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Note 4 - Segment Reporting Level 1 (Notes)
 12 Months Ended
Dec. 31, 2018
Segment Reporting [Abstract]  
Segment Reporting Disclosure [Text Block] 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 the segment’s forecasted annual percentage of total revenue, which approximates the estimated percentage of time spent on the 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, all of which is allocated to our Services segment); and (iii) all corporate cash and investments.
We allocate to our Services segment: (i) corporate expenses based on the segment’s forecasted annual percentage of total revenue, which approximates the estimated percentage of time spent on the segment and (ii) the allocated interest expense related to the intercompany note as described above. No corporate cash or investments are allocated to the Services segment. 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 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).
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.
 
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.
 
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

 
—


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 viewed as a substitute for GAAP pretax income. Our definition of adjusted pretax operating income may not be comparable to similarly-named measures reported by other companies.
Concentration of Risk
As of December 31, 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.