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 its forecasted annual percentage of total revenue, which approximates the estimated percentage of time spent on the Mortgage Insurance segment; (ii) all interest expense except for interest expense related to an intercompany note with terms consistent with the original issued amount of $300 million from the Senior Notes due 2019 that were used to fund our purchase of Clayton; and (iii) all corporate cash and investments.

We allocate to our Services segment: (i) corporate expenses based on its forecasted annual percentage of total revenue, which approximates the estimated percentage of time spent on the Services segment and (ii) as noted above, allocated interest expense. No material corporate cash or investments are allocated to the Services segment. Inter-segment activities are recorded at market rates for segment reporting and eliminated in consolidation.

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, in our Mortgage Insurance segment’s other operating expenses before corporate allocations. We include underwriting-related expenses for third-party contract underwriting services, based on a pro-rata volume of mortgage applications, in our Services segment’s cost of services and other operating expenses before corporate allocations, as applicable.

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 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 investment gains and losses arise primarily from changes in the market value of our investments that are classified as trading or equity securities. These valuation adjustments may not necessarily result in realized economic gains or losses.

Trends in the profitability of our fundamental operating activities can be more clearly identified without the fluctuations of these realized and unrealized gains or losses. 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 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 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).

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



	Three Months Ended March 31,
(In thousands)	2018		2017
Mortgage Insurance
Net premiums written—insurance (1)	$	237,980	$	224,665
(Increase) decrease in unearned premiums	4,570		(2,865		)
Net premiums earned—insurance	242,550		221,800
Net investment income	33,956		31,032
Other income	807		746
Total (2)	277,313		253,578

Provision for losses	37,391		47,232
Policy acquisition costs	7,117		6,729
Other operating expenses before corporate allocations	31,888		39,289
Total (3)	76,396		93,250
Adjusted pretax operating income before corporate allocations	200,917		160,328
Allocation of corporate operating expenses	18,577		14,186
Allocation of interest expense	10,629		11,509
Adjusted pretax operating income	$	171,711	$	134,633

______________________


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


(2)	Excludes net losses on investments and other financial instruments of $18.9 million for the three months ended March 31, 2018, and net losses on investments and other financial instruments of $2.9 million for the three months ended March 31, 2017, not included in adjusted pretax operating income.

(3)Includes inter-segment expenses as follows:



	Three Months Ended March 31,
(In thousands)	2018		2017
Inter-segment expenses	$	1,002	$	2,062



	Three Months Ended March 31,
(In thousands)	2018			2017
Services
Services revenue (1)	$	34,166		$	40,089

Cost of services	23,270			28,690
Other operating expenses before corporate allocations	10,744			12,604
Restructuring and other exit costs (2)	525			—
Total	34,539			41,294
Adjusted pretax operating income (loss) before corporate allocations	(373		)	(1,205		)
Allocation of corporate operating expenses	2,784			3,718
Allocation of interest expense	4,451			4,429
Adjusted pretax operating income (loss)	$	(7,608	)	$	(9,352	)

______________________

(1)Includes inter-segment revenues as follows:



	Three Months Ended March 31,
(In thousands)	2018		2017
Inter-segment revenues	$	1,002	$	2,062


(2)	Primarily includes employee severance and related benefit costs. Does not include impairment of long-lived assets, which is not a component of adjusted pretax operating income.

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



	At March 31, 2018
(In thousands)	Mortgage Insurance		Services		Total
Total assets	$	5,843,685	$	166,564	$	6,010,249

	At December 31, 2017
(In thousands)	Mortgage Insurance		Services		Total
Total assets	$	5,733,918	$	166,963	$	5,900,881

The reconciliation of adjusted pretax operating income to consolidated pretax income (loss) is as follows:



	Three Months Ended March 31,
(In thousands)	2018			2017
Adjusted pretax operating income (loss):
Mortgage Insurance (1)	$	171,711		$	134,633
Services (1)	(7,608		)	(9,352		)
Total adjusted pretax operating income	164,103			125,281

Net losses on investments and other financial instruments	(18,887		)	(2,851		)
Loss on induced conversion and debt extinguishment	—			(4,456		)
Acquisition-related expenses (2)	—			(8		)
Amortization and impairment of other intangible assets	(2,748		)	(3,296		)
Impairment of other long-lived assets and loss from the sale of a business line (3)	(26		)	—
Consolidated pretax income	$	142,442		$	114,670

______________________


(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)	Included within restructuring and other exit costs. See Note 1.

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