | | | 4.9 | | | |
| Pennsylvania | | 3.6 | | | 2.6 | | | 3.3 | | | 2.5 | | | |
| Washington | | 3.5 | | | 2.0 | | | 3.3 | | | 1.9 | | | |
| Maryland | | 3.3 | | | 3.9 | | | 3.4 | | | 3.4 | | | |
| Total | | 51.7 | % | | 60.8 | % | | 51.5 | % | | 59.8 | % | | |
The following table shows, as of December 31, 2021 and 2020, the percentage of our direct Primary Mortgage Insurance RIF and the associated percentage of our mortgage insurance reserve for losses (by location of property) for the top 10 Core Based Statistical Areas, referred to as “CBSAs,” in the U.S. (as measured by our direct Primary Mortgage Insurance RIF as of December 31, 2021).
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Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Top 10 Core Based Statistical Areas - RIF | | | | | | | | |
| | | | | | | | |
| | | December 31, |
| | | 2021 | | 2020 |
Top 10 CBSAs (1) | | RIF | | Reserve for Losses | | RIF | | Reserve for Losses |
| New York-Newark-Jersey City, NY-NJ-PA | | 5.4 | % | | 10.0 | % | | 4.7 | % | | 9.1 | % |
| Chicago-Naperville-Elgin, IL-IN-WI | | 4.2 | | | 5.2 | | | 4.1 | | | 4.7 | |
| Washington-Arlington-Alexandria, DC-VA-MD-WV | | 4.0 | | | 4.1 | | | 4.0 | | | 3.7 | |
| Dallas-Fort Worth-Arlington, TX | | 2.9 | | | 3.4 | | | 3.2 | | | 3.5 | |
| Los Angeles-Long Beach-Anaheim, CA | | 2.6 | | | 3.3 | | | 2.6 | | | 3.4 | |
| Philadelphia-Camden-Wilmington, PA-NJ-DE-MD | | 2.6 | | | 2.3 | | | 2.5 | | | 2.1 | |
| Houston-The Woodlands-Sugar Land, TX | | 2.5 | | | 3.3 | | | 2.3 | | | 3.3 | |
| Minneapolis-St. Paul-Bloomington, MN-WI | | 2.3 | | | 1.3 | | | 2.1 | | | 1.2 | |
| Miami-Fort Lauderdale-Pompano Beach, FL | | 2.2 | | | 4.4 | | | 2.2 | | | 4.8 | |
| Atlanta-Sandy Springs-Alpharetta, GA | | 2.1 | | | 3.3 | | | 2.5 | | | 3.6 | |
| Total | | 30.8 | % | | 40.6 | % | | 30.2 | % | | 39.4 | % |
(1)CBSAs are metropolitan areas and include a portion of adjoining states as noted above.
Risk Distribution
We use third-party reinsurance in our Mortgage Insurance segment’s adjusted pretax operating income, which increasedmortgage insurance business as part of our risk distribution strategy, including to $651.0 millionmanage our capital position and risk profile. When we enter into a reinsurance agreement, the reinsurer receives a premium and, in 2017, from $561.9 million in 2016. exchange, insures an agreed upon portion of incurred losses. While these arrangements have the impact of reducing our earned premiums, they also reduce our required capital and are expected to increase our return on required capital for the related policies.
The increase in adjusted diluted net operating income per share for 2017impact of these programs on our financial results will vary depending on the level of ceded RIF, as comparedwell as the levels of prepayments and incurred losses on the reinsured portfolios, among other factors. See “Key Factors Affecting Our Results—Mortgage—Risk Distribution” and Note 8 of Notes to 2016 was also impacted by the decrease in average diluted shares, as discussed above.
See “Results of Operations—Mortgage Insurance—Adjusted Pretax Operating Income”Consolidated Financial Statements for more information onabout our Mortgage Insurance segment’s results.
Book Value Per Share. The increase in book value per share, from $13.90 at December 31, 2017 to $16.34 at December 31, 2018, is primarily due to net income, partially offset by a decrease of $0.41 per share due to unrealized losses in our available for sale securities, recorded in accumulated other comprehensive income.reinsurance transactions.
The increase in book value per share, from $13.39 at December 31, 2016 to $13.90 at December 31, 2017, is primarily due to our net income and an increase in unrealized gains in other comprehensive income, partially offsettable below provides information about the amounts by which Radian Guaranty’s reinsurance programs reduced its Minimum Required Assets as of the equitydates indicated.
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| PMIERs benefit from risk distribution | | |
| | | | | | | | |
| | December 31, | | |
| ($ in thousands) | | 2021 | | 2020 | | 2019 | | |
PMIERs impact - reduction in Minimum Required Assets (1) | | | | | | | | |
| Excess-of-Loss Program | | $ | 995,171 | | | $ | 912,734 | | | $ | 738,386 | | | |
| Single Premium QSR Program | | 314,183 | | | 423,712 | | | 511,695 | | | |
| QSR Program | | 12,541 | | | 22,712 | | | 35,382 | | | |
| Total PMIERs impact | | $ | 1,321,895 | | | $ | 1,359,158 | | | $ | 1,285,463 | | | |
| Percentage of gross Minimum Required Assets | | 28.4 | % | | 28.8 | % | | 27.4 | % | | |
(1)Excludes the impact of the series of capital and liquidity actions completed in 2017, as discussed above.
The amount of goodwill and other acquired intangible assets included in book value per share decreased significantly, from $1.29 per share at December 31, 2016 to $0.30 per share at December 31, 2017 and $0.28 per share at December 30, 2018, primarily due to the impairment of goodwill and other acquired intangible assets, in each case related to the Services segment, as shown in the chart below.
Return on equity. The changes in return on equity across all periods presented are primarily due to the changes in net income and, to a lesser extent, increases in stockholders’ equity. See “Results of Operations—Consolidated—Net Income” for more information on the changes in net income.
Adjusted net operating return on equity. The increases in adjusted net operating return on equity across all periods presented are primarily due to the increases in our adjusted pretax operating income, partially offset by increases in stockholders’ equity. The increases in our adjusted pretax operating income primarily reflect the increases in our Mortgage Insurance segment’s adjusted pretax operating income. See “Results of Operations—Mortgage Insurance—Adjusted Pretax Operating Income” for more information on our Mortgage Insurance segment’s results. The increase in adjusted net operating return on equity for 2018 as compared to 2017 was also impacted by the reduction in the company’s federal statutory tax rate from 35% to 21%,intercompany reinsurance agreement with Radian Reinsurance, which was effective onterminated in January 1, 2018.2020.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations—Consolidated
Radian Group serves as the holding company for our operating subsidiaries and does not have any operations of its own. Our consolidated operating results for 20182021 primarily reflect the financial results and performance of our two business segments—Mortgage Insurance and Services. See Note 4 of Notes to Consolidated Financial Statements for information regarding the basis of our segment reporting, including the related allocations.homegenius. See “Results of Operations—Mortgage, Insurance,” and “Results of Operations—Services”homegenius” for the operating results of these business segments.
In addition to the results of our operating segments, pretax income (loss) is also affected by other factors. See “Key Factors Affecting Our Results—Other Factors Affecting Consolidated Results.” SeeResults” and “—Use of Non-GAAP Financial Measures” below for more information regarding items that are excluded from the operating results of our operating segments.
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Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following table highlights selected information related to our consolidated results of operations for the years ended December 31, 2018, 20172021, 2020 and 2016:2019.
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| Summary results of operations - Consolidated |
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| | | | | | | | $ Change |
| | Years Ended December 31, | | Favorable (Unfavorable) |
| ($ in millions, except per-share amounts) | | 2021 | | 2020 | | 2019 | | 2021 vs. 2020 | | 2020 vs. 2019 |
| Pretax income | | $ | 764.8 | | | $ | 479.4 | | | $ | 849.0 | | | $ | 285.4 | | | $ | (369.6) | |
| Net income | | 600.7 | | | 393.6 | | | 672.3 | | | 207.1 | | | (278.7) | |
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| Diluted net income per share | | 3.16 | | | 2.00 | | | 3.20 | | | 1.16 | | | (1.20) | |
| Book value per share at December 31 | | 24.28 | | | 22.36 | | | 20.13 | | | 1.92 | | | 2.23 | |
Net premiums earned (1) | | 1,037.2 | | | 1,115.3 | | | 1,145.3 | | | (78.1) | | | (30.0) | |
Services revenue (2) | | 125.8 | | | 105.4 | | | 154.6 | | | 20.4 | | | (49.2) | |
Net investment income (1) | | 147.9 | | | 154.0 | | | 171.8 | | | (6.1) | | | (17.8) | |
| Net gains on investments and other financial instruments | | 15.6 | | | 60.3 | | | 51.7 | | | (44.7) | | | 8.6 | |
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Provision for losses (1) | | 20.9 | | | 485.1 | | | 132.0 | | | 464.2 | | | (353.1) | |
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Cost of services (2) | | 103.7 | | | 86.1 | | | 108.3 | | | (17.6) | | | 22.2 | |
Other operating expenses (3) | | 323.7 | | | 280.7 | | | 306.1 | | | (43.0) | | | 25.4 | |
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Interest expense (1) | | 84.3 | | | 71.2 | | | 56.3 | | | (13.1) | | | (14.9) | |
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| Loss on extinguishment of debt | | — | | | — | | | 22.7 | | | — | | | 22.7 | |
| Impairment of goodwill | | — | | | — | | | 4.8 | | | — | | | 4.8 | |
| Amortization and impairment of other acquired intangible assets | | 3.5 | | | 5.1 | | | 22.3 | | | 1.6 | | | 17.2 | |
| Income tax provision | | 164.2 | | | 85.8 | | | 176.7 | | | (78.4) | | | 90.9 | |
Adjusted pretax operating income (4) | | 757.7 | | | 432.1 | | | 854.6 | | | 325.6 | | | (422.5) | |
Adjusted diluted net operating income per share (4) | | 3.15 | | | 1.74 | | | 3.21 | | | 1.41 | | | (1.47) | |
| Return on equity | | 14.1 | % | | 9.4 | % | | 17.8 | % | | 4.7 | % | | (8.4) | % |
Adjusted net operating return on equity (4) | | 14.0 | % | | 8.2 | % | | 17.9 | % | | 5.8 | % | | (9.7) | % |
|
| | | | | | | | | | | | | | | | | | | |
| | | | $ Change |
| | Year Ended December 31, | | Favorable (Unfavorable) |
| ($ in millions, except per-share amounts) | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 |
| Pretax income | $ | 684.2 |
| | $ | 346.7 |
| | $ | 483.7 |
| | $ | 337.5 |
| | $ | (137.0 | ) |
| Net income | 606.0 |
| | 121.1 |
| | 308.3 |
| | 484.9 |
| | (187.2 | ) |
| | | | | | | | | | |
| Net premiums earned—insurance | $ | 1,014.0 |
| | $ | 932.8 |
| | $ | 921.8 |
| | $ | 81.2 |
| | $ | 11.0 |
|
| Services revenue | 145.0 |
| | 155.1 |
| | 168.9 |
| | (10.1 | ) | | (13.8 | ) |
| Net investment income | 152.5 |
| | 127.2 |
| | 113.5 |
| | 25.3 |
| | 13.7 |
|
| Net gains (losses) on investments and other financial instruments | (42.5 | ) | | 3.6 |
| | 30.8 |
| | (46.1 | ) | | (27.2 | ) |
| Provision for losses | 104.6 |
| | 135.2 |
| | 202.8 |
| | 30.6 |
| | 67.6 |
|
| Cost of services | 98.1 |
| | 104.6 |
| | 114.2 |
| | 6.5 |
| | 9.6 |
|
| Other operating expenses | 280.8 |
| | 267.3 |
| | 244.9 |
| | (13.5 | ) | | (22.4 | ) |
| Restructuring and other exit costs | 6.1 |
| | 17.3 |
| | — |
| | 11.2 |
| | (17.3 | ) |
| Interest expense | 61.5 |
| | 62.8 |
| | 81.1 |
| | 1.3 |
| | 18.3 |
|
| Loss on induced conversion and debt extinguishment | — |
| | 51.5 |
| | 75.1 |
| | 51.5 |
| | 23.6 |
|
| Impairment of goodwill | — |
| | 184.4 |
| | — |
| | 184.4 |
| | (184.4 | ) |
| Amortization and impairment of other acquired intangible assets | 12.4 |
| | 27.7 |
| | 13.2 |
| | 15.3 |
| | (14.5 | ) |
| Income tax provision | 78.2 |
| | 225.6 |
| | 175.4 |
| | 147.4 |
| | (50.2 | ) |
| | | | | | | | | | |
Adjusted pretax operating income (1) | $ | 745.5 |
| | $ | 617.2 |
| | $ | 541.8 |
| | $ | 128.3 |
| | $ | 75.4 |
|
______________________(2)Relates primarily to our homegenius segment. See “Results of Operations—homegenius” and “Results of Operations—All Other” for more information.
| |
(1) | (3)See “Results of Operations—Mortgage,” “Results of Operations—homegenius” and “Results of Operations—All Other” for more information on both direct and allocated operating expenses. (4)See “—Use of Non-GAAP Financial Measures” below. This section of our Annual Report on Form 10-K generally discusses our consolidated results of operations for the years ended December 31, 2021 and 2020 and a year-over-year comparison between 2021 and 2020. Detailed discussions of our consolidated results of operations for the year ended December 31, 2019, including the year-over-year comparisons between 2020 and 2019, that are not included in this Annual Report on Form 10-K can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 26, 2021. |
Net Income. As discussed in more detail below, our net income increased for 2018,2021 compared to 2017,2020, primarily reflect: (i) the impairment of goodwill and other acquired intangible assets related to our Services segment recognized in the three months ended June 30, 2017; (ii) a lower effective income tax rate in 2018 (see “—Income Tax Provision” below); (iii) an increase in net premiums earned; (iv) a decrease in loss on induced conversion and debt extinguishment; (v)reflecting a decrease in provision for losses and (vi)related to our Mortgage segment. Partially offsetting this item was: (i) an increase in net investment income. Partially offsetting these items is an increaseour income tax provision; (ii) a decrease in net losses on investments and other financial instruments. See “Results of Operations—our Mortgage Insurance” and “Results of Operations—Services” for more information on our segment results.
For 2018, revenue increased compared to 2017, primarily driven by increases of 8% in mortgage insurance net premiums earned. Other operating expenses increased by 5% in 2018 compared to 2017. See “—Other Operating Expenses,” below.
As discussed in more detail below, our results for 2017 compared to 2016 primarily reflect: (i) the impairment of goodwill and other acquired intangible assets related to the Services segment; (ii) additional tax expense related to the remeasurement of our net deferred tax assets as a result of the TCJA;earned; (iii) a decrease in net gains on investments and other financial instruments;
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(iv) an increase in other operating expenses; and (v) restructuring and other exit costs associated withexpenses.
Diluted Net Income Per Share. The increase in diluted net income per share for 2021 compared to 2020 is primarily due to the change in net income, as discussed above.
Adjusted Diluted Net Operating Income Per Share. The increase in adjusted diluted net operating income per share for 2021 compared to 2020 is primarily due to the increase in our planMortgage segment’s adjusted pretax operating income, which increased to restructure$781.5 million in 2021, from $453.3 million in 2020. See “Results of Operations—Mortgage—Year Ended December 31, 2021 Compared to Year Ended December 31, 2020—Adjusted Pretax Operating Income” for more information on our Mortgage segment’s results.
| | |
Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Book Value Per Share. The increase in book value per share from $22.36 at December 31, 2020 to $24.28 at December 31, 2021, is primarily due to our net income for the Services business. These items were partially offset by, among other things:year ended December 31, 2021. Partially offsetting this item is: (i) a decrease of $0.75 per share due to unrealized losses in provisionour available for losses;sale securities, recorded in accumulated other comprehensive income and (ii) a decrease in loss on induced conversionof $0.54 per share from the impact of dividends and debt extinguishment; and (iii) lower interest expense.dividend equivalents.
Services RevenueReturn on Equity. The changes in return on equity across all periods presented are primarily due to the changes in net income and, Cost of Services. to a lesser extent, changes in stockholders’ equity. See “—Services revenue and cost of services all relate to our Services segment. See “Results of Operations—Services”Net Income” above for more information.information on the changes in net income.
Adjusted Net Operating Return on Equity. The changes in adjusted net operating return on equity across all periods presented are primarily due to the changes in our adjusted pretax operating income.
Net Gains (Losses) on Investments and Other Financial Instruments. The increase in net lossesNet gains on investments and other financial instruments for 2018,2021 decreased as compared to 2017, is primarily due to the increase in unrealized losses in our trading portfolio related to changes in fair value resulting from increased interest rates.
The decrease in net gains on investments and other financial instruments in 2017 as compared to 2016 is2020 primarily due to: (i) thea decrease in net realized gains attributable to sales and redemptions ofon our fixed-maturities available for sale and trading securities andsale; (ii) thea decrease in net unrealized gains on investments andour trading securities; (iii) a decrease in gains on other financial instruments in 2017, as compared to 2016, primarily related to the change in fair value of trading securities and other investments.
The components of the net gains (losses) on investments and other financial instruments for the periods indicated are as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
Net unrealized gains (losses) related to change in fair value of trading securities and other investments (1) | $ | (27.3 | ) | | $ | 13.2 |
| | $ | 27.2 |
|
| Net realized gains (losses) on investments | (12.1 | ) | | (8.6 | ) | | 4.3 |
|
| Other-than-temporary impairment losses | (1.7 | ) | | (1.4 | ) | | (0.5 | ) |
| Net gains (losses) on other financial instruments | (1.4 | ) | | 0.4 |
| | (0.2 | ) |
| Net gains (losses) on investments and other financial instruments | $ | (42.5 | ) | | $ | 3.6 |
| | $ | 30.8 |
|
| | | | | | |
______________________
| |
(1) | These amounts include unrealized gains (losses) on investment securities other than securities available for sale. For 2017 and 2016, the unrealized gains (losses) on investments exclude the net change in unrealized gains and losses on equity securities. Prior to the implementation of the update to the standard for the accounting of financial instruments effective January 1, 2018, the unrealized gains (losses) associated with equity securities were classified in accumulated other comprehensive income. |
Other Operating Expenses. Other operating expenses for 2018 increased as compared to 2017, primarily as a result of: (i)higher compensation expense in 2018, including variable and incentive-based compensation and (ii) an increase due to the acquisition of EnTitle Direct on March 27, 2018, and the resulting inclusion of its operating expenses. These effects were partially offset by an increase in ceding commissions in 2018, primarily due to the 2018 Single Premium QSR Agreement and the increased cession percentage on the 2016 Single Premium QSR Agreement. In addition to these items, 2018, as compared to 2017, also included: (i) lower expenses associated with retirement and consulting agreements entered into in February 2017 with our former Chief Executive Officer and (ii) lower accrued legal expenses related to defending and resolving certain outstanding legal matters.
Other operating expenses for 2017 increased as compared to 2016, primarily due to: (i) $6.6 million of expenses associated with retirement and consulting agreements entered into in February 2017 with our former Chief Executive Officer; (ii) increases in technology expenses associated with a significant investment in upgrading our systems; (iii) expenses accrued to defend and resolve certain outstanding legal matters;instruments; and (iv) a decrease in ceding commissions. The increase in other operating expenses for 2017 was partially offset by lower compensation expense in 2017, including variable incentive-based compensation.
Restructuring and other exit costs. For 2018, we recognized $3.6 million of other exit costs associated with impairment of internal-use software. Restructuring and other exit costs for 2018 also include the remaining charges associated with our plan to restructure the Services business. See Note 1 of Notes to Consolidated Financial Statements for more information.
For 2017, restructuring and other exit costs represent charges associated with our plan to restructure the Services business. Charges are primarily due to severance and related benefit costs and impairment of long-lived assets and loss from the sale of a business line. See Note 7 of Notes to Consolidated Financial Statements for more information on our review of the strategic
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
direction of the Services segment, which resulted in these charges, as well as charges for impairment of goodwill and other intangible assets.
Interest Expense. Interest expense for 2018 and 2017 decreased, as compared to 2016. This decrease was primarily due to reductions in interest expense from our: (i) August 2016 redemption of the remaining $195.5 million outstanding principal amount of our Senior Notes due 2017; (ii) January 2017 settlement of the remaining $68.0 million outstanding principal amount of our Convertible Senior Notes due 2019; and (iii) purchases during 2016 of $322.0 million aggregate principal amount of Convertible Senior Notes due 2019.
Loss on induced conversion and debt extinguishment. During 2018, we had no induced conversion or debt extinguishment activities.
During 2017, pursuant to cash tender offers, we purchased aggregate principal amounts of $141.4 million, $115.9 million and $152.3 million of our Senior Notes due 2019, 2020 and 2021, respectively, resulting in a loss on induced conversion and debt extinguishment of $45.8 million. During 2017, we also purchased an aggregate principal amount of $21.6 million of our outstanding Convertible Senior Notes due 2017 and settled our obligations on the remaining Convertible Senior Notes due 2019, resulting in losses on debt extinguishment of $1.2 million and $4.5 million, respectively.
During 2016, our purchases of Convertible Senior Notes due 2017 and 2019 and redemption of Senior Notes due 2017 resulted in a loss on induced conversion and debt extinguishment of $75.1 million consisting of: (i) a market premium of $41.8 million, representing the excess of the fair value of our embedded derivatives. These decreases were partially offset by: (i) an increase in net realized gains on equity securities and (ii) a decrease in impairments recorded in earnings. The primary driver of the total consideration delivereddecreased gains on our fixed-income securities in 2021 was the impact of the rising interest rate environment experienced during the year, as compared to the sellerspositive effects of the Convertible Senior Notes due 2017 and 2019 over the fair value of the common stock issuable pursuant to the original conversion terms of the purchased notes; (ii) a loss on debt extinguishment of $17.2 million, representing the difference between the fair value and the carrying value, net of unamortized issuance costs, of the liability component of the purchased Convertible Senior Notes due 2017 and 2019; (iii) a loss on debt extinguishment of $15.0 million on the redemption of the Senior Notes due 2017; and (iv) expenses totaling $1.1 million for transaction costs.
Amortization and Impairment of Other Acquired Intangible Assets and Impairment of Goodwill. In 2018, there was no impairment of goodwill or other acquired intangible assets.
The amortization of intangible assets primarily reflects the amortization of intangible assets acquired as part of the Clayton acquisition. During the second quarter of 2017, we recorded a goodwill impairment charge of $184.4 million, as well as an impairment charge for other acquired intangible assets of $15.8 million,declining interest rate environment in each case related to our Services segment. These charges were primarily due to changes in expectations regarding the future growth of certain Services business lines, resulting from changes in our business strategy, combined with market trends observed during the second quarter of 2017 that we expected would persist. As a result, as of December 31, 2017, the remaining balances of goodwill and other acquired intangible assets reported in our consolidated balance sheet were $10.9 million and $53.3 million, respectively.2020. See Note 76 of Notes to Consolidated Financial Statements for additional information.information about our net gains on investments.
Income Tax Provision. The TCJA significantly changed the U.S. tax system and, among other things, reduced the federal corporate tax rate from 35% to 21%, effective January 1, 2018. Our effective tax rate was 11.4% for 2018, compared to 65.1% for 2017 and 36.3% for 2016. The differenceVariations in our effective tax rates, combined with differences in comparison topretax income, were the drivers of the changes in our income tax provision between periods. Our 2021 effective tax rate was 21.5%, which approximated the federal statutory rates were primarily the resultrate of Discrete Items.21%, as compared to 17.9% for 2020. Our 2018 effective tax rate in 2020 was lower than the federal statutory tax rate of 21% primarily as a result of the tax benefit recorded relateddue to the settlement of our IRS Matter. The increasedecreases in our effectiveliability for uncertain tax rate for 2017 above the 35% federal statutory tax rate was primarily due to the impact of the TCJA, which resulted in a $102.6 million reduction of our net deferred tax assets, recorded as additional income tax provision. See “Overview—positions.Operating Environment—Tax Cuts and Jobs Act” and Note 10 of Notes to Consolidated Financial Statements for additional information on the TCJA.
Our 2016 effective tax rate was slightly higher than the federal statutory rate of 35%, primarily as a result of the non-deductible portion of the purchase premium relating to our Convertible Senior Notes due 2017 and 2019. The increase was partially offset by the income tax benefit resulting from our return-to-provision adjustment.
Use of Non-GAAP Financial Measures. In addition to the traditional GAAP financial measures, we have presented “adjusted pretax operating income (loss),” “adjusted diluted net operating income (loss) per share” and “adjusted“adjusted net operating return on equity,” which are non-GAAP financial measures for the consolidated company, and are among our key performance indicators used in evaluatingto 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 (loss),” “adjusted diluted net operating income (loss) per share” and “adjusted net operating return on equity”equity” are non-GAAP financial measures, for the reasons discussed above we
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
believe these measures aid in understanding the underlying performance of our operations.
Total adjusted pretax operating income (loss), adjusted diluted net operating income (loss) 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 (loss), diluted net income (loss) per share or return on equity. Our definitions of adjusted pretax operating income (loss), adjusted diluted net operating income (loss) per share and adjusted net operating return on equity, as discussed and reconciled below to the most comparable respective GAAP measures, may not be comparable to similarly-named measures reported by other companies.
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 (loss) is defined as GAAP consolidated pretax income from continuing operations,(loss) excluding the effects of: (i) net gains (losses) on investments and other financial instruments;instruments, except for certain investments attributable to our reportable segments; (ii) loss on induced conversionextinguishment of debt; (iii) amortization and debt extinguishment; (iii) acquisition-related expenses; (iv) amortization or impairment of goodwill and other acquired intangible assets; and (v) net(iv) impairment losses recognized in earningsof other long-lived assets and lossesother non-operating items, such as impairment of internal-use software, gains (losses) from the sale of lines of business. Adjusted diluted net operatingbusiness and acquisition-related income per share is calculated by dividing (i) adjusted pretax operating income attributable to common stockholders, net of taxes computed using the company’s statutory tax rate, by (ii) the sum of the weighted average number of common shares outstanding and all dilutive potential common shares outstanding. Interest expense on convertible debt, share dilution from convertible debt and the impact of share-based compensation arrangements have been reflected in the per share calculations consistent with the accounting standard regarding earnings per share, whenever the impact is dilutive. Adjusted net operating return on equity is calculated by dividing annualized adjusted pretax operating income, net of taxes computed using the company’s statutory tax rate, by average stockholders’ equity, based on the average of the beginning and ending balances for each period presented.expenses.
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.income (loss). These adjustments, along with the reasons for their treatment, are described below.in Note 4 of Notes to Consolidated Financial Statements.
The following table provides a reconciliation of consolidated pretax income to our non-GAAP financial measure for the consolidated Company of adjusted pretax operating income.
| | |
(1) | Part II. Item 7. Management’s Discussion and other financial instruments. The recognitionAnalysis of realized investment gains or losses can vary significantly across periods as the activity is highly discretionary based on the timingFinancial Condition and Results of individual securities sales due to such factors as market opportunities, our tax and capital profile and overall market cycles. Unrealized gains and losses arise primarily from changes in the market value of our investments that are classified as trading or equity securities. These valuation adjustments may not necessarily result in realized economic gains or losses.Operations |
Trends in the profitability of our fundamental | | | | | | | | | | | | | | | | | | | | |
| Reconciliation of consolidated pretax income to adjusted pretax operating income |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Consolidated pretax income | | $ | 764,832 | | | $ | 479,441 | | | $ | 848,993 | |
| Less income (expense) items: | | | | | | |
| Net gains on investments and other financial instruments | | 14,094 | | | 60,277 | | | 51,719 | |
| Loss on extinguishment of debt | | — | | | — | | | (22,738) | |
| | | | | | |
| Impairment of goodwill | | — | | | — | | | (4,828) | |
| Amortization and impairment of other acquired intangible assets | | (3,450) | | | (5,144) | | | (22,288) | |
| Impairment of other long-lived assets and other non-operating items | | (3,561) | | | (7,759) | | | (7,507) | |
Total adjusted pretax operating income (1) | | $ | 757,749 | | | $ | 432,067 | | | $ | 854,635 | |
(1)Total adjusted pretax operating activities can be more clearly identified without the fluctuations of these realized and unrealized gains or losses and changes in fair value of other financial instruments. We do not view them to be indicative of our fundamental operating activities. Therefore, these items are excluded from our calculationincome on a consolidated basis consists of adjusted pretax operating income (loss).
| |
(2) | Loss on induced conversion and debt extinguishment. Gains or losses on early extinguishment of debt and losses incurred to purchase our convertible debt prior to maturity are discretionary activities that are undertaken in order to take advantage of market opportunities to strengthen our financial and capital positions; therefore, we do not view these activities as part of our operating performance. Such transactions do not reflect expected future operations and do not provide meaningful insight regarding our current or past operating trends. Therefore, these items are excluded from our calculation of adjusted pretax operating income (loss).
|
| |
(3) | Acquisition-related expenses. Acquisition-related expenses represent the costs incurred to effect an acquisition of a business (i.e., a business combination). Because we pursue acquisitions on a strategic and selective basis and not in the ordinary course of our business, we do not view acquisition-related expenses as a consequence of a primary business activity. Therefore, we do not consider these expenses to be part of our operating performance and they are excluded from our calculation of adjusted pretax operating income (loss).
|
| |
(4) | Amortization or impairment of goodwill and other acquired intangible assets. Amortization of acquired intangible assets represents the periodic expense required to amortize the cost of acquired intangible assets over their estimated useful lives. Acquired intangible assets with an indefinite useful life are also periodically reviewed for potential impairment, and impairment adjustments are made whenever appropriate. These charges are not viewed as part of the operating performance of our primary activities and therefore are excluded from our calculation of adjusted pretax operating income (loss).
|
| |
(5) | Net impairment losses recognized in earnings and losses from the sale of lines of business. The recognition of net impairment losses on investments and the impairment of other long-lived assets does not result in a cash payment and can vary significantly in both amount and frequency, depending on market credit cycles and other factors. Losses from the sale of lines of business are highly discretionary as a result of strategic restructuring decisions, and generally do not occur in the normal course of our business. We do not view these losses to be indicative of our fundamental operating activities. Therefore, whenever these losses occur, we exclude t
|
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
hem from our calculation of adjusted pretax operating income (loss).
Total adjusted pretax operating income, adjusted diluted net operating income per share, and adjusted net operating return on equity are not measures of total 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.
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 income per share and adjusted net operating return on equity, respectively:
|
| | | | | | | | | | | |
| Reconciliation of Consolidated Pretax Income to Adjusted Pretax Operating Income |
| | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 | | 2016 |
| Consolidated pretax income | $ | 684,186 |
| | $ | 346,737 |
| | $ | 483,686 |
|
| Less income (expense) items: | | | | | |
| Net gains (losses) on investments and other financial instruments | (42,476 | ) | | 3,621 |
| | 30,751 |
|
| Loss on induced conversion and debt extinguishment | — |
| | (51,469 | ) | | (75,075 | ) |
Acquisition-related expenses (1) | (881 | ) | | (105 | ) | | (519 | ) |
| Impairment of goodwill | — |
| | (184,374 | ) | | — |
|
| Amortization and impairment of other acquired intangible assets | (12,429 | ) | | (27,671 | ) | | (13,221 | ) |
Impairment of other long-lived assets and loss from the sale of a business line (2) | (5,523 | ) | | (10,440 | ) | | — |
|
Total adjusted pretax operating income (3) | $ | 745,495 |
|
| $ | 617,175 |
|
| $ | 541,750 |
|
| | | | | | |
______________________
| |
(1) | Acquisition-related expenses represent expenses incurred to effect the acquisition of a business, net of adjustments to accruals previously recorded for acquisition expenses. |
| |
(2) | All amounts are included within restructuring and other exit costs on the consolidated statements of operations, except for $1.6 million in 2018 related to the impairment of other long-lived assets, included in other operating expenses. |
| |
(3) | Total adjusted pretax operating income on a consolidated basis consists of adjusted pretax operating income (loss) for our |
Mortgage Insurancesegment, homegenius segment and our Services segment,All Other activities, as further detailed in Note 4 of Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | |
| Reconciliation of diluted net income per share to adjusted diluted net operating income per share |
| | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Diluted net income per share | | $ | 3.16 | | | $ | 2.00 | | | $ | 3.20 | |
| Less per-share impact of reconciling income (expense) items: | | | | | | |
| Net gains on investments and other financial instruments | | 0.08 | | | 0.31 | | | 0.25 | |
| Loss on extinguishment of debt | | — | | | — | | | (0.11) | |
| Impairment of goodwill | | — | | | — | | | (0.02) | |
| Amortization and impairment of other acquired intangible assets | | (0.02) | | | (0.03) | | | (0.11) | |
| Impairment of other long-lived assets and other non-operating items | | (0.02) | | | (0.04) | | | (0.04) | |
Income tax (provision) benefit on other income (expense) items (1) | | (0.01) | | | (0.05) | | | 0.01 | |
| Difference between statutory and effective tax rate | | (0.02) | | | 0.07 | | | 0.01 | |
| Per-share impact of other income (expense) items | | 0.01 | | | 0.26 | | | (0.01) | |
Adjusted diluted net operating income per share (1) | | $ | 3.15 | | | $ | 1.74 | | | $ | 3.21 | |
(1)Calculated using the Company’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.
Adjusted net operating return on equity is calculated by dividing annualized adjusted pretax operating income (loss), net of taxes computed using the Company’s statutory tax rate, by average stockholders’ equity, based on the average of the beginning and ending balances for each period presented. The following table provides a reconciliation of return on equity to our non-GAAP financial measure for the consolidated Company of adjusted net operating return on equity.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
| | | | | | | | | | | |
Reconciliation of Diluted Net Income Per Share to Adjusted Diluted Net Operating Income Per Share |
| | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 | | 2016 |
| Diluted net income per share | $ | 2.77 |
| | $ | 0.55 |
| | $ | 1.37 |
|
| | | | | | |
| Less per-share impact of debt items: | | | | | |
| Loss on induced conversion and debt extinguishment | — |
| | (0.23 | ) | | (0.33 | ) |
Income tax provision (benefit) (1) | — |
| | (0.08 | ) | | (0.07 | ) |
| Per-share impact of debt items | — |
| | (0.15 | ) | | (0.26 | ) |
| | | | | | |
| Less per-share impact of reconciling income (expense) items: | | | | | |
| Net gains (losses) on investments and other financial instruments | (0.19 | ) | | 0.02 |
| | 0.14 |
|
| Impairment of goodwill | — |
| | (0.84 | ) | | — |
|
| Amortization and impairment of other acquired intangible assets | (0.06 | ) | | (0.13 | ) | | (0.06 | ) |
| Impairment of other long-lived assets and loss from the sale of a business line | (0.03 | ) | | (0.05 | ) | | — |
|
Income tax provision (benefit) on other income (expense) items (1) | (0.06 | ) | | (0.35 | ) | | 0.03 |
|
Difference between statutory and effective tax rate (2) | 0.30 |
| | (0.47 | ) | | 0.02 |
|
| Per-share impact of other income (expense) items | 0.08 |
| | (1.12 | ) | | 0.07 |
|
Adjusted diluted net operating income per share (1) | $ | 2.69 |
| | $ | 1.82 |
| | $ | 1.56 |
|
| | | | | | |
______________________
| | |
(1) | Calculated using the company’s federal statutory tax ratesPart II. Item 7. Management’s Discussion and 35% for 2017Analysis of Financial Condition and 2016. Any permanent tax adjustments and state income taxes on these items have been deemed immaterial and are not included.Results of Operations |
| |
(2) | For 2018, includes $0.34 of tax benefit related to the settlement of the IRS Matter, which includes both the impact of the settlement with the IRS as well as the reversal of certain related previously accrued state and local tax liabilities. All of the 2017 amount represents additional tax expense related to the remeasurement of our net deferred tax assets as a result of the TCJA enacted in December 2017. |
|
| | | | | | | | |
Reconciliation of Return on Equity to Adjusted Net Operating Return on Equity (1) |
| | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 | | 2016 |
Return on Equity (1) | 18.7 | % | | 4.1 | % | | 11.5 | % |
Less impact of reconciling income (expense) items: (2) | | | | | |
| Net gains (losses) on investments and other financial instruments | (1.3 | ) | | 0.1 |
| | 1.1 |
|
| Loss on induced conversion and debt extinguishment | — |
| | (1.8 | ) | | (2.8 | ) |
| Impairment of goodwill | — |
| | (6.3 | ) | | — |
|
| Amortization and impairment of other acquired intangible assets | (0.4 | ) | | (0.9 | ) | | (0.5 | ) |
| Impairment of other long-lived assets and loss from the sale of a business line | (0.2 | ) | | (0.4 | ) | | — |
|
Income tax provision (benefit) on reconciling income (expense) items (3) | (0.4 | ) | | (3.2 | ) | | (0.8 | ) |
Difference between statutory and effective tax rate (3) (4) | 2.0 |
| | (3.5 | ) | | (0.2 | ) |
| Impact of reconciling income (expense) items | 0.5 |
| | (9.6 | ) | | (1.6 | ) |
| Adjusted net operating return on equity | 18.2 | % | | 13.7 | % | | 13.1 | % |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Reconciliation of return on equity to adjusted net operating return on equity |
| | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Return on equity (1) | | 14.1 | % | | 9.4 | % | | 17.8 | % |
Less impact of reconciling income (expense) items: (2) | | | | | | |
| Net gains on investments and other financial instruments | | 0.4 | | | 1.4 | | | 1.4 | |
| Loss on extinguishment of debt | | — | | | — | | | (0.6) | |
| Impairment of goodwill | | — | | | — | | | (0.1) | |
| Amortization and impairment of other acquired intangible assets | | (0.1) | | | (0.1) | | | (0.6) | |
| Impairment of other long-lived assets and other non-operating items | | (0.1) | | | (0.2) | | | (0.2) | |
Income tax (provision) benefit on reconciling income (expense) items (3) | | — | | | (0.2) | | | — | |
Difference between statutory and effective tax rate (3) | | (0.1) | | | 0.3 | | | — | |
| Impact of reconciling income (expense) items | | 0.1 | | | 1.2 | | | (0.1) | |
| Adjusted net operating return on equity | | 14.0 | % | | 8.2 | % | | 17.9 | % |
______________________
| |
(1) | Calculated by dividing net income by average stockholders’ equity. |
| |
(2) | As a percentage of average stockholders’ equity. |
92
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
| |
(3) | Calculated using the company’s federal statutory tax rates of 21% for 2018 and 35% for 2017 and 2016. Any permanent tax adjustments and state income taxes on these items have been deemed immaterial and are not included. |
| |
(4) | The difference in 2018 includes the tax benefit related to the settlement of the IRS Matter, which includes both the impact of the settlement with the IRS as well as the reversal of certain related previously accrued state and local tax liabilities. All of the 2017 amount represents additional tax expense related to the remeasurement of our net deferred tax assets as a result of the TCJA enacted in December 2017. |
Results of Operations—Mortgage Insurance
During 2018, we continued our strategy of growing our mortgage insurance portfolio by writing insurance on mortgages with high credit quality. At December 31, 2018, we had $221.4 billion in IIF compared to $200.7 billion in IIF at December 31, 2017. We also expanded our risk distribution strategy and continued to focus on effectively managing our capital and liquidity positions. See “Liquidity and Capital Resources—Radian Group—Short-Term Liquidity Needs—Capital Support for Subsidiaries” and Note 1 of Notes to Consolidated Financial Statements for additional information.
The following table summarizes our Mortgage Insurance segment’s results of operations for the years ended December 31, 2018, 20172021, 2020 and 2016:2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Summary results of operations - Mortgage |
| | | | | | | | | | |
| | | | | | | | $ Change |
| | Years Ended December 31, | | Favorable (Unfavorable) |
| (In millions) | | 2021 | | 2020 | | 2019 | | 2021 vs. 2020 | | 2020 vs. 2019 |
Adjusted pretax operating income (1) | | $ | 781.5 | | | $ | 453.3 | | | $ | 852.9 | | | $ | 328.2 | | | $ | (399.6) | |
| Net premiums written | | 944.5 | | | 1,011.0 | | | 1,075.5 | | | (66.5) | | | (64.5) | |
| Decrease in unearned premiums | | 53.7 | | | 81.8 | | | 58.8 | | | (28.1) | | | 23.0 | |
| Net premiums earned | | 998.3 | | | 1,092.8 | | | 1,134.2 | | | (94.5) | | | (41.4) | |
| Services revenue | | 17.7 | | | 14.8 | | | 8.1 | | | 2.9 | | | 6.7 | |
| Net investment income | | 132.9 | | | 137.2 | | | 151.5 | | | (4.3) | | | (14.3) | |
| | | | | | | | | | |
| Provision for losses | | 19.4 | | | 483.3 | | | 131.5 | | | 463.9 | | | (351.8) | |
| Policy acquisition costs | | 29.0 | | | 31.0 | | | 25.3 | | | 2.0 | | | (5.7) | |
| Cost of services | | 13.9 | | | 10.0 | | | 5.0 | | | (3.9) | | | (5.0) | |
| Other operating expenses | | 223.3 | | | 198.7 | | | 225.7 | | | (24.6) | | | 27.0 | |
| Interest expense | | 84.3 | | | 71.2 | | | 56.3 | | | (13.1) | | | (14.9) | |
|
| | | | | | | | | | | | | | | | | | | |
| | | | $ Change |
| | Year Ended December 31, | | Favorable (Unfavorable) |
| (In millions) | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 |
Adjusted pretax operating income (1) | $ | 772.6 |
| | $ | 651.0 |
| | $ | 561.9 |
| | $ | 121.6 |
| | $ | 89.1 |
|
Net premiums written—insurance (2) | 991.0 |
| | 818.4 |
| | 733.8 |
| | 172.6 |
| | 84.6 |
|
| (Increase) decrease in unearned premiums | 15.7 |
| | 114.4 |
| | 187.9 |
| | (98.7 | ) | | (73.5 | ) |
| Net premiums earned—insurance | 1,006.7 |
| | 932.8 |
| | 921.8 |
| | 73.9 |
| | 11.0 |
|
| Net investment income | 152.1 |
| | 127.2 |
| | 113.5 |
| | 24.9 |
| | 13.7 |
|
| Provision for losses | 104.5 |
| | 136.2 |
| | 204.2 |
| | 31.7 |
| | 68.0 |
|
Other operating expenses (3) | 215.5 |
| | 206.4 |
| | 185.8 |
| | (9.1 | ) | | (20.6 | ) |
| Interest expense | 43.7 |
| | 45.0 |
| | 63.4 |
| | 1.3 |
| | 18.4 |
|
______________________Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
| |
(1) | Our senior management uses adjusted pretax operating income as our primary measure to evaluate the fundamental financial performance of our business segments. See Note 4 of Notes to Consolidated Financial Statements for more information. |
| |
(2) | Net of ceded premiums written under the QSR Program, the Single Premium QSR Program and the Excess-of-Loss Program. See Note 8 of Notes to Consolidated Financial Statements for more information. |
| |
(3) | Includes allocation of corporate operating expenses of $80.1 million, $55.4 million and $45.2 million for 2018, 2017 and 2016, respectively.
|
Adjusted Pretax Operating Income. OurThe increase in our Mortgage Insurance segment’s adjusted pretax operating income for 2018 was $772.6 million,2021, compared to $651.0 million2020, primarily reflects a decrease in provision for 2017 and $561.9 million for 2016. The increase in our adjusted pretax operating income for 2018, compared to 2017, primarily reflects:losses. Partially offsetting this item is: (i) an increasea decrease in net premiums earned; (ii) a decreasean increase in provision for losses;other operating expenses and (iii) an increase in net investment income. Our results for 2017 compared to 2016 primarily reflect a decrease in the provision for losses and to a lesser extent, a decrease in interest expense. These increases in adjusted pretax operating income were partially offset by higher other operating expenses.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
NIW, IIF, RIF
A key component of our current business strategy is to write profitable mortgage insurance on high credit quality mortgages in the U.S. Consistent with this objective, we wrote $56.5 billion of primary new mortgage insurance in 2018, compared to $53.9 billion of NIW in 2017. The NIW written on a Flow Basis in 2018 was Radian’s highest volume in its history. The combination of our NIW and a higher Persistency Rate resulted in an increase in IIF, from $200.7 billion at December 31, 2017 to $221.4 billion at December 31, 2018, as shown in the chart below.
______________________
| |
(1) | Policy years represent the original policy years, and have not been adjusted to reflect subsequent HARP refinancing activity. |
| |
(2) | If adjusted to reflect subsequent HARP refinancing activity, this percentage would decrease to 6.0%, 8.4%, and 12.1% as of December 31, 2018, December 31, 2017 and December 31, 2016, respectively. |
Our IIF is one of the primary drivers of future premiums that we expect to earn over time. Although not reflected in the current period financial statements, nor in our reported book value, we expect our IIF to generate substantial earnings in future periods, due to the high credit quality of our current mortgage insurance portfolio and expected persistency over multiple years. Additionally, as a result of the TCJA, the economic value of our existing IIF increased significantly as of December 31, 2017, due to the increase in expected future net cash flows associated with the reduction in expected tax payments. See “Key Factors Affecting Our Results—Mortgage Insurance—IIF; Persistency Rate; Mix of Business” for more information.
We implemented pricing changes during the first half of 2018 that we estimate will result in an overall relative premium rate decrease on NIW. The changes are expected to gradually affect our results over time, as existing IIF is replaced with NIW at current pricing. These changes, however, do not affect the value or future returns on our IIF written prior to 2018; therefore, the impact of these pricing actions on near-term revenue is expected to be limited. As an example, assuming our current NIW levels, mix and persistency levels remain constant, we estimate that it would take approximately three years for approximately one-half of our IIF to reflect our current pricing structure. However, the ultimate results of the changes will be influenced by many other factors, including the amount of NIW, changes in the product and credit profile mix of both NIW and policy cancellations, the impact of interest rates and product mix on persistency, and the amount of reinsurance we use. See “Overview—Competition and Pricing—Radian’s Pricing” for additional information.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The 4.9% increase in NIW for 2018 compared to 2017 is primarily attributable to increases in mortgage insurance penetration and overall purchase mortgage originations, partially offset by decreases in refinance originations and our share of the mortgage insurance market.
We believe total mortgage origination volume was lower for 2018, as compared to 2017, primarily due to a decrease in refinance mortgage originations resulting from the slightly higher interest rate environment, partially offset by a modest increase in purchase originations. Mortgage insurance penetration in the purchase origination market has gradually increased over the past few years, and because the penetration rate for mortgage insurance is generally three to five times higher on purchase originations than on refinancing transactions, we believe that even though the total mortgage origination volume was lower, the private mortgage insurance market was larger in 2018, compared to 2017.
Although it is difficult to project future volumes, industry sources expect the total mortgage origination market in 2019 to be comparable to the market in 2018, driven by a decline in refinance originations of approximately 11% as a result of higher anticipated interest rates, partially offset by an expected increase in purchase originations of approximately 4%. Given our expected penetration rates, we expect the private mortgage insurance market in 2019 to be comparable to 2018. Based on industry forecasts and our projections, we expect our NIW in 2019 to be in the range of $50 billion.
Consistent with the market trends described above, during 2018 the level of our purchase origination volume increased and our refinance origination volume decreased (each as a percentage of our total NIW), as compared to 2017. As a percentage of our total NIW, the volume of our NIW on mortgage loans with LTVs greater than 95% also increased during 2018, compared to 2017. During 2018, in comparison to 2017, we also continued to experience an increased percentage of our total NIW on mortgage loans to borrowers with higher debt-to-income ratios, including debt-to-income ratios greater than 45%. See “Overview—Operating Environment” for additional information.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Notwithstanding this recent shift toward loans with higher LTVs and borrowers with higher debt-to-income ratios, the mortgage loans underlying our RIF originated after 2008 possess significantly improved credit characteristics compared to our portfolio originated prior to and including 2008. For example, FICO scores for the borrowers of our current portfolio of insured mortgages are higher, and notwithstanding the recent increase in loans with higher LTVs, there are fewer loans with LTVs greater than 95%. In addition, we have limited loans subject to layered risk that combines multiple higher-risk attributes within the same loan, specifically low FICO scores combined with other higher risk characteristics. For example, a de minimis amount of our primary RIF originated after 2008 relates to mortgages with (i) FICO scores less than 680 combined with cash-out refinancings or original LTVs greater than 95% or (ii) FICO scores less than or equal to 720 on an investment property or second home. The table below illustrates the composition of our direct primary mortgage insurance RIF at December 31, 2018 compared to selected prior years, based on FICO score and LTV.
Historical loan data indicates that credit scores and underwriting quality are key drivers of credit performance. As illustrated by the preceding chart, the FICO scores of our primary RIF has significantly improved in business written after 2008. As of December 31, 2018, our portfolio of business written subsequent to 2008, including HARP refinancings, represented approximately 94% of our total primary RIF. The high volume of insurance that we have written on high credit quality loans has led to an improved portfolio mix and, together with favorable credit trends, has had a significant positive impact on our results of operations. For additional information, see the tables that follow, including the table, “Total Primary RIF by Policy Year.”
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our expected future losses on our portfolios 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 on mortgage insurance. |
| |
(2) | Incurred losses in 2017 were slightly elevated due to the impact of Hurricanes Harvey and Irma. See “Overview— Operating Environment—Hurricanes” for additional information.
|
| |
(3) | Radian’s stochastic modeling, used for pricing, indicates an approximate 20% through-the-cycle loss ratio on newly originated mortgage insurance business. |
The following tables provide selected information as of and for the periods indicated related to mortgage insurance NIW, RIF and IIF. Policy years represent the original policy years, and have not been adjusted to reflect subsequent HARP refinancing activity. Throughout this report, unless otherwise noted, RIF is presented on a gross basis before consideration of 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).
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| ($ in millions) | 2018 | | 2017 | | 2016 |
| Total Primary NIW by FICO Score | | | | | | | | | | | |
| >=740 | $ | 34,209 |
| | 60.5 | % | | $ | 32,928 |
| | 61.1 | % | | $ | 31,426 |
| | 62.2 | % |
| 680-739 | 18,250 |
| | 32.3 |
| | 17,641 |
| | 32.7 |
| | 16,001 |
| | 31.7 |
|
| 620-679 | 4,088 |
| | 7.2 |
| | 3,336 |
| | 6.2 |
| | 3,103 |
| | 6.1 |
|
| Total Primary NIW | $ | 56,547 |
| | 100.0 | % | | $ | 53,905 |
| | 100.0 | % | | $ | 50,530 |
| | 100.0 | % |
| | | | | | | | | | | | |
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| ($ in millions) | 2018 | | 2017 | | 2016 |
| Percentage of Primary NIW | | | | | |
| Borrower-paid | 90 | % | | 78 | % | | 75 | % |
| Premium Type | | | | | |
| Direct Monthly and Other Premiums | 79 | % | | 77 | % | | 73 | % |
| Direct Single Premiums | | | | | |
| Lender-paid | 9 | % | | 21 | % | | 25 | % |
Borrower-paid (1) | 12 | % | | 2 | % | | 2 | % |
| Total Primary NIW | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | |
Net Single Premiums (2) | 8 | % | | 15 | % | | 18 | % |
| | | | | | |
| NIW for Purchases | 94 | % | | 89 | % | | 78 | % |
| | | | | | |
| NIW for Refinances | 6 | % | | 11 | % | | 22 | % |
| | | | | | |
| LTV | | | | | |
| 95.01% and above | 16.7 | % | | 13.2 | % | | 5.7 | % |
| 90.01% to 95.00% | 44.4 | % | | 46.0 | % | | 47.5 | % |
| 85.01% to 90.00% | 27.6 | % | | 28.5 | % | | 32.0 | % |
| 85.00% and below | 11.3 | % | | 12.3 | % | | 14.8 | % |
| | | | | | |
| Primary risk written | $ | 14,264 |
| | $ | 13,569 |
| | $ | 12,538 |
|
______________________
| |
(1) | Borrower-paid Single Premium Policies have lower Minimum Required Assets under PMIERs as compared to lender-paid Single Premium Policies. See “Overview—Competition and Pricing—Radian’s Pricing” for additional information.
|
| |
(2) | Represents the percentage of direct Single Premium Policies written, after giving effect to the Single Premium NIW ceded under the Single Premium QSR Program (for NIW after the effective dates of the respective agreements). See Note 8 of Notes to Consolidated Financial Statements for additional information about these arrangements. |
|
| | | | | | | | | | | | |
| | December 31, | |
| ($ in millions) | 2018 | | 2017 | | 2016 | |
| Primary IIF | | | | | | |
| Direct Monthly and Other Premiums | 70 | % | | 69 | % | | 68 | % | |
| Direct Single Premiums | 30 | % | | 31 | % | | 32 | % | |
| | | | | | | |
Net Single Premiums (1) | 17 | % | | 20 | % | | 25 | % | |
| | | | | | | |
| Total Primary IIF | $ | 221,443 |
| | $ | 200,724 |
| | $ | 183,450 |
| |
| | | | | | | |
Persistency Rate (12 months ended) | 83.1 | % | | 81.1 | % | (2) | 76.7 | % | (3) |
Persistency Rate (quarterly, annualized) (4) | 85.5 | % | | 79.4 | % | (2) | 76.8 | % | |
______________________
| |
(1) | Represents the percentage of Single Premium IIF, after giving effect to all quota-share reinsurance ceded. See Note 8 of Notes to Consolidated Financial Statements for additional information about reinsurance transactions. |
| |
(2) | The Persistency Rate in the fourth quarter of 2017 was reduced by an increase in cancellations of Single Premium Policies due to increased cancellations identified through our ongoing servicer monitoring process for Single Premium Policies. |
| |
(3) | The Persistency Rate for the 12 months ended December 31, 2016 was less than in subsequent years, primarily due to increased refinancing activity and the cancellations of Single Premium Policies in 2016. See“—Net Premiums Written and Earned” below.
|
| |
(4) | The Persistency Rate on a quarterly, annualized basis is calculated based on loan level detail for the fourth quarter of each year shown. It may be affected by seasonality or other factors, and may not be indicative of full-year trends. |
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| ($ in millions) | 2018 | | 2017 | | 2016 |
| Primary RIF by Premium Type | | | | | | | | | | | |
| Direct Monthly and Other Premiums | $ | 39,894 |
| | 70.3 | % | | $ | 35,452 |
| | 69.1 | % | | $ | 32,136 |
| | 68.8 | % |
| Direct Single Premiums | 16,834 |
| | 29.7 |
| | 15,836 |
| | 30.9 |
| | 14,605 |
| | 31.2 |
|
| Total primary RIF | $ | 56,728 |
| | 100.0 | % | | $ | 51,288 |
| | 100.0 | % | | $ | 46,741 |
| | 100.0 | % |
| | | | | | | | | | | | |
Net Single Premiums (1) | $ | 8,182 |
| | 17.2 | % | | $ | 8,320 |
| | 19.3 | % | | $ | 10,161 |
| | 24.5 | % |
| | | | | | | | | | | | |
| Primary RIF by Internal Risk Grade | | | | | | | | | | | |
| Prime | $ | 55,374 |
| | 97.6 | % | | $ | 49,674 |
| | 96.9 | % | | $ | 44,708 |
| | 95.6 | % |
| Alt-A and A minus and below | 1,354 |
| | 2.4 |
| | 1,614 |
| | 3.1 |
| | 2,033 |
| | 4.4 |
|
| Total primary RIF | $ | 56,728 |
| | 100.0 | % | | $ | 51,288 |
| | 100.0 | % | | $ | 46,741 |
| | 100.0 | % |
| | | | | | | | | | | | |
______________________
| |
(1) | Represents the dollar amount and percentage, respectively, of RIF on Single Premium Policies, after giving effect to all quota-share reinsurance ceded. |
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| ($ in millions) | 2018 | | 2017 | | 2016 |
| Total primary RIF by FICO score | | | | | | | | | | | |
| >=740 | $ | 33,703 |
| | 59.4 | % | | $ | 30,225 |
| | 58.9 | % | | $ | 26,939 |
| | 57.6 | % |
| 680-739 | 17,941 |
| | 31.6 |
| | 16,097 |
| | 31.4 |
| | 14,497 |
| | 31.0 |
|
| 620-679 | 4,626 |
| | 8.2 |
| | 4,425 |
| | 8.6 |
| | 4,620 |
| | 9.9 |
|
| <=619 | 458 |
| | 0.8 |
| | 541 |
| | 1.1 |
| | 685 |
| | 1.5 |
|
| Total primary RIF | $ | 56,728 |
| | 100.0 | % | | $ | 51,288 |
| | 100.0 | % | | $ | 46,741 |
| | 100.0 | % |
| | | | | | | | | | | | |
| Primary RIF on defaulted loans | $ | 1,032 |
| | | | $ | 1,389 |
| | | | $ | 1,363 |
| | |
| | | | | | | | | | | | |
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| ($ in millions) | 2018 | | 2017 | | 2016 |
| Total primary RIF by LTV | | | | | | | | | | | |
| 95.01% and above | $ | 6,591 |
| | 11.6 | % | | $ | 4,704 |
| | 9.2 | % | | $ | 3,447 |
| | 7.4 | % |
| 90.01% to 95.00% | 30,132 |
| | 53.1 |
| | 27,276 |
| | 53.2 |
| | 24,439 |
| | 52.3 |
|
| 85.01% to 90.00% | 16,464 |
| | 29.0 |
| | 15,719 |
| | 30.6 |
| | 15,208 |
| | 32.5 |
|
| 85.00% and below | 3,541 |
| | 6.3 |
| | 3,589 |
| | 7.0 |
| | 3,647 |
| | 7.8 |
|
| Total primary RIF | $ | 56,728 |
| | 100.0 | % | | $ | 51,288 |
| | 100.0 | % | | $ | 46,741 |
| | 100.0 | % |
| | | | | | | | | | | | |
| Total primary RIF by policy year | | | | | | | | | | | |
| 2008 and prior | $ | 5,749 |
| | 10.1 | % | | $ | 7,159 |
| | 14.0 | % | | $ | 9,143 |
| | 19.5 | % |
| 2009 | 199 |
| | 0.4 |
| | 298 |
| | 0.6 |
| | 468 |
| | 1.0 |
|
| 2010 | 170 |
| | 0.3 |
| | 264 |
| | 0.5 |
| | 417 |
| | 0.9 |
|
| 2011 | 465 |
| | 0.8 |
| | 682 |
| | 1.3 |
| | 917 |
| | 2.0 |
|
| 2012 | 2,094 |
| | 3.7 |
| | 2,830 |
| | 5.5 |
| | 3,734 |
| | 8.0 |
|
| 2013 | 3,504 |
| | 6.2 |
| | 4,557 |
| | 8.9 |
| | 5,902 |
| | 12.6 |
|
| 2014 | 3,464 |
| | 6.1 |
| | 4,356 |
| | 8.5 |
| | 5,607 |
| | 12.0 |
|
| 2015 | 5,806 |
| | 10.2 |
| | 7,096 |
| | 13.8 |
| | 8,469 |
| | 18.1 |
|
| 2016 | 9,544 |
| | 16.8 |
| | 10,992 |
| | 21.4 |
| | 12,084 |
| | 25.9 |
|
| 2017 | 11,958 |
| | 21.1 |
| | 13,054 |
| | 25.5 |
| | — |
| | — |
|
| 2018 | 13,775 |
| | 24.3 |
| | — |
| | — |
| | — |
| | — |
|
Total primary RIF (1) | $ | 56,728 |
| | 100.0 | % | | $ | 51,288 |
| | 100.0 | % | | $ | 46,741 |
| | 100.0 | % |
| | | | | | | | | | | | |
______________________
| |
(1) | At December 31, 2018, 2017 and 2016, consists of 97.7%, 97.3% and 97.0%, respectively, of RIF related to fixed-rate mortgages. |
Net Premiums Written and Earned. Net premiums written and earned for 2018 increased2021 decreased compared to 2017,2020. This decrease primarily due to an increase inreflects lower direct premium rates on our IIF relatedportfolio compared to an increase in our Monthly2020, as well as a lower proportion of Single Premium Policies. This increase wasPolicies, partially offset by the increased cession percentage on the Single Premium QSR Program. Netimprovement in accrued profit commissions in 2021. For 2020, higher recorded ceded
| | |
Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
losses resulted in elevated ceded premiums due to a reduction in accrued profit commissions, which lowered net premiums written in 2017 increasedthat period.
Net premiums earned decreased for 2021 compared to 2016,2020, primarily due to: (i) a decrease in premiums earned on our in-force Single Premium Policies and Monthly Premium Policies and (ii) a decrease in the impact, net of reinsurance, from Single Premium Policy cancellations, due to decreased refinance activity as compared to 2020. These decreases were partially offset by a decrease in ceded premiums, written, combined with the increasewhich were elevated in our IIF.
Net premiums earned increased in 2017, compared2020 due to 2016, primarilyreduced profit commissions as a result of increased IIF and decreasedhigher ceded premiums, net of profit commissions, partially offset by less accelerated revenue recognition due to fewer Single Premium Policy cancellations during 2017.losses in 2020.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The table below provides additional information about the components of mortgage insurance net premiums earned for the periods indicated.indicated, including the effects of our reinsurance programs.
|
| | | | | | | | | | | |
| (in thousands) | 2018 | | 2017 | | 2016 |
| | | | | | |
| Net premiums earned—insurance: | | | | | |
| Direct | | | | | |
| Premiums earned, excluding revenue from cancellations | $ | 1,018,874 |
| | $ | 929,668 |
| | $ | 902,269 |
|
| Single Premium Policy cancellations | 47,990 |
| | 60,348 |
| | 96,824 |
|
| Direct premiums earned | 1,066,864 |
| | 990,016 |
| | 999,093 |
|
| | | | | | |
| Ceded | | | | | |
| Premiums earned, excluding revenue from cancellations | (85,357 | ) | | (63,406 | ) | | (70,714 | ) |
Single Premium Policy cancellations (1) | (13,726 | ) | | (11,734 | ) | | (21,886 | ) |
Profit commission—other (2) | 32,036 |
| | 17,869 |
| | 15,241 |
|
| Ceded premiums, net of profit commission | (67,047 | ) | | (57,271 | ) | | (77,359 | ) |
| | | | | | |
| Assumed premiums earned | 6,904 |
| (3) | 28 |
| | 35 |
|
| Total net premiums earned—insurance | $ | 1,006,721 |
| | $ | 932,773 |
| | $ | 921,769 |
|
| | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Net premiums earned | | | | | | | |
| | | | | | | |
| | Years Ended December 31, | |
| ($ in thousands, except as otherwise indicated) | | 2021 | | 2020 | | 2019 | |
| Direct | | | | | | | |
| Premiums earned, excluding revenue from cancellations | | $ | 988,472 | | | $ | 1,070,335 | | | $ | 1,154,045 | | (1) |
| Single Premium Policy cancellations | | 116,224 | | | 193,349 | | | 79,483 | | |
| Direct | | 1,104,696 | | | 1,263,684 | | | 1,233,528 | | (1) |
Assumed (2) | | 7,066 | | | 12,214 | | | 10,382 | | |
| Ceded | | | | | | | |
| Premiums earned, excluding revenue from cancellations | | (108,692) | | | (107,451) | | | (134,946) | | (1) |
Single Premium Policy cancellations (3) | | (33,388) | | | (55,483) | | | (23,766) | | |
Profit commission—other (4) | | 28,600 | | | (20,197) | | | 49,016 | | (1) |
| Ceded premiums, net of profit commission | | (113,480) | | | (183,131) | | | (109,696) | | (1) |
| Total net premiums earned | | $ | 998,282 | | | $ | 1,092,767 | | | $ | 1,134,214 | | (1) |
| | | | | | | | |
In force portfolio premium yield (in basis points) (5) | | 40.5 | | 44.5 | | 50.4 | (1) |
Direct premium yield (in basis points) (6) | | 45.2 | | 52.4 | | 53.8 | (1) |
Net premium yield (in basis points) (7) | | 40.6 | | 44.9 | | 49.1 | (1) |
| Average primary IIF (in billions) | | $ | 246.1 | | | $ | 243.4 | | | $ | 231.0 | | |
______________________(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. This adjustment increased the 2019 direct premium yield and net premium yield by 1.9 and 1.4 basis points, respectively. See Note 2 of Notes to Consolidated Financial Statements for further information.
| |
(1) | (2)Primarily includes premiums from our participation in certain credit risk transfer programs. (3)Includes the impact of related profit commissions. |
| |
(2) | The amounts represent the profit commission on the Single Premium QSR Program, excluding impact of Single Premium Policy cancellations. |
| |
(3) | Includes premiums earned from our participation in certain Front-end and Back-end credit risk transfer programs. |
The impact of related profit commissions.
(4)Represents the profit commission on the Single Premium QSR Program, excluding the impact of Single Premium Policy cancellations.
(5)Calculated by dividing direct premiums earned, including assumed revenue and excluding revenue from cancellations, by average primary IIF.
(6)Calculated by dividing direct premiums earned, including assumed revenue, by average primary IIF.
(7)Calculated by dividing net premiums earned by average primary IIF. The calculation for all periods presented incorporates the impact of profit commission adjustments related to our Single Premium QSR Program. For the year ended December 31, 2020, these profit commission adjustments were significantly impacted by the increased ceded losses in 2020. See Note 8 of Notes to Consolidated Financial Statements for further information.
Over the past several years, we have experienced a decline in our in force portfolio premium yield due to a number of factors, including the pricing and credit mix of recent NIW compared to the policies that have cancelled. Based on the characteristics of more recent vintages in our portfolio coupled with expectations for higher interest rates that we believe will increase Persistency Rates, we currently expect a decline in our in force portfolio premium yield in 2022 of approximately two basis points, which is a slower rate of decline than we have experienced in recent years. Assuming current pricing levels and our current expectations for future NIW, Persistency Rates and other assumptions, which could change over time, we expect the rate of any future declines in the in force portfolio premium yield after 2022 to further diminish. Due to the impacts of Single Premium Policy cancellations and reinsurance, among other things, the net premium yield may continue to fluctuate from period to period.
The level of mortgage prepayments on the mix of business we write affects the revenue ultimately produced by our mortgage insurance business.business and is influenced by the mix of business we write. We believe that writing a mix of Single Premium Policies and Monthly Premium Policies has the potential to moderate the overall impact on our results if actual prepayments are significantly different from expectations. However, the impact of this moderating effect may depend onis affected by the amount of reinsurance we obtain on portions of
| | |
Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
our portfolio, with the Single Premium QSR Program currently reducing the proportion of retained Single Premium Policies in our portfolio. As of December 31, 2018, the impact of all of our third-party quota share reinsurance programs reduced our RIF on Single Premium Policies as a percentage of total RIF from 29.7% to 17.2%. See “Overview—Operating Environment” as well as “Key Factors Affecting Our Results—Mortgage Insurance—IIF; Persistency Rate; Mix of Business” above for more information.
We experienced a decrease in our total mix of Single Premium Policies to 21% of our NIW for 2018, compared to 23% for 2017 and 27% for 2016. We expect our production level for Single Premium Policies to fluctuate over time based on various factors, which include risk/return considerations and market conditions.
Net Premiums Written and Earned—Ceded. We use third-party reinsurance in our mortgage insurance business to manage capital and risk in an effort to optimize the amounts and types of capital and risk distribution deployed against insured risk. 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 “Key Factors Affecting Our Results—ResultsMortgage Insurance—Third-Party Reinsurance—”Mortgage—IIF and Related Drivers” for more information.
The following table provides information related to the impact of our reinsurance transactions on premiums earned. See Note 8 of Notes to Consolidated Financial Statements for more information about our reinsurance transactions.programs.
| | | | | | | | | | | | | | | | | | | | |
| Ceded premiums earned | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| ($ in thousands) | | 2021 | | 2020 | | 2019 |
| Excess-of-Loss Program | | $ | 62,153 | | | $ | 37,053 | | | $ | 25,483 | |
| Single Premium QSR Program | | 47,226 | | | 137,198 | | | 69,632 | |
| QSR Program | | 3,675 | | | 8,418 | | | 13,979 | |
| Other | | 426 | | | 462 | | | 602 | |
Total ceded premiums earned (1) | | $ | 113,480 | | | $ | 183,131 | | | $ | 109,696 | |
| | | | | | |
| | | | | | |
| | | | | | |
| Percentage of total direct and assumed premiums earned | | 9.9 | % | | 14.2 | % | | 8.8 | % |
Part II Item 7. Management’s Discussion and Analysisoperations. See Note 8 of Notes to Consolidated Financial Condition and Results of Operations
The following table provides information related to the premium impact of our reinsurance transactions.
|
| | | | | | | | |
| | At or For the Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| QSR Program | | | | | |
| % of direct and assumed premiums written | 1.2 | % | | 1.9 | % | | 2.8 | % |
| % of total direct and assumed premiums earned | 1.8 | % | | 2.9 | % | | 4.3 | % |
| | | | | | |
| Single Premium QSR Program | | | | | |
| % of direct and assumed premiums written | 6.8 | % | | 18.8 | % | | 23.4 | % |
| % of total direct and assumed premiums earned | 4.1 | % | | 2.8 | % | | 3.0 | % |
| | | | | | |
| Excess-of-Loss Program | | | | | |
| % of direct and assumed premiums written | 0.8 | % | | — | % | | — | % |
| % of total direct and assumed premiums earned | 0.2 | % | | — | % | | — | % |
Net Investment Income. Increasing yields from higher interest rates, combined withLower investment yields, partially offset by higher average investment balances, resulted in increasesdecreases in net investment income for 2018,2021 compared to 2017.2020. Our higher investment balances were primarily a result of investinginvesting our positive cash flowflows from operations. For 2017, net investment income increased compared to 2016, as we refined our investment liquidity targets and cash management strategies, consistent with rising short-term rates and an increased book yield in our portfolio. All periods include an allocation to the Mortgage Insurance segment of net investment income from investments held at Radian Group.
Provision for Losses. The following table details the financial impact of the significant components of our provision for losses for the periods indicated:indicated.
| | | | | | | | | | | | | | | | | | | | |
| Provision for losses | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| ($ in millions, except reserve per new default) | | 2021 | | 2020 | | 2019 |
Current year defaults (1) | | $ | 160.5 | | | $ | 517.8 | | | $ | 146.7 | |
Prior year defaults (2) | | (141.1) | | | (34.5) | | | (14.7) | |
| Second-lien mortgage loan PDR and other | | — | | | — | | | (0.5) | |
| Provision for losses | | $ | 19.4 | | | $ | 483.3 | | | $ | 131.5 | |
Loss ratio (3) | | 1.9 | % | | 44.2 | % | | 11.6 | % |
Reserve per new default (4) | | $ | 4,283 | | | $ | 4,793 | | | $ | 3,579 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In millions) | 2018 | | 2017 | | 2016 |
Current year defaults (1) | $ | 135.3 |
| | $ | 185.5 |
| | $ | 206.4 |
|
Prior year defaults (2) | (31.7 | ) | | (49.3 | ) | | (3.5 | ) |
| Second-lien mortgage loan PDR and other | 0.9 |
| | 0.0 |
| | 1.3 |
|
| Provision for losses | $ | 104.5 |
| | $ | 136.2 |
| | $ | 204.2 |
|
| | | | | | |
Loss ratio (3) | 10.4 | % | | 14.6 | % | | 22.2 | % |
| | | | | | |
______________________(2)Related to defaulted loans with a default notice dated in a year earlier than the year indicated, which have been continuously in default since that time.
| |
(1) | Related to defaulted loans with a most recent default notice dated in the year indicated. For example, if a loan had defaulted in a prior year, but then subsequently cured and later re-defaulted in the current year, that default would be considered a current year default. |
| |
(2) | Related to defaulted loans with a default notice dated in a year earlier than the year indicated, which have been continuously in default since that time. |
| |
(3) | Provision for losses as a percentage of net premiums earned. |
(3)Provision for losses as a percentage of net premiums earned. See below and “—Net Premiums Written and Earned” for further discussion of the components of this ratio.
(4)Calculated by dividing provision for losses for new defaults, net of reinsurance, by new primary defaults for each period.
Our mortgage insurance provision for losses for 20182021 decreased by $31.7$463.9 million as compared to 2017.2020. Reserves established for new default notices were the primary driver of our total incurred losses for 20182021 and 2017.2020. Current periodyear new primary defaults decreased by 12.9% in 2018,significantly for 2021, compared to 2017.2020, as shown below. The decreases primarily relate to a decrease in the number of new default notices related to the effects of the COVID-19 pandemic, as compared to last year. Our gross Default to Claim Rate assumption for new primary defaults was 8%8.0% at December 31, 2018,2021, compared to 10%8.5% as of December 31, 2017. This reduction in the estimated gross Default to Claim Rate assumption, which was based on observed trends, contributed to the reduction in the portion of our2020.
Our provision for losses related to new defaultsduring 2021, most notably in 2018, compared to 2017.
In addition to the positive trends in our provision for losses for current year defaults for 2018 and 2017, we experienced positivefourth quarter, benefited from favorable reserve development on prior yearperiod defaults, primarily as a result of more favorable trends in Cures than originally estimated, due to favorable outcomes resulting from forbearance programs implemented in response to the COVID-19 pandemic as well as positive trends in home price appreciation. Among other assumption changes, these favorable observed trends resulted in reductions in certainour Default to Claim Rate assumptions based on observed trends of higher Cures than were previously estimated on thosefor prior year defaults.
As expected, Radian Guaranty experienced an increasedefault notices, particularly for those defaults first reported in reported delinquencies in FEMA Designated Areas associated with Hurricanes Harvey2020 following the start of the COVID-19 pandemic. See Notes 1 and Irma during the third and fourth quarters of 2017, followed by cure rates for these delinquencies
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
that are higher than the rates for the rest of our portfolio. These incremental hurricane-related defaults did not result in a material increase in our incurred losses or paid claims.
Although the number of incremental defaults associated with areas impacted by recent or future natural disasters may become somewhat elevated, consistent with our past experience, we do not expect these incremental defaults to result in a material increase in our incurred losses or paid claims, given the limitations on our coverage related to property damage. However, the future reserve impact of incremental defaults from these or other natural disasters may differ from our previous experience due to overall economic conditions, the pace of economic recovery in the affected areas or other factors. See Note 11 of Notes to Consolidated Financial Statements.
Our mortgage insurance provision for losses for 2017 decreased by $68.0 million as compared to 2016. Reserves established for new default notices were the primary driver of our total incurred losses for 2017Statements and 2016. Current year primary defaults increased by 5.9% for 2017, compared to 2016, due to elevated new default notices in 2017 in the FEMA Designated Areas associated with Hurricanes Harvey and Irma received subsequent to those two natural disasters, which occurred during the third quarter of 2017. Due to exclusions in our Master Policies for physical damage, including damage caused by floods or other natural disasters, and based on our past experience with similar natural disasters, we assumed a 3% gross Default to Claim Rate for new primary defaults in FEMA Designated Areas associated with Hurricanes Harvey and Irma received subsequent to those two natural disasters. See “Overview—Operating Environment—Hurricanes”“Item 1A. Risk Factors” for additional information.
For all areas other than FEMA Designated Areas associated with Hurricanes Harvey and Irma, the number of total new primary mortgage insurance defaults in our insured portfolio decreased by 7.2%, as compared to 2016. Our gross Default to Claim Rate assumption for new primary defaults, excluding the new primary defaults in FEMA Designated Areas associated with Hurricanes Harvey and Irma received subsequent to those two natural disasters, was 10% as of December 31, 2017, compared to 12% as of December 31, 2016. This reduction in estimated gross Default to Claim Rate assumptions, which was based on observed trends, contributed to the reduction in the portion ofTo a lesser extent, our provision for losses related to new defaults in 2017, compared to 2016. In addition, the 2017 provision on current year defaults includes $14 million related to pool commutations.
In addition to the positive trends in our provision for losses for current year defaults for 2017 and 2016, we experienced positiveduring 2020 also benefited from favorable reserve development on prior yearperiod defaults, primarily due to reductions in certain Default to Claim Rate assumptions based on observed trends of higher Cures than were previously estimated on those prior year defaults.favorable cure activity.
| | |
Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Our primary default rate at December 31, 20182021 was 2.1%2.9% compared to 2.9%5.2% at December 31, 2017. Our primary defaulted inventory comprised 21,093 loans at December 31, 2018, compared to 27,922 loans at December 31, 2017, representing a decrease of 24.5%. The reduction in our primary defaulted inventory is the result of the total number of defaulted loans: (i) that have cured or (ii) for which claim payments have been made, collectively, exceeding the total number of new defaults on insured loans. Consistent with typical default seasoning patterns, the shift in our portfolio composition toward more recent vintages is expected to result in slightly increased levels of new defaults in our total portfolio for 2019 as compared to 2018, because we do not expect that the reductions in new defaults from our portfolio of insurance written prior to and including 2008 will continue to outpace the anticipated increases from more recent vintages.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table shows the number of primary loans that we have insured, the number of primary and pool loans in default and the percentage of primary loans in default as of the dates indicated:
|
| | | | | | | | |
| | December 31, |
| | 2018 | | 2017 | | 2016 |
| Default Statistics—Primary Insurance: | | | | | |
| Total primary insurance | | | | | |
| Prime | | | | | |
| Number of insured loans | 986,704 |
| | 913,408 |
| | 849,227 |
|
| Number of loans in default | 15,402 |
| | 20,269 |
| | 19,101 |
|
| Percentage of loans in default | 1.56 | % | | 2.22 | % | | 2.25 | % |
| Alt-A and A minus and below | | | | | |
| Number of insured loans | 35,906 |
| | 42,318 |
| | 53,651 |
|
| Number of loans in default | 5,691 |
| | 7,653 |
| | 10,004 |
|
| Percentage of loans in default | 15.85 | % | | 18.08 | % | | 18.65 | % |
| Total primary insurance | | | | | |
| Number of insured loans | 1,022,610 |
| | 955,726 |
| | 902,878 |
|
Number of loans in default (1) | 21,093 |
| | 27,922 |
| | 29,105 |
|
| Percentage of loans in default | 2.06 | % | | 2.92 | % | | 3.22 | % |
| | | | | | |
| Default Statistics—Pool Insurance: | | | | | |
| Number of loans in default | 1,713 |
| | 2,117 |
| (2) | 4,286 |
|
______________________
| |
(1) | Included in this amount at December 31, 2018 and December 31, 2017 are the defaults in the FEMA Designated Areas associated with Hurricanes Harvey and Irma, which occurred during the third quarter of 2017. At December 31, 2018, 2017 and 2016, defaults in these areas were 2,627; 7,051; and 3,321, respectively. |
| |
(2) | Decrease primarily due to pool commutations that took place during the year. |
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
2020. The following table shows a rollforward of the number of our primary loans in default, including new defaults from our insurance writtendefault.
| | | | | | | | | | | | | | | | | | | | |
| Rollforward of primary loans in default | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Beginning default inventory | | 55,537 | | | 21,266 | | | 21,093 | |
| New defaults | | 37,470 | | | 108,025 | | | 40,985 | |
| Cures | | (62,970) | | | (72,404) | | | (38,005) | |
Claims paid (1) | | (937) | | | (1,330) | | | (2,747) | |
Rescissions and Claim Denials, net of (Reinstatements) (2) | | (39) | | | (20) | | | (60) | |
| | | | | | |
| Ending default inventory | | 29,061 | | | 55,537 | | | 21,266 | |
(1)Includes those charged to a deductible under Pool Mortgage Insurance arrangements as well as commutations. Excludes the impact of claims settled related to certain previously disclosed legal proceedings.
(2)Net of any previous Rescission and Claim Denials that were reinstated during the period. Such reinstated Rescissions and Claim Denials may ultimately result in years: (i) prior to and including 2008 and (ii) after 2008:
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| Beginning default inventory | 27,922 |
| | 29,105 |
| | 35,303 |
|
Plus: New defaults on insurance written in years: (1) | | | | | |
| Prior to and including 2008 | 19,629 |
| | 25,300 |
| | 29,772 |
|
| After 2008 | 17,740 |
| | 17,588 |
| | 10,731 |
|
| Total new defaults | 37,369 |
| | 42,888 |
| | 40,503 |
|
Less: Cures (1) | 39,799 |
| | 37,464 |
| | 38,589 |
|
Less: Claims paid (2) | 4,322 |
| | 6,477 |
| | 8,223 |
|
Less: Rescissions and Claim Denials, net of (Reinstatements) (3) | 77 |
| | 130 |
| | (111 | ) |
| Ending default inventory | 21,093 |
| | 27,922 |
| | 29,105 |
|
| | | | | | |
______________________
| |
(1) | Included in this amount for the years ended December 31, 2018 and 2017 are the new defaults and Cures in the FEMA Designated Areas associated with Hurricanes Harvey and Irma, which occurred during the third quarter of 2017. Forthe years ended December 31, 2018, 2017 and 2016, new defaults and Cures in these areas were as follows:a paid claim.
|
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| New defaults | 3,776 |
| | 8,862 |
| | 3,852 |
|
| Cures | 7,723 |
| | 4,366 |
| | 3,727 |
|
| |
(2) | Includes those charged to a deductible or captive reinsurance transactions, as well as commutations. |
| |
(3) | Net of any previous Rescission and Claim Denials that were reinstated during the period. Such reinstated Rescissions and Claim Denials may ultimately result in a paid claim. |
We develop our Default to Claim Rate estimates on defaulted loans based on models that use a variety of loan characteristics to determine the likelihood that a default will reach claim status. Our gross Default to Claim Rate estimates on defaulted loans are mainly developed based on the Stage of Default and Time in Default of the underlying defaulted loans, as measured by the progress toward foreclosure sale and the number of months in default. Our grossSee Note 11 of Notes to Consolidated Financial Statements for the table detailing our Default to Claim Rate assumption for new primary defaults was reduced from 10% at December 31, 2017, to 8% at December 31, 2018. As of December 31, 2018, our gross Default to Claim Rate assumptions on our primary portfolio ranged from 8% for new defaults, up to 68% for defaults not in foreclosure stage, and 75% for Foreclosure Stage Defaults. As of December 31, 2017, these gross Default to Claim Rate assumptions for our primary portfolio, other than for new primary defaults in FEMA Designated Areas associated with Hurricanes Harvey and Irma received subsequent to those two natural disasters, ranged from 10% for new defaults, up to 62% for other defaults not in foreclosure stage, and 81% for Foreclosure Stage Defaults.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
| | |
Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following tables show additional information about our primary loans in default as of the dates indicated:indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Primary loans in default - additional information |
| | | | | | | | | | | | |
| | December 31, 2021 |
| | Total | | Foreclosure Stage Defaulted Loans | | Cure % During the 4th Quarter | | Reserve for Losses | | % of Reserve |
| ($ in thousands) | | # | | % | | # | | % | | $ | | % |
| Missed payments | | | | | | | | | | | | |
| Three payments or less | | 7,267 | | | 25.0 | % | | 47 | | | 39.4 | % | | $ | 62,103 | | | 7.9 | % |
| Four to eleven payments | | 8,088 | | | 27.8 | | | 84 | | | 27.6 | | | 146,872 | | | 18.6 | |
| Twelve payments or more | | 13,389 | | | 46.1 | | | 784 | | | 29.0 | | | 565,192 | | | 71.5 | |
| Pending claims | | 317 | | | 1.1 | | | N/A | | 10.4 | | | 16,213 | | | 2.0 | |
| Total | | 29,061 | | | 100.0 | % | | 915 | | | | | 790,380 | | | 100.0 | % |
| IBNR and other | | | | | | | | | | 2,886 | | | |
| LAE | | | | | | | | | | 19,859 | | | |
| Total primary reserves | | | | | | | | | | $ | 813,125 | | | |
|
| | | | | | | | | | | | | | | | | | |
| | 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 11 payments | 5,905 |
| | 28.0 |
| | 422 |
| | 24.7 |
| | 87,210 |
| | 24.1 |
|
| 12 payments or more | 4,468 |
| | 21.2 |
| | 1,365 |
| | 6.5 |
| | 156,808 |
| | 43.4 |
|
| Pending claims | 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 reserves | | | | | | | | | $ | 385,823 |
| | |
| | | | | | | | | | | | |
|
| | | | |
| December 31, 2018 |
| Key Reserve Assumptions |
| Gross Default to Claim Rate % | | Net Default to Claim Rate % | | Claim Severity % |
| 35% | | 33% | | 96% |
|
| | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | Total | | Foreclosure Stage Defaulted Loans | | Cure % During the 4th Quarter | | Reserve for Losses | | % of Reserve |
| ($ in thousands) | # | | % | | # | | % | | $ | | % |
| Missed payments: | | | | | | | | | | | |
| Three payments or less | 13,004 |
| | 46.6 | % | | 172 |
| | 31.7 | % | | $ | 89,412 |
| | 19.3 | % |
| Four to 11 payments | 7,528 |
| | 27.0 |
| | 426 |
| | 20.9 |
| | 99,759 |
| | 21.5 |
|
| 12 payments or more | 6,651 |
| | 23.8 |
| | 1,933 |
| | 6.3 |
| | 234,895 |
| | 50.6 |
|
| Pending claims | 739 |
| | 2.6 |
| | N/A |
| | 3.1 |
| | 40,144 |
| | 8.6 |
|
| Total | 27,922 |
| | 100.0 | % | | 2,531 |
| | | | 464,210 |
| | 100.0 | % |
| IBNR and other | | | | | | | | | 16,021 |
| | |
| LAE | | | | | | | | | 13,349 |
| | |
| Total primary reserves | | | | | | | | | $ | 493,580 |
| | |
| | | | | | | | | | | | |
|
| | | | |
| December 31, 2017 |
| Key Reserve Assumptions |
| Gross Default to Claim Rate % | | Net Default to Claim Rate % | | Claim Severity % |
| 33% | | 31% | | 98% |
______________________ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | Total | | Foreclosure Stage Defaulted Loans | | Cure % During the 4th Quarter | | Reserve for Losses | | % of Reserve |
| ($ in thousands) | | # | | % | | # | | % | | $ | | % |
| Missed payments | | | | | | | | | | | | |
| Three payments or less | | 12,504 | | | 22.5 | % | | 64 | | | 36.5 | % | | $ | 99,491 | | | 12.4 | % |
| Four to eleven payments | | 37,691 | | | 67.9 | | | 190 | | | 26.3 | | | 512,248 | | | 64.1 | |
| Twelve payments or more | | 5,067 | | | 9.1 | | | 861 | | | 5.4 | | | 172,161 | | | 21.5 | |
| Pending claims | | 275 | | | 0.5 | | | N/A | | 8.2 | | | 15,614 | | | 2.0 | |
| Total | | 55,537 | | | 100.0 | % | | 1,115 | | | | | 799,514 | | | 100.0 | % |
| IBNR and other | | | | | | | | | | 9,966 | | | |
| LAE | | | | | | | | | | 20,172 | | | |
| Total primary reserves | | | | | | | | | | $ | 829,652 | | | |
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 approximately 33%, 31%46% and 42%24%, at December 31, 2018, 20172021 and 2016,2020, respectively. The changeThis increase was primarily due to a shift in our Default to Claim Rate in 2017 resulted primarily from the lower Default to Claim Ratemix of 3% on new primary defaults in FEMA Designated Areas associatedas of December 31, 2021, given the larger proportion of loans with Hurricanes Harvey and Irma subsequent to those two natural disasters and through February 2018. more missed payments.
Our net Default to Claim Rate and loss reserve estimate incorporatesincorporate our expectations with respect to future Rescissions, Claim Denials and Claim Curtailments. Our estimate
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
of such net future Loss Mitigation Activities, inclusive of claim withdrawals, reduced our loss reserve as of December 31, 20182021 and 20172020 by $32$27.3 million and $31$29.1 million, respectively. These expectations are based primarily on recent claim withdrawal activity and our recent experience with respect to the number of claims that have been denied due to the policyholder’s failure to submit sufficient documentation to perfect a claim within the time period permitted under our Master Policies, and alsoas well as 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.
Our reported Rescission, Claim Denial and Claim Curtailments activity in any given period is subject to challenge by our lender and servicer customers through our claims rebuttal process. In addition, we are at times engaged in discussions with our lender and servicer customers regarding our Loss Mitigation Activities. Unless a liability associated with such activities or discussions becomes probable and can be reasonably estimated, we consider our claim payments and our Rescissions, Claim Denials and Claim Curtailments to be resolved for financial reporting purposes. In accordance with the accounting standard regarding contingencies, we accrue for an estimated loss when we determine that the loss is probable and can be reasonably estimated.
We expect that a portion of previously rescinded policies will be reinstated and previously denied claims will be resubmitted with the required documentation and ultimately paid; therefore, we have incorporated this expectation into our
| | |
Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
IBNR reserve estimate. Our IBNR reserve estimate was $11.3 million, $10.4$2.9 million and $14.3$10.0 million at December 31, 2018, 20172021 and 2016,2020, respectively. See Note 11 of Notes to Consolidated Financial Statements for additional information.
Factors that impact the severity of a claim include, but are not limited to: (i) the size of the loan; (ii) the amount of mortgage insurance coverage placed on the loan; (iii) the amount of time between default and claim during which we are expected to cover interest (capped at two years under our Prior Master Policy and capped at three years under our 2014 Master Policy and 2020 Master Policy) and certain expenses; and (iv) the impact of certain loss management activities with respect to the loan. The average Claim Severity experienced for loans covered by our primary insurance was 104.9%83.2% for 2018,2021, compared to 104.7%101.4% in 2017 and 104.1%2020. Given the low volume of claims paid in 2016.2021 due to the ongoing effects of foreclosure moratoriums, our average Claim Severity for claims paid in 2021 may not be indicative of future results.
Our mortgage insurance total loss reserve as a percentage of our mortgage insurance total RIF was 0.7%1.4% at both December 31, 2018, compared to 1.0% at December 31, 20172021 and 1.6% at December 31, 2016.2020, respectively. See Note 11 of Notes to Consolidated Financial Statements for information regarding our reserves for losses by category and a reconciliation of our Mortgage Insurance segment’s beginning and ending reserves for losses and LAE.
Our primary reserve per default (calculated as primary reserve excluding IBNR and other reserves divided by the number of primary defaults) was $17,634, $17,103 and $22,503 at December 31, 2018, 2017 and 2016, respectively. The $17,103 primary reserve per default at December 31, 2017, includes the impact of reserves and defaults related to the FEMA Designated Areas associated with Hurricanes Harvey and Irma. Excluding the impact from new defaults received subsequent to Hurricanes Harvey and Irma in these FEMA Designated Areas, this amount would be approximately $20,500 at December 31, 2017.
We considered the sensitivity of our loss reserve estimates at December 31, 2018 by assessing the potential changes resulting from a parallel shift in Claim Severity and Default to Claim Rate for primary loans. For example, assuming all other factors remain constant, for every one percentage point absolute change in primary Claim Severity (which we estimated to be 96% of our risk exposure at December 31, 2018), we estimated that our total loss reserve at December 31, 2018 would change by approximately $4 million. Assuming the portfolio mix and all other factors remain constant, for every one percentage point absolute change in our primary net Default to Claim Rate, we estimated a $10 million change in our primary loss reserve at December 31, 2018.
In addition, as part of our claims review process, we assess whether defaulted loans were serviced appropriately in accordance with our insurance policies and servicing guidelines. To the extent a servicer has failed to satisfy its servicing obligations, our policies provide that we may curtail the claim payment for such default, and in some circumstances, cancel coverage or deny the claim. Before consideration of any subsequent challenges by our lender and servicer customers, Claim Curtailments due to servicer noncompliance with our insurance policies and servicing guidelines, which impact the severity of our claim payments, were $4.7 million for the year ended December 31, 2018, respectively, compared to $7.2 million for the same period in 2017.
Total mortgage insurance claims paid in 20182021 of $215.9$35.3 million have decreased from claims paid of $390.4$97.6 million in 2017.2020. The decrease in claims paid is consistent with the ongoing decline in the outstanding default inventory. In addition, claims paid for the year ended December 31, 2017 included the payment of $54.8 million made in connection with the scheduled final settlement of the Freddie Mac Agreement in the third quarter of 2017.primarily attributable to COVID-19-related forbearance plans and moratoriums suspending foreclosures and evictions. Claims paid in both periods also include the impact of commutations.commutations and settlements, including for payments made in 2021 and 2020 to settle certain previously disclosed legal proceedings. Although expected claims are included in our reserve for losses, the timing of claims paid is
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
subject to fluctuation from quarter to quarter, based on the rate that defaults cure and other factors, including the impact of foreclosure moratoriums (as further described in “Item 1. Business—Mortgage Insurance—Business—Mortgage—Defaults and Claims”), that make the timing of paid claims difficult to predict.
The following table shows net claims paid by product and the average claim paid by product for the periods indicated:indicated.
| | | | | | | | | | | | | | | | | | | | |
| Claims paid | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
Net claims paid (1) | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Total primary claims paid | | $ | 21,111 | | | $ | 66,186 | | | $ | 118,548 | |
| Total pool and other | | (258) | | | (432) | | | 3,162 | |
| | | | | | |
| | | | | | |
| Subtotal | | 20,853 | | | 65,754 | | | 121,710 | |
Impact of commutations and settlements (2) | | 14,464 | | | 31,847 | | | 10,517 | |
| Total net claims paid | | $ | 35,317 | | | $ | 97,601 | | | $ | 132,227 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Total average net primary claim paid (1) (3) | | $ | 44.8 | | | $ | 46.7 | | | $ | 49.0 | |
Average direct primary claim paid (3) (4) | | $ | 46.3 | | | $ | 49.4 | | | $ | 50.0 | |
(1)Net of reinsurance recoveries. |
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 | | 2016 |
Net claims paid: (1) | | | | | |
| Prime | $ | 120,503 |
| | $ | 182,338 |
| | $ | 252,583 |
|
| Alt-A and A minus and below | 67,136 |
| | 96,102 |
| | 140,056 |
|
| Total primary claims paid | 187,639 |
| | 278,440 |
| | 392,639 |
|
| Pool | 3,520 |
| | 10,687 |
| | 22,120 |
|
Other (2) | 322 |
| | (1,937 | ) | | (384 | ) |
| Subtotal | 191,481 |
| | 287,190 |
| | 414,375 |
|
| Impact of captive terminations | (793 | ) | | 645 |
| | (2,418 | ) |
Impact of commutations (3) | 25,260 |
| | 102,545 |
| | 5,605 |
|
| Total net claims paid | $ | 215,948 |
| | $ | 390,380 |
| | $ | 417,562 |
|
| | | | | | |
Average net claim paid: (1) (4) | | | | | |
| Prime | $ | 49.9 |
| | $ | 49.2 |
| | $ | 47.5 |
|
| Alt-A and A minus and below | 62.4 |
| | 54.1 |
| | 52.3 |
|
| Total average net primary claim paid | 53.7 |
| | 50.8 |
| | 49.1 |
|
| | | | | | |
Average direct primary claim paid (4) (5) | $ | 54.4 |
| | $ | 51.1 |
| | $ | 49.5 |
|
______________________
| |
(1) | Net of reinsurance recoveries and other recoveries. |
| |
(2) | Net of recoveries collected on claims paid in prior years on second-lien mortgage loans. |
| |
(3) | Includes payments to commute mortgage insurance coverage on certain performing and non-performing loans. For 2017, includes payments that, as expected, were made in connection with the final settlement of the Freddie Mac Agreement, as well as payments to commute mortgage insurance coverage on certain performing and non-performing loans on which we had Pool Insurance risk. |
| |
(4) | (3)Calculated without giving effect to the impact of the termination of captive transactions and commutations. |
| |
(5) | Before reinsurance recoveries.
|
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Notwithstanding historical trends, our portfolio originated prior to and including 2008 experienced default and claim activity sooner and to a significantly greater extent than had been the case historically for our books of business prior to the financial crisis. For the periods indicated, the following tables show: (i) cumulative direct claims paid by us on our primary insured bookimpact of business at the end of each successive year after origination, expressed as a percentage of the cumulative premiums written by us in each year of originationcommutations and (ii) direct claims paid by policy origination year. Direct claims paid represent first-lien claims paid prior tosettlements.
(4)Before reinsurance recoveries and captive termination payments, and exclude LAE.recoveries.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Direct Claims Paid vs. Premiums Written—Primary Insurance |
Year of Origination | | End of 1st year | | End of 2nd year | | End of 3rd year | | End of 4th year | | End of 5th year | | End of 6th year | | End of 7th year | | End of 8th year | | End of 9th year | | End of 10th year |
| 2009 | | 0.0 | % | | 1.3 | % | | 3.9 | % | | 7.6 | % | | 11.7 | % | | 14.2 | % | | 15.3 | % | | 15.9 | % | | 16.4 | % | | 16.4 | % |
| 2010 | | 0.0 | % | | 0.4 | % | | 1.3 | % | | 3.1 | % | | 4.9 | % | | 5.5 | % | | 6.0 | % | | 6.3 | % | | 6.4 | % | | — |
|
| 2011 | | 0.0 | % | | 0.2 | % | | 1.1 | % | | 2.0 | % | | 2.7 | % | | 3.2 | % | | 3.6 | % | | 3.8 | % | | — |
| | — |
|
| 2012 | | 0.0 | % | | 0.1 | % | | 0.5 | % | | 0.8 | % | | 1.2 | % | | 1.5 | % | | 1.7 | % | | — |
| | — |
| | — |
|
| 2013 | | 0.0 | % | | 0.1 | % | | 0.4 | % | | 0.9 | % | | 1.3 | % | | 1.6 | % | | — |
| | — |
| | — |
| | — |
|
| 2014 | | 0.0 | % | | 0.0 | % | | 0.6 | % | | 1.4 | % | | 2.0 | % | | — |
| | — |
| | — |
| | — |
| | — |
|
| 2015 | | 0.0 | % | | 0.1 | % | | 0.6 | % | | 1.2 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| 2016 | | 0.0 | % | | 0.1 | % | | 0.4 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| 2017 | | 0.0 | % | | 0.0 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| 2018 | | 0.0 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| ($ in thousands) | 2018 | | 2017 | | 2016 |
| Direct claims paid by origination year (first-lien): | | | | | | | | | | | |
| 2008 and prior | $ | 183,310 |
| | 89.5 | % | | $ | 358,067 |
| | 94.0 | % | | $ | 393,063 |
| | 95.5 | % |
| 2009 | 1,623 |
| | 0.8 |
| | 3,970 |
| | 1.0 |
| | 4,156 |
| | 1.0 |
|
| 2010 | 587 |
| | 0.3 |
| | 1,332 |
| | 0.3 |
| | 1,644 |
| | 0.4 |
|
| 2011 | 1,020 |
| | 0.5 |
| | 1,484 |
| | 0.4 |
| | 1,835 |
| | 0.5 |
|
| 2012 | 2,100 |
| | 1.0 |
| | 2,943 |
| | 0.8 |
| | 3,380 |
| | 0.8 |
|
| 2013 | 3,126 |
| | 1.5 |
| | 4,638 |
| | 1.2 |
| | 4,561 |
| | 1.1 |
|
| 2014 | 5,490 |
| | 2.7 |
| | 5,271 |
| | 1.4 |
| | 2,961 |
| | 0.7 |
|
| 2015 | 4,856 |
| | 2.4 |
| | 3,143 |
| | 0.8 |
| | — |
| | — |
|
| 2016 | 2,416 |
| | 1.2 |
| | 254 |
| | 0.1 |
| | — |
| | — |
|
| 2017 | 253 |
| | 0.1 |
| | — |
| | — |
| | — |
| | — |
|
| 2018 | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total direct claims paid (1) | $ | 204,781 |
| | 100.0 | % | | $ | 381,102 |
| | 100.0 | % | | $ | 411,600 |
| | 100.0 | % |
| | | | | | | | | | | | |
______________________
| |
(1) | Represents total first-lien direct claims paid, excluding impact of reinsurance and LAE. |
Other Operating Expenses. The increase in other operating expenses for 2018,2021, as compared to 2017, primarily reflects an increase in the proportion of corporate expenses allocated to the Mortgage Insurance segment, combined with higher total corporate expense. The increase in allocated expenses was partially offset by lower segment expenses in 2018 as compared to 2017, primarily as a result of increases in (i) ceding commissions, due to the 2018 Single Premium QSR Agreement and (ii) the cession percentage on the 2016 Single Premium QSR Agreement. See “Results of Operations—Consolidated—Other Operating Expenses.”
Other operating expenses for 2017, as compared to 2016, reflect an increase2020, is primarily due to: (i) increasesan increase in technology expenses associated with a significant investmentvariable and share-based compensation expense in upgrading our systems; (ii) higher2021, including as part of allocated corporate operating expenses primarily due to expenses associated with the retirement and consulting agreements entered into with our former Chief Executive Officer; (iii) expenses accrued to defend and resolve certain outstanding legal matters; and (iv)(ii) a decrease in ceding
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
commissions. These increases were partially offset by lower compensation expense in 2017, including variable incentive-based compensation.
Our expense ratio on a net premiums earned basis represents our Mortgage Insurance segment’s operating expenses (which include policy acquisition costs and other operating expenses, as well as allocated corporate operating expenses), expressed as a percentage of net premiums earned. Our expense ratio on this basis was 23.9%25.3% for 2018,2021, compared to 24.7%21.0% for 20172020. The increase in the expense ratio for 2021 as compared to 2020 was driven by: (i) an increase in total other operating expenses and 22.7% for 2016. The increase(ii) a decrease in net premiums earned during 2018 was the primary driver2021, both as compared to 2020.
| | |
Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following tables show additional information about Mortgage other operating expenses.
| | | | | | | | | | | | | | | | | | | | |
| Other operating expenses | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In millions) | | 2021 | | 2020 | | 2019 |
| Direct | | | | | | |
| Salaries and other base employee expenses | | $ | 52.5 | | | $ | 57.6 | | | $ | 60.3 | |
| Variable and share-based incentive compensation | | 17.2 | | | 13.7 | | | 21.5 | |
| Other general operating expenses | | 50.8 | | | 53.7 | | | 74.0 | |
| Ceding commissions | | (24.7) | | | (41.1) | | | (34.2) | |
| Total direct | | 95.8 | | | 83.9 | | | 121.6 | |
| | | | | | |
Allocated (1) | | | | | | |
| Salaries and other base employee expenses | | $ | 42.5 | | | $ | 37.5 | | | $ | 31.0 | |
| Variable and share-based incentive compensation | | 33.9 | | | 23.7 | | | 26.5 | |
| Other general operating expenses | | 51.1 | | | 53.6 | | | 46.6 | |
| Total allocated | | 127.5 | | | 114.8 | | | 104.1 | |
| Total Mortgage | | $ | 223.3 | | | $ | 198.7 | | | $ | 225.7 | |
(1)See Note 4 of the change in the expense ratios between these periods.Notes to Consolidated Financial Statements for more information about our allocation of corporate operating expenses.
Interest Expense.These amounts reflect the portion ofThe increase in interest on Radian Group’s debt obligations allocated to our Mortgage Insurance segment, excluding the Senior Notes due 2019. The allocated interest decreased in 2018 and 2017expense for 2021, as compared to 2016. These decreases were2020, primarily duereflects an increase in our average senior notes outstanding for the full year in 2021 compared to the capital and liquidity actions taken in 2017 and 2016.2020. See “ResultsNote 12 of Operations—Consolidated—Interest Expense.”Notes to Consolidated Financial Statements for additional information on our senior notes.
Results of Operations—Serviceshomegenius
The following table summarizes our Serviceshomegenius segment’s results of operations for the years ended December 31, 2018, 20172021, 2020 and 2016:2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Summary results of operations - homegenius |
| | | | | | | | | | |
| | | | | | | | $ Change |
| | Years Ended December 31, | | Favorable (Unfavorable) |
| (In millions) | | 2021 | | 2020 | | 2019 | | 2021 vs. 2020 | | 2020 vs. 2019 |
Adjusted pretax operating income (loss) (1) | | $ | (27.3) | | | $ | (23.2) | | | $ | (18.0) | | | $ | (4.1) | | | $ | (5.2) | |
| Net premiums earned | | 38.9 | | | 22.6 | | | 12.0 | | | 16.3 | | | 10.6 | |
| Services revenue | | 108.3 | | | 79.5 | | | 76.9 | | | 28.8 | | | 2.6 | |
| Cost of services | | 89.7 | | | 61.5 | | | 56.6 | | | (28.2) | | | (4.9) | |
| | | | | | | | | | |
| | | | | | | | | | |
| Other operating expenses | | 85.1 | | | 62.3 | | | 50.2 | | | (22.8) | | | (12.1) | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | $ Change |
| | Year Ended December 31, | | Favorable (Unfavorable) |
| (In millions) | 2018 | | 2017 | | 2016 | | 2018 vs. 2017 | | 2017 vs. 2016 |
Adjusted pretax operating income (loss) (1) | $ | (27.1 | ) | | $ | (33.8 | ) | | $ | (20.2 | ) | | $ | 6.7 |
| | $ | (13.6 | ) |
| Net premiums earned—insurance | 7.3 |
| | — |
| | — |
| | 7.3 |
| | — |
|
| Services revenue | 148.2 |
| | 161.8 |
| | 177.2 |
| | (13.6 | ) | | (15.4 | ) |
| Cost of services | 98.7 |
| | 105.8 |
| | 115.4 |
| | 7.1 |
| | 9.6 |
|
| Gross profit on services | 49.5 |
| | 56.0 |
| | 61.8 |
| | (6.5 | ) | | (5.8 | ) |
Other operating expenses (2) | 65.2 |
| | 65.3 |
| | 64.3 |
| | 0.1 |
| | (1.0 | ) |
Restructuring and other exit costs (3) | 2.1 |
| | 6.8 |
| | — |
| | 4.7 |
| | (6.8 | ) |
______________________
| |
(1) | (1)Our senior management uses adjusted pretax operating income (loss) as our primary measure to evaluate the fundamental financial performance of each of our business segments. See Note 4 of Notes to Consolidated Financial Statements. |
| |
(2) | Includes allocation of corporate operating expenses of $12.0 million, $14.3 million and $8.5 million for 2018, 2017 and 2016, respectively. |
| |
(3) | Does not include impairment of long-lived assets and loss from the sale of a business line, which are not components of adjusted pretax operating income. |
Our Services segment offers a broad array of mortgage, real estate and title services to market participants across the mortgage and real estate value chain, primarily through our subsidiaries, including Clayton, Green River Capital, Radian Settlement Services and Red Bell. In 2018, we also acquired the businesses of EnTitle Direct (in March 2018) and Independent Settlement Services (in November 2018), as well as the assets of Five Bridges (in December 2018), to enhance our Services offerings. In connection with the restructuring of our Services business, we have refined our Services business strategy going forward to focus on our core mortgage, real estate and title services. These services provide mortgage lenders, financial institutions, mortgage and real estate investors and government entities, among others, with information and other resources that are used to originate, evaluate, acquire, securitize, service and monitor residential real estate and loans secured by residential real estate. Effective with our acquisition of EnTitle Direct in March 2018, we provide title insurance to mortgage lenders as well as directly to borrowers.
The services that we no longer offer as a result of restructuring our Services business have not had a material impact on our consolidated cash flows or results of operations in recent periods. There was no material impact on our consolidated cash flows or results of operations from discontinuing these services. See Notes 1 and 7 of Notes to Consolidated Financial Statements and “Item 1. Business—Services—Services Business Overview” for additional information regarding the Services segment.Statements.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Adjusted pretax operating income (loss)Pretax Operating Loss. . Our ServicesAs described in more detail below, the increase in our homegenius segment’s adjusted pretax operating loss for 2018 was $27.1 million,2021, compared to an adjusted pretax operating loss2020, primarily reflects increases in: (i) cost of $33.8 million in 2017. The decrease in our adjusted pretax operating
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
loss for 2018, as compared to 2017, was driven by: (i) a decrease in compensation-related costs (exclusive of costs related to EnTitle Direct), primarily as a result of our restructuring activities in 2017services and (ii) a decrease in restructuring and other exit costs. These lower expensesoperating expenses. Partially offsetting these items were partially offset by the inclusion of the operating results of EnTitle Direct (acquired in March 2018).
Our Services segment’s adjusted pretax operating loss was $33.8 million in 2017 compared to an adjusted pretax operating loss of $20.2 million in 2016. The increase in our adjusted pretax operating loss in 2017, as compared to 2016, was primarily driven by:increases in: (i) restructuring and other exit costsservices revenue and (ii) decreased gross profit, primarily attributable to a shift in mix of services.net premiums earned.
Net premiums earned-insurance.Premiums Earned. Net premiums earned for 20182021 increased compared to 2017, as a result of the March 2018 acquisition of EnTitle Direct2020. This increase reflects an increase in new title policies written and the inclusion of its operations.closed orders in our title insurance business.
Services Revenue. Services revenue decreased for 2018, as2021 increased compared to 2017, primarily due to a decline in mortgage and title services transaction volumes related primarily to lower volume from a large contract, which was substantially completed during the first half of 2018, partially offset by an increase in real estate services. This decrease in services revenue is generally in line with our expectations following our announced restructuring of our Services segment in late 2017, through which we are repositioning the segment to drive future profitability by focusing on the core products and services that we believe have higher growth potential, produce more predictable and recurring fee-based revenues, and better align with our customer needs.
Revenue decreased in 2017, as compared to 2016,2020, primarily due to the declineincrease in volume in: (i) mortgageclosed orders in our title services related primarily tobusiness. In addition, we increased revenue in our transaction management business and our surveillance business and (ii) real estate services, primarily driven by our REO business. The decrease in transaction management wasincluding increases from valuation and single family rental products and services, as compared to 2020.
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Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Cost of Services. Cost of services for 2021 increased compared to 2020, primarily due to the increase in services revenue and a declinecorresponding increase in loan review volume driven by a decline instaffing levels to help build capacity to accommodate the growing demand for outsourcing. Our surveillance business is transactionalour homegenius products and the decrease in surveillance services volume was primarily due to fewer transactions and pricing changes with one of our top 10 Services customers. The decline in REO asset management volume was primarily driven by a decline in REO asset inflow reflecting market conditions. These decreases were partially offset by an increase in title services transaction volumes related to a large contract.
For the year ended December 31, 2018, the top 10 Services customers (which may include our affiliates) generated approximately 42% of the Services segment’s services revenue, as compared to 49% for 2017 and 52% for 2016. Approximately 2%, 4% and 5% of services revenue on a segment basis for the years ended December 31, 2018, 2017 and 2016, respectively, related to sales to our affiliates, and has been eliminated in our consolidated results. The largest single customer generated approximately 15% of the services revenue for the year ended December 31, 2018 as compared to 11% for the years ended December 31, 2017 and December 31, 2016.
Cost of Services.services. Our cost of services is primarily affected by our level of services revenue and the mixnumber of services provided. Our cost of services primarily consists of employee compensation and related payroll benefits, including the cost of billable labor assigned to revenue-generating activities and, to a lesser extent, other costs ofemployees providing services such as travel and related expenses incurred in providing client services and costs paid to outside vendors, data acquisition costs and other compensation-related expenses to maintain software application platforms that directly support our businesses. The level of these costs may fluctuate if market rates of compensation change, or if there is decreased availability or a loss of qualified employees.those services.
Other Operating Expenses. Other operating expenses primarily consist of compensation costs not classified as cost of services because they are related to employees, such as sales and corporate employees, who are not directly involvedThe increase in providing client services. Compensation-related costs for 2018 represented 50% of the segment’s other operating expenses compared to 50% and 55% for 2017 and 2016, respectively. Other operating expenses for 2018 were impacted by the acquisition of EnTitle Direct in March 2018 and the resulting inclusion of its other operating expenses from the date of acquisition. The inclusion of EnTitle Direct is the primary driver of the increase in compensation-related costs for 2018, compared to the same period in 2017, partially offset by decreases resulting from our restructuring actions taken in 2017.
Compensation-related costs for 2017 compared to 2016 decreased as a percentage of other operating expenses, primarily because of a reduction in force in 2016, combined with the restructuring actions taken in 2017.
Other operating expenses also include other selling, general and administrative expenses, depreciation, and allocations of corporate general and administrative expenses. Other operating expenses for 2018 include allocations of corporate operating expenses of $12.0 million, compared to $14.3 million and $8.5 million for 2017 and 2016, respectively. This decrease in 2018,2021, as compared to 2017, is2020, primarily due to a decrease in the proportion of corporate expenses allocated to the Services segment, partially offset by higher total corporate expenses. The increase in 2017, as compared to 2016, is primarily due to an increase in
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
the proportion of corporate expenses allocated to the Services segment combined withreflects: (i) an increase in totalvariable and share-based incentive compensation expense in 2021, including as part of allocated corporate expenses. See “Results of Operations—Consolidated—Other Operating Expenses.”operating expenses; (ii) continued strategic investments focused on our title and digital real estate businesses, including an increase in staffing levels; and (iii) an increase in title agent commissions.
Restructuring andThe following tables show additional information about homegenius other exit costs. operating expenses.
| | | | | | | | | | | | | | | | | | | | |
| Other operating expenses | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In millions) | | 2021 | | 2020 | | 2019 |
| Direct | | | | | | |
| Salaries and other base employee expenses | | $ | 24.0 | | | $ | 21.1 | | | $ | 14.9 | |
| Variable and share-based incentive compensation | | 14.6 | | | 7.2 | | | 6.6 | |
| Other general operating expenses | | 21.3 | | | 16.0 | | | 14.4 | |
| Title agent commissions | | 6.7 | | | 5.2 | | | 4.1 | |
| Total direct | | 66.6 | | | 49.5 | | | 40.0 | |
| | | | | | |
Allocated (1) | | | | | | |
| Salaries and other base employee expenses | | $ | 6.3 | | | $ | 3.8 | | | $ | 1.5 | |
| Variable and share-based incentive compensation | | 4.9 | | | 3.1 | | | 4.1 | |
| Other general operating expenses | | 7.3 | | | 5.9 | | | 4.6 | |
| Total allocated | | 18.5 | | | 12.8 | | | 10.2 | |
| Total homegenius | | $ | 85.1 | | | $ | 62.3 | | | $ | 50.2 | |
(1)Restructuring and other exit costs were incurred in 2018 and 2017 and include charges associated with our plan to restructure the Services business. The portion of these charges that are included in adjusted pretax operating income are primarily due to severance and related benefit costs. See Notes 1 and 7Note 4 of Notes to Consolidated Financial Statements for additional details.more information about our allocation of corporate operating expenses.
Contractual Obligations and Commitments
We have various contractual obligations that are recorded as liabilities in our consolidated financial statements.Results of Operations—All Other items, including payments under operating lease agreements, are not recorded in our consolidated balance sheets as liabilities but represent a contractual commitment to pay.
The following table summarizes certainour All Other results of our contractual obligations and commitments, including our expected claim payments on insurance policies and interest payments on debt obligations, as ofoperations for the years ended December 31, 2018,2021, 2020 and the future periods in which such obligations are expected to be settled in cash. Additional details regarding these obligations are provided in the narrative following the table and in the Notes to Consolidated Financial Statements that are referenced in the table.2019.
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Payments Due by Period | |
| (In thousands) | Total | | 2019 | | 2020-2021 | | 2022-2023 | | Thereafter | |
| Senior notes (principal and interest) (Note 12) | $ | 1,219,300 |
| | $ | 209,363 |
| (1) | $ | 499,187 |
| (2) | $ | 40,500 |
|
| $ | 470,250 |
| (3) |
Lease obligations (Note 14) (4) | 108,990 |
| | 11,310 |
| | 21,013 |
| | 20,350 |
| | 56,317 |
| |
Reserve for losses and LAE (Note 11) (5)(6) | 398,057 |
| | 154,521 |
| | 217,939 |
| | 25,597 |
| | — |
| |
| Purchase obligations | 4,361 |
| | 1,735 |
| | 2,328 |
| | 298 |
| | — |
| |
Unrecognized tax benefits (Note 10) (7) | — |
| | — |
| | — |
| | — |
| | — |
| |
| Total | $ | 1,730,708 |
| | $ | 376,929 |
| | $ | 740,467 |
| | $ | 86,745 |
| | $ | 526,567 |
| |
| | | | | | | | | | | |
______________________
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(1) | Includes $158.6 million of Senior Notes due 2019 that may be redeemed, in whole or in part at any time prior to maturity. |
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(2) | Includes $234.1 million and $197.7 million of Senior Notes due 2020 and 2021 that may be redeemed, in whole or in part at any time prior to maturity.
|
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(3) | Includes $450 million of Senior Notes due 2024 that may be redeemed, in whole or in part at any time prior to maturity. |
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(4) | Represents contractual payments for operating leases, with the exception of $0.2 million included for capital lease payment obligations through 2020. |
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(5) | Our reserve for losses and LAE reflects the application of accounting policies described below in “Critical Accounting Policies—Reserve for Losses and LAE.” The payments due by period are based on management’s estimates and assume that all of the loss reserves included in the table will result in claim payments, net of expected recoveries.
|
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(6) | Excludes IBNR reserves of $3.3 million relating to the Services business, as the timing or magnitude of any potential payments is unknown. |
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(7) | We have approximately $33.6 million in potential additional liabilities associated with uncertain tax positions as of December 31, 2018. The timing or magnitude of any potential payments is unknown. |
Other Contractual Obligations and Commitments
In addition to the contractual obligations set forth in the table above, we have the following material contractual obligations and commitments. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Summary results of operations - All Other | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | $ Change |
| | Years Ended December 31, | | Favorable (Unfavorable) |
| (In millions) | | 2021 | | 2020 | | 2019 | | 2021 vs. 2020 | | 2020 vs. 2019 |
Adjusted pretax operating income (1) | | $ | 3.5 | | | $ | 2.0 | | | $ | 19.8 | | | $ | 1.5 | | | $ | (17.8) | |
| Services revenue | | 0.2 | | | 12.5 | | | 71.0 | | | (12.3) | | | (58.5) | |
| Net investment income | | 14.6 | | | 16.5 | | | 19.6 | | | (1.9) | | | (3.1) | |
| Cost of services | | 0.1 | | | 15.6 | | | 47.6 | | | 15.5 | | | 32.0 | |
| Other operating expenses | | 11.9 | | | 11.9 | | | 23.0 | | | — | | | 11.1 | |
Affiliate Guaranty/Indemnification Agreements(1). We and certainOur senior management uses adjusted pretax operating income (loss) as our primary measure to evaluate the fundamental financial performance of our subsidiaries have entered into the following intercompany guarantees:
Radian Guaranty and Radian Mortgage Assurance were parties to a cross-guaranty agreement that was terminated effective July 1, 2016. However, it remains in effect for insurance written prior to the termination date. This agreement provides that if either party fails to make a payment to a policyholder, then the other party will step in and make the payment. The obligations of both parties are unconditional and irrevocable; however, no payments may be made without prior approval by the Pennsylvania Insurance Department.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Radian Group and Radian Mortgage Assurance are parties to a guaranty agreement, which provides that Radian Group will make sufficient funds available to Radian Mortgage Assurance to ensure that Radian Mortgage Assurance has a minimum of $5 million of statutory policyholders’ surplus every calendar quarter. Radian Mortgage Assurance had $8.7 million of statutory policyholders’ surplus and no RIF exposure as of December 31, 2018.
To allow our mortgage insurance customers to comply with applicable securities regulations for issuers of ABS (including mortgage-backed securities), we have been required, depending on the amount of credit enhancement we were providing, to provide: (i) audited financial statements for the insurance subsidiary participating in these transactions or (ii) a full and unconditional holding-company level guarantee for our insurance subsidiaries’ obligations in such transactions. Radian Group has guaranteed two structured transactions for Radian Guaranty with approximately $87.8 million of aggregate remaining credit exposure as of December 31, 2018.
Radian Group and Radian Guaranty Reinsurance are parties to an Assumption and Indemnification Agreement with regard to obligations under our tax-sharing arrangements. Pursuant to this agreement, Radian Group is required to assume certain obligations that arise as a result of our tax-sharing arrangements.
In the ordinary course of business, Radian enters into agreements pursuant to which we may be obligated under specified circumstances or upon the occurrence of certain events to indemnify the counterparties with respect to certain matters. The terms and amount of indemnification are negotiated on a transaction by transaction basis, but generally the circumstanceseach of the transaction and/or the contract provisions are such that we believe the exposure to material liability is remote.
Off-Balance Sheet Arrangements
As of December 31, 2018, we had not entered into any material off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K, other than those below:
Securities Lending Agreements
We participate in securities lending agreements for the purpose of increasing the yield on our investment securities portfolio with minimal incremental risk. Pursuant to these agreements, we loan to Borrowers certain securities that are held as part of our investment portfolio. For a complete discussion of our securities lending agreements, including the effect of these agreements on our liquidity and risks related to these agreements, seeCompany’s business segments. See Note 64 of Notes to Consolidated Financial StatementsStatements.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Adjusted pretax operating income increased in 2021 as compared to 2020 primarily as a result of the net changes in services revenue and “Item 7A. Quantitative and Qualitative Disclosures about Market Risk.”
Variable Interest Entity
In November 2018, Radian Guaranty entered into a fully collateralized reinsurance agreement with Eagle Re, an unaffiliated special purpose reinsurer domiciledcost of services due to the sale of Clayton in Bermuda. This reinsurance agreement provides for up to $434.0 million of aggregate excess-of-loss reinsurance coverage for the applicable percentage of mortgage insurance losses on new defaults on an existing portfolio of eligible Monthly Premium Policies issued between January 1, 2017 and January 1, 2018, with an initial RIF of $9.1 billion. Radian Guaranty and its affiliates have retained the first-loss layer of $204.9 million of aggregate losses,2020 as well as any losses in excessthe wind down of the outstanding reinsurance coverage amount. Eagle Re istraditional appraisal business starting in the fourth quarter of 2020, among other adjustments that impacted services revenue. Partially offsetting these items was a special purpose variable interest entity that is not consolidateddecrease in our consolidated financial statements because we do not have the unilateral powernet investment income, resulting from lower investment yields in 2021 compared to direct those activities that are significant to its economic performance. See Note 8 of Notes to Consolidated Financial Statements for further information.2020.
Segregated Funds Held for OthersThrough EnTitle Insurance, we maintain escrow deposits as a service to our customers. Amounts held in escrow and excluded from assets and liabilities in our consolidated balance sheets totaled $4.7 million as of December 31, 2018. These amounts were held at third-party financial institutions and not considered assets of the Company. Should one or more of the financial institutions at which escrow deposits are maintained fail, there is no guarantee that we would recover the funds deposited, whether through Federal Deposit Insurance Corporation coverage or otherwise. In the event of any such failure, we could be held liable for the disposition of these funds owned by third parties.
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Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Liquidity and Capital Resources
Consolidated Cash Flows
The following table summarizes our consolidated cash flows from operating, investing and financing activities.
| | | | | | | | | | | | | | | | | | | | |
| Summary cash flows - Consolidated | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Net cash provided by (used in): | | | | | | |
| Operating activities | | $ | 557,112 | | | $ | 658,434 | | | $ | 694,431 | |
| Investing activities | | (1,862) | | | (883,180) | | | (302,049) | |
| Financing activities | | (496,776) | | | 222,618 | | | (403,106) | |
| Effect of exchange rate changes on cash and restricted cash | | — | | | — | | | (4) | |
| | | | | | |
| Increase (decrease) in cash and restricted cash | | $ | 58,474 | | | $ | (2,128) | | | $ | (10,728) | |
Operating Activities. Our most significant source of operating cash flows is from premiums received from our mortgage insurance policies, while our most significant uses of operating cash flows are for our operating expenses and claims paid on our mortgage insurance policies. Net cash provided by operating activities totaled $557.1 million for 2021, compared to $658.4 million in 2020. This decrease was principally due to lower direct premiums written, partially offset by a reduction in claims paid. See Notes 8 and 11 of Notes to Consolidated Financial Statements for additional information on direct premiums written and claims paid, respectively.
Investing Activities. Net cash used in investing activities decreased in 2021, compared to 2020, primarily as a result of: (i) a decrease in purchases of fixed-maturity investments available for sale and (ii) an increase in sales and redemptions, net of purchases, of short-term investments.
Financing Activities. Net cash used in financing activities for 2021 was $496.8 million, as compared to net cash provided by financing activities for 2020 of $222.6 million. For 2021, our primary financing activities included: (i) repurchases of our common shares; (ii) payment of dividends; and (iii) net changes in secured borrowings. For 2020, cash provided by financing activities included the issuance of Senior Notes due 2025, partially offset by: (i) repurchases of our common shares and (ii) payments of dividends. See Notes 12 and14 of Notes to Consolidated Financial Statements for additional information regarding our borrowings and share repurchases, respectively.
See “Item 8. Financial Statements and Supplementary Data—Consolidated Statements of Cash Flows” for additional information.
Investment Portfolio
At December 31, 2021 and December 31, 2020, the following tables include $104.0 million and $57.5 million, respectively, of securities loaned to third-party borrowers under securities lending agreements, which are classified as other assets in our consolidated balance sheets. See Note 6 of Notes to Consolidated Financial Statements for more information about our investment portfolio, including our securities lending agreements.
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Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The composition of our investment portfolio, presented as a percentage of overall fair value at December 31, 2021 and December 31, 2020, was as follows.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment portfolio diversification | | | | | | | | |
| | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| ($ in millions) | | Fair
Value | | Percent | | Fair
Value | | Percent |
| Corporate bonds and commercial paper | | $ | 3,261.4 | | | 49.3 | % | | $ | 3,527.7 | | | 51.5 | % |
| RMBS | | 714.5 | | | 10.8 | | | 846.9 | | | 12.4 | |
| CMBS | | 745.5 | | | 11.3 | | | 715.5 | | | 10.5 | |
| CLO | | 530.0 | | | 8.0 | | | 568.6 | | | 8.3 | |
State and municipal obligations (1) | | 284.2 | | | 4.3 | | | 307.5 | | | 4.5 | |
| Money market instruments and certificates of deposit | | 275.6 | | | 4.2 | | | 270.0 | | | 3.9 | |
| Other ABS | | 211.2 | | | 3.2 | | | 252.7 | | | 3.7 | |
| U.S. government and agency securities | | 316.4 | | | 4.8 | | | 174.1 | | | 2.5 | |
| Equity securities | | 222.2 | | | 3.3 | | | 172.5 | | | 2.5 | |
Mortgage insurance-linked notes (2) | | 47.0 | | | 0.7 | | | — | | | — | |
| Other investments | | 9.5 | | | 0.1 | | | 10.4 | | | 0.2 | |
| Total | | $ | 6,617.5 | | | 100.0 | % | | $ | 6,845.9 | | | 100.0 | % |
(1)Primarily consists of taxable state and municipal investments.
(2)Comprises the notes purchased by Radian Group—Short-Term Group in connection with the Excess-of-Loss Program. See Note 8 for more information about our reinsurance programs.
The following table shows the scheduled maturities of the securities held in our investment portfolio at December 31, 2021 and December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment portfolio scheduled maturity | | | | | | | | |
| | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| ($ in millions) | | Fair
Value | | Percent | | Fair
Value | | Percent |
| Short-term investments | | $ | 551.5 | | | 8.3 | % | | $ | 618.0 | | | 9.0 | % |
Due in one year or less (1) | | 254.3 | | | 3.8 | | | 132.5 | | | 1.9 | |
Due after one year through five years (1) | | 1,176.9 | | | 17.8 | | | 1,165.0 | | | 17.0 | |
Due after five years through 10 years (1) | | 1,246.6 | | | 18.8 | | | 1,357.5 | | | 19.8 | |
Due after 10 years (1) | | 916.5 | | | 13.9 | | | 1,014.9 | | | 14.8 | |
Asset-backed and mortgage-backed securities (2) | | 2,245.3 | | | 33.9 | | | 2,383.5 | | | 34.9 | |
Equity securities (3) | | 222.2 | | | 3.4 | | | 172.5 | | | 2.5 | |
Other investments (3) | | 4.2 | | | 0.1 | | | 2.0 | | | 0.1 | |
| Total | | $ | 6,617.5 | | | 100.0 | % | | $ | 6,845.9 | | | 100.0 | % |
(1)Actual maturities may differ as a result of calls before scheduled maturity.
(2)Includes RMBS, CMBS, CLO, Other ABS and mortgage insurance-linked notes, which are not due at a single maturity date.
(3)No stated maturity date.
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Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following table provides the ratings of our investment portfolio, from a nationally recognized statistical ratings organization, presented as a percentage of overall fair value, as of December 31, 2021 and December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Investment portfolio by rating | | | | | | | | |
| | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
| ($ in millions) | | Fair
Value | | Percent | | Fair
Value | | Percent |
| U.S. government / AAA | | $ | 2,476.4 | | | 37.4 | % | | $ | 2,420.6 | | | 35.4 | % |
| AA | | 1,016.0 | | | 15.3 | | | 1,095.5 | | | 16.0 | |
| A | | 1,940.2 | | | 29.3 | | | 2,128.6 | | | 31.1 | |
| BBB | | 894.6 | | | 13.5 | | | 999.7 | | | 14.6 | |
| BB and below | | 63.9 | | | 1.0 | | | 24.0 | | | 0.3 | |
| Equity securities | | 222.2 | | | 3.4 | | | 172.5 | | | 2.5 | |
| Other invested assets | | 4.2 | | | 0.1 | | | 5.0 | | | 0.1 | |
| Total | | $ | 6,617.5 | | | 100.0 | % | | $ | 6,845.9 | | | 100.0 | % |
Liquidity NeedsAnalysis—Holding Company
Radian Group serves as the holding company for our insurance and otheroperating subsidiaries and does not have any operations of its own. At December 31, 2018,2021, Radian Group had available, either directly or through an unregulated subsidiary,subsidiaries, unrestricted
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
cash and liquid investments of $714.1$604.9 million. This amountAvailable liquidity at December 31, 2021 excludes certain additional cash and liquid investments that have been advanced to Radian Group from our subsidiaries to pay for corporate expenses and interest payments. In addition, available liquidity at December 31, 2021 does not take into consideration transactions subsequent to December 31, 2021, including a $500 million return of capital from Radian Guaranty to Radian Group paid in February 2022. Total liquidity, which includes our undrawn $275.0 million unsecured revolving credit facility, as described below, was $879.9 million as of December 31, 2018 was $981.62021.
During 2021, Radian Group’s available liquidity decreased by $497.8 million, due primarily to payments for share repurchases and includes our undrawndividends, as described below.
In addition to available cash and marketable securities, Radian Group’s principal sources of cash to fund future liquidity needs include: (i) payments made to Radian Group by its subsidiaries under expense- and tax-sharing arrangements; (ii) net investment income earned on its cash and marketable securities; (iii) to the extent available, dividends or other distributions from its subsidiaries; and (iv) amounts, if any, that Radian Guaranty is able to repay under the Surplus Note due 2027.
In December 2021, Radian Group entered into a new $275.0 million unsecured revolving credit facility with a syndicate of bank lenders. The revolving credit facility has a five year term, provided that under certain conditions Radian Group is required to offer to terminate the facility earlier than the maturity date. This facility replaced Radian Group’s $267.5 million unsecured revolving credit facility aswith a syndicate of that time. See “—Sourcesbank lenders, which had a maturity date of Liquidity” below.January 2022. 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’sour insurance and reinsurance subsidiaries as well as growth initiatives. At December 31, 2021, the full $275.0 million remains undrawn and available under the facility. See Note 1312 of Notes to Consolidated Financial Statements for additional details.
Radian Group’s liquidity increased as a result of Radian Guaranty’s return of $450 million in capital to Radian Group in December 2018, as approved by the Pennsylvania Insurance Department. This distribution of capital is part of our long-term capital plan, which is designed to improve our financial flexibility. A portion of the proceeds is expected to be used for the payment of $159 million principal amount of our outstanding Senior Notes due 2019.
During 2018, available holding company liquidity also increased by $169 million as a result of payments made to Radian Group under tax-sharing arrangements with its subsidiaries, in excess of Radian Group’s consolidated federal tax payment obligation. During the same period, available holding company liquidity was reduced by: (i) the completion of the Company’s previous share repurchase program described below; (ii) the impact of finalizing the settlement of the IRS Matter; (iii) the acquisitions of EnTitle Direct, Independent Settlement Services and the assets of Five Bridges; and (iv) subsequent capital contributions of $24.0 million to the acquired companies. See “Overview—Other 2018 Developments ” for additional information on our 2018 acquisitions.the unsecured revolving credit facility.
On August 9, 2017, Radian Group’s board of directors authorized the Company to repurchase up to $50 million of its common stock. The Company completed this program during the first half of 2018 by purchasing 3.0 million shares, at an average price of $16.56 per share, including commissions.
On August 16, 2018, Radian Group’s board of directors approved a new share repurchase program that authorizes the Company to repurchase up to $100 million of its common stock in the open market or in privately negotiated transactions, based on market and business conditions, stock price and other factors. Radian plans to utilize a Rule 10b5-1 plan, which would permit the Company to purchase shares, at pre-determined price targets, when it may otherwise be precluded from doing so. As of December 31, 2018, the full purchase authority of up to $100 million remained available under this program, which expires on July 31, 2019. See Note 15 of Notes to Consolidated Financial Statements for additional details on our share repurchase programs.
The chart below shows our debt maturity profile at December 31, 2018 and the improvement in Radian’s debt-to-capital ratio from 27.1% at December 31, 2016 to 25.5% at December 31, 2017 and 22.8% at December 31, 2018.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
We expect Radian Group’s principal liquidity demands for the next 12 months are:to be: (i) the payment of corporate expenses, including taxes; (ii) the payment of $159 million principal amount of our outstanding Senior Notes due 2019; (iii) interest payments on our outstanding debt obligations; (iii) subject to approval by our board of directors and (iv)our ongoing assessment of our financial condition and potential needs related to the execution and implementation of our business plans and strategies, the payment of quarterly dividends on our common stock.stock, which we increased in May 2021 from $0.125 to $0.14 per share and in February 2022 to $0.20 per share; and (iv) the potential continued repurchases of shares of our common stock pursuant to share repurchase authorizations, as described below.
In addition to our ongoing short-term liquidity needs discussed above, our most significant need for liquidity beyond the next 12 months is the repayment of $1.4 billion aggregate principal amount of our senior debt due in future years. See “—Capitalization—Holding Company” below for details of our debt maturity profile. Radian Group’s liquidity demands for the next 12 months or in future periods could also include: (i) the potential use of up to $100 million to repurchase Radian Group common stock pursuant to the existing share repurchase authorization; (ii) capital support for Radian Guaranty and our other insurance subsidiaries (if needed); (iii) repayments,early repurchases or early redemptions of portions of our debt obligations; and (iv) potential(ii) additional investments to support our business strategy.
Corporate Expensesstrategy; and Interest Expense(iii) additional capital contributions to its subsidiaries. See “Item 1A. Risk Factors,” including “—Radian Group’s sources of liquidity may be insufficient to fund its obligations.” and “—Radian Guaranty may fail to maintain its eligibility status with the GSEs, and the additional capital required to support Radian Guaranty’s eligibility could reduce our available liquidity.” See also Note 1 of Notes to Consolidated Financial Statements and “Overview—COVID-19 Impacts” for further information.
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Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
We believe that Radian Group has expense-sharing arrangements in place withsufficient current sources of liquidity to fund its principal operating subsidiaries that require those subsidiariesobligations. If we otherwise decide to pay their allocated share of certain holding-company expenses,increase our liquidity position, Radian Group may seek additional capital, including interest paymentsby incurring additional debt, issuing additional equity, or selling assets, which we may not be able to do on mostfavorable terms, if at all.
Share Repurchases. During 2021 and 2020, the Company repurchased 17.8 million shares and 11.0 million shares of Radian Group’s outstanding debt obligations. Payments of these corporate expenses for the next 12 months, excluding interest payments onGroup common stock, respectively, under programs authorized by Radian Group’s debt, are expected to be approximately $85board of directors, at a total cost of $399.1 million to $100 million. For the same period, payments of interest onand $226.3 million, respectively, including commissions. No purchase authority remains available under these programs. On February 9, 2022, Radian Group’s debt obligations are expectedboard of directors approved a new share repurchase program authorizing the company to be approximately $51 million. We expect most of these holding company expensesspend up to be reimbursed by our subsidiaries under our expense-sharing arrangements. See “—Radian Group—Long-Term Liquidity Needs—Services.” The expense-sharing arrangements between$400 million, excluding commissions, to repurchase 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.
Capital Support for Subsidiaries. Private mortgage insurers, including Radian Guaranty, are required to comply with the PMIERs to remain approved insurers of loans purchased by the GSEs. Radian Guaranty currently is an approved mortgage insurer under the PMIERs, and is in compliance with the PMIERs financial requirements. At December 31, 2018, Radian Guaranty’s Available Assets under the PMIERs totaled $3.5 billion, resulting in excess available resources or a “cushion” of $567 million, or 19%, over its Minimum Required Assets of $2.9 billion.common stock. See Note 1914 of Notes to Consolidated Financial Statements for additional details regarding the capital requirements of our subsidiaries.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The chart below summarizes our “cushion” under the PMIERs as of December 31, 2016, 2017 and 2018, as well as Radian’s excess available resources as of December 31, 2018, calculated as if the PMIERs 2.0 requirements were in effect. Our excess available resources include our unsecured revolving credit facility and holding company liquidity, which may be utilized to enhance Radian Guaranty’s PMIERs cushion.
______________________
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(1) | Represents Radian Group’s Liquidity, net of the $35 million minimum liquidity requirement under the unsecured revolving credit facility. Radian Group’s Liquidity as of December 31, 2018 includes $450 million from the December 2018 distribution of capital to our holding company from its mortgage insurance subsidiary, as approved by the Pennsylvania Insurance Department. See Note 19 of Notes to Consolidated Financial Statements. |
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(2) | Represents Radian Guaranty’s excess of Available Assets over its Minimum Required Assets, calculated in accordance with the PMIERs financial requirements. |
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(3) | Represents Radian’s PMIERs excess available resources as of December 31, 2018, calculated as if the PMIERs 2.0 requirements were in effect. |
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(4) | Percentages represent the values shown as a percentage of Minimum Required Assets under the PMIERs. |
The amendment to the 2016 Single Premium QSR Agreement which became effective as of December 31, 2017, and the $100 million of cash and marketable securities that Radian Group transferred to Radian Guaranty in December 2017 in exchange for a Surplus Note both had the effect of increasing the amount of Radian Guaranty’s cushion under the PMIERs financial requirements from December 31, 2016 to December 31, 2017. These increases were partially offset by the temporarily elevated level of Minimum Required Assets at December 31, 2017, due to the increase in reported delinquencies from hurricane-affected areas, as discussed below. See Note 19 of Notes to Consolidated Financial Statements for additional details. Available Assets also increased due to net cash provided by operating activities.
The PMIERs require Radian to maintain significantly more Minimum Required Assets for delinquent loans than for performing loans. Therefore, the increase in new primary defaults received during 2017 from areas affected by Hurricanes Harvey and Irma required us to maintain an elevated level of Minimum Required Assets at December 31, 2017, compared to levels prior to these hurricanes. As of December 31, 2018, the impact of these hurricanes on our level of our Minimum Required Assets has substantially decreased, consistent with our expectation that most of the hurricane-related defaults would cure during 2018, and these incremental defaults did not result in a material increase in our incurred losses or paid claims. See Note 11 of Notes to Consolidated Financial Statements. After the March 31, 2019 effective date of PMIERs 2.0, subject to certain requirements, defaulted loans in FEMA-declared major disaster areas will require a reduced level of Minimum Required
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Assets, which we expect to help reduce the future volatility of our Minimum Required Asset levels upon the occurrence of a similar event.
The two reinsurance agreements we entered into in November 2018 as part of our Excess-of-Loss Program reduced our level of Minimum Required Assets by $455.4 million. This benefit was approximately offset by the distribution of capital from Radian Guaranty to Radian Group in December 2018, which reduced Radian Guaranty’s Available Assets by $450 million. Net cash provided by operating activities also increased Available Assets during 2017 and 2018. See Notes 8 and 19 of Notes to Consolidated Financial Statements and “Overview—Other 2018 Developments” for additional information.
The GSEs may amend the PMIERs at any time, although the GSEs have communicated that for material changes, including material changes affecting Minimum Required Assets, they will generally provide written notice 180 days prior to the effective date. The GSEs also have broad discretion to interpret the PMIERs, which could impact the calculation of Radian Guaranty’s Available Assets and/or Minimum Required Assets. On September 27, 2018, the GSEs issued PMIERs 2.0, which will become effective on March 31, 2019. Radian expects to comply with PMIERs 2.0 and maintain a significant excess of Available Assets over Minimum Required Assets as of the effective date.
If applied as of December 31, 2018, these changes would not have resulted in a material change in Radian’s Minimum Required Assets, but, as shown in the chart above, would have reduced Radian’s PMIERs cushion. The reduction in Radian Guaranty’s PMIERs cushion is primarily due to a reduction in Available Assets of approximately $215 million as a result of the elimination in PMIERS 2.0 of any credit for future premiums for insurance policies written prior to and including 2008, which is permitted under the current PMIERs. If Radian Guaranty’s Available Assets and Minimum Required Assets were calculated as if the PMIERs 2.0 requirements were in effect, Radian Guaranty’s Available Assets at December 31, 2018 would have resulted in an excess or “cushion” of approximately $340 million, or 12%, over its Minimum Required Assets. While the amount of this cushion could fluctuate on a quarterly basis, we expect it to increase over time based, in part on our expectations regarding the future financial performance of Radian Guaranty, including our projected NIW, expected decrease in defaults and risk distribution strategy. See Notes 1 and 8 of Notes to Consolidated Financial Statements for additional information about the PMIERs and our reinsurance programs, respectively. Additionally, notwithstanding our cushions under both the current PMIERs and PMIERs 2.0, our holding company liquidity of $714.1 million and our $267.5 million unsecured revolving credit facility (both as of December 31, 2018) may be utilized to enhance Radian Guaranty’s PMIERs cushion, as necessary, subject to a $35 million minimum liquidity requirement under our unsecured revolving credit facility. See Note 13 of Notes to Consolidated Financial Statements for additional information on the unsecured revolving credit facility.
Radian Guaranty’s Risk-to-capital as of December 31, 2018 was 13.9 to 1. See Note 19 of Notes to Consolidated Financial Statements for more information. Our combined Risk-to-capital, which represents the consolidated Risk-to-capital measure for all of our mortgage insurance subsidiaries, was 12.8 to 1 as of December 31, 2018. Radian Guaranty is not expected to need additional capital to satisfy state insurance regulatory requirements in their current form.
The NAIC is in the process of reviewing the minimum capital and surplus requirements for mortgage insurers and has been considering changes to the Model Act. In May 2016, a working group of state regulators released an exposure draft of a risk-based capital framework to establish capital requirements for mortgage insurers. The process for developing this framework is ongoing. While the timing and outcome of this process is not known, in the event the NAIC adopts changes to the Model Act, we expect that the capital requirements in states that adopt the new Model Act may increase as a result of the changes. However, we continue to believe the changes to the Model Act will not result in financial requirements that require greater capital than the level currently required under the PMIERs financial requirements.
Title insurance companies, including EnTitle Insurance, are subject to comprehensive state regulations, including minimum net worth requirements. EnTitle Insurance was in compliance with its respective minimum net worth requirements at December 31, 2018. In the event the cash flow from operations of the Services segment is not adequate to fund all of its needs, including the regulatory capital needs of EnTitle Insurance, Radian Group may provide additional funds to the Services segment in the form of an intercompany note or other capital contribution, subject to the approval of the Ohio Department of Insurance, if needed. See also “—Services.” Additional capital support may also be required for potential investments in new business initiatives to support our strategy of growing our businesses.share repurchase programs.
Dividends and Dividend Equivalents. . OurThroughout 2020, and for the first quarter of 2021, our quarterly common stock dividend currently is $0.0025was $0.125 per share and, basedshare. Effective May 4, 2021, Radian Group’s board of directors authorized an increase in the Company’s quarterly dividend to $0.14 per share. On February 9, 2022, Radian Group’s board of directors authorized an increase to the Company’s quarterly dividend from $0.14 to $0.20 per share. Based on our current outstanding shares of common stock and RSUs, we wouldexpect to require approximately $2.1$140 million in the aggregate to pay our quarterly dividends and dividend equivalents for the next 12 months. Radian Group is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations that are incorporated in Delaware. Delaware corporation law provides that dividends are only payable out of a corporation’s capital surplus or (subject to certain limitations) recent net profits. As of December 31, 2018,2021, our capital surplus was $3.5$4.2 billion, representing our dividend limitation under Delaware law.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
IRS Matter. In July 2018, Radian finalized a settlement with the IRS which resolved the issues and concluded all disputes relatedfuture quarterly dividends remains subject to the IRS Matter. In 2018, under the termsboard of the settlement, Radian utilized its “qualified deposits” with the U.S. Treasury to settle its $31 million obligation to the IRS,directors’ determination.
Corporate Expenses and in 2019, the Company expects the IRS to refund to Radian the remaining $58 million that was previously on deposit. Interest Expense. Radian Group will nothas expense-sharing arrangements in place with its principal operating subsidiaries that require those subsidiaries to pay their allocated share of certain holding-company-level expenses, including interest payments on Radian Group’s outstanding debt obligations. Corporate expenses and interest expense on Radian Group’s debt obligations allocated under these arrangements during 2021 of $147.4 million and $82.8 million, respectively, were substantially all reimbursed by its subsidiaries. We expect substantially all of our holding company expenses to continue to be reimbursed forby our subsidiaries under our expense-sharing arrangements. The expense-sharing arrangements between Radian Group and its mortgage insurance subsidiaries, as amended, have been approved by the Pennsylvania Insurance Department, but such approval may be modified or revoked at any portion of this potential settlement under the tax-sharing arrangements with its subsidiaries. See Note 10 of Notes to Consolidated Financial Statements for additional information regarding the IRS Matter.time.
Sources of Liquidity.Taxes. In addition to available cash and marketable securities, Radian Group’s principal sources of cash to fund future short-term liquidity needs include payments made to Radian Group under expense- and tax-sharing arrangements with its subsidiaries. See also “—Radian Group—Long-Term Liquidity Needs” and “—Services.” Pursuant to our tax-sharing agreements, our operating subsidiaries pay Radian Group an amount equal to any federal income tax the subsidiary would have paid on a standalone basis if they were not part of our consolidated tax return. As a result, from time to time, under the provisions of our tax-sharing agreements, Radian Group may pay to or receive cash from its operating subsidiariessubsidiaries amounts that is in excess ofdiffer from Radian Group’s consolidated federal tax payment obligation. In 2018, we made no estimated consolidated federal tax payments to the IRS relating to our 2018 tax year, due to the utilization of certain tax attributes, which included NOLs, AMT credits and research and development tax credits. In 2018, under the provisions of our tax-sharing agreements,During 2021, Radian Group received cash $11.7 million of tax-sharing agreement payments from certain of its subsidiaries that were $222operating subsidiaries.
Capitalization—Holding Company
The following table presents our holding company capital structure.
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| Capital structure | | | | |
| | | | |
| | December 31, |
| ($ in thousands) | | 2021 | | 2020 |
| Debt | | | | |
| Senior Notes due 2024 | | $ | 450,000 | | | $ | 450,000 | |
| Senior Notes due 2025 | | 525,000 | | | 525,000 | |
| Senior Notes due 2027 | | 450,000 | | | 450,000 | |
| Deferred debt costs on senior notes | | (15,527) | | | (19,326) | |
| Revolving credit facility | | — | | | — | |
| Total | | 1,409,473 | | | 1,405,674 | |
| Stockholders’ equity | | 4,258,796 | | | 4,284,353 | |
| Total capitalization | | $ | 5,668,269 | | | $ | 5,690,027 | |
| Debt-to-capital ratio | | 24.9 | % | | 24.7 | % |
Stockholders’ equity decreased by $25.6 million in excess of Radian Group’s 2018 consolidated federal tax payment obligations. This amount includes $53 million of taxes receivable from subsidiaries that had been included in our liquidity as of December 31, 2017. For 2019, these excess tax payments from our subsidiaries are not expected2020 to exceed Radian Group’s federal tax payment obligation to the same extent as in 2018. See “—IRS Matter,” above.
In addition to the primary sources of liquidity listed above, on October 16, 2017, Radian Group entered into a three-year, $225.0 million unsecured revolving credit facility with a syndicate of bank lenders. Effective October 26, 2018, Radian increased the amount of total commitments under the credit facility by $42.5 million, bringing the aggregate unsecured revolving credit facility from $225.0 million to $267.5 million. At December 31, 2018, the full $267.52021. The net decrease in stockholders’ equity resulted primarily from share repurchases of $399.1 million, remains undrawn and available under the facility. See Note 13net unrealized losses on investments of Notes to Consolidated Financial Statements for additional information.
If Radian Group’s current sources$143.6 million primarily as a result of liquidity are insufficient for Radian Group to fund its obligationsan increase in market interest rates during the next 12 months, or if we otherwise decide to increaseyear, and dividends of $104.4 million, partially offset by 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.net income of $600.7 million.
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Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
We regularly evaluate opportunities, based on market conditions, to finance our operations by accessing the capital markets or entering into other types of 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.profile and maintain adequate liquidity for our operations. 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
The principal demands for liquidity in our Mortgage business currently include: (i) the payment of claims and potential claim settlement transactions, net of reinsurance; (ii) expenses (including those allocated from Radian Group—Long-Term Liquidity Needs
Group); (iii) repayments of FHLB advances; (iv) repayments, if any, associated with the Surplus Note due 2027; and (v) taxes, including potential additional purchases of U.S. Mortgage Guaranty Tax and Loss Bonds. See Notes 10 and 16 of Notes to Consolidated Financial Statements for additional information related to these non-interest bearing instruments. In addition to the foregoing liquidity demands, other payments have included and, in the future could include, returns of capital from Radian Guaranty to Radian Group, subject to approval by the Pennsylvania Insurance Department, as discussed below.
The principal sources of liquidity in our short-term liquidity needs discussed above,mortgage insurance business currently include insurance premiums, net investment income and cash flows from: (i) investment sales and maturities; (ii) FHLB advances; and (iii) capital contributions from Radian Group. We believe that the operating cash flows generated by each of our most significantmortgage insurance subsidiaries will provide these subsidiaries with a substantial portion of the funds necessary to satisfy their needs for liquidity beyond the next 12 months are:
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(1) | the repayment of our outstanding senior notes, consisting of: |
$234.1 million principal amountforeseeable future. However, see “Overview—COVID-19 Impacts” and Note 1 of outstanding debt due in June 2020;Notes to Consolidated Financial Statements for discussion about the elevated risks and uncertainties associated with the COVID-19 pandemic, including the impact on our PMIERs Cushion.
$197.7 million principal amount of outstanding debt due in March 2021;
$450.0 million principal amount of outstanding debt due in October 2024; and
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(2) | potential additional capital contributions to our subsidiaries. |
As of December 31, 2018, certain2021, our mortgage insurance subsidiaries maintained claims paying resources of our subsidiaries have incurred federal NOLs that could not be carried-back and utilized$5.9 billion on a separate companystatutory basis, which consist of contingency reserves, statutory policyholders’ surplus, premiums received but not yet earned and loss reserves. In addition, our reinsurance programs are designed to provide additional claims-paying resources during times of economic stress and elevated losses. See Note 8 of Notes to Consolidated Financial Statements for additional information.
Radian Guaranty’s Risk-to-capital as of December 31, 2021 was 11.1 to 1. Radian Guaranty is not expected to need additional capital to satisfy state insurance regulatory requirements in their current form. At December 31, 2021, Radian Guaranty had statutory policyholders’ surplus of $778.1 million. This balance includes a $354.1 million benefit from U.S. Mortgage Guaranty Tax and Loss Bonds issued by the U.S. Department of the Treasury, which mortgage guaranty insurers such as Radian Guaranty may purchase in order to be eligible for a tax return basis. Asdeduction, subject to certain limitations, related to amounts required to be set aside in statutory contingency reserves. See Note 16 of Notes to Consolidated Financial Statements and “Item 1A. Risk Factors” for more information.
Radian Guaranty currently is an approved mortgage insurer under the PMIERs. Private mortgage insurers, including Radian Guaranty, are required to comply with the PMIERs to remain approved insurers of loans purchased by the GSEs. At December 31, 2021, Radian Guaranty’s Available Assets under the PMIERs financial requirements totaled approximately $5.4 billion, resulting in a PMIERs Cushion of $2.1 billion, or 62%, over its Minimum Required Assets. Those amounts compare to Available Assets and a PMIERs cushion of $4.7 billion and $1.3 billion, respectively, at December 31, 2020.
The primary driver of the increase in Radian Guaranty’s PMIERs Cushion during 2021 is the increase in Available Assets, reflecting positive cash flows from operating activities, combined with a decrease in Minimum Required Assets. During 2021, Radian Guaranty’s Minimum Required Assets decreased primarily as a result we are not currently obligated underof a decrease in the number of primary loans in default. Radian Guaranty’s Minimum Required Assets include a benefit as a result of reinsurance agreements, including the addition of the Eagle Re 2021-1 Ltd. and Eagle Re 2021-2 Ltd. reinsurance agreements in April 2021 and November 2021, respectively. See Note 8 of Notes to Consolidated Financial Statements for additional information on our tax-sharing agreement to reimburse these subsidiaries for their separate company federal NOL carryforward. However, if inreinsurance agreements.
Our PMIERs Cushion at December 31, 2021 also includes a future period, onebenefit from the current broad-based application of these subsidiaries utilizes its sharethe Disaster Related Capital Charge that has reduced the total amount of federal NOL carryforwards on a separate entity basis, then Radian Group may be obligated to
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
fund such subsidiary’s share of our consolidated tax liability to the IRS. Certain subsidiaries, including Clayton, currently have federal NOLs on a separate entity basis that are available for future utilization. However, we do not expect to fund material obligations related to these subsidiary NOLs. See also “—Radian Group—Short-Term Liquidity Needs—Sources of Liquidity.”
We expect to meet the long-term liquidity needs of Radian Group with a combination of: (i) available cash and marketable securities; (ii) private or public issuances of debt or equity securities, which we may not be able to do on favorable terms, if at all; (iii) cash received under tax- and expense-sharing arrangements with our subsidiaries; (iv) to the extent available, dividends or returns of capital from our subsidiaries; and (v) any amountsMinimum Required Assets that Radian Guaranty otherwise would have been required to hold against pandemic-related defaults by approximately $300 million and $650 million as of December 31, 2021 and 2020, respectively, taking into consideration our risk distribution structures in effect as of those dates. We expect that application of the Disaster Related Capital Charge will continue to reduce Radian Guaranty’s PMIERs Minimum Required Assets, but this impact will diminish over time.
Notwithstanding the continued application of the Disaster Related Capital Charge, the total amount of Minimum Required Assets we may be required to hold against defaulted loans will increase over time, because the 0.30 multiplier is ableapplied to successfully repaya higher base factor for the defaulting loans (including those in forbearance) as they age, with increases taking place upon four,
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Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
six and 12 missed monthly payments. Additionally, given the lack of an expiration date under the Surplus Note.CARES Act, it is difficult to estimate how long the GSEs may continue to offer COVID-19 forbearance programs for new defaults. It is also difficult to assess how long the GSEs may continue to apply the COVID-19 Amendment to loans in a COVID-19-related forbearance program. The COVID-19 Crisis Period expired March 31, 2021.
See “Item 1. Business—Regulation—Federal Regulation—GSE Requirements for Mortgage Insurance Eligibility.” for more information about the Disaster Related Capital Charge, and for further information, including on the expiration of the COVID-19 Crisis Period.
Even though they hold assets in excess of the minimum statutory capital thresholds and PMIERs financial requirements, the ability of Radian’s mortgage insurance subsidiaries to pay dividends on their common stock is restricted by certain provisions of the insurance laws of Pennsylvania, their state of domicile. Under Pennsylvania’s insurance laws, ordinary dividends and other distributions may only be paid out of an insurer’s positive unassigned surplus measured asunless the Pennsylvania Insurance Department approves the payment 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 or other distributions can be paid by these subsidiariesfrom another source.
In light of Radian Guaranty’s negative unassigned surplus related to operating losses in 2019. Due in part toprior periods, the ongoing need to set aside contingency reserves, and the current ongoing economic uncertainty related to the COVID-19 pandemic, which increased losses in 2020 and could cause losses in future periods, we do not expectanticipate that Radian Guaranty or Radian Reinsurance will have positive unassigned surplus, and therefore we expect that they will not have the abilitybe permitted under applicable insurance laws to pay ordinary dividends or other distributions for the foreseeable future.next several years without prior approval from the Pennsylvania Insurance Department. Under Pennsylvania’s insurance laws, an insurer may request an extraordinary dividend or distribution, but payment is subject to the approval ofmust obtain the Pennsylvania Insurance Commissioner.Department’s approval to pay an Extraordinary Distribution. Radian Guaranty has sought and received such approval to return capital by paying an Extraordinary DistributionDistributions to Radian Group, most recently in 2018.February 2022. See Note 1916 of Notes to Consolidated Financial Statements for additional information.information on our Extraordinary Distributions, statutory dividend restrictions and contingency reserve requirements.
There can also be no assurance that our Services segment will generate sufficient cash flow to pay dividends. See “—Services” below.
Mortgage Insurance
As of December 31, 2018, our Mortgage Insurance segment maintained claims paying resources of $4.3 billion on a statutory basis, which consists of contingency reserves, statutory policyholders’ surplus, premiums received but not yet earned and loss reserves.
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) and (iii) taxes. In addition, Radian Guaranty’s Surplus Note to Radian Group has a due date of December 31, 2027. The Surplus Note may be redeemed at any time upon 30 days prior notice, subject to the approval of the Pennsylvania Insurance Department.
In August 2016, Radian Guaranty and Radian Reinsurance becameare both members of the FHLB. As members, they may borrow from the FHLB, subject to certain conditions, which include the needrequirements 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 purchasefor general cash management purposes and for purchases of additional investment securities that have similar durations, for the purpose of generating additional earnings from our investment securities portfolio with minimallimited incremental risk. As of December 31, 2018,2021, there were $82.5$151.0 million of FHLB advances outstanding.
The principal sources of liquidity in our mortgage insurance business currently include insurance premiums, net investment income and cash flows from (i) investment sales and maturities; (ii) FHLB advances; or (iii) capital contributions from Radian Group. We believe that the operating cash flows generated by each of our mortgage insurance subsidiaries will provide these subsidiaries with a substantial portion of the funds necessary to satisfy their claim payments, operating expenses and taxes for the foreseeable future.
Private mortgage insurers, including Radian Guaranty, are required to comply with the PMIERs to remain approved insurers of loans purchased by the GSEs. Radian Guaranty currently is an approved mortgage insurer under the PMIERs and is in compliance with the PMIERs financial requirements. See “—Radian Group—Short-Term Liquidity Needs—Capital Support for Subsidiaries” and Note 112 of Notes to Consolidated Financial Statements for additional information.
Securities Lending Agreements. Radian Guaranty and Radian Reinsurance from time to time enter into certain short-term securities lending agreements with third-party Borrowers for the purpose of increasing the yield on our investment securities portfolio with minimal incremental risk. Under our securities lending program, Radian Guaranty and Radian Reinsurance loan certain securities in their investment portfolios to these Borrowers for short periods of time in exchange for collateral consisting of cash and other securities. We have the right to request the return of the loaned securities at any time.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Under our securities lending agreements, the Borrower generally may return the loaned securities to us at any time, which would require us to return the cash and other collateral within the standard settlement period for the loaned securities on the principal exchange or market in which the securities are traded. We manage this liquidity risk associated with the cash collateral by maintaining the cash collateral in a short-term money-market fund with daily availability.
The counterparty risk under these programs is reduced by the amounts of collateral received. On a daily basis, the value of the underlying securities that we have loaned to the Borrowers is compared to the value of cash and securities collateral we received from the Borrowers, and additional cash or securities are requested or returned, as applicable. In addition, we are indemnified against counterparty credit risk by the intermediary. For additional information on our securities lending agreements, see Note 6of Notes to Consolidated Financial Statements.
Serviceshomegenius
As of December 31, 2018,2021, our Serviceshomegenius segment maintained cash and liquid investments totaling $79.3 million, primarily held by Radian Title Insurance.
Title insurance companies, including Radian Title Insurance, are subject to comprehensive state regulations, including minimum net worth requirements. Radian Title Insurance was in compliance with all of its minimum net worth requirements at December 31, 2021. In the event the cash equivalents totaling $8.6 million, which included restricted cashflows from operations of $2.0 million.
The principal demands for liquidity in our Servicesthe homegenius segment include: (i)are not adequate to fund all of its needs, including the paymentregulatory capital needs of employee compensation and other operating expenses, including those allocated from Radian Group; (ii) reimbursements toTitle Insurance, Radian Group for its portion of allocated expense; and (iii) dividends to Radian Group, if any.
The principal sources of liquidity in our Services segment are cash generated by operations and,may provide additional funds to the extent necessary,homegenius segment in the form of an intercompany note or other capital contributions fromcontribution, and if needed for Radian Group.Title Insurance, subject to the approval of the Ohio Department of Insurance. Additional capital support may also be required for potential investments in new business initiatives to support our strategy of growing our businesses.
Liquidity levels may fluctuate depending on the levels and contractual timing of our invoicing and the payment practices of the Servicesour homegenius clients, in combination with the timing of Services’our homegenius segment’s payments for employee compensation and to external vendors. The amount, if any, and timing of the Serviceshomegenius segment’s dividend paying capacity will depend primarily on the amount of excess cash flow generated by the segment.
The Services segment has not generated sufficient cash flows to pay dividends to Radian Group. Additionally, while cash flow has been sufficient to pay the Services segment’s direct operating expenses, it has not been sufficient to reimburse Radian Group for $97.3 million of its accumulated allocated operating expense and interest expense. We do not expect that the Services segment will be able to bring its reimbursement obligations current in the foreseeable future. In the event the cash flow from operations of the Services segment is not adequate to fund all of its needs, Radian Group may provide additional funds to the Services segment in the form of a capital contribution or an intercompany note.
Cash Flows
The following table summarizes our consolidated cash flows from operating, investing and financing activities:
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| | | | | | | | | | | |
| (In thousands) | Year Ended December 31, |
| 2018 | | 2017 | | 2016 |
| Net cash provided by (used in): | | | | | |
| Operating activities | $ | 677,786 |
| | $ | 360,575 |
| | $ | 381,724 |
|
| Investing activities | (689,414 | ) | | (201,492 | ) | | (176,058 | ) |
| Financing activities | 22,386 |
| | (125,084 | ) | | (203,269 | ) |
| Effect of exchange rate changes on cash and restricted cash | — |
| | 431 |
| | (481 | ) |
| Increase (decrease) in cash and restricted cash | $ | 10,758 |
| | $ | 34,430 |
| | $ | 1,916 |
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Operating Activities
Our most significant source of operating cash flows is from premiums received from our insurance policies, while our most significant uses of operating cash flows are generally for claims paid on our insured policies and our operating expenses. Net cash provided by operating activities totaled $677.8 million for 2018, compared to $360.6 million in 2017. This increase in net cash provided by operating activities in 2018, compared to 2017, was principally the result of: (i) an increase in net premiums written in 2018 and (ii) a reduction in claims paid in 2018. Claims paid for 2017 included payments that were made in connection with the scheduled final settlement of the Freddie Mac Agreement in the third quarter of 2017.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net cash provided by operating activities totaled $360.6 million in 2017, compared to $381.7 million in 2016. This decrease in net cash provided by operating activities in 2017, compared to 2016, was principally the result of estimated payments made for income taxes, partially offset by an increase in net premiums received and a reduction in net claims paid.
Investing Activities
Net cash used in investing activities increased in 2018, compared to 2017, primarily as a result of: (i) an increase in purchases of short-term investments; (ii) a decrease in proceeds from trading securities; and (iii) a decrease in proceeds, net of purchases of fixed-maturity investments. These changes were partially offset by an increase in proceeds, net of purchases, from equity securities. Net cash used in investing activities increased in 2017, compared to 2016, primarily as a result of (i) an increase in purchases, net of proceeds, from sales of equity securities and (ii) a decrease in proceeds from sales of trading securities. These increases were partially offset by a decrease in purchases, net of proceeds from sales, of fixed-maturity investments available for sale.
Financing Activities
Net cash provided by financing activities increased for 2018, as compared to net cash used in financing activities during 2017. For 2018 our primary financing activities included an increase in secured borrowings from the FHLB, partially offset by an increase in the purchases of our common shares. For 2017 our primary financing activities included the issuance of $450 million aggregate principal amount of Senior Notes due 2024 as well as: (i) the purchases of aggregate principal amounts of $141.4 million, $115.9 million and $152.3 million of our Senior Notes due 2019, 2020 and 2021, respectively; (ii) the settlement of our obligations on the remaining $68.0 million aggregate principal amount of our Convertible Senior Notes due 2019; and (iii) the purchase of $21.6 million aggregate principal amount of our Convertible Senior Notes due 2017, all of which were settled in cash for an aggregate amount of $592.5 million during 2017.
Net cash used in financing activities decreased for 2017, compared to 2016, primarily as a result of reduced repurchases of our common stock, partially offset by purchases and redemptions of debt exceeding debt issuances. During 2016, cash used in financing activities primarily related to purchases of our Convertible Senior Notes due 2017 and 2019 as well as repurchases of our common stock, partially offset by the issuance of $350 million aggregate principal amount of Senior Notes due 2021.
See “Item 8. Financial Statements and Supplementary Data—Consolidated Statements of Cash Flows” for additional information.
Stockholders’ Equity
Stockholders’ equity increased to $3.5 billion at December 31, 2018, from $3.0 billion at December 31, 2017. The net increase in stockholders’ equity resulted primarily from our net income of $606.0 million for 2018, partially offset by: (i) net unrealized losses on investments of $87.1 million and (ii) shares repurchased under our share repurchase program of $50.1 million. See Note 15 of Notes to Consolidated Financial Statements for additional information.
During 2018, Radian’s holding company debt-to-capital ratio decreased to 22.8% at December 31, 2018 from 25.5% at December 31, 2017.
Ratings
Radian Group, Radian Guaranty, Radian Reinsurance and Radian ReinsuranceTitle Insurance have been assigned the financial strength 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. See “Item“Item 1A. Risk Factors—The current financial strength ratings assigned to our mortgage insurance subsidiaries could weaken our competitive position and potential downgrades by rating agencies to these ratings and the ratings assigned to Radian Guaranty may fail to maintain its eligibility status withGroup could adversely affect the GSEs.Company.”
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Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Ratings | | | | | | | | | |
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| Moody’s (1) | | S&P (2) |
Radian Group | Ba2 | | BB+ |
Radian Guaranty | Baa2 |
| BBB+ |
Radian Reinsurance | N/A | | BBB+ |
______________________
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(1)Subsidiary | Based on the October 1, 2018 update, | Moody’s outlook for Radian Group and Radian Guaranty currently is Stable.(1) |
| S&P (2) | | Fitch (3) | | Demotech (4) | |
(2) | Based on the October 11, 2018 update, S&P’s outlook for Radian Group | | Ba1 | | BB+ | | BBB- | | N/A | |
Radian Guaranty and | | Baa1 | | BBB+ | | A- | | N/A | |
Radian Reinsurance is currently Stable. | | N/A | | BBB+ | | N/A | | N/A | |
| Radian Title Insurance | | N/A | | N/A | | N/A | | A | |
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(2)Based on the April 28, 2021 update, S&P’s outlook for Radian Group, Radian Guaranty and Radian Reinsurance is currently Stable. Table of Contents(3)Based on the May 3, 2021 release, Fitch’s outlook for Radian Group and Radian Guaranty is currently Stable.Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting PoliciesEstimates
SEC guidance defines Critical Accounting PoliciesEstimates as those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operation of the registrant. These items require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing our consolidated financial statements in accordance with GAAP, management has made estimates, assumptions and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
In preparing these financial statements, management has utilized available information, including our past history, industry standards and the current and projected economic and housing environments, among other factors, in forming its estimates, assumptions and judgments, giving due consideration to materiality. Because the use of estimates is inherent in GAAP, actual results could differ from those estimates. In addition, other companies may utilize different estimates, which may impact comparability of our results of operations to those of companies in similar businesses. A summary of the accounting policiesestimates that management believes are critical to the preparation of our consolidated financial statements is set forth below. See Note 2 of Notes to Consolidated Financial Statements for additional disclosures regarding our significant accounting policies.
Mortgage Insurance Portfolio
Reserve for Losses and LAE
We establish reserves to provide for losses and LAE, which include the estimated costs of settling claims in our Mortgage Insurance segment,mortgage insurance portfolio, in accordance with the accounting standard regarding accounting and reporting by insurance enterprises. Although this standard specifically excludes mortgage insurance from its guidance relating to the reserve for losses, because there is no specific guidance for mortgage insurance, we establish reserves for mortgage insurance as described below, using the guidance contained in this standard supplemented with other accounting guidance.
Estimating our loss reserves involves significant reliance upon assumptions and estimates with regard to the likelihood, magnitude and timing of each potential loss, including an estimate of the impact of our Loss Mitigation Activities. The models, assumptions and estimates we use to establish loss reserves may prove to be inaccurate, especially during an extended economic downturn or a period of extreme market volatility and uncertainty. As such, we cannot be certain that our reserve estimate will be adequate to cover ultimate losses on incurred defaults. For example,In our mortgage insurance loss reserves generally increase as defaulted loans age, because historically, as defaulted loans age, they have been more likely to result in foreclosure, and therefore, have been more likely to result in a claim payment. While we believe this remains accurate, following the financial crisis, there are a significant number of loans in our defaulted portfolio that have been in default for an extended period of time, but which have not been subject to foreclosure, and therefore, have not resulted in claims. As a result, significant uncertainty remains with respect to the ultimate resolution of these aged defaults. This uncertainty requires management to use considerable judgment in estimating the rate at which these loans will result in claims.
Commutations and other negotiated terminations of our insured risks in our Mortgage Insurance segment provide us with an opportunity to exit exposures for an agreed upon payment, or payments, sometimes at an amount less than the previously estimated ultimate liability. Once all exposures relating to such policies are extinguished, all reserves for losses and LAE and other balances relating to the insured policies are generally reversed, with any remaining net gain or loss recorded through provision for losses. We take into consideration the specific contractual and economic terms for each individual agreement when accounting for our commutations or other negotiated terminations, which may result in differences in the accounting for these transactions.
In our Mortgage Insurance business, the default and claim cycle begins with the receipt of a default notice from the loan servicer. Reserves for losses are established upon receipt of notification from servicers that a borrower has missed two monthly payments, which is when we consider a loan to be in default for financial statement and internal tracking purposes. We also establish reserves for associated LAE, consisting of the estimated cost of the claims administration process, including legal and other fees and expenses associated with administering the claims process.
We maintain an extensive database of default and claim payment history, and use models based on a variety of loan characteristics to determine the likelihood that a default will reach claim status.
With respect to loans that are in default, considerable judgment is exercised as to the adequacy of reserve levels. For purposes of reserve modeling, loans are aggregated into groups using a variety of factors. The attributes currently used to define the groups for purposes of developing various assumptions include, but are not limited to, the Stage of Default, the Time in Default and type of insurance (i.e., primary or pool). We use an actuarial projection methodology referred to as a “roll rate” analysis that uses historical claim frequency information to determine the projected ultimate Default to Claim Rates based on the Stage of Default and Time in Default as well as the date that a loan goes into default. With respect to new defaults in FEMA Designated Areas associated with Hurricanes Harvey and Irma received from September 2017 through February 2018, we assume a lower gross Default to Claim Rate than for new defaults with similar characteristics from other areas, due to our
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
expectations based on past experience with other natural disasters, that a significant portion of these defaults will not result in claims. The Default to Claim Rate also includes our estimates with respect to expected Rescissions and Claim Denials, which have the effect of reducing our Default to Claim Rates. We forecast the impact of our Loss Mitigation Activity in protecting us against fraud, underwriting negligence, breach of representation and warranties, inadequate documentation of submitted claims and other items that may give rise to Rescissions or cancellations and Claim Denials, to help determine the Default to Claim Rate. Our Loss Mitigation Activities have resulted in challenges from certain lender and servicer customers, which have resulted in some reversals of our decisions regarding Rescissions, Claim Denials and Claim Curtailments in the ordinary course. Although we believe that our Loss Mitigation Activities are justified under our policies, certain challenges have resulted in disputes and litigation, which if resolved unfavorably to us, could require us to reassume the risk on, and increase loss reserves for, those policies or pay additional claims.See Note 11 of Notes to Consolidated Financial Statements for additional information. Our Master Policies specify the time period during which a suit or action arising from any right of the insured under the policy must be commenced. The assumptions embedded intable detailing our estimated Default to Claim Rate on our in-force default inventory include an adjustment to our estimated Rescissions and Claim Denials to account for the fact that we expect a certain number of policies to be reinstated and ultimately to be paid, as a result of valid challenges by such policy holders.
Our aggregate weighted-average Default to Claim Rate assumption (net of Claim Denials and Rescissions) used in estimating our primary reserve for losses was 33% (31% excluding pending claims) at December 31, 2018 and 31% (29% excluding pending claims) at December 31, 2017. Our Default to Claim Rate estimates on defaulted loans are mainly developed based on the Stage of Default and Time in Default of the underlying defaulted loans grouped according to the period in which the default occurred, as measured by the progress toward foreclosure sale and the number of months in default. Our gross Default to Claim Rate assumption for new primary defaults was reduced from 10% at December 31, 2017, to 8% at December 31, 2018. Our estimates of gross Default to Claim Rates on our primary portfolio as of December 31, 2018 generally ranged from 8% for new defaults to 75% for Foreclosure Stage Defaults. As discussed above, based on our past experience, we assumed an average gross Default to Claim Rate of 3% for new defaults in FEMA Designated Areas associated with Hurricanes Harvey and Irma received subsequent to those two hurricanes and through February 2018, which contributed to the decrease in the overall weighted-average Default to Claim Rate assumption at December 31, 2018 as compared to December 31, 2017. Our estimate of expected Rescissions and Claim Denials (net of expected Reinstatements) embedded in our estimated Default to Claim Rate is generally based on our recent experience. Consideration is also given to differences in characteristics between those rescinded policies and denied claims and the loans remaining in our defaulted inventory.assumptions.
After estimating the Default to Claim Rate, we estimate Claim Severity based on the average of recently observed severity rates within product type, type of insurance and Time in Default cohorts.cohorts, as adjusted to account for anticipated differences in future results compared to recent trends. These average severity estimates are then applied to individual loan coverage amounts to determine reserves. Similar to the Default to Claim Rate, Claim Severity also is impacted by the length of time that loans are in default and by our Loss Mitigation Activity. For claims under our primary mortgage insurance,Primary Mortgage Insurance, the coverage percentage is applied to the claim amount, which consists of the unpaid loan principal, plus past due interest (for which our liability is contractually capped in accordance with the terms of our Master Policies) and certain expenses associated with the default, to determine our maximum liability. Therefore, Claim Severity generally increases the longer that a loan is in default.
We considered the sensitivity of first-lien loss reserve estimates at December 31, 2021 by assessing the potential changes resulting from a parallel shift in Claim Severity and Default to Claim Rate estimates for primary loans, excluding any potential benefits from reinsurance. For example, assuming all other factors remain constant, for every one percentage point change in primary Claim Severity (which we estimate to be 98.7% of defaulted risk exposure at December 31, 2021), we estimated that our loss reserves would change by approximately $8.0 million at December 31, 2021. Assuming all other factors remain constant, for every one percentage point change in our overall primary net Default to Claim Rate (which we estimate to
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Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
be 46% at December 31, 2021, including our assumptions related to Loss Mitigation Activities), we estimated a $17.1 million change in our loss reserves at December 31, 2021.
Senior management regularly reviews the modeled frequency, Claim Severity and Loss Mitigation Activity estimates, which are based on historical trends, as described above. If recent emerging or projected trends differ significantly from the historical trends used to develop the modeled estimates, management evaluates these trends and determines how they should be considered in its reserve estimates.
Estimating our case reserve for losses involves significant reliance upon assumptions and estimates with regard to the likelihood, magnitude and timing of each potential loss. The models, assumptions and estimates we use to establish loss reserves may prove to be inaccurate, especially during an extended economic downturn or a period of market volatility and economic uncertainty such as we have experienced due to the COVID-19 pandemic. These assumptions require management to use considerable judgment in estimating the rate at which these loans will result in claims. As such, given the current environment, there is significant uncertainty around our reserve estimate.
Premium Revenue Recognition
Premiums on mortgage insurance products are written on a recurring basis, either as monthly or annual premiums, or on a multi-year basis as a single premium. Monthly premiums written are earned as coverage is provided each month. For certain monthly policies where the billing is deferred for the first month’s coverage period, currently to the end of the policy, we record a net premium receivable representing the present value of such deferred premiums that we estimate will be collected at that future date. We recognize changes in this receivable based on changes in the estimated amount and timing of such collections, including as a result of changes in observed trends as well as our periodic review of our servicing guide and our operations and collections practices.
Key assumptions supporting our estimate include a collection rate and average life. During 2021 and 2020, we adjusted our assumptions for collectability and average life, which had an impact of increasing the net premium receivable and net premiums earned by $2.3 million and $11.3 million, respectively. If the collection rate assumption increased or decreased by 500 basis points, it would result in a $2.5 million increase or decrease, respectively, in the net premium receivable and net premiums earned. If the average life assumption increased or decreased by one year, it would result in an approximate $2.5 million decrease or increase, respectively, in the net premium receivable and net premiums earned. Additionally, given the difference between the present value of the net premium receivable recorded and the contractual premiums due, changes in our servicing guide, operations or collection practices could have up to a $43.7 million pre-tax benefit to our results of operations in periods when any changes are implemented.
Single premiums written are initially recorded as unearned premiums and earned over time based on the anticipated loss pattern and the estimated period of risk exposure, which is primarily derived from historical experience and other factors such as projected losses, premium type and projected contractual periods of risk based on original LTV. Our estimate for the single premium earnings pattern is updated periodically and subject to change given uncertainty as to the underlying loss development and duration of risk.
During 2019, we updated our estimated period of risk exposure due to the continuing increase in the significance of borrower-paid Single Premium Policies as well as our estimated anticipated loss pattern due to changes in observed and projected losses. During 2019, this change in estimate resulted in a $32.9 million increase in net premiums earned. There were no changes to our single premium earnings pattern estimate in 2020 or 2021.
Actual future experience that is different than expected loss development or policy cancellations could result in further material increases or decreases in the recognition of net premiums earned. Based on historical experience, losses are relatively low during the first two years after a loan is originated and then increase over a period of several years before declining; however, several factors can impact and change this cycle, including the economic environment, the quality of the underwriting of the loan, characteristics of the mortgage loan, the credit profile of the borrower, housing prices and unemployment rates. If the timing of losses were to shift, it could accelerate or decelerate our recognition of net premiums earned and could have a material impact on our results of operations.
Credit Losses and Other Impairments
Investments
We perform an evaluation of fixed-maturity securities available for sale each quarter to assess whether any decline in their fair value below cost is deemed to be a credit impairment recognized in earnings. Factors considered in our assessment for impairment include the extent to which the amortized cost basis is greater than fair value and the reasons for the decline in value. As of December 31, 2021, our gross unrealized losses on available for sale securities was $38.0 million, which can fluctuate materially over time based on changes in market conditions. During 2021 and 2020, we recognized a $0.7 million credit recovery and a $1.0 million credit loss, respectively, related to our fixed-maturity securities available for sale. See Note 6 of Notes to Consolidated Financial Statements for additional information regarding impairments related to investments.
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Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Fair Value of Financial Instruments
Our estimated fair value measurements are intended to reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and the risks inherent in the inputs to the model. Changes in economic conditions and capital market conditions, including but not limited to, benchmark interest rate changes, credit spread changes, market volatility and changes in the value of underlying collateral, could cause actual results to differ materially from our estimated fair value measurements.
Nearly all of our financial instruments recorded at fair value relate to our investment portfolio, which totaled $6.5 billion as of December 31, 2021. The primary 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. For additional information regarding the sensitivity of our investment portfolio to these inputs, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”
See also Note 5 of Notes to Consolidated Financial Statements for additional information pertaining to financial instruments at fair value and our valuation methodologies.
Liability for Legal Contingencies
As discussed in Note 13 of Notes to Consolidated Financial Statements, we are subject to various legal proceedings and claims that arise in the ordinary course of business. We establish accruals only when we determine both that it is probable that a loss has been incurred and the amount of the loss is reasonably estimable, which requires significant judgment.
As described in Note 13 of Notes to Consolidated Financial Statements, we believe there was not at least a reasonable possibility we may have incurred a material loss, or a material loss greater than a recorded accrual, concerning loss contingencies for asserted legal and other claims. Due to the inherently subjective nature of these estimates and the uncertainty and unpredictability surrounding the outcome of legal and other proceedings, actual results may differ materially from any amounts that have been accrued. If one or more legal matters were resolved against the Company in a reporting period for amounts above management’s expectations, actual results could differ materially from any amounts that have been accrued.
Income Taxes
We are required to establish a valuation allowance against our deferred tax assets when it is more likely than not that all or some portion of our deferred tax assets will not be realized. At each balance sheet date, we assess our need for a valuation allowance and this assessment is based on all available evidence, both positive and negative, and requires management to exercise judgment and make assumptions regarding whether such deferred tax assets will be realized in future periods. Future realization of our deferred tax assets will ultimately depend on the existence of sufficient taxable income of the appropriate character (ordinary income or capital gains) within the applicable carryback and carryforward periods provided under the tax law. In making our assessment of the more likely than not standard, the weight assigned to the effect of both positive and negative evidence is commensurate with the extent to which such evidence can be objectively verified.
We have determined that certain non-insurance entities within Radian may continue to generate taxable losses on a separate company basis in the near term and may not be able to fully utilize certain state and local NOLs on their state and local tax returns. Therefore, with respect to deferred tax assets relating to these state and local NOLs and other state timing adjustments, we retained a valuation allowance of $83.4 million at December 31, 2021 and $77.7 million at December 31, 2020.
Estimated factors in this assessment include, but are not limited to, forecasts of future income and actual and planned business and operational changes. An amount up to the total valuation allowance currently recorded could be recognized if our assessment of realizability changes. Our assumptions around these items and the weight assigned to them have remained consistent in recent periods. See Note 10 of Notes to Consolidated Financial Statements for additional information.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the potential for loss due to adverse changes in the value of financial instruments as a result of changes in market conditions. Examples of market risk include changes in interest rates, credit spreads, foreign currency exchange rates and equity prices. We perform sensitivity analyses to determine the effects of market risk exposures on our investment securities by determining the potential loss in future earnings, fair values or cash flows of market-risk-sensitive instruments resulting from one or more selected hypothetical changes in the above mentioned market risks.
Interest-Rate Risk and Credit-Spread Risk
The primary market risks in our investment portfolio are interest-rate risk and credit-spread risk, namely the fair value sensitivity of our fixed income securities to changes in interest rates and credit spreads, respectively. We regularly analyze our exposure to interest-rate risk and credit-spread risk and have determined that the fair value of our investments is materially exposed to changes in both interest rates and credit spreads. As of December 31, 2021, we held $257 million of investment securities for trading purposes, representing less than 5% of our total investment portfolio. Accordingly, in presenting this discussion, we have not distinguished between trading and non-trading instruments.
We calculate the duration of our fixed income securities, expressed in years, in order to estimate the interest-rate sensitivity of these securities. The average duration of our total fixed income portfolio was 4.5 years at December 31, 2021 and 4.7 years at December 31, 2020. To assist us in setting duration targets for the investment portfolio, we analyze: (i) the interest-rate sensitivities of our liabilities, including prepayment risk associated with premium cash flows and credit losses; (ii) entity specific cash flows under various economic scenarios; (iii) return, volatility and correlation of specific asset classes and the interconnection with our liabilities; and (iv) our current risk appetite.
Our stress analysis for interest rates is based on the change in fair value of our fixed income securities, assuming a hypothetical instantaneous and parallel 100-basis point increase in the U.S. Treasury yield curve, with all other factors remaining constant. The carrying value of our fixed income securities has a balance of $6.5 billion and $6.8 billion as of December 31, 2021 and 2020, respectively. If interest rates experienced an increase of 100 basis points, our fixed income portfolio would decrease by $281.7 million and $300.4 million of the market value of the related fixed income portfolio for 2021 and 2020, respectively.
Credit spread represents the additional yield on a fixed income security, above the risk-free rate, that is paid by an issuer to compensate investors for assuming the credit risk of the issuer and market liquidity of the fixed income security. We manage credit-spread risk on both an entity and group level, across issuer, maturity, sector and asset class. Our stress analysis for credit-spread risk is based on the change in fair value of our fixed income securities, assuming a hypothetical 100-basis point increase in all credit spreads, with the exception of U.S. Treasury and agency RMBS obligations for which we have assumed no change in credit spreads, and assuming all other factors remain constant. If credit spreads experienced an increase of 100 basis points, our fixed income portfolio would decrease by $262.8 million and $285.4 millionof the market value of the related fixed income portfolio for 2021 and 2020, respectively.
Actual shifts in credit spreads generally vary by issuer and security, based on issuer-specific and security-specific factors such as credit quality, maturity, sector and asset class. Within a given asset class, investment grade securities generally exhibit less credit-spread volatility than securities with lower credit ratings. At December 31, 2021, 95.5% of our investment portfolio was rated investment grade.
Our sensitivity analyses for interest-rate risk and credit-spread risk provide an indication of our investment portfolio’s sensitivity to shifts in interest rates and credit spreads. However, the timing and magnitude of actual market changes may differ from the hypothetical assumptions used in our sensitivity calculations.
See “Item 1. Business—Investment Policy and Portfolio” for a discussion of portfolio strategy and risk exposure.
Securities Lending Agreements. Radian Group, Radian Guaranty and Radian Reinsurance from time to time enter into short-term securities lending agreements with third-party borrowers for the purpose of increasing the income on our investment securities portfolio with limited incremental risk. Market factors, including changes in interest rates, credit spreads and equity prices, may impact the timing or magnitude of cash outflows for the return of cash collateral. As of December 31, 2021 and 2020, the carrying value of these securities included in the sensitivity analyses above was $86.0 million and $53.7 million, respectively.
We also have the right to request the return of the loaned securities at any time. For additional information on our securities lending agreements, see Note 6 of Notes to Consolidated Financial Statements.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
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Report of Independent Registered Public Accounting Firm
To theBoard of Directors and Stockholders of Radian Group Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Radian Group Inc. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive income, changes in common stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, including the related notes and financial statement schedules listed in the index appearing under Item 15(a)3 (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of First-Lien Primary Case Reserves for Mortgage Insurance Policies
As described in Notes 2 and 11 to the consolidated financial statements, the Company establishes case reserves for losses on mortgage insurance policies for loans that are considered to be in default, as well as reserves for loss adjustment expenses, losses incurred but not reported (“IBNR”) and other reserves. As of December 31, 2021, first-lien primary case reserves were $790.4 million of the total $823.1 million of mortgage insurance loss reserves. Management’s estimate of the case reserves for losses involves significant reliance upon assumptions and estimates with regard to the likelihood, magnitude and timing of each potential loss. Management uses an actuarial projection methodology referred to as a “roll rate” analysis that uses historical claim frequency information to determine the projected ultimate Default to Claim Rates based on the Stage of Default and Time in Default as well as the date that a loan goes into default. After estimating the Default to Claim Rate, management estimates Claim Severity based on the average of recently observed severity rates within product type, type of insurance, and Time in Default cohorts.
The principal considerations for our determination that performing procedures relating to the valuation of first-lien primary case reserves for mortgage insurance policies is a critical audit matter are (i) the significant judgment by management when developing their estimates of the Default to Claim Rates and Claim Severity, which in turn led to a high degree of auditor subjectivity and judgment in performing procedures relating to such estimates; (ii) the significant audit effort and subjectivity in evaluating the audit evidence related to the Default to Claim Rates and Claim Severity; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s valuation of first-lien primary case reserves for mortgage insurance policies, including controls over the development of the Default to Claim Rates and Claim Severity. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent estimate of the case reserves for first-lien primary mortgage insurance policies using actual historical data, comparing this independent estimate to management’s determined case reserves, and evaluating the reasonableness of management’s assumptions related to the Default to Claim Rates and Claim Severity. Performing these procedures involved testing the completeness and accuracy of data provided by management and independently developing Default to Claim Rates and Claim Severity assumptions based on data provided by management.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 25, 2022
We have served as the Company’s auditor since 2007.
Radian Group Inc. and Subsidiaries
Consolidated Balance Sheets
| | | | | | | | | | | | | | |
| | December 31, |
| (In thousands, except per-share amounts) | | 2021 | | 2020 |
| Assets | | | | |
| Investments (Notes 5 and 6) | | | | |
| Fixed-maturities available for sale—at fair value, net of allowance for credit losses of $0 and $948 (amortized cost of $5,367,729 and $5,393,623) | | $ | 5,517,078 | | | $ | 5,723,340 | |
| Trading securities—at fair value (amortized cost of $234,382 and $260,773) | | 256,546 | | | 290,885 | |
| Equity securities—at fair value (cost of $176,229 and $145,501) | | 184,245 | | | 151,240 | |
| Short-term investments—at fair value (includes $48,652 and $15,587 of reinvested cash collateral held under securities lending agreements) | | 551,508 | | | 618,004 | |
| Other invested assets—at fair value | | 4,165 | | | 4,973 | |
| Total investments | | 6,513,542 | | | 6,788,442 | |
| Cash | | 151,145 | | | 87,915 | |
| Restricted cash | | 1,475 | | | 6,231 | |
| Accrued investment income | | 32,812 | | | 34,047 | |
| Accounts and notes receivable | | 124,016 | | | 121,294 | |
| Reinsurance recoverables (includes $51 and $32 for paid losses) | | 67,896 | | | 73,202 | |
| Deferred policy acquisition costs | | 16,317 | | | 18,305 | |
| Property and equipment, net (Note 2) | | 75,086 | | | 80,457 | |
| Goodwill and other acquired intangible assets, net (Note 7) | | 19,593 | | | 23,043 | |
| Other assets (Note 9) | | 837,303 | | | 715,085 | |
| | | | |
| Total assets | | $ | 7,839,185 | | | $ | 7,948,021 | |
| | | | |
| Liabilities and Stockholders’ Equity | | | | |
| Liabilities | | | | |
| Unearned premiums | | $ | 329,090 | | | $ | 448,791 | |
| Reserve for losses and LAE (Note 11) | | 828,642 | | | 848,413 | |
| Senior notes (Note 12) | | 1,409,473 | | | 1,405,674 | |
| FHLB advances (Note 12) | | 150,983 | | | 176,483 | |
| Reinsurance funds withheld | | 228,078 | | | 278,555 | |
| Net deferred tax liability (Note 10) | | 337,509 | | | 213,897 | |
| Other liabilities | | 296,614 | | | 291,855 | |
| Total liabilities | | 3,580,389 | | | 3,663,668 | |
| Commitments and Contingencies (Note 13) | | 0 | | 0 |
| Stockholders’ equity | | | | |
| Common stock: par value $0.001 per share; 485,000 shares authorized at December 31, 2021 and 2020; 194,408 and 210,130 shares issued at December 31, 2021 and 2020, respectively; 175,421 and 191,606 shares outstanding at December 31, 2021 and 2020, respectively | | 194 | | | 210 | |
| Treasury stock, at cost: 18,987 and 18,524 shares at December 31, 2021 and 2020, respectively | | (920,798) | | | (910,115) | |
| Additional paid-in capital | | 1,878,372 | | | 2,245,897 | |
| Retained earnings | | 3,180,935 | | | 2,684,636 | |
| Accumulated other comprehensive income (loss) (Note 15) | | 120,093 | | | 263,725 | |
| Total stockholders’ equity | | 4,258,796 | | | 4,284,353 | |
| Total liabilities and stockholders’ equity | | $ | 7,839,185 | | | $ | 7,948,021 | |
See Notes to Consolidated Financial Statements.
102
Radian Group Inc. and Subsidiaries
Consolidated Statements of Operations
| | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | |
| (In thousands, except per-share amounts) | | 2021 | | 2020 | | 2019 | | |
| Revenues | | | | | | | | |
| Net premiums earned (Note 8) | | $ | 1,037,183 | | | $ | 1,115,321 | | | $ | 1,145,349 | | | |
| Services revenue (Note 4) | | 125,825 | | | 105,385 | | | 154,596 | | | |
| Net investment income (Note 6) | | 147,909 | | | 154,037 | | | 171,796 | | | |
| Net gains on investments and other financial instruments (includes net realized gains on investments of $20,842, $35,826 and $10,843) | | 15,603 | | | 60,277 | | | 51,719 | | | |
| Other income | | 3,412 | | | 3,597 | | | 3,495 | | | |
| Total revenues | | 1,329,932 | | | 1,438,617 | | | 1,526,955 | | | |
| | | | | | | | |
| Expenses | | | | | | | | |
| Provision for losses | | 20,877 | | | 485,117 | | | 132,031 | | | |
| Policy acquisition costs | | 29,029 | | | 30,989 | | | 25,314 | | | |
| Cost of services | | 103,714 | | | 86,066 | | | 108,324 | | | |
| Other operating expenses | | 323,686 | | | 280,710 | | | 306,129 | | | |
| | | | | | | | |
| Interest expense | | 84,344 | | | 71,150 | | | 56,310 | | | |
| Loss on extinguishment of debt (Note 12) | | — | | | — | | | 22,738 | | | |
| Impairment of goodwill (Note 7) | | — | | | — | | | 4,828 | | | |
| Amortization and impairment of other acquired intangible assets | | 3,450 | | | 5,144 | | | 22,288 | | | |
| Total expenses | | 565,100 | | | 959,176 | | | 677,962 | | | |
| | | | | | | | |
| Pretax income | | 764,832 | | | 479,441 | | | 848,993 | | | |
| Income tax provision (Note 10) | | 164,161 | | | 85,815 | | | 176,684 | | | |
| Net income | | $ | 600,671 | | | $ | 393,626 | | | $ | 672,309 | | | |
| | | | | | | | |
| Net Income Per Share | | | | | | | | |
| Basic | | $ | 3.19 | | | $ | 2.01 | | | $ | 3.22 | | | |
| Diluted | | $ | 3.16 | | | $ | 2.00 | | | $ | 3.20 | | | |
| | | | | | | | |
| Weighted-average number of common shares outstanding—basic | | 188,370 | | | 195,443 | | | 208,773 | | | |
| Weighted-average number of common and common equivalent shares outstanding—diluted | | 190,263 | | | 196,642 | | | 210,340 | | | |
See Notes to Consolidated Financial Statements.
103
Radian Group Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| | | | | | |
| Net income | | $ | 600,671 | | | $ | 393,626 | | | $ | 672,309 | |
| Other comprehensive income (loss), net of tax (Note 15) | | | | | | |
| | | | | | |
| Unrealized holding gains (losses) on investments arising during the period for which an allowance for expected losses has not been recognized | | (138,435) | | | 178,761 | | | 180,441 | |
| Less: Reclassification adjustment for net gains (losses) on investments included in net income | | | | | | |
| Net realized gains on disposals and non-credit related impairment losses | | 4,472 | | | 26,440 | | | 8,897 | |
| Net decrease (increase) in expected credit losses | | 725 | | | (991) | | | — | |
| Net unrealized gains (losses) on investments | | (143,632) | | | 153,312 | | | 171,544 | |
| Other adjustments to comprehensive income, net | | — | | | (75) | | | (136) | |
| Other comprehensive income (loss), net of tax | | (143,632) | | | 153,237 | | | 171,408 | |
| Comprehensive income | | $ | 457,039 | | | $ | 546,863 | | | $ | 843,717 | |
See Notes to Consolidated Financial Statements.
104
Radian Group Inc. and Subsidiaries
Consolidated Statements of Changes in Common Stockholders’ Equity
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Common Stock | | | | | | |
| Balance, beginning of period | | $ | 210 | | | $ | 219 | | | $ | 231 | |
| Issuance of common stock under incentive and benefit plans | | 2 | | | 2 | | | 1 | |
| Shares repurchased under share repurchase program (Note 14) | | (18) | | | (11) | | | (13) | |
| Balance, end of period | | 194 | | | 210 | | | 219 | |
| | | | | | |
| Treasury Stock | | | | | | |
| Balance, beginning of period | | (910,115) | | | (901,657) | | | (894,870) | |
| Repurchases of common stock under incentive plans | | (10,683) | | | (8,458) | | | (6,787) | |
| Balance, end of period | | (920,798) | | | (910,115) | | | (901,657) | |
| | | | | | |
| Additional Paid-in Capital | | | | | | |
| Balance, beginning of period | | 2,245,897�� | | | 2,449,884 | | | 2,724,733 | |
| Issuance of common stock under incentive and benefit plans | | 3,114 | | | 3,143 | | | 3,925 | |
| Share-based compensation | | 28,443 | | | 19,164 | | | 21,414 | |
| Shares repurchased under share repurchase program (Note 14) | | (399,082) | | | (226,294) | | | (300,188) | |
| Balance, end of period | | 1,878,372 | | | 2,245,897 | | | 2,449,884 | |
| | | | | | |
| Retained Earnings | | | | | | |
| Balance, beginning of period | | 2,684,636 | | | 2,389,789 | | | 1,719,541 | |
| Net income | | 600,671 | | | 393,626 | | | 672,309 | |
| Dividends and dividend equivalents declared | | (104,372) | | | (98,779) | | | (2,061) | |
| Balance, end of period | | 3,180,935 | | | 2,684,636 | | | 2,389,789 | |
| | | | | | |
| Accumulated Other Comprehensive Income (Loss) | | | | | | |
| Balance, beginning of period | | 263,725 | | | 110,488 | | | (60,920) | |
| Net unrealized gains (losses) on investments, net of tax | | (143,632) | | | 153,312 | | | 171,544 | |
| Other adjustments to other comprehensive income (loss) | | — | | | (75) | | | (136) | |
| Balance, end of period | | 120,093 | | | 263,725 | | | 110,488 | |
| | | | | | |
| Total Stockholders’ Equity | | $ | 4,258,796 | | | $ | 4,284,353 | | | $ | 4,048,723 | |
See Notes to Consolidated Financial Statements.
105
Radian Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Cash flows from operating activities | | | | | | |
| Net income | | $ | 600,671 | | | $ | 393,626 | | | $ | 672,309 | |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | |
| Net (gains) losses on investments and other financial instruments | | (15,603) | | | (60,277) | | | (51,719) | |
| Loss on extinguishment of debt | | — | | | — | | | 22,738 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Impairment of goodwill | | — | | | — | | | 4,828 | |
| Amortization and impairment of other acquired intangible assets | | 3,450 | | | 5,144 | | | 22,288 | |
| Depreciation, other amortization, and other impairments, net | | 72,020 | | | 66,585 | | | 50,439 | |
| Deferred income tax provision | | 161,793 | | | 102,079 | | | 157,162 | |
| Change in: | | | | | | |
| Accrued investment income | | 1,235 | | | (1,714) | | | 2,545 | |
| Accounts and notes receivable | | (2,722) | | | (29,280) | | | (25,504) | |
| Reinsurance recoverables | | 5,306 | | | (56,226) | | | (2,574) | |
| Deferred policy acquisition costs | | 1,988 | | | 2,454 | | | (3,448) | |
| Other assets | | (78,163) | | | 38,680 | | | (77,181) | |
| Unearned premiums | | (119,701) | | | (178,031) | | | (112,535) | |
| Reserve for losses and LAE | | (19,771) | | | 443,648 | | | 3,404 | |
| Reinsurance funds withheld | | (50,477) | | | (13,274) | | | (29,383) | |
| Other liabilities | | (2,914) | | | (54,980) | | | 61,062 | |
| Net cash provided by (used in) operating activities | | 557,112 | | | 658,434 | | | 694,431 | |
| | | | | | |
| Cash flows from investing activities | | | | | | |
| Proceeds from sales of: | | | | | | |
| Fixed-maturities available for sale | | 735,340 | | | 963,589 | | | 986,647 | |
| Trading securities | | 7,952 | | | 11,602 | | | 130,537 | |
| Equity securities | | 36,748 | | | 90,450 | | | 69,779 | |
| Proceeds from redemptions of: | | | | | | |
| Fixed-maturities available for sale | | 1,225,626 | | | 645,068 | | | 464,777 | |
| Trading securities | | 16,668 | | | 22,913 | | | 37,684 | |
| Purchases of: | | | | | | |
| Fixed-maturities available for sale | | (1,980,155) | | | (2,449,762) | | | (1,913,703) | |
| Equity securities | | (105,649) | | | (85,014) | | | (57,422) | |
| | | | | | |
| Sales, redemptions and (purchases) of: | | | | | | |
| Short-term investments, net | | 68,083 | | | (82,925) | | | 8,017 | |
| Other assets and other invested assets, net | | 6,126 | | | 1,434 | | | (739) | |
| Proceeds from sale of subsidiary, net of cash sold | | — | | | 16,481 | | | — | |
| Purchases of property and equipment | | (12,601) | | | (17,016) | | | (27,626) | |
| | | | | | |
| Net cash provided by (used in) investing activities | | (1,862) | | | (883,180) | | | (302,049) | |
| | | | | | |
See Notes to Consolidated Financial Statements.
106
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Cash flows from financing activities | | | | | | |
| Dividends and dividend equivalents paid | | (103,298) | | | (97,458) | | | (2,061) | |
| Issuance of common stock | | 1,382 | | | 1,553 | | | 2,416 | |
| Repurchases of common stock | | (399,100) | | | (226,305) | | | (300,201) | |
| Issuance of senior notes, net | | — | | | 515,567 | | | 442,439 | |
| Repayments and repurchases of senior notes | | — | | | — | | | (610,763) | |
| Credit facility commitment fees paid | | (3,325) | | | (2,292) | | | (989) | |
| Change in secured borrowings, net (with terms three months or less) | | 13,565 | | | (37,475) | | | 13,862 | |
| Proceeds from secured borrowings (with terms greater than three months) | | 42,000 | | | 207,034 | | | 115,275 | |
| Repayments of secured borrowings (with terms greater than three months) | | (48,000) | | | (137,927) | | | (62,932) | |
| Repayments of other borrowings | | — | | | (79) | | | (152) | |
| Net cash provided by (used in) financing activities | | (496,776) | | | 222,618 | | | (403,106) | |
| | | | | | |
| Effect of exchange rate changes on cash and restricted cash | | — | | | — | | | (4) | |
| Increase (decrease) in cash and restricted cash | | 58,474 | | | (2,128) | | | (10,728) | |
| Cash and restricted cash, beginning of period | | 94,146 | | | 96,274 | | | 107,002 | |
| Cash and restricted cash, end of period | | $ | 152,620 | | | $ | 94,146 | | | $ | 96,274 | |
| | | | | | |
| Supplemental disclosures of cash flow information | | | | | | |
| Income taxes paid (Note 10) | | $ | 143,973 | | | $ | 81,404 | | | $ | 71,469 | |
| Interest paid | | 78,704 | | | 60,564 | | | 45,762 | |
See Notes to Consolidated Financial Statements.
107
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
1. Description of Business
We are a diversified mortgage and real estate business, providing both credit-related mortgage insurance coverage and an array of other mortgage, risk, title, real estate and technology products and services. We have 2 reportable business segments—Mortgage and homegenius. Our homegenius segment was previously named “Real Estate,” and during the second quarter of 2021, we renamed it “homegenius” to align with updates to our brand strategy for the segment’s products and services.
Mortgage
Our Mortgage segment provides credit-related insurance coverage, principally through private mortgage insurance on residential first-lien mortgage loans, as well as other credit risk management, contract underwriting and fulfillment 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 and investors, as well as 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 $246.0 billion and $60.9 billion, respectively, as of December 31, 2021, compared to $246.1 billion and $60.7 billion, respectively, as of December 31, 2020. In addition to providing private mortgage insurance, we have participated in credit risk transfer programs developed by the GSEs as part of their initiative to distribute mortgage credit risk and increase the role of private capital in the mortgage market. Our additional RIF under credit risk transfer transactions, resulting from our participation in these programs with the GSEs, totaled $417.7 million as of December 31, 2021, compared to $392.0 million as of December 31, 2020.
The GSEs and state insurance regulators impose various capital and financial requirements on our mortgage insurance subsidiaries. These include Risk-to-capital, other risk-based capital measures and surplus requirements, as well as the PMIERs financial requirements. Failure to comply with these capital and financial requirements may limit the amount of insurance that our mortgage insurance subsidiaries write or may prohibit them from writing insurance altogether. The GSEs and state insurance regulators possess significant discretion with respect to our mortgage insurance subsidiaries and all aspects of their business. See Note 16 for additional information on PMIERs and other regulatory information, and “—Recent Developments” below for a discussion of the elevated risks posed by the COVID-19 pandemic, which has led to an increase in mortgage defaults in our insured portfolio and a resulting increase in our Minimum Required Assets.
homegenius
Our homegenius segment is primarily a fee-for-service business that offers an array of products and services to market participants across the real estate value chain. Our homegenius products and services include title, real estate and technology products and services offered primarily to consumers, mortgage lenders, mortgage and real estate investors, GSEs, real estate brokers and agents. These products and services help lenders, investors, consumers and real estate agents evaluate, manage, monitor, acquire and sell properties, and include SaaS solutions and platforms, as well as managed services, such as real estate owned asset management, single family rental services and real estate valuation services. In addition, we estimateprovide title insurance and non-insurance title, closing and settlement services to mortgage lenders, GSEs and mortgage investors, as well as directly to consumers for residential mortgage loans.
See Note 4 for additional information about our reportable segments and All Other business activities, including the sale of Clayton, as well as other changes impacting our reportable segments in 2021 and 2020.
COVID-19 Developments
As a seller of mortgage credit protection, our results are subject to macroeconomic conditions and specific events that impact the housing finance and real estate markets, including events that impact mortgage originations and the credit performance of our RIF. Many of these conditions are beyond our control, including housing prices, unemployment, interest rate changes, the availability of credit and other national and regional economic conditions.
In general, a deterioration in economic conditions increases the likelihood that borrowers will be unable to satisfy their mortgage obligations. A deteriorating economy can adversely affect housing values, which in turn can influence the willingness of borrowers to continue to make mortgage payments regardless of whether they have the financial resources to do so. Mortgage defaults can also occur due to a variety of specific events affecting borrowers, including death or illness, divorce or
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
other family problems, unemployment or other events. In addition, factors impacting regional economic conditions, acts of terrorism, war or other severe conflicts, event-specific economic depressions or other catastrophic events, such as natural disasters and pandemics, could result in increased defaults due to the impact that the amount that Claim Curtailments due to servicer noncompliance with our insurance policies and servicing guidelines haveof such events on the amountability of borrowers to satisfy their mortgage obligations and on the value of affected homes.
The unprecedented and continually evolving social and economic impacts associated with the COVID-19 pandemic on the U.S. and global economies that we ultimatelybegan in early 2020 had a negative effect on our business and our financial results for the second quarter of 2020, and since then to a lesser extent. Specifically, and primarily as a result of a sharp increase in the number of new defaults during the second quarter of 2020, our financial results in 2020 included: (i) an increase in both provision for losses and reserve for losses and (ii) an increase in our Minimum Required Assets under the PMIERs. However, beginning in the third quarter of 2020 and continuing throughout 2021, the number of new defaults has decreased significantly and has now returned to levels experienced prior to the start of the pandemic. These trends, combined with strong home price appreciation and favorable outcomes from mortgage forbearance programs implemented during the pandemic to assist homeowners, have led to favorable reserve development during 2021 on prior year defaults. See Note 11 for additional information on our reserve for losses.
In addition, in response to the threat posed to the economy from the COVID-19 pandemic, in early 2020 the Federal Reserve enacted certain protective measures to support the economy that resulted in a drop in interest rates generally, and in mortgage rates specifically, resulting in increased mortgage refinance activity. While these developments have benefited our NIW volumes, the low interest rate environment also resulted in a high level of refinance activity and associated increase in policy cancellations, which has reduced our Persistency Rate and in turn contributed to a reduction in our IIF, particularly as a result of a decline in our Single Premium Policies. In the second quarter of 2021 this refinance activity began to moderate, and this trend continued in the second half of 2021.
While recent trends have been favorable, the long-term impact of the COVID-19 pandemic on our businesses will depend on, among other things: the extent and duration of the pandemic, the severity of illness and number of people infected with the virus and the acceptance and long-term effectiveness of anti-viral treatments and vaccines, especially as new strains of COVID-19 have emerged; the wider economic effects of the pandemic and the scope and duration of governmental and other third-party measures restricting day-to-day life and business operations; the impact of economic stimulus efforts to pay with respectsupport the economy through the pandemic; and governmental and GSE programs implemented to claims. As partassist borrowers experiencing a COVID-19-related hardship, including forbearance programs, as well as suspensions of our claims review process, we assess whether defaulted loans were serviced appropriatelyforeclosures and evictions.
2. Significant Accounting Policies
Basis of Presentation
Our consolidated financial statements are prepared in accordance with GAAP and include the accounts of Radian Group Inc. and its subsidiaries. All intercompany accounts and transactions, and intercompany profits and losses, have been eliminated. Certain prior period amounts have been reclassified to conform to current period presentation.
We refer to Radian Group Inc. together with its consolidated subsidiaries as “Radian,” the “Company,” “we,” “us” or “our,” unless the context requires otherwise. We generally refer to Radian Group Inc. alone, without its consolidated subsidiaries, as “Radian Group.” Unless otherwise defined in this report, certain terms and acronyms used throughout this report are defined in the Glossary of Abbreviations and Acronyms included as part of this report.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of our contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. While the amounts included in our consolidated financial statements include our best estimates and assumptions, actual results may vary materially.
Investments
We group fixed-maturity securities in our investment portfolio into trading or available for sale securities. Trading securities are reported at fair value, with unrealized gains and losses reported as a separate component of income. Investments in fixed-maturity securities classified as available for sale are reported at fair value, with unrealized gains and losses (net of tax) reported as a separate component of stockholders’ equity as accumulated other comprehensive income (loss). Equity securities primarily consist of our interests in a variety of broadly-diversified exchange traded funds, which are recorded at fair value with unrealized gains and losses reported in income. Short-term investments consist of money market instruments, certificates of deposit and highly liquid, interest-bearing instruments with an original maturity of 12 months or less at the time of purchase. Amortization of premium and accretion of discount are calculated principally using the interest method
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
over the term of the investment. Realized gains and losses on investments are recognized using the specific identification method. See Notes 5 and 6 for further discussion on investments.
We recognize an impairment as a loss for fixed-maturities available for sale on the statement of operations if: (i) we intend to sell the impaired security; (ii) it is more likely than not that we will be required to sell the impaired security prior to recovery of its amortized cost basis; or (iii) the present value of cash flows we expect to collect is less than the amortized cost basis of a security. In those instances, we record an impairment loss through earnings that varies depending on specific circumstances. If a sale is likely, the full amount of the impairment is recognized as a loss in the statement of operations. Otherwise, unrealized losses on securities are separated into: (i) the portion of loss that represents the credit loss and (ii) the portion that is due to other factors. In evaluating whether a decline in value for other securities relates to an existing credit loss, we consider several factors, including, but not limited to, the following:
■the extent to which the amortized cost basis is greater than fair value;
■reasons for the decline in value (e.g., adverse conditions related to industry or geographic area, changes in financial condition to the issuers or underlying loan obligors);
■any changes to the rating of the security by a rating agency;
■the failure of the issuer to make a scheduled payment;
■the financial position, access to capital and near-term prospects of the issuer, including the current and future impact of any specific events; and
■our best estimate of the present value of cash flows expected to be collected.
If a credit loss is determined to exist, the impairment amount is calculated as the difference between the amortized cost and the present value of future expected cash flows, limited to the difference between the carrying amount (i.e., fair value) and amortized cost. This credit loss impairment is included in net gains (losses) on investments and other financial instruments in the statement of operations, with an offset to an allowance for credit losses. Subsequent changes (favorable and unfavorable) in expected credit losses are recognized immediately in net income as a credit loss impairment or a reversal of credit loss impairment.
Prior to the adoption of ASU 2016-13, Financial Instruments—Credit Losses, effective January 1, 2020, subsequent increases in the fair value of any other-than-temporarily impaired securities were recognized as a component of other comprehensive income until such gains were realized through cash collection or sale, rather than through net income.
Fair Value of Financial Instruments
Our estimated fair value measurements are intended to reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and the risks inherent in the inputs to the model. Changes in economic conditions and capital market conditions, including but not limited to, credit spread changes, benchmark interest rate changes, market volatility and changes in the value of underlying collateral, could cause actual results to differ materially from our estimated fair value measurements. We define fair value as the current amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
In accordance with GAAP, which establishes a three-level valuation hierarchy, we disclose fair value measurements based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I measurements) and the lowest priority to unobservable inputs (Level III measurements). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the measurement in its entirety. The three levels of the fair value hierarchy are defined below:
Level I — Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level II — Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities; and
Level III — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Level III inputs are used to measure fair value only to the extent that observable inputs are not available.
For markets in which inputs are not observable or are limited, we use significant judgment and assumptions that a typical market participant would use to evaluate the market price of an asset or liability. Given the level of judgment necessary, another market participant may derive a materially different estimate of fair value. These assets and liabilities are classified in Level III of our fair value hierarchy.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
Available for sale securities, trading securities, equity securities and certain other assets are recorded at fair value as described in Note 5. All changes in fair value of trading securities, equity securities and certain other assets are included in our consolidated statements of operations.
Restricted Cash
Included in our restricted cash balances as of December 31, 2021 were cash funds held in trusts for the benefit of certain policyholders.
Accounts and Notes Receivable
Accounts and notes receivable primarily consist of accrued premiums receivable, amounts billed and due from our customers for services performed, and certain receivables related to our reinsurance transactions. Accounts and notes receivable are carried at their estimated collectible amounts, net of any allowance for doubtful accounts, and are periodically evaluated for collectability based on past payment history and current economic conditions. See “—Revenue Recognition—Mortgage Insurance” below for information on our deferred premiums and Note 8 for details on our reinsurance agreements.
Income Taxes
We provide for income taxes in accordance with the provisions of the accounting standard regarding accounting for income taxes. As required under this standard, our deferred tax assets and deferred tax liabilities are recognized under the balance sheet method, which recognizes the future tax effect of temporary differences between the amounts recorded in our consolidated financial statements and the tax bases of these amounts. Deferred tax assets and deferred tax liabilities are measured using the enacted tax rates that are expected to apply to taxable income in the periods in which the deferred tax asset or deferred tax liability is expected to be realized or settled. In regard to accumulated other comprehensive income, the Company’s policy for releasing disproportionate income tax effects is to release the effects as individual items are sold.
We are required to establish a valuation allowance against our deferred tax assets when it is more likely than not that all or some portion of our deferred tax assets will not be realized. At each balance sheet date, we assess our need for a valuation allowance. Our assessment is based on all available evidence, both positive and negative. This requires management to exercise judgment and make assumptions regarding whether our deferred tax assets will be realized in future periods.
See Note 10 for further discussion on income taxes.
Reserve for Losses and LAE
Mortgage Insurance
We establish reserves to provide for losses and LAE on our mortgage insurance policies, which include the estimated costs of settling claims, in accordance with the accounting standard regarding accounting and servicing guidelines. If a servicer failedreporting by insurance enterprises (ASC 944). Although this standard specifically excludes mortgage insurance from its guidance relating to satisfy its servicing obligations,the reserve for losses, because there is no specific guidance for mortgage insurance, we establish reserves for mortgage insurance as described below, using the guidance contained in this standard supplemented with other accounting guidance.
In our mortgage insurance policies provide that we may curtailbusiness, the claim payment for such default and claim cycle begins with the receipt of a default notice from the loan servicer. Case reserves for losses are established upon receipt of notification from servicers that a borrower has missed 2 monthly payments, which is when we consider a loan to be in some circumstances, cancel coverage or denydefault for financial statement and internal tracking purposes. We also establish reserves for associated LAE, consisting of the claim.estimated cost of the claims administration process, including legal and other fees and expenses associated with administering the claims process.
We do not establish reserves for loans that are in default if we believe that we will not be liable for the payment of a claim with respect to that default unless a reserve for premium deficiency is required.default. We generally do not establish loss reserves for expected future claims on insured mortgages that are not in default. See “—Reserve for Premium DeficiencyDeficiency”” below for an exception to thisthese general principle.principles.
IBNRWith respect to loans that are in default, considerable judgment is exercised as to the adequacy of reserve levels. We use an actuarial projection methodology referred to as a “roll rate” analysis that uses historical claim frequency information to determine the projected ultimate Default to Claim Rates based on the Stage of Default and Other Reserves
We also establish reserves for defaults that we estimate have been incurred but have not been reported to us on a timely basis by the servicer,Time in Default as well as for previous Rescissions,the date that a loan goes into default. The Default to Claim Denials andRate also includes our estimates with respect to expected Loss Mitigation Activities, which have the effect of reducing our Default to Claim Curtailments thatRates.
After estimating the Default to Claim Rate, we estimate will be reinstatedClaim Severity based on observed severity rates within product type, type of insurance and subsequently paid. We generally give the policyholder up to 30 days to challenge our decision to rescind coverage before we consider a policy to be rescinded and remove it from our defaulted inventory; therefore, we currently expect only a limited percentage of policies that were rescinded to be reinstated. We currently expect a significant percentage of claims that were denied to be resubmitted as a perfected claim and ultimately paid. Most often, a Claim Denial is the result of a servicer’s inability to provide the loan origination file or other servicing documents for review. Under the terms of our Master
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Policies with our lending customers, our policyholders have up to one year after the acquisition of borrower’s title to provide to us the necessary documents to perfect a claim. AllTime in Default cohorts. These severity estimates are periodically reviewed and adjustments are made as they become necessary.then applied to individual loan coverage amounts to determine reserves.
The impact to our reserve due to estimated future Loss Mitigation Activities incorporates our expectations regarding the number of policies that we expect to be reinstated as a result of our claims rebuttal process. Rescissions, Claim Denials and
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
Claim Curtailments may occur for various reasons, including, without limitation, underwriting negligence, fraudulent applications and appraisals, breach of representations and warranties and inadequate documentation, primarily related to our insurance written in years prior to and including 2008. The level of Rescissions, Claim Denials and Claim Curtailments has been declining in recent periods as our defaults related to insurance written in years prior to and including 2008 continue to decline, and we expect this trend to continue.
Unless a liability associated with such activities or discussions becomes probable and can be reasonably estimated, we consider our claim payments and our Rescissions, Claim Denials and Claim Curtailments to be resolved for financial reporting purposes. Under the accounting standard regarding contingencies, anAn estimated loss is accrued only if we determine that the loss is probable and can be reasonably estimated. For populations of disputed Rescissions, Claim Denials and Claim Curtailments where we determine that a settlement is probable and that a loss can be reasonably estimated, we reflect our best estimate of the expected loss related to the populations under discussion in our financial statements, primarily as a component of our IBNR reserve. While our reserves include our best estimate of such losses, the outcome of the discussions or potential legal proceedings that could ensue is uncertain, and it is reasonably possible that a loss exists in excess of the amount accrued.
Sensitivity AnalysisEstimating our case reserve for losses involves significant reliance upon assumptions and estimates with regard to the likelihood, magnitude and timing of each potential loss. The models, assumptions and estimates we use to establish loss reserves may not prove to be accurate, especially in the event of an extended economic downturn or a period of market volatility and economic uncertainty such as we have experienced due to the COVID-19 pandemic. For example, the ultimate cure rate for loan defaults resulting from the pandemic may be lower or higher than our expectations. These assumptions require management to use considerable judgment in estimating the rate at which these loans will result in claims. As such, given the current environment, there is significant uncertainty around our reserve estimate.
Title Insurance
We consideredestablish reserves for estimated future claims payments on our title insurance policies at the sensitivitytime the related policy revenue is recorded. Our title insurance reserve for losses and LAE comprises estimates of first-lien loss reserve estimates at December 31, 2018 by assessing the potential changes resulting from a parallel shift in Claim Severityboth known claims and Default to Claim Rate estimates for primary loans. For example, assuming all other factors remain constant, for every one percentage point change in primary Claim Severity (which we estimateincurred but unreported claims expected to be 96.0%paid in the future for policies issued as of risk exposure at December 31, 2018), we estimated thatthe balance sheet date. Title insurance policies typically insure against prior events affecting the quality of real estate titles, rather than against unforeseen, and therefore less avoidable, future events. As such, claims payments often result from either judgment errors or mistakes made in the title search and examination process or the escrow process.
We provide for losses associated with these policies based upon our loss reserves would changehistorical experience and other factors. However, by approximately $3.8 million at December 31, 2018. Assuming all other factors remain constant, for every one percentage point changetheir nature, title claims can often be complex, vary greatly in our overall primary net Defaultdollar amounts, vary in number due to Claim Rate (which we estimateeconomic and market conditions such as an increase in mortgage foreclosures, and involve uncertainties as to be 33% at December 31, 2018, including our assumptions relatedultimate exposure. Due to Rescissionsthe length of time over which claim payments are made and Claim Denials), we estimated a $10.4 million changeregularly occurring changes in our loss reserves at December 31, 2018.
Senior management regularly reviews the modeled frequency, Rescission, Claim Denial, Claim Curtailmentsunderlying economic and Claim Severitymarket conditions, these estimates which are based on historical trends, as described above. If recent emerging or projected trends differ significantly from the historical trends usedsubject to develop the modeled estimates, management evaluates these trends and determines how they should be considered in its reserve estimates.variability.
Reserve for Premium DeficiencyInterest-Rate Risk and Credit-Spread Risk
Insurance enterprisesThe primary market risks in our investment portfolio are requiredinterest-rate risk and credit-spread risk, namely the fair value sensitivity of our fixed income securities to establish a PDR ifchanges 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 net present value of the expected future losses and expenses for a particular product line exceeds the net present value of expected future premiums and existing reserves for that product line. We reassess our expectations for premiums, losses and expenses for our mortgage insurance business at least quarterly and update our premium deficiency analyses accordingly. For our mortgage insurance business, we group our mortgage insurance products into two categories: first-lien and second-lien mortgage loans.
For our first-lien insurance business, because the combination of the net presentfair value of our expected future premiumsinvestments is materially exposed to changes in both interest rates and existing reserves (netcredit spreads. As of reinsurance recoverables) significantly exceededDecember 31, 2021, we held $257 million of investment securities for trading purposes, representing less than 5% of our total investment portfolio. Accordingly, in presenting this discussion, we have not distinguished between trading and non-trading instruments.
We calculate the net presentduration of our fixed income securities, expressed in years, in order to estimate the interest-rate sensitivity of these securities. The average duration of our total fixed income portfolio was 4.5 years at December 31, 2021 and 4.7 years at December 31, 2020. To assist us in setting duration targets for the investment portfolio, we analyze: (i) the interest-rate sensitivities of our liabilities, including prepayment risk associated with premium cash flows and credit losses; (ii) entity specific cash flows under various economic scenarios; (iii) return, volatility and correlation of specific asset classes and the interconnection with our liabilities; and (iv) our current risk appetite.
Our stress analysis for interest rates is based on the change in fair value of our future expected lossesfixed income securities, assuming a hypothetical instantaneous and expenses,parallel 100-basis point increase in the U.S. Treasury yield curve, with all other factors remaining constant. The carrying value of our fixed income securities has a first-lien PDR was not requiredbalance of $6.5 billion and $6.8 billion as of December 31, 2018 or2021 and 2020, respectively. If interest rates experienced an increase of 100 basis points, our fixed income portfolio would decrease by $281.7 million and $300.4 million of the market value of the related fixed income portfolio for 2021 and 2020, respectively.
Credit spread represents the additional yield on a fixed income security, above the risk-free rate, that is paid by an issuer to compensate investors for assuming the credit risk of the issuer and market liquidity of the fixed income security. We manage credit-spread risk on both an entity and group level, across issuer, maturity, sector and asset class. Our stress analysis for credit-spread risk is based on the change in fair value of our fixed income securities, assuming a hypothetical 100-basis point increase in all credit spreads, with the exception of U.S. Treasury and agency RMBS obligations for which we have assumed no change in credit spreads, and assuming all other factors remain constant. If credit spreads experienced an increase of 100 basis points, our fixed income portfolio would decrease by $262.8 million and $285.4 millionof the market value of the related fixed income portfolio for 2021 and 2020, respectively.
Actual shifts in credit spreads generally vary by issuer and security, based on issuer-specific and security-specific factors such as credit quality, maturity, sector and asset class. Within a given asset class, investment grade securities generally exhibit less credit-spread volatility than securities with lower credit ratings. At December 31, 2017. 2021, 95.5% of our investment portfolio was rated investment grade.
Our second-lien PDRsensitivity analyses for interest-rate risk and credit-spread risk provide an indication of our investment portfolio’s sensitivity to shifts in interest rates and credit spreads. However, the timing and magnitude of actual market changes may differ from the hypothetical assumptions used in our sensitivity calculations.
See “Item 1. Business—Investment Policy and Portfolio” for a discussion of portfolio strategy and risk exposure.
Securities Lending Agreements. Radian Group, Radian Guaranty and Radian Reinsurance from time to time enter into short-term securities lending agreements with third-party borrowers for the purpose of increasing the income on our investment securities portfolio with limited incremental risk. Market factors, including changes in interest rates, credit spreads and equity prices, may impact the timing or magnitude of cash outflows for the return of cash collateral. As of December 31, 2021 and 2020, the carrying value of these securities included in the sensitivity analyses above was $86.0 million and $53.7 million, respectively.
We also have the right to request the return of the loaned securities at any time. For additional information on our securities lending agreements, see Note 6 of Notes to Consolidated Financial Statements.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
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Report of Independent Registered Public Accounting Firm
To theBoard of Directors and Stockholders of Radian Group Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Radian Group Inc. and its subsidiaries (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive income, changes in common stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, including the related notes and financial statement schedules listed in the index appearing under Item 15(a)3 (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a componentmaterial effect on the financial statements.
Because of other liabilities.its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Evaluating
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the expected profitabilitycurrent period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our existingespecially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of First-Lien Primary Case Reserves for Mortgage Insurance Policies
As described in Notes 2 and 11 to the consolidated financial statements, the Company establishes case reserves for losses on mortgage insurance businesspolicies for loans that are considered to be in default, as well as reserves for loss adjustment expenses, losses incurred but not reported (“IBNR”) and other reserves. As of December 31, 2021, first-lien primary case reserves were $790.4 million of the needtotal $823.1 million of mortgage insurance loss reserves. Management’s estimate of the case reserves for a PDR for our first-lien businesslosses involves significant reliance upon assumptions and estimates with regard to the likelihood, magnitude and timing of each potential loss. Management uses an actuarial projection methodology referred to as a “roll rate” analysis that uses historical claim frequency information to determine the projected ultimate Default to Claim Rates based on the Stage of Default and Time in Default as well as the date that a loan goes into default. After estimating the Default to Claim Rate, management estimates Claim Severity based on the average of recently observed severity rates within product type, type of insurance, and Time in Default cohorts.
The principal considerations for our determination that performing procedures relating to the valuation of first-lien primary case reserves for mortgage insurance policies is a critical audit matter are (i) the significant judgment by management when developing their estimates of the Default to Claim Rates and Claim Severity, which in turn led to a high degree of auditor subjectivity and judgment in performing procedures relating to such estimates; (ii) the significant audit effort and subjectivity in evaluating the audit evidence related to the Default to Claim Rates and Claim Severity; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s valuation of first-lien primary case reserves for mortgage insurance policies, including controls over the development of the Default to Claim Rates and Claim Severity. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent estimate of the case reserves for first-lien primary mortgage insurance policies using actual historical data, comparing this independent estimate to management’s determined case reserves, and evaluating the reasonableness of management’s assumptions related to the Default to Claim Rates and Claim Severity. Performing these procedures involved testing the completeness and accuracy of data provided by management and independently developing Default to Claim Rates and Claim Severity assumptions based on data provided by management.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 25, 2022
We have served as the Company’s auditor since 2007.
Radian Group Inc. and Subsidiaries
Consolidated Balance Sheets
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| | December 31, |
| (In thousands, except per-share amounts) | | 2021 | | 2020 |
| Assets | | | | |
| Investments (Notes 5 and 6) | | | | |
| Fixed-maturities available for sale—at fair value, net of allowance for credit losses of $0 and $948 (amortized cost of $5,367,729 and $5,393,623) | | $ | 5,517,078 | | | $ | 5,723,340 | |
| Trading securities—at fair value (amortized cost of $234,382 and $260,773) | | 256,546 | | | 290,885 | |
| Equity securities—at fair value (cost of $176,229 and $145,501) | | 184,245 | | | 151,240 | |
| Short-term investments—at fair value (includes $48,652 and $15,587 of reinvested cash collateral held under securities lending agreements) | | 551,508 | | | 618,004 | |
| Other invested assets—at fair value | | 4,165 | | | 4,973 | |
| Total investments | | 6,513,542 | | | 6,788,442 | |
| Cash | | 151,145 | | | 87,915 | |
| Restricted cash | | 1,475 | | | 6,231 | |
| Accrued investment income | | 32,812 | | | 34,047 | |
| Accounts and notes receivable | | 124,016 | | | 121,294 | |
| Reinsurance recoverables (includes $51 and $32 for paid losses) | | 67,896 | | | 73,202 | |
| Deferred policy acquisition costs | | 16,317 | | | 18,305 | |
| Property and equipment, net (Note 2) | | 75,086 | | | 80,457 | |
| Goodwill and other acquired intangible assets, net (Note 7) | | 19,593 | | | 23,043 | |
| Other assets (Note 9) | | 837,303 | | | 715,085 | |
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| Total assets | | $ | 7,839,185 | | | $ | 7,948,021 | |
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| Liabilities and Stockholders’ Equity | | | | |
| Liabilities | | | | |
| Unearned premiums | | $ | 329,090 | | | $ | 448,791 | |
| Reserve for losses and LAE (Note 11) | | 828,642 | | | 848,413 | |
| Senior notes (Note 12) | | 1,409,473 | | | 1,405,674 | |
| FHLB advances (Note 12) | | 150,983 | | | 176,483 | |
| Reinsurance funds withheld | | 228,078 | | | 278,555 | |
| Net deferred tax liability (Note 10) | | 337,509 | | | 213,897 | |
| Other liabilities | | 296,614 | | | 291,855 | |
| Total liabilities | | 3,580,389 | | | 3,663,668 | |
| Commitments and Contingencies (Note 13) | | 0 | | 0 |
| Stockholders’ equity | | | | |
| Common stock: par value $0.001 per share; 485,000 shares authorized at December 31, 2021 and 2020; 194,408 and 210,130 shares issued at December 31, 2021 and 2020, respectively; 175,421 and 191,606 shares outstanding at December 31, 2021 and 2020, respectively | | 194 | | | 210 | |
| Treasury stock, at cost: 18,987 and 18,524 shares at December 31, 2021 and 2020, respectively | | (920,798) | | | (910,115) | |
| Additional paid-in capital | | 1,878,372 | | | 2,245,897 | |
| Retained earnings | | 3,180,935 | | | 2,684,636 | |
| Accumulated other comprehensive income (loss) (Note 15) | | 120,093 | | | 263,725 | |
| Total stockholders’ equity | | 4,258,796 | | | 4,284,353 | |
| Total liabilities and stockholders’ equity | | $ | 7,839,185 | | | $ | 7,948,021 | |
See Notes to Consolidated Financial Statements.
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Radian Group Inc. and Subsidiaries
Consolidated Statements of Operations
| | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | |
| (In thousands, except per-share amounts) | | 2021 | | 2020 | | 2019 | | |
| Revenues | | | | | | | | |
| Net premiums earned (Note 8) | | $ | 1,037,183 | | | $ | 1,115,321 | | | $ | 1,145,349 | | | |
| Services revenue (Note 4) | | 125,825 | | | 105,385 | | | 154,596 | | | |
| Net investment income (Note 6) | | 147,909 | | | 154,037 | | | 171,796 | | | |
| Net gains on investments and other financial instruments (includes net realized gains on investments of $20,842, $35,826 and $10,843) | | 15,603 | | | 60,277 | | | 51,719 | | | |
| Other income | | 3,412 | | | 3,597 | | | 3,495 | | | |
| Total revenues | | 1,329,932 | | | 1,438,617 | | | 1,526,955 | | | |
| | | | | | | | |
| Expenses | | | | | | | | |
| Provision for losses | | 20,877 | | | 485,117 | | | 132,031 | | | |
| Policy acquisition costs | | 29,029 | | | 30,989 | | | 25,314 | | | |
| Cost of services | | 103,714 | | | 86,066 | | | 108,324 | | | |
| Other operating expenses | | 323,686 | | | 280,710 | | | 306,129 | | | |
| | | | | | | | |
| Interest expense | | 84,344 | | | 71,150 | | | 56,310 | | | |
| Loss on extinguishment of debt (Note 12) | | — | | | — | | | 22,738 | | | |
| Impairment of goodwill (Note 7) | | — | | | — | | | 4,828 | | | |
| Amortization and impairment of other acquired intangible assets | | 3,450 | | | 5,144 | | | 22,288 | | | |
| Total expenses | | 565,100 | | | 959,176 | | | 677,962 | | | |
| | | | | | | | |
| Pretax income | | 764,832 | | | 479,441 | | | 848,993 | | | |
| Income tax provision (Note 10) | | 164,161 | | | 85,815 | | | 176,684 | | | |
| Net income | | $ | 600,671 | | | $ | 393,626 | | | $ | 672,309 | | | |
| | | | | | | | |
| Net Income Per Share | | | | | | | | |
| Basic | | $ | 3.19 | | | $ | 2.01 | | | $ | 3.22 | | | |
| Diluted | | $ | 3.16 | | | $ | 2.00 | | | $ | 3.20 | | | |
| | | | | | | | |
| Weighted-average number of common shares outstanding—basic | | 188,370 | | | 195,443 | | | 208,773 | | | |
| Weighted-average number of common and common equivalent shares outstanding—diluted | | 190,263 | | | 196,642 | | | 210,340 | | | |
See Notes to Consolidated Financial Statements.
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Radian Group Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| | | | | | |
| Net income | | $ | 600,671 | | | $ | 393,626 | | | $ | 672,309 | |
| Other comprehensive income (loss), net of tax (Note 15) | | | | | | |
| | | | | | |
| Unrealized holding gains (losses) on investments arising during the period for which an allowance for expected losses has not been recognized | | (138,435) | | | 178,761 | | | 180,441 | |
| Less: Reclassification adjustment for net gains (losses) on investments included in net income | | | | | | |
| Net realized gains on disposals and non-credit related impairment losses | | 4,472 | | | 26,440 | | | 8,897 | |
| Net decrease (increase) in expected credit losses | | 725 | | | (991) | | | — | |
| Net unrealized gains (losses) on investments | | (143,632) | | | 153,312 | | | 171,544 | |
| Other adjustments to comprehensive income, net | | — | | | (75) | | | (136) | |
| Other comprehensive income (loss), net of tax | | (143,632) | | | 153,237 | | | 171,408 | |
| Comprehensive income | | $ | 457,039 | | | $ | 546,863 | | | $ | 843,717 | |
See Notes to Consolidated Financial Statements.
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Radian Group Inc. and Subsidiaries
Consolidated Statements of Changes in Common Stockholders’ Equity
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Common Stock | | | | | | |
| Balance, beginning of period | | $ | 210 | | | $ | 219 | | | $ | 231 | |
| Issuance of common stock under incentive and benefit plans | | 2 | | | 2 | | | 1 | |
| Shares repurchased under share repurchase program (Note 14) | | (18) | | | (11) | | | (13) | |
| Balance, end of period | | 194 | | | 210 | | | 219 | |
| | | | | | |
| Treasury Stock | | | | | | |
| Balance, beginning of period | | (910,115) | | | (901,657) | | | (894,870) | |
| Repurchases of common stock under incentive plans | | (10,683) | | | (8,458) | | | (6,787) | |
| Balance, end of period | | (920,798) | | | (910,115) | | | (901,657) | |
| | | | | | |
| Additional Paid-in Capital | | | | | | |
| Balance, beginning of period | | 2,245,897�� | | | 2,449,884 | | | 2,724,733 | |
| Issuance of common stock under incentive and benefit plans | | 3,114 | | | 3,143 | | | 3,925 | |
| Share-based compensation | | 28,443 | | | 19,164 | | | 21,414 | |
| Shares repurchased under share repurchase program (Note 14) | | (399,082) | | | (226,294) | | | (300,188) | |
| Balance, end of period | | 1,878,372 | | | 2,245,897 | | | 2,449,884 | |
| | | | | | |
| Retained Earnings | | | | | | |
| Balance, beginning of period | | 2,684,636 | | | 2,389,789 | | | 1,719,541 | |
| Net income | | 600,671 | | | 393,626 | | | 672,309 | |
| Dividends and dividend equivalents declared | | (104,372) | | | (98,779) | | | (2,061) | |
| Balance, end of period | | 3,180,935 | | | 2,684,636 | | | 2,389,789 | |
| | | | | | |
| Accumulated Other Comprehensive Income (Loss) | | | | | | |
| Balance, beginning of period | | 263,725 | | | 110,488 | | | (60,920) | |
| Net unrealized gains (losses) on investments, net of tax | | (143,632) | | | 153,312 | | | 171,544 | |
| Other adjustments to other comprehensive income (loss) | | — | | | (75) | | | (136) | |
| Balance, end of period | | 120,093 | | | 263,725 | | | 110,488 | |
| | | | | | |
| Total Stockholders’ Equity | | $ | 4,258,796 | | | $ | 4,284,353 | | | $ | 4,048,723 | |
See Notes to Consolidated Financial Statements.
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Radian Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Cash flows from operating activities | | | | | | |
| Net income | | $ | 600,671 | | | $ | 393,626 | | | $ | 672,309 | |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | |
| Net (gains) losses on investments and other financial instruments | | (15,603) | | | (60,277) | | | (51,719) | |
| Loss on extinguishment of debt | | — | | | — | | | 22,738 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Impairment of goodwill | | — | | | — | | | 4,828 | |
| Amortization and impairment of other acquired intangible assets | | 3,450 | | | 5,144 | | | 22,288 | |
| Depreciation, other amortization, and other impairments, net | | 72,020 | | | 66,585 | | | 50,439 | |
| Deferred income tax provision | | 161,793 | | | 102,079 | | | 157,162 | |
| Change in: | | | | | | |
| Accrued investment income | | 1,235 | | | (1,714) | | | 2,545 | |
| Accounts and notes receivable | | (2,722) | | | (29,280) | | | (25,504) | |
| Reinsurance recoverables | | 5,306 | | | (56,226) | | | (2,574) | |
| Deferred policy acquisition costs | | 1,988 | | | 2,454 | | | (3,448) | |
| Other assets | | (78,163) | | | 38,680 | | | (77,181) | |
| Unearned premiums | | (119,701) | | | (178,031) | | | (112,535) | |
| Reserve for losses and LAE | | (19,771) | | | 443,648 | | | 3,404 | |
| Reinsurance funds withheld | | (50,477) | | | (13,274) | | | (29,383) | |
| Other liabilities | | (2,914) | | | (54,980) | | | 61,062 | |
| Net cash provided by (used in) operating activities | | 557,112 | | | 658,434 | | | 694,431 | |
| | | | | | |
| Cash flows from investing activities | | | | | | |
| Proceeds from sales of: | | | | | | |
| Fixed-maturities available for sale | | 735,340 | | | 963,589 | | | 986,647 | |
| Trading securities | | 7,952 | | | 11,602 | | | 130,537 | |
| Equity securities | | 36,748 | | | 90,450 | | | 69,779 | |
| Proceeds from redemptions of: | | | | | | |
| Fixed-maturities available for sale | | 1,225,626 | | | 645,068 | | | 464,777 | |
| Trading securities | | 16,668 | | | 22,913 | | | 37,684 | |
| Purchases of: | | | | | | |
| Fixed-maturities available for sale | | (1,980,155) | | | (2,449,762) | | | (1,913,703) | |
| Equity securities | | (105,649) | | | (85,014) | | | (57,422) | |
| | | | | | |
| Sales, redemptions and (purchases) of: | | | | | | |
| Short-term investments, net | | 68,083 | | | (82,925) | | | 8,017 | |
| Other assets and other invested assets, net | | 6,126 | | | 1,434 | | | (739) | |
| Proceeds from sale of subsidiary, net of cash sold | | — | | | 16,481 | | | — | |
| Purchases of property and equipment | | (12,601) | | | (17,016) | | | (27,626) | |
| | | | | | |
| Net cash provided by (used in) investing activities | | (1,862) | | | (883,180) | | | (302,049) | |
| | | | | | |
See Notes to Consolidated Financial Statements.
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| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Cash flows from financing activities | | | | | | |
| Dividends and dividend equivalents paid | | (103,298) | | | (97,458) | | | (2,061) | |
| Issuance of common stock | | 1,382 | | | 1,553 | | | 2,416 | |
| Repurchases of common stock | | (399,100) | | | (226,305) | | | (300,201) | |
| Issuance of senior notes, net | | — | | | 515,567 | | | 442,439 | |
| Repayments and repurchases of senior notes | | — | | | — | | | (610,763) | |
| Credit facility commitment fees paid | | (3,325) | | | (2,292) | | | (989) | |
| Change in secured borrowings, net (with terms three months or less) | | 13,565 | | | (37,475) | | | 13,862 | |
| Proceeds from secured borrowings (with terms greater than three months) | | 42,000 | | | 207,034 | | | 115,275 | |
| Repayments of secured borrowings (with terms greater than three months) | | (48,000) | | | (137,927) | | | (62,932) | |
| Repayments of other borrowings | | — | | | (79) | | | (152) | |
| Net cash provided by (used in) financing activities | | (496,776) | | | 222,618 | | | (403,106) | |
| | | | | | |
| Effect of exchange rate changes on cash and restricted cash | | — | | | — | | | (4) | |
| Increase (decrease) in cash and restricted cash | | 58,474 | | | (2,128) | | | (10,728) | |
| Cash and restricted cash, beginning of period | | 94,146 | | | 96,274 | | | 107,002 | |
| Cash and restricted cash, end of period | | $ | 152,620 | | | $ | 94,146 | | | $ | 96,274 | |
| | | | | | |
| Supplemental disclosures of cash flow information | | | | | | |
| Income taxes paid (Note 10) | | $ | 143,973 | | | $ | 81,404 | | | $ | 71,469 | |
| Interest paid | | 78,704 | | | 60,564 | | | 45,762 | |
See Notes to Consolidated Financial Statements.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
1. Description of Business
We are a diversified mortgage and real estate business, providing both credit-related mortgage insurance coverage and an array of other mortgage, risk, title, real estate and technology products and services. We have 2 reportable business segments—Mortgage and homegenius. Our homegenius segment was previously named “Real Estate,” and during the second quarter of 2021, we renamed it “homegenius” to align with updates to our brand strategy for the segment’s products and services.
Mortgage
Our Mortgage segment provides credit-related insurance coverage, principally through private mortgage insurance on residential first-lien mortgage loans, as well as other credit risk management, contract underwriting and fulfillment 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 and investors, as well as 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 $246.0 billion and $60.9 billion, respectively, as of December 31, 2021, compared to $246.1 billion and $60.7 billion, respectively, as of December 31, 2020. In addition to providing private mortgage insurance, we have participated in credit risk transfer programs developed by the GSEs as part of their initiative to distribute mortgage credit risk and increase the role of private capital in the mortgage market. Our additional RIF under credit risk transfer transactions, resulting from our participation in these programs with the GSEs, totaled $417.7 million as of December 31, 2021, compared to $392.0 million as of December 31, 2020.
The GSEs and state insurance regulators impose various capital and financial requirements on our mortgage insurance subsidiaries. These include Risk-to-capital, other risk-based capital measures and surplus requirements, as well as the PMIERs financial requirements. Failure to comply with these capital and financial requirements may limit the amount of insurance that our mortgage insurance subsidiaries write or may prohibit them from writing insurance altogether. The GSEs and state insurance regulators possess significant discretion with respect to our mortgage insurance subsidiaries and all aspects of their business. See Note 16 for additional information on PMIERs and other regulatory information, and “—Recent Developments” below for a discussion of the elevated risks posed by the COVID-19 pandemic, which has led to an increase in mortgage defaults in our insured portfolio and a resulting increase in our Minimum Required Assets.
homegenius
Our homegenius segment is primarily a fee-for-service business that offers an array of products and services to market participants across the real estate value chain. Our homegenius products and services include title, real estate and technology products and services offered primarily to consumers, mortgage lenders, mortgage and real estate investors, GSEs, real estate brokers and agents. These products and services help lenders, investors, consumers and real estate agents evaluate, manage, monitor, acquire and sell properties, and include SaaS solutions and platforms, as well as managed services, such as real estate owned asset management, single family rental services and real estate valuation services. In addition, we provide title insurance and non-insurance title, closing and settlement services to mortgage lenders, GSEs and mortgage investors, as well as directly to consumers for residential mortgage loans.
See Note 4 for additional information about our reportable segments and All Other business activities, including the sale of Clayton, as well as other changes impacting our reportable segments in 2021 and 2020.
COVID-19 Developments
As a seller of mortgage credit protection, our results are subject to macroeconomic conditions and specific events that impact the housing finance and real estate markets, including events that impact mortgage originations and the credit performance of our RIF. Many of these conditions are beyond our control, including housing prices, unemployment, interest rate changes, the availability of credit and other national and regional economic conditions.
In general, a deterioration in economic conditions increases the likelihood that borrowers will be unable to satisfy their mortgage obligations. A deteriorating economy can adversely affect housing values, which in turn can influence the willingness of borrowers to continue to make mortgage payments regardless of whether they have the financial resources to do so. Mortgage defaults can also occur due to a variety of specific events affecting borrowers, including death or illness, divorce or
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
other family problems, unemployment or other events. In addition, factors impacting regional economic conditions, acts of terrorism, war or other severe conflicts, event-specific economic depressions or other catastrophic events, such as natural disasters and pandemics, could result in increased defaults due to the impact of such events on the ability of borrowers to satisfy their mortgage obligations and on the value of affected homes.
The unprecedented and continually evolving social and economic impacts associated with the COVID-19 pandemic on the U.S. and global economies that began in early 2020 had a negative effect on our business and our financial results for the second quarter of 2020, and since then to a lesser extent. Specifically, and primarily as a result of a sharp increase in the number of new defaults during the second quarter of 2020, our financial results in 2020 included: (i) an increase in both provision for losses and reserve for losses and (ii) an increase in our Minimum Required Assets under the PMIERs. However, beginning in the third quarter of 2020 and continuing throughout 2021, the number of new defaults has decreased significantly and has now returned to levels experienced prior to the start of the pandemic. These trends, combined with strong home price appreciation and favorable outcomes from mortgage forbearance programs implemented during the pandemic to assist homeowners, have led to favorable reserve development during 2021 on prior year defaults. See Note 11 for additional information on our reserve for losses.
In addition, in response to the threat posed to the economy from the COVID-19 pandemic, in early 2020 the Federal Reserve enacted certain protective measures to support the economy that resulted in a drop in interest rates generally, and in mortgage rates specifically, resulting in increased mortgage refinance activity. While these developments have benefited our NIW volumes, the low interest rate environment also resulted in a high level of refinance activity and associated increase in policy cancellations, which has reduced our Persistency Rate and in turn contributed to a reduction in our IIF, particularly as a result of a decline in our Single Premium Policies. In the second quarter of 2021 this refinance activity began to moderate, and this trend continued in the second half of 2021.
While recent trends have been favorable, the long-term impact of the COVID-19 pandemic on our businesses will depend on, among other things: the extent and duration of the pandemic, the severity of illness and number of people infected with the virus and the acceptance and long-term effectiveness of anti-viral treatments and vaccines, especially as new strains of COVID-19 have emerged; the wider economic effects of the pandemic and the scope and duration of governmental and other third-party measures restricting day-to-day life and business operations; the impact of economic stimulus efforts to support the economy through the pandemic; and governmental and GSE programs implemented to assist borrowers experiencing a COVID-19-related hardship, including forbearance programs, as well as suspensions of foreclosures and evictions.
2. Significant Accounting Policies
Basis of Presentation
Our consolidated financial statements are prepared in accordance with GAAP and include the accounts of Radian Group Inc. and its subsidiaries. All intercompany accounts and transactions, and intercompany profits and losses, have been eliminated. Certain prior period amounts have been reclassified to conform to current period presentation.
We refer to Radian Group Inc. together with its consolidated subsidiaries as “Radian,” the “Company,” “we,” “us” or “our,” unless the context requires otherwise. We generally refer to Radian Group Inc. alone, without its consolidated subsidiaries, as “Radian Group.” Unless otherwise defined in this report, certain terms and acronyms used throughout this report are defined in the Glossary of Abbreviations and Acronyms included as part of this report.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of our contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. While the amounts included in our consolidated financial statements include our best estimates and assumptions, actual results may vary materially.
Investments
We group fixed-maturity securities in our investment portfolio into trading or available for sale securities. Trading securities are reported at fair value, with unrealized gains and losses reported as a separate component of income. Investments in fixed-maturity securities classified as available for sale are reported at fair value, with unrealized gains and losses (net of tax) reported as a separate component of stockholders’ equity as accumulated other comprehensive income (loss). Equity securities primarily consist of our interests in a variety of broadly-diversified exchange traded funds, which are recorded at fair value with unrealized gains and losses reported in income. Short-term investments consist of money market instruments, certificates of deposit and highly liquid, interest-bearing instruments with an original maturity of 12 months or less at the time of purchase. Amortization of premium revenues. The models, assumptions and estimatesaccretion of discount are calculated principally using the interest method
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
over the term of the investment. Realized gains and losses on investments are recognized using the specific identification method. See Notes 5 and 6 for further discussion on investments.
We recognize an impairment as a loss for fixed-maturities available for sale on the statement of operations if: (i) we useintend to evaluatesell the needimpaired security; (ii) it is more likely than not that we will be required to sell the impaired security prior to recovery of its amortized cost basis; or (iii) the present value of cash flows we expect to collect is less than the amortized cost basis of a security. In those instances, we record an impairment loss through earnings that varies depending on specific circumstances. If a sale is likely, the full amount of the impairment is recognized as a loss in the statement of operations. Otherwise, unrealized losses on securities are separated into: (i) the portion of loss that represents the credit loss and (ii) the portion that is due to other factors. In evaluating whether a decline in value for other securities relates to an existing credit loss, we consider several factors, including, but not limited to, the following:
■the extent to which the amortized cost basis is greater than fair value;
■reasons for the decline in value (e.g., adverse conditions related to industry or geographic area, changes in financial condition to the issuers or underlying loan obligors);
■any changes to the rating of the security by a PDR may not accurately forecastrating agency;
■the failure of the issuer to make a scheduled payment;
■the financial position, access to capital and near-term prospects of the issuer, including the current and future performance, especially duringimpact of any extended economic downturnspecific events; and
■our best estimate of the present value of cash flows expected to be collected.
If a credit loss is determined to exist, the impairment amount is calculated as the difference between the amortized cost and the present value of future expected cash flows, limited to the difference between the carrying amount (i.e., fair value) and amortized cost. This credit loss impairment is included in net gains (losses) on investments and other financial instruments in the statement of operations, with an offset to an allowance for credit losses. Subsequent changes (favorable and unfavorable) in expected credit losses are recognized immediately in net income as a credit loss impairment or perioda reversal of extreme market volatility and uncertainty.credit loss impairment.
Prior to the adoption of ASU 2016-13, Financial Instruments—Credit Losses, effective January 1, 2020, subsequent increases in the fair value of any other-than-temporarily impaired securities were recognized as a component of other comprehensive income until such gains were realized through cash collection or sale, rather than through net income.
Fair Value of Financial Instruments
Our estimated fair value measurements are intended to reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and the risks inherent in the inputs to the model. Changes in economic conditions and capital market conditions, including but not limited to, credit spread changes, benchmark interest rate changes, market volatility
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
and changes in the value of underlying collateral, could cause actual results to differ materially from our estimated fair value measurements. We define fair value as the current amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
In accordance with GAAP, we establishedwhich establishes a three-level valuation hierarchy, for disclosure ofwe disclose fair value measurements based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I measurements) and the lowest priority to unobservable inputs (Level III measurements). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the measurement in its entirety. The three levels of the fair value hierarchy are defined below:
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Level I | Level I — Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; Level II — Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities; and Level III— Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
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Level II | — Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities; and
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Level III | — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Level III inputs are used to measure fair value only to the extent that observable inputs are not available.
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For markets in which inputs are not observable or are limited, we use significant judgment and assumptions that a typical market participant would use to evaluate the market price of an asset or liability. Given the level of judgment necessary, another market participant may derive a materially different estimate of fair value. These assets and liabilities are classified in Level III of our fair value hierarchy.
There were no material Level III assets or liabilities at December 31, 2018.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
Available for sale securities, trading securities, equity securities and certain other assets are recorded at fair value as described in Note 5 of Notes to Consolidated Financial Statements. 5. All changes in fair value of trading securities, equity securities (effective January 1, 2018) and certain other assets are included in our consolidated statements of operations. Prior to the implementation
Restricted Cash
Included in our restricted cash balances as of the update to the standardDecember 31, 2021 were cash funds held in trusts for the accountingbenefit of financial instruments effective January 1, 2018, the unrealized gains (losses) associated with equity securities were classified in accumulated other comprehensive income. All changes in the fair value of available for sale securities are recorded in accumulated other comprehensive income (loss).certain policyholders.
The following are descriptions of our valuation methodologies for financial assetsAccounts and liabilities measured at fair value.Notes Receivable
Investments
U.S. government and agency securities—The fair value of U.S. government and agency securities is estimated using observed market transactions, including broker-dealer quotes and actual trade activity as a basis for valuation. U.S. government and agency securities are categorized in either Level I or Level II of the fair value hierarchy.
State and municipal obligations—The fair value of state and municipal obligations is estimated using recent transaction activity, including market observations. Valuation models are used, which incorporate bond structure, yield curve, credit spreads and other factors. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable.
Money market instruments—The fair value of money market instruments is based on daily prices, which are published and available to all potential investors and market participants. As such, these securities are categorized in Level I of the fair value hierarchy.
Corporate bonds and notes—The fair value of corporate bondsAccounts and notes is estimated using recent transaction activity, including market observations. Spread models are used that incorporate issuer and structure characteristics, such as credit risk and early redemption features, where applicable. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable.
RMBS, CMBS and Other ABS—The fair value of these instruments is estimated based on prices of comparable securities and spreads and observable prepayment speeds. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable. The fair value of any Level III securities is generally estimated by discounting estimated future cash flows.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Foreign government and agency securities—The fair value of foreign government and agency securities is estimated using observed market yields used to create a maturity curve and observed credit spreads from market makers and broker-dealers. These securities are categorized in Level II of the fair value hierarchy.
Equity securities—The fair value of these securities is generally estimated using observable market data in active markets or bid prices from market makers and broker-dealers. Generally, these securities are categorized in Level I or II of the fair value hierarchy, as observable market data are readily available. From time to time, certain equity securities may be categorized in Level III of the fair value hierarchy due to a lack of market-based transaction data or the use of model-based valuations.
Other investments— These securitiesreceivable primarily consist of commercial paperaccrued premiums receivable, amounts billed and short-term certificates of deposit, whichdue from our customers for services performed, and certain receivables related to our reinsurance transactions. Accounts and notes receivable are categorized in Level II of the fair value hierarchy. The fair value of these investments is estimated using market data for comparable instruments of similar maturity and average yield.
We are responsible for the determination of the value of all investments carried at fair value and the supporting methodologies and assumptions. To assist us in this responsibility, we utilize independent third-party valuation service providers to gather, analyze and interpret market information and estimate fair values based upon relevant methodologies and assumptionstheir estimated collectible amounts, net of any allowance for various asset classes and individual securities. We perform monthly quantitative and qualitative analyses on the prices received from third parties to determine whether the prices are reasonable estimates of fair value. Our analysis includes: (i) a review of the methodology used by third-party pricing services; (ii) a comparison of pricing services’ valuations to other independent sources; (iii) a review of month-to-month price fluctuations; and (iv) a comparison of actual purchase and sale transactions with valuations received from third parties. These processes are designed to ensure that our investment values are accurately recorded, that the data inputs and valuation techniques utilized are appropriate and consistently applied and that the assumptions are reasonable and consistent with the objective of determining fair value.
Investments
We group fixed-maturity securities in our investment portfolio into one of three main categories: held to maturity, available for sale or trading securities. Fixed-maturity securities for which we have the positive intent and ability to hold to maturity, if any, are classified as held to maturitydoubtful accounts, and are reported at amortized cost. Trading securities are securities that are purchasedperiodically evaluated for collectability based on past payment history and held primarilycurrent economic conditions. See “—Revenue Recognition—Mortgage Insurance” below for the purpose of selling them in the near term,information on our deferred premiums and are reported at fair value, with unrealized gains and losses reported as a separate component of income. Investments in fixed-maturity securities not classified as held to maturity or trading securities are classified as availableNote 8 for sale and are reported at fair value, with unrealized gains and losses (net of tax) reported as a separate component of stockholders’ equity as accumulated other comprehensive income (loss). Equity securities consist of holdings in common stock, preferred stock and exchange traded funds, which, effective January 1, 2018, are all recorded at fair value with unrealized gains and losses reported in income. Prior to the implementation of the update to the standard for the accounting of financial instruments effective January 1, 2018, the unrealized gains (losses) associated with equity securities that were available for sale were classified in accumulated other comprehensive income. Short-term investments consist of money market instruments, certificates of deposit and highly liquid, interest-bearing instruments with an original maturity of 12 months or less at the time of purchase. Amortization of premium and accretion of discount are calculated principally using the interest method over the term of the investment. Realized gains and lossesdetails on investments are recognized using the specific identification method.
We record an other-than-temporary impairment adjustment on a security with an unrealized loss if we intend to sell the impaired security, if it is more likely than not that we will be required to sell the impaired security prior to recovery of its amortized cost basis, or if the present value of cash flows we expect to collect is less than the amortized cost basis of the security. If a sale is likely, the security is classified as other-than-temporarily impaired and the full amount of the impairment is recognized as a loss in the statement of operations. Otherwise, losses on securities that are other-than-temporarily impaired are separated into: (i) the portion of loss that represents the credit loss and (ii) the portion that is due to other factors. The credit loss portion is recognized as a loss in the statement of operations, while the loss due to other factors is recognized in accumulated other comprehensive income (loss), net of taxes. A credit loss is determined to exist if the present value of discounted cash flows expected to be collected from the security is less than the amortized cost basis of the security. The present value of discounted cash flows is determined using the original yield of the security. In evaluating whether a decline in value is other-than-temporary, we consider several factors in addition to the above, including, but not limited to, the following:
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• | the extent and the duration of the decline in value;
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the reasons for the decline in value (e.g., credit event, interest related or market fluctuations); and
the financial position, access to capital and near term prospects of the issuer, including the current and future impact of any specific events.
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Income Taxes
We provide for income taxes in accordance with the provisions of the accounting standard regarding accounting for income taxes. As required under this standard, our deferred tax assets and deferred tax liabilities are recognized under the balance sheet method, which recognizes the future tax effect of temporary differences between the amounts recorded in our consolidated financial statements and the tax bases of these amounts. Deferred tax assets and deferred tax liabilities are measured using the enacted tax rates that are expected to apply to taxable income in the periods in which the deferred tax asset or deferred tax liability is expected to be realized or settled. In regardsregard to accumulated other comprehensive income, the Company’s policy for releasing disproportionate income tax effects is to release the effects as individual items are sold.
We are required to establish a valuation allowance against our deferred tax assets when it is more likely than not that all or some portion of our deferred tax assets will not be realized. At each balance sheet date, we assess our need for a valuation allowance. Our assessment is based on all available evidence, both positive and negative. This requires management to exercise judgment and make assumptions regarding whether our deferred tax assets will be realized in future periods.
Our provisionSee Note 10 for further discussion on income taxestaxes.
Reserve for interim financial periods is based on an estimate of our annual effective tax rateLosses and LAE
Mortgage Insurance
We establish reserves to provide for the full year of 2018losses and 2017. When estimating our full year 2018 and 2017 effective tax rates, we adjust our forecasted pre-tax income for gains and lossesLAE on our investments, changes in the accounting for uncertainty in income taxes, changes in our beginning of year valuation allowance, and other adjustments. The impact of these items is accounted for as Discrete Items at the applicable federal tax rate.
Goodwill and Other Acquired Intangible Assets, Net
Goodwill and other acquired intangible assets were established primarily in connection with our acquisition of Clayton. Goodwill is an asset representingmortgage insurance policies, which include the estimated future economic benefits arising from the assets we have acquired that were not individually identified and separately recognized, and includes the valuecosts of discounted expected future cash flows of Clayton, Clayton’s workforce, expected synergiessettling claims, in accordance with our other affiliates and other unidentifiable intangible assets. Goodwill is deemed to have an indefinite useful life and is subject to review for impairment annually, or more frequently, whenever circumstances indicate potential impairment at the reporting unit level. A reporting unit represents a business for which discrete financial information is available; more than one reporting unit may be aggregated into a single reporting unit if they have similar economic characteristics. Events that could result in an interim assessment of goodwill impairment and/or a potential impairment charge include, but are not limited to: (i) significant under-performance relative to historical or projected future operating results; (ii) significant changes in the strategy for the Services segment; (iii) significant negative industry or economic trends; and (iv) a decline in Radian’s market capitalization below book value if such decline is attributable to the Services segment. Management regularly updates certain assumptions related to our projections, including the likelihood of achieving the assumed potential revenues from new initiatives and business strategies, and if these or other items have a significant negative impact on the reporting unit’s projections we may perform additional analysis to determine whether an impairment charge is needed. Lower earnings over sustained periods also can lead to impairment of goodwill, which could result in a charge to earnings. The value of goodwill is primarily supported by revenue projections, which are mostly driven by projected transaction volume and margins.
In performing the interim quantitative analysis for our goodwill impairment test as of June 30, 2017, we elected to early adopt the update to the accounting standard regarding goodwillaccounting and other intangibles, which simplified the subsequent measurement of goodwillreporting by eliminating step two of the goodwill impairment test. Underinsurance enterprises (ASC 944). Although this standard specifically excludes mortgage insurance from its guidance if indicators for impairment are present, we perform a quantitative analysis to evaluate our long-lived assets for potential impairment, and then determine the amount of the goodwill impairment by comparing a reporting unit’s fair value to its carrying amount. After adjusting the carrying value for any impairment of other intangibles or long-lived assets, an impairment charge is recognized for any excess of the reporting unit’s carrying amount over the reporting unit’s estimated fair value, uprelating to the full amount of the goodwill allocated to the reporting unit.
Intangible assets, other than goodwill, primarily consist of customer relationships, technology, trade name and trademarks, client backlog and non-competition agreements. Customer relationships represent the value of the specifically acquired customer relationships and are valuedreserve for losses, because there is no specific guidance for mortgage insurance, we establish reserves for mortgage insurance as described below, using the excess earnings approach using estimated client revenues, attrition rates, implied royalty ratesguidance contained in this standard supplemented with other accounting guidance.
In our mortgage insurance business, the default and discount rates. The excess earnings approach estimatesclaim cycle begins with the present value of expected earnings in excessreceipt of a traditional return on business assets. Technology represents proprietary software useddefault notice from the loan servicer. Case reserves for loan review, underwriting and due diligence, managing the REO disposition process, performing surveillancelosses are established upon receipt of mortgagenotification from servicers that a borrower has missed 2 monthly payments, which is when we consider a loan servicers, real estate valuations and client workflow solutions. Trade name and trademarks primarily reflect the value inherent in the recognition of the “Clayton” name and its reputation. For purposes of our intangible assets, we use the term client backlog to refer to the estimated present value of fees to be earnedin default for services performed on loans currently under surveillance or REO assets under
Part II Item 7. Management’s Discussionfinancial statement and Analysis of Financial Condition and Results of Operations
management. The value of a non-competition agreement is an appraisal of potential lost revenues that would arise from an individual leaving to workinternal tracking purposes. We also establish reserves for a competitor or initiating a competing enterprise. For financial reporting purposes, intangible assets with finite lives are amortized over their applicable estimated useful lives in a manner that approximates the pattern of expected economic benefit from each intangible asset.
The calculationassociated LAE, consisting of the estimated fair valuecost of goodwillthe claims administration process, including legal and other acquired intangibles is performed primarily using an income approachfees and requiresexpenses associated with administering the use of significant estimates and assumptionsclaims process.
We do not establish reserves for loans that are highly subjective in nature, suchdefault if we believe that we will not be liable for the payment of a claim with respect to that default. We generally do not establish loss reserves for expected future claims on insured mortgages that are not in default. See “—Reserve for Premium Deficiency”below for an exception to these general principles.
With respect to loans that are in default, considerable judgment is exercised as attrition rates, discount rates, future expected cash flows and market conditions. The most significant assumptions relate to the valuationadequacy of customer relationships. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. During the fourth quarter 2018, we performed our annual quantitative assessment of goodwill and concluded there was no impairment of goodwill as of December 31, 2018. See Note 7 of Notes to Consolidated Financial Statements for additional information.
Recent Accounting Pronouncements
Accounting Standards Adopted During 2018. In May 2014, the FASB issuedreserve levels. We use an update to the accounting standard regarding revenue recognition. In July 2015, the FASB delayed the effective date for this updated standard for public companies to interim and annual periods beginning after December 15, 2017, and subsequently issued various clarifying updates. Our adoption of this standard, effective January 1, 2018, had no impact on our financial statements. See Note 2 of Notes to Consolidated Financial Statements for the disclosures required by this update.
In January 2016, the FASB issued an update that makes certain changes to the standard for the accounting of financial instruments. Among other things, the update requires: (i) equity investments to be measured at fair value with changes in fair value recognized in net income; (ii) the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (iii) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset; and (iv) separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (alsoactuarial projection methodology referred to as “own credit”) whena “roll rate” analysis that uses historical claim frequency information to determine the organization has electedprojected ultimate Default to measure the liability at fair value in accordance with the fair value option for financial instruments. The update also eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized costClaim Rates based on the balance sheet. This update is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. In February 2018, the FASB issued technical corrections related to this update, which addresses common questions regarding the applicationStage of Default and adoption of the new guidance and the subsequent amendments. As a result of adopting these updates, equity securities are no longer classified as available for sale securities and changesTime in fair value are recognized through earnings. Consequently, we recorded a cumulative effect adjustment to retained earnings from accumulated other comprehensive income representing unrealized losses related to equity securities in the amount of $0.2 million, net of tax. In addition, we elected to utilize net asset value as a practical expedient to measure certain other investments, which resulted in an increase to other invested assets with an offset to retained earnings in the amount of $2.3 million, net of tax. Our adoption of both of these updates, effective January 1, 2018, resulted in a net increase to retained earnings of $2.1 million. See Notes 5 and 6 of Notes to Consolidated Financial Statements for additional information.
In January 2017, the FASB issued an update to the accounting standard regarding business combinations. This update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied prospectively as of the beginning of the period of adoption. We adopted this update effective January 1, 2018 and it did not have a material impact on our financial statements.
In February 2018, the FASB issued an update to the accounting standard regarding income statement reporting of comprehensive income and reclassification of certain tax effects from accumulated other comprehensive income. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA. The provisions of this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period, for reporting periods for which financial statements have not been available for issuance. We elected to early adopt this update effective January 1, 2018. As a result we recorded a reclassification adjustment from accumulated other
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
comprehensive income to retained earnings in the amount of $2.7 million. See Note 10 of Notes to Consolidated Financial Statements for additional information regarding the TCJA.
In August 2018, the FASB issued an update to the accounting standard regarding the disclosure requirements for fair value measurements. The amendments in this update remove certain disclosure requirements regarding transfers between Level I and Level II assetsDefault as well as the requirementdate that a loan goes into default. The Default to discloseClaim Rate also includes our estimates with respect to expected Loss Mitigation Activities, which have the valuation process for Level III assets. This update is effective for fiscal years beginning after December 15, 2019, including interim periodseffect of reducing our Default to Claim Rates.
After estimating the Default to Claim Rate, we estimate Claim Severity based on observed severity rates within those fiscal years. Early adoption is permitted, including adoptionproduct type, type of insurance and Time in an interim period. We electedDefault cohorts. These severity estimates are then applied to early adopt the full update as of December 31, 2018 and it did not have a materialindividual loan coverage amounts to determine reserves.
The impact onto our financial statements or disclosures.
Accounting Standards Not Yet Adopted. In February 2016, the FASB issued an update that replaces the existing accounting and disclosure requirements for leases of property, plant and equipment. The update requires lesseesreserve due to recognize, as of the lease commencement date, assets and liabilities for all leases with lease terms of more than 12 months, which is a change from the current GAAP requirement to recognize only capital leases on the balance sheet. Leases are required to be classified as either operating or finance, with expense on operating leases recorded as a single lease cost on a straight-line basis. For finance leases, interest expense on the lease liability is required to be recognized separately from the straight-line amortization of the right-of-use asset. Quantitative disclosures are required for certain items, including the cost of leases, the weighted-average remaining lease term, the weighted-average discount rate and a maturity analysis of lease liabilities. Additional qualitative disclosures are also requiredestimated future Loss Mitigation Activities incorporates our expectations regarding the naturenumber of the leases, such as basis, terms and conditions of: (i) variable interest payments; (ii) extension and termination options; and (iii) residual value guarantees. In July 2018 the FASB issued a further update containing certain targeted improvements to the accounting and disclosure requirements for leases, including an additional (and optional) transition method to recognize the cumulative-effect adjustment as of the beginning of the period of adoption, rather than recognizing the cumulative-effect adjustment as of the beginning of the earliest comparative period presented. We expect to elect the optional transition method to recognize the cumulative-effect adjustment as of the beginning of the period of adoption.However, we do not expect the adoption of this standard to impact our stockholders’ equity, results of operations or liquidity. In addition,policies that we expect to elect the practical expedients for transitioning existing leases to the new standard as of the effective date. As a result of applying the practical expedients: (i) we are not required to reassess expired or existing contracts to determine if they contain additional leases; (ii) we are not required to reassess the lease classification for expired and existing leases; and (iii) we are not required to reassess initial direct costs for existing leases. The update is effective for us on January 1, 2019 and upon our adoption, we expect to record an increase in other assets of approximately $50 million, which represents a right of use asset, and a corresponding net increase in other liabilities for the same amount. The net increase of approximately $50 million in other liabilities represents a discounted lease liability of approximately $74 million from operating leases, primarily for our various facilities, which represents the present value of these future lease payments discounted at our incremental borrowing rate, partially offset by an adjustment for unamortized allowances and incentives. Additionally, upon adoption we expect to expand our financial statement disclosures as required by the amendments, as well as implement any necessary changes to our control environment and reporting processes to reflect the requirements of the amendments. See Note 14 of Notes to Consolidated Financial Statements for additional information about our leases.
In June 2016, the FASB issued an update to the accounting standard regarding the measurement of credit losses on financial instruments and certain other assets. This update requires that financial assets measured at their amortized cost basis be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities are to be recorded through an allowance for credit losses, rather than a write-down of the asset, with the amount of the allowance limited to the amount by which fair value is less than amortized cost. This update is effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This update is not applicable to credit losses associated with our mortgage insurance policies. We are currently evaluating the impact on our financial statements and future disclosuresreinstated as a result of this update.our claims rebuttal process. Rescissions, Claim Denials and
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
Claim Curtailments may occur for various reasons, including, without limitation, underwriting negligence, fraudulent applications and appraisals, breach of representations and warranties and inadequate documentation, primarily related to our insurance written in years prior to and including 2008.
Unless a liability associated with such activities or discussions becomes probable and can be reasonably estimated, we consider our claim payments and our Rescissions, Claim Denials and Claim Curtailments to be resolved for financial reporting purposes. An estimated loss is accrued only if we determine that the FASB issued an updateloss is probable and can be reasonably estimated. For populations of disputed Rescissions, Claim Denials and Claim Curtailments where we determine that a settlement is probable and that a loss can be reasonably estimated, we reflect our best estimate of the expected loss related to the accounting standard regarding receivables. The new standard requires certain premiums on purchased callable debt securities to be amortized to the earliest call date. The amortization period for callable debt securities purchased at a discount will not be impacted. The provisions of this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including adoptionpopulations under discussion in an interim period. We do not expect the adoption of this update to have a material effect on our financial statements, primarily as a component of our IBNR reserve. While our reserves include our best estimate of such losses, the outcome of the discussions or potential legal proceedings that could ensue is uncertain, and disclosures.it is reasonably possible that a loss exists in excess of the amount accrued.
In August 2018, the FASB issued an updateEstimating our case reserve for losses involves significant reliance upon assumptions and estimates with regard to the accounting standard regardinglikelihood, magnitude and timing of each potential loss. The models, assumptions and estimates we use to establish loss reserves may not prove to be accurate, especially in the accounting for long-duration insurance contracts. The new standard: (i) requires that assumptions used to measure the liability for future policy benefits be
Part II Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
reviewed at least annually; (ii) defines and simplifies the measurementan extended economic downturn or a period of market risk benefits; (iii) simplifiesvolatility and economic uncertainty such as we have experienced due to the amortizationCOVID-19 pandemic. For example, the ultimate cure rate for loan defaults resulting from the pandemic may be lower or higher than our expectations. These assumptions require management to use considerable judgment in estimating the rate at which these loans will result in claims. As such, given the current environment, there is significant uncertainty around our reserve estimate.
Title Insurance
We establish reserves for estimated future claims payments on our title insurance policies at the time the related policy revenue is recorded. Our title insurance reserve for losses and LAE comprises estimates of deferred acquisition costs;both known claims and (iv) enhancesincurred but unreported claims expected to be paid in the required disclosures about long-duration contracts. This update is effectivefuture 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 impactpolicies issued as of the adoptionbalance sheet date. Title insurance policies typically insure against prior events affecting the quality of this update.real estate titles, rather than against unforeseen, and therefore less avoidable, future events. As such, claims payments often result from either judgment errors or mistakes made in the title search and examination process or the escrow process.
In August 2018, the FASB issuedWe provide for losses associated with these policies based upon our historical experience and other factors. However, by their nature, title claims can often be complex, vary greatly in dollar amounts, vary in number due to economic and market conditions such as an updateincrease in mortgage foreclosures, and involve uncertainties as to ultimate exposure. Due to the accounting standard regarding the capitalizationlength 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 thattime over which claim payments 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 updatemade and do not expect it to have a material effect on our financial statements and disclosures.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risk represents the potential for loss due to adverseregularly occurring changes in the value of financial instruments as a result of changes inunderlying economic and market conditions. Examples of market risk include changes in interest rates, credit spreads, foreign currency exchange rates and equity prices. We perform sensitivity analysesconditions, these estimates are subject to determine the effects of market risk exposures on our investment securities by determining the potential loss in future earnings, fair values or cash flows of market-risk-sensitive instruments resulting from one or more selected hypothetical changes in the above mentioned market risks.variability.
Interest-Rate Risk and Credit-Spread Risk
The primary market risks in our investment portfolio are interest-rate risk and credit-spread risk, namely the fair value sensitivity of our fixed income securities to changes in interest rates and credit spreads, respectively. We regularly analyze our exposure to interest-rate risk and credit-spread risk and have determined that the fair value of our investments is materially exposed to changes in both interest rates and credit spreads.
Our sensitivity analysis As of December 31, 2021, we held $257 million of investment securities for interest rates is based on the change in fair valuetrading purposes, representing less than 5% of our fixed income securities, assuming a hypothetical instantaneoustotal investment portfolio. Accordingly, in presenting this discussion, we have not distinguished between trading and parallel 100-basis point increase or decrease in the U.S. Treasury yield curve, with all other factors remaining constant. non-trading instruments.
We calculate the duration of our fixed income securities, expressed in years, in order to estimate the interest-rate sensitivity of these securities, as shown in the table below.
Credit spread represents the additional yield on a fixed income security, above the risk-free rate, that is paid by an issuer to compensate investors for assuming the credit risk of the issuer and market liquidity of the fixed income security. We manage credit-spread risk on both an entity and group level, across issuer, maturity, sector and asset class. Our sensitivity analysis for credit-spread risk is based on the change in fair value of our fixed income securities, assuming a hypothetical 100-basis point increase or decrease in all credit spreads, with the exception of U.S. Treasury and agency obligations for which we have assumed no change in credit spreads, and assuming all other factors remain constant. Actual shifts in credit spreads generally vary by issuer and security, based on issuer-specific and security-specific factors such as credit quality, maturity, sector and asset class. Within a given asset class, investment grade securities generally exhibit less credit-spread volatility than securities with lower credit ratings. Our investment securities portfolio primarily consists of investment grade securities.
Our sensitivity analyses for interest-rate risk and credit-spread risk provide an indication of our investment portfolio’s sensitivity to shifts in interest rates and credit spreads. However, the timing and magnitude of actual market changes may differ from the hypothetical assumptions used in our sensitivity calculations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following table illustrates the sensitivity of our investment portfolio to both interest-rate risk and credit-spread risk.
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| | Short-term and Available for Sale | | Trading |
| ($ in millions) | December 31, 2018 | | December 31,
2017 | | December 31, 2018 | | December 31,
2017 |
Carrying value of fixed income investment portfolio (1) (2) | $ | 4,556.1 |
| | $ | 4,009.8 |
| | $ | 566.2 |
| | $ | 606.4 |
|
Percentage of fixed income investment portfolio compared to total investment portfolio (3) | 87.9 | % | | 85.8 | % | | 10.9 | % | | 13.0 | % |
| Average duration of fixed income portfolio | 4.0 years |
| | 4.4 years |
| | 4.3 years |
| | 5.1 years |
|
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| Interest-rate risk increase/(decrease) in market value | | | | | | | |
| +100 basis points - $ | $ | (175.0 | ) | | $ | (169.8 | ) | | $ | (23.4 | ) | | $ | (29.7 | ) |
+100 basis points - % (4) | (3.8 | )% | | (4.2 | )% | | (4.1 | )% | | (4.9 | )% |
| - 100 basis points - $ | $ | 186.8 |
| | $ | 184.7 |
| | $ | 25.3 |
| | $ | 32.5 |
|
- 100 basis points - % (4) | 4.1 | % | | 4.6 | % | | 4.5 | % | | 5.4 | % |
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| Credit-spread risk increase/(decrease) in market value | | | | | | | |
| +100 basis points - $ | $ | (185.5 | ) | | $ | (183.8 | ) | | $ | (24.8 | ) | | $ | (30.4 | ) |
+100 basis points - % (4) | (4.1 | )% | | (4.6 | )% | | (4.4 | )% | | (5.0 | )% |
| - 100 basis points - $ | $ | 173.0 |
| | $ | 148.6 |
| | $ | 22.6 |
| | $ | 24.6 |
|
- 100 basis points - % (4) | 3.8 | % | | 3.7 | % | | 4.0 | % | | 4.1 | % |
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(1) | Total fixed income securities include fixed-maturity investments available for sale, trading securities and short-term investments and exclude reinvested cash collateral held under securities lending agreements. At December 31, 2018 and 2017, fixed income securities shown above also include $97.1 million and $134.1 million, respectively, invested in certain fixed income exchange-traded funds that are classified as equity securities in our consolidated balance sheets, as well as $17.8 million and $20.7 million, respectively, in fixed income securities loaned under securities lending agreements that are classified as other assets in our consolidated balance sheets. |
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(2) | At December 31, 2017, equity securities, including our fixed income exchange-traded funds included in this table, were classified as available for sale in our consolidated balance sheet. At December 31, 2018, in accordance with the new accounting guidance adopted for 2018, equity securities are no longer classified as available for sale in our consolidated balance sheet and changes in fair value for equity securities are recognized through earnings. As a result, at December 31, 2018, the fixed income exchange-traded funds that are classified as equity securities in our consolidated balance sheet are included in trading securities in this table. See Note 2 of Notes to Consolidated Financial Statements for additional details on the implementation of this new accounting guidance. |
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(3) | Total investment portfolio comprises total investments per the consolidated balance sheets including securities loaned under securities lending agreements that are classified as other assets in our consolidated balance sheets. |
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(4) | Change in value expressed as a percentage of the market value of the related fixed income portfolio. |
The average duration of our total fixed income portfolio was 4.0 years at December 31, 2018 compared to 4.5 years at December 31, 2017.2021 and 4.7 years at December 31, 2020. To assist us in setting duration targets for the investment portfolio, we analyze: (i) the interest-rate sensitivities of our liabilities, including prepayment risk associated with premium cash flows and credit losses; (ii) entity specific cash flows under various economic scenarios; (iii) return, volatility and correlation of specific asset classes and the interconnection with our liabilities; and (iv) our current risk appetite.
Our stress analysis for interest rates is based on the change in fair value of our fixed income securities, assuming a hypothetical instantaneous and parallel 100-basis point increase in the U.S. Treasury yield curve, with all other factors remaining constant. The carrying value of our fixed income securities has a balance of $6.5 billion and $6.8 billion as of December 31, 2021 and 2020, respectively. If interest rates experienced an increase of 100 basis points, our fixed income portfolio would decrease by $281.7 million and $300.4 million of the market value of the related fixed income portfolio for 2021 and 2020, respectively.
Credit spread represents the additional yield on a fixed income security, above the risk-free rate, that is paid by an issuer to compensate investors for assuming the credit risk of the issuer and market liquidity of the fixed income security. We manage credit-spread risk on both an entity and group level, across issuer, maturity, sector and asset class. Our stress analysis for credit-spread risk is based on the change in fair value of our fixed income securities, assuming a hypothetical 100-basis point increase in all credit spreads, with the exception of U.S. Treasury and agency RMBS obligations for which we have assumed no change in credit spreads, and assuming all other factors remain constant. If credit spreads experienced an increase of 100 basis points, our fixed income portfolio would decrease by $262.8 million and $285.4 millionof the market value of the related fixed income portfolio for 2021 and 2020, respectively.
Actual shifts in credit spreads generally vary by issuer and security, based on issuer-specific and security-specific factors such as credit quality, maturity, sector and asset class. Within a given asset class, investment grade securities generally exhibit less credit-spread volatility than securities with lower credit ratings. At December 31, 2021, 95.5% of our investment portfolio was rated investment grade.
Our sensitivity analyses for interest-rate risk and credit-spread risk provide an indication of our investment portfolio’s sensitivity to shifts in interest rates and credit spreads. However, the timing and magnitude of actual market changes may differ from the hypothetical assumptions used in our sensitivity calculations.
See “Item 1. Business—Investment Policy and Portfolio” for a discussion of portfolio strategy and risk exposure.
Securities Lending Agreements.Radian Group, Radian Guaranty and Radian Reinsurance from time to time enter into certain short-term securities lending agreements with third-party Borrowersborrowers for the purpose of increasing the yieldincome on our investment securities portfolio with minimallimited incremental risk. Market factors, including changes in interest rates, credit spreads and equity prices, may impact the timing or magnitude of cash outflows for the return of cash collateral. For the purpose of illustrating our interest-rate risk and credit-spread risk, we have included our fixed income securities (which include certain exchange-traded funds) loaned in the sensitivity table above. As of December 31, 20182021 and December 31, 2017,2020, the carrying value of these securities included in the sensitivity analyses above was $17.8$86.0 million and $20.7$53.7 million, respectively.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Under our securities lending agreements, the Borrower generally may return the loaned securities to us at any time, which would require us to return the cash and other collateral within the standard settlement period for the loaned securities on the principal exchange or market in which the securities are traded. We manage this liquidity risk associated with the cash collateral by maintaining the cash collateral in a short-term money-market fund with daily availability.
The counterparty risk under these programs is reduced by the amounts of collateral received. On a daily basis, the value of the underlying securities that we have loaned to the Borrowers is compared to the value of cash and securities collateral we received from the Borrowers, and additional cash or securities are requested or returned, as applicable. In addition, we are indemnified against counterparty credit risk by the intermediary. We also have the right to request the return of the loaned securities at any time. For additional information on our securities lending agreements, see Note 6 of Notes to Consolidated Financial Statements.
Foreign Exchange Rate Risk
As of December 31, 2018 and 2017, we did not hold any foreign currency denominated securities in our investment portfolio. Exchange gains and losses on foreign currency transactions from our foreign operations have not been material due to the limited amount of business performed in those locations. Currency risk is further limited because, in general, both the revenues and expenses of our foreign operations are denominated in the same functional currency, based on the country in which the operations occur.
Equity Market Price
Equity Investments at December 31, 2018. At December 31, 2018, the market value and cost of the equity securities in our investment portfolio were $130.6 million and $139.4 million, respectively. These amounts include market value and cost of fixed income exchange-traded funds of $96.9 million and $102.7 million, respectively, which are subject to interest-rate risk and credit-spread risk consistent with our other fixed income securities. Therefore, these fixed income exchange-traded funds have been included in the table above for purposes of illustrating our sensitivity to these risks.
The remaining $33.7 million and $36.7 million of market value and cost, respectively, of equity securities at December 31, 2018, primarily consists of publicly-traded business development company equity securities and equity-related exchange-traded funds. Due to our limited basis in these investments at December 31, 2018, our exposure to changes in equity market prices is not significant.
Equity Investments at December 31, 2017. At December 31, 2017, the market value and cost of the equity securities in our investment portfolio were $162.8 million and $163.1 million, respectively. These amounts include market value and cost of fixed income exchange-traded funds of $134.0 million and $135.0 million, respectively, which are subject to interest-rate risk and credit-spread risk consistent with our other fixed income securities. Therefore, these fixed income exchange-traded funds have been included in the table above for purposes of illustrating our sensitivity to these risks.
The remaining $28.8 million and $28.1 million of market value and cost, respectively, of equity securities at December 31, 2017, consists of publicly-traded business development company equity securities and equity-related exchange-traded funds. Due to our limited basis in these investments at December 31, 2017, our exposure to changes in equity market prices was not significant. See “Item 1. Business—Investment Policy and Portfolio” for additional information on risk management.
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Item 8. | Financial Statements and Supplementary Data. |
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
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| Annual Financial Statements |
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Financial Statements as of December 20182021 and 20172020 and for the years ended December 31, 2018, 20172021, 2020 and 2016:2019 | |
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REPORT ON MANAGEMENT’S RESPONSIBILITY
Management is responsible for the preparation, integrity and objectivityReport of the Consolidated Financial Statements and other financial information presented in this annual report. The accompanying Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in the United States of America, applying certain estimations and judgments as required.
Our board of directors exercises its responsibility for the financial statements through its Audit Committee, which consists entirely of independent non-management board members. The Audit Committee meets periodically with management and with PricewaterhouseCoopers LLP, the independent registered public accounting firm retained to audit our Consolidated Financial Statements, both privately and with management present, to review accounting, auditing, internal control and financial reporting matters.
The accompanying report of PricewaterhouseCoopers LLP is based on its audit, which it is required to conduct in accordance with the standards of theIndependent Registered Public Company Accounting Oversight Board (U.S.), and which includes the consideration of our internal control over financial reporting to establish a basis for reliance thereon in determining the nature, timing and extent of audit tests to be applied.
Richard G. Thornberry
Chief Executive Officer
J. Franklin Hall
Senior Executive Vice President and Chief Financial Officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Radian Group Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Radian Group Inc. and its subsidiaries (the “Company”) as of December 31, 20182021 and 2017,2020, and the related consolidated statements of operations, comprehensive income, changes in common stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018,2021, including the related notes and financial statement schedules listed in the index appearing under Item 15(a)(3)3 (collectively referred to as the “consolidated financial statements”). We also have audited the Company’sCompany's internal control over financial reporting as of December 31, 2018,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(“COSO”).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20182021 and 2017,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20182021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’sCompany's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’sCompany's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of First-Lien Primary Case Reserves for Mortgage Insurance Policies
As described in Notes 2 and 11 to the consolidated financial statements, the Company establishes case reserves for losses on mortgage insurance policies for loans that are considered to be in default, as well as reserves for loss adjustment expenses, losses incurred but not reported (“IBNR”) and other reserves. As of December 31, 2021, first-lien primary case reserves were $790.4 million of the total $823.1 million of mortgage insurance loss reserves. Management’s estimate of the case reserves for losses involves significant reliance upon assumptions and estimates with regard to the likelihood, magnitude and timing of each potential loss. Management uses an actuarial projection methodology referred to as a “roll rate” analysis that uses historical claim frequency information to determine the projected ultimate Default to Claim Rates based on the Stage of Default and Time in Default as well as the date that a loan goes into default. After estimating the Default to Claim Rate, management estimates Claim Severity based on the average of recently observed severity rates within product type, type of insurance, and Time in Default cohorts.
The principal considerations for our determination that performing procedures relating to the valuation of first-lien primary case reserves for mortgage insurance policies is a critical audit matter are (i) the significant judgment by management when developing their estimates of the Default to Claim Rates and Claim Severity, which in turn led to a high degree of auditor subjectivity and judgment in performing procedures relating to such estimates; (ii) the significant audit effort and subjectivity in evaluating the audit evidence related to the Default to Claim Rates and Claim Severity; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s valuation of first-lien primary case reserves for mortgage insurance policies, including controls over the development of the Default to Claim Rates and Claim Severity. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent estimate of the case reserves for first-lien primary mortgage insurance policies using actual historical data, comparing this independent estimate to management’s determined case reserves, and evaluating the reasonableness of management’s assumptions related to the Default to Claim Rates and Claim Severity. Performing these procedures involved testing the completeness and accuracy of data provided by management and independently developing Default to Claim Rates and Claim Severity assumptions based on data provided by management.
/s/ PricewaterhouseCoopers LLP
Philadelphia, PAPennsylvania
February 28, 201925, 2022
We have served as the Company’s auditor since 2007.
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| Radian Group Inc. |
| CONSOLIDATED BALANCE SHEETS |
| | December 31,
2018 | | December 31,
2017 |
| (In thousands, except per-share amounts) | | | |
| Assets | | | |
| Investments (Note 6) | | | |
| Fixed-maturities available for sale—at fair value (amortized cost $4,098,962 and $3,426,217) | $ | 4,021,575 |
| | $ | 3,458,719 |
|
| Trading securities—at fair value | 469,071 |
| | 606,401 |
|
| Equity securities—at fair value (cost of $139,377 and $163,106) | 130,565 |
| | 162,830 |
|
| Short-term investments—at fair value (includes $11,699 and $19,357 of reinvested cash collateral held under securities lending agreements) | 528,403 |
| | 415,658 |
|
| Other invested assets—at fair value (amortized cost at December 31, 2017) | 3,415 |
| | 334 |
|
| Total investments | 5,153,029 |
| | 4,643,942 |
|
| Cash | 95,393 |
| | 80,569 |
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| Restricted cash | 11,609 |
| | 15,675 |
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| Accounts and notes receivable | 78,652 |
| | 72,558 |
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| Deferred income taxes, net (Note 10) | 131,643 |
| | 229,567 |
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| Goodwill and other acquired intangible assets, net (Note 7) | 58,998 |
| | 64,212 |
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| Prepaid reinsurance premium (Note 2) | 417,628 |
| | 386,509 |
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| Other assets (Note 9) | 367,700 |
| | 407,849 |
|
| Total assets | $ | 6,314,652 |
| | $ | 5,900,881 |
|
| Liabilities and Stockholders’ Equity |
| | |
| Unearned premiums | $ | 739,357 |
| | $ | 723,938 |
|
| Reserve for losses and loss adjustment expenses (“LAE”) (Note 11) | 401,361 |
| | 507,588 |
|
| Senior notes (Note 12) | 1,030,348 |
| | 1,027,074 |
|
| Reinsurance funds withheld (Note 2) | 321,212 |
| | 288,398 |
|
| Other liabilities (Note 13) | 333,659 |
| | 353,845 |
|
| Total liabilities | 2,825,937 |
| | 2,900,843 |
|
| Commitments and Contingencies (Note 14) |
| |
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| Stockholders’ equity | | | |
| Common stock: par value $.001 per share; 485,000 shares authorized at December 31, 2018 and 2017; 231,132 and 233,417 shares issued at December 31, 2018 and 2017, respectively; 213,473 and 215,814 shares outstanding at December 31, 2018 and 2017, respectively | 231 |
| | 233 |
|
| Treasury stock, at cost: 17,660 and 17,603 shares at December 31, 2018 and 2017, respectively | (894,870 | ) | | (893,888 | ) |
| Additional paid-in capital | 2,724,733 |
| | 2,754,275 |
|
| Retained earnings | 1,719,541 |
| | 1,116,333 |
|
| Accumulated other comprehensive income (loss) (Note 18) | (60,920 | ) | | 23,085 |
|
| Total stockholders’ equity | 3,488,715 |
| | 3,000,038 |
|
| Total liabilities and stockholders’ equity | $ | 6,314,652 |
| | $ | 5,900,881 |
|
Radian Group Inc. and Subsidiaries
Consolidated Balance Sheets
| | | | | | | | | | | | | | |
| | December 31, |
| (In thousands, except per-share amounts) | | 2021 | | 2020 |
| Assets | | | | |
| Investments (Notes 5 and 6) | | | | |
| Fixed-maturities available for sale—at fair value, net of allowance for credit losses of $0 and $948 (amortized cost of $5,367,729 and $5,393,623) | | $ | 5,517,078 | | | $ | 5,723,340 | |
| Trading securities—at fair value (amortized cost of $234,382 and $260,773) | | 256,546 | | | 290,885 | |
| Equity securities—at fair value (cost of $176,229 and $145,501) | | 184,245 | | | 151,240 | |
| Short-term investments—at fair value (includes $48,652 and $15,587 of reinvested cash collateral held under securities lending agreements) | | 551,508 | | | 618,004 | |
| Other invested assets—at fair value | | 4,165 | | | 4,973 | |
| Total investments | | 6,513,542 | | | 6,788,442 | |
| Cash | | 151,145 | | | 87,915 | |
| Restricted cash | | 1,475 | | | 6,231 | |
| Accrued investment income | | 32,812 | | | 34,047 | |
| Accounts and notes receivable | | 124,016 | | | 121,294 | |
| Reinsurance recoverables (includes $51 and $32 for paid losses) | | 67,896 | | | 73,202 | |
| Deferred policy acquisition costs | | 16,317 | | | 18,305 | |
| Property and equipment, net (Note 2) | | 75,086 | | | 80,457 | |
| Goodwill and other acquired intangible assets, net (Note 7) | | 19,593 | | | 23,043 | |
| Other assets (Note 9) | | 837,303 | | | 715,085 | |
| | | | |
| Total assets | | $ | 7,839,185 | | | $ | 7,948,021 | |
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| Liabilities and Stockholders’ Equity | | | | |
| Liabilities | | | | |
| Unearned premiums | | $ | 329,090 | | | $ | 448,791 | |
| Reserve for losses and LAE (Note 11) | | 828,642 | | | 848,413 | |
| Senior notes (Note 12) | | 1,409,473 | | | 1,405,674 | |
| FHLB advances (Note 12) | | 150,983 | | | 176,483 | |
| Reinsurance funds withheld | | 228,078 | | | 278,555 | |
| Net deferred tax liability (Note 10) | | 337,509 | | | 213,897 | |
| Other liabilities | | 296,614 | | | 291,855 | |
| Total liabilities | | 3,580,389 | | | 3,663,668 | |
| Commitments and Contingencies (Note 13) | | 0 | | 0 |
| Stockholders’ equity | | | | |
| Common stock: par value $0.001 per share; 485,000 shares authorized at December 31, 2021 and 2020; 194,408 and 210,130 shares issued at December 31, 2021 and 2020, respectively; 175,421 and 191,606 shares outstanding at December 31, 2021 and 2020, respectively | | 194 | | | 210 | |
| Treasury stock, at cost: 18,987 and 18,524 shares at December 31, 2021 and 2020, respectively | | (920,798) | | | (910,115) | |
| Additional paid-in capital | | 1,878,372 | | | 2,245,897 | |
| Retained earnings | | 3,180,935 | | | 2,684,636 | |
| Accumulated other comprehensive income (loss) (Note 15) | | 120,093 | | | 263,725 | |
| Total stockholders’ equity | | 4,258,796 | | | 4,284,353 | |
| Total liabilities and stockholders’ equity | | $ | 7,839,185 | | | $ | 7,948,021 | |
See Notes to Consolidated Financial Statements.
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| Radian Group Inc. |
| CONSOLIDATED STATEMENTS OF OPERATIONS |
| | Year Ended December 31, |
| (In thousands, except per-share amounts) | 2018 | | 2017 | | 2016 |
| Revenues: | | | | | |
| Net premiums earned—insurance | $ | 1,014,007 |
| | $ | 932,773 |
| | $ | 921,769 |
|
| Services revenue | 144,972 |
| | 155,103 |
| | 168,894 |
|
| Net investment income | 152,475 |
| | 127,248 |
| | 113,466 |
|
| Net gains (losses) on investments and other financial instruments | (42,476 | ) | | 3,621 |
| | 30,751 |
|
| Other income | 4,028 |
| | 2,886 |
| | 3,572 |
|
| Total revenues | 1,273,006 |
| | 1,221,631 |
| | 1,238,452 |
|
| Expenses: | | | | | |
| Provision for losses | 104,641 |
| | 135,154 |
| | 202,788 |
|
| Policy acquisition costs | 25,265 |
| | 24,277 |
| | 23,480 |
|
| Cost of services | 98,124 |
| | 104,599 |
| | 114,174 |
|
| Other operating expenses | 280,818 |
| | 267,321 |
| | 244,896 |
|
| Restructuring and other exit costs (Note 1) | 6,053 |
| | 17,268 |
| | — |
|
| Interest expense | 61,490 |
|
| 62,761 |
|
| 81,132 |
|
| Loss on induced conversion and debt extinguishment (Note 12) | — |
| | 51,469 |
| | 75,075 |
|
| Impairment of goodwill (Note 7) | — |
| | 184,374 |
| | — |
|
| Amortization and impairment of other acquired intangible assets | 12,429 |
| | 27,671 |
| | 13,221 |
|
| Total expenses | 588,820 |
| | 874,894 |
| | 754,766 |
|
| Pretax income | 684,186 |
| | 346,737 |
| | 483,686 |
|
| Income tax provision | 78,175 |
|
| 225,649 |
|
| 175,433 |
|
| Net income | $ | 606,011 |
| | $ | 121,088 |
| | $ | 308,253 |
|
| | | | | | |
| Net income per share: | | | | | |
| Basic | $ | 2.83 |
| | $ | 0.56 |
| | $ | 1.46 |
|
| Diluted | $ | 2.77 |
| | $ | 0.55 |
| | $ | 1.37 |
|
| | | | | | |
| Weighted-average number of common shares outstanding—basic | 214,267 |
| | 215,321 |
| | 211,789 |
|
| Weighted-average number of common and common equivalent shares outstanding—diluted | 218,553 |
| | 220,406 |
| | 229,258 |
|
Radian Group Inc. and Subsidiaries
Consolidated Statements of Operations
| | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | |
| (In thousands, except per-share amounts) | | 2021 | | 2020 | | 2019 | | |
| Revenues | | | | | | | | |
| Net premiums earned (Note 8) | | $ | 1,037,183 | | | $ | 1,115,321 | | | $ | 1,145,349 | | | |
| Services revenue (Note 4) | | 125,825 | | | 105,385 | | | 154,596 | | | |
| Net investment income (Note 6) | | 147,909 | | | 154,037 | | | 171,796 | | | |
| Net gains on investments and other financial instruments (includes net realized gains on investments of $20,842, $35,826 and $10,843) | | 15,603 | | | 60,277 | | | 51,719 | | | |
| Other income | | 3,412 | | | 3,597 | | | 3,495 | | | |
| Total revenues | | 1,329,932 | | | 1,438,617 | | | 1,526,955 | | | |
| | | | | | | | |
| Expenses | | | | | | | | |
| Provision for losses | | 20,877 | | | 485,117 | | | 132,031 | | | |
| Policy acquisition costs | | 29,029 | | | 30,989 | | | 25,314 | | | |
| Cost of services | | 103,714 | | | 86,066 | | | 108,324 | | | |
| Other operating expenses | | 323,686 | | | 280,710 | | | 306,129 | | | |
| | | | | | | | |
| Interest expense | | 84,344 | | | 71,150 | | | 56,310 | | | |
| Loss on extinguishment of debt (Note 12) | | — | | | — | | | 22,738 | | | |
| Impairment of goodwill (Note 7) | | — | | | — | | | 4,828 | | | |
| Amortization and impairment of other acquired intangible assets | | 3,450 | | | 5,144 | | | 22,288 | | | |
| Total expenses | | 565,100 | | | 959,176 | | | 677,962 | | | |
| | | | | | | | |
| Pretax income | | 764,832 | | | 479,441 | | | 848,993 | | | |
| Income tax provision (Note 10) | | 164,161 | | | 85,815 | | | 176,684 | | | |
| Net income | | $ | 600,671 | | | $ | 393,626 | | | $ | 672,309 | | | |
| | | | | | | | |
| Net Income Per Share | | | | | | | | |
| Basic | | $ | 3.19 | | | $ | 2.01 | | | $ | 3.22 | | | |
| Diluted | | $ | 3.16 | | | $ | 2.00 | | | $ | 3.20 | | | |
| | | | | | | | |
| Weighted-average number of common shares outstanding—basic | | 188,370 | | | 195,443 | | | 208,773 | | | |
| Weighted-average number of common and common equivalent shares outstanding—diluted | | 190,263 | | | 196,642 | | | 210,340 | | | |
See Notes to Consolidated Financial Statements.
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| | | | | | | | | | | |
| Radian Group Inc. |
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
| | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 | | 2016 |
| Net income | $ | 606,011 |
| | $ | 121,088 |
| | $ | 308,253 |
|
| Other comprehensive income (loss), net of tax (Note 18): | | | | | |
| Unrealized gains (losses) on investments: | | | | | |
| Unrealized holding gains (losses) arising during the period | (97,356 | ) | | 31,903 |
| | 8,782 |
|
| Less: Reclassification adjustment for net gains (losses) included in net income | (10,270 | ) | | (2,642 | ) | | 2,251 |
|
| Net unrealized gains (losses) on investments | (87,086 | ) | | 34,545 |
| | 6,531 |
|
| Foreign currency translation adjustments: | | | | | |
| Unrealized foreign currency translation adjustments | 5 |
| | 150 |
| | (474 | ) |
| Less: Reclassification adjustment for liquidation of foreign subsidiary and other adjustments included in net income | 1 |
| | (721 | ) | | — |
|
| Net foreign currency translation adjustments | 4 |
| | 871 |
| | (474 | ) |
| Net actuarial gains | 129 |
| | 64 |
| | 25 |
|
| Other comprehensive income (loss), net of tax | (86,953 | ) | | 35,480 |
| | 6,082 |
|
| Comprehensive income | $ | 519,058 |
| | $ | 156,568 |
| | $ | 314,335 |
|
Radian Group Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| | | | | | |
| Net income | | $ | 600,671 | | | $ | 393,626 | | | $ | 672,309 | |
| Other comprehensive income (loss), net of tax (Note 15) | | | | | | |
| | | | | | |
| Unrealized holding gains (losses) on investments arising during the period for which an allowance for expected losses has not been recognized | | (138,435) | | | 178,761 | | | 180,441 | |
| Less: Reclassification adjustment for net gains (losses) on investments included in net income | | | | | | |
| Net realized gains on disposals and non-credit related impairment losses | | 4,472 | | | 26,440 | | | 8,897 | |
| Net decrease (increase) in expected credit losses | | 725 | | | (991) | | | — | |
| Net unrealized gains (losses) on investments | | (143,632) | | | 153,312 | | | 171,544 | |
| Other adjustments to comprehensive income, net | | — | | | (75) | | | (136) | |
| Other comprehensive income (loss), net of tax | | (143,632) | | | 153,237 | | | 171,408 | |
| Comprehensive income | | $ | 457,039 | | | $ | 546,863 | | | $ | 843,717 | |
See Notes to Consolidated Financial Statements.
|
| | | | | | | | | | | |
| Radian Group Inc. |
| CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY |
| | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 | | 2016 |
| Common Stock | | | | | |
| Balance, beginning of period | $ | 233 |
| | $ | 232 |
| | $ | 224 |
|
| Impact of extinguishment of convertible senior notes (Note 12) | — |
| | — |
| | 17 |
|
| Issuance of common stock under incentive and benefit plans | 1 |
| | 1 |
| | — |
|
| Shares repurchased under share repurchase program (Note 15) | (3 | ) | | — |
| | (9 | ) |
| Balance, end of period | 231 |
| | 233 |
| | 232 |
|
| | | | | | |
| Treasury Stock | | | | | |
| Balance, beginning of period | (893,888 | ) | | (893,332 | ) | | (893,176 | ) |
| Repurchases of common stock under incentive plans | (982 | ) | | (556 | ) | | (156 | ) |
| Balance, end of period | (894,870 | ) | | (893,888 | ) | | (893,332 | ) |
| | | | | | |
| Additional Paid-in Capital | | | | | |
| Balance, beginning of period | 2,754,275 |
| | 2,779,891 |
| | 2,716,618 |
|
| Issuance of common stock under incentive and benefit plans | 2,859 |
| | 8,635 |
| | 2,117 |
|
| Stock-based compensation | 17,649 |
| | 13,491 |
| | 18,257 |
|
| Impact of extinguishment of convertible senior notes (Note 12) | — |
| | (52,700 | ) | | 143,078 |
|
| Cumulative effect of adoption of the accounting standard update for share-based payment transactions | — |
| | 756 |
| | — |
|
| Termination of capped calls (Note 12) | — |
| | 4,208 |
| | — |
|
| Shares repurchased under share repurchase program (Note 15) | (50,050 | ) | | (6 | ) | | (100,179 | ) |
| Balance, end of period | 2,724,733 |
| | 2,754,275 |
| | 2,779,891 |
|
| | | | | | |
| Retained Earnings | | | | | |
| Balance, beginning of period | 1,116,333 |
| | 997,890 |
| | 691,742 |
|
| Net income | 606,011 |
| | 121,088 |
| | 308,253 |
|
| Dividends declared | (2,140 | ) | | (2,154 | ) | | (2,105 | ) |
| Cumulative effect of adopting the accounting standard update for financial instruments | 2,061 |
| | — |
| | — |
|
| Cumulative effect of adopting the accounting standard update for the reclassification of certain tax effects from accumulated other comprehensive income | (2,724 | ) | | — |
| | — |
|
| Cumulative effect of adoption of the accounting standard update for share-based payment transactions, net of tax | — |
| | (491 | ) | | — |
|
| Balance, end of period | 1,719,541 |
| | 1,116,333 |
| | 997,890 |
|
| | | | | | |
Radian Group Inc. and Subsidiaries
Consolidated Statements of Changes in Common Stockholders’ Equity
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Common Stock | | | | | | |
| Balance, beginning of period | | $ | 210 | | | $ | 219 | | | $ | 231 | |
| Issuance of common stock under incentive and benefit plans | | 2 | | | 2 | | | 1 | |
| Shares repurchased under share repurchase program (Note 14) | | (18) | | | (11) | | | (13) | |
| Balance, end of period | | 194 | | | 210 | | | 219 | |
| | | | | | |
| Treasury Stock | | | | | | |
| Balance, beginning of period | | (910,115) | | | (901,657) | | | (894,870) | |
| Repurchases of common stock under incentive plans | | (10,683) | | | (8,458) | | | (6,787) | |
| Balance, end of period | | (920,798) | | | (910,115) | | | (901,657) | |
| | | | | | |
| Additional Paid-in Capital | | | | | | |
| Balance, beginning of period | | 2,245,897�� | | | 2,449,884 | | | 2,724,733 | |
| Issuance of common stock under incentive and benefit plans | | 3,114 | | | 3,143 | | | 3,925 | |
| Share-based compensation | | 28,443 | | | 19,164 | | | 21,414 | |
| Shares repurchased under share repurchase program (Note 14) | | (399,082) | | | (226,294) | | | (300,188) | |
| Balance, end of period | | 1,878,372 | | | 2,245,897 | | | 2,449,884 | |
| | | | | | |
| Retained Earnings | | | | | | |
| Balance, beginning of period | | 2,684,636 | | | 2,389,789 | | | 1,719,541 | |
| Net income | | 600,671 | | | 393,626 | | | 672,309 | |
| Dividends and dividend equivalents declared | | (104,372) | | | (98,779) | | | (2,061) | |
| Balance, end of period | | 3,180,935 | | | 2,684,636 | | | 2,389,789 | |
| | | | | | |
| Accumulated Other Comprehensive Income (Loss) | | | | | | |
| Balance, beginning of period | | 263,725 | | | 110,488 | | | (60,920) | |
| Net unrealized gains (losses) on investments, net of tax | | (143,632) | | | 153,312 | | | 171,544 | |
| Other adjustments to other comprehensive income (loss) | | — | | | (75) | | | (136) | |
| Balance, end of period | | 120,093 | | | 263,725 | | | 110,488 | |
| | | | | | |
| Total Stockholders’ Equity | | $ | 4,258,796 | | | $ | 4,284,353 | | | $ | 4,048,723 | |
|
| | | | | | | | | | | |
| Radian Group Inc. |
| CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY |
| | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 | | 2016 |
| Accumulated Other Comprehensive Income (Loss) | | | | | |
| Balance, beginning of period | 23,085 |
| | (12,395 | ) | | (18,477 | ) |
| Cumulative effect of adopting the accounting standard update for financial instruments | 224 |
| | — |
| | — |
|
| Cumulative effect of adopting the accounting standard update for reclassification of certain tax effects from accumulated other comprehensive income | 2,724 |
| | — |
| | — |
|
| Net unrealized gains (losses) on investments, net of tax | (87,086 | ) | | 34,545 |
| | 6,531 |
|
| Net foreign currency translation adjustment, net of tax | 4 |
| | 871 |
| | (474 | ) |
| Net actuarial gains | 129 |
| | 64 |
| | 25 |
|
| Balance, end of period | (60,920 | ) | | 23,085 |
| | (12,395 | ) |
| | | | | | |
| Total Stockholders’ Equity | $ | 3,488,715 |
| | $ | 3,000,038 |
| | $ | 2,872,286 |
|
See Notes to Consolidated Financial Statements.
|
| | | | | | | | | | | |
| Radian Group Inc. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (In thousands) | Year Ended December 31, |
| 2018 | | 2017 | | 2016 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 606,011 |
| | $ | 121,088 |
| | $ | 308,253 |
|
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | |
| Net (gains) losses on investments and other financial instruments | 42,476 |
| | (3,621 | ) | | (30,751 | ) |
| Loss on induced conversion and debt extinguishment | — |
| | 51,469 |
| | 75,075 |
|
| Deferred income tax provision | 120,573 |
| | 166,527 |
| | 170,887 |
|
| Impairment of goodwill | — |
| | 184,374 |
| | — |
|
| Amortization and impairment of other acquired intangible assets | 12,429 |
| | 27,797 |
| | 13,221 |
|
| Depreciation, other amortization, and other impairments, net | 56,661 |
| | 58,038 |
| | 57,795 |
|
| Change in: |
|
| |
|
| |
|
|
| Accounts and notes receivable | (4,599 | ) | | 3,628 |
| | (16,011 | ) |
| Prepaid reinsurance premiums | (31,119 | ) | | (157,071 | ) | | (188,947 | ) |
| Unearned premiums | 15,419 |
| | 42,716 |
| | 862 |
|
| Reserve for losses and LAE | (109,642 | ) | | (252,681 | ) | | (216,135 | ) |
| Reinsurance funds withheld | 32,814 |
| | 130,397 |
| | 158,001 |
|
| Other assets | 43,562 |
| | (16,491 | ) | | (7,662 | ) |
| Other liabilities | (106,799 | ) | | 4,405 |
| | 57,136 |
|
| Net cash provided by (used in) operating activities | 677,786 |
| | 360,575 |
| | 381,724 |
|
| | | | | | |
| Cash flows from investing activities: | | | | | |
| Proceeds from sales of: | | | | | |
| Fixed-maturity investments available for sale | 728,584 |
| | 888,219 |
| | 687,173 |
|
| Trading securities | 58,317 |
| | 194,784 |
| | 290,855 |
|
| Equity securities | 95,697 |
| | 38,318 |
| | 74,868 |
|
| Proceeds from redemptions of: | | | | | |
| Fixed-maturity investments available for sale | 457,595 |
| | 463,548 |
| | 337,630 |
|
| Trading securities | 54,329 |
| | 79,296 |
| | 123,645 |
|
| Purchases of: | | | | | |
| Fixed-maturity investments available for sale | (1,875,069 | ) | | (1,947,916 | ) | | (1,990,652 | ) |
| Equity securities | (69,160 | ) | | (213,469 | ) | | (830 | ) |
| Sales, redemptions and (purchases) of: | | | | | |
| Short-term investments, net | (108,325 | ) | | 324,258 |
| | 334,456 |
|
| Other assets and other invested assets, net | 2,590 |
| | 882 |
| | 2,489 |
|
| Net cash received (transferred) in sale of subsidiaries | — |
| | (650 | ) | | — |
|
| Purchases of property and equipment, net | (26,008 | ) | | (28,676 | ) | | (35,542 | ) |
| Acquisitions, net of cash acquired | (7,964 | ) | | (86 | ) | | (150 | ) |
| Net cash provided by (used in) investing activities | (689,414 | ) | | (201,492 | ) | | (176,058 | ) |
Radian Group Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Cash flows from operating activities | | | | | | |
| Net income | | $ | 600,671 | | | $ | 393,626 | | | $ | 672,309 | |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | |
| Net (gains) losses on investments and other financial instruments | | (15,603) | | | (60,277) | | | (51,719) | |
| Loss on extinguishment of debt | | — | | | — | | | 22,738 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Impairment of goodwill | | — | | | — | | | 4,828 | |
| Amortization and impairment of other acquired intangible assets | | 3,450 | | | 5,144 | | | 22,288 | |
| Depreciation, other amortization, and other impairments, net | | 72,020 | | | 66,585 | | | 50,439 | |
| Deferred income tax provision | | 161,793 | | | 102,079 | | | 157,162 | |
| Change in: | | | | | | |
| Accrued investment income | | 1,235 | | | (1,714) | | | 2,545 | |
| Accounts and notes receivable | | (2,722) | | | (29,280) | | | (25,504) | |
| Reinsurance recoverables | | 5,306 | | | (56,226) | | | (2,574) | |
| Deferred policy acquisition costs | | 1,988 | | | 2,454 | | | (3,448) | |
| Other assets | | (78,163) | | | 38,680 | | | (77,181) | |
| Unearned premiums | | (119,701) | | | (178,031) | | | (112,535) | |
| Reserve for losses and LAE | | (19,771) | | | 443,648 | | | 3,404 | |
| Reinsurance funds withheld | | (50,477) | | | (13,274) | | | (29,383) | |
| Other liabilities | | (2,914) | | | (54,980) | | | 61,062 | |
| Net cash provided by (used in) operating activities | | 557,112 | | | 658,434 | | | 694,431 | |
| | | | | | |
| Cash flows from investing activities | | | | | | |
| Proceeds from sales of: | | | | | | |
| Fixed-maturities available for sale | | 735,340 | | | 963,589 | | | 986,647 | |
| Trading securities | | 7,952 | | | 11,602 | | | 130,537 | |
| Equity securities | | 36,748 | | | 90,450 | | | 69,779 | |
| Proceeds from redemptions of: | | | | | | |
| Fixed-maturities available for sale | | 1,225,626 | | | 645,068 | | | 464,777 | |
| Trading securities | | 16,668 | | | 22,913 | | | 37,684 | |
| Purchases of: | | | | | | |
| Fixed-maturities available for sale | | (1,980,155) | | | (2,449,762) | | | (1,913,703) | |
| Equity securities | | (105,649) | | | (85,014) | | | (57,422) | |
| | | | | | |
| Sales, redemptions and (purchases) of: | | | | | | |
| Short-term investments, net | | 68,083 | | | (82,925) | | | 8,017 | |
| Other assets and other invested assets, net | | 6,126 | | | 1,434 | | | (739) | |
| Proceeds from sale of subsidiary, net of cash sold | | — | | | 16,481 | | | — | |
| Purchases of property and equipment | | (12,601) | | | (17,016) | | | (27,626) | |
| | | | | | |
| Net cash provided by (used in) investing activities | | (1,862) | | | (883,180) | | | (302,049) | |
| | | | | | |
|
| | | | | | | | | | | |
| Radian Group Inc. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (In thousands) | Year Ended December 31, |
| 2018 | | 2017 | | 2016 |
| Cash flows from financing activities: | | | | | |
| Dividends paid | (2,140 | ) | | (2,154 | ) | | (2,105 | ) |
| Issuance of senior notes, net | — |
| | 442,163 |
| | 343,417 |
|
| Purchases and redemptions of senior notes | — |
| | (593,527 | ) | | (445,072 | ) |
| Proceeds from termination of capped calls | — |
| | 4,208 |
| | — |
|
| Issuance of common stock | 1,385 |
| | 7,132 |
| | 717 |
|
| Purchases of common shares | (50,053 | ) | | (6 | ) | | (100,188 | ) |
| Credit facility commitment fees paid | (1,510 | ) | | (1,993 | ) | | — |
|
| Change in secured borrowings (Note 13) | 39,342 |
| | 19,357 |
| | — |
|
| Proceeds from secured borrowings (with terms greater than 3 months) | 56,449 |
| | — |
| | — |
|
| Payments of secured borrowings (with terms greater than 3 months) | (20,917 | ) | | — |
| | — |
|
| Excess tax benefits from stock-based awards | — |
| | — |
| | 333 |
|
| Repayments of other borrowings | (170 | ) | | (264 | ) | | (371 | ) |
| Net cash provided by (used in) financing activities | 22,386 |
| | (125,084 | ) | | (203,269 | ) |
| Effect of exchange rate changes on cash and restricted cash | — |
| | 431 |
| | (481 | ) |
| Increase (decrease) in cash and restricted cash | 10,758 |
| | 34,430 |
| | 1,916 |
|
| Cash and restricted cash, beginning of period | 96,244 |
| | 61,814 |
| | 59,898 |
|
| Cash and restricted cash, end of period | $ | 107,002 |
| | $ | 96,244 |
| | $ | 61,814 |
|
| | | | | | |
| Supplemental disclosures of cash flow information: | | | | | |
| Income taxes paid (received) (Note 10) | $ | 8,364 |
| | $ | 94,328 |
| | $ | (673 | ) |
| Interest paid | 56,688 |
| | 57,453 |
| | 65,531 |
|
See Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Cash flows from financing activities | | | | | | |
| Dividends and dividend equivalents paid | | (103,298) | | | (97,458) | | | (2,061) | |
| Issuance of common stock | | 1,382 | | | 1,553 | | | 2,416 | |
| Repurchases of common stock | | (399,100) | | | (226,305) | | | (300,201) | |
| Issuance of senior notes, net | | — | | | 515,567 | | | 442,439 | |
| Repayments and repurchases of senior notes | | — | | | — | | | (610,763) | |
| Credit facility commitment fees paid | | (3,325) | | | (2,292) | | | (989) | |
| Change in secured borrowings, net (with terms three months or less) | | 13,565 | | | (37,475) | | | 13,862 | |
| Proceeds from secured borrowings (with terms greater than three months) | | 42,000 | | | 207,034 | | | 115,275 | |
| Repayments of secured borrowings (with terms greater than three months) | | (48,000) | | | (137,927) | | | (62,932) | |
| Repayments of other borrowings | | — | | | (79) | | | (152) | |
| Net cash provided by (used in) financing activities | | (496,776) | | | 222,618 | | | (403,106) | |
| | | | | | |
| Effect of exchange rate changes on cash and restricted cash | | — | | | — | | | (4) | |
| Increase (decrease) in cash and restricted cash | | 58,474 | | | (2,128) | | | (10,728) | |
| Cash and restricted cash, beginning of period | | 94,146 | | | 96,274 | | | 107,002 | |
| Cash and restricted cash, end of period | | $ | 152,620 | | | $ | 94,146 | | | $ | 96,274 | |
| | | | | | |
| Supplemental disclosures of cash flow information | | | | | | |
| Income taxes paid (Note 10) | | $ | 143,973 | | | $ | 81,404 | | | $ | 71,469 | |
| Interest paid | | 78,704 | | | 60,564 | | | 45,762 | |
Radian Group Inc.
See Notes to Consolidated Financial StatementsStatements.
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
1. Description of Business and Recent Developments
We are a diversified mortgage and real estate services business, providing both credit-related mortgage insurance coverage and other credit risk management solutions, as well as a broadan array of other mortgage, risk, title, real estate and titletechnology products and services. We have two2 reportable business segments—Mortgage Insurance and Services.homegenius. Our homegenius segment was previously named “Real Estate,” and during the second quarter of 2021, we renamed it “homegenius” to align with updates to our brand strategy for the segment’s products 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, contract underwriting and fulfillment 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 and investors, andas well as other beneficiaries, by mitigating default-related losses on residential mortgage loans. Generally, these loans are made to home buyershomebuyers 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 insuranceIIF and RIF was $56.7were $246.0 billion and $60.9 billion, respectively, as of December 31, 2018.2021, compared to $246.1 billion and $60.7 billion, respectively, as of December 31, 2020. In addition to providing private mortgage insurance, we have participated in credit risk transfer programs developed by the GSEs as part of their initiative to distribute mortgage credit risk and increase the role of private capital in the mortgage market. Our additional RIF under credit risk transfer transactions, resulting from our participation in these programs with the GSEs, totaled $417.7 million as of December 31, 2021, compared to $392.0 million as of December 31, 2020.
The GSEs and state insurance regulators impose various capital and financial requirements on our mortgage insurance subsidiaries. These include Risk-to-capital, other risk-based capital measures and surplus requirements, as well as the PMIERs financial requirements discussed below.requirements. Failure to comply with these capital and financial requirements may limit the amount of insurance that our mortgage insurance subsidiaries may write or may prohibit our mortgage insurance subsidiariesthem from writing insurance altogether. The GSEs and state insurance regulators also possess significant discretion with respect to our mortgage insurance subsidiaries and all aspects of their business. See Note 1916 for additional information on PMIERs and other regulatory information.
PMIERs. In order to be eligible to insure loans purchasedinformation, and “—Recent Developments” below for a discussion of the elevated risks posed by the GSEs,COVID-19 pandemic, which has led to an increase in mortgage insurers such as Radian Guaranty must meet the GSEs’ eligibility requirements, or PMIERs. At December 31, 2018, Radian Guaranty is an approved mortgage insurer under the PMIERsdefaults in our insured portfolio and isa resulting increase in compliance with the PMIERs financial requirements. The PMIERs financial requirements require that a mortgage insurer’s Available Assets meet or exceed itsour Minimum Required Assets. The GSEs may amend the PMIERs at any time, and they have broad discretion to interpret the requirements, which could impact the calculation of Radian Guaranty’s Available Assets and/or Minimum Required Assets.
The PMIERs are comprehensive, covering virtually all aspects of the business and operations of a private mortgage insurer, including internal risk management and quality controls, the relationship between the GSEs and the approved insurer, as well as the approved insurer’s financial condition. In addition, the GSEs have a broad range of consent rights under the PMIERs and require private mortgage insurers to obtain the prior consent of the GSEs before taking certain actions, which may include entering into various intercompany agreements and commuting or reinsuring risk, among others. If Radian Guaranty is unable to satisfy the requirements set forth in the PMIERs, the GSEs could restrict it from conducting certain types of business with them or take actions that may include not purchasing loans insured by Radian Guaranty.
From time to time, we enter into reinsurance transactions as a component of our long-term risk distribution strategy to manage our capital position and risk profile, which includes managing Radian Guaranty’s capital position under the PMIERs financial requirements. The credit that we receive under the PMIERs financial requirements for these transactions is subject to initial and ongoing review by the GSEs.
Serviceshomegenius
Our Serviceshomegenius segment is primarily a fee-for-service business that offers a broadan array of products and services to market participants across the real estate value chain. Our homegenius products and services include title, real estate and technology products and services offered primarily to consumers, mortgage lenders, mortgage and real estate value chain. These services comprise mortgage services,investors, GSEs, real estate servicesbrokers and title services, including technologyagents. These products and turn-key solutions, that provide information and other resources used to originate, evaluate, acquire, securitize, service and monitor residential real estate and loans secured by residential real estate. These services are primarily provided to mortgage lenders, financial institutions, investors and government entities. In addition, we provide title insurance to mortgage lenders as well as directly to borrowers.
Our mortgage services help loan originators and investors evaluate, acquire, surveil and securitize mortgages. These services include loan review, RMBS securitization and distressed asset reviews, review and valuation services related to single family rental properties, servicer and loan surveillance and underwriting. Our real estate services help lenders, investors, consumers and
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
real estate agents evaluate, manage, monitor, acquire and sell properties. These real estate servicesproperties, and include software as a serviceSaaS solutions and platforms, as well as managed services, such as REOreal estate owned asset management, real estate valuationsingle family rental services and real estate brokeragevaluation services. Our title servicesIn addition, we provide a comprehensive suite of title insurance products,and non-insurance title, closing and settlement services to mortgage lenders, GSEs and both traditionalmortgage investors, as well as directly to consumers for residential mortgage loans.
See Note 4 for additional information about our reportable segments and digital closing services.All Other business activities, including the sale of Clayton, as well as other changes impacting our reportable segments in 2021 and 2020.
2018COVID-19 Developments
Capital and Liquidity Actions. On August 9, 2017, Radian Group’s board of directors authorized the Company to repurchase up to $50 million of its common stock. The Company completed this program during the first half of 2018 by purchasing 3.0 million shares at an average price of $16.56 per share, including commissions.
On August 16, 2018, Radian Group’s board of directors approvedAs a new share repurchase program that authorizes the Company to repurchase up to $100 million of its common stock in the open market or in privately negotiated transactions until expiration of the program on July 31, 2019. As of December 31, 2018, the full purchase authority of up to $100 million remained available under this program. See Note 15 for additional information.
Reinsurance. As part of Radian’s long-term risk distribution strategy, in November 2018, Radian Guaranty entered into a fully collateralized reinsurance agreement with Eagle Re, an unaffiliated special purpose reinsurer domiciled in Bermuda. This reinsurance agreement provides for up to $434.0 million of aggregate excess-of-loss reinsurance coverage for the applicable percentageseller of mortgage insurance losses on newcredit protection, our results are subject to macroeconomic conditions and specific events that impact the housing finance and real estate markets, including events that impact mortgage originations and the credit performance of our RIF. Many of these conditions are beyond our control, including housing prices, unemployment, interest rate changes, the availability of credit and other national and regional economic conditions.
In general, a deterioration in economic conditions increases the likelihood that borrowers will be unable to satisfy their mortgage obligations. A deteriorating economy can adversely affect housing values, which in turn can influence the willingness of borrowers to continue to make mortgage payments regardless of whether they have the financial resources to do so. Mortgage defaults on an existing portfoliocan also occur due to a variety of eligible Monthly Premium Policies issued between January 1, 2017 and January 1, 2018, with an initial RIF of $9.1 billion.specific events affecting borrowers, including death or illness, divorce or
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
other family problems, unemployment or other events. In addition, Radian Guaranty entered into a separate excess-of-loss reinsurance agreement for upfactors impacting regional economic conditions, acts of terrorism, war or other severe conflicts, event-specific economic depressions or other catastrophic events, such as natural disasters and pandemics, could result in increased defaults due to $21.4 million of coverage, representing a pro rata share of the credit risk alongside the risk assumed by Eagle Re on those Monthly Premium Policies. See Note 8 for additional information.
IRS Matter. Radian finalized a settlement with the IRS which resolved the issues and concluded all disputes related to the IRS Matter. In the three-month period ended June 30, 2018, we recorded tax benefits of $73.6 million, which includes both the impact of such events on the settlementability of borrowers to satisfy their mortgage obligations and on the value of affected homes.
The unprecedented and continually evolving social and economic impacts associated with the IRSCOVID-19 pandemic on the U.S. and global economies that began in early 2020 had a negative effect on our business and our financial results for the second quarter of 2020, and since then to a lesser extent. Specifically, and primarily as a result of a sharp increase in the number of new defaults during the second quarter of 2020, our financial results in 2020 included: (i) an increase in both provision for losses and reserve for losses and (ii) an increase in our Minimum Required Assets under the PMIERs. However, beginning in the third quarter of 2020 and continuing throughout 2021, the number of new defaults has decreased significantly and has now returned to levels experienced prior to the start of the pandemic. These trends, combined with strong home price appreciation and favorable outcomes from mortgage forbearance programs implemented during the pandemic to assist homeowners, have led to favorable reserve development during 2021 on prior year defaults. See Note 11 for additional information on our reserve for losses.
In addition, in response to the threat posed to the economy from the COVID-19 pandemic, in early 2020 the Federal Reserve enacted certain protective measures to support the economy that resulted in a drop in interest rates generally, and in mortgage rates specifically, resulting in increased mortgage refinance activity. While these developments have benefited our NIW volumes, the low interest rate environment also resulted in a high level of refinance activity and associated increase in policy cancellations, which has reduced our Persistency Rate and in turn contributed to a reduction in our IIF, particularly as a result of a decline in our Single Premium Policies. In the second quarter of 2021 this refinance activity began to moderate, and this trend continued in the second half of 2021.
While recent trends have been favorable, the long-term impact of the COVID-19 pandemic on our businesses will depend on, among other things: the extent and duration of the pandemic, the severity of illness and number of people infected with the virus and the acceptance and long-term effectiveness of anti-viral treatments and vaccines, especially as new strains of COVID-19 have emerged; the wider economic effects of the pandemic and the scope and duration of governmental and other third-party measures restricting day-to-day life and business operations; the impact of economic stimulus efforts to support the economy through the pandemic; and governmental and GSE programs implemented to assist borrowers experiencing a COVID-19-related hardship, including forbearance programs, as well as the reversalsuspensions of certain previously accrued stateforeclosures and local tax liabilities. In 2018, under the terms of the settlement, Radian utilized its “qualified deposits” with the U.S. Treasury to settle its $31 million obligation to the IRS, and in 2019, the Company expects the IRS to refund to Radian the remaining $58 million that was previously on deposit. See Note 10 for additional information.evictions.
Restructuring and Other Exit Costs. As a result of the Company’s continued implementation of its 2017 plan to restructure the Services business, for the year ended December 31, 2018, pretax restructuring charges of $2.5 million were recognized, which include $2.0 million in cash expenses. For the year ended December 31, 2017, pretax restructuring charges of $17.3 million were recognized, including $6.8 million of cash expenses. This initiative was completed during 2018 and, for the two-year period ending December 31, 2018, we recognized total restructuring charges of $19.8 million, consisting of: (i) asset impairment charges (including the loss recognized on the sale of our EuroRisk business) of $10.8 million; (ii) employee severance and benefit costs of $7.4 million; (iii) facility and lease termination costs of $1.3 million; and (iv) contract termination and other restructuring costs of $0.3 million. See Note 7 for additional information, including the events that led to the restructuring plan.
We review assets for impairment in accordance with the accounting guidance for long-lived assets. As part of this assessment, during 2018, we incurred $3.6 million of other exit costs associated with impairment of internal-use software that was in addition to the asset impairment charges recognized as part of the restructuring charges associated with our Services business.
2. Significant Accounting Policies
Basis of Presentation
Our consolidated financial statements are prepared in accordance with GAAP and include the accounts of Radian Group Inc. and its subsidiaries. All intercompany accounts and transactions, and intercompany profits and losses, have been eliminated. Certain prior period amounts have been reclassified to conform to current period presentation.
We refer to Radian Group Inc. together with its consolidated subsidiaries as “Radian,” the “Company,” “we,” “us” or “our,” unless the context requires otherwise. We generally refer to Radian Group Inc. alone, without its consolidated subsidiaries, as “Radian Group.” Unless otherwise defined in this report, certain terms and acronyms used throughout this report are defined in the Glossary of Abbreviations and Acronyms included as part of this report.
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of our contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. While the amounts included in our consolidated financial statements include our best estimates and assumptions, actual results may vary materially.
Investments
We group fixed-maturity securities in our investment portfolio into trading or available for sale securities. Trading securities are reported at fair value, with unrealized gains and losses reported as a separate component of income. Investments in fixed-maturity securities classified as available for sale are reported at fair value, with unrealized gains and losses (net of tax) reported as a separate component of stockholders’ equity as accumulated other comprehensive income (loss). Equity securities primarily consist of our interests in a variety of broadly-diversified exchange traded funds, which are recorded at fair value with unrealized gains and losses reported in income. Short-term investments consist of money market instruments, certificates of deposit and highly liquid, interest-bearing instruments with an original maturity of 12 months or less at the time of purchase. Amortization of premium and accretion of discount are calculated principally using the interest method
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
over the term of the investment. Realized gains and losses on investments are recognized using the specific identification method. See Notes 5 and 6 for further discussion on investments.
We recognize an impairment as a loss for fixed-maturities available for sale on the statement of operations if: (i) we intend to sell the impaired security; (ii) it is more likely than not that we will be required to sell the impaired security prior to recovery of its amortized cost basis; or (iii) the present value of cash flows we expect to collect is less than the amortized cost basis of a security. In those instances, we record an impairment loss through earnings that varies depending on specific circumstances. If a sale is likely, the full amount of the impairment is recognized as a loss in the statement of operations. Otherwise, unrealized losses on securities are separated into: (i) the portion of loss that represents the credit loss and (ii) the portion that is due to other factors. In evaluating whether a decline in value for other securities relates to an existing credit loss, we consider several factors, including, but not limited to, the following:
■the extent to which the amortized cost basis is greater than fair value;
■reasons for the decline in value (e.g., adverse conditions related to industry or geographic area, changes in financial condition to the issuers or underlying loan obligors);
■any changes to the rating of the security by a rating agency;
■the failure of the issuer to make a scheduled payment;
■the financial position, access to capital and near-term prospects of the issuer, including the current and future impact of any specific events; and
■our best estimate of the present value of cash flows expected to be collected.
If a credit loss is determined to exist, the impairment amount is calculated as the difference between the amortized cost and the present value of future expected cash flows, limited to the difference between the carrying amount (i.e., fair value) and amortized cost. This credit loss impairment is included in net gains (losses) on investments and other financial instruments in the statement of operations, with an offset to an allowance for credit losses. Subsequent changes (favorable and unfavorable) in expected credit losses are recognized immediately in net income as a credit loss impairment or a reversal of credit loss impairment.
Prior to the adoption of ASU 2016-13, Financial Instruments—Credit Losses, effective January 1, 2020, subsequent increases in the fair value of any other-than-temporarily impaired securities were recognized as a component of other comprehensive income until such gains were realized through cash collection or sale, rather than through net income.
Fair Value of Financial Instruments
Our estimated fair value measurements are intended to reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and the risks inherent in the inputs to the model. Changes in economic conditions and capital market conditions, including but not limited to, credit spread changes, benchmark interest rate changes, market volatility and changes in the value of underlying collateral, could cause actual results to differ materially from our estimated fair value measurements. We define fair value as the current amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
In accordance with GAAP, which establishes a three-level valuation hierarchy, we disclose fair value measurements based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I measurements) and the lowest priority to unobservable inputs (Level III measurements). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the measurement in its entirety. The three levels of the fair value hierarchy are defined below:
Level I — Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level II — Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities; and
Level III — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Level III inputs are used to measure fair value only to the extent that observable inputs are not available.
For markets in which inputs are not observable or are limited, we use significant judgment and assumptions that a typical market participant would use to evaluate the market price of an asset or liability. Given the level of judgment necessary, another market participant may derive a materially different estimate of fair value. These assets and liabilities are classified in Level III of our fair value hierarchy.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
Available for sale securities, trading securities, equity securities and certain other assets are recorded at fair value as described in Note 5. All changes in fair value of trading securities, equity securities and certain other assets are included in our consolidated statements of operations.
Restricted Cash
Included in our restricted cash balances as of December 31, 2021 were cash funds held in trusts for the benefit of certain policyholders.
Accounts and Notes Receivable
Accounts and notes receivable primarily consist of accrued premiums receivable, amounts billed and due from our customers for services performed, and certain receivables related to our reinsurance transactions. Accounts and notes receivable are carried at their estimated collectible amounts, net of any allowance for doubtful accounts, and are periodically evaluated for collectability based on past payment history and current economic conditions. See “—Revenue Recognition—Mortgage Insurance” below for information on our deferred premiums and Note 8 for details on our reinsurance agreements.
Income Taxes
We provide for income taxes in accordance with the provisions of the accounting standard regarding accounting for income taxes. As required under this standard, our deferred tax assets and deferred tax liabilities are recognized under the balance sheet method, which recognizes the future tax effect of temporary differences between the amounts recorded in our consolidated financial statements and the tax bases of these amounts. Deferred tax assets and deferred tax liabilities are measured using the enacted tax rates that are expected to apply to taxable income in the periods in which the deferred tax asset or deferred tax liability is expected to be realized or settled. In regard to accumulated other comprehensive income, the Company’s policy for releasing disproportionate income tax effects is to release the effects as individual items are sold.
We are required to establish a valuation allowance against our deferred tax assets when it is more likely than not that all or some portion of our deferred tax assets will not be realized. At each balance sheet date, we assess our need for a valuation allowance. Our assessment is based on all available evidence, both positive and negative. This requires management to exercise judgment and make assumptions regarding whether our deferred tax assets will be realized in future periods.
See Note 10 for further discussion on income taxes.
Reserve for Losses and LAE
Mortgage Insurance
We establish reserves to provide for losses and LAE on our mortgage insurance policies, which include the estimated costs of settling claims, in our Mortgage Insurance segment, in accordance with the accounting standard regarding accounting and reporting by insurance enterprises.enterprises (ASC 944). Although this standard specifically excludes mortgage insurance from its guidance relating to the reserve for losses, because there is no specific guidance for mortgage insurance, we establish reserves for mortgage insurance as described below, using the guidance contained in this standard supplemented with other accounting guidance.
Estimating our loss reserves involves significant reliance upon assumptions and estimates with regard to the likelihood, magnitude and timing of each potential loss, including an estimate of the impact of our Loss Mitigation Activities. The models, assumptions and estimates we use to establish loss reserves may prove to be inaccurate, especially during an extended economic downturn or a period of extreme market volatility and uncertainty. As such, we cannot be certain that our reserve estimate will be adequate to cover ultimate losses on incurred defaults. For example,In our mortgage insurance loss reserves generally increase as defaulted loans age, because historically, as defaulted loans age, they have been more likely to result in foreclosure, and therefore, have been more likely to result in a claim payment. While we believe this remains accurate, following the financial crisis, there are a significant number of loans in our defaulted portfolio that have been in default for an extended period of time, but which have not been subject to foreclosure, and therefore, have not resulted in claims. As a result, significant uncertainty remains with respect to the ultimate resolution of these aged defaults. This uncertainty requires management to use considerable judgment in estimating the rate at which these loans will result in claims.
Commutations and other negotiated terminations of our insured risks in our Mortgage Insurance segment provide us with an opportunity to exit exposures for an agreed upon payment, or payments, sometimes at an amount less than the previously estimated ultimate liability. Once all exposures relating to such policies are extinguished, all reserves for losses and LAE and other balances relating to the insured policies are generally reversed, with any remaining net gain or loss recorded through provision for losses. We take into consideration the specific contractual and economic terms for each individual agreement when accounting for our commutations or other negotiated terminations, which may result in differences in the accounting for these transactions.
In our Mortgage Insurance business, the default and claim cycle begins with the receipt of a default notice from the loan servicer. ReservesCase reserves for losses are established upon receipt of notification from servicers that a borrower has missed two2 monthly payments, which is when we consider a loan to be in default for financial statement and internal tracking purposes. We also establish reserves for associated LAE, consisting of the estimated cost of the claims administration process, including legal and other fees and expenses associated with administering the claims process.
We maintaindo not establish reserves for loans that are in default if we believe that we will not be liable for the payment of a claim with respect to that default. We generally do not establish loss reserves for expected future claims on insured mortgages that are not in default. See “—Reserve for Premium Deficiency”below for an extensive database of claim payment history, and use models based on a variety of loan characteristicsexception to determine the likelihood that a default will reach claim status.these general principles.
With respect to loans that are in default, considerable judgment is exercised as to the adequacy of reserve levels. For purposes of reserve modeling, loans are aggregated into groups using a variety of factors. The attributes currently used to define the groups for purposes of developing various assumptions include, but are not limited to, the Stage of Default, the Time in Default and type of insurance (i.e., primary or pool). We use an actuarial projection methodology referred to as a “roll rate” analysis that uses historical claim frequency information to determine the projected ultimate Default to Claim Rates based on the Stage of Default and Time in Default as well as the date that a loan goes into default. With respect to new defaults in FEMA Designated Areas associated with Hurricanes Harvey and Irma received from September 2017 through February 2018, we assume a lower gross Default to Claim Rate than for new defaults with similar characteristics from other areas, due to our expectations based on past experience with other natural disasters, that a significant portion of these defaults will not result in claims. The Default to Claim Rate also includes our estimates with respect to expected Rescissions and Claim Denials,Loss Mitigation Activities, which have the effect of reducing our Default to Claim Rates. We forecast the impact of our Loss Mitigation Activity in protecting us against fraud, underwriting negligence, breach of representation and warranties, inadequate documentation of submitted claims and other items that may give rise to Rescissions or cancellations and Claim Denials, to help determine the Default to Claim
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
Rate. Our Loss Mitigation Activities have resulted in challenges from certain lender and servicer customers, which have resulted in some reversals of our decisions regarding Rescissions, Claim Denials and Claim Curtailments in the ordinary course. Although we believe that our Loss Mitigation Activities are justified under our policies, certain challenges have resulted in disputes and litigation, which if resolved unfavorably to us, could require us to reassume the risk on, and increase loss reserves for, those policies or pay additional claims. See Note11for additional information. Our Master Policies specify the time period during which a suit or action arising from any right of the insured under the policy must be commenced. The assumptions embedded in our estimated Default to Claim Rate on our in-force default inventory include an adjustment to our estimated Rescissions and Claim Denials to account for the fact that we expect a certain number of policies to be reinstated and ultimately to be paid, as a result of valid challenges by such policy holders.
After estimating the Default to Claim Rate, we estimate Claim Severity based on the average of recently observed severity rates within product type, type of insurance and Time in Default cohorts. These average severity estimates are then applied to individual loan coverage amounts to determine reserves. Similar to the Default to Claim Rate, Claim Severity also is impacted by the length of time that loans are in default and by our Loss Mitigation Activity. For claims under our primary mortgage insurance, the coverage percentage is applied to the claim amount, which consists of the unpaid loan principal, plus past due interest (for which our liability is contractually capped in accordance with the terms of our Master Policies) and certain expenses associated with the default, to determine our maximum liability. Therefore, Claim Severity generally increases the longer that a loan is in default. In addition, we estimate the impact that the amount that Claim Curtailments due to servicer noncompliance with our insurance policies and servicing guidelines have on the amount that we ultimately will have to pay with respect to claims. As part of our claims review process, we assess whether defaulted loans were serviced appropriately in accordance with our insurance policies and servicing guidelines. If a servicer failed to satisfy its servicing obligations, our insurance policies provide that we may curtail the claim payment for such default, and in some circumstances, cancel coverage or deny the claim.
We do not establish reserves for loans that are in default if we believe that we will not be liable for the payment of a claim with respect to that default unless a reserve for premium deficiency is required. We generally do not establish loss reserves for expected future claims on insured mortgages that are not in default. See “—Reserve for Premium Deficiency” below for an exception to this general principle.
IBNR and Other Reserves
We also establish reserves for defaults that we estimate have been incurred but have not been reported to us on a timely basis by the servicer, as well as for previous Rescissions, Claim Denials and Claim Curtailments that we estimate will be reinstated and subsequently paid. We generally give the policyholder up to 30 days to challenge our decision to rescind coverage before we consider a policy to be rescinded and remove it from our defaulted inventory; therefore, we currently expect only a limited percentage of policies that were rescinded to be reinstated. We currently expect a significant percentage of claims that were denied to be resubmitted as a perfected claim and ultimately paid. Most often, a Claim Denial is the result of a servicer’s inability to provide the loan origination file or other servicing documents for review. Under the terms of our Master Policies with our lending customers, our policyholders have up to one year after the acquisition of borrower’s title to provide to us the necessary documents to perfect a claim. All estimates are periodically reviewed and adjustments are made as they become necessary.
The impact to our reserve due to estimated future Loss Mitigation Activities incorporates our expectations regarding the number of policies that we expect to be reinstated as a result of our claims rebuttal process. Rescissions, Claim Denials and
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
Claim Curtailments may occur for various reasons, including, without limitation, underwriting negligence, fraudulent applications and appraisals, breach of representations and warranties and inadequate documentation, primarily related to our insurance written in years prior to and including 2008. The level of Rescissions, Claim Denials and Claim Curtailments has been declining in recent periods as our defaults related to insurance written in years prior to and including 2008 continue to decline, and we expect this trend to continue.
Unless a liability associated with such activities or discussions becomes probable and can be reasonably estimated, we consider our claim payments and our Rescissions, Claim Denials and Claim Curtailments to be resolved for financial reporting purposes. Under the accounting standard regarding contingencies, anAn estimated loss is accrued only if we determine that the loss is probable and can be reasonably estimated. For populations of disputed Rescissions, Claim Denials and Claim Curtailments where we determine that a settlement is probable and that a loss can be reasonably estimated, we reflect our best estimate of the expected loss related to the populations under discussion in our financial statements, primarily as a component of our IBNR reserve. While our reserves include our best estimate of such losses, the outcome of the discussions or potential legal proceedings that could ensue is uncertain, and it is reasonably possible that a loss exists in excess of the amount accrued.
Radian Group Inc.
Noteseach potential loss. The models, assumptions and estimates we use to Consolidated Financial Statements (Continued)
Senior management regularly reviewsestablish loss reserves may not prove to be accurate, especially in the modeled frequency, Rescission, Claim Denial, Claim Curtailmentsevent of an extended economic downturn or a period of market volatility and Claim Severity estimates, which are based on historical trends,economic uncertainty such as described above. If recent emerging or projected trends differ significantlywe have experienced due to the COVID-19 pandemic. For example, the ultimate cure rate for loan defaults resulting from the pandemic may be lower or higher than our expectations. These assumptions require management to use considerable judgment in estimating the rate at which these loans will result in claims. As such, given the current environment, there is significant uncertainty around our reserve estimate.
Title Insurance
We establish reserves for estimated future claims payments on our title insurance policies at the time the related policy revenue is recorded. Our title insurance reserve for losses and LAE comprises estimates of both known claims and incurred but unreported claims expected to be paid in the future for policies issued as of the balance sheet date. Title insurance policies typically insure against prior events affecting the quality of real estate titles, rather than against unforeseen, and therefore less avoidable, future events. As such, claims payments often result from either judgment errors or mistakes made in the title search and examination process or the escrow process.
We provide for losses associated with these policies based upon our historical trends usedexperience and other factors. However, by their nature, title claims can often be complex, vary greatly in dollar amounts, vary in number due to developeconomic and market conditions such as an increase in mortgage foreclosures, and involve uncertainties as to ultimate exposure. Due to the modeledlength of time over which claim payments are made and regularly occurring changes in underlying economic and market conditions, these estimates management evaluates these trends and determines how they should be considered in its reserve estimates.are subject to variability.
Reserve for Premium Deficiency
Insurance enterprises are required to establish a PDR if the net present value of the expected future losses and expenses for a particular product line exceeds the net present value of expected future premiums and existing reserves for that product line. We reassess our expectations for premiums, losses and expenses for our mortgage insurance business at least quarterly and update our premium deficiency analyses accordingly. For our mortgage insurance business, we group our mortgage insurance products into two2 categories: first-lien and second-lien mortgage loans.
As of December 31, 20182021 and 2017,2020, the combination of the net present value of our expected future premiums and existing reserves (net of reinsurance recoverables) significantly exceeded the net present value of our future expected losses and expenses associated with our first lienfirst-lien mortgage insurance portfolio. Our remaining second-lien mortgage insurance exposure is immaterial. We had a second-lien PDR is recordedof $0.1 million as of December 31, 2020, and did not require a second-lien PDR as of December 31, 2021.
Revenue Recognition
Mortgage Insurance
Premiums on mortgage insurance products are written on a recurring basis, either as monthly or annual premiums, or on a multi-year basis as a component of other liabilities.
Fair Value of Financial Instruments
Our estimated fair value measurementssingle premium. Monthly premiums written are intended to reflectearned as coverage is provided each month. For certain monthly policies where the assumptions market participants would use in pricing an asset or liability based onbilling is deferred for the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and the risks inherent in the inputsfirst month’s coverage period, currently to the model. Changesend of the policy, we record a net premium receivable representing the present value of such deferred premiums that we estimate will be collected at that future date. As of December 31, 2021 and 2020, this net premium receivable was $30.3 million and $29.7 million, respectively, representing the present values of $74.0 million and $77.0 million, respectively, in economic conditionscontractual deferred monthly premiums, after adjustments for the estimated collectability and capital market conditions, including but not limited to, credit spreadtiming of future billing. We recognize changes benchmark interest rate changes, market volatility andin this receivable based on changes in the estimated amount and timing of such collections, including as a result of changes in observed trends as well as our periodic review of our servicing guide and our operations and collections practices. Given the difference between the present value of underlying collateral, could cause actual results to differ materially from our estimated fair value measurements. We define fair value as the current amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants atnet premium receivable recorded and the measurement date.
In accordance with GAAP, we established a three-level valuation hierarchy for disclosure of fair value measurements based on the transparency of inputscontractual premiums due, such changes to the valuationpreceding factors could have a material effect on our results of an asset or liability as of the measurement date. The hierarchy gives the highest priority to unadjusted quoted pricesoperations in active markets for identical assets or liabilities (Level I measurements) and the lowest priority to unobservable inputs (Level III measurements). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the measurement in its entirety. The three levels of the fair value hierarchyfuture periods if any changes are defined below:implemented.
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Level I
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Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
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Level II | — Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities; and
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Level III | — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Level III inputs are used to measure fair value only to the extent that observable inputs are not available.
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For markets in which inputs are not observable or are limited, we use significant judgment and assumptions that a typical market participant would use to evaluate the market price of an asset or liability. Given the level of judgment necessary, another market participant may derive a materially different estimate of fair value. These assets and liabilities are classified in Level III of our fair value hierarchy.
Available for sale securities, trading securities, equity securities and certain other assets are recorded at fair value as described in Note 5. All changes in fair value of trading securities, equity securities (effective January 1, 2018) and certain other assets are included in our consolidated statements of operations. Prior to the implementation of the update to the standard for the accounting of financial instruments effective January 1, 2018, the unrealized gains (losses) associated with equity securities were classified in accumulated other comprehensive income. All changes in the fair value of available for sale securities are recorded in accumulated other comprehensive income (loss).
Insurance Premiums—Revenue Recognition
Mortgage insuranceAnnual premiums written are initially recorded as unearned premiums and amortized on an annual or multi-year basisa monthly, straight-line basis. Single premiums written are initially recorded as unearned premiums and earned over time. Annual premiums are amortizedtime based on a monthly, straight-line basis. Multi-year premiums are amortized over the terms of the contracts in relation to the anticipated claim payment pattern, based onwhich includes historical industry experience.experience and is updated periodically. During 2019, 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 HPA, most 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 subsequent 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. Our results for 2019 include a $32.9 million increase in net premiums earned and a $0.12 increase in net income per share, resulting from a cumulative adjustment related to the updated amortization rates used to recognize revenue for Single Premium Policies.
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
s written on a monthly basis are earned over the period that coverage is provided. When we rescind insurance coverage on a loan, we refund all premiums received in connection with such coverage. When insurance coverage on a loan is canceled due to claim payment, we refund all premiums received since the date of delinquency. When insurance coverage is cancelled for a reason other than Rescission or claim payment, all premium that is nonrefundable is immediately earned. Premium revenue is recognized net of our accrual for estimated premium refunds due to Rescissions or other factors.
With respect to our reinsurance transactions, ceded premiums written on an annual or multi-year basis are initially set up as prepaid reinsurance and are amortized in a manner consistent with the recognition of income on direct premiums.
Title Insurance and Related Services
Title insurance premiums are recognized as revenue upon closing and completion of the real estate transaction. Premiums generally are calculated with reference to the policy amount. Premiums are charged to customers based on rates predetermined in coordination with each state’s respective Department of Insurance. Such regulations vary from state to state. Premium revenues from agency title operations are primarily comprised of premiums recognized upon title order and completion of real estate transaction closing.
Other title-related fees and income are closely related to title insurance premiums and are primarily associated with managing the closing of real estate transactions. As such, revenue is primarily recognized upon closing of the real estate transaction or completion and billing of services. We offer title services that include tax and title data services; centralized recording services; document retrieval; default curative title services; deed reports; property reports and other real estate or title-related activities. Expenses typically associated with premiums include third-party agent commissions and premium taxes.
Other Services
We recognize revenue representing the transfer of services to customers in an amount that reflects the consideration that we expect to be entitled to receive in exchange for those services, which are recognized as the performance obligations are satisfied. Due to the transactional nature of our business, our services revenue may fluctuate from period to period as transactions are commenced or completed.
Prior to our January 2020 sale of Clayton, our services included transaction management services related to loan acquisition, RMBS securitization and distressed asset reviews and servicer and loan surveillance services. Also, through December 2020, we offered residential real estate appraisal services through a panel of independent contractor appraisers; however, consistent with increased market demand for technology-driven solutions, in October 2020 we announced the wind down of this traditional appraisal business, in order to focus on our digital valuation services that are expected to produce higher growth. Our remaining services and related revenue recognition considerations are as follows:
Real Estate Services. We provide real estate services, including asset management and valuation services. Asset management services include management of the entire REO disposition process, services such as diligence and underwriting that serve the single family rental asset class, and a web-based asset management workflow solution for task driven asset management, including the management of REO assets, rental properties, due diligence for bulk acquisitions, loss mitigation efforts and short sales. Revenue attributable to REO services provided is based on a percentage of the sale and recognized over time, measured based on the progress to date and typically coincides with the client’s successful closing on the property. In certain instances, fees are received at the time that an asset is assigned to Radian for management. These fees are recorded as deferred revenue and are recognized over time based on progress to date and the availability to customers.
For valuation services, we leverage technology and a quality control process to deliver real estate valuation products and services to our customers, which include: appraisal review products; hybrid/ancillary appraisal products; automated valuation products; interactive valuation products; and broker price opinions. Each service qualifies as a separate performance obligation for which revenue is recognized as the service is performed and made available to the client.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
Mortgage Services. We provide third-party contract underwriting and fulfillment solutions to our mortgage customers. Generally, revenue is recognized when contract underwriting results are made available to the customer or fulfillment services are completed.
Cost of Services
Cost of services consists primarily of costs paid for employee compensation and related payroll benefits, as well as corresponding travel and related expenses incurred in providing such services to clients.
Leases
We determine if an arrangement includes a lease at inception, and if it does, we recognize a right-of-use asset and lease liability. 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 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.
Lease expense is recognized on a straight-line basis over the expected lease term. Lease and non-lease 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.
See Note 13 for additional information on our lease liabilities.
Reinsurance
We cede insurance risk through the use of reinsurance contracts and follow reinsurance accounting for those transactions where significant risk is transferred. Loss reserves and unearned premiums are established before consideration is given to amounts related to our reinsurance agreements.
In accordance with the terms of the Single Premium QSR Program, rather than making a cash payment or transferring investments for ceded premiums written, Radian Guaranty holds the related amounts to collateralize the reinsurers’ obligations and has established a corresponding funds withheld liability. Any loss recoveries and any potential profit commission to Radian Guaranty will be realized from this account. The reinsurers’ share of earned premiums is paid from this account on a quarterly basis. This liability also includes an interest credit on funds withheld, which is recorded as ceded premiums at a rate specified in the agreement and, depending on experience under the contract, may be paid to either Radian Guaranty or the reinsurers.
The ceding commission earned for premiums ceded pursuant to this transaction is attributable to other underwriting costs (including any related deferred policy acquisition costs). The unamortized portion of the ceding commission in excess of our related acquisition cost is reflected in other liabilities. Ceded premiums written are recorded on the balance sheet as prepaid reinsurance premiums and amortized to ceded premiums earned in a manner consistent with the recognition of income on direct premiums. See Note 8 for further discussion of our reinsurance transactions.
Variable Interest Entities
In connection with our reinsurance programs for our mortgage insurance business, we may enter into contracts with VIEs. VIEs include corporations, trusts or partnerships in which: (i) the entity has insufficient equity at risk to allow it to finance its activities without additional subordinated financial support or (ii) at-risk equity holders, as a group, do not have the characteristics of a controlling financial interest.
We perform an evaluation to determine whether we are required to consolidate the VIE’s assets and liabilities in our consolidated financial statements, based on whether we are deemed to be the primary beneficiary. The primary beneficiary of a VIE is the variable interest holder that is determined to have the controlling financial interest as a result of having both: (i) the power to direct the activities of a VIE that most significantly impact the economic performance of the VIE and (ii) the obligation to absorb losses or right to receive benefits from the VIE that potentially could be significant to the VIE. See Note 8 for additional information.
Goodwill and Other Acquired Intangible Assets, Net
Goodwill is an asset representing the estimated future economic benefits arising from the assets we have acquired that were not individually identified and separately recognized. We generally perform our annual goodwill impairment test during the fourth quarter of each year, using balances as of the prior quarter. Goodwill is deemed to have an indefinite useful life and is subject to review for impairment annually, or more frequently, whenever circumstances indicate potential impairment at the
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
reporting unit level. A reporting unit represents a business for which discrete financial information is available. We have concluded that we have 1 reporting unit, the homegenius segment, for purposes of our goodwill impairment assessment.
Acquired intangible assets, other than goodwill, primarily consist of customer relationships and represent the value of the specifically acquired customer relationships. For financial reporting purposes, intangible assets with finite lives are amortized over their applicable estimated useful lives in a manner that approximates the pattern of expected economic benefit from each intangible asset.
The calculation of the estimated fair value of goodwill and other acquired intangibles is performed primarily using an income approach and requires the use of significant estimates and assumptions that are highly subjective in nature, such as future expected cash flows, discount rates, attrition rates and market conditions. The most significant assumptions relate to the valuation of customer relationships. For more information on our accounting for goodwill and other acquired intangibles, see Note 7.
Property and Equipment
We capitalize certain costs associated with the development of internal-use software and the purchase of property and equipment. Software, property and equipment are carried at cost, net of accumulated depreciation and amortization. Amortization and depreciation are calculated on a straight-line basis over the estimated useful life of the respective assets and commence during the month of our placement of the assets into use.
The estimated useful life used to calculate the amortization of internal-use software is generally seven years. Leasehold improvements are depreciated over the lesser of the estimated useful life of the asset improved or the remaining term of the lease. The estimated useful life used to calculate the depreciation of furniture and equipment is generally three years. Depreciation and amortization expense associated with property and equipment for the years ended December 31, 2021, 2020 and 2019 was $15.9 million, $18.3 million and $20.8 million, respectively.
The following is a summary of the gross and net carrying amounts and accumulated amortization / depreciation (including impairment) of our property and equipment as of the periods indicated.
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| Property and equipment |
| | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| (In thousands) | | Gross Carrying Amount | | Accumulated Amortization /
Depreciation | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization /
Depreciation | | Net Carrying Amount |
| Internal-use software | | $ | 145,248 | | | $ | (91,542) | | | $ | 53,706 | | | $ | 136,033 | | | $ | (81,724) | | | $ | 54,309 | |
| Leasehold improvements | | 34,805 | | | (18,108) | | | 16,697 | | | 32,975 | | | (15,608) | | | 17,367 | |
| Furniture and equipment | | 67,322 | | | (62,639) | | | 4,683 | | | 65,478 | | | (56,697) | | | 8,781 | |
| Total | | $ | 247,375 | | | $ | (172,289) | | | $ | 75,086 | | | $ | 234,486 | | | $ | (154,029) | | | $ | 80,457 | |
Deferred Policy Acquisition Costs
Incremental, direct costs associated with the successful acquisition of mortgage insurance business,policies, consisting of compensation, premium tax and other policy issuance and underwriting expenses, are initially deferred and reported as deferred policy acquisition costs. AmortizationConsistent with industry accounting practice, amortization of these costs for each underwriting year book of business is expensedrecognized in proportion to estimated gross profits over the estimated life of the policies. Ceding commissions received under our reinsurance arrangements related to these costs
Estimated gross profits are also deferredcomposed of earned premium, interest income, losses and accounted for using similar assumptions. See Notes 8 and 9 for additional details.
LAE. Estimates of expected gross profit, including the Persistency Rate and loss development assumptions for each underwriting year used as a basis for amortization, are evaluated quarterly and the total amortization recorded to date is adjusted by a charge or credit to our consolidated statements of operations if actual experience or other evidence suggests that previous estimates should be revised. Considerable judgment is used in evaluating these estimates and the assumptions on which they are based. The use of different assumptions may have a significant effect on the amortization of deferred policy acquisition costs. Ceding commissions received under our reinsurance arrangements related to these costs are also deferred and accounted for using similar assumptions. See Note 8 for additional information.
Revenue Recognition—ServicesEarnings 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
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
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 primarily to our share-based compensation arrangements. In computing diluted net income per share, we use the treasury stock method, which is computed by assuming the issuance of common stock for the potential dilution of our unvested RSUs. For all calculations, the determination of whether potential common shares are dilutive or anti-dilutive is based on net income.
Share-Based Compensation
The cost related to share-based equity instruments is measured based on the grant-date fair value at the date of issuance, which for RSU awards is primarily determined by our common stock price on the date of grant. For share-based awards with performance conditions related to our own operations, the expense recognized is dependent on the probability of the performance measure being achieved. Compensation cost is generally recognized over the periods that an employee provides service in exchange for the award. Any forfeitures of awards are recognized as they occur. See Note 17 for further information.
TheRecent Accounting Pronouncements
Accounting Standards Adopted During 2021
In December 2019, the FASB has issued anASU 2019-12, Income Taxes—Simplifying the Accounting for Income Taxes. This update simplifies the accounting for income taxes by removing certain exceptions to the accounting standard regarding revenue recognition, Revenue from Contracts with Customers, which establishesgeneral principles forof ASC Topic 740 in GAAP and clarifies certain aspects to promote consistency among reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from our contracts with customers to provide services.entities. We adopted this update effective January 1, 2018, using the modified retrospective approach.2021. The principleadoption of this update requires an entity to recognize revenue representing the transfer of services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those services, recognized as the performance obligations are satisfied.
The majority of our revenue-generating transactions are not subject to the new standard as this update did not changehave an impact on our financial statements and disclosures.
In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs. This update clarifies that, for each reporting period, to the extent the amortized cost basis of an individual callable debt security exceeds the amount repayable by the issuer at the next call date, the excess (i.e., the premium) should be amortized to the next call date. We adopted ASU 2020-08 on January 1, 2021 on a prospective basis. The adoption of this update did not have a material impact on our financial statements and disclosures.
Accounting Standards Not Yet Adopted
In August 2018, the FASB issued ASU 2018-12, Financial Services—Insurance—Targeted Improvements to the Accounting for Long-Duration Contracts. The new standard: (i) requires that assumptions used to measure the liability for future policy benefits be reviewed at least annually; (ii) defines and simplifies the measurement of market risk benefits; (iii) simplifies the amortization of deferred acquisition costs; and (iv) enhances the required disclosures about long-duration contracts. This update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. We continue to evaluate the impact the new accounting guidance will have on our financial statements and disclosures.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform—Facilitation of the Effects of Reference Reform on Financial Reporting. This new guidance provides optional practical expedients and exceptions for applying GAAP requirements to investments, derivatives or other transactions affected by reference rate reform such as those that impact the assessment of contract modifications. The amendments in this update are optional and may be elected from the date of issuance through December 31, 2022, as reference rate reform activities occur. We continue to evaluate the impact the discontinuance of LIBOR and the new accounting guidance will have on our financial statements and disclosures.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
3. Net Income Per Share
The calculation of basic and diluted net income per share is as follows.
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| Net income per share | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In thousands, except per-share amounts) | | 2021 | | 2020 | | 2019 |
| Net income—basic and diluted | | $ | 600,671 | | | $ | 393,626 | | | $ | 672,309 | |
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| Average common shares outstanding—basic | | 188,370 | | | 195,443 | | | 208,773 | |
Dilutive effect of stock-based compensation arrangements (1) | | 1,893 | | | 1,199 | | | 1,567 | |
| Adjusted average common shares outstanding—diluted | | 190,263 | | | 196,642 | | | 210,340 | |
| | | | | | |
| Net income per share: | | | | | | |
| Basic | | $ | 3.19 | | | $ | 2.01 | | | $ | 3.22 | |
| Diluted | | $ | 3.16 | | | $ | 2.00 | | | $ | 3.20 | |
(1)The following number of shares of our common stock equivalents issued under our share-based compensation arrangements are not included in the calculation of diluted net income per share because they are anti-dilutive.
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| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Shares of common stock equivalents | | 28 | | | 865 | | | 221 | |
4. Segment Reporting
We have 2 strategic business units that we manage separately—Mortgage and homegenius. Our Mortgage segment derives its revenue recognition principlesfrom mortgage insurance and other mortgage and risk services, including contract underwriting and fulfillment solutions provided to mortgage lending institutions and mortgage credit investors. Our homegenius segment offers an array of title, real estate and technology products and services to consumers, mortgage lenders, mortgage and real estate investors, GSEs, real estate brokers and agents.
In addition, we report as All Other activities that include: (i) income (losses) from assets held by Radian Group, our holding company; (ii) related general corporate operating expenses not attributable or allocated to our reportable segments; (iii) income and expenses related to Clayton for all periods prior to our sale of this business in the first quarter of 2020; (iv) the income and expenses related to our traditional appraisal services, which we wound down beginning in the fourth quarter of 2020; and (v) certain other immaterial activities, including investments in new business opportunities.
During the second quarter of 2021, our Real Estate segment was renamed “homegenius” to align with updates to our brand strategy for the segment’s products and insurance products, which together representedservices. The homegenius segment name change had no impact on the majoritycomposition of our segments or on our previously reported historical financial position, results of operations, cash flow or segment level results.
We allocate corporate operating expenses to both reportable segments based on each segment’s forecasted annual percentage of total revenue, for 2018which approximates the estimated percentage of management time spent on each segment. In addition, we allocate all corporate interest expense to our Mortgage segment, due to the capital-intensive nature of our mortgage insurance business.
With the primary exception of goodwill and other acquired intangible assets, which all relate to our homegenius segment and are subject to other GAAP guidance discussed elsewhere withinreviewed as part of our disclosures. This update is primarily applicable to revenues from our Servicesannual goodwill impairment assessment, we do not manage assets by segment.
See Note 1 “—for additional details about our Mortgage and homegenius businesses.
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 income (loss) excluding the effects of: (i) net gains (losses) on investments and other financial instruments, except for certain investments attributable to our reportable segments; (ii) loss on extinguishment of debt; (iii) amortization and impairment of goodwill and other acquired intangible assets; and (iv)
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
impairment of other long-lived assets and other non-operating items, such as impairment of internal-use software, gains (losses) from the sale of lines of business and acquisition-related income and expenses.
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). These adjustments, along with the reasons for their treatment, are described below.
(1)Services”Net gains (losses) on investments and other financial instruments. The recognition of realized investment gains or losses can vary significantly across periods as the activity is highly discretionary based on the timing of individual securities sales due to such factors as market opportunities, our tax and capital profile and overall market cycles. Unrealized gains and losses arise primarily from changes in the market value of our investments that are classified as trading or equity securities. These valuation adjustments may not necessarily result in realized economic gains or losses.
Trends in the profitability of our fundamental operating activities can be more clearly identified without the fluctuations of these realized and unrealized gains or losses and changes in fair value of other financial instruments. Except for information aboutcertain investments attributable to our reportable segments, we do not view them to be indicative of our fundamental operating activities.
(2)Loss on extinguishment of debt. Gains or losses on early extinguishment of debt and losses incurred to purchase our debt prior to maturity are discretionary activities that are undertaken in order to take advantage of market opportunities to strengthen our financial and capital positions; therefore, we do not view these activities as part of our operating performance. Such transactions do not reflect expected future operations and do not provide meaningful insight regarding our current or past operating trends.
(3)Amortization and impairment of goodwill and other acquired intangible assets. Amortization of acquired intangible assets represents the servicesperiodic expense required to amortize the cost of acquired intangible assets over their estimated useful lives. Acquired intangible assets are also periodically reviewed for potential impairment, and impairment adjustments are made whenever appropriate. We do not view these charges as part of the operating performance of our primary activities.
(4)Impairment of other long-lived assets and other non-operating items. Includes activities that we offer.do not view to be indicative of our fundamental operating activities, such as: (i) impairment of internal-use software and other long-lived assets; (ii) gains (losses) from the sale of lines of business: and (iii) acquisition-related income and expenses.
The reconciliation of adjusted pretax operating income (loss) for our reportable segments to consolidated pretax income is as follows.
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| Reconciliation of adjusted pretax operating income (loss) by segment |
| | | | | | |
| | December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Adjusted pretax operating income (loss) | | | | | | |
| Mortgage | | $ | 781,546 | | | $ | 453,294 | | | $ | 852,854 | |
| homegenius | | (27,324) | | | (23,240) | | | (17,987) | |
Total adjusted pretax operating income for reportable
segments | | 754,222 | | | 430,054 | | | 834,867 | |
| All Other adjusted pretax operating income | | 3,527 | | | 2,013 | | | 19,768 | |
Net gains on investments and other financial instruments (1) | | 14,094 | | | 60,277 | | | 51,719 | |
| Loss on extinguishment of debt | | — | | | — | | | (22,738) | |
| Impairment of goodwill | | — | | | — | | | (4,828) | |
| Amortization and impairment of other acquired intangible assets | | (3,450) | | | (5,144) | | | (22,288) | |
| Impairment of other long-lived assets and other non-operating items | | (3,561) | | | (7,759) | | | (7,507) | |
| Consolidated pretax income | | $ | 764,832 | | | $ | 479,441 | | | $ | 848,993 | |
(1)For 2021, excludes $1.5 million in net gains on investments attributable to our homegenius segment and included in adjusted pretax operating income (loss) for that reportable segment.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
Revenue and Other Segment Information
The following tables reconcile reportable segment revenues to consolidated revenues and summarize interest expense, depreciation expense, allocation of corporate operating expenses and adjusted pretax operating income for our reportable segments as follows.
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| Reportable segment revenue and other segment information |
| | | | | | | | | | | | | | |
| | December 31, 2021 |
| (In thousands) | | Mortgage | | homegenius | | Reportable Segment Total | | All Other | | Inter-segment | | Adjustments | | Consolidated Total |
| Net premiums earned | | $ | 998,282 | | | $ | 38,901 | | | $ | 1,037,183 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,037,183 | |
| Services revenue | | 17,670 | | | 108,282 | | | 125,952 | | | 154 | | | (281) | | | — | | | 125,825 | |
| Net investment income | | 132,929 | | | 358 | | | 133,287 | | | 14,622 | | | — | | | — | | | 147,909 | |
| Net gains on investments and other financial instruments | | — | | | 1,509 | | | 1,509 | | | — | | | — | | | 14,094 | | | 15,603 | |
| Other income | | 2,678 | | | — | | | 2,678 | | | 734 | | | — | | | — | | | 3,412 | |
| Total revenues | | $ | 1,151,559 | | | $ | 149,050 | | | $ | 1,300,609 | | | $ | 15,510 | | | $ | (281) | | | $ | 14,094 | | | $ | 1,329,932 | |
| Other segment information: | | | | | | | | | | | | | | |
| Interest expense | | $ | 84,344 | | | $ | — | | | $ | 84,344 | | | | | | | | | |
| Direct depreciation expense | | 9,580 | | | 2,452 | | | 12,032 | | | | | | | | | |
Allocation of corporate operating expenses (1) | | 127,482 | | | 18,482 | | | 145,964 | | | | | | | | | |
(1)Includes allocated depreciation expense of $3.2 million, $0.5 million and $3.7 million allocated to Mortgage, homegenius and Reportable Segment Total, respectively.
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| | December 31, 2020 |
| (In thousands) | | Mortgage | | homegenius | | Reportable Segment Total | | All Other | | Inter-segment | | Adjustments | | Consolidated Total |
| Net premiums earned | | $ | 1,092,767 | | | $ | 22,554 | | | $ | 1,115,321 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,115,321 | |
| Services revenue | | 14,765 | | | 79,524 | | | 94,289 | | | 12,535 | | | (1,439) | | | — | | | 105,385 | |
| Net investment income | | 137,195 | | | 361 | | | 137,556 | | | 16,481 | | | — | | | — | | | 154,037 | |
| Net gains on investments and other financial instruments | | — | | | — | | | — | | | — | | | — | | | 60,277 | | | 60,277 | |
| Other income | | 2,816 | | | — | | | 2,816 | | | 534 | | | — | | | 247 | | | 3,597 | |
| Total revenues | | $ | 1,247,543 | | | $ | 102,439 | | | $ | 1,349,982 | | | $ | 29,550 | | | $ | (1,439) | | | $ | 60,524 | | | $ | 1,438,617 | |
| Other segment information: | | | | | | | | | | | | | | |
| Interest expense | | $ | 71,150 | | | $ | — | | | $ | 71,150 | | | | | | | | | |
| Direct depreciation expense | | 12,387 | | | 2,857 | | | 15,244 | | | | | | | | | |
Allocation of corporate operating expenses (1) | | 114,802 | | | 12,807 | | | 127,609 | | | | | | | | | |
(1)Includes allocated depreciation expense of $2.6 million, $0.3 million and $2.9 million allocated to Mortgage, homegenius and Reportable Segment Total, respectively.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
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| | December 31, 2019 |
| (In thousands) | | Mortgage | | homegenius | | Reportable Segment Total | | All Other | | Inter-segment | | Adjustments | | Consolidated Total |
| Net premiums earned | | $1,134,214 | | $ | 11,976 | | | $ | 1,146,190 | | | $ | (841) | | | $ | — | | | $ | — | | | $ | 1,145,349 | |
| Services revenue | | 8,134 | | | 76,941 | | | 85,075 | | | 70,961 | | | (1,440) | | | — | | | 154,596 | |
| Net investment income | | 151,491 | | | 680 | | | 152,171 | | | 19,625 | | | — | | | — | | | 171,796 | |
| Net gains on investments and other financial instruments | | — | | | — | | | — | | | — | | | — | | | 51,719 | | | 51,719 | |
| Other income | | 2,798 | | | — | | | 2,798 | | | 697 | | | — | | | — | | | 3,495 | |
| Total revenues | | $ | 1,296,637 | | | $ | 89,597 | | | $ | 1,386,234 | | | $ | 90,442 | | | $ | (1,440) | | | $ | 51,719 | | | $ | 1,526,955 | |
| Other segment information: | | | | | | | | | | | | | | |
| Interest expense | | $ | 56,310 | | | $ | — | | | $ | 56,310 | | | | | | | | | |
| Direct depreciation expense | | 15,323 | | | 2,321 | | | 17,644 | | | | | | | | | |
Allocation of corporate operating expenses (1) | | 104,078 | | | 10,165 | | | 114,243 | | | | | | | | | |
(1)Includes allocated depreciation expense of $1.6 million, $0.1 million and $1.7 million allocated to Mortgage, homegenius and Reportable Segment Total, respectively.
There was no single customer that accounted for more than 10% of our consolidated revenues (excluding net gains on investments and other financial instruments) in 2021, 2020 or 2019. There was 1 customer that accounted for more than 10% of NIW in 2021, as compared to 1 in 2020 and none in 2019.
The table below represents the disaggregation of Servicesservices revenues by revenue type:type.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 | | 2016 |
| Services segment revenue | | | | | |
| Mortgage Services | $ | 80,314 |
| | $ | 83,405 |
| | $ | 102,244 |
|
| Real Estate Services | 58,874 |
| | 55,095 |
| | 58,056 |
|
| Title Services | 10,263 |
| | 23,333 |
| | 16,949 |
|
Total (1) | $ | 149,451 |
| | $ | 161,833 |
| | $ | 177,249 |
|
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| Services revenue | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| homegenius | | | | | | |
| Title | | $ | 40,202 | | | $ | 23,265 | | | $ | 14,185 | |
| Real estate | | | | | | |
| Valuation | | 32,459 | | | 21,749 | | | 27,549 | |
| Single family rental | | 27,291 | | | 17,159 | | | 16,011 | |
| Asset management workflow platform | | 5,348 | | | 7,707 | | | 9,951 | |
| REO asset management | | 2,381 | | | 5,518 | | | 5,930 | |
| Other real estate services | | 320 | | | 2,770 | | | 2,862 | |
| Mortgage | | 17,670 | | | 14,682 | | | 7,632 | |
All Other (1) | | 154 | | | 12,535 | | | 70,476 | |
| Total services revenue | | $ | 125,825 | | | $ | 105,385 | | | $ | 154,596 | |
______________________(1)
| |
(1) | Includes inter-segment revenues of $3.2 million, $6.7 million,Includes services revenue from Clayton prior to its sale in January 2020 and $8.4 million in 2018, 2017 and 2016, respectively. For 2018, amounts exclude $7.7 million of Services segment net premiums earned—insurance and net investment income, as both are excluded from the scope of the revenue recognition standard. See Note 4 for segment information. |
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
Our Services segment revenues are recognized over time and measured each period based on the progress to date as services are performed and made available to customers. Our contracts with customers, including payment terms, are generally short-term in nature; therefore, any impact related to timing is immaterial. our traditional appraisal business, which we wound down beginning in the fourth quarter of 2020.
Revenue recognized related to services made available to customers and billed is reflected in accounts and notes receivable. Accounts and notes receivable includes $20.0 million and $18.8 million as of December 31, 2021 and 2020, respectively, related to services revenue contracts. Revenue recognized related to services performed and not yet billed is recorded in unbilled receivables and reflected in other assets. Deferred revenue, which represents advance payments received from customers in advance of revenue recognition, is immaterial for all periods presented. We have no material bad-debt expense.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
5. Fair Value of Financial Instruments
The following represents balancestables include a list of assets that are measured at fair value by hierarchy level as of December 31, 2021 and 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Assets carried at fair value by hierarchy level | |
| | | | | | | | | |
| | December 31, 2021 | |
| (In thousands) | | Level I | | Level II | | Level III | | Total | |
| Investments | | | | | | | | | |
| Fixed-maturities available for sale | | | | | | | | | |
| U.S. government and agency securities | | $ | 192,452 | | | $ | 29,278 | | | $ | — | | | $ | 221,730 | | |
| State and municipal obligations | | — | | | 177,257 | | | — | | | 177,257 | | |
| Corporate bonds and notes | | — | | | 2,910,231 | | | — | | | 2,910,231 | | |
| RMBS | | — | | | 705,117 | | | — | | | 705,117 | | |
| CMBS | | — | | | 709,203 | | | — | | | 709,203 | | |
| CLO | | — | | | 530,040 | | | — | | | 530,040 | | |
| Other ABS | | — | | | 211,187 | | | — | | | 211,187 | | |
| Foreign government and agency securities | | — | | | 5,296 | | | — | | | 5,296 | | |
Mortgage insurance-linked notes (1) | | — | | | 47,017 | | | — | | | 47,017 | | |
| | | | | | | | | |
| Total fixed-maturities available for sale | | 192,452 | | | 5,324,626 | | | — | | | 5,517,078 | | |
| | | | | | | | | |
| Trading securities | | | | | | | | | |
| | | | | | | | | |
| State and municipal obligations | | — | | | 94,637 | | | — | | | 94,637 | | |
| Corporate bonds and notes | | — | | | 119,186 | | | — | | | 119,186 | | |
| RMBS | | — | | | 9,438 | | | — | | | 9,438 | | |
| CMBS | | — | | | 33,285 | | | — | | | 33,285 | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total trading securities | | — | | | 256,546 | | | — | | | 256,546 | | |
| | | | | | | | | |
| Equity securities | | 176,828 | | | 7,417 | | | — | | | 184,245 | | |
| | | | | | | | | |
| Short-term investments | | | | | | | | | |
| U.S. government and agency securities | | 94,665 | | | — | | | — | | | 94,665 | | |
| State and municipal obligations | | — | | | 12,270 | | | — | | | 12,270 | | |
| Money market instruments | | 274,535 | | | — | | | — | | | 274,535 | | |
| Corporate bonds and notes | | — | | | 65,191 | | | — | | | 65,191 | | |
| | | | | | | | | |
| CMBS | | — | | | 3,023 | | | — | | | 3,023 | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Other investments (2) | | — | | | 101,824 | | | — | | | 101,824 | | |
| Total short-term investments | | 369,200 | | | 182,308 | | | — | | | 551,508 | | |
| | | | | | | | | |
Other invested assets (3) | | — | | | — | | | 3,000 | | | 3,000 | | |
| | | | | | | | | |
Total investments at fair value (3) | | 738,480 | | | 5,770,897 | | | 3,000 | | | 6,512,377 | | |
| | | | | | | | | |
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|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Assets carried at fair value by hierarchy level | |
| | | | | | | | | |
| | December 31, 2021 | |
| (In thousands) | | Level I | | Level II | | Level III | | Total | |
| Other | | | | | | | | | |
Embedded derivatives (4) | | — | | | — | | | 4,200 | | | 4,200 | | |
Loaned securities (5) | | | | | | | | | |
| | | | | | | | | |
| Corporate bonds and notes | | — | | | 65,994 | | | — | | | 65,994 | | |
| | | | | | | | | |
| Equity securities | | 38,002 | | | — | | | — | | | 38,002 | | |
Total assets at fair value (3) | | $ | 776,482 | | | $ | 5,836,891 | | | $ | 7,200 | | | $ | 6,620,573 | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
(1)Comprises the notes purchased by Radian Group in connection with the Excess-of-Loss Program. See Note 8 for more information about our reinsurance programs.
(2)Comprising short-term certificates of deposit and commercial paper.
(3)Does not include other invested assets of $1.2 million that are primarily invested in limited partnership investments valued using the net asset value as a practical expedient.
(4)Embedded derivatives related to Services contractsour Excess-of-Loss Program are classified as other assets in our consolidated balance sheets. See Note 8 for more information about our reinsurance programs.
(5)Securities loaned to third-party borrowers under securities lending agreements are classified as other assets in our consolidated balance sheets. See Note 6 for more information.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Assets carried at fair value by hierarchy level | |
| | | | | | | | | |
| | December 31, 2020 | |
| (In thousands) | | Level I | | Level II | | Level III | | Total | |
| | | | | | | | | |
| Investments | | | | | | | | | |
| Fixed-maturities available for sale | | | | | | | | | |
| U.S. government and agency securities | | $ | 140,034 | | | $ | 29,189 | | | $ | — | | | $ | 169,223 | | |
| State and municipal obligations | | — | | | 165,271 | | | — | | | 165,271 | | |
| Corporate bonds and notes | | — | | | 3,047,189 | | | — | | | 3,047,189 | | |
| RMBS | | — | | | 833,939 | | | — | | | 833,939 | | |
| CMBS | | — | | | 681,265 | | | — | | | 681,265 | | |
| CLO | | — | | | 568,558 | | | — | | | 568,558 | | |
| Other ABS | | — | | | 252,457 | | | — | | | 252,457 | | |
| Foreign government and agency securities | | — | | | 5,438 | | | — | | | 5,438 | | |
| | | | | | | | | |
| Total fixed-maturities available for sale | | 140,034 | | | 5,583,306 | | | — | | | 5,723,340 | | |
| | | | | | | | | |
| Trading securities | | | | | | | | | |
| | | | | | | | | |
| State and municipal obligations | | — | | | 120,449 | | | — | | | 120,449 | | |
| | | | | | | | | |
| Corporate bonds and notes | | — | | | 123,142 | | | — | | | 123,142 | | |
| RMBS | | — | | | 13,000 | | | — | | | 13,000 | | |
| CMBS | | — | | | 34,294 | | | — | | | 34,294 | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total trading securities | | — | | | 290,885 | | | — | | | 290,885 | | |
| | | | | | | | | |
| Equity securities | | 142,761 | | | 8,479 | | | — | | | 151,240 | | |
| | | | | | | | | | |
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|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Assets carried at fair value by hierarchy level | |
| | | | | | | | | |
| | December 31, 2020 | |
| (In thousands) | | Level I | | Level II | | Level III | | Total | |
| | | | | | | | | |
| Short-term investments | | | | | | | | | |
| | | | | | | | | |
| State and municipal obligations | | — | | | 21,819 | | | — | | | 21,819 | | |
| Money market instruments | | 268,900 | | | — | | | — | | | 268,900 | | |
| Corporate bonds and notes | | — | | | 30,495 | | | — | | | 30,495 | | |
| | | | | | | | | |
| | | | | | | | | |
| Other ABS | | — | | | 219 | | | — | | | 219 | | |
| | | | | | | | | |
Other investments (1) | | — | | | 296,571 | | | — | | | 296,571 | | |
| Total short-term investments | | 268,900 | | | 349,104 | | | — | | | 618,004 | | |
| | | | | | | | | | |
Other invested assets (2) | | — | | | — | | | 3,000 | | | 3,000 | | |
| | | | | | | | | | |
Total investments at fair value (2) | | 551,695 | | | 6,231,774 | | | 3,000 | | | 6,786,469 | | |
| | | | | | | | | | |
| Other | | | | | | | | | |
Embedded derivatives (3) | | — | | | — | | | 5,513 | | | 5,513 | | |
Loaned securities (4) | | | | | | | | | |
| U.S. government and agency securities | | 4,876 | | | — | | | — | | | 4,876 | | |
| Corporate bonds and notes | | — | | | 31,324 | | | — | | | 31,324 | | |
| | | | | | | | | |
| Equity securities | | 21,299 | | | — | | | — | | | 21,299 | | |
Total assets at fair value (2) | | $ | 577,870 | | | $ | 6,263,098 | | | $ | 8,513 | | | $ | 6,849,481 | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
(1)Comprising short-term certificates of deposit and commercial paper.
(2)Does not include other invested assets of $2.0 million that are primarily invested in limited partnership investments valued using the net asset value as a practical expedient.
(3)Embedded derivatives related to our Excess-of-Loss Program are classified as other assets in our consolidated balance sheets. See Note 8 for more information about our reinsurance programs.
(4)Securities loaned to third-party borrowers under securities lending agreements are classified as other assets in our consolidated balance sheets. See Note 6 for more information.
There were no transfers to or from Level III for the years ended December 31, 2021 and 2020. Activity related to Level III assets and liabilities (including realized and unrealized gains and losses, purchases, sales, issuances, settlements and transfers) was immaterial for the years ended December 31, 2021 and 2020.
Valuation Methodologies for Assets Measured at Fair Value
We are responsible for the determination of the value of all investments carried at fair value and the supporting methodologies and assumptions. To assist us in this responsibility, we utilize independent third-party valuation service providers to gather, analyze and interpret market information and estimate fair values based upon relevant methodologies and assumptions for various asset classes and individual securities.
We perform monthly quantitative and qualitative analyses on the prices received from third parties to determine whether the prices are reasonable estimates of fair value. Our analysis includes: (i) a review of the methodology used by third-party pricing services; (ii) a comparison of pricing services’ valuations to other independent sources; (iii) a review of month-to-month price fluctuations; and (iv) a comparison of actual purchase and sale transactions with valuations received from third parties. These processes are designed to ensure that our investment values are accurately recorded, that the data inputs and valuation techniques utilized are appropriate and consistently applied and that the assumptions are reasonable and consistent with the objective of determining fair value.
The following are descriptions of our valuation methodologies for financial assets measured at fair value.
U.S. Government and Agency Securities. The fair value of U.S. government and agency securities is estimated using observed market transactions, including broker-dealer quotes and actual trade activity as a basis for valuation. U.S. government and agency securities are categorized in either Level I or Level II of the fair value hierarchy.
State and Municipal Obligations. The fair value of state and municipal obligations is estimated using recent transaction activity, including market observations. Valuation models are used, which incorporate bond structure, yield curve, credit spreads and other factors. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
Money Market Instruments. The fair value of money market instruments is based on daily prices, which are published and available to all potential investors and market participants. As such, these securities are categorized in Level I of the fair value hierarchy.
Corporate Bonds and Notes. The fair value of corporate bonds and notes is estimated using recent transaction activity, including market observations. Spread models are used that incorporate issuer and structure characteristics, such as credit risk and early redemption features, where applicable. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable.
Asset-backed and Mortgage-backed Securities. The fair value of these instruments, which include RMBS, CMBS, CLO, Other ABS and mortgage insurance-linked notes, is estimated based on prices of comparable securities and spreads and observable prepayment speeds. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable. The fair value of any Level III securities is generally estimated by discounting estimated future cash flows.
Foreign Government and Agency Securities. The fair value of foreign government and agency securities is estimated using observed market yields used to create a maturity curve and observed credit spreads from market makers and broker-dealers. These securities are categorized in Level II of the fair value hierarchy.
Equity Securities. The fair value of these securities is generally estimated using observable market data in active markets or bid prices from market makers and broker-dealers. Generally, these securities are categorized in Level I or II of the fair value hierarchy, as observable market data are readily available. From time to time, certain equity securities may be categorized in Level III of the fair value hierarchy due to a lack of market-based transaction data or the use of model-based valuations.
Other Investments. These securities primarily consist of commercial paper and short-term certificates of deposit, which are categorized in Level II of the fair value hierarchy. The fair value of these investments is estimated using market data for comparable instruments of similar maturity and average yield.
Other Invested Assets. These assets consist of interests in private debt or equity investments. The estimated fair value of these other invested assets is primarily based on the private company’s performance, as well as the terms of the instrument and general market benchmarks. As such, these investments are categorized in Level III of the fair value hierarchy.
Embedded Derivatives. The estimated fair value related to our embedded derivatives generally reflects the present value impact of the variation in investment income on the assets held by the reinsurance trusts and the contractual reference rate used to calculate the reinsurance premiums we will pay. These assets are categorized in Level III of the fair value hierarchy.
Other Fair Value Disclosure
The carrying value and estimated fair value of other selected liabilities not carried at fair value in our consolidated balance sheets were as follows as of the dates indicated:indicated.
|
| | | | | | | |
| (In thousands) | December 31, 2018 | | December 31, 2017 |
| Accounts Receivable - Services Contracts | $ | 15,461 |
| | $ | 17,391 |
|
| Unbilled Receivables - Services Contracts | 19,917 |
| | 22,257 |
|
| Deferred Revenues - Services Contracts | 3,204 |
| | 3,235 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial liabilities not carried at fair value | | | | | | | | |
| | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| (In thousands) | | Carrying
Amount | | Estimated
Fair Value | | Carrying
Amount | | Estimated
Fair Value |
| Senior notes | | $ | 1,409,473 | | | $ | 1,534,378 | | | $ | 1,405,674 | | | $ | 1,563,503 | |
| FHLB advances | | 150,983 | | | 152,117 | | | 176,483 | | | 179,578 | |
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.
Fee-for-Service Contracts
Generally, our contracts with our clients do not include minimum volume commitments and can be terminated at any time by our clients. Although someThe fair value of our contracts and assignments are recurring in nature, and include repetitive monthly assignments, a significant portionsenior notes is estimated based on quoted market prices. The fair value of our engagementsFHLB advances is estimated based on expected cash flows for similar borrowings. These liabilities are transactionalcategorized in nature and may be performed in connection with securitizations, loan sales, loan purchases or other transactions. Due to the transactional nature of our business, our Services segment revenues may fluctuate from period to period as transactions are commenced or completed. We do not recognize revenue or expense related to amounts advanced by us and subsequently reimbursed by clients for maintenance or repairs, because we do not take controlLevel II of the service prior to the client taking control. We record an expense if an advance is made by us that is not in accordance with a client contract, and the client is not obligated to reimburse us.fair value hierarchy. See Note 12 for further information about these borrowings.
Due to the nature of the services provided,
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
6. Investments
Available for Sale Securities
Our available for sale securities within our Services arrangements with customers may include anyinvestment portfolio consisted of the following three basic types of contracts:
Fixed-Price Contracts. We use fixed-price contracts in our real estate valuation and component services, our loan review, underwriting and due diligence services as well as our title and closing services. We also use fixed-price contracts in our surveillance business for our servicer oversight services and RMBS surveillance services, and in our asset management business activities. Under fixed-price contracts we agree to perform the specified services and deliverables for a pre-determined per-unit or per-file price or day rate. Each service qualifies as a separate performance obligation and revenue is recognized as the service performed is made available to the client.
Time-and-Expense Contracts. The Services segment also derives a portion of its revenue from professional service activities under time-and-expense contracts. In these types of contracts, we are paid a fixed hourly rate, and we are reimbursed for billable out-of-pocket expenses as work is performed. These contracts are used in our loan review, underwriting and due diligence services. Services revenue consisting of billed time fees and pass-through expenses is recorded over time and based on the progress to date as services are performed and made available to customers. Services revenue may also include expenses billed to clients, which includes travel and other out-of-pocket expenses, and other reimbursable expenses.
Percentage-of-Sale Contracts. Under percentage-of-sale contracts, we are paid a contractual percentage of the sale proceeds upon the sale of each property. These contracts are only used fordates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Available for sale securities | | | | | | | | | | |
| | | | | | | | | | |
| | December 31, 2021 |
| (In thousands) | | Amortized
Cost | | Allowance for Credit Losses | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair Value |
| Fixed-maturities available for sale | | | | | | | | | | |
| U.S. government and agency securities | | $ | 221,407 | | | $ | — | | | $ | 1,719 | | | $ | (1,396) | | | $ | 221,730 | |
| State and municipal obligations | | 162,964 | | | — | | | 14,694 | | | (401) | | | 177,257 | |
| Corporate bonds and notes | | 2,867,063 | | | — | | | 133,665 | | | (24,886) | | | 2,975,842 | |
| RMBS | | 697,581 | | | — | | | 14,313 | | | (6,777) | | | 705,117 | |
| CMBS | | 690,827 | | | — | | | 21,444 | | | (3,068) | | | 709,203 | |
| CLO | | 529,906 | | | — | | | 1,032 | | | (898) | | | 530,040 | |
| Other ABS | | 210,657 | | | — | | | 1,142 | | | (612) | | | 211,187 | |
| Foreign government and agency securities | | 5,109 | | | — | | | 187 | | | — | | | 5,296 | |
Mortgage insurance-linked notes (1) | | 45,384 | | | — | | | 1,633 | | | — | | | 47,017 | |
| Total securities available for sale, including loaned securities | | 5,430,898 | | | $ | — | | | $ | 189,829 | | | $ | (38,038) | | | 5,582,689 | |
Less: loaned securities (2) | | 63,169 | | | | | | | | | 65,611 | |
| Total fixed-maturities available for sale | | $ | 5,367,729 | | | | | | | | | $ | 5,517,078 | |
(1)Comprises the notes purchased by Radian Group in connection with the Excess-of-Loss Program. See Note 8 for more information about our reinsurance programs. (2)Included in other assets in our consolidated balance sheets as further described below. See below for a discussion of our securities lending agreements. |
| | December 31, 2020 |
| (In thousands) | | Amortized
Cost | | Allowance for Credit Losses | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair Value |
| Fixed-maturities available for sale | | | | | | | | | | |
| U.S. government and agency securities | | $ | 176,033 | | | $ | — | | | $ | 1,677 | | | $ | (3,611) | | | $ | 174,099 | |
| State and municipal obligations | | 149,258 | | | — | | | 16,113 | | | (100) | | | 165,271 | |
| Corporate bonds and notes | | 2,832,350 | | | (948) | | | 250,771 | | | (3,758) | | | 3,078,415 | |
| RMBS | | 799,814 | | | — | | | 34,439 | | | (314) | | | 833,939 | |
| CMBS | | 645,071 | | | — | | | 39,495 | | | (3,301) | | | 681,265 | |
| CLO | | 569,173 | | | — | | | 2,026 | | | (2,641) | | | 568,558 | |
| Other ABS | | 249,988 | | | — | | | 2,901 | | | (432) | | | 252,457 | |
| Foreign government and agency securities | | 5,100 | | | — | | | 338 | | | — | | | 5,438 | |
| Total securities available for sale, including loaned securities | | 5,426,787 | | | $ | (948) | | | $ | 347,760 | | | $ | (14,157) | | | 5,759,442 | |
Less: loaned securities (1) | | 33,164 | | | | | | | | | 36,102 | |
| Total fixed-maturities available for sale | | $ | 5,393,623 | | | | | | | | | $ | 5,723,340 | |
(1)Included in other assets in our consolidated balance sheets as further described below. See below for a discussion of our securities lending agreements. |
The following table provides a portion of our REO management services and our real estate brokerage services. In addition, through the use of our proprietary technology, property leads are sent to select clients. Revenue attributable to services provided under a percentage-of-sale contract is recognized over time and measured based on the progress to date and typically coincides with the client’s successful closing on the property. The revenue recognized for these transactions is based on a percentagerollforward of the sale.allowance for credit losses on fixed-maturities available for sale, which relates entirely to corporate bonds and notes for the periods indicated.
In certain instances, fees
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
| | | | | | | | | | | | | | |
| Rollforward of allowance for credit losses on fixed-maturities available for sale |
| | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 |
| Beginning balance | | $ | 948 | | | $ | — | |
| Current provision for securities without prior allowance | | — | | | 1,254 | |
| Net increases (decreases) in allowance on previously impaired securities | | (918) | | | — | |
| Reduction for securities sold | | (30) | | | (306) | |
| Ending balance | | $ | — | | | $ | 948 | |
Gross Unrealized Losses and Related Fair Value of Available for Sale Securities
For securities deemed “available for sale” that are received atin an unrealized loss position and for which an allowance for credit loss has not been established, the following tables show the gross unrealized losses and fair value, aggregated by investment category and length of time that an asset is assigned to Radian for management. These fees are recordedindividual securities have been in a continuous unrealized loss position, as deferred revenue and are recognized over time based on progress to date and the availability to customers.
Cost of Services
Cost of services consists primarily of employee compensation and related payroll benefits, the cost of billable labor assigned to revenue-generating activities, as well as corresponding travel and related expenses incurred in providing such services to clients in our Services segment. Cost of services also includes costs paid to outside vendors, including real estate
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
agents that provide valuation and related services, as well as data acquisition costs and other compensation-related expenses to maintain software application platforms that directly support our businesses. Cost of services does not include an allocation of overhead costs.
Title Insurance – Premiums and Reserve for Losses and LAE
Title insurance premiums are typically due and earned in full when the real estate transaction is closed. Premiums generally are calculated with reference to the policy amount. The premium charged by a title insurer or an agent is subject to regulation in most areas. Such regulations vary from state to state.
We provide for losses associated with title insurance policies, closing protection letters and other risk-based products based upon our historical experience and other factors by a charge to expense when the related premium revenue is recognized. The resulting reserve for IBNR claims, together with the reserve for known claims, reflects management’s best estimate of the total costs required to settle all incurred claims, and are considered to be adequate for such purpose.
Income Taxes
We provide for income taxes in accordance with the provisions of the accounting standard regarding accounting for income taxes. As required under this standard, our deferred tax assets and deferred tax liabilities are recognized under the balance sheet method, which recognizes the future tax effect of temporary differences between the amounts recorded in our consolidated financial statements and the tax bases of these amounts. Deferred tax assets and deferred tax liabilities are measured using the enacted tax rates that are expected to apply to taxable incomedates indicated. Included in the periods in which the deferred tax asset or deferred tax liability is expected to be realized or settled. In regards to accumulated other comprehensive income, the Company’s policy for releasing disproportionate income tax effects is to release the effects as individual items are sold.
We are required to establish a valuation allowance against our deferred tax assets when it is more likely than not that all or some portion of our deferred tax assets will not be realized. At each balance sheet date, we assess our need for a valuation allowance. Our assessment is based on all available evidence, both positive and negative. This requires management to exercise judgment and make assumptions regarding whether our deferred tax assets will be realized in future periods.
Our provision for income taxes for interim financial periods is based on an estimate of our annual effective tax rate for the full year of 2018 and 2017. When estimating our full year 2018 and 2017 effective tax rates, we adjust our forecasted pre-tax income for gains and losses on our investments, changes in the accounting for uncertainty in income taxes, changes in our beginning of year valuation allowance, and other adjustments. The impact of these items is accounted for as Discrete Items at the applicable federal tax rate.
On December 22, 2017, the TCJA was enacted into law. We were required to recognize the accounting effects of the TCJA in the period of enactment, including remeasuring our deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” which provides guidance on accounting for the tax effects of the TCJA for which the accounting was incomplete. To the extent that a company’s accounting for certain income tax effects of the TCJA was incomplete but a reasonable estimate could be made, a company was required to record provisional estimates in the financial statements, during a measurement period not to extend beyond one year of the enactment date. Since the TCJA was passed late in the fourth quarter of 2017, we accounted for the tax effects of the TCJA on a provisional basis and determined reasonable estimates for those effects, which were included in our financial statementsamounts as of December 31, 2017. As a result of finalizing our interpretation of related guidance, we completed our accounting in the fourth quarter of 2018 during the one-year measurement period from the enactment date. No material adjustments to our provisional amounts were required.
Risks2021 and Uncertainties
Radian Group and its subsidiaries2020, are subject to risks and uncertaintiesloaned securities under securities lending agreements that could affect amounts reported in our financial statements in future periods. Our future performance and financial condition are subject to significant risks and uncertainties that could cause actual results to be materially different from our estimates and forward-looking statements.
Foreign Currency Revaluation/Translation
Assets and liabilities denominated in foreign currencies are revalued or translated at year-end exchange rates. Operating results are translated at average rates of exchange prevailing during the year. Unrealized gains and losses, net of deferred taxes, resulting from translation are included in accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses resulting from transactions in foreign currency are recorded in our statements of operations.
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
Cash and Restricted Cash
Included in our restricted cash balances as of December 31, 2018 were: (i) funds for a mortgage insurance reserve policy held in escrow for any future duties, rights and liabilities; (ii) funds held in trust for the benefit of certain policyholders; (iii) escrow funds held for servicer liabilities; and (iv) escrow funds held for title services obligations. Total cash and restricted cash shown in the consolidated statement of cash flows as of December 31, 2018 of $107.0 million comprise cash and restricted cash of $95.4 million and $11.6 million, respectively, as shown on the consolidated balance sheet as of December 31, 2018. Total cash and restricted cash shown in the consolidated statement of cash flows as of December 31, 2017 of $96.2 million comprise cash and restricted cash of $80.5 million and $15.7 million, respectively, as shown on the consolidated balance sheet as of December 31, 2017.
Within our consolidated statements of cash flows, we classify cash receipts and cash payments related to items measured at fair value according to their nature and purpose. Because our investment activity for trading securities relates to overall strategic initiatives and is not trading related, it is recorded as cash flows from investing activities.
Investments
We group fixed-maturity securities in our investment portfolio into one of three main categories: held to maturity, available for sale or trading securities. Fixed-maturity securities for which we have the positive intent and ability to hold to maturity, if any, are classified as held to maturity and are reported at amortized cost. Trading securities are securities that are purchased and held primarilyother assets in our consolidated balance sheets, as further described below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized losses on fixed-maturities available for sale by category and length of time |
| | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| ($ in thousands) | Less Than 12 Months | | 12 Months or Greater | | Total |
Description of
Securities | | # of
securities | | Fair
Value | | Unrealized
Losses | | # of
securities | | Fair
Value | | Unrealized
Losses | | # of
securities | | Fair
Value | | Unrealized
Losses |
| U.S. government and agency securities | | 14 | | | $ | 101,602 | | | $ | (1,165) | | | 2 | | | $ | 6,937 | | | $ | (231) | | | 16 | | | $ | 108,539 | | | $ | (1,396) | |
| State and municipal obligations | | 20 | | | 32,721 | | | (401) | | | — | | | — | | | — | | | 20 | | | 32,721 | | | (401) | |
| Corporate bonds and notes | | 209 | | | 864,355 | | | (16,799) | | | 34 | | | 99,475 | | | (8,087) | | | 243 | | | 963,830 | | | (24,886) | |
| RMBS | | 57 | | | 365,476 | | | (6,749) | | | 3 | | | 1,543 | | | (28) | | | 60 | | | 367,019 | | | (6,777) | |
| CMBS | | 81 | | | 188,457 | | | (2,053) | | | 9 | | | 22,050 | | | (1,015) | | | 90 | | | 210,507 | | | (3,068) | |
| CLO | | 84 | | | 313,380 | | | (675) | | | 11 | | | 35,612 | | | (223) | | | 95 | | | 348,992 | | | (898) | |
| Other ABS | | 54 | | | 138,851 | | | (603) | | | 1 | | | 631 | | | (9) | | | 55 | | | 139,482 | | | (612) | |
| | | | | | | | | | | | | | | | | | |
| Total | | 519 | | | $ | 2,004,842 | | | $ | (28,445) | | | 60 | | | $ | 166,248 | | | $ | (9,593) | | | 579 | | | $ | 2,171,090 | | | $ | (38,038) | |
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|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| ($ in thousands) | Less Than 12 Months | | 12 Months or Greater | | Total |
Description of
Securities | | # 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 | | | $ | 90,591 | | | $ | (3,611) | | | — | | | $ | — | | | $ | — | | | 4 | | | $ | 90,591 | | | $ | (3,611) | |
| State and municipal obligations | | 4 | | | 9,626 | | | (100) | | | — | | | — | | | — | | | 4 | | | 9,626 | | | (100) | |
| Corporate bonds and notes | | 60 | | | 174,848 | | | (3,758) | | | — | | | — | | | — | | | 60 | | | 174,848 | | | (3,758) | |
| RMBS | | 5 | | | 42,003 | | | (305) | | | 2 | | | 915 | | | (9) | | | 7 | | | 42,918 | | | (314) | |
| CMBS | | 43 | | | 118,345 | | | (3,035) | | | 6 | | | 8,312 | | | (266) | | | 49 | | | 126,657 | | | (3,301) | |
| CLO | | 52 | | | 173,459 | | | (970) | | | 25 | | | 137,506 | | | (1,671) | | | 77 | | | 310,965 | | | (2,641) | |
| Other ABS | | 26 | | | 70,759 | | | (322) | | | 3 | | | 12,119 | | | (110) | | | 29 | | | 82,878 | | | (432) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Total | | 194 | | | $ | 679,631 | | | $ | (12,101) | | | 36 | | | $ | 158,852 | | | $ | (2,056) | | | 230 | | | $ | 838,483 | | | $ | (14,157) | |
See “—Net Gains on Investments” below for additional details on our net gains (losses) on investments, including the purpose of selling themchanges in the near term, and are reported at fair value, with unrealized gains andallowance for credit losses reported as a separate component of income. Investments in fixed-maturity securities not classified as held to maturity or trading securities are classified ason fixed-maturities available for sale and are reported at fair value, with unrealized gains and losses (net of tax) reported as a separate component of stockholders’ equity as accumulated other comprehensive income (loss). Equityimpairments due to our intent to sell securities consist of holdings in common stock, preferred stock and exchange traded funds, which, effective January 1, 2018, are all recorded at fair value with unrealized gains and losses reported in income. Prior to the implementation of the update to the standard for the accounting of financial instruments effective January 1, 2018, the unrealized gains (losses) associated with equity securities that were available for sale were classified in accumulated other comprehensive income. Short-term investments consist of money market instruments, certificates of deposit and highly liquid, interest-bearing instruments with an original maturity of 12 months or less at the time of purchase. Amortization of premium and accretion of discount are calculated principally using the interest method over the term of the investment. Realized gains and losses on investments are recognized using the specific identification method. See Notes 5 and 6 for further discussion on the fair value of investments.
We record an other-than-temporary impairment adjustment on a security with an unrealized loss if we intend to sell the impaired security, if it is more likely than not that we will be required to sell the impaired security prior to recoveryposition. See Note 2 for a discussion of its amortized cost basis, or if the present value of cash flows we expect to collect is less than the amortized cost basis of the security. If a sale is likely, the security is classified as other-than-temporarily impaired and the full amount of the impairment is recognized as a loss in the statement of operations. Otherwise, losses on securities that are other-than-temporarily impaired are separated into: (i) the portion of loss that represents the credit loss and (ii) the portion that is due to other factors. The credit loss portion is recognized as a loss in the statement of operations, while the loss due to other factors is recognized in accumulated other comprehensive income (loss), net of taxes. A credit loss is determined to exist if the present value of discounted cash flows expected to be collected from the security is less than the amortized cost basis of the security. The present value of discounted cash flows is determined using the original yield of the security. In evaluating whether a decline in value is other-than-temporary, we consider several factors in addition to the above, including, but not limited to, the following:
the extent and the duration of the decline in value;
the reasonsour accounting policy for the decline in value (e.g., credit event, interest related or market fluctuations); andimpairments.
the financial position, access to capital and near term prospects of the issuer, including the current and future impact of any specific events.
Securities Lending Agreements
SecuritiesWe participate in a securities lending agreements, in whichprogram whereby we loan certain securities in our investment portfolio to third partiesthird-party borrowers for short periods of timetime. These securities lending agreements are collateralized financing arrangements whereby we transfer securities to third parties through an intermediary in exchange for collateral consisting of cash andor other securities, are treated as collateralized financing arrangements in our consolidated balance sheets. In all of our securities lending agreements, the securities that we transfer to Borrowers (loaned securities) may be transferred or loaned by the Borrowers; however,securities. However, pursuant to the terms of these agreements, we maintain effective control over all loaned securities, including: (i) retaining ownership of the securities;
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
(ii)receiving the related investment or other income; and (iii) having the right to request the return of the loanedsecurities. Although we report such securities at any time. We report such securitiesfair value within other assets in our consolidated balance sheets. We receivesheets, rather than in investments, the detailed information provided in this Note includes these securities. See Note 9 for additional information.
Under our securities lending agreements, the borrower is required to provide to us collateral, consisting of cash or other securities, as collateral for suchin amounts generally equal to or exceeding: (i) 102% of the value of the loaned securities (105% in the case of foreign securities) or (ii) another agreed-upon percentage not less than 100% of the market value of the loaned securities. Any cash collateral we receive may be invested in liquid assets. Cash collateral, which is reinvested for our benefit by the intermediary in accordance with the investment guidelines contained in the securities lending and collateral agreements, is reflected in short-term investments, with an offsetting liability recognized in other liabilities for the obligation to return the cash collateral to the Borrower.collateral. Securities collateral we receive from Borrowers is held on deposit for the Borrower’sborrower’s benefit and we may not transfer or loan such securities collateral unless the Borrowerborrower is in default. Therefore, such securities collateral is not reflected in our consolidated financial statements given that the risks and rewards of ownership are not transferred to us from the Borrowers. See Note 6 for additional information.borrowers.
Fees received and paid in connection with securities lending agreements are recorded in net investment income and interest expense, respectively, on the consolidated statements of operations.
AccountsAll of our securities lending agreements are classified as overnight and Notes Receivablerevolving. Securities collateral on deposit with us from third-party borrowers totaling $57.8 million and $43.3 million as of December 31, 2021 and December 31, 2020, respectively, may not be transferred or re-pledged unless the third-party borrower is in default, and is therefore not reflected in our consolidated financial statements.
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|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
Net Investment Income
Net investment income consisted of the following.
| | | | | | | | | | | | | | | | | | | | |
| Net investment income | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Investment income | | | | | | |
| Fixed-maturities | | $ | 145,613 | | | $ | 148,127 | | | $ | 155,104 | |
| Equity securities | | 8,158 | | | 6,378 | | | 7,028 | |
| Short-term investments | | 817 | | | 5,774 | | | 17,255 | |
| Other | | 368 | | | 354 | | | 545 | |
| Gross investment income | | 154,956 | | | 160,633 | | | 179,932 | |
| Investment expenses | | (7,047) | | | (6,596) | | | (8,136) | |
| Net investment income | | $ | 147,909 | | | $ | 154,037 | | | $ | 171,796 | |
Net Gains on Investments
Net gains on investments consisted of the following.
| | | | | | | | | | | | | | | | | | | | | |
| Net gains on investments | | | | | | | |
| | | | | | | |
| | Years Ended December 31, | |
| (In thousands) | | 2021 |
| 2020 |
| 2019 | |
| Net realized gains (losses) | | | | | | | |
Fixed-maturities available for sale (1) | | $ | 5,661 | | | $ | 34,869 | | | $ | 11,262 | | |
| Trading securities | | 390 | | | 4 | | | (303) | | |
| Equity securities | | 10,820 | | | 353 | | | (719) | | |
| Other investments | | 3,971 | | | 600 | | | 603 | | |
| Net realized gains on investments | | 20,842 | | | 35,826 | | | 10,843 | | |
| Impairment losses due to intent to sell | | — | | | (1,401) | | | — | | |
| Net decrease (increase) in expected credit losses | | 918 | | | (1,254) | | | — | | |
| Net unrealized gains (losses) on investments | | (4,661) | | | 10,960 | | | 33,220 | | |
| Total net gains on investments | | $ | 17,099 | | | $ | 44,131 | | | $ | 44,063 | | |
Accounts(1)Components of net realized gains (losses) on fixed-maturities available for sale include the following.
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Gross investment gains from sales and redemptions | | $ | 22,766 | | | $ | 37,431 | | | $ | 17,663 | |
| Gross investment losses from sales and redemptions | | (17,105) | | | (2,562) | | | (6,401) | |
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|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
The net changes in unrealized gains (losses) recognized in earnings on investments that were still held at each period-end were as follows.
| | | | | | | | | | | | | | | | | | | | |
| Net changes in unrealized gains (losses) on investments still held | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Net unrealized gains (losses) on investments still held | | | | | | |
| Trading securities | | $ | (7,330) | | | $ | 10,583 | | | $ | 16,346 | |
| Equity securities | | 10,210 | | | 1,759 | | | 11,906 | |
| Other investments | | 1,173 | | | 248 | | | (174) | |
| Net unrealized gains (losses) on investments still held | | $ | 4,053 | | | $ | 12,590 | | | $ | 28,078 | |
Contractual Maturities
The contractual maturities of fixed-maturities available for sale were as follows.
| | | | | | | | | | | | | | |
| Contractual maturities of fixed-maturities available for sale | | | | |
| | | | |
| | December 31, 2021 |
| (In thousands) | | Amortized Cost | | Fair Value |
| Due in one year or less | | $ | 182,884 | | | $ | 183,770 | |
Due after one year through five years (1) | | 1,116,102 | | | 1,150,676 | |
Due after five years through 10 years (1) | | 1,191,992 | | | 1,228,959 | |
Due after 10 years (1) | | 765,565 | | | 816,720 | |
Asset-backed and mortgage-backed securities (2) | | 2,174,355 | | | 2,202,564 | |
| Total | | 5,430,898 | | | 5,582,689 | |
| Less: loaned securities | | 63,169 | | | 65,611 | |
| Total fixed-maturities available for sale | | $ | 5,367,729 | | | $ | 5,517,078 | |
(1)Actual maturities may differ as a result of calls before scheduled maturity.
(2)Includes RMBS, CMBS, CLO, Other ABS and mortgage insurance-linked notes, receivablewhich are not due at a single maturity date.
Other
For the years ended December 31, 2021, 2020 and 2019, we did not transfer any securities to or from the available for sale or trading categories.
Our fixed-maturities available for sale include securities totaling $14.3 million and $16.9 million at December 31, 2021 and 2020, respectively, on deposit and serving as collateral with various state regulatory authorities. Our fixed-maturities available for sale and trading securities also include securities serving as collateral for our FHLB advances. See Note 12 for additional information about our FHLB advances.
7. Goodwill and Other Acquired Intangible Assets, Net
All of our goodwill and other acquired intangible assets relate to our homegenius segment. There was no change to our goodwill balance of $9.8 million during the years ended December 31, 2021 and 2020.
The following is a summary of the gross and net carrying amounts and accumulated amortization (including impairment) of our other acquired intangible assets as of the periods indicated.
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|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other acquired intangible assets |
| | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| (In thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Client relationships | | $ | 43,550 | | | $ | (34,620) | | | $ | 8,930 | | | $ | 43,550 | | | $ | (31,559) | | | $ | 11,991 | |
| Technology | | 8,285 | | | (7,675) | | | 610 | | | 8,285 | | | (7,370) | | | 915 | |
| Licenses | | 463 | | | (212) | | | 251 | | | 463 | | | (128) | | | 335 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Total | | $ | 52,298 | | | $ | (42,507) | | | $ | 9,791 | | | $ | 52,298 | | | $ | (39,057) | | | $ | 13,241 | |
For the years ended December 31, 2021, 2020 and 2019, amortization expense (including impairment) was $3.4 million, $5.1 million and $8.6 million, respectively. The estimated amortization expense for 2022 and thereafter is as follows.
| | | | | | | | |
| Estimated amortization expense | | |
| | |
| (In thousands) | | Estimated Amortization Expense |
| 2022 | | $ | 3,397 | |
| 2023 | | 3,361 | |
| 2024 | | 3,033 | |
| | |
| | |
| Thereafter | | — | |
| Total | | $ | 9,791 | |
Impairment Analysis
As part of our 2021 annual goodwill impairment assessment performed during the fourth quarter, we estimated the fair value of the reporting unit using primarily consistan income approach. The key factor in our fair value analysis was forecasted future cash flows. We considered both positive and negative factors and concluded that, after considering all of accrued premiums receivable due fromthe factors and evidence available, there was no impairment of goodwill indicated as of the measurement date because the estimated fair value of the reporting unit exceeded our carrying amount. Additionally, there was no impairment indicated for the remaining other acquired intangible assets as of December 31, 2021.
Based primarily on the wind down of our traditional appraisal business in the fourth quarter of 2020, we recognized impairments of $1.0 million and $0.3 million related to client relationships and technology, respectively, as of December 31, 2020.
In January 2020, we completed the sale of Clayton, through which we provided mortgage services related to loan acquisition, RMBS securitization and distressed asset reviews and servicer and loan surveillance services. We recognized an impairment charge of $4.8 million for goodwill allocated to the Clayton asset group and an impairment of other acquired intangible assets for $13.7 million as of December 31, 2019.
8. Reinsurance
In our mortgage insurance customers, amounts billed and duetitle insurance businesses, we use reinsurance as part of our risk distribution strategy, including to manage our capital position and risk profile. 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. The amount of credit that we receive under the PMIERs financial requirements for our third-party reinsurance transactions is subject to ongoing review and approval by the GSEs.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
The effect of all of our reinsurance programs on our net income is as follows.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reinsurance impacts on net premiums written and earned | |
| | | | | | | | | | | | | |
| | Net Premiums Written | | Net Premiums Earned | |
| | Years Ended December 31, | | Years Ended December 31, | |
| (In thousands) | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 | |
| Direct | | | | | | | | | | | | | |
| Mortgage insurance | | $ | 984,995 | | | $ | 1,085,670 | | | $ | 1,120,996 | | | $ | 1,104,696 | | | $ | 1,263,684 | | | $ | 1,233,528 | | (1) |
| Title insurance | | 39,665 | | | 22,843 | | | 11,342 | | | 39,665 | | | 22,843 | | | 11,342 | | |
| Total direct | | 1,024,660 | | | 1,108,513 | | | 1,132,338 | | | 1,144,361 | | | 1,286,527 | | | 1,244,870 | | (1) |
Assumed (2) | | | | | | | | | | | | | |
| Mortgage insurance | | 7,066 | | | 12,197 | | | 10,379 | | | 7,066 | | | 12,214 | | | 10,382 | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Ceded | | | | | | | | | | | | | |
Mortgage insurance (3) | | (47,515) | | | (86,912) | | | (55,925) | | | (113,480) | | | (183,131) | | | (109,696) | | (1) |
| Title insurance | | (764) | | | (289) | | | (207) | | | (764) | | | (289) | | | (207) | | |
Total ceded (3) | | (48,279) | | | (87,201) | | | (56,132) | | | (114,244) | | | (183,420) | | | (109,903) | | (1) |
| Total net premiums | | $ | 983,447 | | | $ | 1,033,509 | | | $ | 1,086,585 | | | $ | 1,037,183 | | | 1,115,321 | | | $ | 1,145,349 | | (1) |
(1)Includes a cumulative adjustment to unearned premiums related to an update to the amortization rates used to recognize revenue for Single Premium Policies. See Note 2 for further information.
(2)Primarily includes premiums from our Services customers for services our Services segment has performed, andparticipation in certain credit risk transfer programs.
(3)Net of profit commission, receivable,which is impacted by the level of ceded losses recoverable, if any, related to ouron reinsurance transactions. See Note 11 for additional information on our reserve for losses and reinsurance recoverables.
| | | | | | | | | | | | | | | | | | | | |
| Other reinsurance impacts | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
Ceding commissions earned (1) | | $ | 31,745 | | | $ | 53,654 | | | $ | 48,659 | |
Ceded losses (2) | | (4,570) | | | 58,266 | | | 5,859 | |
(1)8Ceding commissions earned are primarily related to mortgage insurance and are included as an offset to expenses primarily in other operating expenses on our consolidated statements of operations. Deferred ceding commissions of $38.6 million and $52.5 million are included in other liabilities on our consolidated balance sheets at December 31, 2021 and 2020, respectively.
(2)Primarily all related to mortgage insurance.
Single Premium QSR Program
Radian Guaranty entered into each of the 2016 Single Premium QSR Agreement, 2018 Single Premium QSR Agreement and 2020 Single Premium QSR Agreement with panels of third-party reinsurers to cede a contractual quota share percent of our Single Premium NIW as of the effective date of each agreement (as set forth in the table below), subject to certain conditions. Radian Guaranty receives a ceding commission for details. Accountsceded premiums written pursuant to these transactions. Radian Guaranty also receives a profit commission annually, provided that the loss ratio on the loans covered under the agreement generally remains below the applicable prescribed thresholds. Losses on the ceded risk up to this level reduce Radian Guaranty’s profit commission on a dollar-for-dollar basis.
Each of the agreements is subject to a scheduled termination date as set forth in the table below; however, Radian Guaranty has the option, based on certain conditions and subject to a termination fee, to terminate any of the agreements at the end of any calendar quarter on or after the applicable optional termination date. If Radian Guaranty exercises this option in the future, it would result in Radian Guaranty reassuming the related RIF in exchange for a net payment to the reinsurer calculated in accordance with the terms of the applicable agreement. Radian Guaranty also may terminate any of the agreements prior to the applicable scheduled termination date under certain circumstances, including if one or both of the GSEs no longer grant full PMIERs capital relief for the reinsurance.
As of January 1, 2022, Radian Guaranty is no longer ceding NIW under the Single Premium QSR Program.
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|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
The following table sets forth additional details regarding the Single Premium QSR Program.
| | | | | | | | | | | | | | | | | | | | |
| Single Premium QSR Program | | | | | | |
| | | | | | |
| | 2020 Single Premium QSR Agreement | | 2018 Single Premium QSR Agreement | | 2016 Single Premium QSR Agreement |
| | | | | | |
| NIW policy dates | | Jan 1, 2020-Dec 31, 2021 | | Jan 1, 2018-Dec 31, 2019 | | Jan 1, 2012-Dec 31, 2017 |
| Effective date | | January 1, 2020 | | January 1, 2018 | | January 1, 2016 |
| Scheduled termination date | | December 31, 2031 | | December 31, 2029 | | December 31, 2027 |
| Optional termination date | | January 1, 2024 | | January 1, 2022 | | January 1, 2020 |
| Quota share % | | 65% | | 65% | | 20% - 65% (1) |
| Ceding commission % | | 25% | | 25% | | 25% |
| Profit commission % | | Up to 56% | | Up to 56% | | Up to 55% |
| | | | | | | |
| (In millions) | | As of December 31, 2021 |
| RIF ceded | | $ | 2,198 | | | $ | 1,117 | | | $ | 1,913 | |
| | | | | | | |
| (In millions) | | As of December 31, 2020 |
| RIF ceded | | $ | 1,597 | | | $ | 1,979 | | | $ | 3,071 | |
(1)Effective December 31, 2017, we amended the 2016 Single Premium QSR Agreement to increase the amount of ceded risk on performing loans under the agreement from 35% to 65% for the 2015 through 2017 vintages. Loans included in the 2012 through 2014 vintages, and any other loans subject to the agreement that were delinquent at the time of the amendment, were unaffected by the change and therefore the amount of ceded risk for those loans continues to range from 20% to 35%.
Excess-of-Loss Program
Radian Guaranty has entered into 6 fully collateralized reinsurance arrangements with the Eagle Re Issuers. For the respective coverage periods, Radian Guaranty retains the first-loss layer of aggregate losses, as well as any losses in excess of the outstanding reinsurance coverage amounts. The Eagle Re Issuers provide second layer coverage up to the outstanding coverage amounts. For each of these 6 reinsurance arrangements, the Eagle Re Issuers financed their coverage by issuing mortgage insurance-linked notes receivableto eligible capital markets investors in unregistered private offerings. The aggregate excess-of-loss reinsurance coverage for these arrangements decreases over the maturity period of the mortgage insurance-linked notes (either a 10-year or 12.5-year period depending on the transaction) as the principal balances of the underlying covered mortgages decrease and as any claims are carriedpaid by the applicable Eagle Re Issuer or the mortgage insurance is canceled. Radian Guaranty has rights to terminate the reinsurance agreements upon the occurrence of certain events.
Under each of the reinsurance agreements, 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, or triggers, are reached, including a delinquency trigger event based on an elevated level of delinquencies as defined in the related insurance-linked notes transaction agreements. With the exception of insurance-linked notes issued by Eagle Re 2020-2 Ltd., Eagle Re 2021-1 Ltd. and Eagle Re 2021-2 Ltd., the insurance-linked notes issued by the Eagle Re Issuers in connection with our Excess-of-Loss Program are currently subject to a delinquency trigger event, which was first reported to the insurance-linked note investors on June 25, 2020. For the insurance-linked notes that are subject to a delinquency trigger event, both the amortization of the outstanding reinsurance coverage amount pursuant to our reinsurance arrangements with the Eagle Re Issuers and the amortization of the principal amount of the related insurance-linked notes issued by the Eagle Re Issuers have been suspended and will continue to be suspended during the pendency of the trigger event.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
The following tables set forth additional details regarding the Excess-of-Loss Program as of December 31, 2021 and December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Excess-of-Loss Program |
| | | | | | | | | | | | | | | | | | |
| (In millions) | | Eagle Re 2021-2 Ltd. | | Eagle Re 2021-1 Ltd. | | Eagle Re 2020-2 Ltd. | | Eagle Re 2020-1 Ltd. | | Eagle Re 2019-1 Ltd. | | Eagle Re 2018-1 Ltd. |
| Issued | | November
2021 | | April
2021 | | October
2020 | | February
2020 | | April
2019 | | November
2018 |
| NIW policy dates | | Jan 1, 2021-
Jul 31, 2021 | | Aug 1, 2020-
Dec 31, 2020 | | Oct 1, 2019-
Jul 31, 2020 | | Jan 1, 2019-
Sep 30, 2019 | | Jan 1, 2018-
Dec 31, 2018 | | Jan 1, 2017-
Dec 31, 2017 |
| Initial RIF | | $ | 10,758 | | | | $ | 11,061 | | | | $ | 13,011 | | | | $ | 9,866 | | | | $ | 10,705 | | | | $ | 9,109 | | |
| Initial coverage | | 484 | | | | 498 | | (1) | | 390 | | | | 488 | | | | 562 | | | | 434 | | (2) |
| Initial first layer retention | | 242 | | | | 221 | | | | 423 | | | | 202 | | | | 268 | | | | 205 | | |
| | | | | | | | | | | | | | | | | | |
| (In millions) | | As of December 31, 2021 |
| RIF | | $ | 10,379 | | | | $ | 9,496 | | | | $ | 7,623 | | | | $ | 3,241 | | | | $ | 2,429 | | | | $ | 2,117 | | |
| Remaining coverage | | 484 | | | | 498 | | | | 144 | | | | 488 | | | | 385 | | | | 276 | | |
| First layer retention | | 242 | | | | 221 | | | | 423 | | | | 202 | | | | 264 | | | | 201 | | |
| | | | | | | | | | | | | | | | | | |
| (In millions) | | As of December 31, 2020 |
| RIF | | $ | — | | | | $ | — | | | | $ | 11,748 | | | | $ | 6,121 | | | | $ | 4,657 | | | | $ | 3,986 | | |
| Remaining coverage | | — | | | | — | | | | 390 | | | | 488 | | | | 385 | | | | 276 | | (2) |
| First layer retention | | — | | | | — | | | | 423 | | | | 202 | | | | 265 | | | | 201 | | |
(1)Radian Group purchased $45.4 million original principal amount of these mortgage insurance-linked notes, which are included in fixed-maturities available for sale on our consolidated balance sheet at their estimated collectible amounts,December 31, 2021. See Notes 5 and 6 for additional information.
(2)Excludes a separate excess-of-loss reinsurance agreement entered into by Radian Guaranty with coverage of $21.4 million. This agreement was terminated in December 2021.
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 assets and liabilities of the Eagle Re Issuers in our 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 for more information on our accounting treatment of VIEs.
The reinsurance premium due to the Eagle Re Issuers is calculated by multiplying the outstanding reinsurance coverage amount at the beginning of a period by a coupon rate, which is the sum of one-month LIBOR (or an acceptable alternative to LIBOR) or SOFR, as applicable, plus a contractual risk margin, and then subtracting actual investment income collected on the assets in the reinsurance trust during the preceding month. As a result, the premiums we pay will vary based on: (i) the spread between LIBOR (or an acceptable alternative to LIBOR) or SOFR, as provided in each applicable reinsurance agreement, and the rates on the investments held by the reinsurance trust and (ii) the outstanding amount of reinsurance coverage.
As the reinsurance premium will vary based on changes in these rates, we concluded that the reinsurance agreements contain embedded derivatives, which we have accounted for separately as freestanding derivatives and recorded in other assets or other liabilities on our consolidated balance sheets. Changes in the fair value of these embedded derivatives are recorded in net gains (losses) on investments and other financial instruments in our consolidated statements of operations. See Note 5 for more information on our fair value measurements of financial instruments, including our embedded derivatives.
In the event an Eagle Re Issuer is unable to meet its future obligations to us, if any, 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) become worthless and the Eagle Re Issuer 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 any allowancethe 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.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
The Eagle Re Issuers represent our only VIEs as of December 31, 2021 and December 31, 2020. The following table presents the total assets and liabilities of the Eagle Re Issuers as of the dates indicated.
| | | | | | | | | | | | | | |
Total VIE assets and liabilities of Eagle Re Issuers (1) | | | | |
| | | | |
| | December 31, |
| (In thousands) | | 2021 | | 2020 |
| Eagle Re 2021-2 Ltd. | | $ | 484,122 | | | $ | — | |
| Eagle Re 2021-1 Ltd. | | 497,735 | | | — | |
| Eagle Re 2020-2 Ltd. | | 143,986 | | | 390,324 | |
| Eagle Re 2020-1 Ltd. | | 488,385 | | | 488,385 | |
| Eagle Re 2019-1 Ltd. | | 384,602 | | | 384,602 | |
| Eagle Re 2018-1 Ltd. | | 275,718 | | | 275,718 | |
| Total | | $ | 2,274,548 | | | $ | 1,539,029 | |
(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. Assets and liabilities are equal to each other for doubtful accounts, and are periodically evaluated for collectability based on past payment history and current economic conditions. Accounts and notes receivable exclude unbilled receivables totaling $19.9 million, which represent receivables for services performed that are not yet billed. Unbilled receivables are presented in other assets.each of the Eagle Re Issuers.
Company-Owned Life Insurance (“COLI”)QSR Program
In 2012, Radian Guaranty entered into the QSR Program with a third-party reinsurance provider. Radian Guaranty has ceded the maximum amount permitted under the QSR Program and is no longer ceding NIW under this program. RIF ceded under the QSR Program was $207.1 million and $381.8 million as of December 31, 2021 and 2020, respectively.
Other 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 liable for any defaulted amounts. However, consistent with the PMIERs reinsurer counterparty collateral requirements, Radian Guaranty’s reinsurers have established trusts to help secure our potential cash recoveries. In addition to the total VIE assets of the Eagle Re Issuers discussed above, the amount held in reinsurance trusts was $167.9 million as of December 31, 2021, compared to $228.6 million as of December 31, 2020. In addition, for the Single Premium QSR Program, Radian Guaranty holds amounts related to ceded premiums written to collateralize the reinsurers’ obligations, which is reported in reinsurance funds withheld on our 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.
9. Other Assets
The following table shows the components of other assets as of the dates indicated.
| | | | | | | | | | | | | | |
| Other assets | | | | |
| | | | |
| | December 31, |
| (In thousands) | | 2021 | | 2020 |
| Prepaid federal income taxes (Note 10) | | $ | 354,123 | | | $ | 210,889 | |
Prepaid reinsurance premiums (1) | | 201,674 | | | 267,638 | |
Company-owned life insurance (2) | | 113,386 | | | 115,586 | |
| Loaned securities (Notes 5 and 6) | | 103,996 | | | 57,499 | |
| Right-of-use assets (Note 13) | | 31,878 | | | 32,985 | |
| Other | | 32,246 | | | 30,488 | |
| Total other assets | | $ | 837,303 | | | $ | 715,085 | |
(1)Relates primarily to our Single Premium QSR Program.
(2)We are the beneficiary of insurance policies on the lives of certain of our current and past officers and employees. We have recognizedThe balances reported in other assets reflect the amountamounts that could be realized upon surrender of the insurance policies as of each respective date.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
Right-of-Use Assets
We assess our various asset groups, which include right-of-use assets, for changes in grouping and for potential impairment when certain events occur or when there are changes in circumstances, including potential alternative uses. If circumstances require a change in asset groupings or a right-of-use asset to be tested for possible impairment, and the carrying value of the right-of-use asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value.
During the second quarter of 2021, in response to the COVID-19 pandemic and our successful transition to a virtual work environment, we made the decision to exit, and to actively market for sublease, all office space in our former corporate headquarters in downtown Philadelphia. As part of this change, we entered into 2 new leases with overall reduced square footage, including our new corporate headquarters, effective September 2021, in Wayne, Pennsylvania and a Cherry Hill, New Jersey location.
As a result, during the three months ended June 30, 2021, we recognized an impairment of $3.5 million related to our former corporate headquarters leases, reducing the carrying value of certain lease assets and the related property and equipment to its estimated fair value. The right-of-use asset fair value was estimated using an income approach based on forecasted future cash flows expected to be derived from the property based on current sublease market rent, which could differ from actual results and require us to revise our initial estimates. Following this impairment, which was recorded within other operating expenses in our consolidated statements of operations, the aggregate carrying value of the right-of-use assets and leasehold improvements related to the former corporate headquarters leases that we plan to sublease was $26.4 million as of December 31, 2021.
10. Income Taxes
Income Tax Provision
The components of our consolidated income tax provision from continuing operations are as follows.
| | | | | | | | | | | | | | | | | | | | |
| Income tax provision | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Current provision (benefit) | | $ | 2,368 | | | $ | (16,264) | | | $ | 19,522 | |
| Deferred provision | | 161,793 | | | 102,079 | | | 157,162 | |
| Total income tax provision | | $ | 164,161 | | | $ | 85,815 | | | $ | 176,684 | |
The reconciliation of taxes computed at the statutory tax rate of 21% in 2021, 2020 and 2019 to the provision for income taxes is as follows.
| | | | | | | | | | | | | | | | | | | | |
| Reconciliation of provision for income taxes | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Provision for income taxes computed at the statutory tax rate | | $ | 160,615 | | | $ | 100,683 | | | $ | 178,289 | |
| Change in tax resulting from: | | | | | | |
| | | | | | |
| Valuation allowance | | 5,700 | | | 11,290 | | | 1,941 | |
| Uncertain tax positions | | 853 | | | (14,784) | | | 1,202 | |
| State tax benefit, net of federal impact | | (1,714) | | | (9,062) | | | (293) | |
| Other, net | | (1,293) | | | (2,312) | | | (4,455) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Provision for income taxes | | $ | 164,161 | | | $ | 85,815 | | | $ | 176,684 | |
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
Deferred Tax Assets and Liabilities
The significant components of our net deferred tax assets and liabilities from continuing operations are summarized as follows.
| | | | | | | | | | | | | | |
| Deferred tax assets and liabilities | | | | |
| | | | |
| | December 31, |
| (In thousands) | | 2021 | | 2020 |
| Deferred tax assets | | | | |
| | | | |
| State income taxes, net of federal impact | | $ | 77,637 | | | $ | 75,499 | |
| Goodwill and intangibles | | 29,744 | | | 32,673 | |
| Unearned premiums | | 23,699 | | | 27,703 | |
| Accrued expenses | | 16,584 | | | 11,140 | |
| Lease liability | | 11,240 | | | 11,214 | |
| Loss reserves | | 6,286 | | | 4,578 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Other | | 18,967 | | | 25,066 | |
| Total deferred tax assets | | $ | 184,157 | | | $ | 187,873 | |
| | | | |
| Deferred tax liabilities | | | | |
| | | | |
| Contingency reserve | | $ | 368,000 | | | $ | 216,122 | |
| Net unrealized gain on investments | | 31,876 | | | 70,057 | |
| Depreciation | | 12,775 | | | 13,029 | |
| Differences in fair value of financial instruments | | 7,763 | | | 9,087 | |
| | | | |
| | | | |
| | | | |
| | | | |
| Other | | 17,824 | | | 15,747 | |
| Total deferred tax liabilities | | 438,238 | | | 324,042 | |
| Less: Valuation allowance | | 83,428 | | | 77,728 | |
| Net deferred tax asset (liability) | | $ | (337,509) | | | $ | (213,897) | |
Current and Deferred Taxes
As of December 31, 2021, we recorded a net current federal income tax payable of $19.9 million, which primarily relates to applying the standards of accounting for uncertainty in income taxes.
Certain entities within our consolidated group have generated net deferred tax assets of approximately $76.1 million, relating primarily to state and local NOL carryforwards which, if unutilized, will expire during various future tax periods. We are required to establish a valuation allowance against our deferred tax assets when it is more likely than not that all or some portion of our deferred tax assets will not be realized. At each balance sheet date, we assess our need for a valuation allowance. Our assessment is based on all available evidence, both positive and negative. This requires management to exercise judgment and make assumptions regarding whether our deferred tax assets will be realized in future periods. We have determined that certain non-insurance entities within Radian may continue to generate taxable losses on a separate company basis in the near term and may not be able to fully utilize certain state and local NOLs on their state and local tax returns. Therefore, with respect to deferred tax assets relating to these state and local NOLs and other state timing adjustments, we retained a valuation allowance of $83.4 million at December 31, 2021 and $77.7 million at December 31, 2020.
As a mortgage guaranty insurer, we are eligible for a tax deduction, subject to certain limitations, under Internal Revenue Code 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 issued by the U.S. Department of the Treasury in an amount equal to the tax benefit derived from deducting any portion of our statutory contingency reserves. As of December 31, 2021, we held $354.1 million of these bonds, which are included as prepaid income taxes within other assets in our consolidated balance sheets. See Note 9 for additional information.
Property and Equipment
Property and equipment is carried at cost, netThe corresponding deduction of depreciation. For financial statement reporting purposes, computer hardware and software is generally depreciated over three or five years, furniture and fixtures is depreciated over seven years, and office equipment is depreciated over five years. Leasehold improvements are depreciated over the lesser of the estimated useful life of the asset improved or the remaining term of the lease. See Note 9 for additional information.
Goodwill and Other Acquired Intangible Assets, Net
Goodwill and other acquired intangible assets were established primarily in connection with our acquisition of Clayton. Goodwill is an asset representing the estimated future economic benefits arising from the assets we have acquired that were not individually identified and separately recognized, and includes the value of discounted expected future cash flows of Clayton, Clayton’s workforce, expected synergies with our other affiliates and other unidentifiable intangible assets. Goodwill is deemed to have an indefinite useful life and is subject to review for impairment annually, or more frequently, whenever circumstances indicate potential impairment at the reporting unit level. A reporting unit represents a business for which discrete financial information is available; more than one reporting unit may be aggregated into a single reporting unit if they have similar economic characteristics. Events that could result in an interim assessment of goodwill impairment and/or a potential impairment charge include, but are not limited to: (i) significant under-performance relative to historical or projected future operating results; (ii) significant changes in the strategy for the Services segment; (iii) significant negative industry or economic trends; and (iv) a decline in Radian’s market capitalization below book value if such decline is attributable to the Services segment. Management regularly updates certain assumptions related to our projections, including the likelihood of achieving the assumed potential revenues from new initiatives and business strategies, and if these or other items have a significant negative impact on the reporting unit’s projections we may perform additional analysis to determine whether an impairment charge is needed. Lower earnings over sustained periods also can lead to impairment of goodwill, which could result in a charge to earnings. The value of goodwill is primarily supported by revenue projections, which are mostly driven by projected transaction volume and margins.
In performing the interim quantitative analysis for our goodwill impairment test as of June 30, 2017, we elected to early adopt the update to the accounting standard regarding goodwill and other intangibles, which simplified the subsequent measurement of goodwill by eliminating step two of the goodwill impairment test. Under this guidance, if indicators for
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
impairment are present, we perform a quantitative analysis to evaluate our long-lived assets for potential impairment, and then determine the amount of the goodwill impairment by comparing a reporting unit’s fair value to its carrying amount. After adjusting the carrying value for any impairment of other intangibles or long-lived assets, an impairment charge is recognized for any excess of the reporting unit’s carrying amount over the reporting unit’s estimated fair value, up to the full amount of the goodwill allocated to the reporting unit.
Intangible assets, other than goodwill, primarily consist of customer relationships, technology, trade name and trademarks, client backlog and non-competition agreements. Customer relationships represent the value of the specifically acquired customer relationships and are valued using the excess earnings approach using estimated client revenues, attrition rates, implied royalty rates and discount rates. The excess earnings approach estimates the present value of expected earnings in excess of a traditional return on business assets. Technology represents proprietary software used for loan review, underwriting and due diligence, managing the REO disposition process, performing surveillance of mortgage loan servicers, real estate valuations and client workflow solutions. Trade name and trademarks primarily reflect the value inherentstatutory contingency reserves resulted in the recognition of the “Clayton” namea net deferred tax liability. See Note 16 for additional information about our U.S. Mortgage Guaranty Tax and its reputation. For purposesLoss Bonds.
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|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
Unrecognized Tax Benefits
As of our intangible assets,December 31, 2021, we use the term client backlog to refer to the estimated present valuehave $3.9 million of fees to be earned for services performed on loans currently under surveillance or REO assets under management. The valuenet unrecognized tax benefits, including $2.3 million of a non-competition agreement is an appraisal of potential lost revenuesinterest and penalties, that would arise from an individual leaving to work for a competitor or initiating a competing enterprise. For financial reporting purposes, intangible assets with finite lives are amortized over their applicable estimated useful lives in a manner that approximatesaffect the pattern of expected economic benefit from each intangible asset.
The calculation of the estimated fair value of goodwill and other acquired intangibles is performed primarily using an income approach and requires the use of significant estimates and assumptions that are highly subjective in nature, such as attrition rates, discount rates, future expected cash flows and market conditions. The most significant assumptions relate to the valuation of customer relationships.effective tax rate, if recognized. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.
For more information on our accounting for goodwill and other intangibles, including our impairment analysis policy see Note 7.
Accounting for Share-Based Compensation
The stock-based compensation cost related to share-based liability awards is based on the fair value as of the measurement date. The compensation cost for equity instruments is measured based on the grant-date fair value at the date of issuance. For share-based awards with performance conditions related to our own operations, the expense recognized is dependent on the probability of the performance measure being achieved. Compensation cost is generally recognized over the periods that an employee provides service in exchange for the award.
Effective January 1, 2017, upon the implementationrecognition of the updateinterest and penalties associated with uncertain tax positions is to the accounting standard regarding stock-based compensation, windfalls and shortfalls resulting from cancellations, expirations or exercises of stock options are reflected in the consolidated statements of operationsrecord such items as parta component of our income tax provision, as they occur. Prior to 2017, we applied the short-cut method, under the accounting standard regarding share-based payment, to accountof which $0.7 million and $0.3 million were recorded for the windfallyears ended December 31, 2021 and 2020, respectively.
A reconciliation of the beginning and ending gross unrecognized tax benefits that were expectedis as follows.
| | | | | | | | | | | | | | |
| Reconciliation of gross unrecognized tax benefits | | | | |
| | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 |
| Balance at beginning of period | | $ | 20,249 | | | $ | 37,208 | |
| Tax positions related to the current year: | | | | |
| Increases | | 267 | | | 250 | |
| Decreases | | (858) | | | (1,788) | |
| Tax positions related to prior years: | | | | |
| Increases | | 230 | | | 16,568 | |
| Decreases | | — | | | (171) | |
| | | | |
| | | | |
| Lapses of applicable statute of limitation | | — | | | (31,818) | |
| Balance at end of period | | $ | 19,888 | | | $ | 20,249 | |
Our total unrecognized tax benefits decreased by $0.4 million from December 31, 2020 to result fromDecember 31, 2021, primarily due to a net decrease in unrecognized tax benefits associated with our recognition of certain premium income. Over the exercise of stock options. See Note 16 for further information.
Purchases of Convertible Debt Prior to Maturity
We account for the purchases ofnext 12 months, our outstanding convertible debt as induced conversions of convertible debt in accordance with the accounting standard regarding derecognition of debt with conversion and other options, and the accounting standard regarding debt modifications and extinguishments. The accounting standards require the recognition through earnings of an inducement charge equalunrecognized tax benefits may decrease by approximately $1.2 million due to the fair valueexpiration of the consideration delivered in excessapplicable statute of the consideration issuable under the original conversion terms. The remaining consideration delivered and transaction costs incurred are required to be allocated between the extinguishment of the liability component and the reacquisition of the equity component. Therefore, we recognize a loss on induced conversion and debt extinguishment equallimitations relating to the sum of: (i) the inducement charge; (ii) the difference between the fair value and the carrying value2018 tax year. The statute of the liability component of the purchased debt; (iii) transaction costs allocated to the debt component; and (iv) unamortized debt issuance costs related to the purchased debt.
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
Reinsurance
We cede insurance risk through the use of reinsurance contracts and follow reinsurance accounting for those transactions where significant risk is transferred. Loss reserves and unearned premiums are established before consideration is given to amountslimitations related to our reinsurance agreements.federal consolidated income tax return remains open for tax years 2018-2021. Additionally, among the entities within our consolidated group, various tax years remain open to potential examination by state and local taxing authorities.
In accordance with
11. Losses and LAE
Our reserve for losses and LAE, at the termsend of each period indicated, consisted of the Single Premium QSR Program, rather than making a cash payment or transferring investmentsfollowing.
| | | | | | | | | | | | | | |
| Reserve for losses and LAE | | | | |
| | | | |
| | December 31, |
| (In thousands) | | 2021 | | 2020 |
Mortgage insurance loss reserves (1) | | $ | 823,136 | | | $ | 844,107 | |
| Title insurance loss reserves | | 5,506 | | | 4,306 | |
| Total reserve for losses and LAE | | $ | 828,642 | | | $ | 848,413 | |
(1)Primarily comprises first-lien primary case reserves of $790.4 million and $799.5 million at December 31, 2021 and 2020, respectively.
For the periods indicated, the following table presents information relating to our mortgage insurance reserve for ceded premiums written, Radian Guaranty holds the related amounts to collateralize the reinsurers’ obligationslosses, including our IBNR reserve and has established a corresponding funds withheld liability. Any loss recoveries and any potential profit commission to Radian Guaranty will be realized from this account. The reinsurers’ share of earned premiums is paid from this account on a quarterly basis. This liability also includes an interest credit on funds withheld, which is recorded as ceded premiums at a rate specified in the agreement and, depending on experience under the contract, may be paid to either Radian Guaranty or the reinsurers. The ceding commission earned for premiums ceded pursuant to this transaction is attributable to other underwriting costs (including any related deferred policy acquisition costs). The unamortized portion of the ceding commission in excess of our related acquisition cost is reflected in other liabilities. Ceded premiums written are recorded on the balance sheet as prepaid reinsurance premiums and amortizedLAE.
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|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
| | | | | | | | | | | | | | | | | | | | |
| Rollforward of mortgage insurance reserve for losses | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Balance at January 1, | | $ | 844,107 | | | $ | 401,273 | | | $ | 397,891 | |
Less: Reinsurance recoverables (1) | | 71,769 | | | 14,594 | | | 11,009 | |
| Balance at January 1, net of reinsurance recoverables | | 772,338 | | | 386,679 | | | 386,882 | |
| Add: Losses and LAE incurred in respect of default notices reported and unreported in: | | | | | | |
Current year (2) | | 160,565 | | | 517,807 | | | 146,733 | |
| Prior years | | (141,126) | | | (34,547) | | | (14,709) | |
| Total incurred | | 19,439 | | | 483,260 | | | 132,024 | |
| Deduct: Paid claims and LAE related to: | | | | | | |
Current year (2) | | 1,112 | | | 4,148 | | | 4,220 | |
| Prior years | | 34,205 | | | 93,453 | | | 128,007 | |
| Total paid | | 35,317 | | | 97,601 | | | 132,227 | |
| Balance at end of period, net of reinsurance recoverables | | 756,460 | | | 772,338 | | | 386,679 | |
Add: reinsurance recoverables (1) | | 66,676 | | | 71,769 | | | 14,594 | |
| Balance at December 31, | | $ | 823,136 | | | $ | 844,107 | | | $ | 401,273 | |
(1)Related to ceded premiums earned in a manner consistent with the recognition of incomelosses recoverable, if any, on direct premiums. See Note 8 for further discussion of our reinsurance transactions.
Variable Interest Entity
As a provider of mortgage insurance we may enter into contracts with variable interest entities (“VIEs”). VIEs include corporations, trusts or partnerships in which equity investors have: (i) insufficient equity at risk to allow it to finance its activities without additional subordinated financial support and (ii) at-risk equity holders that, as a group, do not have the characteristics of a controlling financial interest.
We perform an evaluation to determine whether we are required to consolidate the VIE’s assets and liabilities in our consolidated financial statements, based on whether we are deemed to be the primary beneficiary. The primary beneficiary of a VIE is the variable interest holder that is determined to have the controlling financial interest as a result of having both (i) the power to direct the activities of a VIE that most significantly impact the economic performance of the VIE and (ii) the obligation to absorb losses or right to receive benefits from the VIE that potentially could be significant to the VIE. See Note 8 for additional information.
Restructuring(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 Other Exit Costslater re-defaulted in the current year, that default would be considered a current year default.
RestructuringReserve Activity
Incurred Losses
Case reserves established for new default notices have been the primary driver of our total incurred losses in recent years, and other exit costs include items such as asset impairment charges (including loss from the sale of a business line), employee severance and benefit costs, facility and lease termination costs, contract terminations and other costs of restructuring or exiting activities. The timing of the future expense and associated cash payments for restructuring and other exit costs is dependent on the type of exit cost. We review assets for impairment in accordance with the accounting guidance for long-lived assets. The loss on sale of a business line is calculatedthey were primarily impacted by the excessnumber of its carry amount overnew primary default notices received in the sale price. Generally,period and our employee severancerelated gross Default to Claim Rate assumption applied to those new defaults.
New primary default notices totaled 37,470 for the year ended December 31, 2021, compared to 108,025 for the year ended December 31, 2020 and benefit costs are part40,985 for the year ended December 31, 2019. For the year ended December 31, 2020, the significant increase in the number of the Company’s ongoing benefit arrangement and are recognized when probable and estimable. A liability for facility and lease contract termination costs is recognized at the date we cease the usenew primary default notices was substantially all related to defaults of rights conveyed by the contract and is measured at its fair value, which is determined based on the remaining contractual lease rentals reduced by estimated sublease rentals. Other contract termination and exit costs include future costs that will be incurred, which are recognizedloans subject to forbearance programs implemented in total when they no longer will benefit the Company. The liabilities for restructuring and other exit costs are recorded in other liabilities.
Recent Accounting Pronouncements
Accounting Standards Adopted During 2018.In May 2014, the FASB issued an updateresponse to the accounting standard regarding revenue recognition. In July 2015, the FASB delayed the effective date for this updated standard for public companiesCOVID-19 pandemic.
Our gross Default to interim and annual periods beginning after December 15, 2017, and subsequently issued various clarifying updates. Our adoption of this standard, effective January 1, 2018, had no impact on our financial statements. The disclosures required by this update are included above in “—Revenue Recognition—Services.”
In January 2016, the FASB issued an update that makes certain changesClaim Rate assumption applied to the standard for the accounting of financial instruments. Among other things, the update requires: (i) equity investments to be measured at fair value with changes in fair value recognized in net income; (ii) the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (iii) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset; and (iv) separate presentation in other comprehensive income of the portion of the total change in the fair value
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The update also eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. This update is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. In February 2018, the FASB issued technical corrections related to this update, which addresses common questions regarding the application and adoption of the new guidance and the subsequent amendments. As a result of adopting these updates, equity securities are no longer classified as available for sale securities and changes in fair value are recognized through earnings. Consequently, we recorded a cumulative effect adjustment to retained earnings from accumulated other comprehensive income representing unrealized losses related to equity securities in the amount of $0.2 million, net of tax. In addition, we elected to utilize net asset value as a practical expedient to measure certain other investments, which resulted in an increase to other invested assets with an offset to retained earnings in the amount of $2.3 million, net of tax. Our adoption of both of these updates, effective January 1, 2018, resulted in a net increase to retained earnings of $2.1 million. See Notes 5 and 6 for additional information.
In January 2017, the FASB issued an update to the accounting standard regarding business combinations. This update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied prospectively as of the beginning of the period of adoption. We adopted this update effective January 1, 2018 and it did not have a material impact on our financial statements.
In February 2018, the FASB issued an update to the accounting standard regarding income statement reporting of comprehensive income and reclassification of certain tax effects from accumulated other comprehensive income. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA. The provisions of this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period, for reporting periods for which financial statements have not been available for issuance. We elected to early adopt this update effective January 1, 2018. As a result we recorded a reclassification adjustment from accumulated other comprehensive income to retained earnings in the amount of $2.7 million. See Note 10 for additional information regarding the TCJA.
In August 2018, the FASB issued an update to the accounting standard regarding the disclosure requirements for fair value measurements. The amendments in this update remove certain disclosure requirements regarding transfers between Level I and Level II assets as well as the requirement to disclose the valuation process for Level III assets. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We elected to early adopt the full updatedefaults was 8.0% as of December 31, 2018 and it did not have a material impact on our financial statements or disclosures.
Accounting Standards Not Yet Adopted.In February 2016, the FASB issued an update that replaces the existing accounting and disclosure requirements for leases of property, plant and equipment. The update requires lessees2021, compared to recognize,8.5% as of December 31, 2020 and 7.5% as of December 31, 2019. The combination of fewer new default notices and a lower Default to Claim Rate assumption on new defaults was the lease commencement date, assets and liabilities for all leases with lease terms of more than 12 months, which is a change from the current GAAP requirement to recognize only capital leases on the balance sheet. Leases are required to be classified as either operating or finance, with expense on operating leases recorded as a single lease cost on a straight-line basis. For finance leases, interest expense on the lease liability is required to be recognized separately from the straight-line amortizationprimary driver of the right-of-use asset. Quantitative disclosures are requireddecrease in losses incurred related to current year defaults for certain items, including the cost of leases, the weighted-average remaining lease term, the weighted-average discount rate and a maturity analysis of lease liabilities. Additional qualitative disclosures are also required regarding the nature of the leases, suchyear ended December 31, 2021, as basis, terms and conditions of: (i) variable interest payments; (ii) extension and termination options; and (iii) residual value guarantees. In July 2018 the FASB issued a further update containing certain targeted improvementscompared to the accounting and disclosure requirementsyear ended December 31, 2020.
Our provision for leases, including an additional (and optional) transition method to recognizelosses during 2021, most notably in the cumulative-effect adjustment as of the beginning of the period of adoption, rather than recognizing the cumulative-effect adjustment as of the beginning of the earliest comparative period presented. We expect to elect the optional transition method to recognize the cumulative-effect adjustment as of the beginning $50 million, which represents a right of use asset, and a corresponding net increase in other liabilities for the same amount. The net increase of approximately $50 million in other liabilities represents a discounted lease liability of approximately $74 million from operating leases,fourth quarter, was positively impacted by favorable reserve development on prior year defaults, primarily for our various facilities, which represents the present value of these future lease payments discounted at our incremental borrowing rate, partially offset by an adjustment for unamortized allowances and incentives. Additionally, upon adoption we expect to expand our financial statement disclosures as required by the amendments, as well as implement any necessary changes to our control environment and reporting processes to reflect the requirements of the amendments. See Note 14 for additional information about our leases. However, we do not expect the adoption of this standard to impact our stockholders’ equity, results of operations or liquidity. In addition, we expect to elect the practical expedients for transitioning existing leases to the new standard as of the effective date. As a result of applying the practical expedients: (i) we are not required to reassess expired or existing contracts to determine if they contain additional leases; (ii) we are not required to reassess the lease classification for expired and existing leases; and (iii) we are not required to reassess initial direct costs for existing leases. The update is effective for us on January 1, 2019 and upon our adoption, we expect to record an increase in other assets of approximately $50 million, which represents a right of use asset, and a corresponding net increase in other liabilities for the same amount. The net increase of approximately $50 million in other liabilities represents a discounted lease liability of approximately $74 million from operating leases, primarily for our various facilities, which represents the present value of these future lease payments discounted at our incremental borrowing rate, partially offset by an adjustment for unamortized allowances and incentives. Additionally, upon adoption we expect to expand our financial statement disclosures as required by the amendments, as well as implement any necessary changes to our control environment and reporting processes to reflect the requirements of the amendments. See Note 14 for additional information about our leases.
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
of the period of adoption.$50 million, which represents a right of use asset, and a corresponding net increase in other liabilities for the same amount. The net increase of approximately $50 million in other liabilities represents a discounted lease liability of approximately $74 million from operating leases, primarily for our various facilities, which represents the present value of these future lease payments discounted at our incremental borrowing rate, partially offset by an adjustment for unamortized allowances and incentives. Additionally, upon adoption we expect to expand our financial statement disclosures as required by the amendments, as well as implement any necessary changes to our control environment and reporting processes to reflect the requirements of the amendments. See Note 14 for additional information about our leases.
In June 2016, the FASB issued an update to the accounting standard regarding the measurement of credit losses on financial instruments and certain other assets. This update requires that financial assets measured at their amortized cost basis be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities are to be recorded through an allowance for credit losses, rather than a write-down of the asset, with the amount of the allowance limited to the amount by which fair value is less than amortized cost. This update is effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This update is not applicable to credit losses associated with our mortgage insurance policies. We are currently evaluating the impact on our financial statements and future disclosures as a result of this update.
In March 2017, the FASB issued an updatemore favorable trends in Cures than originally estimated, due to favorable outcomes resulting from forbearance programs implemented in response to the accounting standard regarding receivables. The new standard requiresCOVID-19 pandemic as well as positive trends in home price appreciation. These favorable observed trends resulted in reductions in our Default to Claim Rate assumptions for prior year default notices, particularly for those defaults first reported in 2020 following the start of the COVID-19 pandemic.
Our provision for losses during 2020 and 2019 were also positively impacted by favorable reserve development on prior year defaults, primarily driven by a reduction in certain premiumsDefault to Claim Rate assumptions for those prior year defaults based on purchased callable debt securitiesobserved trends.
See also Note 1 for additional information on the elevated risks and uncertainties resulting from the COVID-19 pandemic to be amortizedour business.
Default to Claim Rate. Our Default to Claim Rate estimates on defaulted loans are mainly developed based on the Stage of Default and Time in Default of the underlying defaulted loans grouped according to the earliest call date. The amortization period for callable debt securities purchased at a discount will not be impacted. The provisions of this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We do not expectwhich the adoption of this update to have a material effect on our financial statements and disclosures.
In August 2018, the FASB issued an update to the accounting standard regarding the accounting for long-duration insurance contracts. The new standard: (i) requires that assumptions used to measure the liability for future policy benefits be reviewed at least annually; (ii) defines and simplifies the measurement of market risk benefits; (iii) simplifies the amortization of deferred acquisition costs; and (iv) enhances the required disclosures about long-duration contracts. This update is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the potential impact of the adoption of this update.
In August 2018, the FASB issued an update to the accounting standard regarding the capitalization of implementation costs for activities performed in a cloud computing arrangement that is a service contract. The new standard aligns the accounting for implementation costs of hosting arrangements that are service contracts with the accounting for capitalizing internal-use software. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the potential impact of the adoption of this update and do not expect it to have a material effect on our financial statements and disclosures.
3. Net Income Per Share
Basic net income per share is computed by dividing net incomedefault occurred, as measured by the weighted-averageprogress toward foreclosure sale and the number of common shares outstanding, while diluted net income per share is computed by dividing net income attributablemonths in default. While our estimates of ultimate losses on defaults from prior years declined in 2021 due to common stockholders by the sumelevated Cures, which reduced our inventory 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 and our outstanding convertible senior notes, if any. For all calculations, the determination of whether potential common shares are dilutive or anti-dilutive is based on net income.
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
The calculation of basic and diluted net income per share was as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| (In thousands, except per-share amounts) | | | | | |
Net income—basic | $ | 606,011 |
| | $ | 121,088 |
| | $ | 308,253 |
|
Adjustment for dilutive Convertible Senior Notes due 2019, net of tax (1) | — |
| | (215 | ) | | 5,816 |
|
Net income —diluted | $ | 606,011 |
| | $ | 120,873 |
| | $ | 314,069 |
|
| | | | | | |
Average common shares outstanding—basic | 214,267 |
| | 215,321 |
| | 211,789 |
|
| Dilutive effect of Convertible Senior Notes due 2017 | — |
| | 323 |
| | 207 |
|
| Dilutive effect of Convertible Senior Notes due 2019 | — |
| | 457 |
| | 14,263 |
|
Dilutive effect of stock-based compensation arrangements (2) | 4,286 |
| | 4,305 |
| | 2,999 |
|
| Adjusted average common shares outstanding—diluted | 218,553 |
| | 220,406 |
| | 229,258 |
|
| | | | | | |
| Net income per share: | | | | | |
| | | | | | |
| Basic | $ | 2.83 |
| | $ | 0.56 |
| | $ | 1.46 |
|
| | | | | | |
| Diluted | $ | 2.77 |
| | $ | 0.55 |
| | $ | 1.37 |
|
______________________
| | | | | |
(1)
| As applicable, includes coupon interest, amortization of discount
Radian Group Inc. and fees, and other changes in income or loss that would result from the assumed conversion. Included in the year ended December 31, 2017 is a benefit relatedSubsidiaries Notes to our adjustment of estimated accrued expense to actual amounts, resulting from the January 2017 settlement of our obligations on the remaining Convertible Senior Notes due 2019.Consolidated Financial Statements |
| |
(2) | 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: |
|
| | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 | | 2016 |
| Shares of common stock equivalents | 337 |
| | 353 |
| | 1,042 |
|
defaults, COVID-19-related hardship forbearance plans and foreclosure moratoriums resulted in delays in resolving the remaining defaults, leading to an increase in the Default to Claim Rates applied to the remaining inventory. 4. Segment Reporting
We have two strategic business units that we manage separately—Mortgage Insurance and Services. Adjusted pretax operating income (loss) for each segment represents segment resultsThe following table shows our gross Default to Claim Rates on a standalone basis; therefore, inter-segment eliminations and reclassifications required for consolidated GAAP presentation have not been reflected.
We allocate to our Mortgage Insurance segment: (i) corporate expensesprimary portfolio based on the segment’s forecasted annual percentageTime in Default and as of total revenue, which approximates the dates indicated.
| | | | | | | | | | | | | | | | | | | | |
| Default to Claim Rates |
| | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
| Default to Claim Rate on: | | | | | | |
| New defaults | | 8.0 | % | | 8.5 | % | | 7.5 | % |
| Defaults not in Foreclosure Stage | | | | | | |
Time in Default: < 2 years (1) | | 41.6 | % | | 21.0 | % | | 22.0 | % |
| Time in Default: 2 - 5 years | | 75.0 | % | | 62.5 | % | | 48.0 | % |
| Time in Default: > 5 years | | 80.0 | % | | 70.0 | % | | 63.0 | % |
| Foreclosure Stage Defaults | | 85.0 | % | | 75.0 | % | | 70.0 | % |
(1)Represents the weighted average Default to Claim Rate for all defaults not in foreclosure stage that have been in default for up to two years, including new defaults. The estimated percentage of time spent on the segment; (ii) all interest expense (except for interest expense relatedDefault to an intercompany note with terms consistent with the original issued amount of $300 millionClaim Rates applied to defaults within this population vary by Time in Default, and range from the Senior Notes dueDefault to Claim Rates on new defaults shown above, up to 80.1%, 55.0% and 55.6% for more aged defaults in this category as of December 31, 2021, 2020 and 2019, that were usedrespectively.
Our estimate of expected Rescissions and Claim Denials (net of expected Reinstatements) embedded in our estimated net Default to fund our purchase of Clayton, all of whichClaim Rate is allocated to our Services segment); and (iii) all corporate cash and investments.
We allocate to our Services segment: (i) corporate expensesgenerally based on our recent experience. Consideration is also given to differences in characteristics between those rescinded policies and denied claims and the segment’s forecasted annual percentage of total revenue, which approximates the estimated percentage of time spent on the segment and (ii) the allocated interest expense related to the intercompany note as described above. No corporate cash or investments are allocated to the Services segment. Inter-segment activities are recorded at market rates for segment reporting and eliminated in consolidation.
Contract underwriting activities are reported within our Services segment. We include underwriting-related expenses for mortgage insurance, based on a pro-rata volume of mortgage applications excluding third-party contract underwriting services,loans remaining in our Mortgage Insurance segment’s other operating expenses before corporate allocations. We include underwriting-related expenses for third-party contract underwriting services, based on a pro-rata volumedefaulted inventory.
Claims Paid
Total claims paid decreased in 2021 compared to 2020. The decrease in claims paid is primarily attributable to COVID-19-related hardship forbearance plans and suspensions of mortgage applications, in our Services segment’s cost of servicesforeclosures and other operating expenses before corporate allocations,evictions, as applicable.
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
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 income (loss) from continuing operations excluding the effects of net gains (losses) on investments and other financial instruments, loss on induced conversion and debt extinguishment, acquisition-related expenses, amortization or impairment of goodwill and other acquired intangible assets, and net impairment losses recognized in earnings and losses from the sale of lines of business.
Although adjusted pretax operating income 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. These adjustments, along with the reasons for their treatment, are described below.
| |
(1) | Net gains (losses) on investments and other financial instruments. The recognition of realized investment gains or losses can vary significantly across periods as the activity is highly discretionary based on the timing of individual securities sales due to such factors as market opportunities, our tax and capital profile and overall market cycles. Unrealized gains and losses arise primarily from changes in the market value of our investments that are classified as trading or equity securities. These valuation adjustments may not necessarily result in realized economic gains or losses.
|
Trends in the profitability of our fundamental operating activities can be more clearly identified without the fluctuations of these realized and unrealized gains or losses and changes in fair value of other financial instruments. We do not view them to be indicative of our fundamental operating activities. Therefore, these items are excluded from our calculation of adjusted pretax operating income (loss).
| |
(2) | Loss on induced conversion and debt extinguishment. Gains or losses on early extinguishment of debt and losses incurred to purchase our convertible debt prior to maturity are discretionary activities that are undertaken in order to take advantage of market opportunities to strengthen our financial and capital positions; therefore, we do not view these activities as part of our operating performance. Such transactions do not reflect expected future operations and do not provide meaningful insight regarding our current or past operating trends. Therefore, these items are excluded from our calculation of adjusted pretax operating income (loss).
|
| |
(3) | Acquisition-related expenses. Acquisition-related expenses represent the costs incurred to effect an acquisition of a business (i.e., a business combination). Because we pursue acquisitions on a strategic and selective basis and not in the ordinary course of our business, we do not view acquisition-related expenses as a consequence of a primary business activity. Therefore, we do not consider these expenses to be part of our operating performance and they are excluded from our calculation of adjusted pretax operating income (loss).
|
| |
(4) | Amortization or impairment of goodwill and other acquired intangible assets. Amortization of acquired intangible assets represents the periodic expense required to amortize the cost of acquired intangible assets over their estimated useful lives. Acquired intangible assets with an indefinite useful life are also periodically reviewed for potential impairment, and impairment adjustments are made whenever appropriate. These charges are not viewed as part of the operating performance of our primary activities and therefore are excluded from our calculation of adjusted pretax operating income (loss).
|
| |
(5) | Net impairment losses recognized in earnings and losses from the sale of lines of business. The recognition of net impairment losses on investments and the impairment of other long-lived assets does not result in a cash payment and can vary significantly in both amount and frequency, depending on market credit cycles and other factors. Losses from the sale of lines of business are highly discretionary as a result of strategic restructuring decisions, and generally do not occur in the normal course of our business. We do not view these losses to be indicative of our fundamental operating activities. Therefore, whenever these losses occur, we exclude them from our calculation of adjusted pretax operating income (loss).
|
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
Summarized operating results for our segments as of and for the years ended, as applicable, were as follows:
|
| | | | | | | | | | | |
| | December 31, 2018 |
| (In thousands) | Mortgage Insurance | | Services | | Total |
Net premiums written—insurance (1) | $ | 991,021 |
| | $ | 7,286 |
| (2) | $ | 998,307 |
|
| (Increase) decrease in unearned premiums | 15,700 |
| | — |
| (2) | 15,700 |
|
| Net premiums earned—insurance | 1,006,721 |
| | 7,286 |
| (2) | 1,014,007 |
|
| Services revenue | — |
| | 148,217 |
| | 148,217 |
|
| Net investment income | 152,102 |
| | 373 |
| (2) | 152,475 |
|
| Other income | 2,794 |
| | 1,234 |
| (2) | 4,028 |
|
Total (3) (4) | 1,161,617 |
| | 157,110 |
| | 1,318,727 |
|
| | | | | | |
| Provision for losses | 104,547 |
| | 408 |
| (2) | 104,955 |
|
| Policy acquisition costs | 25,265 |
| | — |
| | 25,265 |
|
| Cost of services | — |
| | 98,692 |
| | 98,692 |
|
| Other operating expenses before corporate allocations | 135,372 |
| | 53,250 |
| | 188,622 |
|
Restructuring and other exit costs (5) | — |
| | 2,100 |
| | 2,100 |
|
Total (4) | 265,184 |
| | 154,450 |
| | 419,634 |
|
| Adjusted pretax operating income (loss) before corporate allocations | 896,433 |
| | 2,660 |
| | 899,093 |
|
| Allocation of corporate operating expenses | 80,134 |
| | 11,974 |
| | 92,108 |
|
| Allocation of interest expense | 43,685 |
| | 17,805 |
| | 61,490 |
|
| Adjusted pretax operating income (loss) | $ | 772,614 |
| | $ | (27,119 | ) | | $ | 745,495 |
|
| | | | | | |
| Total assets | $ | 6,138,679 |
| | $ | 175,973 |
| | $ | 6,314,652 |
|
______________________
| |
(1) | Net of ceded premiums written under the QSR Program, the Single Premium QSR Program and the Excess-of-Loss Program. See Note 8 for additional information. |
| |
(2) | Results from inclusion of the operations of EnTitle Direct, a national title insurance and settlement service company, acquired in March 2018. |
| |
(3) | Excludes net losses on investments and other financial instruments of $42.5 million, not included in adjusted pretax operating income. |
| |
(4) | Includes inter-segment revenues and expenses as follows: |
|
| | | | | | | |
| | December 31, 2018 |
| (In thousands) | Mortgage Insurance | | Services |
| Inter-segment revenues included in Services segment | $ | — |
| | $ | 3,245 |
|
| Inter-segment expenses included in Mortgage Insurance segment | 3,245 |
| | — |
|
| |
(5) | Does not include impairment of long-lived assets and loss from the sale of a business line, which are not components of adjusted pretax operating income. |
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
|
| | | | | | | | | | | |
| | December 31, 2017 |
| (In thousands) | Mortgage Insurance | | Services | | Total |
Net premiums written—insurance (1) (2) | $ | 818,417 |
| | $ | — |
| | $ | 818,417 |
|
(Increase) decrease in unearned premiums (2) | 114,356 |
| | — |
| | 114,356 |
|
| Net premiums earned—insurance | 932,773 |
| | — |
| | 932,773 |
|
| Services revenue | — |
| | 161,833 |
| | 161,833 |
|
| Net investment income | 127,248 |
| | — |
| | 127,248 |
|
| Other income | 2,886 |
| | — |
| | 2,886 |
|
Total (3) (4) | 1,062,907 |
| | 161,833 |
| | 1,224,740 |
|
| | | | | | |
| Provision for losses | 136,183 |
| | — |
| | 136,183 |
|
| Policy acquisition costs | 24,277 |
| | — |
| | 24,277 |
|
| Cost of services | — |
| | 105,812 |
| | 105,812 |
|
| Other operating expenses before corporate allocations | 150,975 |
| | 50,969 |
| | 201,944 |
|
Restructuring and other exit costs (5) | — |
| | 6,828 |
| | 6,828 |
|
Total (4) | 311,435 |
| | 163,609 |
| | 475,044 |
|
| Adjusted pretax operating income (loss) before corporate allocations | 751,472 |
| | (1,776 | ) | | 749,696 |
|
| Allocation of corporate operating expenses | 55,441 |
| | 14,319 |
| | 69,760 |
|
| Allocation of interest expense | 45,016 |
| | 17,745 |
| | 62,761 |
|
| Adjusted pretax operating income (loss) | $ | 651,015 |
| | $ | (33,840 | ) | | $ | 617,175 |
|
| | | | | | |
| Total assets | $ | 5,733,918 |
| | $ | 166,963 |
| (6) | $ | 5,900,881 |
|
______________________
| |
(1) | Net of ceded premiums written under the QSR Program and the Single Premium QSR Program. See Note 8 for additional information. |
| |
(2) | Effective December 31, 2017, we amended the 2016 Single Premium QSR Agreement to increase the amount of ceded risk for performing loans under the agreement from 35% to 65% for the 2015 through 2017 vintages, resulting in a reduction of $145.7 million in net premiums written. |
| |
(3) | Excludes net gains on investments and other financial instruments of $3.6 million, not included in adjusted pretax operating income. |
| |
(4) | Includes inter-segment revenues and expenses as follows: |
|
| | | | | | | |
| | December 31, 2017 |
| (In thousands) | Mortgage Insurance | | Services |
| Inter-segment revenues included in Services segment | $ | — |
| | $ | 6,730 |
|
| Inter-segment expenses included in Mortgage Insurance segment | 6,730 |
| | — |
|
| |
(5) | Does not include impairment of long-lived assets and loss from the sale of a business line, which are not components of adjusted pretax operating income. |
| |
(6) | The decrease in total assets for the Services segment at December 31, 2017, as compared to December 31, 2016, is primarily due to the impairment of goodwill and other acquired intangible assets. See Note 7 for further details. |
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
|
| | | | | | | | | | | |
| | December 31, 2016 |
| | Mortgage Insurance | | Services | | Total |
| (In thousands) | | | | | |
Net premiums written—insurance (1) | $ | 733,834 |
| | $ | — |
| | $ | 733,834 |
|
| (Increase) decrease in unearned premiums | 187,935 |
| | — |
| | 187,935 |
|
| Net premiums earned—insurance | 921,769 |
| | — |
| | 921,769 |
|
| Services revenue | — |
| | 177,249 |
| | 177,249 |
|
| Net investment income | 113,466 |
| | — |
| | 113,466 |
|
| Other income | 3,572 |
| | — |
| | 3,572 |
|
Total (2) (3) | 1,038,807 |
| | 177,249 |
| | 1,216,056 |
|
| | | | | | |
| Provision for losses | 204,175 |
| | — |
| | 204,175 |
|
| Policy acquisition costs | 23,480 |
| | — |
| | 23,480 |
|
| Cost of services | — |
| | 115,369 |
| | 115,369 |
|
| Other operating expenses before corporate allocations | 140,624 |
| | 55,815 |
| | 196,439 |
|
Total (3) | 368,279 |
| | 171,184 |
| | 539,463 |
|
| Adjusted pretax operating income (loss) before corporate allocations | 670,528 |
| | 6,065 |
| | 676,593 |
|
| Allocation of corporate operating expenses | 45,178 |
| | 8,533 |
| | 53,711 |
|
| Allocation of interest expense | 63,439 |
| | 17,693 |
| | 81,132 |
|
| Adjusted pretax operating income (loss) | $ | 561,911 |
| | $ | (20,161 | ) | | $ | 541,750 |
|
| | | | | | |
| Total assets | 5,506,338 |
| | 356,836 |
| | 5,863,174 |
|
______________________
| |
(1) | Net of ceded premiums written under the QSR Program and the Single Premium QSR Program. See Note 8 for additional information. |
| |
(2) | Excludes net gains on investments and other financial instruments of $30.8 million, not included in adjusted pretax operating income. |
| |
(3) | Includes inter-segment revenues and expenses as follows: |
|
| | | | | | | |
| | December 31, 2016 |
| (In thousands) | Mortgage Insurance | | Services |
| Inter-segment revenues included in Services segment | $ | — |
| | $ | 8,355 |
|
| Inter-segment expenses included in Mortgage Insurance segment | 8,355 |
| | — |
|
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
The reconciliation of adjusted pretax operating income (loss) to consolidated pretax income is as follows:
|
| | | | | | | | | | | |
| | December 31, |
| (In thousands) | 2018 | | 2017 | | 2016 |
| Adjusted pretax operating income (loss): | | | | | |
Mortgage insurance (1) | $ | 772,614 |
| | $ | 651,015 |
| | $ | 561,911 |
|
Services (1) | (27,119 | ) | | (33,840 | ) | | (20,161 | ) |
| Total adjusted pretax operating income | $ | 745,495 |
| | $ | 617,175 |
| | $ | 541,750 |
|
| | | | | | |
| Net gains (losses) on investments and other financial instruments | (42,476 | ) | | 3,621 |
| | 30,751 |
|
| Loss on induced conversion and debt extinguishment | — |
| | (51,469 | ) | | (75,075 | ) |
Acquisition-related expenses (2) | (881 | ) | | (105 | ) | | (519 | ) |
| Impairment of goodwill | — |
| | (184,374 | ) | | — |
|
| Amortization and impairment of other acquired intangible assets | (12,429 | ) | | (27,671 | ) | | (13,221 | ) |
Impairment of other long-lived assets (3) | (5,523 | ) | | (10,440 | ) | | — |
|
| Consolidated pretax income | $ | 684,186 |
| | $ | 346,737 |
| | $ | 483,686 |
|
______________________
| |
(1) | Includes inter-segment expenses and revenues as listed in the notes to the preceding tables. |
| |
(2) | Acquisition-related expenses represent expenses incurred to effect the acquisition of a business, net of adjustments to accruals previously recorded for acquisition expenses.
|
| |
(3) | For the year ended December 31, 2018, this item comprises other operating expenses of $1.5 million and restructuring and other exit costs of $4.0 million, each as included in the consolidated statement of operations. For the year ended December 31, 2017, the full amount is included in restructuring and other exit costs in the consolidated statement of operations. See Note 1. |
On a consolidated basis, “adjusted pretax operating income” is a measure not determined in accordance with GAAP. Total adjusted pretax operating income is not a measure of total profitability, and therefore should not be considered in isolation or viewedwell as a substitute for GAAP pretax income. Our definition of adjusted pretax operating income may not be comparablereduction in payments made to similarly-named measures reported by other companies.settle certain previously disclosed legal proceedings.
Concentration of Risk
As of December 31, 2018, California is the only state that accounted for more than 10% of our mortgage insurance business measured by primary RIF. California accounted for 12.3% of our Mortgage Insurance segment’s primary RIF at December 31, 2018, compared to 12.4% at December 31, 2017. California accounted for 11.9% of our Mortgage Insurance segment’s direct primary NIW for the year ended December 31, 2018, compared to 14.1% and 14.8% for the years ended December 31, 2017 and 2016, respectively.
There was no single mortgage insurance customer that accounted for more than 10% of NIW or more than 10% of our consolidated revenues (excluding net gains (losses) on investments and other financial instruments) in 2018, 2017 or 2016.
Net premiums earned attributable to foreign countries and long-lived assets located in foreign countries were immaterial for the periods presented.
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
5.Other Fair Value of Financial InstrumentsDisclosure
The following is a list of assets that are measured atcarrying value and estimated fair value by hierarchy level as of December 31, 2018:
|
| | | | | | | | | | | | |
| | December 31, 2018 | |
| (In thousands) | Level I | | Level II | | Total | |
| Assets at Fair Value | | | | | | |
| Investment Portfolio: | | | | | | |
| U.S. government and agency securities | $ | 199,302 |
| | $ | 28,412 |
| | $ | 227,714 |
| |
| State and municipal obligations | — |
| | 324,742 |
| | 324,742 |
| |
| Money market instruments | 95,132 |
| | — |
| | 95,132 |
| |
| Corporate bonds and notes | — |
| | 2,564,068 |
| | 2,564,068 |
| |
| RMBS | — |
| | 353,224 |
| | 353,224 |
| |
| CMBS | — |
| | 591,393 |
| | 591,393 |
| |
| Other ABS | — |
| | 705,468 |
| | 705,468 |
| |
| Equity securities | 136,662 |
| | 3,958 |
| | 140,620 |
| |
Other investments (1) | — |
| | 175,113 |
| | 175,113 |
| |
Total Investments at Fair Value (2) | 431,096 |
| | 4,746,378 |
| | 5,177,474 |
| (3) |
Total Assets at Fair Value (4) | $ | 431,096 |
| | $ | 4,746,378 |
| | $ | 5,177,474 |
| (3) |
______________________
| |
(1) | Comprising short-term certificates of deposit and commercial paper. |
| |
(2) | Doesother selected liabilities not include certain other invested assets of $3.4 million that is primarily invested in limited partnership investments valued using the net asset value as a practical expedient. Includes cash collateral held under securities lending agreements of $11.7 million that is reinvested in money market instruments. |
| |
(3) | Includes $27.9 million of securities loaned to third-party Borrowers under securities lending agreements, classified as other assets in our consolidated balance sheets. See Note 6 for more information. |
| |
(4) | Does not include the fair value of an immaterial embedded derivative, which we have accounted for separately as a freestanding derivative and classified in other assets in our consolidated balance sheet. See Note 8 for more information. |
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
The following is a list of those assets that are measured at fair value by hierarchy level as of December 31, 2017:
|
| | | | | | | | | | | | | |
| | December 31, 2017 | |
| (In thousands) | Level I | | Level II | | Total | |
| Assets at Fair Value | | | | | | |
| Investment Portfolio: | | | | | | |
| U.S. government and agency securities | $ | 124,969 |
| | $ | 8,023 |
| | $ | 132,992 |
| |
| State and municipal obligations | — |
| | 386,111 |
| | 386,111 |
| |
| Money market instruments | 213,357 |
| | — |
| | 213,357 |
| |
| Corporate bonds and notes | — |
| | 2,304,017 |
| | 2,304,017 |
| |
| RMBS | — |
| | 216,749 |
| | 216,749 |
| |
| CMBS | — |
| | 503,955 |
| | 503,955 |
| |
| Other ABS | — |
| | 676,158 |
| | 676,158 |
| |
| Foreign government and agency securities | — |
| | 36,448 |
| | 36,448 |
| |
| Equity securities | 175,205 |
| | 860 |
| | 176,065 |
| |
Other investments (1) | — |
| | 25,720 |
| | 25,720 |
| |
Total Investments at Fair Value (2) | 513,531 |
| | 4,158,041 |
| | 4,671,572 |
| (3 | ) |
| Total Assets at Fair Value | $ | 513,531 |
| | $ | 4,158,041 |
| | $ | 4,671,572 |
| (3 | ) |
______________________
| |
(1) | Comprising short-term certificates of deposit and commercial paper. |
| |
(2) | Does not include certain other invested assets of $0.3 million, primarily invested in limited partnerships, accounted for as cost-method investments and not measured at fair value. Includes cash collateral held under securities lending agreements of $19.4 million reinvested in money market instruments. |
| |
(3) | Includes $28.0 million of securities loaned to third-party Borrowers under securities lending agreements, classified as other assets in our consolidated balance sheets. See Note 6 for more information. |
At December 31, 2018 and 2017, 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 years ended December 31, 2018 and 2017. Activity related to Level III assets and liabilities (including realized and unrealized gains and losses, purchases, sales, issuances, settlements and transfers) was immaterial for the years ended December 31, 2018 and 2017.
Valuation Methodologies for Assets Measured at Fair Value
The following are descriptions of our valuation methodologies for financial assets and liabilities measured at fair value.
We are responsible for the determination of the value of all investments carried at fair value and the supporting methodologies and assumptions. To assist us in this responsibility, we utilize independent third-party valuation service providers to gather, analyze and interpret market information and estimate fair values based upon relevant methodologies and assumptions for various asset classes and individual securities. We perform monthly quantitative and qualitative analyses on the prices received from third parties to determine whether the prices are reasonable estimates of fair value. Our analysis includes: (i) a reviewour consolidated balance sheets were as follows as of the methodology used by third-party pricing services; (ii) a comparison of pricing services’ valuations to other independent sources; (iii) a review of month-to-month price fluctuations; and (iv) a comparison of actual purchase and sale transactions with valuations received from third parties. These processes are designed to ensure that our investment values are accurately recorded, that the data inputs and valuation techniques utilized are appropriate and consistently applied and that the assumptions are reasonable and consistent with the objective of determining fair value.dates indicated.
U.S. government and agency securities. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial liabilities not carried at fair value | | | | | | | | |
| | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| (In thousands) | | Carrying
Amount | | Estimated
Fair Value | | Carrying
Amount | | Estimated
Fair Value |
| Senior notes | | $ | 1,409,473 | | | $ | 1,534,378 | | | $ | 1,405,674 | | | $ | 1,563,503 | |
| FHLB advances | | 150,983 | | | 152,117 | | | 176,483 | | | 179,578 | |
The fair value of U.S. government and agency securitiesour senior notes is estimated using observedbased on quoted market transactions, including broker-dealer quotes and actual trade activity as a basis for valuation. U.S. government and agency securities are categorized in either Level I or Level II of the fair value hierarchy.
State and municipal obligations. prices. The fair value of state and municipal obligations is estimated using recent transaction activity, including market observations. Valuation models are used, which incorporate bond structure, yield curve, credit spreads
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
and other factors. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable.
Money market instruments. The fair value of money market instruments is based on daily prices, which are published and available to all potential investors and market participants. As such, these securities are categorized in Level I of the fair value hierarchy.
Corporate bonds and notes. The fair value of corporate bonds and notes is estimated using recent transaction activity, including market observations. Spread models are used that incorporate issuer and structure characteristics, such as credit risk and early redemption features, where applicable. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable.
RMBS, CMBS, and Other ABS. The fair value of these instrumentsour FHLB advances is estimated based on prices of comparable securities and spreads and observable prepayment speeds.expected cash flows for similar borrowings. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable. The fair value of any Level III securities is generally estimated by discounting estimated future cash flows.
Foreign government and agency securities. The fair value of foreign government and agency securities is estimated using observed market yields used to create a maturity curve and observed credit spreads from market makers and broker-dealers. These securitiesliabilities are categorized in Level II of the fair value hierarchy. See Note 12 for further information about these borrowings.
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
6. Investments
Available for Sale Securities
Our available for sale securities within our investment portfolio consisted of the following as of the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Available for sale securities | | | | | | | | | | |
| | | | | | | | | | |
| | December 31, 2021 |
| (In thousands) | | Amortized
Cost | | Allowance for Credit Losses | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair Value |
| Fixed-maturities available for sale | | | | | | | | | | |
| U.S. government and agency securities | | $ | 221,407 | | | $ | — | | | $ | 1,719 | | | $ | (1,396) | | | $ | 221,730 | |
| State and municipal obligations | | 162,964 | | | — | | | 14,694 | | | (401) | | | 177,257 | |
| Corporate bonds and notes | | 2,867,063 | | | — | | | 133,665 | | | (24,886) | | | 2,975,842 | |
| RMBS | | 697,581 | | | — | | | 14,313 | | | (6,777) | | | 705,117 | |
| CMBS | | 690,827 | | | — | | | 21,444 | | | (3,068) | | | 709,203 | |
| CLO | | 529,906 | | | — | | | 1,032 | | | (898) | | | 530,040 | |
| Other ABS | | 210,657 | | | — | | | 1,142 | | | (612) | | | 211,187 | |
| Foreign government and agency securities | | 5,109 | | | — | | | 187 | | | — | | | 5,296 | |
Mortgage insurance-linked notes (1) | | 45,384 | | | — | | | 1,633 | | | — | | | 47,017 | |
| Total securities available for sale, including loaned securities | | 5,430,898 | | | $ | — | | | $ | 189,829 | | | $ | (38,038) | | | 5,582,689 | |
Less: loaned securities (2) | | 63,169 | | | | | | | | | 65,611 | |
| Total fixed-maturities available for sale | | $ | 5,367,729 | | | | | | | | | $ | 5,517,078 | |
(1)Comprises the notes purchased by Radian Group in connection with the Excess-of-Loss Program. See Note 8 for more information about our reinsurance programs. (2)Included in other assets in our consolidated balance sheets as further described below. See below for a discussion of our securities lending agreements. |
| | December 31, 2020 |
| (In thousands) | | Amortized
Cost | | Allowance for Credit Losses | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair Value |
| Fixed-maturities available for sale | | | | | | | | | | |
| U.S. government and agency securities | | $ | 176,033 | | | $ | — | | | $ | 1,677 | | | $ | (3,611) | | | $ | 174,099 | |
| State and municipal obligations | | 149,258 | | | — | | | 16,113 | | | (100) | | | 165,271 | |
| Corporate bonds and notes | | 2,832,350 | | | (948) | | | 250,771 | | | (3,758) | | | 3,078,415 | |
| RMBS | | 799,814 | | | — | | | 34,439 | | | (314) | | | 833,939 | |
| CMBS | | 645,071 | | | — | | | 39,495 | | | (3,301) | | | 681,265 | |
| CLO | | 569,173 | | | — | | | 2,026 | | | (2,641) | | | 568,558 | |
| Other ABS | | 249,988 | | | — | | | 2,901 | | | (432) | | | 252,457 | |
| Foreign government and agency securities | | 5,100 | | | — | | | 338 | | | — | | | 5,438 | |
| Total securities available for sale, including loaned securities | | 5,426,787 | | | $ | (948) | | | $ | 347,760 | | | $ | (14,157) | | | 5,759,442 | |
Less: loaned securities (1) | | 33,164 | | | | | | | | | 36,102 | |
| Total fixed-maturities available for sale | | $ | 5,393,623 | | | | | | | | | $ | 5,723,340 | |
(1)Included in other assets in our consolidated balance sheets as further described below. See below for a discussion of our securities lending agreements. |
The following table provides a rollforward of the allowance for credit losses on fixed-maturities available for sale, which relates entirely to corporate bonds and notes for the periods indicated.
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
| | | | | | | | | | | | | | |
| Rollforward of allowance for credit losses on fixed-maturities available for sale |
| | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 |
| Beginning balance | | $ | 948 | | | $ | — | |
| Current provision for securities without prior allowance | | — | | | 1,254 | |
| Net increases (decreases) in allowance on previously impaired securities | | (918) | | | — | |
| Reduction for securities sold | | (30) | | | (306) | |
| Ending balance | | $ | — | | | $ | 948 | |
Gross Unrealized Losses and Related Fair Value of Available for Sale Securities
For securities deemed “available for sale” that are in an unrealized loss position and for which an allowance for credit loss has not been established, the following tables show the gross unrealized losses and fair value, 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 December 31, 2021 and 2020, are loaned securities under securities lending agreements that are classified as other assets in our consolidated balance sheets, as further described below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized losses on fixed-maturities available for sale by category and length of time |
| | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| ($ in thousands) | Less Than 12 Months | | 12 Months or Greater | | Total |
Description of
Securities | | # of
securities | | Fair
Value | | Unrealized
Losses | | # of
securities | | Fair
Value | | Unrealized
Losses | | # of
securities | | Fair
Value | | Unrealized
Losses |
| U.S. government and agency securities | | 14 | | | $ | 101,602 | | | $ | (1,165) | | | 2 | | | $ | 6,937 | | | $ | (231) | | | 16 | | | $ | 108,539 | | | $ | (1,396) | |
| State and municipal obligations | | 20 | | | 32,721 | | | (401) | | | — | | | — | | | — | | | 20 | | | 32,721 | | | (401) | |
| Corporate bonds and notes | | 209 | | | 864,355 | | | (16,799) | | | 34 | | | 99,475 | | | (8,087) | | | 243 | | | 963,830 | | | (24,886) | |
| RMBS | | 57 | | | 365,476 | | | (6,749) | | | 3 | | | 1,543 | | | (28) | | | 60 | | | 367,019 | | | (6,777) | |
| CMBS | | 81 | | | 188,457 | | | (2,053) | | | 9 | | | 22,050 | | | (1,015) | | | 90 | | | 210,507 | | | (3,068) | |
| CLO | | 84 | | | 313,380 | | | (675) | | | 11 | | | 35,612 | | | (223) | | | 95 | | | 348,992 | | | (898) | |
| Other ABS | | 54 | | | 138,851 | | | (603) | | | 1 | | | 631 | | | (9) | | | 55 | | | 139,482 | | | (612) | |
| | | | | | | | | | | | | | | | | | |
| Total | | 519 | | | $ | 2,004,842 | | | $ | (28,445) | | | 60 | | | $ | 166,248 | | | $ | (9,593) | | | 579 | | | $ | 2,171,090 | | | $ | (38,038) | |
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| ($ in thousands) | Less Than 12 Months | | 12 Months or Greater | | Total |
Description of
Securities | | # 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 | | | $ | 90,591 | | | $ | (3,611) | | | — | | | $ | — | | | $ | — | | | 4 | | | $ | 90,591 | | | $ | (3,611) | |
| State and municipal obligations | | 4 | | | 9,626 | | | (100) | | | — | | | — | | | — | | | 4 | | | 9,626 | | | (100) | |
| Corporate bonds and notes | | 60 | | | 174,848 | | | (3,758) | | | — | | | — | | | — | | | 60 | | | 174,848 | | | (3,758) | |
| RMBS | | 5 | | | 42,003 | | | (305) | | | 2 | | | 915 | | | (9) | | | 7 | | | 42,918 | | | (314) | |
| CMBS | | 43 | | | 118,345 | | | (3,035) | | | 6 | | | 8,312 | | | (266) | | | 49 | | | 126,657 | | | (3,301) | |
| CLO | | 52 | | | 173,459 | | | (970) | | | 25 | | | 137,506 | | | (1,671) | | | 77 | | | 310,965 | | | (2,641) | |
| Other ABS | | 26 | | | 70,759 | | | (322) | | | 3 | | | 12,119 | | | (110) | | | 29 | | | 82,878 | | | (432) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Total | | 194 | | | $ | 679,631 | | | $ | (12,101) | | | 36 | | | $ | 158,852 | | | $ | (2,056) | | | 230 | | | $ | 838,483 | | | $ | (14,157) | |
See “—Net Gains on Investments” below for additional details on our net gains (losses) on investments, including the changes in the allowance for credit losses on fixed-maturities available for sale and other impairments due to our intent to sell securities in an unrealized loss position. See Note 2 for a discussion of our accounting policy for impairments.
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. These securities lending agreements are collateralized financing arrangements whereby we transfer securities to third parties through an intermediary in exchange for cash or other securities. However, pursuant to the terms of these agreements, we maintain effective control over all loaned securities. Although we report such securities at fair value within other assets in our consolidated balance sheets, rather than in investments, the detailed information provided in this Note includes these securities. See Note 9 for additional information.
Under our securities lending agreements, the borrower is required to provide to us collateral, consisting of cash or securities, in amounts generally equal to or exceeding: (i) 102% of the value of the loaned securities (105% in the case of foreign securities) or (ii) another agreed-upon percentage not less than 100% of the market value of the loaned securities. Any cash collateral we receive may be invested in liquid assets. Cash collateral, which is reinvested for our benefit by the intermediary in accordance with the investment guidelines contained in the securities lending and collateral agreements, is reflected in short-term investments, with an offsetting liability recognized in other liabilities for the obligation to return the cash collateral. Securities collateral we receive is held on deposit for the borrower’s benefit and we may not transfer or loan such securities collateral unless the borrower is in default. Therefore, such securities collateral is not reflected in our consolidated financial statements given that the risks and rewards of ownership are not transferred to us from the borrowers.
Fees received and paid in connection with securities lending agreements are recorded in net investment income and interest expense, respectively, on the consolidated statements of operations.
All of our securities lending agreements are classified as overnight and revolving. Securities collateral on deposit with us from third-party borrowers totaling $57.8 million and $43.3 million as of December 31, 2021 and December 31, 2020, respectively, may not be transferred or re-pledged unless the third-party borrower is in default, and is therefore not reflected in our consolidated financial statements.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
Net Investment Income
Net investment income consisted of the following.
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| Net investment income | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Investment income | | | | | | |
| Fixed-maturities | | $ | 145,613 | | | $ | 148,127 | | | $ | 155,104 | |
| Equity securities | | 8,158 | | | 6,378 | | | 7,028 | |
| Short-term investments | | 817 | | | 5,774 | | | 17,255 | |
| Other | | 368 | | | 354 | | | 545 | |
| Gross investment income | | 154,956 | | | 160,633 | | | 179,932 | |
| Investment expenses | | (7,047) | | | (6,596) | | | (8,136) | |
| Net investment income | | $ | 147,909 | | | $ | 154,037 | | | $ | 171,796 | |
Net Gains on Investments
Net gains on investments consisted of the following.
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| Net gains on investments | | | | | | | |
| | | | | | | |
| | Years Ended December 31, | |
| (In thousands) | | 2021 |
| 2020 |
| 2019 | |
| Net realized gains (losses) | | | | | | | |
Fixed-maturities available for sale (1) | | $ | 5,661 | | | $ | 34,869 | | | $ | 11,262 | | |
| Trading securities | | 390 | | | 4 | | | (303) | | |
| Equity securities | | 10,820 | | | 353 | | | (719) | | |
| Other investments | | 3,971 | | | 600 | | | 603 | | |
| Net realized gains on investments | | 20,842 | | | 35,826 | | | 10,843 | | |
| Impairment losses due to intent to sell | | — | | | (1,401) | | | — | | |
| Net decrease (increase) in expected credit losses | | 918 | | | (1,254) | | | — | | |
| Net unrealized gains (losses) on investments | | (4,661) | | | 10,960 | | | 33,220 | | |
| Total net gains on investments | | $ | 17,099 | | | $ | 44,131 | | | $ | 44,063 | | |
(1)Components of net realized gains (losses) on fixed-maturities available for sale include the following.
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| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Gross investment gains from sales and redemptions | | $ | 22,766 | | | $ | 37,431 | | | $ | 17,663 | |
| Gross investment losses from sales and redemptions | | (17,105) | | | (2,562) | | | (6,401) | |
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
The net changes in unrealized gains (losses) recognized in earnings on investments that were still held at each period-end were as follows.
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| Net changes in unrealized gains (losses) on investments still held | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Net unrealized gains (losses) on investments still held | | | | | | |
| Trading securities | | $ | (7,330) | | | $ | 10,583 | | | $ | 16,346 | |
| Equity securities | | 10,210 | | | 1,759 | | | 11,906 | |
| Other investments | | 1,173 | | | 248 | | | (174) | |
| Net unrealized gains (losses) on investments still held | | $ | 4,053 | | | $ | 12,590 | | | $ | 28,078 | |
Contractual Maturities
The contractual maturities of fixed-maturities available for sale were as follows.
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| Contractual maturities of fixed-maturities available for sale | | | | |
| | | | |
| | December 31, 2021 |
| (In thousands) | | Amortized Cost | | Fair Value |
| Due in one year or less | | $ | 182,884 | | | $ | 183,770 | |
Due after one year through five years (1) | | 1,116,102 | | | 1,150,676 | |
Due after five years through 10 years (1) | | 1,191,992 | | | 1,228,959 | |
Due after 10 years (1) | | 765,565 | | | 816,720 | |
Asset-backed and mortgage-backed securities (2) | | 2,174,355 | | | 2,202,564 | |
| Total | | 5,430,898 | | | 5,582,689 | |
| Less: loaned securities | | 63,169 | | | 65,611 | |
| Total fixed-maturities available for sale | | $ | 5,367,729 | | | $ | 5,517,078 | |
(1)Actual maturities may differ as a result of calls before scheduled maturity.
Equity securities.(2)Includes RMBS, CMBS, CLO, Other ABS and mortgage insurance-linked notes, which are not due at a single maturity date.
Other
For the years ended December 31, 2021, 2020 and 2019, we did not transfer any securities to or from the available for sale or trading categories.
Our fixed-maturities available for sale include securities totaling $14.3 million and $16.9 million at December 31, 2021 and 2020, respectively, on deposit and serving as collateral with various state regulatory authorities. Our fixed-maturities available for sale and trading securities also include securities serving as collateral for our FHLB advances. See Note 12 for additional information about our FHLB advances.
7. Goodwill and Other Acquired Intangible Assets, Net
All of our goodwill and other acquired intangible assets relate to our homegenius segment. There was no change to our goodwill balance of $9.8 million during the years ended December 31, 2021 and 2020.
The following is a summary of the gross and net carrying amounts and accumulated amortization (including impairment) of our other acquired intangible assets as of the periods indicated.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
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| Other acquired intangible assets |
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| | December 31, 2021 | | December 31, 2020 |
| (In thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Client relationships | | $ | 43,550 | | | $ | (34,620) | | | $ | 8,930 | | | $ | 43,550 | | | $ | (31,559) | | | $ | 11,991 | |
| Technology | | 8,285 | | | (7,675) | | | 610 | | | 8,285 | | | (7,370) | | | 915 | |
| Licenses | | 463 | | | (212) | | | 251 | | | 463 | | | (128) | | | 335 | |
| | | | | | | | | | | | |
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| Total | | $ | 52,298 | | | $ | (42,507) | | | $ | 9,791 | | | $ | 52,298 | | | $ | (39,057) | | | $ | 13,241 | |
For the years ended December 31, 2021, 2020 and 2019, amortization expense (including impairment) was $3.4 million, $5.1 million and $8.6 million, respectively. The estimated amortization expense for 2022 and thereafter is as follows.
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| Estimated amortization expense | | |
| | |
| (In thousands) | | Estimated Amortization Expense |
| 2022 | | $ | 3,397 | |
| 2023 | | 3,361 | |
| 2024 | | 3,033 | |
| | |
| | |
| Thereafter | | — | |
| Total | | $ | 9,791 | |
Impairment Analysis
As part of our 2021 annual goodwill impairment assessment performed during the fourth quarter, we estimated the fair value of the reporting unit using primarily an income approach. The key factor in our fair value analysis was forecasted future cash flows. We considered both positive and negative factors and concluded that, after considering all of the factors and evidence available, there was no impairment of goodwill indicated as of the measurement date because the estimated fair value of the reporting unit exceeded our carrying amount. Additionally, there was no impairment indicated for the remaining other acquired intangible assets as of December 31, 2021.
Based primarily on the wind down of our traditional appraisal business in the fourth quarter of 2020, we recognized impairments of $1.0 million and $0.3 million related to client relationships and technology, respectively, as of December 31, 2020.
In January 2020, we completed the sale of Clayton, through which we provided mortgage services related to loan acquisition, RMBS securitization and distressed asset reviews and servicer and loan surveillance services. We recognized an impairment charge of $4.8 million for goodwill allocated to the Clayton asset group and an impairment of other acquired intangible assets for $13.7 million as of December 31, 2019.
8. 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. 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. The amount of credit that we receive under the PMIERs financial requirements for our third-party reinsurance transactions is subject to ongoing review and approval by the GSEs.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
The effect of all of our reinsurance programs on our net income is as follows.
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| Reinsurance impacts on net premiums written and earned | |
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| | Net Premiums Written | | Net Premiums Earned | |
| | Years Ended December 31, | | Years Ended December 31, | |
| (In thousands) | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 | |
| Direct | | | | | | | | | | | | | |
| Mortgage insurance | | $ | 984,995 | | | $ | 1,085,670 | | | $ | 1,120,996 | | | $ | 1,104,696 | | | $ | 1,263,684 | | | $ | 1,233,528 | | (1) |
| Title insurance | | 39,665 | | | 22,843 | | | 11,342 | | | 39,665 | | | 22,843 | | | 11,342 | | |
| Total direct | | 1,024,660 | | | 1,108,513 | | | 1,132,338 | | | 1,144,361 | | | 1,286,527 | | | 1,244,870 | | (1) |
Assumed (2) | | | | | | | | | | | | | |
| Mortgage insurance | | 7,066 | | | 12,197 | | | 10,379 | | | 7,066 | | | 12,214 | | | 10,382 | | |
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| Ceded | | | | | | | | | | | | | |
Mortgage insurance (3) | | (47,515) | | | (86,912) | | | (55,925) | | | (113,480) | | | (183,131) | | | (109,696) | | (1) |
| Title insurance | | (764) | | | (289) | | | (207) | | | (764) | | | (289) | | | (207) | | |
Total ceded (3) | | (48,279) | | | (87,201) | | | (56,132) | | | (114,244) | | | (183,420) | | | (109,903) | | (1) |
| Total net premiums | | $ | 983,447 | | | $ | 1,033,509 | | | $ | 1,086,585 | | | $ | 1,037,183 | | | 1,115,321 | | | $ | 1,145,349 | | (1) |
(1)Includes a cumulative adjustment to unearned premiums related to an update to the amortization rates used to recognize revenue for Single Premium Policies. See Note 2 for further information.
(2)Primarily includes premiums from our participation in certain credit risk transfer programs.
(3)Net of profit commission, which is impacted by the level of ceded losses recoverable, if any, on reinsurance transactions. See Note 11 for additional information on our reserve for losses and reinsurance recoverables.
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| Other reinsurance impacts | | | | | | |
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| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
Ceding commissions earned (1) | | $ | 31,745 | | | $ | 53,654 | | | $ | 48,659 | |
Ceded losses (2) | | (4,570) | | | 58,266 | | | 5,859 | |
(1)Ceding commissions earned are primarily related to mortgage insurance and are included as an offset to expenses primarily in other operating expenses on our consolidated statements of operations. Deferred ceding commissions of $38.6 million and $52.5 million are included in other liabilities on our consolidated balance sheets at December 31, 2021 and 2020, respectively.
(2)Primarily all related to mortgage insurance.
Single Premium QSR Program
Radian Guaranty entered into each of the 2016 Single Premium QSR Agreement, 2018 Single Premium QSR Agreement and 2020 Single Premium QSR Agreement with panels of third-party reinsurers to cede a contractual quota share percent of our Single Premium NIW as of the effective date of each agreement (as set forth in the table below), subject to certain conditions. Radian Guaranty receives a ceding commission for ceded premiums written pursuant to these transactions. Radian Guaranty also receives a profit commission annually, provided that the loss ratio on the loans covered under the agreement generally remains below the applicable prescribed thresholds. Losses on the ceded risk up to this level reduce Radian Guaranty’s profit commission on a dollar-for-dollar basis.
Each of the agreements is subject to a scheduled termination date as set forth in the table below; however, Radian Guaranty has the option, based on certain conditions and subject to a termination fee, to terminate any of the agreements at the end of any calendar quarter on or after the applicable optional termination date. If Radian Guaranty exercises this option in the future, it would result in Radian Guaranty reassuming the related RIF in exchange for a net payment to the reinsurer calculated in accordance with the terms of the applicable agreement. Radian Guaranty also may terminate any of the agreements prior to the applicable scheduled termination date under certain circumstances, including if one or both of the GSEs no longer grant full PMIERs capital relief for the reinsurance.
As of January 1, 2022, Radian Guaranty is no longer ceding NIW under the Single Premium QSR Program.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
The following table sets forth additional details regarding the Single Premium QSR Program.
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| Single Premium QSR Program | | | | | | |
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| | 2020 Single Premium QSR Agreement | | 2018 Single Premium QSR Agreement | | 2016 Single Premium QSR Agreement |
| | | | | | |
| NIW policy dates | | Jan 1, 2020-Dec 31, 2021 | | Jan 1, 2018-Dec 31, 2019 | | Jan 1, 2012-Dec 31, 2017 |
| Effective date | | January 1, 2020 | | January 1, 2018 | | January 1, 2016 |
| Scheduled termination date | | December 31, 2031 | | December 31, 2029 | | December 31, 2027 |
| Optional termination date | | January 1, 2024 | | January 1, 2022 | | January 1, 2020 |
| Quota share % | | 65% | | 65% | | 20% - 65% (1) |
| Ceding commission % | | 25% | | 25% | | 25% |
| Profit commission % | | Up to 56% | | Up to 56% | | Up to 55% |
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| (In millions) | | As of December 31, 2021 |
| RIF ceded | | $ | 2,198 | | | $ | 1,117 | | | $ | 1,913 | |
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| (In millions) | | As of December 31, 2020 |
| RIF ceded | | $ | 1,597 | | | $ | 1,979 | | | $ | 3,071 | |
(1)Effective December 31, 2017, we amended the 2016 Single Premium QSR Agreement to increase the amount of ceded risk on performing loans under the agreement from 35% to 65% for the 2015 through 2017 vintages. Loans included in the 2012 through 2014 vintages, and any other loans subject to the agreement that were delinquent at the time of the amendment, were unaffected by the change and therefore the amount of ceded risk for those loans continues to range from 20% to 35%.
Excess-of-Loss Program
Radian Guaranty has entered into 6 fully collateralized reinsurance arrangements with the Eagle Re Issuers. For the respective coverage periods, Radian Guaranty retains the first-loss layer of aggregate losses, as well as any losses in excess of the outstanding reinsurance coverage amounts. The Eagle Re Issuers provide second layer coverage up to the outstanding coverage amounts. For each of these 6 reinsurance arrangements, the Eagle Re Issuers financed their coverage by issuing mortgage insurance-linked notes to eligible capital markets investors in unregistered private offerings. The aggregate excess-of-loss reinsurance coverage for these arrangements decreases over the maturity period of the mortgage insurance-linked notes (either a 10-year or 12.5-year period depending on the transaction) 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. Radian Guaranty has rights to terminate the reinsurance agreements upon the occurrence of certain events.
Under each of the reinsurance agreements, 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, or triggers, are reached, including a delinquency trigger event based on an elevated level of delinquencies as defined in the related insurance-linked notes transaction agreements. With the exception of insurance-linked notes issued by Eagle Re 2020-2 Ltd., Eagle Re 2021-1 Ltd. and Eagle Re 2021-2 Ltd., the insurance-linked notes issued by the Eagle Re Issuers in connection with our Excess-of-Loss Program are currently subject to a delinquency trigger event, which was first reported to the insurance-linked note investors on June 25, 2020. For the insurance-linked notes that are subject to a delinquency trigger event, both the amortization of the outstanding reinsurance coverage amount pursuant to our reinsurance arrangements with the Eagle Re Issuers and the amortization of the principal amount of the related insurance-linked notes issued by the Eagle Re Issuers have been suspended and will continue to be suspended during the pendency of the trigger event.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
The following tables set forth additional details regarding the Excess-of-Loss Program as of December 31, 2021 and December 31, 2020.
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| Excess-of-Loss Program |
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| (In millions) | | Eagle Re 2021-2 Ltd. | | Eagle Re 2021-1 Ltd. | | Eagle Re 2020-2 Ltd. | | Eagle Re 2020-1 Ltd. | | Eagle Re 2019-1 Ltd. | | Eagle Re 2018-1 Ltd. |
| Issued | | November
2021 | | April
2021 | | October
2020 | | February
2020 | | April
2019 | | November
2018 |
| NIW policy dates | | Jan 1, 2021-
Jul 31, 2021 | | Aug 1, 2020-
Dec 31, 2020 | | Oct 1, 2019-
Jul 31, 2020 | | Jan 1, 2019-
Sep 30, 2019 | | Jan 1, 2018-
Dec 31, 2018 | | Jan 1, 2017-
Dec 31, 2017 |
| Initial RIF | | $ | 10,758 | | | | $ | 11,061 | | | | $ | 13,011 | | | | $ | 9,866 | | | | $ | 10,705 | | | | $ | 9,109 | | |
| Initial coverage | | 484 | | | | 498 | | (1) | | 390 | | | | 488 | | | | 562 | | | | 434 | | (2) |
| Initial first layer retention | | 242 | | | | 221 | | | | 423 | | | | 202 | | | | 268 | | | | 205 | | |
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| (In millions) | | As of December 31, 2021 |
| RIF | | $ | 10,379 | | | | $ | 9,496 | | | | $ | 7,623 | | | | $ | 3,241 | | | | $ | 2,429 | | | | $ | 2,117 | | |
| Remaining coverage | | 484 | | | | 498 | | | | 144 | | | | 488 | | | | 385 | | | | 276 | | |
| First layer retention | | 242 | | | | 221 | | | | 423 | | | | 202 | | | | 264 | | | | 201 | | |
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| (In millions) | | As of December 31, 2020 |
| RIF | | $ | — | | | | $ | — | | | | $ | 11,748 | | | | $ | 6,121 | | | | $ | 4,657 | | | | $ | 3,986 | | |
| Remaining coverage | | — | | | | — | | | | 390 | | | | 488 | | | | 385 | | | | 276 | | (2) |
| First layer retention | | — | | | | — | | | | 423 | | | | 202 | | | | 265 | | | | 201 | | |
(1)Radian Group purchased $45.4 million original principal amount of these mortgage insurance-linked notes, which are included in fixed-maturities available for sale on our consolidated balance sheet at December 31, 2021. See Notes 5 and 6 for additional information.
(2)Excludes a separate excess-of-loss reinsurance agreement entered into by Radian Guaranty with coverage of $21.4 million. This agreement was terminated in December 2021.
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 assets and liabilities of the Eagle Re Issuers in our 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 for more information on our accounting treatment of VIEs.
The reinsurance premium due to the Eagle Re Issuers is calculated by multiplying the outstanding reinsurance coverage amount at the beginning of a period by a coupon rate, which is the sum of one-month LIBOR (or an acceptable alternative to LIBOR) or SOFR, as applicable, plus a contractual risk margin, and then subtracting actual investment income collected on the assets in the reinsurance trust during the preceding month. As a result, the premiums we pay will vary based on: (i) the spread between LIBOR (or an acceptable alternative to LIBOR) or SOFR, as provided in each applicable reinsurance agreement, and the rates on the investments held by the reinsurance trust and (ii) the outstanding amount of reinsurance coverage.
As the reinsurance premium will vary based on changes in these rates, we concluded that the reinsurance agreements contain embedded derivatives, which we have accounted for separately as freestanding derivatives and recorded in other assets or other liabilities on our consolidated balance sheets. Changes in the fair value of these securitiesembedded derivatives are recorded in net gains (losses) on investments and other financial instruments in our consolidated statements of operations. See Note 5 for more information on our fair value measurements of financial instruments, including our embedded derivatives.
In the event an Eagle Re Issuer is generallyunable to meet its future obligations to us, if any, 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) become worthless and the Eagle Re Issuer 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.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
The Eagle Re Issuers represent our only VIEs as of December 31, 2021 and December 31, 2020. The following table presents the total assets and liabilities of the Eagle Re Issuers as of the dates indicated.
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Total VIE assets and liabilities of Eagle Re Issuers (1) | | | | |
| | | | |
| | December 31, |
| (In thousands) | | 2021 | | 2020 |
| Eagle Re 2021-2 Ltd. | | $ | 484,122 | | | $ | — | |
| Eagle Re 2021-1 Ltd. | | 497,735 | | | — | |
| Eagle Re 2020-2 Ltd. | | 143,986 | | | 390,324 | |
| Eagle Re 2020-1 Ltd. | | 488,385 | | | 488,385 | |
| Eagle Re 2019-1 Ltd. | | 384,602 | | | 384,602 | |
| Eagle Re 2018-1 Ltd. | | 275,718 | | | 275,718 | |
| Total | | $ | 2,274,548 | | | $ | 1,539,029 | |
(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. Assets and liabilities are equal to each other for each of the Eagle Re Issuers.
QSR Program
In 2012, Radian Guaranty entered into the QSR Program with a third-party reinsurance provider. Radian Guaranty has ceded the maximum amount permitted under the QSR Program and is no longer ceding NIW under this program. RIF ceded under the QSR Program was $207.1 million and $381.8 million as of December 31, 2021 and 2020, respectively.
Other 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 liable for any defaulted amounts. However, consistent with the PMIERs reinsurer counterparty collateral requirements, Radian Guaranty’s reinsurers have established trusts to help secure our potential cash recoveries. In addition to the total VIE assets of the Eagle Re Issuers discussed above, the amount held in reinsurance trusts was $167.9 million as of December 31, 2021, compared to $228.6 million as of December 31, 2020. In addition, for the Single Premium QSR Program, Radian Guaranty holds amounts related to ceded premiums written to collateralize the reinsurers’ obligations, which is reported in reinsurance funds withheld on our 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.
9. Other Assets
The following table shows the components of other assets as of the dates indicated.
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| Other assets | | | | |
| | | | |
| | December 31, |
| (In thousands) | | 2021 | | 2020 |
| Prepaid federal income taxes (Note 10) | | $ | 354,123 | | | $ | 210,889 | |
Prepaid reinsurance premiums (1) | | 201,674 | | | 267,638 | |
Company-owned life insurance (2) | | 113,386 | | | 115,586 | |
| Loaned securities (Notes 5 and 6) | | 103,996 | | | 57,499 | |
| Right-of-use assets (Note 13) | | 31,878 | | | 32,985 | |
| Other | | 32,246 | | | 30,488 | |
| Total other assets | | $ | 837,303 | | | $ | 715,085 | |
(1)Relates primarily to our Single Premium QSR Program.
(2)We are the beneficiary of insurance policies on the lives of certain of our current and past officers and employees. The balances reported in other assets reflect the amounts that could be realized upon surrender of the insurance policies as of each respective date.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
Right-of-Use Assets
We assess our various asset groups, which include right-of-use assets, for changes in grouping and for potential impairment when certain events occur or when there are changes in circumstances, including potential alternative uses. If circumstances require a change in asset groupings or a right-of-use asset to be tested for possible impairment, and the carrying value of the right-of-use asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value.
During the second quarter of 2021, in response to the COVID-19 pandemic and our successful transition to a virtual work environment, we made the decision to exit, and to actively market for sublease, all office space in our former corporate headquarters in downtown Philadelphia. As part of this change, we entered into 2 new leases with overall reduced square footage, including our new corporate headquarters, effective September 2021, in Wayne, Pennsylvania and a Cherry Hill, New Jersey location.
As a result, during the three months ended June 30, 2021, we recognized an impairment of $3.5 million related to our former corporate headquarters leases, reducing the carrying value of certain lease assets and the related property and equipment to its estimated fair value. The right-of-use asset fair value was estimated using observablean income approach based on forecasted future cash flows expected to be derived from the property based on current sublease market datarent, which could differ from actual results and require us to revise our initial estimates. Following this impairment, which was recorded within other operating expenses in active markets or bid prices from market makers and broker-dealers. Generally, these securities are categorized in Level I or IIour consolidated statements of operations, the aggregate carrying value of the fair value hierarchy,right-of-use assets and leasehold improvements related to the former corporate headquarters leases that we plan to sublease was $26.4 million as observable market dataof December 31, 2021.
10. Income Taxes
Income Tax Provision
The components of our consolidated income tax provision from continuing operations are readily available. From timeas follows.
| | | | | | | | | | | | | | | | | | | | |
| Income tax provision | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Current provision (benefit) | | $ | 2,368 | | | $ | (16,264) | | | $ | 19,522 | |
| Deferred provision | | 161,793 | | | 102,079 | | | 157,162 | |
| Total income tax provision | | $ | 164,161 | | | $ | 85,815 | | | $ | 176,684 | |
The reconciliation of taxes computed at the statutory tax rate of 21% in 2021, 2020 and 2019 to time,the provision for income taxes is as follows.
| | | | | | | | | | | | | | | | | | | | |
| Reconciliation of provision for income taxes | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Provision for income taxes computed at the statutory tax rate | | $ | 160,615 | | | $ | 100,683 | | | $ | 178,289 | |
| Change in tax resulting from: | | | | | | |
| | | | | | |
| Valuation allowance | | 5,700 | | | 11,290 | | | 1,941 | |
| Uncertain tax positions | | 853 | | | (14,784) | | | 1,202 | |
| State tax benefit, net of federal impact | | (1,714) | | | (9,062) | | | (293) | |
| Other, net | | (1,293) | | | (2,312) | | | (4,455) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Provision for income taxes | | $ | 164,161 | | | $ | 85,815 | | | $ | 176,684 | |
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
Deferred Tax Assets and Liabilities
The significant components of our net deferred tax assets and liabilities from continuing operations are summarized as follows.
| | | | | | | | | | | | | | |
| Deferred tax assets and liabilities | | | | |
| | | | |
| | December 31, |
| (In thousands) | | 2021 | | 2020 |
| Deferred tax assets | | | | |
| | | | |
| State income taxes, net of federal impact | | $ | 77,637 | | | $ | 75,499 | |
| Goodwill and intangibles | | 29,744 | | | 32,673 | |
| Unearned premiums | | 23,699 | | | 27,703 | |
| Accrued expenses | | 16,584 | | | 11,140 | |
| Lease liability | | 11,240 | | | 11,214 | |
| Loss reserves | | 6,286 | | | 4,578 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Other | | 18,967 | | | 25,066 | |
| Total deferred tax assets | | $ | 184,157 | | | $ | 187,873 | |
| | | | |
| Deferred tax liabilities | | | | |
| | | | |
| Contingency reserve | | $ | 368,000 | | | $ | 216,122 | |
| Net unrealized gain on investments | | 31,876 | | | 70,057 | |
| Depreciation | | 12,775 | | | 13,029 | |
| Differences in fair value of financial instruments | | 7,763 | | | 9,087 | |
| | | | |
| | | | |
| | | | |
| | | | |
| Other | | 17,824 | | | 15,747 | |
| Total deferred tax liabilities | | 438,238 | | | 324,042 | |
| Less: Valuation allowance | | 83,428 | | | 77,728 | |
| Net deferred tax asset (liability) | | $ | (337,509) | | | $ | (213,897) | |
Current and Deferred Taxes
As of December 31, 2021, we recorded a net current federal income tax payable of $19.9 million, which primarily relates to applying the standards of accounting for uncertainty in income taxes.
Certain entities within our consolidated group have generated net deferred tax assets of approximately $76.1 million, relating primarily to state and local NOL carryforwards which, if unutilized, will expire during various future tax periods. We are required to establish a valuation allowance against our deferred tax assets when it is more likely than not that all or some portion of our deferred tax assets will not be realized. At each balance sheet date, we assess our need for a valuation allowance. Our assessment is based on all available evidence, both positive and negative. This requires management to exercise judgment and make assumptions regarding whether our deferred tax assets will be realized in future periods. We have determined that certain equity securitiesnon-insurance entities within Radian may continue to generate taxable losses on a separate company basis in the near term and may not be categorizedable to fully utilize certain state and local NOLs on their state and local tax returns. Therefore, with respect to deferred tax assets relating to these state and local NOLs and other state timing adjustments, we retained a valuation allowance of $83.4 million at December 31, 2021 and $77.7 million at December 31, 2020.
As a mortgage guaranty insurer, we are eligible for a tax deduction, subject to certain limitations, under Internal Revenue Code Section 832(e) for amounts required by state law or regulation to be set aside in Level IIIstatutory contingency reserves. The deduction is allowed only to the extent that we purchase non-interest bearing U.S. Mortgage Guaranty Tax and Loss Bonds issued by the U.S. Department of the fair value hierarchyTreasury in an amount equal to the tax benefit derived from deducting any portion of our statutory contingency reserves. As of December 31, 2021, we held $354.1 million of these bonds, which are included as prepaid income taxes within other assets in our consolidated balance sheets. The corresponding deduction of our statutory contingency reserves resulted in the recognition of a net deferred tax liability. See Note 16 for additional information about our U.S. Mortgage Guaranty Tax and Loss Bonds.
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
Unrecognized Tax Benefits
As of December 31, 2021, we have $3.9 million of net unrecognized tax benefits, including $2.3 million of interest and penalties, that would affect the effective tax rate, if recognized. Our policy for the recognition of interest and penalties associated with uncertain tax positions is to record such items as a component of our income tax provision, of which $0.7 million and $0.3 million were recorded for the years ended December 31, 2021 and 2020, respectively.
A reconciliation of the beginning and ending gross unrecognized tax benefits is as follows.
| | | | | | | | | | | | | | |
| Reconciliation of gross unrecognized tax benefits | | | | |
| | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 |
| Balance at beginning of period | | $ | 20,249 | | | $ | 37,208 | |
| Tax positions related to the current year: | | | | |
| Increases | | 267 | | | 250 | |
| Decreases | | (858) | | | (1,788) | |
| Tax positions related to prior years: | | | | |
| Increases | | 230 | | | 16,568 | |
| Decreases | | — | | | (171) | |
| | | | |
| | | | |
| Lapses of applicable statute of limitation | | — | | | (31,818) | |
| Balance at end of period | | $ | 19,888 | | | $ | 20,249 | |
Our total unrecognized tax benefits decreased by $0.4 million from December 31, 2020 to December 31, 2021, primarily due to a lacknet decrease in unrecognized tax benefits associated with our recognition of market-based transaction data orcertain premium income. Over the usenext 12 months, our unrecognized tax benefits may decrease by approximately $1.2 million due to the expiration of model-based valuations.the applicable statute of limitations relating to the 2018 tax year. The statute of limitations related to our federal consolidated income tax return remains open for tax years 2018-2021. Additionally, among the entities within our consolidated group, various tax years remain open to potential examination by state and local taxing authorities.
11. Losses and LAE
Our reserve for losses and LAE, at the end of each period indicated, consisted of the following.
| | | | | | | | | | | | | | |
| Reserve for losses and LAE | | | | |
| | | | |
| | December 31, |
| (In thousands) | | 2021 | | 2020 |
Mortgage insurance loss reserves (1) | | $ | 823,136 | | | $ | 844,107 | |
| Title insurance loss reserves | | 5,506 | | | 4,306 | |
| Total reserve for losses and LAE | | $ | 828,642 | | | $ | 848,413 | |
(1)Primarily comprises first-lien primary case reserves of $790.4 million and $799.5 million at December 31, 2021 and 2020, respectively.
For the periods indicated, the following table presents information relating to our mortgage insurance reserve for losses, including our IBNR reserve and LAE.
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
| | | | | | | | | | | | | | | | | | | | |
| Rollforward of mortgage insurance reserve for losses | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Balance at January 1, | | $ | 844,107 | | | $ | 401,273 | | | $ | 397,891 | |
Less: Reinsurance recoverables (1) | | 71,769 | | | 14,594 | | | 11,009 | |
| Balance at January 1, net of reinsurance recoverables | | 772,338 | | | 386,679 | | | 386,882 | |
| Add: Losses and LAE incurred in respect of default notices reported and unreported in: | | | | | | |
Current year (2) | | 160,565 | | | 517,807 | | | 146,733 | |
| Prior years | | (141,126) | | | (34,547) | | | (14,709) | |
| Total incurred | | 19,439 | | | 483,260 | | | 132,024 | |
| Deduct: Paid claims and LAE related to: | | | | | | |
Current year (2) | | 1,112 | | | 4,148 | | | 4,220 | |
| Prior years | | 34,205 | | | 93,453 | | | 128,007 | |
| Total paid | | 35,317 | | | 97,601 | | | 132,227 | |
| Balance at end of period, net of reinsurance recoverables | | 756,460 | | | 772,338 | | | 386,679 | |
Add: reinsurance recoverables (1) | | 66,676 | | | 71,769 | | | 14,594 | |
| Balance at December 31, | | $ | 823,136 | | | $ | 844,107 | | | $ | 401,273 | |
(1)Related to ceded losses recoverable, if any, on reinsurance transactions. See Note 8 for additional information.
Other investments. (2)These securitiesRelated 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
Incurred Losses
Case reserves established for new default notices have been the primary driver of our total incurred losses in recent years, and they were primarily consistimpacted by the number of commercial papernew primary default notices received in the period and short-term certificatesour related gross Default to Claim Rate assumption applied to those new defaults.
New primary default notices totaled 37,470 for the year ended December 31, 2021, compared to 108,025 for the year ended December 31, 2020 and 40,985 for the year ended December 31, 2019. For the year ended December 31, 2020, the significant increase in the number of deposit, which are categorizednew primary default notices was substantially all related to defaults of loans subject to forbearance programs implemented in Level IIresponse to the COVID-19 pandemic.
Our gross Default to Claim Rate assumption applied to new defaults was 8.0% as of December 31, 2021, compared to 8.5% as of December 31, 2020 and 7.5% as of December 31, 2019. The combination of fewer new default notices and a lower Default to Claim Rate assumption on new defaults was the primary driver of the fair value hierarchy. decrease in losses incurred related to current year defaults for the year ended December 31, 2021, as compared to the year ended December 31, 2020.
Our provision for losses during 2021, most notably in the fourth quarter, was positively impacted by favorable reserve development on prior year defaults, primarily as a result of more favorable trends in Cures than originally estimated, due to favorable outcomes resulting from forbearance programs implemented in response to the COVID-19 pandemic as well as positive trends in home price appreciation. These favorable observed trends resulted in reductions in our Default to Claim Rate assumptions for prior year default notices, particularly for those defaults first reported in 2020 following the start of the COVID-19 pandemic.
Our provision for losses during 2020 and 2019 were also positively impacted by favorable reserve development on prior year defaults, primarily driven by a reduction in certain Default to Claim Rate assumptions for those prior year defaults based on observed trends.
See also Note 1 for additional information on the elevated risks and uncertainties resulting from the COVID-19 pandemic to our business.
Default to Claim Rate. Our Default to Claim Rate estimates on defaulted loans are mainly developed based on the Stage of Default and Time in Default of the underlying defaulted loans grouped according to the period in which the default occurred, as measured by the progress toward foreclosure sale and the number of months in default. While our estimates of ultimate losses on defaults from prior years declined in 2021 due to elevated Cures, which reduced our inventory of primary
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
defaults, COVID-19-related hardship forbearance plans and foreclosure moratoriums resulted in delays in resolving the remaining defaults, leading to an increase in the Default to Claim Rates applied to the remaining inventory.
The fair valuefollowing table shows our gross Default to Claim Rates on our primary portfolio based on the Time in Default and as of these investmentsthe dates indicated.
| | | | | | | | | | | | | | | | | | | | |
| Default to Claim Rates |
| | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
| Default to Claim Rate on: | | | | | | |
| New defaults | | 8.0 | % | | 8.5 | % | | 7.5 | % |
| Defaults not in Foreclosure Stage | | | | | | |
Time in Default: < 2 years (1) | | 41.6 | % | | 21.0 | % | | 22.0 | % |
| Time in Default: 2 - 5 years | | 75.0 | % | | 62.5 | % | | 48.0 | % |
| Time in Default: > 5 years | | 80.0 | % | | 70.0 | % | | 63.0 | % |
| Foreclosure Stage Defaults | | 85.0 | % | | 75.0 | % | | 70.0 | % |
(1)Represents the weighted average Default to Claim Rate for all defaults not in foreclosure stage that have been in default for up to two years, including new defaults. The estimated Default to Claim Rates applied to defaults within this population vary by Time in Default, and range from the Default to Claim Rates on new defaults shown above, up to 80.1%, 55.0% and 55.6% for more aged defaults in this category as of December 31, 2021, 2020 and 2019, respectively.
Our estimate of expected Rescissions and Claim Denials (net of expected Reinstatements) embedded in our estimated net Default to Claim Rate is estimated using market data for comparable instrumentsgenerally based on our recent experience. Consideration is also given to differences in characteristics between those rescinded policies and denied claims and the loans remaining in our defaulted inventory.
Claims Paid
Total claims paid decreased in 2021 compared to 2020. The decrease in claims paid is primarily attributable to COVID-19-related hardship forbearance plans and suspensions of similar maturityforeclosures and average yield.evictions, as well as a reduction in payments made to settle certain previously disclosed legal proceedings.
Other Fair Value Disclosure
The carrying value and estimated fair value of other selected assets and liabilities not carried at fair value in our consolidated balance sheets were as follows as of the dates indicated:indicated.
|
| | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| (In thousands) | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
| Assets: | | | | | | | |
Other invested assets (1) | $ | — |
| | $ | — |
| | $ | 334 |
| | $ | 3,226 |
|
| Liabilities: | | | | | | | |
| Senior notes | 1,030,348 |
| | 1,007,687 |
| | 1,027,074 |
| | 1,093,934 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial liabilities not carried at fair value | | | | | | | | |
| | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| (In thousands) | | Carrying
Amount | | Estimated
Fair Value | | Carrying
Amount | | Estimated
Fair Value |
| Senior notes | | $ | 1,409,473 | | | $ | 1,534,378 | | | $ | 1,405,674 | | | $ | 1,563,503 | |
| FHLB advances | | 150,983 | | | 152,117 | | | 176,483 | | | 179,578 | |
______________________
| |
(1) | As a result of implementing the update to the standard for the accounting of financial instruments effective January 1, 2018, other invested assets, primarily consisting of investments in limited partnerships, are no longer carried at amortized cost, and instead are valued in our consolidated balance sheets using the net asset value as a practical expedient to estimate fair value. |
Senior Notes. The fair value of our senior notes is estimated based on the quoted market pricesprices. 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 same or similar instruments.fair value hierarchy. See Note 12 for further information.
166
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
6. Investments
Available for Sale Securities
Our available for sale securities within our investment portfolio consisted of the following as of the dates indicated:indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Available for sale securities | | | | | | | | | | |
| | | | | | | | | | |
| | December 31, 2021 |
| (In thousands) | | Amortized
Cost | | Allowance for Credit Losses | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair Value |
| Fixed-maturities available for sale | | | | | | | | | | |
| U.S. government and agency securities | | $ | 221,407 | | | $ | — | | | $ | 1,719 | | | $ | (1,396) | | | $ | 221,730 | |
| State and municipal obligations | | 162,964 | | | — | | | 14,694 | | | (401) | | | 177,257 | |
| Corporate bonds and notes | | 2,867,063 | | | — | | | 133,665 | | | (24,886) | | | 2,975,842 | |
| RMBS | | 697,581 | | | — | | | 14,313 | | | (6,777) | | | 705,117 | |
| CMBS | | 690,827 | | | — | | | 21,444 | | | (3,068) | | | 709,203 | |
| CLO | | 529,906 | | | — | | | 1,032 | | | (898) | | | 530,040 | |
| Other ABS | | 210,657 | | | — | | | 1,142 | | | (612) | | | 211,187 | |
| Foreign government and agency securities | | 5,109 | | | — | | | 187 | | | — | | | 5,296 | |
Mortgage insurance-linked notes (1) | | 45,384 | | | — | | | 1,633 | | | — | | | 47,017 | |
| Total securities available for sale, including loaned securities | | 5,430,898 | | | $ | — | | | $ | 189,829 | | | $ | (38,038) | | | 5,582,689 | |
Less: loaned securities (2) | | 63,169 | | | | | | | | | 65,611 | |
| Total fixed-maturities available for sale | | $ | 5,367,729 | | | | | | | | | $ | 5,517,078 | |
(1)Comprises the notes purchased by Radian Group in connection with the Excess-of-Loss Program. See Note 8 for more information about our reinsurance programs. (2)Included in other assets in our consolidated balance sheets as further described below. See below for a discussion of our securities lending agreements. |
| | December 31, 2020 |
| (In thousands) | | Amortized
Cost | | Allowance for Credit Losses | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair Value |
| Fixed-maturities available for sale | | | | | | | | | | |
| U.S. government and agency securities | | $ | 176,033 | | | $ | — | | | $ | 1,677 | | | $ | (3,611) | | | $ | 174,099 | |
| State and municipal obligations | | 149,258 | | | — | | | 16,113 | | | (100) | | | 165,271 | |
| Corporate bonds and notes | | 2,832,350 | | | (948) | | | 250,771 | | | (3,758) | | | 3,078,415 | |
| RMBS | | 799,814 | | | — | | | 34,439 | | | (314) | | | 833,939 | |
| CMBS | | 645,071 | | | — | | | 39,495 | | | (3,301) | | | 681,265 | |
| CLO | | 569,173 | | | — | | | 2,026 | | | (2,641) | | | 568,558 | |
| Other ABS | | 249,988 | | | — | | | 2,901 | | | (432) | | | 252,457 | |
| Foreign government and agency securities | | 5,100 | | | — | | | 338 | | | — | | | 5,438 | |
| Total securities available for sale, including loaned securities | | 5,426,787 | | | $ | (948) | | | $ | 347,760 | | | $ | (14,157) | | | 5,759,442 | |
Less: loaned securities (1) | | 33,164 | | | | | | | | | 36,102 | |
| Total fixed-maturities available for sale | | $ | 5,393,623 | | | | | | | | | $ | 5,723,340 | |
(1)Included in other assets in our consolidated balance sheets as further described below. See below for a discussion of our securities lending agreements. |
The following table provides a rollforward of the allowance for credit losses on fixed-maturities available for sale, which relates entirely to corporate bonds and notes for the periods indicated.
|
| | | | | | | | | | | | | | | |
| | 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 |
| (1) | $ | 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 |
| (2) | 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 | 4,106,594 |
| | 4,028,987 |
| (3) | 10,433 |
| | 88,040 |
|
______________________
| | | | | |
(1)
| Includes securities with a fair value of $10.7 million serving as collateral for FHLB advances.
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
| |
(2) | Includes securities with a fair value of $77.7 million serving as collateral for FHLB advances. |
| |
(3) | Includes $7.4 million of fixed maturity securities loaned to third-party Borrowers under securities lending agreements, classified as other assets in our consolidated balance sheets, as further described below. |
|
| | | | | | | | | | | | | | | |
| | December 31, 2017 |
| (In thousands) | Amortized Cost | | Fair Value | | Gross Unrealized Gains | | Gross Unrealized Losses |
| Fixed-maturities available for sale: | | | | | | | |
| U.S. government and agency securities | $ | 69,667 |
| | $ | 69,396 |
| | $ | 96 |
| | $ | 367 |
|
| State and municipal obligations | 156,587 |
| | 161,722 |
| | 5,834 |
| | 699 |
|
| Corporate bonds and notes | 1,869,318 |
| | 1,894,886 |
| | 33,620 |
| | 8,052 |
|
| RMBS | 189,455 |
| | 187,229 |
| | 636 |
| | 2,862 |
|
| CMBS | 451,595 |
| | 453,394 |
| | 3,409 |
| | 1,610 |
|
| Other ABS | 672,715 |
| | 674,548 |
| | 2,655 |
| | 822 |
|
| Foreign government and agency securities | 31,417 |
| | 32,207 |
| | 823 |
| | 33 |
|
| Total fixed-maturities available for sale | 3,440,754 |
| | 3,473,382 |
| | 47,073 |
| | 14,445 |
|
Equity securities available for sale (2) | 176,349 |
| | 176,065 |
| | 1,705 |
| | 1,989 |
|
| Total debt and equity securities | $ | 3,617,103 |
| | $ | 3,649,447 |
| (1) | $ | 48,778 |
| | $ | 16,434 |
|
______________________ | | | | | | | | | | | | | | |
| Rollforward of allowance for credit losses on fixed-maturities available for sale |
| | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 |
| Beginning balance | | $ | 948 | | | $ | — | |
| Current provision for securities without prior allowance | | — | | | 1,254 | |
| Net increases (decreases) in allowance on previously impaired securities | | (918) | | | — | |
| Reduction for securities sold | | (30) | | | (306) | |
| Ending balance | | $ | — | | | $ | 948 | |
| |
(1) | Includes $14.7 million of fixed maturity securities and $13.2 million of equity securities loaned to third-party Borrowers under securities lending agreements, classified as other assets in our consolidated balance sheets, as further described below. |
| |
(2) | Primarily consists of investments in fixed-income and equity exchange-traded funds and publicly-traded business development company equities. |
Gross Unrealized Losses and Related Fair ValuesValue of Available for Sale Securities
For securities deemed “available for sale” and that are in an unrealized loss position and for which an allowance for credit loss has not been established, the following tables show the gross unrealized losses and fair values,value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of the dates indicated. Included in the amounts as of December 31, 2018,2021 and 2020, are loaned
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
securities under securities lending agreements that are classified as other assets in our consolidated balance sheets, as further described below.
| | Unrealized losses on fixed-maturities available for sale by category and length of time | | Unrealized losses on fixed-maturities available for sale by category and length of time |
| | | | | | | | | | | | | | | | | | | | | | December 31, 2021 |
| | | December 31, 2018 | |
($ 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 | |
| ($ in thousands) | | ($ in thousands) | Less Than 12 Months | | 12 Months or Greater | | Total |
Description of
Securities | | Description of
Securities | | # 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 |
| U.S. government and agency securities | | 14 | | | $ | 101,602 | | | $ | (1,165) | | | 2 | | | $ | 6,937 | | | $ | (231) | | | 16 | | | $ | 108,539 | | | $ | (1,396) | |
| State and municipal obligations | | 12 |
| | 41,263 |
| | 955 |
| | 16 |
| | 39,982 |
| | 945 |
| | 28 |
| | 81,245 |
| | 1,900 |
| State and municipal obligations | | 20 | | | 32,721 | | | (401) | | | — | | | — | | | — | | | 20 | | | 32,721 | | | (401) | |
| Corporate bonds and notes | | 330 |
| | 1,208,430 |
| | 36,284 |
| | 126 |
| | 601,533 |
| | 27,604 |
| | 456 |
| | 1,809,963 |
| | 63,888 |
| Corporate bonds and notes | | 209 | | | 864,355 | | | (16,799) | | | 34 | | | 99,475 | | | (8,087) | | | 243 | | | 963,830 | | | (24,886) | |
| RMBS | | 15 |
| | 92,315 |
| | 782 |
| | 28 |
| | 77,395 |
| | 3,704 |
| | 43 |
| | 169,710 |
| | 4,486 |
| RMBS | | 57 | | | 365,476 | | | (6,749) | | | 3 | | | 1,543 | | | (28) | | | 60 | | | 367,019 | | | (6,777) | |
| CMBS | | 62 |
| | 328,696 |
| | 3,973 |
| | 33 |
| | 125,728 |
| | 3,385 |
| | 95 |
| | 454,424 |
| | 7,358 |
| CMBS | | 81 | | | 188,457 | | | (2,053) | | | 9 | | | 22,050 | | | (1,015) | | | 90 | | | 210,507 | | | (3,068) | |
| CLO | | CLO | | 84 | | | 313,380 | | | (675) | | | 11 | | | 35,612 | | | (223) | | | 95 | | | 348,992 | | | (898) | |
| Other ABS | | 129 |
| | 503,109 |
| | 7,917 |
| | 26 |
| | 89,628 |
| | 983 |
| | 155 |
| | 592,737 |
| | 8,900 |
| Other ABS | | 54 | | | 138,851 | | | (603) | | | 1 | | | 631 | | | (9) | | | 55 | | | 139,482 | | | (612) | |
| | Total | | 550 |
| | $ | 2,201,228 |
| | $ | 50,707 |
| | 237 |
| | $ | 957,742 |
| | $ | 37,333 |
| | 787 |
| | $ | 3,158,970 |
| | $ | 88,040 |
| Total | | 519 | | | $ | 2,004,842 | | | $ | (28,445) | | | 60 | | | $ | 166,248 | | | $ | (9,593) | | | 579 | | | $ | 2,171,090 | | | $ | (38,038) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2017 |
($ in thousands)
Description of Securities | | Less Than 12 Months | | 12 Months or Greater | | Total |
| | # of securities | | Fair Value | | Unrealized Losses | | # of securities | | Fair Value | | Unrealized Losses | | # of securities | | Fair Value | | Unrealized Losses |
| U.S. government and agency securities | | 6 |
| | $ | 23,309 |
| | $ | 129 |
| | 3 |
| | $ | 9,799 |
| | $ | 238 |
| | 9 |
| | $ | 33,108 |
| | $ | 367 |
|
| State and municipal obligations | | 21 |
| | 65,898 |
| | 699 |
| | — |
| | — |
| | — |
| | 21 |
| | 65,898 |
| | 699 |
|
| Corporate bonds and notes | | 152 |
| | 672,318 |
| | 4,601 |
| | 32 |
| | 139,105 |
| | 3,451 |
| | 184 |
| | 811,423 |
| | 8,052 |
|
| RMBS | | 8 |
| | 19,943 |
| | 204 |
| | 26 |
| | 101,812 |
| | 2,658 |
| | 34 |
| | 121,755 |
| | 2,862 |
|
| CMBS | | 35 |
| | 139,353 |
| | 1,395 |
| | 4 |
| | 3,518 |
| | 215 |
| | 39 |
| | 142,871 |
| | 1,610 |
|
| Other ABS | | 92 |
| | 260,864 |
| | 777 |
| | 7 |
| | 8,297 |
| | 45 |
| | 99 |
| | 269,161 |
| | 822 |
|
| Foreign government and agency securities | | 5 |
| | 7,397 |
| | 33 |
| | — |
| | — |
| | — |
| | 5 |
| | 7,397 |
| | 33 |
|
| Equity securities | | 13 |
| | 149,785 |
| | 1,989 |
| | — |
| | — |
| | — |
| | 13 |
| | 149,785 |
| | 1,989 |
|
| Total | | 332 |
| | $ | 1,338,867 |
| | $ | 9,827 |
| | 72 |
| | $ | 262,531 |
| | $ | 6,607 |
| | 404 |
| | $ | 1,601,398 |
| | $ | 16,434 |
|
126
Although we held securities in an unrealized loss position as of December 31, 2018, 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 December 31, 2018 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 December 31, 2018, we did not have the intent to sell any debt securities in an unrealized loss position and we determined that it is more likely than not that we will not be required to sell the securities before recovery of their cost basis, which may be at maturity; therefore, we did not consider these investments to be other-than-temporarily impaired at December 31, 2018.
Other-than-temporary Impairment Activity. To the extent we determine that a security is deemed to have had an other-than-temporary impairment, an impairment loss is recognized. While we recognized other-than-temporary impairment losses in
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
earnings during | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| ($ in thousands) | Less Than 12 Months | | 12 Months or Greater | | Total |
Description of
Securities | | # 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 | | | $ | 90,591 | | | $ | (3,611) | | | — | | | $ | — | | | $ | — | | | 4 | | | $ | 90,591 | | | $ | (3,611) | |
| State and municipal obligations | | 4 | | | 9,626 | | | (100) | | | — | | | — | | | — | | | 4 | | | 9,626 | | | (100) | |
| Corporate bonds and notes | | 60 | | | 174,848 | | | (3,758) | | | — | | | — | | | — | | | 60 | | | 174,848 | | | (3,758) | |
| RMBS | | 5 | | | 42,003 | | | (305) | | | 2 | | | 915 | | | (9) | | | 7 | | | 42,918 | | | (314) | |
| CMBS | | 43 | | | 118,345 | | | (3,035) | | | 6 | | | 8,312 | | | (266) | | | 49 | | | 126,657 | | | (3,301) | |
| CLO | | 52 | | | 173,459 | | | (970) | | | 25 | | | 137,506 | | | (1,671) | | | 77 | | | 310,965 | | | (2,641) | |
| Other ABS | | 26 | | | 70,759 | | | (322) | | | 3 | | | 12,119 | | | (110) | | | 29 | | | 82,878 | | | (432) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Total | | 194 | | | $ | 679,631 | | | $ | (12,101) | | | 36 | | | $ | 158,852 | | | $ | (2,056) | | | 230 | | | $ | 838,483 | | | $ | (14,157) | |
See “—Net Gains on Investments” below for additional details on our net gains (losses) on investments, including the years ended December 31, 2018, 2017changes in the allowance for credit losses on fixed-maturities available for sale and 2016, there were no other-than-temporary impairment losses recognized in accumulated other comprehensive income (loss) for those periods.
For the year ended December 31, 2018, we recorded other-than-temporary impairment losses in earnings of $1.7 millionimpairments due to our intent to sell certain: (i) corporate bonds and notes and (ii) state and municipal obligations, each with an amortized cost basis greater than their fair value. While we recognized other-than-temporary impairment losses related to our intent to sell securities, there were no credit-related other-than-temporary impairment losses recognized in earnings during the year ended December 31, 2018.
For the year ended December 31, 2017, we recorded other-than-temporary impairment losses in earnings of $1.4 million. These losses comprised $0.4 million due to our intent to sell certain corporate bonds at a loss and $1.0 million due to credit deterioration, which included $0.5 million related to a convertible note of a non-public company issuer included in debt securities and $0.5 million related to a privately-placed equity security.
For the year ended December 31, 2016, we recorded other-than-temporary impairment losses in earnings of $0.5 million due to our intent to sell certain corporate bonds at a loss. While we recognized other-than-temporary impairment losses related to our intent to sell securities in earnings, there were no credit-related other-than-temporary impairment losses recognized in earnings during the year ended December 31, 2016.
Trading Securities
The trading securities withinan unrealized loss position. See Note 2 for a discussion of our investment portfolio, which are recorded at fair value, consisted of the following as of the dates indicated:accounting policy for impairments.
|
| | | | | | | | |
| | December 31, | |
| (In thousands) | 2018 | | 2017 | |
| Trading securities: | | | | |
| State and municipal obligations | $ | 168,359 |
| | $ | 214,841 |
| |
| Corporate bonds and notes | 228,151 |
| | 307,271 |
| |
| RMBS | 21,083 |
| | 29,520 |
| |
| CMBS | 51,478 |
| | 50,561 |
| |
| Foreign government and agency securities | — |
| | 4,241 |
| |
| Total | $ | 469,071 |
|
| $ | 606,434 |
| (1) |
______________________
| |
(1) | At December 31, 2017, includes a de minimis amount of loaned securities under securities lending agreements that are classified as other assets in our consolidated balance sheets, as further described below. |
Securities Lending Agreements
During the third quarter of 2017, we commenced participationWe participate in a securities lending program whereby we loan certain securities in our investment portfolio to Borrowersthird-party borrowers for short periods of time. These securities lending agreements are collateralized financing arrangements whereby we transfer securities to third parties through an intermediary in exchange for cash or other securities. However, pursuant to the terms of these agreements, we maintain effective control over all loaned securities. Although we report such securities at fair value within other assets in our consolidated balance sheets, rather than in investments, the detailed information provided in this Note includes these securities. See Notes 2 andNote 9 for additional information.
Under our securities lending agreements, the Borrowerborrower is required to provide to us collateral, consisting of cash or securities, in amounts generally equal to or exceedingexceeding: (i) 102% of the value of the loaned securities (105% in the case of foreign securities) or (ii) another agreed-upon percentage not less than 100% of the market value of the loaned securities. Any cash collateral we receive may be invested in liquid assets.
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
The Borrower generally may return Cash collateral, which is reinvested for our benefit by the loanedintermediary in accordance with the investment guidelines contained in the securities to us at any time, which would require uslending and collateral agreements, is reflected in short-term investments, with an offsetting liability recognized in other liabilities for the obligation to return the cash collateral. Securities collateral within the standard settlement periodwe receive is held on deposit for the loanedborrower’s benefit and we may not transfer or loan such securities collateral unless the borrower is in default. Therefore, such securities collateral is not reflected in our consolidated financial statements given that the risks and rewards of ownership are not transferred to us from the borrowers.
Fees received and paid in connection with securities lending agreements are recorded in net investment income and interest expense, respectively, on the principal exchange or market in which the securities are traded. We manage this liquidity risk associated with cash collateral by maintaining the cash collateral in a short-term money-market fund with daily availability. The credit risk under these programs is reduced by the amountsconsolidated statements of collateral received. On a daily basis, the valueoperations.
All of the underlying securities that we have loaned to the Borrowers is compared to the value of cash and securities collateral we received from the Borrowers, and additional cash or securities are requested or returned, as applicable. In addition, we are indemnified against counterparty credit risk by the intermediary.
Key balances related to our securities lending agreements atare classified as overnight and revolving. Securities collateral on deposit with us from third-party borrowers totaling $57.8 million and $43.3 million as of December 31, 2018, consisted of2021 and December 31, 2020, respectively, may not be transferred or re-pledged unless the following:third-party borrower is in default, and is therefore not reflected in our consolidated financial statements.
|
| | | | | | | |
| (In thousands) | December 31, 2018 | | December 31, 2017 |
Loaned securities: (1) | | | |
| U.S. government and agency securities | $ | 9,987 |
| | $ | — |
|
| Corporate bonds and notes | 7,818 |
| | 13,862 |
|
| Foreign government and agency securities | — |
| | 867 |
|
| Equity securities | 10,055 |
| | 13,235 |
|
| Total loaned securities, at fair value | $ | 27,860 |
| | $ | 27,964 |
|
| | | | |
| Total loaned securities, at amortized cost | $ | 28,992 |
| | 27,846 |
|
Securities collateral on deposit from Borrowers (2) | 16,815 |
| | 9,342 |
|
Reinvested cash collateral, at estimated fair value (3) | 11,699 |
| | 19,357 |
|
______________________
| | | | | |
(1)
| Our securities loaned under securities lending agreements are reported at fair value within other assets in our consolidated balance sheets. All of our securities lending agreements are classified as overnight
Radian Group Inc. and revolving. None of the amounts are subjectSubsidiaries Notes to offsetting.Consolidated Financial Statements |
| |
(2) | Securities collateral on deposit with us from Borrowers may not be transferred or re-pledged unless the Borrower is in default, and is therefore not reflected in our consolidated financial statements. |
| |
(3) | All cash collateral received has been reinvested in accordance with the securities lending agreements and is included in short-term investments in our consolidated balance sheets. Amounts payable on the return of cash collateral under securities lending agreements are included within other liabilities in our consolidated balance sheets. |
Net Investment Income
Net investment income consisted of:of the following.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 | | 2016 |
| Investment income: | | | | | |
| Fixed-maturities | $ | 141,552 |
| | $ | 122,890 |
| | $ | 115,880 |
|
| Equity securities | 7,157 |
| | 4,318 |
| | 86 |
|
| Short-term investments | 10,270 |
| | 5,453 |
| | 3,086 |
|
| Other | 976 |
| | 987 |
| | 1,161 |
|
| Gross investment income | 159,955 |
| | 133,648 |
| | 120,213 |
|
| Investment expenses | (7,480 | ) | | (6,400 | ) | | (6,747 | ) |
| Net investment income | $ | 152,475 |
| | $ | 127,248 |
| | $ | 113,466 |
|
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | | | | |
| Net investment income | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Investment income | | | | | | |
| Fixed-maturities | | $ | 145,613 | | | $ | 148,127 | | | $ | 155,104 | |
| Equity securities | | 8,158 | | | 6,378 | | | 7,028 | |
| Short-term investments | | 817 | | | 5,774 | | | 17,255 | |
| Other | | 368 | | | 354 | | | 545 | |
| Gross investment income | | 154,956 | | | 160,633 | | | 179,932 | |
| Investment expenses | | (7,047) | | | (6,596) | | | (8,136) | |
| Net investment income | | $ | 147,909 | | | $ | 154,037 | | | $ | 171,796 | |
Net Gains (Losses) on Investments and Other Financial Instruments
Net realized and unrealized gains (losses), including impairment losses, on investments and other financial instruments consisted of:of the following.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2018 |
| 2017 |
| 2016 |
| Net realized gains (losses) on investments: | | | | | |
Fixed-maturities available for sale (1) | $ | (11,256 | ) | | $ | (3,014 | ) | | $ | 4,160 |
|
| Trading securities | (1,840 | ) | | (5,995 | ) | | (237 | ) |
| Equity securities | 532 |
| | 368 |
| | (170 | ) |
| Short-term investments | (10 | ) | | (16 | ) | | (135 | ) |
| Other invested assets | 414 |
| | 22 |
| | 631 |
|
| Other gains (losses) | 66 |
| | 32 |
| | 64 |
|
| Net realized gains (losses) on investments | (12,094 | ) | | (8,603 | ) | | 4,313 |
|
| Other-than-temporary impairment losses | (1,744 | ) | | (1,420 | ) | | (526 | ) |
Net unrealized gains (losses) on investment securities (2) | (27,287 | ) | | 13,230 |
| | 27,217 |
|
| Total net gains (losses) on investments | (41,125 | ) | | 3,207 |
| | 31,004 |
|
| Net gains (losses) on other financial instruments | (1,351 | ) | | 414 |
| | (253 | ) |
| Net gains (losses) on investments and other financial instruments | $ | (42,476 | ) | | $ | 3,621 |
| | $ | 30,751 |
|
______________________ | | | | | | | | | | | | | | | | | | | | | |
| Net gains on investments | | | | | | | |
| | | | | | | |
| | Years Ended December 31, | |
| (In thousands) | | 2021 |
| 2020 |
| 2019 | |
| Net realized gains (losses) | | | | | | | |
Fixed-maturities available for sale (1) | | $ | 5,661 | | | $ | 34,869 | | | $ | 11,262 | | |
| Trading securities | | 390 | | | 4 | | | (303) | | |
| Equity securities | | 10,820 | | | 353 | | | (719) | | |
| Other investments | | 3,971 | | | 600 | | | 603 | | |
| Net realized gains on investments | | 20,842 | | | 35,826 | | | 10,843 | | |
| Impairment losses due to intent to sell | | — | | | (1,401) | | | — | | |
| Net decrease (increase) in expected credit losses | | 918 | | | (1,254) | | | — | | |
| Net unrealized gains (losses) on investments | | (4,661) | | | 10,960 | | | 33,220 | | |
| Total net gains on investments | | $ | 17,099 | | | $ | 44,131 | | | $ | 44,063 | | |
(1)Components of net realized gains (losses) on fixed-maturities available for sale include: |
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 | | 2016 |
| Gross investment gains from sales and redemptions | $ | 1,986 |
| | $ | 6,052 |
| | $ | 10,326 |
|
| Gross investment losses from sales and redemptions | (13,242 | ) | | (9,066 | ) | | (6,166 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Gross investment gains from sales and redemptions | | $ | 22,766 | | | $ | 37,431 | | | $ | 17,663 | |
| Gross investment losses from sales and redemptions | | (17,105) | | | (2,562) | | | (6,401) | |
| | | | | |
(2)
| These amounts include unrealized gains (losses) on investment securities other than securities available for sale. For 2017
Radian Group Inc. and 2016, the unrealized gains (losses) on investments exclude the net change in unrealized gains and losses on equity securities. PriorSubsidiaries Notes to the implementation of the update to the standard for the accounting of financial instruments effective January 1, 2018, the unrealized gains (losses) associated with equity securities were classified in accumulated other comprehensive income.Consolidated Financial Statements |
Net Unrealized Gains (Losses) on Investment Securities
For each period indicated, theThe net changechanges in unrealized gains (losses) on investment securities shown below represents a component of net gains (losses)recognized in earnings on investments and other financial instruments. The net change in unrealized gains (losses) on trading securities and equity securities that were still held at each period endperiod-end were as follows:follows.
| | | | | | | | | | | | | | | | | | | | |
| Net changes in unrealized gains (losses) on investments still held | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Net unrealized gains (losses) on investments still held | | | | | | |
| Trading securities | | $ | (7,330) | | | $ | 10,583 | | | $ | 16,346 | |
| Equity securities | | 10,210 | | | 1,759 | | | 11,906 | |
| Other investments | | 1,173 | | | 248 | | | (174) | |
| Net unrealized gains (losses) on investments still held | | $ | 4,053 | | | $ | 12,590 | | | $ | 28,078 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 | | 2016 |
| Net changes in unrealized gains (losses): | | | | | |
| Trading securities | $ | (16,462 | ) | | $ | 8,827 |
| | $ | 16,850 |
|
Equity securities (1) | (8,886 | ) | | — |
| | — |
|
| Net changes in unrealized gains (losses) on investment securities | $ | (25,348 | ) | | $ | 8,827 |
| | $ | 16,850 |
|
______________________
| |
(1) | Prior to the implementation of the update to the standard for the accounting of financial instruments effective January 1, 2018, the unrealized losses associated with equity securities were classified in accumulated other comprehensive income. |
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
Change in Unrealized Gains (Losses) Recorded in Accumulated Other Comprehensive Income (Loss)
The change in unrealized gains (losses) recorded in accumulated other comprehensive income (loss) consisted of the following:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 | | 2016 |
| Fixed-maturities: | | | | | |
| Unrealized holding gains (losses) arising during the period, net of tax | $ | (97,356 | ) | | $ | 32,147 |
| | $ | 8,822 |
|
| Less reclassification adjustment for net gains (losses) included in net income (loss), net of tax | (10,270 | ) | | (2,556 | ) | | 2,361 |
|
| Net unrealized gains (losses) on investments, net of tax | $ | (87,086 | ) | | $ | 34,703 |
| | $ | 6,461 |
|
| | | | | | |
Equities (1): | |
| | |
| | |
|
| Unrealized holding gains (losses) arising during the period, net of tax | $ | — |
| | $ | (244 | ) | | $ | (40 | ) |
| Less reclassification adjustment for net gains (losses) included in net income (loss), net of tax | — |
| | (86 | ) | | (110 | ) |
| Net unrealized gains (losses) on investments, net of tax | $ | — |
| | $ | (158 | ) | | $ | 70 |
|
______________________
| |
(1) | Prior to our implementation of the update to the standard for the accounting of financial instruments effective January 1, 2018, the unrealized losses associated with equity securities were classified in accumulated other comprehensive income. Effective January 1, 2018, we measure our equity investments at fair value, with changes in fair value recognized in net income. |
Contractual Maturities
The contractual maturities of fixed-maturity investmentsfixed-maturities available for sale were as follows:follows.
| | | | | | | | | | | | | | |
| Contractual maturities of fixed-maturities available for sale | | | | |
| | | | |
| | December 31, 2021 |
| (In thousands) | | Amortized Cost | | Fair Value |
| Due in one year or less | | $ | 182,884 | | | $ | 183,770 | |
Due after one year through five years (1) | | 1,116,102 | | | 1,150,676 | |
Due after five years through 10 years (1) | | 1,191,992 | | | 1,228,959 | |
Due after 10 years (1) | | 765,565 | | | 816,720 | |
Asset-backed and mortgage-backed securities (2) | | 2,174,355 | | | 2,202,564 | |
| Total | | 5,430,898 | | | 5,582,689 | |
| Less: loaned securities | | 63,169 | | | 65,611 | |
| Total fixed-maturities available for sale | | $ | 5,367,729 | | | $ | 5,517,078 | |
|
| | | | | | | |
| | December 31, 2018 |
| (In thousands) | Amortized
Cost | | Fair
Value |
| Due in one year or less | $ | 56,350 |
| | $ | 56,067 |
|
Due after one year through five years (1) | 933,807 |
| | 920,173 |
|
Due after five years through ten years (1) | 1,142,145 |
| | 1,107,129 |
|
Due after ten years (1) | 379,972 |
| | 368,899 |
|
RMBS (2) | 334,843 |
| | 332,142 |
|
CMBS (2) | 546,729 |
| | 539,915 |
|
Other ABS (2) | 712,748 |
| | 704,662 |
|
Total (3) | $ | 4,106,594 |
| | $ | 4,028,987 |
|
______________________(2)Includes RMBS, CMBS, CLO, Other ABS and mortgage insurance-linked notes, which are not due at a single maturity date.
| |
(1) | Actual maturities may differ as a result of calls before scheduled maturity. |
| |
(2) | RMBS, CMBS, and Other ABS are shown separately, as they are not due at a single maturity date. |
| |
(3) | Available for sale includes securities loaned under securities lending agreements with a fair value of $7.4 million. |
Other
As of December 31, 2018 and 2017, our investment portfolio included no securities of countries that have obligations that have been under particular stress due to economic uncertainty, potential restructuring and ratings downgrades.
For the years ended December 31, 2018, 20172021, 2020 and 2016, we did not sell or transfer any fixed-maturity investments classified as held to maturity. For the years ended December 31, 2018, 2017 and 2016,2019, we did not transfer any securities to or from the available for sale or trading categories.
As of December 31, 2018, we did not have any investment in any person (including affiliates thereof) that exceeded 10% of our total stockholders’ equity.
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
As of December 31, 2018, Radian had an aggregate amount of $88.4 million of U.S. government and agency securities and RMBS, classified asOur fixed-maturities available for sale within our investmentinclude securities portfolio,totaling $14.3 million and $16.9 million at December 31, 2021 and 2020, respectively, on deposit and serving as collateral with various state regulatory authorities. Our fixed-maturities available for sale and trading securities also include securities serving as collateral for our FHLB advances. There were no FHLB advances outstanding at December 31, 2017. See Note 1312 for additional information.information about our FHLB advances.
Our investments include securities on deposit with various state insurance commissioners of $17.6 million and $11.8 million at December 31, 2018 and 2017, respectively.
7. Goodwill and Other Acquired Intangible Assets, Net
All of our goodwill and other acquired intangible assets relate to our Serviceshomegenius segment. The following table shows the changes in the carrying amountThere was no change to our goodwill balance of goodwill as of and for$9.8 million during the years ended December 31, 20182021 and 2017:
|
| | | | | | | | | | | |
| (In thousands) | Goodwill | | Accumulated Impairment Losses | | Net |
| Balance at December 31, 2016 | $ | 197,265 |
| | $ | (2,095 | ) | | $ | 195,170 |
|
| Goodwill acquired | 126 |
| | — |
| | 126 |
|
| Impairment losses | — |
| | (184,374 | ) | | (184,374 | ) |
| Balance at December 31, 2017 | 197,391 |
| | (186,469 | ) | | 10,922 |
|
| Goodwill acquired | 3,170 |
| | — |
| | 3,170 |
|
| Balance at December 31, 2018 | $ | 200,561 |
| | $ | (186,469 | ) | | $ | 14,092 |
|
The following is a summary of the gross and net carrying amounts and accumulated amortization (including impairment) of our other acquired intangible assets as of the periods indicated:indicated.
|
| | | | | | | | | | | |
| | December 31, 2018 |
| (In thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Client relationships | $ | 84,000 |
| | $ | (48,227 | ) | (1) | $ | 35,773 |
|
| Technology | 17,362 |
| | (13,141 | ) | (2) | 4,221 |
|
| Trade name and trademarks | 8,340 |
| | (3,864 | ) | | 4,476 |
|
| Non-competition agreements | 185 |
| | (177 | ) | | 8 |
|
| Licenses | 463 |
| | (35 | ) | | 428 |
|
| Total | $ | 110,350 |
| | $ | (65,444 | ) | | $ | 44,906 |
|
|
| | | | | | | | | | | |
| | December 31, 2017 |
| (In thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Client relationships | $ | 82,530 |
| | $ | (41,596 | ) | (1) | $ | 40,934 |
|
| Technology | 15,250 |
| | (8,922 | ) | (2) | 6,328 |
|
| Trade name and trademarks | 8,340 |
| | (3,003 | ) | | 5,337 |
|
| Client backlog | 6,680 |
| | (6,006 | ) | | 674 |
|
| Non-competition agreements | 185 |
| | (168 | ) | | 17 |
|
| Total | $ | 112,985 |
| | $ | (59,695 | ) | | $ | 53,290 |
|
______________________
| | | | | |
(1)
| Includes an impairment charge of $14.9 million in the quarter ended June 30, 2017.
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
| |
(2) | Includes an impairment charge of $0.9 million in the quarter ended June 30, 2017. |
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other acquired intangible assets |
| | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| (In thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Client relationships | | $ | 43,550 | | | $ | (34,620) | | | $ | 8,930 | | | $ | 43,550 | | | $ | (31,559) | | | $ | 11,991 | |
| Technology | | 8,285 | | | (7,675) | | | 610 | | | 8,285 | | | (7,370) | | | 915 | |
| Licenses | | 463 | | | (212) | | | 251 | | | 463 | | | (128) | | | 335 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Total | | $ | 52,298 | | | $ | (42,507) | | | $ | 9,791 | | | $ | 52,298 | | | $ | (39,057) | | | $ | 13,241 | |
For the years ended December 31, 2018, 20172021, 2020 and 2016,2019, amortization expense (including impairment) was $12.4$3.4 million, $11.8$5.1 million and $13.2$8.6 million, respectively. The estimated aggregateamortization expense for 20192022 and thereafter is as follows:follows.
|
| | | |
| (In thousands) | |
| 2019 | $ | 8,688 |
|
| 2020 | 7,321 |
|
| 2021 | 5,907 |
|
| 2022 | 5,375 |
|
| 2023 | 4,923 |
|
| Thereafter | 12,692 |
|
| Total | $ | 44,906 |
|
Accounting Policy Considerations
Goodwill is an asset representing the estimated future economic benefits arising from the assets we have acquired that are not individually identified and separately recognized, and includes the value of the discounted expected future cash flows from these businesses, the workforce, expected synergies with our other affiliates and other unidentifiable intangible assets. Goodwill is deemed to have an indefinite useful life and is subject to review for impairment annually, or more frequently, whenever events and circumstances indicate potential impairment.
In the second quarter of 2017, we elected to early adopt the update to the accounting standard regarding goodwill and other intangibles, as discussed in Note 2. In accordance with the updated standard, our goodwill impairment test is a two-step process. Step one compares a reporting unit’s estimated fair value to its carrying value. If the carrying amount exceeds the estimated fair value, the second step must be completed to measure the amount of the reporting unit’s goodwill impairment loss, if any. Any excess of the reporting unit’s carrying amount over its estimated fair value is recognized as an impairment charge, up to the full amount of the goodwill allocated to the reporting unit, after adjusting the carrying value for any impairment of other intangibles or long-lived assets. For purposes of performing our goodwill impairment test, we have concluded that the Services segment constitutes one reporting unit to which all of our recorded goodwill is related.
We generally perform our annual goodwill impairment test during the fourth quarter of each year, using balances as of the prior quarter. However, if there are events and circumstances that indicate that it is more likely than not that the fair value of a reporting unit is less than the carrying amount, we will perform additional analysis on an interim basis. As part of our goodwill impairment assessment, we estimate the fair value of the reporting unit using primarily an income approach and, at a lower weighting, a market approach. The key driver in our fair value analysis is forecasted future cash flows.
For financial reporting purposes, other acquired intangible assets with finite lives will be amortized over their applicable estimated useful lives in a manner that approximates the pattern of expected economic benefit from each intangible asset, as follows:
|
| | | |
| Estimated Useful Life |
Client relationships | 5 years | - | 15 years |
Technology | 3 years | - | 8 years |
Trade name and trademarks | 6 years | - | 10 years |
Licenses | 10 years | | |
Non-competition agreements | 2 years | - | 3 years |
For additional information on our accounting policies for goodwill and other acquired intangible assets, see Note 2. | | | | | | | | |
| Estimated amortization expense | | |
| | |
| (In thousands) | | Estimated Amortization Expense |
| 2022 | | $ | 3,397 | |
| 2023 | | 3,361 | |
| 2024 | | 3,033 | |
| | |
| | |
| Thereafter | | — | |
| Total | | $ | 9,791 | |
Impairment Analysis
2018 Activity
Goodwill. We conducted our annual goodwill impairment analysis in the fourth quarter of 2018. Although the goodwill associated with our fourth quarter 2018 acquisitions is included in our goodwill as of December 31, 2018, these recent acquisitions were excluded from our impairment analysis as of the measurement date.
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
As part of our 2021 annual goodwill impairment assessment in 2018,performed during the fourth quarter, we estimated the fair value of the reporting unit using primarily an income approach and, to a lesser extent, a market approach. The key factor in our fair value analysis was forecasted future cash flows, which were less than originally had been expected at the acquisition date.flows. We considered both positive and negative factors and concluded that, after considering all of the factors and evidence available, there iswas no impairment of goodwill indicated as of December 31, 2018the measurement date because the estimated fair value of the reporting unit exceeded our carrying amount.
Other Acquired Intangible Assets. As of December 31, 2018, we also evaluated the recoverability of our other acquired intangible assets. Factors affecting the estimated fair value of our goodwill, as described above, were also considered in estimating the recoverability of our other acquired intangible assets. Based on our analysis, Additionally, there was no impairment indicated for other acquired intangible assets, as the carrying amounts were estimated to be recoverable from future cash flows. As of December 31, 2018, the balance of client relationships and technology includes recently acquired assets from our fourth quarter 2018 acquisitions. These recently acquired assets were excluded from our recoverability analysis.
2017 Activity
Goodwill. We performed an interim goodwill impairment test as of June 30, 2017, due to events and circumstances identified during our June 30, 2017 qualitative analysis that indicated that it was more likely than not that the fair value was less than the carrying amount. We performed our qualitative assessment of goodwill at June 30, 2017, focusing on the impact of certain key factors affecting our Services segment, including: (i) decisions related to changes in the business strategy for our Services segment determined in the second quarter of 2017, following our Chief Executive Officer’s evaluation of both existing products and new product development opportunities and (ii) second quarter 2017 results for our Services segment which were negatively impacted by market trends. Our expectation that these market trends would persist negatively impacted our projected future cash flows compared to the projections used in our prior valuation.
Our Chief Executive Officer joined Radian in March 2017 and initiated a review to evaluate the strategic direction of the Services segment. Based on this strategic review, in the second quarter of 2017, we made several decisions with respect to business strategy for the segment in order to reposition the Services business to drive future growth and profitability. We determined to: (i) discontinue certain initiatives, as discussed below and (ii) shift the strategy of the Services segment to focus on core products and services that, in the current market environment, are expected to have higher growth potential, to produce more predictable, recurring revenue streams over time and to better align with our market expertise and the needs of our customers. Our strategic decisions included an intent to scale back or, in certain cases, discontinue certain planned or existing initiatives, such as discontinuing a new product line which, based on a market study received in the second quarter of 2017, would have required significant additional investment to achieve the growth rates that had been expected. The impact of the strategic decisions determined during the second quarter resulted in a meaningful reduction in the fair value of the Services segment since the previous annual impairment test.
During the second quarter of 2017, the Services segment performed below forecasted levels. In combination with the recent underperformance of the Services segment, the anticipated business and growth opportunities for certain business lines in our Services segment had been impacted by: (i) market demand, which was lower than anticipated; (ii) increased competition, including with respect to product alternatives and pricing; and (iii) delays in the realization of efficiencies and margin improvements associated with certain technology initiatives. The demand for certain products and services had decreased due to several factors. Given the decreased volume of refinancings in the mortgage market that began in the first half of 2017, our customers had excess internal capacity which they were choosing to utilize and as a result they were less reliant on outsourcing to us. Additionally, due to market and competitive pressures, we renewed the contract terms with one of our largest customers during the second quarter of 2017, with lower pricing and volumes than expected in order to retain the engagement. We also experienced lower than expected customer acceptance for certain of our current and proposed products and services. The impact of these factors, partially offset by related future expense reductions, constituted a majority of the decline in the fair value of the Services segment since the previous annual impairment test.
Our quantitative valuation analysis, performed in connection with our annual goodwill impairment analysis in 2016, relied heavily on achieving the growth rates in our projected future cash flows. The impact of the market trends observed during the second quarter of 2017, which we expected to continue, together with our strategic decisions discussed above, resulted in changes to our expected product mix and the expected growth rates associated with various initiatives, which in turn generated material reductions to our forecasted net cash flows. Given the significant negative impact that the market trends and our strategic decisions would have on the timing and amount of our projected future cash flows in comparison to our original projections, we performed a quantitative analysis of the associated goodwill and other acquired intangible assets as of June 30, 2017.
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
As a result of the quantitative goodwill analysis, we recorded an impairment charge of $184.4 million for the three months ended June 30, 2017, to reduce the carrying amount of the Services segment to its estimated fair value. As discussed further below, prior to finalizing this amount, we also evaluated the recoverability of the segment’s other acquired intangible assets and recorded impairment charges of $15.8 million related to the Services segment’s other acquired intangible assets. See “—Other Acquired Intangible Assets,” below. Substantially all of our goodwill and other acquired intangible assets will continue to be deductible for tax purposes in accordance with the originally scheduled amortization period of approximately 15 years.
During the fourth quarter of 2017, we elected to perform a qualitative annual goodwill impairment analysis, which requires us to assess all relevant events and circumstances that could affect the significant inputs used to determine the fair value of the reporting unit. We considered factors such as: (i) the increase in and timing of revenues during the third and fourth quarters of 2017 (as compared to the forecasted amounts for the same periods); (ii) the impact to projected cash flows, a significant input used to determine the fair value of the reporting unit, associated with the TCJA enacted in the fourth quarter of 2017; (iii) our recent interim goodwill impairment test and recognition of impairment charges; and (iv) the recent sale of a business line. Based on our qualitative assessment in the fourth quarter of 2017, we concluded that it was not “more likely than not” that the fair value of the Services reporting unit was less than its carrying amount as of December 31, 2017.
Other Acquired Intangible Assets. As of June 30, 2017, we evaluated the recoverability of our other acquired intangible assets. Factors affecting the estimated fair value of our goodwill, as described above, also affected the estimated recoverability of our other acquired intangible assets. Based on our analysis in the second quarter of 2017, impairment was indicated for the Services segment’s client relationships and technology, related to certain product lines that were affected by the factors above. There was no impairment indicated for the remaining other acquired intangible assets as of December 31, 2021.
Based primarily on the remaining carrying amounts were estimatedwind down of our traditional appraisal business in the fourth quarter of 2020, we recognized impairments of $1.0 million and $0.3 million related to be recoverable despite the decline in projected earnings.
Client relationships represent the value of the specifically acquired customerclient relationships and are valued usingtechnology, respectively, as of December 31, 2020.
In January 2020, we completed the excess earnings approach using estimated client revenues, attrition rates, implied royalty ratessale of Clayton, through which we provided mortgage services related to loan acquisition, RMBS securitization and discount rates. The excess earnings approach estimates the present value of expected earnings in excess of a traditional return on business assets. For the three months ended June 30, 2017, we recordeddistressed asset reviews and servicer and loan surveillance services. We recognized an impairment charge of $14.9$4.8 million relatedfor goodwill allocated to the segment’s client relationships, primarily due to the changes in estimated client revenues based on the factors discussed above. The remaining carrying value of client relationships is supported by projected earnings.
For the three months ended June 30, 2017, we also recordedClayton asset group and an impairment charge of $0.9other acquired intangible assets for $13.7 million related to technology, representing the estimated unrecoverable valueas of a portion of the acquired proprietary software used to provide services in a product line impacted by the factors described above. The remaining carrying value of technology was supported by technology that we expected to continue to use in its current form, in either the same or an alternative capacity.December 31, 2019.
8. Reinsurance
In our mortgage insurance business,and title insurance businesses, we use reinsurance as part of our risk distribution strategy, including to manage our capital position and risk profile. Premiums areThe reinsurance arrangements for our mortgage insurance business include premiums ceded under the QSR Program, the Single Premium QSR Program the QSR Program and the Excess-of-Loss Program.
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
The effect of all of our reinsurance programs on our net income is as follows.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reinsurance impacts on net premiums written and earned | |
| | | | | | | | | | | | | |
| | Net Premiums Written | | Net Premiums Earned | |
| | Years Ended December 31, | | Years Ended December 31, | |
| (In thousands) | | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 | |
| Direct | | | | | | | | | | | | | |
| Mortgage insurance | | $ | 984,995 | | | $ | 1,085,670 | | | $ | 1,120,996 | | | $ | 1,104,696 | | | $ | 1,263,684 | | | $ | 1,233,528 | | (1) |
| Title insurance | | 39,665 | | | 22,843 | | | 11,342 | | | 39,665 | | | 22,843 | | | 11,342 | | |
| Total direct | | 1,024,660 | | | 1,108,513 | | | 1,132,338 | | | 1,144,361 | | | 1,286,527 | | | 1,244,870 | | (1) |
Assumed (2) | | | | | | | | | | | | | |
| Mortgage insurance | | 7,066 | | | 12,197 | | | 10,379 | | | 7,066 | | | 12,214 | | | 10,382 | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Ceded | | | | | | | | | | | | | |
Mortgage insurance (3) | | (47,515) | | | (86,912) | | | (55,925) | | | (113,480) | | | (183,131) | | | (109,696) | | (1) |
| Title insurance | | (764) | | | (289) | | | (207) | | | (764) | | | (289) | | | (207) | | |
Total ceded (3) | | (48,279) | | | (87,201) | | | (56,132) | | | (114,244) | | | (183,420) | | | (109,903) | | (1) |
| Total net premiums | | $ | 983,447 | | | $ | 1,033,509 | | | $ | 1,086,585 | | | $ | 1,037,183 | | | 1,115,321 | | | $ | 1,145,349 | | (1) |
(1)Includes a cumulative adjustment to unearned premiums related to an update to the amortization rates used to recognize revenue for Single Premium Policies. See Note 2 for further information.
(2)Primarily includes premiums from our participation in certain credit risk transfer programs.
(3)Net of profit commission, which is impacted by the level of ceded losses recoverable, if any, on reinsurance transactions. See Note 11 for additional information on our reserve for losses and reinsurance recoverables.
| | | | | | | | | | | | | | | | | | | | |
| Other reinsurance impacts | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
Ceding commissions earned (1) | | $ | 31,745 | | | $ | 53,654 | | | $ | 48,659 | |
Ceded losses (2) | | (4,570) | | | 58,266 | | | 5,859 | |
(1)Ceding commissions earned are primarily related to mortgage insurance net premiums written and earned isare included as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 | | 2016 |
| Net premiums written—insurance: | | | | | |
| Direct | $ | 1,082,285 |
| | $ | 1,032,735 |
| | $ | 1,000,111 |
|
| Assumed | 6,901 |
| (1) | 25 |
| | 29 |
|
Ceded (2) | (98,165 | ) | | (214,343 | ) | | (266,306 | ) |
| Net premiums written—insurance | $ | 991,021 |
| | $ | 818,417 |
| | $ | 733,834 |
|
| Net premiums earned—insurance: | | | | | |
| Direct | $ | 1,066,864 |
| | $ | 990,016 |
|
| $ | 999,093 |
|
| Assumed | 6,904 |
| (1) | 28 |
|
| 35 |
|
Ceded (2) | (67,047 | ) | | (57,271 | ) | | (77,359 | ) |
| Net premiums earned—insurance | $ | 1,006,721 |
| | $ | 932,773 |
| | $ | 921,769 |
|
______________________
| |
(1) | Includes premiums earned from our participation in certain Front-end and Back-end credit risk transfer programs.(2)Primarily all related to mortgage insurance.
|
| |
(2) | Net of profit commission. |
Single Premium QSR Program
2016 Single Premium QSR Agreement. In the first quarter of 2016, in order to proactively manage the risk and return profile of Radian Guaranty’s insured portfolio and continue managing its capital position under the PMIERs financial requirements in a cost-effective manner, Radian Guaranty entered into each of the 2016 Single Premium QSR Agreement, with a panel of third-party reinsurers. Under the 20162018 Single Premium QSR Agreement effective January 1, 2016, Radian Guaranty began ceding the followingand 2020 Single Premium IIF andQSR Agreement with panels of third-party reinsurers to cede a contractual quota share percent of our Single Premium NIW as of the effective date of each agreement (as set forth in the table below), subject to certain conditions:
20% of its existing performing Single Premium Policies written between January 1, 2012 and March 31, 2013;
35% of its existing performing Single Premium Policies written between April 1, 2013 and December 31, 2015; and
35% of its Single Premium NIW from January 1, 2016 to December 31, 2017, subject to a limitation on ceded premiums written equal to $195 million for policies issued between January 1, 2016 and December 31, 2017.
conditions. Radian Guaranty receives a 25% ceding commission for ceded premiums cededwritten pursuant to this transaction.these transactions. Radian Guaranty also receives a profit commission annually, provided that the loss ratio on the loans covered under the agreement generally remains below 55%.the applicable prescribed thresholds. Losses on the ceded risk aboveup to this level reduce Radian Guaranty’s profit commission on a dollar-for-dollar basis.
The agreementEach of the agreements is subject to a scheduled to terminate on December 31, 2027;termination date as set forth in the table below; however, Radian Guaranty has the option, based on certain conditions and subject to a termination fee, to terminate any of the agreement as of January 1, 2020, oragreements at the end of any calendar quarter thereafter, whichon or after the applicable optional termination date. If Radian Guaranty exercises this option in the future, it would result in Radian Guaranty reassuming the related RIF in exchange for a net payment fromto the reinsurer calculated in accordance with the terms of the applicable agreement. Radian Guaranty also may terminate any of the agreements prior to the applicable scheduled termination date under certain circumstances, including if one or both of the GSEs no longer grant full PMIERs capital relief for the reinsurance.
As of January 1, 2022, Radian Guaranty is no longer ceding NIW under the Single Premium QSR Program.
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
The following table sets forth additional details regarding the Single Premium QSR Program.
| | | | | | | | | | | | | | | | | | | | |
| Single Premium QSR Program | | | | | | |
| | | | | | |
| | 2020 Single Premium QSR Agreement | | 2018 Single Premium QSR Agreement | | 2016 Single Premium QSR Agreement |
| | | | | | |
| NIW policy dates | | Jan 1, 2020-Dec 31, 2021 | | Jan 1, 2018-Dec 31, 2019 | | Jan 1, 2012-Dec 31, 2017 |
| Effective date | | January 1, 2020 | | January 1, 2018 | | January 1, 2016 |
| Scheduled termination date | | December 31, 2031 | | December 31, 2029 | | December 31, 2027 |
| Optional termination date | | January 1, 2024 | | January 1, 2022 | | January 1, 2020 |
| Quota share % | | 65% | | 65% | | 20% - 65% (1) |
| Ceding commission % | | 25% | | 25% | | 25% |
| Profit commission % | | Up to 56% | | Up to 56% | | Up to 55% |
| | | | | | | |
| (In millions) | | As of December 31, 2021 |
| RIF ceded | | $ | 2,198 | | | $ | 1,117 | | | $ | 1,913 | |
| | | | | | | |
| (In millions) | | As of December 31, 2020 |
| RIF ceded | | $ | 1,597 | | | $ | 1,979 | | | $ | 3,071 | |
(1)Effective December 31, 2017, we amended the 2016 Single Premium QSR Agreement to increase the amount of ceded risk on performing loans under the agreement from 35% to 65% for the 2015 through 2017 vintages. As ofLoans included in the effective date, the result of this amendment increased the amount of risk ceded on Single Premium Policies, including for the purposes of calculating2012 through 2014 vintages, and any future ceding commissions and profit commissions that Radian Guaranty will earn. It also increased the future amounts of our ceded premiums and ceded losses. RIF ceded under the 2016 Single Premium QSR Agreement was $6.3 billion as of December 31, 2018, compared to $6.9 billion and $3.8 billion as of December 31, 2017 and 2016, respectively.
2018 Single Premium QSR Agreement. In October 2017, we entered into the 2018 Single Premium QSR Agreement with a panel of third-party reinsurers. Under the 2018 Single Premium QSR Agreement, we expect to cede 65% of our Single Premium NIW beginning with the business written in January 2018, subject to certain conditions that may affect the amount ceded, including a limitation on ceded premiums written equal to $335 million for policies issued between January 1, 2018 and December 31, 2019. Notwithstanding this limitation, the parties may mutually agree to amend the agreement, including with respect to any limitations on the amounts of insurance that may be ceded.
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
Radian Guaranty receives a 25% ceding commission for premiums ceded pursuant to this transaction. Radian Guaranty also receives an annual profit commission based on the performance of theother loans subject to the agreement provided that were delinquent at the loss ratiotime of the amendment, were unaffected by the change and therefore the amount of ceded risk for those loans continues to range from 20% to 35%.
Excess-of-Loss Program
Radian Guaranty has entered into 6 fully collateralized reinsurance arrangements with the Eagle Re Issuers. For the respective coverage periods, Radian Guaranty retains the first-loss layer of aggregate losses, as well as any losses in excess of the outstanding reinsurance coverage amounts. The Eagle Re Issuers provide second layer coverage up to the outstanding coverage amounts. For each of these 6 reinsurance arrangements, the Eagle Re Issuers financed their coverage by issuing mortgage insurance-linked notes to eligible capital markets investors in unregistered private offerings. The aggregate excess-of-loss reinsurance coverage for these arrangements decreases over the maturity period of the mortgage insurance-linked notes (either a 10-year or 12.5-year period depending on the subject loanstransaction) 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 below 56% for that calendar year.canceled. Radian Guaranty may discontinue ceding new policies under the agreement at the end of any calendar quarter.
The agreement is scheduledhas rights to terminate on December 31, 2029. However, Radian Guaranty may terminate this agreement prior to the scheduled date if one or bothreinsurance agreements upon the occurrence of certain events.
Under each of the GSEs no longer grant fullreinsurance agreements, the outstanding reinsurance coverage amount will begin amortizing after an initial period in which a target level of credit for the reinsurance. Radian Guaranty also has the option,enhancement is obtained and will stop amortizing if certain thresholds, or triggers, are reached, including a delinquency trigger event based on certain conditionsan elevated level of delinquencies as defined in the related insurance-linked notes transaction agreements. With the exception of insurance-linked notes issued by Eagle Re 2020-2 Ltd., Eagle Re 2021-1 Ltd. and Eagle Re 2021-2 Ltd., the insurance-linked notes issued by the Eagle Re Issuers in connection with our Excess-of-Loss Program are currently subject to a termination fee,delinquency trigger event, which was first reported to terminate the agreement as of January 1, 2022, or atinsurance-linked note investors on June 25, 2020. For the end of any calendar quarter thereafter. Terminationinsurance-linked notes that are subject to a delinquency trigger event, both the amortization of the agreement would result in Radian Guaranty reassumingoutstanding reinsurance coverage amount pursuant to our reinsurance arrangements with the Eagle Re Issuers and the amortization of the principal amount of the related RIF in exchange for a net payment frominsurance-linked notes issued by the reinsurer calculated in accordance withEagle Re Issuers have been suspended and will continue to be suspended during the termspendency of the agreement. RIF ceded undertrigger event.
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
The following tables set forth additional details regarding the 2018 Single Premium QSR Agreement was $1.9 billionExcess-of-Loss Program as of December 31, 2018.2021 and December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Excess-of-Loss Program |
| | | | | | | | | | | | | | | | | | |
| (In millions) | | Eagle Re 2021-2 Ltd. | | Eagle Re 2021-1 Ltd. | | Eagle Re 2020-2 Ltd. | | Eagle Re 2020-1 Ltd. | | Eagle Re 2019-1 Ltd. | | Eagle Re 2018-1 Ltd. |
| Issued | | November
2021 | | April
2021 | | October
2020 | | February
2020 | | April
2019 | | November
2018 |
| NIW policy dates | | Jan 1, 2021-
Jul 31, 2021 | | Aug 1, 2020-
Dec 31, 2020 | | Oct 1, 2019-
Jul 31, 2020 | | Jan 1, 2019-
Sep 30, 2019 | | Jan 1, 2018-
Dec 31, 2018 | | Jan 1, 2017-
Dec 31, 2017 |
| Initial RIF | | $ | 10,758 | | | | $ | 11,061 | | | | $ | 13,011 | | | | $ | 9,866 | | | | $ | 10,705 | | | | $ | 9,109 | | |
| Initial coverage | | 484 | | | | 498 | | (1) | | 390 | | | | 488 | | | | 562 | | | | 434 | | (2) |
| Initial first layer retention | | 242 | | | | 221 | | | | 423 | | | | 202 | | | | 268 | | | | 205 | | |
| | | | | | | | | | | | | | | | | | |
| (In millions) | | As of December 31, 2021 |
| RIF | | $ | 10,379 | | | | $ | 9,496 | | | | $ | 7,623 | | | | $ | 3,241 | | | | $ | 2,429 | | | | $ | 2,117 | | |
| Remaining coverage | | 484 | | | | 498 | | | | 144 | | | | 488 | | | | 385 | | | | 276 | | |
| First layer retention | | 242 | | | | 221 | | | | 423 | | | | 202 | | | | 264 | | | | 201 | | |
| | | | | | | | | | | | | | | | | | |
| (In millions) | | As of December 31, 2020 |
| RIF | | $ | — | | | | $ | — | | | | $ | 11,748 | | | | $ | 6,121 | | | | $ | 4,657 | | | | $ | 3,986 | | |
| Remaining coverage | | — | | | | — | | | | 390 | | | | 488 | | | | 385 | | | | 276 | | (2) |
| First layer retention | | — | | | | — | | | | 423 | | | | 202 | | | | 265 | | | | 201 | | |
(1)Radian Group purchased $45.4 million original principal amount of these mortgage insurance-linked notes, which are included in fixed-maturities available for sale on our consolidated balance sheet at December 31, 2021. See Notes 5 and 6 for additional information.
(2)Excludes a separate excess-of-loss reinsurance agreement entered into by Radian Guaranty with coverage of $21.4 million. This agreement was terminated in December 2021.
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 assets and liabilities of the Eagle Re Issuers in our 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 for more information on our accounting treatment of VIEs.
The reinsurance premium due to the Eagle Re Issuers is calculated by multiplying the outstanding reinsurance coverage amount at the beginning of a period by a coupon rate, which is the sum of one-month LIBOR (or an acceptable alternative to LIBOR) or SOFR, as applicable, plus a contractual risk margin, and then subtracting actual investment income collected on the assets in the reinsurance trust during the preceding month. As a result, the premiums we pay will vary based on: (i) the spread between LIBOR (or an acceptable alternative to LIBOR) or SOFR, as provided in each applicable reinsurance agreement, and the rates on the investments held by the reinsurance trust and (ii) the outstanding amount of reinsurance coverage.
As the reinsurance premium will vary based on changes in these rates, we concluded that the reinsurance agreements contain embedded derivatives, which we have accounted for separately as freestanding derivatives and recorded in other assets or other liabilities on our consolidated balance sheets. Changes in the fair value of these embedded derivatives are recorded in net gains (losses) on investments and other financial instruments in our consolidated statements of operations. See Note 5 for more information on our fair value measurements of financial instruments, including our embedded derivatives.
In the event an Eagle Re Issuer is unable to meet its future obligations to us, if any, 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) become worthless and the Eagle Re Issuer 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.
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
The Eagle Re Issuers represent our only VIEs as of December 31, 2021 and December 31, 2020. The following table presents the total assets and liabilities of the Eagle Re Issuers as of the dates indicated.
| | | | | | | | | | | | | | |
Total VIE assets and liabilities of Eagle Re Issuers (1) | | | | |
| | | | |
| | December 31, |
| (In thousands) | | 2021 | | 2020 |
| Eagle Re 2021-2 Ltd. | | $ | 484,122 | | | $ | — | |
| Eagle Re 2021-1 Ltd. | | 497,735 | | | — | |
| Eagle Re 2020-2 Ltd. | | 143,986 | | | 390,324 | |
| Eagle Re 2020-1 Ltd. | | 488,385 | | | 488,385 | |
| Eagle Re 2019-1 Ltd. | | 384,602 | | | 384,602 | |
| Eagle Re 2018-1 Ltd. | | 275,718 | | | 275,718 | |
| Total | | $ | 2,274,548 | | | $ | 1,539,029 | |
(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. Assets and liabilities are equal to each other for each of the Eagle Re Issuers.
QSR Program
In 2012, Radian Guaranty entered into the QSR Program with a third-party reinsurance provider. Radian Guaranty has ceded the maximum amount permitted under the QSR Program and is no longer ceding NIW under this program. RIF ceded under the QSR Program was $0.9 billion, $1.2 billion$207.1 million and $1.6 billion$381.8 million as of December 31, 2018, 20172021 and 2016,2020, respectively.
Ceded Premiums, Commissions and Losses
The following tables show the amounts related to the Single Premium QSR Program and the QSR Program for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Single Premium QSR Program | | QSR Program |
| | Year Ended December 31, | | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
Ceded premiums written (1) | $ | 74,876 |
| | $ | 193,517 |
| | $ | 233,206 |
| | $ | 13,486 |
| | $ | 19,356 |
| | $ | 28,097 |
|
Ceded premiums earned (1) | 44,286 |
| | 27,284 |
| | 29,808 |
| | 19,660 |
| | 28,503 |
| | 42,515 |
|
| Ceding commissions written | 29,745 |
| | 55,333 |
| | 66,153 |
| | 3,890 |
| | 5,536 |
| | 8,019 |
|
Ceding commissions earned (2) | 22,097 |
| | 13,774 |
| | 15,303 |
| | 11,349 |
| | 13,122 |
| | 16,573 |
|
| Ceded losses | 4,574 |
| | 2,490 |
| | 2,262 |
| | 512 |
| | 771 |
| | 1,858 |
|
______________________
| |
(1) | Net of profit commission. |
| |
(2) | Includes amounts reported in policy acquisition costs and other operating expenses. |
Excess-of-Loss Program
In November 2018, Radian Guaranty entered into a fully collateralized reinsurance agreement with Eagle Re, an unaffiliated special purpose reinsurer domiciled in Bermuda. This reinsurance agreement provides for up to $434.0 million of aggregate excess-of-loss reinsurance coverage for the applicable percentage of mortgage insurance losses on new defaults on an existing portfolio of eligible Monthly Premium Policies issued between January 1, 2017 and January 1, 2018, with an initial RIF of $9.1 billion. In addition, Radian Guaranty entered into a separate excess-of-loss reinsurance agreement for up to $21.4 million of coverage, representing a pro rata share of the credit risk alongside the risk assumed by Eagle Re on those Monthly Premium Policies.
Radian Guaranty and its affiliates have retained the first-loss layer of $204.9 million of aggregate losses. Eagle Re and a separate third-party reinsurer provide 90% and 10% coverage, respectively, on the mezzanine layer of up to $214.1 million of losses (in excess of the retained losses of $204.9 million). Eagle Re also provides 100% coverage on the next layer of $241.4 million of aggregate losses. Radian Guaranty and its affiliates will then retain losses in excess of the outstanding reinsurance coverage amount. The aggregate excess of loss reinsurance coverage decreases over a ten-year period as the principal balances of the underlying covered mortgages decrease and as claims are paid by Eagle Re. The outstanding reinsurance coverage amount will stop amortizing if certain thresholds are reached, such as if the reinsured mortgages were to experience an elevated level of delinquencies or certain credit enhancement tests were not maintained. Radian Guaranty has rights to terminate the reinsurance agreement upon the occurrence of certain events, including an option to terminate on or after November 25, 2023.
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
Eagle Re financed its coverage by issuing mortgage insurance-linked notes in an aggregate amount of $434.0 million to unaffiliated investors. The notes mature on November 25, 2028, but are subject to earlier termination by Eagle Re, upon Radian Guaranty’s exercise of its rights to terminate the reinsurance agreement. The notes are non-recourse to any assets of Radian Guaranty or its affiliates. The proceeds of the notes have been deposited into a reinsurance trust account for the benefit of Radian Guaranty, and are required to be the source of reinsurance claim payments to Radian Guaranty and principal repayments on the mortgage insurance-linked notes. Funds in the reinsurance trust account are required to be invested in U.S. government money market funds, cash or U.S. Treasury securities at all times.
The reinsurance premium due to Eagle Re is calculated by multiplying the outstanding reinsurance coverage amount at the beginning of a period by a coupon rate, which is the sum of one-month LIBOR plus a contractual risk margin, and then subtracting actual investment income collected on the assets in the reinsurance trust during the preceding month. As a result, the premiums we pay will vary based on (i) the spread between LIBOR and the rates on the investments held by the reinsurance trust and (ii) the outstanding amount of reinsurance coverage. Radian Guaranty will also pay an additional annual premium to reimburse Eagle Re for expenses in connection with the issuance of the Notes and Eagle Re’s annual anticipated operating expenses, which are not expected to be material. If the reinsurance agreement is not terminated after five years from issuance, the reinsurance premium’s risk margin payable to Eagle Re increases by 50%.
In connection with our excess of loss reinsurance agreement with Eagle Re, we concluded that (i) the risk transfer requirements for reinsurance accounting were met as Eagle Re is assuming significant insurance risk and has a reasonable possibility of a significant loss; and (ii) Eagle Re is a variable interest entity (“VIE”). Based on the accounting guidance that addresses VIEs, because Radian does not have: (i) the power to direct the activities of Eagle Re that most significantly affect its economic performance or (ii) the obligation to absorb losses or the right to receive benefits from Eagle Re that potentially could be significant to Eagle Re, we have not consolidated Eagle Re in our consolidated financial statements. We have also concluded that the reinsurance agreement contains an embedded derivative, which we have accounted for separately as a freestanding derivative. See Note 2 for additional accounting policy information.
Although the risk transfer requirements for reinsurance accounting have been met and there is also no recourse to Radian Guaranty by the holders of the mortgage insurance-linked notes, reinsurance does not relieve us of our obligations to our policyholders. In the event the VIE is unable to meet its obligations to us, our insurance subsidiaries would be liable to make claims payments to our policyholders. In the event that all of the assets in the reinsurance trust (consisting of U.S. government money market funds, cash or U.S. Treasury securities) have become worthless and the VIE is unable to make its payments to us, our maximum potential loss would be the amount of mortgage insurance claim payments for losses on the insured policies, net of the aggregate reinsurance payments already received, up to the full $434.0 million aggregate excess-of-loss reinsurance coverage amount. In the same scenario, the related embedded derivative of $1.1 million, currently recorded in other assets, would no longer have value.
Eagle Re represents our only variable interest entity as of December 31, 2018. The following table presents Eagle Re’s total assets as well as Radian Guaranty’s maximum exposure to loss associated with Eagle Re, each as of December 31, 2018.
|
| | | | | | | | | | | | | | | |
| | | | | Maximum Exposure to Loss |
| (In thousands) | | Total VIE Assets (1) | | On - Balance Sheet | | Off - Balance Sheet (3) | | Total |
| Eagle Re | | $ | 434,034 |
| | $ | 1,114 |
| (2) | $ | 434,034 |
| | 435,148 |
|
| Total | | $ | 434,034 |
| | $ | 1,114 |
| | $ | 434,034 |
| | 435,148 |
|
______________________
| |
(1) | Eagle Re’s assets are required to be invested in U.S. government money market funds, cash or U.S. Treasury securities. Eagle Re’s liabilities consist of its mortgage insurance-linked notes of $434.0 million, as described above. |
| |
(2) | Represents the fair value of the related embedded derivative, included in other assets in our consolidated balance sheets. |
| |
(3) | Represents the maximum amount that would be payable in the future by Radian Guaranty to its policyholders on claims, without the benefit of any corresponding reinsurance recoverables, in the event of the combination of two events: (i) all of the assets in the reinsurance trust (consisting of U.S. government money market funds, cash or U.S. Treasury securities) have become worthless and (ii) $660.4 million of claims have been paid on the reinsured RIF. |
Other 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 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 trusttrusts to help
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
secure our potential cash recoveries. In addition to the total VIE assets of the Eagle Re Issuers discussed above, the amount held in reinsurance trusts was $167.9 million as of December 31, 2021, compared to $228.6 million as of December 31, 2020. In addition, for the Single Premium QSR Program, Radian Guaranty holds amounts received fromrelated to ceded premiums written to collateralize the reinsurers’ obligations, which is reported in reinsurance funds withheld on our 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.
Other
In our title insurance business, we also use reinsurance as part of our risk distribution strategy. EnTitle Insurance’s reinsurance agreement with a third-party reinsurer provides for coverage of 100% of losses in excess of $1.0 million ultimate net loss on a per claim basis, subject to certain aggregate limits. For the year ended December 31, 2018, the effect of this agreement was immaterial to our results of operations. In addition, on March 27, 2018, EnTitle Insurance entered into a loss portfolio transfer reinsurance transaction in which all policies issued by EnTitle Insurance and outstanding at the time, subject to certain limitations, became reinsured by a third party.
9. Other Assets
The following table shows the components of other assets foras of the periods indicated:dates indicated.
| | | | | | | | | | | | | | |
| Other assets | | | | |
| | | | |
| | December 31, |
| (In thousands) | | 2021 | | 2020 |
| Prepaid federal income taxes (Note 10) | | $ | 354,123 | | | $ | 210,889 | |
Prepaid reinsurance premiums (1) | | 201,674 | | | 267,638 | |
Company-owned life insurance (2) | | 113,386 | | | 115,586 | |
| Loaned securities (Notes 5 and 6) | | 103,996 | | | 57,499 | |
| Right-of-use assets (Note 13) | | 31,878 | | | 32,985 | |
| Other | | 32,246 | | | 30,488 | |
| Total other assets | | $ | 837,303 | | | $ | 715,085 | |
(1)Relates primarily to our Single Premium QSR Program.
(2)We are the beneficiary of insurance policies on the lives of certain of our current and past officers and employees. The balances reported in other assets reflect the amounts that could be realized upon surrender of the insurance policies as of each respective date.
|
| | | | | | | |
| | December 31, |
| (In thousands) | 2018 | | 2017 |
Deposit with the IRS (1) | $ | — |
| | $ | 88,557 |
|
| Company-owned life insurance | 83,377 |
| | 85,862 |
|
Internal-use software (2) | 51,367 |
| | 48,751 |
|
Current federal income tax receivable (1) | 44,506 |
| | — |
|
Property and equipment (3) | 37,090 |
| | 38,291 |
|
| Accrued investment income | 34,878 |
| | 31,389 |
|
| Loaned securities (Note 6) | 27,860 |
| | 27,964 |
|
| Unbilled receivables | 19,917 |
| | 22,257 |
|
| Deferred policy acquisition costs | 17,311 |
| | 16,987 |
|
| Reinsurance recoverables | 14,402 |
| | 8,492 |
|
| Other | 36,992 |
| | 39,299 |
|
| Total other assets | $ | 367,700 |
| | $ | 407,849 |
|
______________________
| | | | | |
(1)
| In 2018,
Radian utilized its “qualified deposits” with the U.S. TreasuryGroup Inc. and Subsidiaries Notes to settle its $31 million obligation to the IRS, and in 2019, the Company expects the IRS to refund to Radian the remaining $58 million that was previously on deposit. As such, the remaining balances of the deposits with the IRS as of December 31, 2018 are included in current federal income tax receivable. In January 2019, we received $33 million of the $58 million refund from the IRS and expect to receive the remaining $25 million in the coming months. See Note 10 for additional information regarding the IRS Matter.Consolidated Financial Statements |
| |
(2) | Internal-use software, at cost, has been reduced by accumulated amortization of $60.3 million and $48.4 million at December 31, 2018 and 2017, respectively, as well as $5.1 million of impairment charges in 2018. Amortization expense was $11.4 million, $10.7 million and $6.0 million for the years ended December 31, 2018, 2017 and 2016 respectively. |
| |
(3) | Property and equipment at cost, less accumulated depreciation of $62.9 million and $57.6 million at December 31, 2018 and 2017, respectively. Depreciation expense was $8.0 million, $6.9 million and $5.6 million for the years ended December 31, 2018, 2017 and 2016 respectively. |
We assess our various asset groups, which include right-of-use assets, for changes in grouping and for potential impairment when certain events occur or when there are changes in circumstances, including potential alternative uses. If circumstances require a change in asset groupings or a right-of-use asset to be tested for possible impairment, and the carrying value of the right-of-use asset is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. TableDuring the second quarter of Contents2021, in response to the COVID-19 pandemic and our successful transition to a virtual work environment, we made the decision to exit, and to actively market for sublease, all office space in our former corporate headquarters in downtown Philadelphia. As part of this change, we entered into 2 new leases with overall reduced square footage, including our new corporate headquarters, effective September 2021, in Wayne, Pennsylvania and a Cherry Hill, New Jersey location.GlossaryAs a result, during the three months ended June 30, 2021, we recognized an impairment of $3.5 million related to our former corporate headquarters leases, reducing the carrying value of certain lease assets and the related property and equipment to its estimated fair value. The right-of-use asset fair value was estimated using an income approach based on forecasted future cash flows expected to be derived from the property based on current sublease market rent, which could differ from actual results and require us to revise our initial estimates. Following this impairment, which was recorded within other operating expenses in our consolidated statements of operations, the aggregate carrying value of the right-of-use assets and leasehold improvements related to the former corporate headquarters leases that we plan to sublease was $26.4 million as of December 31, 2021.Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
10. Income Taxes
Income Tax Provision
The components of our consolidated income tax provision from continuing operations are as follows:follows.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 | | 2016 |
| Current provision (benefit) | $ | (42,398 | ) | | $ | 59,122 |
| | $ | 4,546 |
|
| Deferred provision | 120,573 |
| | 166,527 |
| | 170,887 |
|
| Total income tax provision | $ | 78,175 |
| | $ | 225,649 |
| | $ | 175,433 |
|
| | | | | | | | | | | | | | | | | | | | |
| Income tax provision | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Current provision (benefit) | | $ | 2,368 | | | $ | (16,264) | | | $ | 19,522 | |
| Deferred provision | | 161,793 | | | 102,079 | | | 157,162 | |
| Total income tax provision | | $ | 164,161 | | | $ | 85,815 | | | $ | 176,684 | |
The reconciliation of taxes computed at the statutory tax rate of 21% in 20182021, 2020 and 35% in 2017 and 20162019 to the provision for income taxes is as follows:follows.
| | | | | | | | | | | | | | | | | | | | |
| Reconciliation of provision for income taxes | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Provision for income taxes computed at the statutory tax rate | | $ | 160,615 | | | $ | 100,683 | | | $ | 178,289 | |
| Change in tax resulting from: | | | | | | |
| | | | | | |
| Valuation allowance | | 5,700 | | | 11,290 | | | 1,941 | |
| Uncertain tax positions | | 853 | | | (14,784) | | | 1,202 | |
| State tax benefit, net of federal impact | | (1,714) | | | (9,062) | | | (293) | |
| Other, net | | (1,293) | | | (2,312) | | | (4,455) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Provision for income taxes | | $ | 164,161 | | | $ | 85,815 | | | $ | 176,684 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 | | 2016 |
| Provision for income taxes computed at the statutory tax rate | $ | 143,679 |
| | $ | 121,358 |
| | $ | 169,290 |
|
| Change in tax resulting from: |
|
| |
|
| |
|
|
| Repurchase premium on convertible notes | — |
| | (96 | ) | | 9,988 |
|
| State tax provision (benefit), net of federal impact | 5,570 |
| | (15,641 | ) | | (8,974 | ) |
| Valuation allowance | (1,856 | ) | | 18,197 |
| | 10,663 |
|
| Remeasurement of net deferred tax assets due to the TCJA | — |
| | 102,617 |
| | — |
|
| Impact related to settlement of IRS Matter | (73,585 | ) | | — |
| | — |
|
| Other, net | 4,367 |
| | (786 | ) | | (5,534 | ) |
| Provision for income taxes | $ | 78,175 |
| | $ | 225,649 |
| | $ | 175,433 |
|
135
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
Deferred Tax Assets and Liabilities
The significant components of our net deferred tax assets and liabilities from continuing operations are summarized as follows:follows.
| | Deferred tax assets and liabilities | | Deferred tax assets and liabilities | |
| | | | December 31, |
| (In thousands) | | (In thousands) | | 2021 | | 2020 |
| Deferred tax assets | | Deferred tax assets | | | | |
| | State income taxes, net of federal impact | | State income taxes, net of federal impact | | $ | 77,637 | | | $ | 75,499 | |
| Goodwill and intangibles | | Goodwill and intangibles | | 29,744 | | | 32,673 | |
| Unearned premiums | | Unearned premiums | | 23,699 | | | 27,703 | |
| Accrued expenses | | Accrued expenses | | 16,584 | | | 11,140 | |
| Lease liability | | Lease liability | | 11,240 | | | 11,214 | |
| Loss reserves | | Loss reserves | | 6,286 | | | 4,578 | |
| | | | December 31, | |
| (In thousands) | 2018 | | 2017 | |
| Deferred tax assets: | | | | |
| Accrued expenses | $ | 17,487 |
| | $ | 30,267 |
| |
| Unearned premiums | 34,686 |
| | 35,035 |
| |
| Differences in fair value of financial instruments | 1,115 |
| | — |
| |
| Net unrealized loss on investments | 16,297 |
| | — |
| |
| State income taxes | 67,069 |
| | 68,577 |
| |
| Partnership investments | — |
| | 47,991 |
| |
| Loss reserves | 1,044 |
| | 1,397 |
| |
| Alternative minimum tax credit carryforward | — |
| | 57,086 |
| |
| Goodwill and intangibles | 35,068 |
| | 36,947 |
| |
| Deferred policy acquisition and ceding commission costs | 15,288 |
| | 14,888 |
| |
| Share-based compensation | 10,776 |
| | 10,190 |
| |
| | Other | 13,091 |
| | 16,421 |
| Other | | 18,967 | | | 25,066 | |
| Total deferred tax assets | 211,921 |
| | 318,799 |
| Total deferred tax assets | | $ | 184,157 | | | $ | 187,873 | |
| Deferred tax liabilities: | |
| | |
| |
| Partnership investments | 639 |
| | — |
| |
| Differences in fair value of financial instruments | — |
| | 3,833 |
| |
| | Deferred tax liabilities | | Deferred tax liabilities | | | | |
| | Contingency reserve | | Contingency reserve | | $ | 368,000 | | | $ | 216,122 | |
| Net unrealized gain on investments | — |
| | 6,792 |
| Net unrealized gain on investments | | 31,876 | | | 70,057 | |
| Depreciation | 12,201 |
| | 11,138 |
| Depreciation | | 12,775 | | | 13,029 | |
| Differences in fair value of financial instruments | | Differences in fair value of financial instruments | | 7,763 | | | 9,087 | |
| | Other | 2,942 |
| | 2,446 |
| Other | | 17,824 | | | 15,747 | |
| Total deferred tax liabilities | 15,782 |
| | 24,209 |
| Total deferred tax liabilities | | 438,238 | | | 324,042 | |
| Less: Valuation allowance | 64,496 |
| | 65,023 |
| Less: Valuation allowance | | 83,428 | | | 77,728 | |
| Net deferred tax asset | $ | 131,643 |
| | $ | 229,567 |
| |
| Net deferred tax asset (liability) | | Net deferred tax asset (liability) | | $ | (337,509) | | | $ | (213,897) | |
Tax Reform
On December 22, 2017, H.R.1, the TCJA, was signed into law. In accordance with the provisions of the accounting standard regarding accounting for income taxes, changes in tax rates and tax law are accounted for in the period of enactment, which, for federal legislation, is the date the President signed the bill into law. Effective January 1, 2018, the TCJA, among other things, reduced the federal corporate income tax rate from 35% to 21%, repealed the corporate alternative minimum tax and modified certain limitations on executive compensation. Under GAAP, the effect of tax rate changes on deferred tax balances is recorded as a component of the income tax provision related to continuing operations for the period in which the new tax law is enacted.
Accordingly, in 2017, we recognized a non-cash income tax expense of $102.6 million related to the remeasurement of our net deferred tax assets, which was included as a component of the income tax provision for the year ended December 31, 2017. Additionally, as a result of finalizing our interpretation of related guidance, we completed our accounting in the fourth quarter of 2018 during the one-year measurement period from the enactment date, as provided under Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” issued by the SEC staff in December 2017. No material adjustments to our provisional amounts were required.
For periods beginning after December 31, 2017, we began realizing a significant reduction in our annualized effective tax rate, before considering Discrete Items, primarily due to the reduction in the federal corporate tax rate from 35% to 21%.
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
Current and Deferred Taxes
As of December 31, 2018,2021, we recorded a net current federal income tax receivablepayable of $43.8$19.9 million, which primarily relates to the unused portion of our qualified deposits relating to our IRS settlement, partially offset by liabilities of $33.6 million related to applying the standards of accounting for uncertainty in income taxes. We have $2.2 million of U.S. NOL carryforwards, related to our March 2018 acquisition of EnTitle, which is subject to limitation under IRC Section 382. To the extent not utilized, the U.S. NOL carryforwards will expire by tax year 2038.
Certain entities within our consolidated group have also generated net deferred tax assets of approximately $67.7$76.1 million, relating primarily to state and local NOL carryforwards which, if unutilized, will expire during various future tax periods.
Valuation Allowances
We are required to establish a valuation allowance against our deferred tax assets when it is more likely than not that all or some portion of our deferred tax assets will not be realized. At each balance sheet date, we assess our need for a valuation allowance. Our assessment is based on all available evidence, both positive and negative. This requires management to exercise judgment and make assumptions regarding whether our deferred tax assets will be realized in future periods. We have determined that certain non-insurance entities within Radian may continue to generate taxable losses on a separate company basis in the near term and may not be able to fully utilize certain state and local NOLs on their state and local tax returns. Therefore, with respect to deferred tax assets relating to these state and local NOLs and other state timing adjustments, we retained a valuation allowance of $64.5$83.4 million at December 31, 20182021 and $65.0$77.7 million at December 31, 2017.2020.
Tax Benefit Preservation Measures
We currently haveAs a mortgage guaranty insurer, we are eligible for a tax benefit preservation plan, together withdeduction, subject to certain amendmentslimitations, under Internal Revenue Code Section 832(e) for amounts required by state law or regulation to our amendedbe 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 restated bylaws and our amended and restated certificate of incorporation (collectively, our “Tax Benefit Preservation Measures”), that was established to protect our ability to utilize our NOLs and other tax attributes by attempting to prevent an “ownership change” under U.S. federal income tax rules. Our Tax Benefit Preservation Measures expire in 2019.
IRS Matter
In July 2018, we finalized a settlement with the IRS related to adjustments we had been contesting that resulted from the examinationLoss Bonds issued by the IRSU.S. Department of the Treasury in an amount equal to the tax benefit derived from deducting any portion of our 2000 through 2007statutory contingency reserves. As of December 31, 2021, we held $354.1 million of these bonds, which are included as prepaid income taxes within other assets in our consolidated federal income tax returns.balance sheets. The IRS opposedcorresponding deduction of our statutory contingency reserves resulted in the recognition of certaina net deferred tax losses and deductions that were generated through our investment in a portfolio of non-economic REMIC residual interests and proposed denying the associated tax benefits of these items.
This settlement with the IRS resolved the issues and concluded all disputes related to the IRS Matter. In the three-month period ended June 30, 2018, we recorded tax benefits of $73.6 million, which includes both the impact of the settlement with the IRS as well as the reversal of certain previously accrued state and local tax liabilities. In 2018, under the terms of the settlement, Radian utilized its “qualified deposits” with the U.S. Treasury to settle its $31 million obligation to the IRS, and in 2019, the Company expects the IRS to refund to Radian the remaining $58 million that was previously on deposit.liability. See Note 916 for additional information about these qualified deposits.our U.S. Mortgage Guaranty Tax and Loss Bonds.
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
Unrecognized Tax Benefits
As of December 31, 2018,2021, we have $16.6$3.9 million of net unrecognized tax benefits, including $2.3 million of interest and penalties, that would affect the effective tax rate, if recognized. We have no interest or penalty accrued as of December 31, 2018. Our policy for the recognition of interest and penalties associated with uncertain tax positions is to record such items as a component of our income tax provision, of which $2.2$0.7 million and $1.8$0.3 million were recorded for the years ended December 31, 20172021 and 2016,2020, respectively. In 2018, we recorded an income tax benefit of $61.6 million for interest and penalties primarily related to our IRS settlement.
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
A reconciliation of the beginning and ending gross unrecognized tax benefits is as follows:follows.
|
| | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 |
| Balance at beginning of period | $ | 123,951 |
| | $ | 123,028 |
|
| Tax positions related to the current year: | | | |
| Increases | 5,058 |
| | 2,343 |
|
| Tax positions related to prior years: | | | |
| Increases | 26,465 |
| | 24,122 |
|
| Decreases | (43,146 | ) | | (1,437 | ) |
| Settlements with taxing authorities | (52,353 | ) | | — |
|
| Lapses of applicable statute of limitation | (26,423 | ) | | (24,105 | ) |
| Balance at end of period | $ | 33,552 |
| | $ | 123,951 |
|
| | | | | | | | | | | | | | |
| Reconciliation of gross unrecognized tax benefits | | | | |
| | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 |
| Balance at beginning of period | | $ | 20,249 | | | $ | 37,208 | |
| Tax positions related to the current year: | | | | |
| Increases | | 267 | | | 250 | |
| Decreases | | (858) | | | (1,788) | |
| Tax positions related to prior years: | | | | |
| Increases | | 230 | | | 16,568 | |
| Decreases | | — | | | (171) | |
| | | | |
| | | | |
| Lapses of applicable statute of limitation | | — | | | (31,818) | |
| Balance at end of period | | $ | 19,888 | | | $ | 20,249 | |
Our total net unrecognized tax benefits decreased by $90.4$0.4 million from December 31, 20172020 to December 31, 2018,2021, primarily due to a $43.1 millionnet decrease in prior year tax positions and a $52.4 million decrease due to settlements with taxing authorities. The settlement of the IRS Matter was the primary contributor to both of these decreases. These decreases were partially offset by an increase of $26.5 million in our net unrecognized tax benefits related to prior years. This net increase primarily reflects the impact of unrecognized tax benefits associated with our recognition of certain premium income. Although unrecognized tax benefits for this item decreased due to the expiration of the applicable statute of limitations for the taxable period ended December 31, 2014, the related amounts continued to impact subsequent years and resulted in a corresponding increase to the unrecognized tax benefits. Over the next twelve12 months, our unrecognized tax benefits may decrease by approximately $6.5$1.2 million due to the expiration of the applicable statute of limitations relating to the 20152018 tax year. The statute of limitations related to our federal consolidated income tax return remains open for tax years 2015-2017.2018-2021. Additionally, among the entities within our consolidated group, various tax years remain open to potential examination by state and local taxing authorities.
11. Losses and Loss Adjustment ExpensesLAE
Our reserve for losses and LAE, at the end of each period indicated, consisted of:of the following.
| | Reserve for losses and LAE | | Reserve for losses and LAE | |
| | | Year Ended December 31, | | December 31, |
| (In thousands) | 2018 | | 2017 | (In thousands) | | 2021 | | 2020 |
| Mortgage Insurance loss reserves | $ | 397,891 |
| | $ | 507,588 |
| |
Services loss reserves (1) | 3,470 |
| | — |
| |
Mortgage insurance loss reserves (1) | | Mortgage insurance loss reserves (1) | | $ | 823,136 | | | $ | 844,107 | |
| Title insurance loss reserves | | Title insurance loss reserves | | 5,506 | | | 4,306 | |
| Total reserve for losses and LAE | $ | 401,361 |
| | $ | 507,588 |
| Total reserve for losses and LAE | | $ | 828,642 | | | $ | 848,413 | |
______________________(1)Primarily comprises first-lien primary case reserves of $790.4 million and $799.5 million at December 31, 2021 and 2020, respectively.
| |
(1) | A majority of this amount is subject to reinsurance, with the related reinsurance recoverables reported in other assets in our consolidated balance sheet, and relates to the acquisition of EnTitle Direct, completed on March 27, 2018. See Note 8 for information about our use of reinsurance in our title insurance business. |
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
The following table shows our mortgage insurance reserve for losses and LAE by category at the end of each period indicated:
|
| | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 |
| Reserves for losses by category: | | | |
| Prime | $ | 231,169 |
| | $ | 285,022 |
|
| Alt-A and A minus and below | 119,527 |
| | 170,873 |
|
| IBNR and other | 13,864 |
| | 16,021 |
|
| LAE | 10,271 |
| | 13,349 |
|
Reinsurance recoverable (1) | 10,992 |
| | 8,315 |
|
| Total primary reserves | 385,823 |
| | 493,580 |
|
Total pool reserves (2) | 11,640 |
| | 13,463 |
|
| Total First-lien reserves | 397,463 |
| | 507,043 |
|
Other (3) | 428 |
| | 545 |
|
| Total reserve for losses | $ | 397,891 |
| | $ | 507,588 |
|
______________________
| |
(1) | Represents ceded losses on reinsurance transactions, including the QSR Program and the Single Premium QSR Program. These amounts are included in the reinsurance recoverables reported in other assets in our consolidated balance sheets. |
| |
(2) | Includes reinsurance recoverable of $17 thousand and $35 thousand as of December 31, 2018 and December 31, 2017, respectively. |
| |
(3) | Does not include our second-lien PDR that is included in other liabilities. |
For the periods indicated, the following table presents information relating to our mortgage insurance reserve for losses, including our IBNR reserve and LAE, but excluding our second-lien mortgage loan PDR:LAE.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 | | 2016 |
| Balance at January 1, | $ | 507,588 |
| | $ | 760,269 |
| | $ | 976,399 |
|
Less: Reinsurance recoverables (1) | 8,350 |
| | 6,851 |
| | 8,286 |
|
| Balance at January 1, net of reinsurance recoverables | 499,238 |
| | 753,418 |
| | 968,113 |
|
| Add: Losses and LAE incurred in respect of default notices reported and unreported in: | | | | | |
Current year (2) | 135,291 |
| | 185,486 |
| | 206,383 |
|
| Prior years | (31,699 | ) | | (49,286 | ) | | (3,516 | ) |
| Total incurred | 103,592 |
| | 136,200 |
| | 202,867 |
|
| Deduct: Paid claims and LAE related to: | | | | | |
Current year (2) | 5,856 |
| | 25,011 |
| | 11,410 |
|
| Prior years | 210,092 |
| | 365,369 |
| | 406,152 |
|
| Total paid | 215,948 |
| | 390,380 |
| (3) | 417,562 |
|
| Balance at end of period, net of reinsurance recoverables | 386,882 |
| | 499,238 |
| | 753,418 |
|
Add: reinsurance recoverables (1) | 11,009 |
| | 8,350 |
| | 6,851 |
|
| Balance at December 31, | $ | 397,891 |
| | $ | 507,588 |
| | $ | 760,269 |
|
______________________
| | | | | |
(1)
| Related
Radian Group Inc. and Subsidiaries Notes to ceded losses recoverable, if any, on reinsurance transactions, the QSR Program and the Single Premium QSR Program. See Note 8 for additional information.Consolidated Financial Statements |
| |
(2) | | | | | | | | | | | | | | | | | | | | | | | Rollforward of mortgage insurance reserve for losses | | | | | | | | | | | | | | | | Years Ended December 31, | | (In thousands) | | 2021 | | 2020 | | 2019 | | Balance at January 1, | | $ | 844,107 | | | $ | 401,273 | | | $ | 397,891 | | Less: Reinsurance recoverables (1) | | 71,769 | | | 14,594 | | | 11,009 | | | Balance at January 1, net of reinsurance recoverables | | 772,338 | | | 386,679 | | | 386,882 | | | Add: Losses and LAE incurred in respect of default notices reported and unreported in: | | | | | | | Current year (2) | | 160,565 | | | 517,807 | | | 146,733 | | | Prior years | | (141,126) | | | (34,547) | | | (14,709) | | | Total incurred | | 19,439 | | | 483,260 | | | 132,024 | | | Deduct: Paid claims and LAE related to: | | | | | | | Current year (2) | | 1,112 | | | 4,148 | | | 4,220 | | | Prior years | | 34,205 | | | 93,453 | | | 128,007 | | | Total paid | | 35,317 | | | 97,601 | | | 132,227 | | | Balance at end of period, net of reinsurance recoverables | | 756,460 | | | 772,338 | | | 386,679 | | Add: reinsurance recoverables (1) | | 66,676 | | | 71,769 | | | 14,594 | | | Balance at December 31, | | $ | 823,136 | | | $ | 844,107 | | | $ | 401,273 | |
(1)Related to ceded losses recoverable, if any, on reinsurance transactions. See Note 8 for additional information. (2)Related to underlying defaulted loans with a most recent default notice dated in the year indicated. For example, if a loan had defaulted in a prior year, but then subsequently cured and later re-defaulted in the current year, that default notice dated in the year indicated. For example, if a loan had defaulted in a prior year, but then subsequently cured and later re-defaulted in the current year, that default |
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
would be considered a current year default. For 2017, includes payments made on pool commutations, in some cases for loans not previously in default.
| |
(3) | Includes the payment of $54.8 million made in connection with the scheduled final settlement of the Freddie Mac Agreement in the third quarter of 2017. |
Reserve Activity
2018 ActivityIncurred Losses
Loss Reserves. Our mortgage insurance lossCase reserves at December 31, 2018 declined as compared to December 31, 2017, primarily as a result of the amount of paid claims continuing to outpace losses incurred related to new default notices reported in the current year. Reserves established for new default notices werehave been the primary driver of our total incurred losses for 2018,in recent years, and they were primarily impacted by the number of new primary default notices received in the period and our related gross Default to Claim Rate assumption applied to those new defaults, which declined from 10% atdefaults.
New primary default notices totaled 37,470 for the year ended December 31, 20172021, compared to 8% at108,025 for the year ended December 31, 2018.2020 and 40,985 for the year ended December 31, 2019. For the year ended December 31, 2020, the significant increase in the number of new primary default notices was substantially all related to defaults of loans subject to forbearance programs implemented in response to the COVID-19 pandemic.
Our gross Default to Claim Rate assumption applied to new defaults was 8.0% as of December 31, 2021, compared to 8.5% as of December 31, 2020 and 7.5% as of December 31, 2019. The combination of fewer new default notices and a lower Default to Claim Rate assumption on new defaults was the primary driver of the decrease in losses incurred related to current year defaults for the year ended December 31, 2021, as compared to the year ended December 31, 2020.
Our provision for losses during 20182021, most notably in the fourth quarter, was positively impacted by favorable reserve development on prior year defaults, which was primarily driven byas a reduction duringresult of more favorable trends in Cures than originally estimated, due to favorable outcomes resulting from forbearance programs implemented in response to the periodCOVID-19 pandemic as well as positive trends in certainhome price appreciation. These favorable observed trends resulted in reductions in our Default to Claim Rate assumptions for these prior year default notices, particularly for those defaults compared tofirst reported in 2020 following the assumptions used at December 31, 2017. The reductions in Default to Claim Rate assumptions resulted from observed trends, primarily higher Cures than were previously estimated.
Hurricane Impact 2018/2017. During the third quarter of 2017, Hurricanes Harvey and Irma caused extensive property damage to areas of Texas, Florida and Georgia, as well as other general disruptions including power outages and flooding. Although the mortgage insurance we write protects the lenders from a portion of losses resulting from loan defaults, it does not provide protection against property loss or physical damage. Our Master Policies contain an exclusion against physical damage, including damage caused by floods or other natural disasters. Depending on the policy form and circumstances, we may, among other things, deduct the cost to repair or remedy physical damage above a de minimis amount from a claim payment and/or, under certain circumstances, deny a claim where (i) the property underlying a mortgage in default is subject to unrestored physical damage or (ii) the physical damage is deemed to be the principal cause of default. Following Hurricanes Harvey and Irma, we observed an increase in new primary defaults from FEMA Designated Areas associated with these hurricanes. As expected most of these hurricane-related defaults cured by the end of 2018, and at higher cure rates than the rates for our general population of defaults. We assigned a 3% Default to Claim Rate assumption to the new primary defaults from FEMA Designated Areas associated with Hurricanes Harvey and Irma that were reported subsequent to those two natural disasters and through February 2018. These incremental defaults did not have a material impact on our provision for losses in 2017 or 2018.
Claims Paid. Total claims paid decreased for 2018, compared to 2017. The decrease in claims paid is consistent with the ongoing decline in the outstanding default inventory. In addition, claims paid for 2017 were higher because they included payments that were made in connection with the scheduled final settlementstart of the Freddie Mac Agreement in the third quarter of 2017.
2017 ActivityCOVID-19 pandemic.
Our loss reserves at December 31, 2017 declined as compared to December 31, 2016, primarily as a result of the amount of paid claims and Cures continuing to outpace losses incurred related to new default notices reported in the current year. Reserves established for new default notices were the primary driver of our total incurred loss for 2017, and they were primarily impacted by the number of new primary default notices received in the period and our related gross Default to Claim Rate assumption applied to those new defaults, which, except as discussed above for FEMA Designated Areas associated with Hurricanes Harvey and Irma, declined from 12% at December 31, 2016 to 10% at December 31, 2017. The provision for losses during 2017 was2020 and 2019 were also 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 thesethose prior year defaults comparedbased on observed trends.
See also Note 1 for additional information on the elevated risks and uncertainties resulting from the COVID-19 pandemic to the assumptions used at December 31, 2016. The reductions in our business.
Default to Claim Rate assumptions resulted from observed trends, primarily higher Cures than were previously estimated.
2016 Activity
Our loss reserves at December 31, 2016 declined as compared to December 31, 2015, primarily as a result of the amount of paid claims continuing to exceed losses incurred related to new default notices reported in the current year. Reserves established for new default notices were the primary driver of our total incurred loss for 2016, and they were impacted primarily by the number of new primary default notices received in the period and our related gross Default to Claim Rate
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
assumption applied to those new defaults, which was 12% as of December 31, 2016. The impact to incurred losses from reserve development on default notices reported in prior years was not significant during 2016.
Reserve Assumptions
Default to Claim Rate
Our aggregate weighted-average Default to Claim Rate assumption (net of Claim Denials and Rescissions) used in estimating our primary reserve for losses wasRate. 33% (31% excluding pending claims) at December 31, 2018 compared to 31% (29% excluding pending claims) at December 31, 2017. The increase in our Default to Claim Rate in 2018 was primarily driven by a reduction in the number of defaults in FEMA Designated Areas associated with Hurricanes Harvey and Irma (which had a lower Default to Claim Rate of 3%). Excluding the impact of defaults associated with these FEMA Designated Areas, our aggregate weighted-average net Default to Claim Rate (net of Claims Denials and Rescissions) was 33% at December 31, 2018, as compared to 38% at December 31, 2017. As of December 31, 2018, our gross Default to Claim Rates on our primary portfolio ranged from 8% for new defaults, to 68% for other defaults not in Foreclosure Stage, and 75% for Foreclosure Stage Defaults. As of December 31, 2017, these gross Default to Claim Rates ranged from 10% for new defaults, to 62% for other defaults not in Foreclosure Stage, and 81% for Foreclosure Stage Defaults. Our Default to Claim Rate estimates on defaulted loans are mainly developed based on the Stage of Default and Time in Default of the underlying defaulted loans grouped according to the period in which the default occurred, as measured by the progress toward foreclosure sale and the number of months in default. While our estimates of ultimate losses on defaults from prior years declined in 2021 due to elevated Cures, which reduced our inventory of primary
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
defaults, COVID-19-related hardship forbearance plans and foreclosure moratoriums resulted in delays in resolving the remaining defaults, leading to an increase in the Default to Claim Rates applied to the remaining inventory.
The following table shows our gross Default to Claim Rates on our primary portfolio based on the Time in Default and as of the dates indicated.
| | | | | | | | | | | | | | | | | | | | |
| Default to Claim Rates |
| | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
| Default to Claim Rate on: | | | | | | |
| New defaults | | 8.0 | % | | 8.5 | % | | 7.5 | % |
| Defaults not in Foreclosure Stage | | | | | | |
Time in Default: < 2 years (1) | | 41.6 | % | | 21.0 | % | | 22.0 | % |
| Time in Default: 2 - 5 years | | 75.0 | % | | 62.5 | % | | 48.0 | % |
| Time in Default: > 5 years | | 80.0 | % | | 70.0 | % | | 63.0 | % |
| Foreclosure Stage Defaults | | 85.0 | % | | 75.0 | % | | 70.0 | % |
(1)Represents the weighted average Default to Claim Rate for all defaults not in foreclosure stage that have been in default for up to two years, including new defaults. The estimated Default to Claim Rates applied to defaults within this population vary by Time in Default, and range from the Default to Claim Rates on new defaults shown above, up to 80.1%, 55.0% and 55.6% for more aged defaults in this category as of December 31, 2021, 2020 and 2019, respectively.
Our estimate of expected Rescissions and Claim Denials (net of expected Reinstatements) embedded in our estimated net Default to Claim Rate is generally based on our recent experience. Consideration is also given to differences in characteristics between those rescinded policies and denied claims and the loans remaining in our defaulted inventory.
Loss MitigationClaims Paid
Total claims paid decreased in 2021 compared to 2020. The decrease in claims paid is primarily attributable to COVID-19-related hardship forbearance plans and suspensions of foreclosures and evictions, as well as a reduction in payments made to settle certain previously disclosed legal proceedings.
Concentration of Risk
As our insurance written in years prior to and including 2008 has become a smaller percentage of our overall insured portfolio, a reduced amount of Loss Mitigation Activity has occurred with respect to the claims we receive, and we expect this general trend to continue. As a result, our future Loss Mitigation Activity is not expected to mitigate our paid losses significantly. Our estimate of such net future Loss Mitigation Activities, inclusive of claim withdrawals, reduced our loss reserve as of December 31, 20182021 and 2017 by $32 million and $31 million, respectively. The amount of estimated Loss Mitigation Activities incorporated into our reserve analysis at any point in time is affected by a number of factors, including not only our estimated rate of Rescissions, Claim Denials and Claim Curtailments on future claims, but also the volume and attributes2020, there was no state that accounted for more than 10% of our defaulted insured loans,mortgage insurance business measured by primary RIF. California accounted for 10.9% of our estimated Default to Claim Rate and our estimated Claim Severity, among other assumptions.
Our reported Rescission, Claim Denial and Claim Curtailment activity in any given period is subject to challenge by our lender and servicer customers. We expect that a portion of previous Rescissions will be reinstated and previous Claim Denials will be resubmitted withdirect NIW for the required documentation and ultimately paid; therefore, we have incorporated this expectation into our IBNR reserve estimate. Our IBNR reserve estimate of $11.3 million and $10.4 million atyear ended December 31, 20182021, compared to 10.4% and 2017, respectively, includes reserves for this activity.
We also accrue10.6% for the premiums that we expect to refund to our lender customers in connection with our estimated Rescissions.
Sensitivity Analysis
We considered the sensitivity of first-lien loss reserve estimates atyears ended December 31, 2018 by assessing the potential changes resulting from a parallel shift in Claim Severity2020 and Default to Claim Rate estimates for primary loans. For example, assuming all other factors remain constant, for every one percentage point change in primary Claim Severity (which we estimate to be 96.0% of risk exposure at December 31, 2018), we estimated that our loss reserves would change by approximately $3.8 million at December 31, 2018. Assuming all other factors remain constant, for every one percentage point change in our overall primary net Default to Claim Rate (which we estimate to be 33% at December 31, 2018, including our assumptions related to Rescissions and Claim Denials), we estimated a $10.4 million change in our loss reserves at December 31, 2018.2019, respectively.
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
Additional Disclosures
The following tables provide information as of and for the periods indicated about: (i) incurred losses, net of reinsurance; (ii) the total of IBNR liabilities plus expected development on reported claims, included within the net incurred loss amounts; (iii) the cumulative number of reported defaults; and (iv) cumulative paid claims, net of reinsurance. The default year represents the period that a new default notice is first reported to us by loan servicers, related to borrowers thatwho missed two2 monthly payments.
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
The information about net incurred losses and paid claims development for the years ended prior to 20182021 is presented as supplementary information.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Incurred losses, net of reinsurance |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Total of IBNR Liabilities Plus Expected Development on Reported Claims (1) | | Cumulative Number of Reported Defaults (2) |
| ($ in thousands) | Years Ended December 31, | | | |
| | Unaudited | | | |
| Default Year | | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | | As of December 31, 2021 |
| 2012 | | $ | 803,831 | | $ | 763,969 | | $ | 711,213 | | $ | 720,502 | | $ | 715,646 | | $ | 714,783 | | $ | 713,750 | | $ | 713,839 | | $ | 713,146 | | $ | 713,057 | | | $ | 7 | | | 73,517 | |
| 2013 | | | 505,732 | | 405,334 | | 401,444 | | 404,333 | | 402,259 | | 400,243 | | 399,356 | | 399,317 | | 398,820 | | | 6 | | | 58,577 | |
| 2014 | | | | 337,784 | | 247,074 | | 265,891 | | 264,620 | | 260,098 | | 261,507 | | 261,377 | | 260,254 | | | 7 | | | 47,976 | |
| 2015 | | | | | 222,555 | | 198,186 | | 178,042 | | 183,952 | | 183,546 | | 184,066 | | 182,647 | | | 12 | | | 42,607 | |
| 2016 | | | | | | 201,016 | | 165,440 | | 149,753 | | 148,811 | | 148,640 | | 148,349 | | | 18 | | | 40,503 | |
| 2017 | | | | | | | 180,851 | | 151,802 | | 133,357 | | 130,274 | | 126,989 | | | 28 | | | 42,888 | |
| 2018 | | | | | | | | 131,513 | | 116,634 | | 95,534 | | 88,252 | | | 51 | | | 37,369 | |
| 2019 | | | | | | | | | 143,475 | | 136,860 | | 109,416 | | | 150 | | | 40,985 | |
| 2020 | | | | | | | | | | 504,160 | | 408,809 | | | 786 | | | 108,025 | |
| 2021 | | | | | | | | | | | 156,328 | | | 1,771 | | | 37,470 | |
| Total | | | | | | | | | | | $ | 2,592,921 | | | | | |
(1)Represents reserves as of December 31, 2021 related to IBNR liabilities.
(2)Represents total number of new primary default notices received in each calendar year as compiled monthly based on reports received from loan servicers. As reflected in our Default to Claim Rate assumptions, a significant portion of reported defaults generally do not result in a claim. In certain instances, a defaulted loan may cure, and then re-default in a later period. Consistent with our reserving practice, each new event of default is treated as a unique occurrence and therefore certain loans that cure and re-default may be included as a reported default in multiple periods.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Incurred Losses, Net of Reinsurance | | | | |
| | Year Ended December 31, | | As of December 31, 2018 |
| ($ in thousands) | | | | | | | | | | | Total of IBNR Liabilities Plus Expected Development on Reported Claims (1) | | Cumulative Number of Reported Defaults (2) |
| | Unaudited | | | |
| Default Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | | |
| 2009 | $ | 1,671,239 |
| $ | 1,894,783 |
| $ | 1,930,263 |
| $ | 1,939,479 |
| $ | 1,974,568 |
| $ | 1,991,796 |
| $ | 2,016,412 |
| $ | 2,018,907 |
| $ | 2,022,629 |
| $ | 2,025,828 |
| | $ | 1,572 |
| | 213.836 |
|
| 2010 | | 1,102,856 |
| 1,215,136 |
| 1,192,482 |
| 1,195,056 |
| 1,207,774 |
| 1,220,289 |
| 1,218,264 |
| 1,219,469 |
| 1,221,938 |
| | 1,019 |
| | 146.324 |
|
| 2011 | | | 1,058,625 |
| 1,152,016 |
| 1,052,277 |
| 1,050,555 |
| 1,062,579 |
| 1,061,161 |
| 1,059,116 |
| 1,060,376 |
| | 970 |
| | 118.972 |
|
| 2012 | | | | 803,831 |
| 763,969 |
| 711,213 |
| 720,502 |
| 715,646 |
| 714,783 |
| 713,750 |
| | 586 |
| | 89.845 |
|
| 2013 | | | | | 505,732 |
| 405,334 |
| 401,444 |
| 404,333 |
| 402,259 |
| 400,243 |
| | 344 |
| | 71.749 |
|
| 2014 | | | | | | 337,784 |
| 247,074 |
| 265,891 |
| 264,620 |
| 260,098 |
| | 241 |
| | 58.215 |
|
| 2015 | | | | | | | 222,555 |
| 198,186 |
| 178,042 |
| 183,952 |
| | 292 |
| | 49.825 |
|
| 2016 | | | | | | | | 201,016 |
| 165,440 |
| 149,753 |
| | 428 |
| | 46.264 |
|
| 2017 | | | | | | | | | 180,851 |
| 151,802 |
| | 1,212 |
| | 47.283 |
|
| 2018 | | | | | | | | | �� | 131,513 |
| | 1,876 |
| | 39.598 |
|
| | | | | | | | | | Total |
| $ | 6,299,253 |
| |
|
| |
|
|
______________________
| | | | | |
(1)
| Represents reserves as of December 31, 2018 related
Radian Group Inc. and Subsidiaries Notes to IBNR liabilities.Consolidated Financial Statements |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative paid claims, net of reinsurance |
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Years Ended December 31, | | |
| | Unaudited | | |
| Default Year | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 |
| 2012 | | $ | 19,200 | | | $ | 295,332 | | | $ | 528,744 | | | $ | 631,982 | | | $ | 672,271 | | | $ | 692,291 | | | $ | 702,136 | | | $ | 704,770 | | | $ | 708,528 | | | $ | 708,929 | |
| 2013 | | | | 34,504 | | | 191,040 | | | 307,361 | | | 357,087 | | | 379,036 | | | 388,688 | | | 392,818 | | | 395,093 | | | 395,292 | |
| 2014 | | | | | | 13,108 | | | 115,852 | | | 200,422 | | | 233,607 | | | 246,611 | | | 252,619 | | | 255,742 | | | 256,107 | |
| 2015 | | | | | | | | 10,479 | | | 84,271 | | | 142,421 | | | 163,916 | | | 172,645 | | | 174,812 | | | 175,874 | |
| 2016 | | | | | | | | | | 11,061 | | | 76,616 | | | 119,357 | | | 134,115 | | | 137,306 | | | 138,525 | |
| 2017 | | | | | | | | | | | | 24,653 | | | 66,585 | | | 99,678 | | | 108,484 | | | 111,458 | |
| 2018 | | | | | | | | | | | | | | 5,584 | | | 36,066 | | | 54,625 | | | 60,926 | |
| 2019 | | | | | | | | | | | | | | | | 4,220 | | | 18,703 | | | 28,896 | |
| 2020 | | | | | | | | | | | | | | | | | | 4,148 | | | 9,867 | |
| 2021 | | | | | | | | | | | | | | | | | | | | 1,112 | |
| Total | | | | | | | | | | | | | | | | | | | | $ | 1,886,986 | |
| All outstanding liabilities before 2012, net of reinsurance | | 30,421 | |
Liabilities for claims, net of reinsurance (1) | | $ | 736,356 | |
(1)Calculated as follows:
| | | | | | | | |
(2) | Represents total number of new default notices received in each calendar year as compiled monthly based on reports received from loan servicers. As reflected in our Default to Claim Rate assumptions, a significant portion of reported defaults generally do not result in a claim. (In certain instances, a defaulted loan may cure, and then re-default in a later period. Consistent with our reserving practice, each new event of default is treated as a unique occurrence and therefore certain loans that cure and re-default may be included as a reported default in multiple periods. Included in this amount for the year ended December 31, 2018 and December 31, 2017 are 3,776 and 8,862 notices, respectively, of new primary defaults related to the FEMA Designated Areas associated with Hurricanes Harvey and Irma.thousands) |
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Cumulative Paid Claims, Net of Reinsurance |
| | Year Ended December 31, |
| (In thousands) | | | | | | | | | |
| | Unaudited | |
| Default Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 |
| 2009 | $ | 136,413 |
| $ | 619,496 |
| $ | 1,236,210 |
| $ | 1,471,264 |
| $ | 1,711,019 |
| $ | 1,807,031 |
| $ | 1,921,134 |
| $ | 1,958,660 |
| $ | 1,986,076 |
| $ | 2,004,219 |
|
| 2010 | | 11,810 |
| 394,278 |
| 700,316 |
| 956,598 |
| 1,055,935 |
| 1,145,497 |
| 1,178,546 |
| 1,198,031 |
| 1,210,281 |
|
| 2011 | | | 40,392 |
| 323,216 |
| 756,820 |
| 892,959 |
| 982,830 |
| 1,016,855 |
| 1,038,582 |
| 1,048,966 |
|
| 2012 | | | | 19,200 |
| 295,332 |
| 528,744 |
| 631,982 |
| 672,271 |
| 692,291 |
| 702,136 |
|
| 2013 | | | | | 34,504 |
| 191,040 |
| 307,361 |
| 357,087 |
| 379,036 |
| 388,688 |
|
| 2014 | | | | | | 13,108 |
| 115,852 |
| 200,422 |
| 233,607 |
| 246,611 |
|
| 2015 | | | | | | | 10,479 |
| 84,271 |
| 142,421 |
| 163,916 |
|
| 2016 | | | | | | | | 11,061 |
| 76,616 |
| 119,357 |
|
| 2017 | | | | | | | | | 24,653 |
| 66,585 |
|
| 2018 | | | | | | | | | | 5,584 |
|
| | | | | | | | | | Total |
| $ | 5,956,343 |
|
| | | | | | All outstanding liabilities before 2009, net of reinsurance | | 33,479 |
|
| | | | | | Liabilities for claims, net of reinsurance (1) | | $ | 376,389 |
|
______________________
| |
(1)Incurred losses, net of reinsurance | Calculated as follows: | $ | 2,592,921 | |
| All outstanding liabilities before 2012, net of reinsurance | | 30,421 | |
| Cumulative paid claims, net of reinsurance | | (1,886,986) | |
| Liabilities for claims, net of reinsurance | | $ | 736,356 | |
|
| | | |
| (In thousands) | |
| Incurred losses, net of reinsurance | $ | 6,299,253 |
|
| Add: All outstanding liabilities before 2009, net of reinsurance | 33,479 |
|
| Less: Cumulative paid claims, net of reinsurance | 5,956,343 |
|
| Liabilities for claims, net of reinsurance | $ | 376,389 |
|
The following table provides a reconciliation of the net incurred losses and paid claims development tables above to the Mortgage Insurancemortgage insurance reserve for losses and LAE at December 31, 2018:2021.
|
| | | |
| (In thousands) | December 31, 2018 |
| Net outstanding liabilities - Mortgage Insurance: | |
| Reserve for losses and LAE, net of reinsurance | $ | 376,389 |
|
| Reinsurance recoverables on unpaid claims | 11,009 |
|
| Unallocated LAE | 10,493 |
|
Total gross reserve for losses and LAE (1) | $ | 397,891 |
|
______________________
| | | | | | | | |
(1)Net outstanding liabilities - mortgage insurance | Excludes Services | |
| | |
| (In thousands) | | December 31, 2021 |
| Reserve for losses and LAE, net of reinsurance | | $ | 736,356 | |
| Reinsurance recoverables on unpaid claims | | 66,676 | |
| Unallocated LAE | | 20,104 | |
Total gross reserve for losses and LAE of $3.5 million. (1) | | $ | 823,136 | |
(1)Excludes title insurance reserve for losses and LAE of $5.5 million.
The following is supplementary information about average historical claims duration as of December 31, 2018,2021, representing the average distribution of when claims are paid relative to the year of default:default.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Average annual percentage payout of incurred losses by age, net of reinsurance (unaudited) |
| | | | | | | | | | | | | | | | | | | | |
| Years | | 1 | | 2 | | 3 | | 4 | | 5 | | 6 | | 7 | | 8 | | 9 | | 10 |
| Mortgage insurance | | 6.1% | | 31.6% | | 26.4% | | 10.8% | | 4.2% | | 1.9% | | 1.0% | | 0.4% | | 0.3% | | 0.1% |
|
| | | | | | | | | | |
| | Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance (Unaudited) |
| Years | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
| Mortgage Insurance | 6.1% | 34.5% | 31.4% | 13.8% | 7.4% | 4.1% | 2.9% | 1.5% | 1.2% | 0.9% |
141
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
12. Senior NotesBorrowings and Financing Activities
The carrying value of our senior notesdebt at December 31, 20182021 and 20172020 was as follows:follows.
|
| | | | | | | | |
| | | December 31, |
| ($ in thousands) | | 2018 | | 2017 |
| 5.500% | Senior Notes due 2019 | $ | 158,324 |
| | $ | 157,636 |
|
| 5.250% | Senior Notes due 2020 | 232,729 |
| | 231,834 |
|
| 7.000% | Senior Notes due 2021 | 195,867 |
| | 195,146 |
|
| 4.500% | Senior Notes due 2024 | 443,428 |
| | 442,458 |
|
| | Total Senior Notes | $ | 1,030,348 |
| | $ | 1,027,074 |
|
| | | | | | | | | | | | | | |
| Borrowings | | | | |
| | | | |
| | December 31, |
| (In thousands) | | 2021 | | 2020 |
| Senior notes | | | | |
| Senior Notes due 2024 | | $ | 446,631 | | | $ | 445,512 | |
| Senior Notes due 2025 | | 518,405 | | | 516,634 | |
| Senior Notes due 2027 | | 444,437 | | | 443,528 | |
| Total senior notes | | $ | 1,409,473 | | | $ | 1,405,674 | |
| | | | | |
| FHLB advances | | | | |
| FHLB advances due 2021 | | $ | — | | | $ | 67,500 | |
| FHLB advances due 2022 | | 71,050 | | | 61,050 | |
| FHLB advances due 2023 | | 52,995 | | | 27,995 | |
| FHLB advances due 2024 | | 13,954 | | | 9,954 | |
| FHLB advances due 2025 | | 9,984 | | | 9,984 | |
| FHLB advances due 2027 | | 3,000 | | | — | |
| Total FHLB advances | | $ | 150,983 | | | $ | 176,483 | |
Extinguishment of Debt
2017 Activity
Repurchases of Senior Notes due 2019, 2020 and 2021. During the third quarter of 2017, pursuant to cash tender offers, we purchased aggregate principal amounts of $141.4 million, $115.9 million and $152.3 million of our Senior Notes due 2019, 2020 and 2021, respectively. We funded the purchases with $450.8 million in cash (plus accrued and unpaid interest due on the purchased notes). These purchases resulted in a loss on induced conversion and debt extinguishment of $45.8 million. At December 31, 2017, the remaining principal amounts of our outstanding Senior Notes due 2019, 2020 and 2021 were $158.6 million, $234.1 million and $197.7 million, respectively.
Repurchases of Convertible Senior Notes due 2017 and 2019. During the second quarter of 2017, we purchased an aggregate principal amount of $21.6 million of our outstanding Convertible Senior Notes due 2017. We funded the purchases with $31.6 million in cash (plus accrued and unpaid interest due on the purchased notes). These purchases of Convertible Senior Notes due 2017 resulted in a loss on induced conversion and debt extinguishment of $1.2 million.
In connection with our purchases of Convertible Senior Notes due 2017, we terminated a corresponding portion of the capped call transactions we entered into in 2010 related to the initial issuance of the Convertible Senior Notes due 2017. We received proceeds of $4.1 million for this termination.
In November 2016, we announced our intent to exercise our redemption option for the remaining $68.0 million aggregate principal amount of our Convertible Senior Notes due 2019. As a result of the average closing price of our common stock exceeding the conversion price of $10.60 prior to the redemption date, all of the holders of these notes elected to exercise their conversion rights. Radian elected to settle all of the notes surrendered for conversion with cash. We settled our obligations with respect to these conversions on January 27, 2017, with a cash payment of $110.1 million. At the time of settlement, this transaction resulted in a pretax charge of $4.5 million, representing the difference between the fair value and the carrying value, net of unamortized issuance costs, of the liability component of the Convertible Senior Notes due 2019. This transaction also resulted in an aggregate decrease as of the settlement date of 6.4 million diluted shares for the purposes of determining diluted net income per share.
As of December 31, 2017, there were no Convertible Senior Notes due 2017 or Convertible Senior Notes due 2019 outstanding.
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
2016 Activity
Repurchases of Convertible Senior Notes due 2017 and 2019. During 2016, we entered into privately negotiated agreements to purchase, for cash or a combination of cash and shares of Radian Group common stock, aggregate principal amounts of $30.1 million and $322.0 million, respectively, of our outstanding Convertible Senior Notes due 2017 and 2019. We funded the purchases with $235.0 million in cash (plus accrued and unpaid interest due on the purchased notes) and by issuing to certain of the sellers 17.0 million shares of Radian Group common stock. These purchases of Convertible Senior Notes due 2017 and 2019 resulted in a pretax charge of $60.1 million. This loss represents:
the $41.8 million market premium representing the excess of the fair value of the total consideration delivered to the sellers of the Convertible Senior Notes due 2017 and 2019 over the fair value of the common stock issuable pursuant to the original conversion terms of the purchased notes;
the $17.2 million difference between the fair value and the carrying value, net of unamortized issuance costs, of the liability component of the purchased notes; and
the $1.1 million impact of related transaction costs.
In connection with our privately negotiated purchases of Convertible Senior Notes due 2017 in March 2016, we terminated a corresponding portion of the capped call transactions we had entered into in 2010 related to the initial issuance of the Convertible Senior Notes due 2017. As a result of this termination, we received consideration of 0.2 million shares of Radian Group common stock, which was valued at $2.6 million based on a stock price on the closing date of $11.86. In accordance with the accounting standards regarding equity and contracts in an entity’s own equity, the total consideration received was recorded as an increase to additional paid-in capital. The shares of Radian Group common stock received were retired, resulting in a decrease in shares issued and outstanding and a corresponding increase in unissued shares.
Redemption of Senior Notes due 2017. On August 12, 2016, we redeemed the remaining $195.5 million aggregate principal amount of our Senior Notes due 2017 for the price established in accordance with the indenture governing the notes. We paid $211.3 million in cash (including accrued interest through the redemption date) to holders of the notes at redemption and recorded a loss on debt extinguishment of $15.0 million.
Senior Notes
Senior Notes due 2019. In May 2014, in anticipation of the Clayton acquisition, we issued $300 million principal amount of Senior Notes due 2019 and received net proceeds of $293.8 million. These notes mature on June 1, 2019 and bear interest at a rate of 5.500% per annum, payable semi-annually on June 1 and December 1 of each year, commencing on December 1, 2014.
Senior Notes due 2020. In June 2015, we issued $350 million aggregate principal amount of Senior Notes due 2020 and received net proceeds of $343.3 million. These notes mature on June 15, 2020 and bear interest at a rate of 5.250% per annum, payable semi-annually on June 15 and December 15 of each year, commencing on December 15, 2015.
Senior Notes due 2021. In March 2016, we issued $350 million aggregate principal amount of Senior Notes due 2021 and received net proceeds of $343.4 million. These notes mature on March 15, 2021 and bear interest at a rate of 7.000% per annum, payable semi-annually on March 15 and September 15 of each year, commencing on September 15, 2016.
Senior Notes due 2024. In September 2017, we issued $450 million aggregate principal amount of Senior Notes due 2024 and received net proceeds of $442.2 million. These notes mature on October 1, 2024 and bear interest at a rate of 4.500% per annum, payable semi-annually on April 1 and October 1 of each year, with interest payments commencing on April 1, 2018.
Senior Notes due 2025. In May 2020, we issued $525 million aggregate principal amount of Senior Notes due 2025 and received net proceeds of $515.6 million. These notes mature on March 15, 2025 and bear interest at a rate of 6.625% per annum, payable semi-annually on March 15 and September 15 of each year, with interest payments commencing on September 15, 2020.
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.
Redemption Terms in Senior Notes. We have the option to redeem the Senior Notes due 2019, 2020, 20212024, 2025 and 20242027, in whole or in part, at any time, or from time to time, prior to July 1, 2024 (the date that is three months prior to the maturity date of the Senior notes due 2024), September 15, 2024 (the date that is six months prior to the maturity date of the Senior notes due 2025) and September 15, 2026 (the date that is six months prior to the maturity date of the Senior notes due 2027) (in each case, the “Par Call Date”), respectively, at a redemption price equal to the greater of: (i) 100% of the aggregate principal amount of the notes to be redeemed orand (ii) a “make-wholethe make-whole amount,” which is the sum of the present values of the remaining scheduled payments of principal and interest (excluding any portion of interest accrued to the redemption date) in respect of the notes to be redeemed 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.
Covenants in Senior Notes. The indentures governing the Senior Notes due 2019, 2020, 20212024, 2025 and 2024 have2027 contain covenants customary for securities of this nature, including covenants related to the payments of the notes, reports, complianceperiodic reporting and certificates to be issued and modification ofcovenants related to amendments to the covenants.indentures. Additionally, the applicable indentures include covenants restricting us from encumbering the capital stock of a
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
designated subsidiary (as defined in the respective indenturesindenture 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.
13. Other Liabilities
The following table shows the components of other liabilities We were in compliance with all covenants as of the dates indicated:December 31, 2021.
|
| | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 |
| Deferred ceding commission | $ | 91,400 |
| | $ | 89,907 |
|
| FHLB advances | 82,532 |
| | — |
|
| Accrued compensation | 61,452 |
| | 67,687 |
|
| Amount payable on the return of cash collateral under securities lending agreements | 11,699 |
| | 19,357 |
|
| Current federal income taxes | — |
| | 96,740 |
|
| Other | 86,576 |
| | 80,154 |
|
| Total other liabilities | $ | 333,659 |
| | $ | 353,845 |
|
142
| | | | | |
|
Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
FHLB Advances
In August 2016, Radian Guaranty and Radian Reinsurance became members of the FHLB. As members, they may borrow from the FHLB, subject to certain conditions, which include the need to post collateral and the requirement to maintain a minimum investment in FHLB stock, in part depending on the level of their outstanding FHLB advances.
As of December 31, 2018,2021, we had $82.5$151.0 million of fixed-rate advances outstanding with a weighted average interest rate of 2.73%0.97%. Interest on the FHLB advances is payable quarterly, or at maturity if the term of the advance is less than 90 days. As of December 31, 2018, $60.5 million of the FHLB advances mature in 2019, $3.0 million mature in 2020, $8.0 million mature in 2021, $9.0 million mature in 2023 and $2.0 million mature in 2024. Principal is due at maturity. For obligations with maturities greater than or equal to 90 days, we may prepay the debt at any time, subject to a prepayment fee calculation.fee.
The principal balance of the FHLB advances areis required to be collateralized by eligible assets with a market value that must be maintained atgenerally within a minimum range of approximately 103% to 105%114% of the principal balance of the FHLB advances (basedamount borrowed, depending on the eligible collateral we have provided at December 31, 2018, which consistedtype of an aggregate amount of $88.4 million in U.S. government and agency securities and RMBS fromassets pledged. Our fixed-maturities available for sale withinand trading securities include securities totaling $167.3 million and $188.0 million at December 31, 2021 and 2020, respectively, which serve as collateral for our investment securities portfolio).
Amount Payable on the Return of Cash Collateral under Securities Lending Agreements
We participate in a securities lending program through which we loan certain securities in our investment portfolioFHLB advances to Borrowers for short periods of time. These securities lending agreements, whereby we transfer securities to third parties through an intermediary in exchange for cash or other securities, are considered collateralized financing arrangements. Amounts payable on the return of cash collateral under securities lending agreements are classified as other liabilities in our consolidated balance sheets. See Note 6 for additional information.satisfy this requirement.
Revolving Credit Facility
On October 16, 2017,In December 2021 Radian Group entered into a three-year, $225.0new $275.0 million unsecured revolving credit facility with a syndicate of bank lenders. The revolving credit facility has a five year term, provided that under certain conditions Radian Group is required to offer to terminate the facility earlier than the maturity date. This replaced Radian Group’s $267.5 million unsecured revolving credit facility with a syndicate of bank lenders, which was set to expire in January 2022. Terms of the credit facility include an accordion feature that allows Radian Group, at its option, to increase the total borrowing capacity during the term of the agreement, subject to our obtaining the necessary increased commitments from lenders (which may include then existing or other lenders), up to a total of $300 million. Effective October 26, 2018, Radian Group exercised its rights under the accordion feature to add another global bank to the existing syndicate of bank lenders and to increase the amount of total commitments under the credit facility by $42.5 million, bringing the aggregate unsecured revolving credit facility to $267.5$400.0 million.
Subject to certain limitations, borrowings under the credit facility may be used for working capital and general corporate purposes, including capital contributions to Radian Group’s insurance and reinsurance subsidiaries as well as growth initiatives. The credit facility contains customary representations, warranties, covenants, terms and conditions. Our ability to borrow under the credit facility is conditioned on the satisfaction of certain financial and other covenants, including covenants related to
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
minimum net worth and statutory surplus, a maximum debt-to-capitalization level, limits on certain types of indebtedness and liens, minimum liquidity levels and Radian Guaranty’s eligibility as a private mortgage insurer with the GSEs. At December 31, 2018,2021, Radian Group was in compliance with all the covenants and there were no amounts outstanding under this revolving credit facility.
14.13. Commitments and Contingencies
Legal Proceedings
We are routinely involved in a number of legal actions and regulatory claims, assertions, actions,proceedings, including reviews, audits inquiries and investigationsinquiries by various regulatory entities, involving compliance with laws oras well as litigation and other regulations,disputes arising in the outcomeordinary course of which are uncertain.our business. These legal proceedings and regulatory matters 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 any one or more of these matters currently pending or threatened could have an adverse effect on our liquidity, financial condition or results of operations for any particular period. In accordance with applicable accounting standards and guidance, we establish accruals only when we determine both that it is probable that a loss has been incurred and the amount of the loss is reasonably estimable. We accrue the amount that represents our best estimate of the probable loss; however, if we can only determine a range of estimated losses, we accrue an amount within the range that, in our judgment, reflects the most likely outcome, and if none of the estimates within the range is more likely, we accrue the minimum amount of the range.
In the course of our regular review of pending legal and regulatory matters, we determine whether it is reasonably possible that a potential loss may have a material impact on our liquidity, results of operations or financial condition. If we determine such a loss is reasonably possible, we disclose information relating to such potential loss, including an estimate or range of loss or a statement that such an estimate cannot be made. On a quarterly basis, we review relevant information with respect to loss contingencies and update our accruals, disclosures and estimates of reasonably possible losses or range of losses based on such reviews. We are often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the court on motions or appeals, analysis by experts and the progress of settlement negotiations. In addition, we generally make no
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
disclosures for loss contingencies that are determined to be remote. For matters for which we disclose an estimated loss, the disclosed estimate reflects the reasonably possible loss or range of loss in excess of the amount accrued, if any.
Loss estimates are inherently subjective, based on currently available information and are subject to management’s judgment and various assumptions. Due to the inherently subjective nature of these estimates and the uncertainty and unpredictability surrounding the outcome of legal and other proceedings, actual results may differ materially from any amounts that have been accrued.
As described in Note 10, on September 4, 2014 we received formal Notices of Deficiency from the IRS related to certain losses and deductions resulting from our investment in a portfolio of non-economic REMIC residual interests. As previously disclosed, we contested adjustments resulting from the examination by the IRS of our 2000 through 2007 consolidated federal income tax returns. In July 2018, we finalized a settlement with the IRS related to the adjustments we had been contesting. This settlement with the IRS resolved the issues and concluded all disputes related to the IRS Matter. In 2018, under the terms of the settlement, Radian utilized its “qualified deposits” with the U.S. Treasury to settle its $31 million obligation to the IRS, and in 2019, the Company expects the IRS to refund to Radian the remaining $58 million that was previously on deposit.
On December 22, 2016, Ocwen Loan Servicing, LLC and Homeward Residential, Inc. (collectively, “Ocwen”) filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania against Radian Guaranty (the “Complaint”) alleging breach of contract and bad faith claims and seeking monetary damages and declaratory relief. Ocwen has also initiated similar legal proceedings against several other mortgage insurers. On December 17, 2016, Ocwen separately filed a parallel arbitration petition against Radian Guaranty before the American Arbitration Association (“AAA”) asserting substantially the same allegations (the “Arbitration”). Ocwen’s filings together listed 9,420 mortgage insurance certificates issued under multiple insurance policies, including Pool Insurance policies, as subject to the dispute. On June 5, 2017, Ocwen filed an amended complaint and an amended petition (collectively, the “Amended Filings”) with both the court and the AAA, respectively, together listing 8,870 certificates as subject to the dispute. On April 11, 2018, the parties entered into a confidential agreement with respect to all certificates subject to the dispute. The confidential agreement resolved certain categories of claims involved in the dispute and, on April 12, 2018, the parties filed a stipulation of voluntary dismissal of the federal court proceeding and the trial judge issued an Order dismissing all claims and counterclaims subject to the parties’ agreement. Radian Guaranty was not required to make any payment in connection with this confidential agreement. Pursuant to the confidential agreement, the parties: (1) dismissed the federal court proceeding; (2) narrowed the scope of the dispute to Ocwen’s breach of contract claims
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
seeking payment of insurance benefits on approximately 2,500 certificates that Ocwen was previously pursuing through the Amended Filings; and (3) agreed to resolve the remaining dispute through the Arbitration. Radian Guaranty believes that Ocwen’s allegations and claims in the legal proceedings described above are without merit and legally deficient, and plans to defend these claims vigorously. We are not able to estimate a reasonably possible loss, if any, or range of loss in this matter because of the current preliminary stage of the Arbitration.
On August 31, 2018, Nationstar Mortgage LLC d/b/a Mr. Cooper (“Nationstar”) filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania against Radian Guaranty (the “Complaint”) alleging breach of contract, bad faith, and unjust enrichment claims and seeking monetary damages and declaratory relief. The Complaint lists 3,014 mortgage insurance certificates issued under multiple insurance policies as subject to disputes involving insurance coverage decisions. The Complaint further lists 2,231 mortgage insurance certificates issued under multiple insurance policies as subject to disputes involving premium refund requests. Radian Guaranty believes that Nationstar’s allegations and claims in the legal proceedings described above are without merit and legally deficient, and plans to defend these claims vigorously. We are not able to estimate a reasonably possible loss, if any, or range of loss in this matter because of the preliminary stage of the litigation.
We also are periodically subject to reviews and audits, as well as inquiries, information-gathering requests and investigations.investigations, by regulatory entities. 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 Mortgage Insurance policies. Although we believe that our Loss Mitigation Activities are justified under our policies, from time to time we continue to face challenges from certain lender and servicer customers regarding our Loss Mitigation Activities, which have resulted in some reversals of our decisions regarding Rescissions, Claim Denials or Claim Curtailments. We are currently in discussions with these customers regarding Loss Mitigation Activities and our claim payment practices, which if not resolved,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, thosethe associated policies or pay additional claims.
The legal and regulatory matters discussed above could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief that could require significant expenditures or have other effects on our business in excess of amounts we have established as reserves for such matters.
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, resulting in discount rates ranging from 4.37% to 7.08%. While the majority of our lease population expires within one year of one of Radian Group’s corporate bonds, our more significant leases do not. For those leases, we adjust the corporate bond rate for both U.S. Department of the Treasury rate yields, and a corporate spread adjustment determined from recent market data.
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.
| | | | | | | | | | | | | | |
| Total lease cost | | | | |
| | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 |
| Operating lease cost | | $ | 9,333 | | | $ | 8,798 | |
| Short-term lease cost | | 384 | | | 13 | |
| Total lease cost | | $ | 9,717 | | | $ | 8,811 | |
| | | | | |
| Cash paid for amounts included in the measurement of lease liabilities | | | | |
| Operating cash flows from operating leases | | $ | (9,060) | | | $ | (9,595) | |
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
| | | | | | | | | | | | | | |
| Operating leases | | | | |
| | | | |
| | December 31, |
| ($ in thousands) | | 2021 | | 2020 |
| Operating leases | | | | |
Operating lease right-of-use assets (1) | | $ | 31,878 | | | $ | 32,985 | |
Operating lease liabilities (2) | | 53,523 | | | 53,399 | |
| Weighted-average remaining lease term - operating leases (in years) | | 7.9 years | | 9.3 years |
| Weighted-average discount rate - operating leases | | 6.21 | % | | 6.72 | % |
| Remaining maturities of lease liabilities for future years is as follows: | | | | |
| 2022 | | $ | 12,033 | | | |
| 2023 | | 12,191 | | | |
| 2024 | | 11,952 | | | |
| 2025 | | 9,704 | | | |
| 2026 | | 7,225 | | | |
| 2027 and thereafter | | 32,646 | | | |
| Total lease payments | | 85,751 | | | |
| Less: Imputed interest | | (32,228) | | | |
Present value of lease liabilities (2) | | $ | 53,523 | | | |
(1)Classified in other assets in our consolidated balance sheets. See Note 11 for further information.9.
Further, there are loans(2)Classified in other liabilities in our total defaulted portfolio (in particular, our older defaulted portfolio) for which actions or proceedings (such as foreclosure that provide the insured with title to the property) may not have been commenced within the outermost deadline in our Prior Master Policy. We are evaluating these loans regarding this potential violation and our corresponding rights under the Prior Master Policy. While we can provide no assurance regarding the ultimate resolution of these issues, it is possible that arbitration or legal proceedings could result.consolidated balance sheets.
Other
Securities regulations became effective in 2005 that impose enhanced disclosure requirements on issuers of ABS (including mortgage-backed securities). To allow our customers to comply with these regulations at that time, we typically were required, depending on the amount of credit enhancement we were providing, to provide: (i) audited financial statements for the insurance subsidiary participating in the transaction or (ii) a full and unconditional holding company-level guarantee for our insurance subsidiaries’ obligations in such transactions. Radian Group has guaranteed two structured transactions for Radian Guaranty involving $87.8The table above excludes approximately $5.8 million of remaining credit exposurefuture payment obligations related to an additional operating lease, which had not yet commenced as of December 31, 2018.2021.
At December 31, 2021 and 2020, there were no future minimum receipts expected from sublease rental payments. We entered into a sublease agreement in January 2022 for a portion of the office space in our former corporate headquarters in Philadelphia and are actively marketing all remaining space in that location for sublease. Upon entering a sublease agreement, we do not anticipate being relieved of our primary obligation under the original lease and will act as a lessor recognizing any sublease income in other income on a straight-line basis over the remaining lease term.
Other
We provide contract underwriting as an outsourced service to our mortgage insurance customers. UnderGenerally, under our current contract underwriting program the remedy we offer is limited indemnification toindemnification. In 2021 and 2020, our provision for contract underwriting customers only with respect to those loans that we simultaneously underwrite for both secondary market complianceexpenses and for potential mortgage insurance eligibility. In 2018,our payments for losses related to contract underwriting remedies were de minimis. In 2018, our provision for contract underwriting expenses was de minimis and our reserve for contract underwriting obligations at December 31, 2018 was $0.2 million. We monitor this risk and negotiate our underwriting fee structure and recourse agreements on a client-by-client basis. We also routinely audit the performance of our contract underwriters.
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
We lease office space for use in our operations. The lease agreements, which expire periodically through August 2032, contain provisions for scheduled periodic rent increases. Net rental expense in connection with these leases totaled $9.7 million in 2018, $5.7 million in 2017 and $5.0 million in 2016. The commitment for non-cancelable operating leases in future years is as follows:
|
| | | |
| (In thousands) | |
| 2019 | $ | 11,310 |
|
| 2020 | 10,847 |
|
| 2021 | 10,165 |
|
| 2022 | 10,100 |
|
| 2023 | 10,251 |
|
| Thereafter | 56,317 |
|
| Total | $ | 108,990 |
|
At December 31, 2018, there were no future minimum receipts expected from sublease rental payments.
15.14. Capital Stock
2018Share Repurchase Activity
On August 16, 2018,14, 2019, Radian Group’s board of directors approved a new share repurchase program that authorizesauthorizing the Company to repurchase up to $100 million of its common stock in the open market or in privately negotiated transactions, based on market and business conditions, stock price and other factors. As of December 31, 2018, the full purchase authority of up to $100 million remained available under this program, which expires on July 31, 2019.
On August 9, 2017, Radian Group’s board of directors authorized a share repurchase program to spend up to $50$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 establishedgenerally operates its share repurchase programs pursuant to a trading plan under Rule 10b5-1 of the Exchange Act, which permits the Company to implementpurchase shares, at predetermined price targets, when it may otherwise be precluded from doing so.
Since then, Radian Group’s board of directors has authorized several increases to the program. The Company completedprogram along with extensions of the program’s expiration date. Most recently, in August 2021, Radian Group’s board of directors approved a $200 million increase to this program, duringbringing the first halfcumulative authorization to repurchase shares up to $675 million, excluding commissions, and extended the expiration of 2018 by purchasing 3.0this program to August 31, 2022. During the year ended December 31, 2021, the Company purchased 17.8 million shares of Radian Group common stock at an average price of $16.56$22.48 per share, including commissions.
2017 Activity As of December 31, 2021, no purchase authority remained available under this program.
On June 29, 2016,February 9, 2022, Radian Group’s board of directors authorizedapproved a share repurchase program authorizing the Company to spend up to $125$400 million, excluding commissions, to repurchase Radian Group common stock. In orderstock in the open market or in
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
privately negotiated transactions, based on market and business conditions, stock price and other factors. Radian plans to implement the program, Radian adoptedutilize a trading plan under Rule 10b5-1Rule10b5-1 of the Exchange Act, duringwhich, once implemented, permits the third quarter of 2016. During the second quarter of 2017, 380Company to purchase shares, were purchased at an averagepredetermined price of $15.59 per share, which represented the only purchases made under the plan. This share repurchase program expired on June 30, 2017.
2016 Activity
In the first quarter of 2016, we announced and completed a share repurchase program. Pursuant to this program, we purchased an aggregate of 9.4 million shares of Radian Group common stock for $100.2 million, at a weighted-average price per share of $10.62, including commissions. No further purchase authority remains under this share repurchase program.
As partial consideration for our March 2016 privately negotiated purchases of a portion of our Convertible Senior Notes due 2017 and 2019, we issued to the sellers 17.0 million shares of Radian Group common stock. In addition,targets, when it may otherwise be precluded from doing so. The authorization will expire in connection with our termination of the corresponding portion of the related capped call transactions, we received consideration of 0.2 million shares of Radian Group common stock. See Note 12 for additional information regarding these transactions.February 2024.
All shares of Radian Group common stock that we received from the above transactions were retired, resulting in a decrease in shares issued and outstanding and a corresponding increase in unissued shares.
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. Through December 31, 2018, from time to time we also purchased shares on the open market
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
to fund certain 401(k) matches.ESPP. In addition, upon the vesting of certain restricted stock awardsRSUs 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 Paidand Dividend Equivalents
InDuring the first quarter of 2021 and each quarter of the quarters during 2018, 2017 and 2016,2020, we declared quarterly cash dividends on our common stock equal to $0.0025$0.125 per share. On May 4, 2021, Radian Group’s board of directors authorized an increase to the Company’s quarterly dividend from $0.125 to $0.14 per share, beginning with the dividend declared in the second quarter of 2021.
On February 9, 2022, Radian Group’s board of directors authorized an increase to our quarterly dividend from $0.14 to $0.20 per share, beginning with dividends declared in the first quarter of 2022.
Dividend equivalents are accrued on RSUs when dividends are declared on the Company’s common stock, subject to certain exclusions. See Note 17 for information about our dividend equivalents on RSU awards.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
15. Accumulated Other Comprehensive Income (Loss)
The following tables show the rollforward of accumulated other comprehensive income (loss) as of the periods indicated.
| | | | | | | | | | | | | | | | | | | | |
| Rollforward of accumulated other comprehensive income | | | | | | |
| | | | | | |
| | Year Ended December 31, 2021 |
| (In thousands) | | Before Tax | | Tax Effect | | Net of Tax |
| Balance at beginning of period | | $ | 333,829 | | | $ | 70,104 | | | $ | 263,725 | |
| Other comprehensive income (loss) | | | | | | |
| Unrealized holding gains (losses) on investments arising during the period for which an allowance for expected credit losses has not been recognized | | (175,234) | | | (36,799) | | | (138,435) | |
Less: Reclassification adjustment for net gains (losses) on investments included in net income: (1) | | | | | | |
| Net realized gains on disposals and non-credit related impairment losses | | 5,661 | | | 1,189 | | | 4,472 | |
| Net decrease (increase) in expected credit losses | | 918 | | | 193 | | | 725 | |
| Net unrealized gains (losses) on investments | | (181,813) | | | (38,181) | | | (143,632) | |
| | | | | | |
| Other comprehensive income (loss) | | (181,813) | | | (38,181) | | | (143,632) | |
| Balance at end of period | | $ | 152,016 | | | $ | 31,923 | | | $ | 120,093 | |
| | | | | | |
| | Year Ended December 31, 2020 |
| (In thousands) | | Before Tax | | Tax Effect | | Net of Tax |
| Balance at beginning of period | | $ | 139,858 | | | $ | 29,370 | | | $ | 110,488 | |
| Other comprehensive income (loss) | | | | | | |
| Unrealized holding gains (losses) on investments arising during the period for which an allowance for expected credit losses has not been recognized | | 226,280 | | | 47,519 | | | 178,761 | |
Less: Reclassification adjustment for net gains (losses) included in net income (1) | | | | | | |
| Net realized gains on disposals and non-credit related impairment losses | | 33,468 | | | 7,028 | | | 26,440 | |
| Net decrease (increase) in expected credit losses | | (1,254) | | | (263) | | | (991) | |
| Net unrealized gains on investments | | 194,066 | | | 40,754 | | | 153,312 | |
| Other adjustments to comprehensive income, net | | (95) | | | (20) | | | (75) | |
| Other comprehensive income (loss) | | 193,971 | | | 40,734 | | | 153,237 | |
| Balance at end of period | | $ | 333,829 | | | $ | 70,104 | | | $ | 263,725 | |
| | | | | | |
| | Year Ended December 31, 2019 |
| (In thousands) | | Before Tax | | Tax Effect | | Net of Tax |
| Balance at beginning of period | | $ | (77,114) | | | $ | (16,194) | | | $ | (60,920) | |
| Other comprehensive income (loss) | | | | | | |
| | | | | | |
| Unrealized holding gains (losses) arising during the period | | 228,406 | | | 47,965 | | | 180,441 | |
Less: Reclassification adjustment for net gains (losses) included in net income (1) | | 11,262 | | | 2,365 | | | 8,897 | |
| Net unrealized gains on investments | | 217,144 | | | 45,600 | | | 171,544 | |
| Other adjustments to comprehensive income, net | | (172) | | | (36) | | | (136) | |
| Other comprehensive income (loss) | | 216,972 | | | 45,564 | | | 171,408 | |
| Balance at end of period | | $ | 139,858 | | | $ | 29,370 | | | $ | 110,488 | |
| | | | | | |
(1)Included in net gains on investments and other financial instruments in our consolidated statements of operations. |
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
16. Share-BasedStatutory Information
Radian Group serves as the holding company for our insurance subsidiaries, through which we conduct our mortgage insurance and Other Compensation Programstitle insurance businesses. These insurance subsidiaries are subject to comprehensive, detailed regulation by the insurance departments in the various states where our insurance subsidiaries are domiciled or licensed to transact business. Insurance laws vary from state to state, but generally grant broad supervisory powers to state agencies or officials to examine insurance companies and enforce rules or exercise discretion affecting almost every significant aspect of the insurance business, including the power to revoke or restrict an insurance company’s ability to write new business.
On May 10, 2017,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. The PMIERs are comprehensive, covering virtually all aspects of the business and operations of a private mortgage insurer, including internal risk management and quality controls, the relationship between the GSEs and the approved insurer, as well as the approved insurer’s financial condition.
See “—PMIERs” below for additional information.
The PMIERs and state insurance regulations include various capital requirements and dividend restrictions based on our stockholders approvedinsurance subsidiaries’ statutory financial position and results of operations, as described below. Our failure to maintain adequate levels of capital could lead to intervention by the Amendedvarious insurance regulatory authorities, which could materially and Restated Equity Compensation Plan, which amendedadversely affect our business, business prospects and restatedfinancial condition.
Statutory Financial Statements
We prepare our statutory financial statements in accordance with the 2014 Equity Plan.accounting practices required or permitted, if applicable, by the insurance departments of the respective states of domicile of our insurance subsidiaries. Required SAP are established by the NAIC, as well as state laws, regulations and general administrative rules. In addition, insurance departments have the right to permit other specific practices that may deviate from prescribed practices. As of December 31, 2021, we did not have any prescribed or permitted SAP that resulted in reported statutory surplus or risk-based capital being materially different from what would have been reported had NAIC statutory accounting practices been followed.
Reflecting the principal differences between SAP and GAAP, statutory financial statements typically do not include unrealized gains or losses on fixed-maturity securities, deferred policy acquisition costs, certain net deferred tax assets and certain other less readily marketable assets that are designated as non-admitted assets. In addition to these general differences, SAP also requires that mortgage insurance companies establish a special contingency reserve equal to 50% of premiums earned in each year, generally to be maintained for 10 years, to protect policyholders against loss during adverse economic cycles.
As a result of the Amendedrequirement to establish and Restated Equity Compensation Plan,maintain this statutory liability, contingency reserves affect the ability of a mortgage insurer to pay dividends, as described below. With regulatory approval, a mortgage insurance company may make early withdrawals from this contingency reserve when incurred losses exceed 35% of net premiums in a calendar year. Due to elevated losses in 2020, Radian Guaranty received regulatory approval to release $93.0 million from contingency reserves for that year. Radian Guaranty did not release any amounts from their contingency reserves in 2021. Based on the typical 10-year holding requirement, Radian Guaranty is scheduled to release contingency reserves to unassigned surplus beginning in 2024. See “—Statutory Dividend Restrictions” below for additional information.
As a mortgage guaranty insurer, we also have awards outstanding under our 2008 Equity Plan and 1995 Equity Plan. The last awards granted pursuantare eligible for a tax deduction, subject to certain limitations, related to amounts required to be set aside in statutory contingency reserves to the 2008 Equity Planextent we purchase U.S. Mortgage Guaranty Tax and 1995 Equity PlanLoss Bonds issued by the U.S. Department of the Treasury. Under SAP, this deduction reduces the tax provision reflected in the statutory financial statements, which in turn increases statutory net income and surplus as well as Available Assets under the PMIERs. As of December 31, 2021, Radian Guaranty held $354.1 million of these bonds, which have a 10-year original maturity but may generally be redeemed in any tax year prior to maturity.
All of our mortgage insurance subsidiaries are domiciled in Pennsylvania, and we currently write new business using 2 principal subsidiaries, Radian Guaranty and Radian Reinsurance. Radian Guaranty, our only approved insurer under the PMIERs, is authorized as a monoline insurer to write mortgage guaranty insurance (or in states where there is no specific authorization for mortgage guaranty insurance, the applicable line of insurance under which mortgage guaranty insurance is regulated) in all 50 states, the District of Columbia and Guam. Radian Reinsurance is licensed only in Pennsylvania as a stock casualty insurance company authorized to carry on the business of credit insurance, which includes the authority to write direct mortgage guaranty insurance. We use Radian Reinsurance to participate in the credit risk transfer programs developed by Fannie Mae and Freddie Mac.
Additionally, as part of our title services, we offer title insurance through Radian Title Insurance, an Ohio domiciled title insurance underwriter and settlement services company that is licensed to issue title insurance policies in 41 states and the District of Columbia.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
Our insurance subsidiaries’ statutory net income and statutory policyholders’ surplus for the years ended and as of December 31, 2021, 2020 and 2019 were grantedas follows.
| | | | | | | | | | | | | | | | | | | | | | | |
| Statutory net income (loss) | | | | | | | |
| | | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Radian Guaranty | | $ | 753,506 | | | | $ | 441,947 | | | $ | 703,380 | |
| Radian Reinsurance | | 9,103 | | | | 32,484 | | | 101,591 | |
| Other mortgage subsidiaries | | 1,669 | | | | 1,086 | | | 144 | |
| Radian Title Insurance | | 6,862 | | | | 2,126 | | | 331 | |
| | | | | | | |
| Statutory policyholders’ surplus | | | | | | | |
| | | | | | | |
| | December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Radian Guaranty | | $ | 778,148 | | | | $ | 481,484 | | | $ | 637,718 | |
| Radian Reinsurance | | 327,118 | | | | 360,704 | | | 455,594 | |
| Other mortgage subsidiaries | | 14,524 | | (1) | | 41,327 | | | 45,672 | |
| Radian Title Insurance | | 36,599 | | | | 28,849 | | | 27,349 | |
(1)NaN previous insurance subsidiaries, Radian Mortgage Guaranty Inc. and Radian Investor Surety Inc., were dissolved in 20142021.
Statutory Capital Requirements
Under state insurance regulations, Radian Guaranty is required to maintain minimum surplus levels and, 2008,in certain states, a maximum ratio of net RIF relative to statutory capital, or Risk-to-capital. There are 16 RBC States that currently impose a Statutory RBC Requirement. The most common Statutory RBC Requirement is that a mortgage insurer’s Risk-to-capital may not exceed 25 to 1. In certain of the RBC States, a mortgage insurer must satisfy a MPP Requirement. Unless an RBC State grants a waiver or other form of relief, if a mortgage insurer, such as Radian Guaranty, is not in compliance with the Statutory RBC Requirement of that state, the mortgage insurer may be prohibited from writing new mortgage insurance business in that state.
The statutory capital requirements for the non-RBC States are de minimis (ranging from $1 million to $5 million); however, the insurance laws of these states generally grant broad supervisory powers to state agencies or officials to enforce rules or exercise discretion affecting almost every significant aspect of the insurance business, including the power to revoke or restrict an insurance company’s ability to write new business. Radian Guaranty’s domiciliary state, Pennsylvania, is not one of the RBC States.
Radian Guaranty was in compliance with all applicable Statutory RBC Requirements or MPP Requirements, as applicable, in each of the RBC States as of December 31, 2021. Radian Guaranty’s Risk-to-capital calculation was 11.1:1 and 12.7:1 as of December 31, 2021 and 2020, respectively. 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.
Our other mortgage insurance and title insurance subsidiaries were also in compliance with all statutory and counterparty capital requirements as of December 31, 2021 and 2020.
For many years, the NAIC has been reviewing the minimum capital and surplus requirements for mortgage insurers and considering changes to the Model Act. In December 2019, a working group of state regulators released exposure drafts of a revised Model Act, including new proposed mortgage guaranty insurance capital requirements for mortgage insurers. Since that time, the process for developing the Model Act largely has been inactive, although work has proceeded on developing a new, legally non-binding capital monitoring framework that regulators could use as an alternative for assessing the capital adequacy of a mortgage insurer. The requirements set forth in the most recent exposure draft of the non-binding capital adequacy tool are impacted, among other things, by changes in the economic and housing environment, including changes in home prices and incomes.
PMIERs
The PMIERs financial requirements require that a mortgage insurer’s Available Assets meet or exceed its Minimum Required Assets. At December 31, 2021, Radian Guaranty is an approved mortgage insurer under the PMIERs and is in compliance with the current PMIERs financial requirements.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
The GSEs may amend the PMIERs at any time, and they have broad discretion to interpret the requirements, which could impact the calculation of Radian Guaranty’s Available Assets and/or Minimum Required Assets. In addition, the GSEs have a broad range of consent rights under the PMIERs and require private mortgage insurers to obtain the prior consent of the GSEs before taking certain actions. If Radian Guaranty is unable to satisfy the requirements set forth in the PMIERs, the GSEs could restrict it from conducting certain types of business with them or take actions that may include not purchasing loans insured by Radian Guaranty.
Statutory Dividend Restrictions
As of December 31, 2021, the amount of restricted net assets held by our consolidated insurance subsidiaries (which represents our equity investment in those insurance subsidiaries) totaled $4.8 billion of our consolidated net assets. Despite holding assets above the minimum statutory capital thresholds and PMIERs financial requirements, the ability of Radian’s mortgage insurance subsidiaries to pay dividends on their common stock is restricted by certain provisions of the insurance laws of Pennsylvania, their state of domicile.
Under Pennsylvania’s insurance laws, ordinary dividends and distributions may only be paid out of an insurer’s positive unassigned surplus unless the Pennsylvania Insurance Department approves the payment of extraordinary dividends or other distributions from another source. While all proposed dividends and distributions to stockholders must be filed with the Pennsylvania Insurance Department prior to payment, if a Pennsylvania domiciled insurer had positive unassigned surplus, such insurer can pay dividends or other distributions during any 12-month period in an aggregate amount less than or equal to the greater of: (i) 10% of the preceding year-end statutory policyholders’ surplus or (ii) the preceding year’s statutory net income, in each case without the prior approval of the Pennsylvania Insurance Department.
As of December 31, 2021, Radian Guaranty had negative unassigned surplus of $562.8 million. Therefore, no dividends or other ordinary distributions can be paid by Radian Guaranty. In light of Radian Guaranty’s negative unassigned surplus related to operating losses in prior periods and the ongoing need to set aside contingency reserves, we do not anticipate that Radian Guaranty will be permitted under applicable insurance laws to pay ordinary dividends to Radian Group for the next several years.
In September 2021, Radian Reinsurance paid an ordinary dividend of $36.0 million to Radian Group. As of December 31, 2021, Radian Reinsurance had positive unassigned surplus of $286.1 million. As a result, Radian Reinsurance does have the ability to pay ordinary dividends in 2022. Under Pennsylvania’s insurance laws, Radian Reinsurance can distribute up to $32.7 million in 2022 without prior approval from the Pennsylvania Insurance Department.
As of December 31, 2021 and 2020, Radian Guaranty had contingency reserves of $3.9 billion and $3.4 billion, respectively. As discussed above, absent early releases related to elevated incurred losses such as occurred in 2020, Radian Guaranty is scheduled to release contingency reserves to unassigned surplus beginning in 2024, which should accelerate the reduction of its negative unassigned surplus. Under Pennsylvania’s insurance laws, an insurer may request approval to pay an Extraordinary Distribution, subject to the approval of the Pennsylvania Insurance Department. Radian Guaranty sought and received such approval to return capital by paying Extraordinary Distributions to Radian Group in the past, most recently in February 2022, as discussed below. Radian Reinsurance sought and received approval to return capital by paying an Extraordinary Distribution to Radian Group in January 2020.
The surplus additions (distributions) between Radian Group and Radian Guaranty and our other insurance subsidiaries for the years ended December 31, 2021, 2020 and 2019 were as follows.
| | | | | | | | | | | | | | | | | | | | |
| Surplus additions (distributions) | | | | | | |
| | | | | | |
| | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
| Additions to Radian Guaranty surplus | | $ | — | | | $ | 200,000 | | | $ | — | |
| Distributions from Radian Guaranty surplus | | — | | | — | | | (375,000) | |
| Additions to other insurance subsidiaries’ surplus | | 250 | | | — | | | 65,200 | |
| Distributions from other insurance subsidiaries’ surplus | | (40,000) | | | (465,000) | | | (14,000) | |
In February 2022, the Pennsylvania Insurance Department approved a $500 million return of capital from Radian Guaranty to Radian Group, which was paid on February 11, 2022 in cash and marketable securities. This transfer was approved by the Pennsylvania Insurance Department as an Extraordinary Distribution in the form of a return of paid-in capital and will result in a $500 million decrease in Radian Guaranty’s statutory policyholders’ surplus.
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Radian Group Inc. and Subsidiaries Notes to Consolidated Financial Statements |
17. Share-Based Compensation and Other Benefit Programs
All outstanding awards granted under the Equity Plans have beenare performance-based or time-vestedtime-based awards in the form of RSUs, non-qualified stock options restricted stock, RSUs,or phantom stock, or stock appreciation rights.stock. The maximum contractual term for stock options and similar instruments under the Equity Plans is 10 years, although awards of these instruments may be granted with shorter terms.
On May 12, 2021, our stockholders approved the 2021 Equity Plan. The Amendedterms of the 2021 Equity Plan apply to awards granted on or after May 12, 2021, the effective date of the plan (the “Effective Date”). In addition to the 2021 Equity Plan, we also have awards outstanding under the 1995 Equity Plan, the 2008 Equity Plan and Restatedthe 2017 Equity CompensationPlan (collectively, the “Prior Equity Plans”).The last awards granted pursuant to the 2008 and 1995 Equity Plans were granted in 2014 and 2008, respectively.
The 2021 Equity Plan authorizes the issuance of up to 8,954,1098.3 million new shares plus such number of our common stock, plus: (i) any shares of our common stock that wereremained available for awards under the 2017 Equity Plan as of the Effective Date; and (ii) any shares of our common stock subject to outstanding awards outstanding under the 2014Prior Equity Plan and the 2008 Equity Plan prior to the effective datePlans as of the AmendedEffective Date that are payable in shares and Restated Equity Plan that subsequently terminate, expire, or are cancelled and become available for issuance undercanceled without having been exercised, vested, or settled in full (as applicable) on or after the Amended and RestatedEffective Date, subject to certain adjustments set forth in the 2021 Equity Compensation Plan (“Prior PlanPlans Shares”). There were 7,906,19010.2 million shares available for grant under the Amended and Restated2021 Equity Compensation Plan, including Prior Plans Shares, as of December 31, 2018 (the “share reserve”), which includes Prior Plan Shares. Each grant of restricted stock, RSUs, or performance share awards under the Amended and Restated Equity Compensation Plan (other than those settled in cash) reduces the share reserve available for grant under the Amended and Restated Equity Compensation Plan by 1.31 shares for every share subject to such grant. Absent this share reserve adjustment for outstanding restricted stock, RSUs, phantom stock or performance share awards, our shares remaining available for grant under the Amended and Restated Equity Compensation Plan would have been 11,108,244 shares as of December 31, 2018. Awards under the Amended and Restated Equity Compensation Plan that provide for settlement solely in cash (and not common shares) do not count against the share reserve.2021.
Most awards vest at the end of the performance or service period.period and will vest earlier under certain circumstances. In the event of a grantee’s death or disability, awards generally vest immediately. Upon retirement, if certain conditions are met, awards generally vest immediately or at the end of the performance period, if any. AwardsCertain time-based RSU awards granted under the Equity Plans to officers under our 2021 Equity Plan and our non-employee directors provide for “double trigger” vesting2017 Equity Plan will vest in whole or in part in the event of a change of control. As a result, awardsthe grantee’s employment is terminated by us without cause or for “good reason.” Awards granted to officers will vest in connection with a change of control only in the event the grantee’s employment is terminated by us without cause or the grantee terminates employment for “good reason,” in each case within 90 days before or one year after the change of control. Awards to our non-employee directors will vest in connection with a change of control only in the event the grantee fails to be appointed to the board of directors of the surviving entity or is not nominated for reelection, or fails to be reelected after nomination, to the board of directors of the Company or the surviving entity, in each case at any time beginning upon the change of control and ending 90 days following the first meeting of the stockholders of the Company or the surviving entity after the change in control. In the event of a hypothetical change of control as of December 31, 2018, we estimate that the vesting of awards, assuming for purposes of this hypothetical that “double trigger” vesting occurred, would have resulted in a pretax accounting charge to us of approximately $19.7 million, representing the acceleration of compensation expense.entity.
We use the Monte Carlo valuation model to determine the fair value of all cash-settled awards where stock price is a factor in determining the vesting, as well as for cash- or equity-settled performance awards where there exists a similar stock price-based market condition. The Monte Carlo valuation model incorporates multiple input variables, including expected life, volatility, risk-free rate of return and dividend yield for each award to estimate the probability that a vesting condition will be achieved. In determining these assumptions for the Monte Carlo valuations, we consider historic and observable market data.
Radian Group Inc.
Notes to Consolidated Financial Statements (Continued)
Depending on certain characteristics of the awards granted under the various Equity Plans noted above, they are accounted for as either liabilities or equity instruments. The following table summarizes awards outstandingthe compensation cost recognized and compensation expense recognized for each type of share-based award as of and for the years ended:
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| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| ($ in thousands) | | 2018 | | 2017 | | 2016 |
| Share-Based Compensation Programs | | Liability Recorded/ Equity Instruments Outstanding | | Compensation Cost Recognized (1) | | Liability Recorded/ Equity Instruments Outstanding | | Compensation Cost Recognized (1) | | Liability Recorded/ Equity Instruments Outstanding | | Compensation Cost Recognized (1) |
| Liabilities: RSUs—Cash-Settled | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 18 |
| | $ | (718 | ) |
| Equity: | | | | | | | | | | | | |
RSUs—Equity Settled | | 3,763,633 |
| | 16,591 |
| | 3,434,976 |
| | 12,206 |
| | 3,208,454 |
| | 13,285 |
|
| Non-Qualified Stock Options | | 1,312,791 |
| | 603 |
| | 1,692,743 |
| | 851 |
| | 2,839,738 |
| | 3,286 |
|
| Phantom Stock | | 234,427 |
| | 2 |
| | 234,302 |
| | 2 |
| | 234,174 |
| | 2 |
|
| Employee Stock Purchase Plan | | | | 453 |
| | | | 432 |
| | | | 449 |
|
| Equity | | | | 17,649 |
| | | | 13,491 |
| | | | 17,022 |
|
| Total all share-based plans | | | | $ | 17,649 |
| | | | $ | 13,492 |
| | | | $ | 16,304 |
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(1) | For purposes of calculating compensation cost recognized, we generally consider awards effectively vested (and we recognize the full compensation costs) when grantees become retirement eligible. |
The following table reflects additional information regarding all share-based awards for the years indicated:indicated.
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| Share-based compensation expense | | | | | | |
| | | | | | |
| | | Years Ended December 31, |
| (In thousands) | | 2021 | | 2020 | | 2019 |
Compensation cost recognized (1) | | | | | | |
| RSUs | | $ | 27,803 | | | $ | 18,403 | | | $ | 20,694 | |
| ESPP | | 589 | | | 671 | | | 444 | |
| Non-Qualified Stock Options and Other | | (29) | | | 119 | | | 276 | |
| Total compensation cost recognized | | 28,363 | | | 19,193 | | | 21,414 | |
| Less: Costs deferred as acquisition costs | | — | | | — | | | 373 | |
| Share-based compensation expense | | 28,363 | | | 19,193 | | | 21,041 | |
| Income tax benefit related to share-based compensation expense | | 7,168 | | | 4,264 | | | 6,343 | |
| Share-based compensation expense, net | | $ | 21,195 | | | $ | 14,929 | | | $ | 14,698 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| (In thousands) | 2018 | | 2017 | | 2016 |
| Total compensation cost recognized | $ | 17,649 |
| | $ | 13,492 |
| | $ | 16,304 |
|
| Less: Costs deferred as acquisition costs | 324 |
| | 269 |
| | 206 |
|
| Stock-based compensation expense | $ | 17,325 |
| | $ | 13,223 |
| | $ | 16,098 |
|
The grant date fair value of the performance-based RSUs that are based on the cumulative growth in Radian’s book value per share is calculated based on the stock price as of the grant date, discounted for executives for the lackone-year-post-vesting holding period.
The following table summarizes additional information concerning stock option activity for the periods indicated:indicated.
Upon the exercise of stock options, we generally issue shares from the authorized, unissued share reserves when the exercise price is less than the treasury stock repurchase price and from treasury stock when the exercise price is greater than the treasury stock repurchase price.
The Radian Group Inc. Savings Incentive Plan (“Savings Plan”) covers substantially all of our full-time and our part-time employees. Participants can contribute up to 100% of their baseeligible earnings as pretax and/or after-tax (Roth IRA)(“Roth IRA”) contributions up to a maximum amount of $18,500Internal Revenue Service annual limit, which was $19,500 for 2018.2021. The Savings Plan also includes a catch-up contribution provision whereby participants who are or will be age 50 and above during the Savings Plan year may contribute an additional contribution. The maximum catch-up contribution for the Savings Plan in 20182021 was $6,000. Effective January 1, 2018, we$6,500. We match up to 100% of the first 6.0% of base earningseligible compensation contributed in any given year. Previously, in 2016 and 2017 the match was up to 100% of the first 4.5% of annual base earnings. Our expense for matching funds for the years ended December 31, 2018, 20172021, 2020 and 20162019 was $6.1$7.8 million, $4.8$7.8 million and $4.9$5.6 million, respectively.
See Supplemental Notes.
The Radian Group Inc. (the “Parent Company”,Company,” “we” or “our”) financial statements represent the stand-alone financial statements of the Parent Company. These financial statements have been prepared on the same basis and using the same accounting policies as described in the consolidated financial statements included herein, except that the Parent Company uses the equity-method of accounting for its majority-owned subsidiaries. These financial statements should be read in conjunction with our consolidated financial statements and the accompanying notes thereto.
The Parent Company provides certain services to its subsidiaries. The Parent Company allocates to its subsidiaries expenses it incurs in the capacity of supporting those subsidiaries, including operating expenses, which are allocated based on the forecasted annual percentage of total revenue, which approximates the estimated percentage of time spent on certain subsidiaries, and interest expense, which is allocated based on relative capital. These expenses are presented net of allocations in the Condensed Statements of Operations. Substantially all operating expenses and most of our interest expense except for discount amortization on our senior notes, have been allocated to the subsidiaries for 2018, 20172021, 2020 and 2016.2019.
Amounts allocated to the subsidiaries for expenses are based on actual cost, without any mark-up. The Parent Company considers these charges to be fair and reasonable. The subsidiaries generally reimburse the Parent Company for these costs in a timely manner, which has the impact of temporarily improving the cash flows of the Parent Company, if accrued expenses are reimbursed prior to actual payment. See Note D for additional information.
The following table shows the components of our Parent Company expenses that have been allocated to our subsidiaries for the periods indicated:indicated.
