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 results 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 expenses based on an allocated percentage of time spent on the Mortgage Insurance segment; (ii) all interest expense except for interest expense related to the Senior Notes due 2019 that were issued to fund our purchase of Clayton; and (iii) all corporate cash and investments.

We allocate to our Services segment: (i) corporate expenses based on an allocated percentage of time spent on the Services segment; and (ii) as noted above, all interest expense related to the Senior Notes due 2019. 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.

Adjusted Pretax Operating Income (Loss)

Our senior management, including our Chief Executive Officer (our 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 and impairment of intangible assets; and net impairment losses recognized in earnings.

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: (1) not viewed as part of the operating performance of our primary activities; or (2) not expected to result in an economic impact equal to the amount reflected in pretax income (loss) from continuing operations. These adjustments, along with the reasons for their treatment, are described below.

(1)

Net gains (losses) on investments and other financial instruments. The recognition of realized investment gains or losses can vary significantly across periods as the activity is highly discretionary based on the timing of individual securities sales due to such factors as market opportunities, our tax and capital profile and overall market cycles. Unrealized investment gains and losses arise primarily from changes in the market value of our investments that are classified as trading. These valuation adjustments may not necessarily result in 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. We do not view them to be indicative of our fundamental operating activities. Therefore, these items are excluded from our calculation of adjusted pretax operating income (loss). However, we include the change in expected economic loss or recovery associated with our consolidated VIEs, if any, in the calculation of adjusted pretax operating income (loss).

(2)

Loss on induced conversion and debt extinguishment. Gains or losses on early extinguishment of debt and losses incurred to purchase our convertible debt prior to maturity are discretionary activities that are undertaken in order to take advantage of market opportunities to strengthen our financial and capital positions; therefore, we do not view these activities as part of our operating performance. Such transactions do not reflect expected future operations and do not provide meaningful insight regarding our current or past operating trends. Therefore, these items are excluded from our calculation of adjusted pretax operating income (loss).

(3)

Acquisition-related expenses. Acquisition-related expenses represent the costs incurred to effect an acquisition of a business (i.e., a business combination). Because we pursue acquisitions on a strategic and selective basis and not in the ordinary course of our business, we do not view acquisition-related expenses as a consequence of a primary business activity. Therefore, we do not consider these expenses to be part of our operating performance and they are excluded from our calculation of adjusted pretax operating income (loss).

(4)

Amortization and impairment of intangible assets. Amortization of intangible assets represents the periodic expense required to amortize the cost of intangible assets over their estimated useful lives. 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. The recognition of net impairment losses on investments can vary significantly in both size and timing, depending on market credit cycles. We do not view these impairment losses to be indicative of our fundamental operating activities. Therefore, whenever these losses occur, we exclude them from our calculation of adjusted pretax operating income (loss).

Summarized operating results for our segments as of and for the periods indicated, are as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2016			2015			2016		2015
Mortgage Insurance
Net premiums written—insurance (1)	$	232,353		$	251,082		$	258,663	$	492,990
Decrease (increase) in unearned premiums	(3,268		)	(13,645		)	191,372		(30,958		)
Net premiums earned—insurance	229,085			237,437			450,035		462,032
Net investment income	28,839			19,285			56,040		36,613
Other income	3,424			1,743			5,339		3,074
Total (2)	261,348			258,465			511,414		501,719

Provision for losses	50,074			31,637			93,349		77,488
Policy acquisition costs	5,393			6,963			11,782		14,713
Other operating expenses before corporate allocations	36,126			41,853			69,955		75,903
Total (3)	91,593			80,453			175,086		168,104
Adjusted pretax operating income before corporate allocations	169,755			178,012			336,328		333,615
Allocation of corporate operating expenses	14,286			12,516			23,615		22,274
Allocation of interest expense	18,124			20,070			35,236		40,023
Adjusted pretax operating income	$	137,345		$	145,426		$	277,477	$	271,318

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(1)	Net of ceded premiums written under the QSR Transactions and the Single Premium QSR Transaction. See Note 7 for additional information.


(2)	Excludes net gains on investments and other financial instruments of $30.5 million and $61.8 million, respectively, for the three and six months ended June 30, 2016, and $28.4 million and $45.2 million, respectively, for the three and six months ended June 30, 2015, not included in adjusted pretax operating income.


(3)	Includes inter-segment expenses as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2016		2015		2016		2015
Inter-segment expenses	$	709	$	1,092	$	1,305	$	1,994



	Three Months Ended June 30,					Six Months Ended June 30,
(In thousands)	2016			2015		2016			2015
Services
Services revenue (1)	$	39,002		$	44,595	$	71,198		$	76,127

Direct cost of services	25,224			25,501		47,277			44,754
Other operating expenses before corporate allocations	12,537			11,522		26,420			20,379
Total	37,761			37,023		73,697			65,133
Adjusted pretax operating income (loss) before corporate allocations	1,241			7,572		(2,499		)	10,994
Allocation of corporate operating expenses	2,779			1,307		4,530			2,288
Allocation of interest expense	4,422			4,431		8,844			8,863
Adjusted pretax operating income (loss)	$	(5,960	)	$	1,834	$	(15,873	)	$	(157	)

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(1)	Includes inter-segment revenues as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2016		2015		2016		2015
Inter-segment revenues	$	709	$	1,092	$	1,305	$	1,994

Selected balance sheet information for our segments as of the periods indicated, is as follows:



	At June 30, 2016
(In thousands)	Mortgage Insurance		Services		Total
Total assets	$	5,708,233	$	359,030	$	6,067,263



	At December 31, 2015
(In thousands)	Mortgage Insurance		Services		Total
Total assets	$	5,281,597	$	360,503	$	5,642,100

The reconciliation of adjusted pretax operating income to consolidated pretax income from continuing operations is as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2016			2015			2016			2015
Adjusted pretax operating income (loss):
Mortgage Insurance (1)	$	137,345		$	145,426		$	277,477		$	271,318
Services (1)	(5,960		)	1,834			(15,873		)	(157		)
Total adjusted pretax operating income	131,385			147,260			261,604			271,161

Net gains (losses) on investments and other financial instruments	30,527			28,448			61,813			45,227
Loss on induced conversion and debt extinguishment	(2,108		)	(91,876		)	(57,678		)	(91,876		)
Acquisition-related (expenses) benefits (2)	54			(567		)	(151		)	(774		)
Amortization and impairment of intangible assets	(3,311		)	(3,281		)	(6,639		)	(6,304		)
Consolidated pretax income from continuing operations	$	156,547		$	79,984		$	258,949		$	217,434

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(1)	Includes inter-segment expenses and revenues as listed in the notes to the preceding tables.


(2)	Acquisition-related (expenses) benefits represent expenses incurred to effect the acquisition of a business, net of adjustments to accruals previously recorded for acquisition expenses.

On a consolidated basis, “adjusted pretax operating income (loss)” is a measure not determined in accordance with GAAP. Total adjusted pretax operating income (loss) is not a measure of total profitability, and therefore should not be viewed as a substitute for GAAP pretax income (loss) from continuing operations. Our definition of adjusted pretax operating income (loss) may not be comparable to similarly-named measures reported by other companies.