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
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.”
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.
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.
Private mortgage insurance penetration in the insurable market tends to be 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 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.”
instruments effective January 1, 2018, equity securities. These unrealized gains and losses are generally the result of changes in interest rates or credit spreads and may not necessarily result in economic gains or losses.
Net Income. As discussed in more detail below, our net income increased for 2018, compared to 2017, 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) a decrease in provision for losses and (vi) an increase in net investment income. Partially offsetting these items is an increase in net losses on investments and other financial instruments. See “Results of Operations-Mortgage Insurance” and “Results of Operations-Services” for more information on our segment results.
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.
Mortgage Insurance segment and our Services segment, as further detailed in Note 4 of Notes to Consolidated Financial Statements.
The impact of the level of mortgage prepayments on the mix of business we write affects the revenue ultimately produced by our mortgage insurance business. 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, this moderating effect may depend on 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. 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.
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.
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 gross 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.
Other Operating Expenses. The increase in other operating expenses for 2018, 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 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, as compared to 2017, is 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
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 circumstances of the transaction and/or the contract provisions are such that we believe the exposure to material liability is remote.
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.
Does 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.
During the third quarter of 2017, we commenced participation in a securities lending program whereby we loan certain securities in our investment portfolio to 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 and 9 for additional information.
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.
The effect of reinsurance on our mortgage insurance net premiums written and earned is as follows:
35% of its existing performing Single Premium Policies written between April 1, 2013 and December 31, 2015; and
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.
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.
Represents reserves as of December 31, 2018 related to IBNR liabilities.
The following is supplementary information about average historical claims duration as of December 31, 2018, representing the average distribution of when claims are paid relative to the year of default:
designated subsidiary (as defined in the respective indentures 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.
The vesting of approximately 50% of the performance-based RSUs granted to each executive officer in 2017 and 2016 is dependent upon (i) Radian Group’s TSR compared to the median TSR of a designated peer group of companies as of the date of grant (the “Relative TSR Measure”) and (ii) Radian Group’s absolute TSR (“Absolute TSR Measure,” and together with the Relative TSR Measure, the “TSR Measures”), in each case measured over a three-year performance period and subject to certain conditions. The remaining 50% of each executive officer’s target award will vest based on the cumulative growth in Radian’s book value per share, adjusted for certain defined items, over a three-year performance period. The vesting of performance-based RSUs granted to non-executives in 2017 is the same as described above for executive officers. The vesting of performance-based RSUs granted to non-executives in 2016 is entirely based on the TSR Measures described above and does not include a book value measure.
We prepare our statutory financial statements in accordance with the accounting practices required or permitted, if applicable, by the insurance departments of the respective states of domicile of our insurance subsidiaries. Required SAPP are established by a variety of NAIC publications, 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, 2018, we did not have any prescribed or permitted statutory accounting practices that resulted in reported statutory surplus or risk-based capital being different from what would have been reported had NAIC statutory accounting practices been followed.
Radian Guaranty’s Risk-to-capital calculation appears in the table below. For purposes of the Risk-to-capital requirements imposed by certain states, statutory capital is defined as the sum of statutory policyholders’ surplus plus statutory contingency reserves.