Pricing has always been and continues to be competitive in the mortgage insurance industry, as industry participants compete for market share and customer relationships. As a result of this competitive environment, recent pricing trends have included: (i) the continued use of a spectrum of filed rates to allow for pricing based on more granular loan and borrower attributes (commonly referred to as “black-box” pricing); (ii) the use of customized (often discounted) rates on lender-paid, Single Premium Policies and to a limited extent, on borrower-paid Monthly Premium Policies, including in response to requests for pricing bids by certain lenders; and (iii) reductions by certain of our competitors of their standard rates for lender-paid Single Premium Policies. In the first half of 2016, there were wide-spread pricing changes made by private mortgage insurers. Since then, pricing throughout the industry has been relatively stable with respect to borrower-paid Monthly Premium Policies, although we believe that certain of our competitors recently have increased the frequency with which they are offering discounted, borrower-paid Monthly Premium Policies to lenders on a selective basis (i.e., not applying the discount to all similarly situated lenders). We remain disciplined in evaluating this trend and will make strategic pricing decisions going forward based on, among other factors, our perspective regarding the most appropriate path for achieving our overall objectives regarding growing the long term economic value of our mortgage insurance portfolio. In addition, we note that in 2016, the California Department of Insurance issued guidance to the mortgage insurance industry stating that any approved discounting of a mortgage insurer’s rates must be provided to all similarly situated customers of the mortgage insurer. This guidance follows a 2015 industry-wide inquiry by the Office of the Commissioner of Insurance of Wisconsin regarding rebating practices. Although the ongoing impact of this regulatory oversight is uncertain, it is possible that this attention to pricing practices will discourage mortgage insurers from engaging in the current practice of selective discounting of rates (i.e., not applying the discount to all similarly situated lenders). See “Item 1A. Risk Factors-Our insurance subsidiaries are subject to comprehensive state insurance regulations and other requirements, which we may fail to satisfy.”
See Note 8 of Notes to Consolidated Financial Statements and “Results of Operations-Mortgage Insurance-Net Premiums Written and Earned” for additional information about our reinsurance transactions.
Book Value Per Share. As shown below, 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 increase in unrealized gains in other comprehensive income, partially offset by the equity impact of the series of capital and liquidity actions completed in 2017 described above.
All book value per share items above are calculated based on 214.5 million shares outstanding as of December 31, 2016, except for the December 31, 2017 book value per share, which was calculated based on 215.8 million shares outstanding as of December 31, 2017.
The amount of goodwill and other intangible assets included in book value per share decreased significantly, from $1.29 per share at December 31, 2016 to $0.30 at December 31, 2017, primarily due to the impairment of goodwill and other intangible assets, in each case related to the Services segment, as shown in the chart below.
Interest Expense. Interest expense for 2017 decreased 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.
As a percentage of our total NIW, the level of our purchase origination volume increased and our refinance origination volume decreased during 2017, compared to 2016. As a percentage of our total NIW, the volume of our NIW on mortgage loans with LTVs greater than 95% also increased during 2017, compared to 2016, primarily driven by the various factors discussed above. Despite these recent volume increases, the portion of our overall portfolio comprised of loans with LTVs greater than 95% has not significantly changed. During the second half of 2017, we also began to observe an increase in mortgage loans with higher debt-to-income ratios, including mortgage loans with debt-to-income ratios greater than 45%. However, based on our currently expected credit losses, we do not believe that these recent changes have materially impacted the overall credit quality of our portfolio.
Includes Rescissions, Claim Denials and Reinstatements on the population of loans subject to the BofA Settlement Agreement.
We have approximately $189.6 million in potential additional liabilities associated with uncertain tax positions as of December 31, 2017. The timing or magnitude of any potential payments is unknown.
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 are a diversified mortgage and real estate services business, providing both credit-related insurance coverage and other credit risk management solutions, as well as a broad array of mortgage and real estate services. We have two reportable business segments-Mortgage Insurance and Services. On April 1, 2015, Radian Guaranty completed the sale of its former financial guaranty subsidiary, Radian Asset Assurance, to Assured, pursuant to the Radian Asset Assurance Stock Purchase Agreement. The operating results of Radian Asset Assurance were classified as discontinued operations. See Note 18 for additional information related to discontinued operations.
On April 1, 2015, Radian Guaranty completed the sale of 100% of the issued and outstanding shares of Radian Asset Assurance, its former financial guaranty subsidiary, for a purchase price of approximately $810 million, pursuant to the Radian Asset Assurance Stock Purchase Agreement. The divestiture was intended to better position Radian Guaranty to comply with the PMIERs and to support Radian’s strategic focus on the mortgage and real estate industries. After closing costs and other adjustments, Radian Guaranty received net proceeds of $789 million. For additional information related to discontinued operations, see Note 18.
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.
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.
For more information on our accounting for goodwill and other intangibles, including our impairment analysis policy, see Note 7.
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.
Excludes net gains on investments and other financial instruments of $3.6 million, not included in adjusted pretax operating income.
The largest single mortgage insurance customer (including branches and affiliates), measured by primary NIW, accounted for 6.8% of NIW during 2017, compared to 5.7% and 4.6% from the largest single customer in 2016 and 2015, respectively. Earned premiums from one mortgage insurance customer represented 15%, 15% and 16% of our consolidated revenues (excluding net gains (losses) on investments and other financial instruments) in 2017, 2016 and 2015, respectively.
In 2012, Radian Guaranty entered into the QSR Transactions with a third-party reinsurance provider. Radian Guaranty has ceded the maximum amount permitted under the QSR Transactions; therefore, Radian Guaranty is no longer ceding NIW under these transactions. RIF ceded under the QSR Transactions was $1.2 billion, $1.6 billion and $2.1 billion as of December 31, 2017, 2016 and 2015, respectively.
The agreement is scheduled to terminate on December 31, 2029. However, Radian Guaranty may terminate this agreement prior to the scheduled date if one or both of the GSEs no longer grant full credit for the reinsurance. Radian Guaranty also has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of January 1, 2022, or at the end of any calendar quarter thereafter. Termination of the agreement would result in Radian Guaranty reassuming the related RIF in exchange for a net payment from the reinsurer calculated in accordance with the terms of the agreement.
Does not include our second-lien mortgage loan PDR that is included in other liabilities.
Includes the payment of $54.8 million made in connection with the scheduled settlement of the Freddie Mac Agreement in the third quarter of 2017.
Upon the original issuance of the Convertible Senior Notes due 2017 and 2019, in accordance with accounting standards related to convertible debt instruments that may be settled in cash upon conversion, the Company recorded pretax equity components, net of the capped call transaction (with respect to the Convertible Senior Notes due 2017) and related issuance costs (with respect to the Convertible Senior Notes due 2017 and 2019). Upon the elimination of the outstanding principal amounts of the Convertible Senior Notes due 2017 and 2019, the associated pretax equity components of $5.0 million and $13.1 million at December 31, 2016, respectively, were eliminated.
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, 2017, from time to time we also purchased shares on the open market to fund certain 401(k) matches. In addition, upon the vesting of certain restricted stock awards 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.
Volatility of Radian’s stock is used in the calculation of the grant date fair value of the portion of the awards based on TSR Measures, as described above. Volatility of Radian’s stock is not an applicable assumption for valuing the portion of the awards based on the cumulative growth in Radian’s book value per share. Volatility is determined at the date of grant using the historical share price volatility and the expected life of each award.
Radian Guaranty did not receive capital contributions from Radian Group in the years ended December 31, 2017 or 2016. However, in December 2017, Radian Group transferred $100 million of cash and marketable securities to Radian Guaranty in exchange for a Surplus Note issued by Radian Guaranty. This Surplus Note has a 0% interest rate and is scheduled to mature on 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.