The following analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in Item 8. Certain terms and acronyms used throughout this report are defined in the Glossary of Abbreviations and Acronyms included as part of this report. Some of the information in this discussion and analysis or included elsewhere in this report, including information with respect to our projections, plans and strategy for our business, are forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under “Cautionary Note Regarding Forward-Looking Statements-Safe Harbor Provisions” and in the Risk Factors detailed in Item 1A of this Annual Report on Form 10-K.
This section of our Annual Report on Form 10-K generally discusses our financial results for the years ended December 31, 2019 and 2018 and a year-over-year comparison between 2019 and 2018. Detailed discussions of our financial results for the year ended December 31, 2017, including the year-over-year comparisons between 2018 and 2017, that are not included in this Annual Report on Form 10-K can be found in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 28, 2019.
Our mortgage insurance business continues to benefit from the improvement in market conditions since the financial crisis of 2007-2008, and from the current strength of the U.S. economy and housing finance industry. In addition, our mortgage insurance business has benefited from strong demand for home purchases by first-time home buyers and other purchasers requiring low down payment loans. The positive growth in home prices and historically low levels of unemployment are reflected in the performance and favorable results of our existing portfolio of IIF, as evidenced by, among other things, the improvement in our levels of new defaults, incurred losses, paid claims and cure rates.
Loans originated for the private mortgage insurance market since 2008 have consisted primarily of high credit quality loans and mortgage underwriting quality remained strong throughout 2019. These high credit quality loans have significantly better credit performance than the loans originated during 2008 and prior periods. Significant contributors to the improved loan quality include the greater risk discipline of loan originators and the private mortgage insurance providers, the Qualified Mortgage (QM) loan requirements under the Dodd Frank Act (including the QM Patch, which is scheduled to expire in January 2021) and the loan-level criteria of the PMIERs financial requirements.
Our Services business, comprising real estate, title and mortgage services, is largely a transactional business that depends on the level of customer activity and may be sensitive to changes in macro-level home sales, home prices, interest rates, home default rates and GSE guidelines. In addition, demand for our title services may be impacted by general marketplace competition in the real estate title industry, coupled with housing and mortgage banking related conditions such as new home sales, the sizes of the real estate purchase and refinance markets and interest rate fluctuations. See “Item 1. Business-Services-Services Business Overview” and Notes 4 and 7 of Notes to Consolidated Financial Statements for additional information regarding the Services segment.
PMIERs. In order to be eligible to insure loans purchased by the GSEs, mortgage insurers such as Radian Guaranty must meet the GSEs’ eligibility requirements, or PMIERs. The GSEs have significant discretion under the PMIERs and may amend the PMIERs at any time. The most recent revisions to PMIERs, or PMIERs 2.0, became effective on March 31, 2019. Radian Guaranty currently is an approved mortgage insurer under the PMIERs. See “Item 1. Business-Regulation-GSE Requirements,” “Liquidity and Capital Resources-Mortgage Insurance” and Note 18 of Notes to Consolidated Financial Statements for additional information.
Pricing is highly competitive in the mortgage insurance industry. During 2019, the mortgage insurance industry has continued to shift to a pricing environment where a variety of pricing methodologies and pricing levels are being deployed with differing degrees of risk-based granularity. The shift away from a predominately rate card-based pricing model and the increase in “black box” and other pricing frameworks provides a more dynamic pricing capability that allows for more frequent pricing changes throughout the mortgage insurance industry.
In recent years, participants in the private mortgage insurance industry have engaged in a range of risk distribution strategies. In our mortgage insurance business, we use reinsurance as a capital and risk management tool to lower the risk profile and financial volatility of our mortgage insurance portfolio through economic cycles. We have distributed risk through third-party quota share and excess-of-loss reinsurance arrangements, as well as through the capital markets by using mortgage insurance-linked notes transactions. Among other benefits, risk distribution reduces our required capital, lowers our overall
Our Mortgage Insurance segment provides credit-related insurance coverage, principally through private mortgage insurance, as well as other credit risk management solutions, to mortgage lending institutions and mortgage credit investors nationwide. The following sections discuss certain key drivers affecting our Mortgage Insurance revenue, as well as other key factors affecting our results.
Premiums. The premium rates we charge for our insurance are based on a number of borrower, loan and property characteristics. The mortgage insurance industry is highly competitive and private mortgage insurers compete with each other and with the FHA and VA with respect to price and other factors. We expect price competition to
continue throughout the mortgage insurance industry and future price changes from private mortgage insurers or the FHA could impact our future premium rates or our ability to compete.
Approximately 69% of the loans in our total primary mortgage insurance portfolio at December 31, 2019 are Monthly Premium Policies that provide a level monthly premium for the first 10 years of the policy, followed by a reduced level monthly premium thereafter. For loans that have been refinanced under HARP or HARP Replacement Programs, the initial 10-year period is reset. Due to the borrower’s ability to cancel the policy generally when the LTV reaches 80% of the original value, and the automatic cancellation of the policy on the date the LTV is scheduled to reach 78% of the original value, the volume of loans that remain insured after 10 years and would be subject to the premium reset is generally not material in relation to the total loans originated. However, to the extent the volume of loans resetting from year to year varies significantly, the trend in earned premiums may also vary.
The mix of credit characteristics in our total direct RIF (e.g., loans with higher risk characteristics, or loans with layered risk that combine multiple higher-risk attributes within the same loan, generally result in more delinquencies and claims). See “Results of Operations-Mortgage Insurance-NIW, IIF, RIF.”
Changes in housing values (declines in housing values generally make it more difficult for borrowers to sell a home to avoid default or for the property to be sold to mitigate a claim, and also may negatively affect a borrower’s willingness to continue to make mortgage payments when the home value is less than the mortgage balance; conversely, increases in housing values tend to reduce the level of defaults as well as make it more likely that foreclosures will result in the loan being satisfied).
Our ability to mitigate potential losses through Rescissions, Claim Denials, cancellations and Claim Curtailments on claims submitted to us. These actions all reduce our incurred losses. However, if these Loss Mitigation Activities are successfully challenged at rates that are higher than expected or we agree to settle disputes related to our Loss Mitigation Activities, our incurred losses will increase. We may enter into specific agreements that govern activities such as claims decisions, claim payments, Loss Mitigation Activities and insurance coverage. As our portfolio originated prior to and including 2008 has become a smaller percentage of our overall insured portfolio, there has been a decrease in the amount of Loss Mitigation Activity with respect to the claims we receive, and we expect this trend to continue, particularly given the limitations on our Loss Mitigation Activities imposed in the 2014 Master Policy and the additional clarifications that will be effective under our new 2020 Master Policy. See Note 2 of Notes to Consolidated Financial Statements for additional information on Loss Mitigation Activities and “Item 1A. Risk Factors-Our Loss Mitigation Activity is not expected to mitigate mortgage insurance losses to the same extent as in prior years; Loss Mitigation Activity could continue to negatively impact our customer relationships.”
Other Operating Expenses. Our other operating expenses are affected by the amount of our NIW, as well as the amount of IIF. Our other operating expenses may also be affected by the impact of performance on our incentive compensation programs, as a result of our pay-for-performance approach to compensation that is based on the level of achievement of both short-term and long-term goals.
In contrast to our mortgage insurance business, the Services segment is primarily a fee-for-service business without significant balance sheet risk. Key factors impacting results for our Services business include:
Services Revenue. Our Services segment is dependent upon overall activity in the mortgage, real estate and mortgage finance markets, as well as the overall health of the related industries. Due, in part, to the transactional nature of the business, revenues for our Services segment are subject to fluctuations from period to period, including seasonal fluctuations that reflect the activities in these markets. Sales volume is also affected by the number of competing companies and alternative products offered in the market. We believe the diversity of
services we offer has the potential to produce fee income from the Services segment throughout various mortgage finance environments, although market conditions can significantly impact the mix and amount of fee income we generate in any particular period. In addition, see Note 2 of Notes to Consolidated Financial Statements for information on revenue recognition policies for our Services segment.
Premiums. We earn net premiums on title insurance, effective with our acquisition of Radian Title Insurance in the first quarter of 2018. By adding the capabilities of this subsidiary to the title and settlement services that we already were offering through our existing title agency, Radian Settlement Services, we expanded the geographic reach of our title services and are positioned to provide title insurance and settlement services to our customers across the country.
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, effective with our implementation of the update to the standard for the accounting of financial instruments effective January 1, 2018, equity securities. These valuation adjustments may not necessarily result in realized economic gains or losses.
Radian Group serves as the holding company for our operating subsidiaries and does not have any operations of its own. Our consolidated operating results for 2019 primarily reflect the financial results and performance of our two business segments-Mortgage Insurance and Services. See Note 4 of Notes to Consolidated Financial Statements for information regarding the basis of our segment reporting, including the related allocations. See “Results of Operations-Mortgage Insurance,” and “Results of Operations-Services” for the operating results of these business segments.
The following table highlights selected information related to our consolidated results of operations for the years ended December 31, 2019, 2018 and 2017:
Relates to our Services segment. See “Results of Operations-Services” for more information.
Net Income. As discussed in more detail below, our net income increased for 2019 compared to 2018 primarily reflecting: (i) an increase in net premiums earned; (ii) an increase in net gains on investments and other financial instruments; and (iii) an increase in net investment income. Partially offsetting these items are increases in: (i) provision for losses; (ii) other operating
Adjusted Diluted Net Operating Income Per Share. The increase in adjusted diluted net operating income per share for 2019 compared to 2018 is primarily due to the increase in our Mortgage Insurance segment’s adjusted pretax operating income, which increased to $868.9 million in 2019, from $772.6 million in 2018.
Adjusted Net Operating Return on Equity. The changes in adjusted net operating return on equity across all periods presented are primarily due to the increases in our adjusted pretax operating income, partially offset by increases in stockholders’ equity. The increases in our adjusted pretax operating income primarily reflect the increases in our Mortgage Insurance segment’s adjusted pretax operating income. See “Results of Operations-Mortgage Insurance-Adjusted Pretax Operating Income” for more information on our Mortgage Insurance segment’s results.
Net Gains (Losses) on Investments and Other Financial Instruments. The net gains on investments and other financial instruments for 2019, as compared to net losses in 2018, are primarily due to: (i) the increase in unrealized gains in our trading portfolio related to changes in fair value resulting from lower interest rates and (ii) net realized gains on our fixed-maturities available for sale. See Note 6 of Notes to Consolidated Financial Statements for additional information on net gains (losses) on investments.
Restructuring and Other Exit Costs. In 2019, we did not recognize any restructuring or other exit costs. For 2018, we recognized $3.6 million of other exit costs associated with impairment of internal-use software. Restructuring and other exit costs for 2018 also include the remaining charges associated with our 2017 plan to restructure the Services business.
Interest Expense. Interest expense for 2019 decreased compared to 2018. This decrease was primarily due to reductions in interest expense from our: (i) repayment at maturity of $158.6 million aggregate principal amount of our Senior Notes due 2019 and (ii) tender offers and the subsequent redemptions that together resulted in the repayment of the remaining aggregate principal amounts of $234.1 million and $197.7 million of our Senior Notes due 2020 and 2021, respectively. Partially offsetting these decreases was higher interest expense from the issuance of $450 million aggregate principal amount of Senior Notes due 2027.
Loss on Extinguishment of Debt. During 2019, the redemption of our remaining Senior Notes due 2020 and 2021 resulted in a loss on extinguishment of debt of $22.7 million. See Note 12 of Notes to Consolidated Financial Statements for additional information. During 2018, we had no loss on extinguishment of debt.
Use of Non-GAAP Financial Measures. In addition to the traditional GAAP financial measures, we have presented “adjusted pretax operating income,” “adjusted diluted net operating income per share” and “adjusted net operating return on equity,” which are non-GAAP financial measures for the consolidated company, among our key performance indicators to evaluate our fundamental financial performance. These non-GAAP financial measures align with the way our business performance is evaluated by both management and by our board of directors. These measures have been established in order to increase transparency for the purposes of evaluating our operating trends and enabling more meaningful comparisons with our peers. Although on a consolidated basis “adjusted pretax operating income,” “adjusted diluted net operating income per share” and “adjusted net operating return on equity” are non-GAAP financial measures, for the reasons discussed above we believe these measures aid in understanding the underlying performance of our operations. 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 the Company’s business segments and to allocate resources to the segments.
Adjusted pretax operating income is defined as GAAP consolidated pretax income (loss), excluding the effects of: (i) net gains (losses) on investments and other financial instruments; (ii) loss on extinguishment of debt; (iii) amortization and impairment of goodwill and other acquired intangible assets; and (iv) impairment of other long-lived assets and other non-operating items, such as losses from the sale of lines of business and acquisition-related expenses. Adjusted diluted net operating income per share is calculated by dividing (i) adjusted pretax operating income attributable to common stockholders, net of taxes computed using the Company’s statutory tax rate, by (ii) the sum of the weighted average number of common shares outstanding and all dilutive potential common shares outstanding. Adjusted net operating return on equity is calculated by dividing annualized adjusted pretax operating income, net of taxes computed using the Company’s statutory tax rate, by average stockholders’ equity, based on the average of the beginning and ending balances for each period presented.
Adjusted Pretax Operating Income. The increase in our Mortgage Insurance segment’s adjusted pretax operating income for 2019, compared to 2018, primarily reflects: (i) an increase in net premiums earned and (ii) an increase in net investment income. See “-NIW, IIF, RIF-Net Premiums Written and Earned” for more information about our net premiums earned. Partially offsetting these items are increases in: (i) provision for losses; (ii) other operating expenses; and (iii) interest expense as a result of the Clayton Intercompany Note repayment. See “Results of Operations-Services-Interest Expense” for additional information.
A key component of our current business strategy is to write profitable NIW while effectively maintaining the portfolio’s health, balance and profitability. Consistent with this objective, we wrote $71.3 billion of primary new mortgage insurance in 2019, compared to $56.5 billion of NIW in 2018. The NIW written on a Flow Basis in 2019 was Radian’s highest volume in its history. Our 2019 NIW, partially offset by cancellations and amortization within our existing portfolio, resulted in an increase in IIF to $240.6 billion at December 31, 2019, from $221.4 billion at December 31, 2018, as shown in the chart below.
We target a blended return on required capital on new business on an unlevered basis (i.e., after-tax underwriting returns
plus projected investment income) within the mid-teens range. This projected targeted return incorporates the impact of the PMIERs 2.0 financial requirements and the risk distribution programs we have in place to cover NIW at the time it is originated, such as our Single Premium QSR Program, but does not include the impact of leverage or risk distribution transactions that are executed after the NIW has been originated, such as our Excess-of-Loss Program. Actions we take with respect to pricing and risk on NIW we are writing today are expected to gradually affect our results over time, due to the natural turnover of the mortgage insurance portfolio as existing IIF cancels.
Our NIW increased by 26.1% in 2019 as compared to 2018, aided by a strong mortgage origination market and increased private mortgage insurance penetration rates. See “Overview-Operating Environment” for additional information about the mortgage origination market. Our NIW for 2019 also reflects the successful implementation of our spectrum of innovative pricing structures, including RADAR Rates, our “black box” pricing strategy. Currently, a majority of the NIW we are writing is being priced through RADAR Rates.
For loans with multiple borrowers, the percentage of primary RIF by FICO score represents the lowest of the borrowers’ FICO scores. Data for 2018 and 2017 had previously been presented based on the FICO score of the primary borrower and have been restated to reflect the lowest of the borrowers’ FICO scores.
Net Premiums Written and Earned. Net premiums written and earned for 2019 increased compared to 2018, reflecting an increase in our IIF primarily related to an increase in our Monthly Premium Policies. Net premiums earned for 2019 also includes a $32.9 million cumulative adjustment related to an update to the amortization rates used to recognize revenue for Single Premium Policies. See Note 2 of Notes to Consolidated Financial Statements for further information.
The amounts represent the profit commission on the Single Premium QSR Program, excluding the impact of Single Premium Policy cancellations.
The impact of the level of mortgage prepayments based 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, the impact of this moderating effect is affected by 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. See “Overview-Operating Environment” as well as “Key Factors Affecting Our Results-Mortgage Insurance-IIF; Persistency Rate; Mix of Business” above for more information.
We experienced a decrease in our total mix of Single Premium Policies to 16.5% of our NIW for 2019, compared to 21.2% for 2018. Borrower-paid Single Premium Policies were 86.1% of our total direct Single Premium NIW for 2019 compared to 56.1% for 2018. We expect our production level for Single Premium Policies to fluctuate over time based on various factors, which include risk/return considerations and market conditions.
increase our return on required capital for the related policies. The impact of these programs on our financial results will vary depending on the level of ceded RIF, as well as the levels of prepayments and incurred losses on the reinsured portfolios, among other factors. See “Key Factors Affecting Our Results-Mortgage Insurance-Risk Distribution” and Note 8 of Notes to Consolidated Financial Statements for more information about our reinsurance transactions.
The table below provides information about the PMIERs impact of our reinsurance programs on our Minimum Required Assets as of the dates indicated.
Our primary default rate at December 31, 2019 was 2.0% compared to 2.1% at December 31, 2018. The following table shows a rollforward of the number of our primary loans in default, including new defaults from our insurance written in years: (i) prior to and including 2008 and (ii) after 2008:
Total mortgage insurance claims paid in 2019 of $132.2 million have decreased from claims paid of $215.9 million in 2018. The decrease in claims paid is consistent with the ongoing decline in the outstanding default inventory. Claims paid in both periods also include the impact of commutations. Although expected claims are included in our reserve for losses, the timing of claims paid is subject to fluctuation from quarter to quarter, based on the rate that defaults cure and other factors (as described in “Item 1. Business-Mortgage Insurance-Defaults and Claims”) that make the timing of paid claims difficult to predict.
Includes payments to commute mortgage insurance coverage on certain performing and non-performing loans. For 2019 and 2017, includes payments that, as expected, were made in connection with the settlement of the Freddie Mac Agreement, as well as payments to commute mortgage insurance coverage on certain performing and non-performing loans on which we had Pool Insurance risk.
Calculated without giving effect to the impact of captive reinsurance terminations and other commutations.
Our Services segment offers a broad array of real estate, title and mortgage services to market participants across the mortgage and real estate value chain. These services are primarily provided to mortgage lenders, financial institutions, investors and government entities. In addition, we provide title insurance and settlement services to mortgage lenders as well as directly to consumers. Prior to our January 2020 sale of Clayton, our mortgage services included transaction management services such as loan review, RMBS securitization and distressed asset reviews, as well as servicer and loan surveillance. See “Item 1. Business-Services-Services Business Overview-Services Offered” and Note 1 of Notes to Consolidated Financial Statements for additional information regarding the Services segment and the January 2020 sale of Clayton.
Adjusted Pretax Operating Income (Loss). Our Services segment’s adjusted pretax operating loss for 2019 was $14.3 million, compared to an adjusted pretax operating loss of $27.1 million in 2018. The decrease in our adjusted pretax operating loss for 2019, as compared to 2018, was driven by a decrease in interest expense, as discussed below, partially offset by an increase in operating expense.
Net Premiums Earned-Insurance. Net premiums earned for 2019 increased compared to 2018, as a result of the acquisition of the title insurance business in March 2018 and the inclusion of its operations.
Services Revenue. Services revenue increased for 2019, as compared to 2018, primarily due to the inclusion of revenue from businesses acquired in 2018 since their respective dates of acquisition.
Cost of Services. Our cost of services is primarily affected by our level of services revenue and the mix of services provided. The level of these costs may also fluctuate if market rates of compensation change, or if there is decreased availability or a loss of qualified employees.
We have various contractual obligations that are recorded as liabilities in our consolidated financial statements.
Includes $3.8 million for operating leases that were divested as part of the sale of Clayton.
Includes our reserve for losses and LAE which reflects the application of accounting policies described below in “Critical Accounting Policies-Reserve for Losses and LAE.” The payments due by period are based on management’s estimates and assume that all of the loss reserves included in the table will result in claim payments, net of expected recoveries.
Excludes approximately $38.5 million in potential additional liabilities associated with uncertain tax positions as of December 31, 2019. The timing or magnitude of any potential payments is unknown.
As of December 31, 2019, we had not entered into any material off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K, other than those below:
As described in Notes 2 and 11 to the consolidated financial statements, the Company establishes case reserves for losses on mortgage insurance policies for loans that are considered to be in default, as well as reserves for loss adjustment expenses, IBNR and other reserves. As of December 31, 2019, first-lien primary case reserves were $339.8 million of the total $401.3 million of mortgage insurance loss reserves. Management’s estimate of the case reserves involves significant reliance upon assumptions and estimates with regard to the likelihood, magnitude and timing of each potential loss. Management uses an actuarial projection methodology referred to as a “roll rate” analysis that uses historical claim frequency information to determine the projected ultimate default to claim rates based on the stage of default and time in default as well as the date that a loan goes into default. After estimating the default to claim rate, management estimates claim severity based on the average of recently observed severity rates within product type, type of insurance, and time in default cohorts.
We group fixed-maturity securities in our investment portfolio into one of three main categories: held to maturity, available for sale or trading securities. Fixed-maturity securities for which we have the positive intent and ability to hold to maturity, if any, are classified as held to maturity and are reported at amortized cost. Trading securities are reported at fair value, with unrealized gains and losses reported as a separate component of income. Investments in fixed-maturity securities not classified as held to maturity or trading securities are classified as available for sale and are reported at fair value, with unrealized gains and losses (net of tax) reported as a separate component of stockholders’ equity as accumulated other comprehensive income (loss). Equity securities consist of holdings in common stock, preferred stock and exchange traded funds, which, effective January 1, 2018, are all recorded at fair value with unrealized gains and losses reported in income. 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 that were available for sale were classified in accumulated other comprehensive income. Short-term investments consist of money market instruments, certificates of deposit and highly liquid, interest-bearing instruments with an original maturity of 12 months or less at the time of purchase. Amortization of premium and accretion of discount are calculated principally using the interest method over the term of the investment. Realized gains and losses on investments are recognized using the specific identification method. See Notes 5 and 6 for further discussion on investments.
We record an other-than-temporary impairment adjustment on a security with an unrealized loss if we intend to sell the impaired security, if it is more likely than not that we will be required to sell the impaired security prior to recovery of its amortized cost basis, or if the present value of cash flows we expect to collect is less than the amortized cost basis of the security. If a sale is likely, the security is classified as other-than-temporarily impaired and the full amount of the impairment is recognized as a loss in the statement of operations. Otherwise, losses on securities that are other-than-temporarily impaired are separated into: (i) the portion of loss that represents the credit loss and (ii) the portion that is due to other factors. The credit loss portion is recognized as a loss in the statement of operations, while the loss due to other factors is recognized in accumulated other comprehensive income (loss), net of taxes. A credit loss is determined to exist if the present value of discounted cash flows expected to be collected from the security is less than the amortized cost basis of the security. The present value of discounted cash flows is determined using the original yield of the security. In evaluating whether a decline in value is other-than-temporary, we consider several factors in addition to the above, including, but not limited to, the following:
Included in our restricted cash balances as of December 31, 2019 were cash funds held in trusts for the benefit of: a mortgage insurance reserve policy held in escrow for any future duties, rights and liabilities; certain policyholders; servicer liabilities; and title services obligations.
Our provision for income taxes for interim financial periods is based on an estimate of our annual effective tax rate for the full year. When estimating our full year effective tax rates, we adjust our forecasted pre-tax income for gains and losses on our investments, changes in the accounting for uncertainty in income taxes, changes in our beginning of year valuation allowance, and other adjustments. The impact of these items is accounted for as Discrete Items at the applicable federal tax rate.
We establish reserves to provide for losses and LAE, which include the estimated costs of settling claims in our Mortgage Insurance segment, in accordance with the accounting standard regarding accounting and reporting by insurance enterprises (ASC 944). Although this standard specifically excludes mortgage insurance from its guidance relating to the reserve for losses, because there is no specific guidance for mortgage insurance, we establish reserves for mortgage insurance as described below, using the guidance contained in this standard supplemented with other accounting guidance.
Estimating our case reserve for losses involves significant reliance upon assumptions and estimates with regard to the likelihood, magnitude and timing of each potential loss, including an estimate of the impact of our Loss Mitigation Activities. The models, assumptions and estimates we use to establish loss reserves may prove to be inaccurate, especially during an extended economic downturn or a period of extreme market volatility and uncertainty. As such, we cannot be certain that our reserve estimate will be adequate to cover ultimate losses on incurred defaults. This uncertainty requires management to use considerable judgment in estimating the rate at which these loans will result in claims.
Insurance enterprises are required to establish a PDR if the net present value of the expected future losses and expenses for a particular product line exceeds the net present value of expected future premiums and existing reserves for that product line. We reassess our expectations for premiums, losses and expenses for our mortgage insurance business at least quarterly and update our premium deficiency analyses accordingly. For our mortgage insurance business, we group our mortgage insurance products into two categories: first-lien and second-lien mortgage loans. As of December 31, 2019 and 2018, the combination of the net present value of our expected future premiums and existing reserves (net of reinsurance recoverables) significantly exceeded the net present value of our future expected losses and expenses associated with our first lien mortgage insurance portfolio. Our second-lien PDR, which was $0.2 million and $0.9 million as of December 31, 2019 and 2018,
When we rescind insurance coverage on a loan, we refund all premiums received in connection with such coverage. When insurance coverage on a loan is canceled due to claim payment, we refund all premiums received since the date of delinquency. When insurance coverage is cancelled for a reason other than Rescission or claim payment, all premium that is nonrefundable is immediately earned. Premium revenue is recognized net of our accrual for estimated premium refunds due to Rescissions or other factors, which accrual is presented in other liabilities.
Revenue expected to be recognized in any future period related to remaining performance obligations, such as contracts where revenue is recognized as invoiced and contracts with variable consideration related to undelivered performance obligations, is not material.
Generally, our contracts with our Services clients do not include minimum volume commitments and can be terminated at any time by our clients. Although some of our contracts and assignments are recurring in nature, and include repetitive monthly assignments, a portion of our engagements are transactional in nature. Due to the transactional nature of our business, our Services segment revenues may fluctuate from period to period as transactions are commenced or completed. We do not recognize revenue or expense related to amounts advanced by us and subsequently reimbursed by clients for maintenance or repairs, because we do not take control of the service prior to the client taking control. We record an expense if an advance is made by us that is not in accordance with a client contract, and the client is not obligated to reimburse us.
Due to the nature of the services provided, our Services arrangements with customers may include fixed price contracts, and to a lesser extent, percentage-of-sale contracts.
Fixed-Price Contracts. Following the Clayton sale, we use fixed-price contracts in our real estate valuation and asset management business activities, our title and closing services, as well as our services related to single family rental services and contract underwriting. Prior to the Clayton sale, we also used fixed-price contracts in our surveillance business for our servicer oversight services and RMBS surveillance services. Under fixed-price contracts we agree to perform the specified services and deliverables for a pre-determined per-unit or per-file price or day rate. Each service qualifies as a separate performance obligation and revenue is recognized as the service performed is made available to the client.
Lease expense is recognized on a straight-line basis over the expected lease term. For lease agreements entered into after the adoption of a new accounting standard in 2019, lease and non-lease components are generally not accounted for separately. For more information regarding this new accounting standard, see “-Recent Accounting Pronouncements-Accounting Standards Adopted During 2019” below. We have elected the short-term exemption for contracts with lease terms of 12 months or less.
In connection with our reinsurance programs for our mortgage insurance business, we may enter into contracts with variable interest entities (“VIEs”). VIEs include corporations, trusts or partnerships in which: (i) the entity has insufficient equity at risk to allow it to finance its activities without additional subordinated financial support or (ii) at-risk equity holders, as a group, do not have the characteristics of a controlling financial interest.
We perform an evaluation to determine whether we are required to consolidate the VIE’s assets and liabilities in our consolidated financial statements, based on whether we are deemed to be the primary beneficiary. The primary beneficiary of a VIE is the variable interest holder that is determined to have the controlling financial interest as a result of having both: (i) the power to direct the activities of a VIE that most significantly impact the economic performance of the VIE and (ii) the obligation to absorb losses or right to receive benefits from the VIE that potentially could be significant to the VIE. See Note 8 for additional information.
Acquired intangible assets, other than goodwill, primarily consist of customer relationships and represents the value of the specifically acquired customer relationships and are valued using the excess earnings approach using estimated client revenues, attrition rates, implied royalty rates and discount rates. The excess earnings approach estimates the present value of expected earnings in excess of a traditional return on business assets. For financial reporting purposes, intangible assets with finite lives are amortized over their applicable estimated useful lives in a manner that approximates the pattern of expected economic benefit from each intangible asset.
Estimated gross profits are composed of earned premium, interest income, losses and LAE. Estimates of expected gross profit, including the Persistency Rate and loss development assumptions for each underwriting year used as a basis for amortization, are evaluated quarterly and the total amortization recorded to date is adjusted by a charge or credit to our consolidated statements of operations if actual experience or other evidence suggests that previous estimates should be revised. Considerable judgment is used in evaluating these estimates and the assumptions on which they are based. The use of different assumptions may have a significant effect on the amortization of deferred policy acquisition costs. Ceding commissions received under our reinsurance arrangements related to these costs are also deferred and accounted for using similar assumptions. See Notes 8 and 9 for additional information.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software. This ASU requires the capitalization of implementation costs for activities performed in a cloud computing arrangement that is a service contract. The new standard aligns the accounting for implementation costs of hosting arrangements that are service contracts with the accounting for capitalizing internal-use software. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We elected to early adopt this update effective December 31, 2019. The adoption of this update did not have a material effect on our financial statements and disclosures.
The calculation of basic and diluted net income per share is as follows:
Includes additional depreciation expense of $0.5 million, $0.1 million and $0.6 million allocated to Mortgage Insurance, Services and Reportable Segment Total, respectively.
The table below represents the disaggregation of services revenues by revenue type:
Includes $48.4 million, $50.8 million and $46.1 million for the years ended December 31, 2019, 2018 and 2017, respectively, related to Clayton, which was sold in January 2020.
Our Services segment revenues are recognized over time and measured each period based on the progress to date as services are performed and made available to customers. Our contracts with customers, including payment terms, are generally short-term in nature; therefore, any impact related to timing is immaterial. Revenue recognized related to services made available to customers and billed is reflected in accounts and notes receivable. Revenue recognized related to services performed and not yet billed is recorded in unbilled receivables and reflected in other assets. We have no material bad-debt expense. The following represents balances related to service revenue contracts as of the dates indicated:
There was no single 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 2019, 2018 or 2017.
Does not include other invested assets of $2.6 million that are primarily invested in limited partnership investments valued using the net asset value as a practical expedient and $1.5 million invested in a private convertible promissory note.
State and Municipal Obligations. The fair value of state and municipal obligations is estimated using recent transaction activity, including market observations. Valuation models are used, which incorporate bond structure, yield curve, credit spreads and other factors. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable.
Money Market Instruments. The fair value of money market instruments is based on daily prices, which are published and available to all potential investors and market participants. As such, these securities are categorized in Level I of the fair value hierarchy.
Corporate Bonds and Notes. The fair value of corporate bonds and notes is estimated using recent transaction activity, including market observations. Spread models are used that incorporate issuer and structure characteristics, such as credit risk and early redemption features, where applicable. These securities are generally categorized in Level II of the fair value hierarchy or in Level III when market-based transaction activity is unavailable.
Foreign Government and Agency Securities. The fair value of foreign government and agency securities is estimated using observed market yields used to create a maturity curve and observed credit spreads from market makers and broker-dealers. These securities are categorized in Level II of the fair value hierarchy.
The carrying value and estimated fair value of other selected liabilities not carried at fair value in our consolidated balance sheets were as follows as of the dates indicated:
The fair value of our senior notes is estimated based on the quoted market prices. The fair value of our FHLB advances is estimated based on expected cash flows for similar borrowings. These liabilities are categorized in Level II of the fair value hierarchy. See Note 12 for further information.
Although we held available for sale securities in an unrealized loss position as of December 31, 2019, we did not consider those securities to be other-than-temporarily impaired as of such date. For all investment categories, the unrealized losses of 12 months or greater duration as of December 31, 2019 were generally caused by interest rate or credit spread movements since the purchase date, and as such, we expect to recover the amortized cost basis of these securities. As of December 31, 2019, we did not have the intent to sell any available for sale securities in an unrealized loss position, and we determined that it is more likely than not that we will not be required to sell the securities before recovery of their cost basis, which may be at maturity; therefore, we did not consider these investments to be other-than-temporarily impaired at December 31, 2019.
These amounts include unrealized gains (losses) on investment securities other than securities available for sale. For 2017, 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.
The net changes in unrealized gains (losses) recognized in earnings on investments that were still held at each period-end were as follows:
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.
Change in Unrealized Gains (Losses) Recorded in Accumulated Other Comprehensive Income (Loss)
For the years ended December 31, 2019, 2018 and 2017, we did not transfer any securities to or from the available for sale or trading categories.
Excludes total gross carrying amount and accumulated amortization (including impairment) related to Clayton of $60.9 million and $57.2 million, respectively, which were reclassified to assets held-for-sale and included in other assets on our consolidated balance sheets at December 31, 2019.
As described below, in 2017, we undertook a strategic review of our Services business and made several decisions with respect to the business strategy that were designed to reposition this business to drive future growth and profitability. As a further step in this strategic repositioning, we initiated a process in 2019 to evaluate a potential sale of Clayton, through which we provided mortgage services related to loan acquisition, RMBS securitization and distressed asset reviews and servicer and loan surveillance services. This sale was completed in January 2020.
We report an asset group as held for sale when: (i) management is committed to a formal plan to sell the assets; (ii) the asset group is available for immediate sale; (iii) it is being actively marketed at a price that is reasonable in relation to its fair value; (iv) there is an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated; (v) the sale is probable and expected to be completed within one year; and (vi) it is deemed unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Based on developments in the fourth quarter of 2019, we determined that the asset group associated with the sale of Clayton met the criteria to be reclassified as held for sale as of December 31, 2019.
An asset group classified as held for sale is reflected at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, a loss is recognized. Due to the reclassification as held for sale of the asset group associated with the sale of Clayton, we recognized an impairment charge of $4.8 million for goodwill allocated to this asset group. The allocation was based on the estimated relative indicated fair value of the Clayton asset group and the remaining Services reporting unit. In addition, we recognized an impairment of other acquired intangible assets for $13.7 million and reclassified the remaining other acquired intangible assets balance associated with the asset group of $3.7 million as held for sale as of December 31, 2019.
We generally perform our annual goodwill impairment test during the fourth quarter of each year, using balances as of the prior quarter. Following the reclassification to held for sale of allocated goodwill and other acquired intangible assets and the related impairment recognized, we elected to perform a qualitative impairment analysis for the remaining goodwill and other acquired intangible assets in the fourth quarter of 2019. The qualitative analysis requires us to assess all relevant events and circumstances that could affect the significant inputs used to determine the fair value of the reporting unit. We considered factors such as: (i) our recent impairment of goodwill and other acquired intangible assets related to the sale of Clayton and (ii) the increase in and timing of revenues during the third and fourth quarters of 2019 for the remaining reporting unit (as compared to the forecasted amounts for the same periods), including the impact of higher margin business. Based on our qualitative assessment in the fourth quarter of 2019, we concluded that it is not “more likely than not” that the fair value of the remaining Services reporting unit is less than its carrying amount as of December 31, 2019. In addition, based on our analysis, there was no impairment indicated for the remaining other acquired intangible assets, as the carrying amounts were estimated to be recoverable from future cash flows.
In our mortgage insurance and title insurance businesses, we use reinsurance as part of our risk distribution strategy, including to manage our capital position and risk profile. The reinsurance arrangements for our mortgage insurance business include premiums ceded under the QSR Program, the Single Premium QSR Program, and the Excess-of-Loss Program. The Company’s related PMIERs credit under these programs are subject to GSE approval.
The effect of all of our reinsurance programs on our net income is as follows:
In 2012, Radian Guaranty entered into the QSR Program with a third-party reinsurance provider. Radian Guaranty has ceded the maximum amount permitted under the QSR Program and is no longer ceding NIW under this program. RIF ceded under the QSR Program was $0.6 billion, $0.9 billion and $1.2 billion as of December 31, 2019, 2018 and 2017, respectively.
2016 Single Premium QSR Agreement. In 2016, Radian Guaranty entered into the 2016 Single Premium QSR Agreement with a panel of third-party reinsurers. Under the 2016 Single Premium QSR Agreement, effective January 1, 2016, Radian Guaranty began ceding the following Single Premium IIF and NIW, subject to certain conditions:
The agreement is scheduled to terminate on December 31, 2027. Radian Guaranty has the option, based on certain conditions and subject to a termination fee, to terminate the agreement at the end of any calendar quarter on or after January 1, 2020. If Radian Guaranty exercises this option in the future, it would result in Radian Guaranty reassuming the related RIF in exchange for a net payment to the reinsurer calculated in accordance with the terms of the agreement. Radian Guaranty also may terminate this agreement prior to the scheduled termination date under certain circumstances/conditions, including if one or both of the GSEs no longer grant full PMIERs credit for the reinsurance.
Effective December 31, 2017, we amended the 2016 Single Premium QSR Agreement to increase the amount of ceded risk on performing loans under the agreement from 35% to 65% for the 2015 through 2017 vintages. As of the effective date, the result of this amendment increased the amount of risk ceded on Single Premium Policies, including for the purposes of calculating any future ceding commissions and profit commissions that Radian Guaranty will earn. It also increased the future
The agreement is scheduled to terminate on December 31, 2029. Radian Guaranty 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, which would result in Radian Guaranty reassuming the related RIF in exchange for a net payment to the reinsurer calculated in accordance with the terms of the agreement. Radian Guaranty also may terminate this agreement prior to the scheduled termination date under certain circumstances/conditions, including if one or both of the GSEs no longer grant full PMIERs credit for the reinsurance. RIF ceded under the 2018 Single Premium QSR Agreement was $3.2 billion as of December 31, 2019, compared to $1.9 billion as of December 31, 2018. As of January 1, 2020, Radian Guaranty is no longer ceding NIW under this arrangement.
2020 Single Premium QSR Agreement. In January 2020, we entered into the 2020 Single Premium QSR Agreement with a panel of third-party reinsurers. Under the 2020 Single Premium QSR Agreement, beginning with the business written in January 2020, we expect to cede 65% of our Single Premium NIW, subject to certain conditions and a limitation on ceded premiums written equal to $250 million for policies issued between January 1, 2020 and December 31, 2021. The parties may mutually agree to increase the amount of ceded risk above this level.
Through December 31, 2019, Radian Guaranty entered into two fully collateralized reinsurance arrangements with the Eagle Re Issuers. For the respective coverage periods, Radian Guaranty will retain the first-loss layer of aggregate losses, as well as any losses in excess of the outstanding reinsurance coverage amounts. The Eagle Re Issuers will provide the second layer coverage up to the outstanding coverage amounts. The aggregate excess-of-loss reinsurance coverage for these transactions decreases over a ten-year period as the principal balances of the underlying covered mortgages decrease and as any claims are paid by the applicable Eagle Re Issuer or the mortgage insurance is canceled. The outstanding reinsurance coverage amount will begin amortizing after an initial period in which a target level of credit enhancement is obtained and will stop amortizing if certain thresholds are reached, such as if the reinsured mortgages were to experience an elevated level of delinquencies or certain credit enhancement tests were not maintained. Radian Guaranty has rights to terminate the reinsurance agreements upon the occurrence of certain events. The Eagle Re Issuers financed their coverage by issuing mortgage insurance-linked notes to eligible third-party capital markets investors in an unregistered private offering.
The Eagle Re Issuers are not subsidiaries or affiliates of Radian Guaranty. Based on the accounting guidance that addresses VIEs, we have not consolidated any of the Eagle Re Issuers in our consolidated financial statements, because Radian does not have: (i) the power to direct the activities that most significantly affect the Eagle Re Issuers’ economic performances or (ii) the obligation to absorb losses or the right to receive benefits from the Eagle Re Issuers that potentially could be significant to the Eagle Re Issuers.
The reinsurance premium due to the Eagle Re Issuers is calculated by multiplying the outstanding reinsurance coverage amount at the beginning of a period by a coupon rate, which is the sum of one-month LIBOR plus a contractual risk margin, and then subtracting actual investment income collected on the assets in the reinsurance trust during the preceding month. As a result, the premiums we pay will vary based on: (i) the spread between LIBOR and the rates on the investments held by the reinsurance trust and (ii) the outstanding amount of reinsurance coverage. As the reinsurance premium will vary based on changes in these rates, we concluded that the reinsurance agreements contain embedded derivatives, which we have accounted for separately as freestanding derivatives and recorded in other assets on our consolidated balance sheets. See Note 2 for more information on our accounting treatment of VIEs.
Assets held by the Eagle Re Issuers are required to be invested in U.S. government money market funds, cash or U.S. Treasury securities. Liabilities of Eagle Re Issuers consist of their mortgage insurance-linked notes, as described above.
Although we use reinsurance as one of our risk management tools, reinsurance does not relieve us of our obligations to our policyholders. In the event the reinsurers are unable to meet their obligations to us, our insurance subsidiaries would be liable for any defaulted amounts. However, consistent with the PMIERs reinsurer counterparty collateral requirements, Radian Guaranty’s reinsurers have established trusts to help secure our potential cash recoveries. In addition to the total VIE assets of the Eagle Re Issuers discussed above, the amount held in reinsurance trusts was $203.2 million as of December 31, 2019, compared to $212.2 million as of December 31, 2018. In addition, for the Single Premium QSR Program, Radian Guaranty holds amounts received from ceded premiums written to collateralize the reinsurers’ obligations, which is reported in reinsurance funds withheld on our consolidated balance sheets. Any loss recoveries and profit commissions paid to Radian Guaranty related to the Single Premium QSR Program are expected to be realized from this account.
Internal-use software, at cost, has been reduced by accumulated amortization of $73.5 million and $60.3 million at December 31, 2019 and 2018, respectively, as well as $3.8 million of impairment charges in 2019 and $5.1 million of impairment charges in 2018. Amortization expense was $13.0 million, $11.4 million and $10.7 million for the years ended December 31, 2019, 2018 and 2017, respectively.
disclosure requirements for leases of property, plant and equipment. See Note 2 for additional information. Right-of-use assets are shown less accumulated amortization of $8.5 million at December 31, 2019.
In July 2018, we finalized a settlement with the IRS related to adjustments we had been contesting that resulted from the examination by the IRS of our 2000 through 2007 consolidated federal income tax returns. This settlement with the IRS resolved the issues and concluded all disputes related to the IRS Matter. During 2018, we recorded tax benefits of $73.6 million, which includes both the impact of the settlement with the IRS as well as the reversal of certain previously accrued state and local tax liabilities. In 2018, under the terms of the settlement, Radian utilized its “qualified deposits” with the U.S. Department of the Treasury to settle its $31 million obligation to the IRS, and during the first quarter of 2019, the IRS refunded to Radian the remaining $57.2 million that was previously on deposit. See Note 9 for additional information about these qualified deposits.
Our total net unrecognized tax benefits increased by $3.7 million from December 31, 2018 to December 31, 2019, primarily due to the impact of unrecognized tax benefits associated with our recognition of certain premium income. Over the next 12 months, our unrecognized tax benefits may decrease by approximately $7.5 million due to the expiration of the applicable statute of limitations relating to the 2015 and 2016 tax years. The statute of limitations related to our federal consolidated income tax return remains open for tax years 2015-2018. Additionally, among the entities within our consolidated group, various tax years remain open to potential examination by state and local taxing authorities.
Primarily comprises first lien primary case reserves of $339.8 million and $361.7 million at December 31, 2019 and 2018, respectively.
Includes the payment of $54.8 million made in connection with the scheduled final settlement of the Freddie Mac Agreement in the third quarter of 2017.
Represents the weighted average Default to Claim Rate for all defaults not in foreclosure stage that have been in default for up to five years, including new defaults. The estimated Default to Claim Rates applied to defaults within this population vary by Time in Default, and range from the Default to Claim Rates on new defaults shown above, up to 55.6%, 57.4% and 62.0% for more aged defaults in this category as of December 31, 2019, 2018, and 2017, respectively.
As of December 31, 2019, California is the only state that accounted for more than 10% of our mortgage insurance business measured by primary RIF. California accounted for 11.2% of our Mortgage Insurance segment’s primary RIF at December 31, 2019, compared to 12.3% at December 31, 2018. California accounted for 10.6% of our Mortgage Insurance segment’s direct primary NIW for the year ended December 31, 2019, compared to 11.9% and 14.1% for the years ended December 31, 2018 and 2017, respectively.
The carrying value of our debt at December 31, 2019 and 2018 was as follows:
Repayment of Senior Notes due 2019. In accordance with the terms of the notes under the related indenture, we retired the remaining aggregate principal amount of $158.6 million of outstanding Senior Notes due 2019 upon their maturity in June 2019.
Repurchases of Senior Notes due 2020 and 2021. During the second quarter of 2019, pursuant to cash tender offers to purchase any and all of our outstanding Senior Notes due 2020 and 2021, we purchased aggregate principal amounts of $207.2 million and $127.3 million of our Senior Notes due 2020 and 2021, respectively. We funded the purchases with $351.8 million in cash (which includes accrued and unpaid interest due on the purchased notes). These purchases resulted in a loss on extinguishment of debt of $16.8 million.
Following these purchases and redemptions, there were no remaining principal amounts outstanding on the Senior Notes due 2020 and 2021 at December 31, 2019.
Repurchases of Senior Notes due 2019, 2020 and 2021. During the third quarter of 2017, pursuant to cash tender offers, we purchased aggregate principal amounts of $141.4 million, $115.9 million and $152.3 million of our Senior Notes due 2019, 2020 and 2021, respectively. We funded the purchases with $450.8 million in cash (plus accrued and unpaid interest due on the purchased notes). These purchases resulted in a loss on extinguishment of debt of $45.8 million. At December 31, 2017, the remaining principal amounts of our outstanding Senior Notes due 2019, 2020 and 2021 were $158.6 million, $234.1 million and $197.7 million, respectively.
Repurchases of Convertible Senior Notes due 2017 and 2019. During the second quarter of 2017, we purchased an aggregate principal amount of $21.6 million of our outstanding Convertible Senior Notes due 2017. We funded the purchases
As of December 31, 2017, there were no Convertible Senior Notes due 2017 or Convertible Senior Notes due 2019 outstanding.
The FHLB advances are required to be collateralized by eligible assets with a market value that must be maintained at a minimum of approximately 103% to 105% of the principal balance of the FHLB advances. Our fixed-maturities available for sale include securities totaling $143.1 million and $88.4 million at December 31, 2019 and 2018, respectively, which serve as collateral for our FHLB advances to satisfy this requirement.
Radian Group has in place a $267.5 million unsecured revolving credit facility with a syndicate of bank lenders, which is scheduled to expire on October 16, 2020. Terms of the credit facility include an accordion feature that allows Radian Group, at its option, to increase the total borrowing capacity during the term of the agreement, subject to our obtaining the necessary increased commitments from lenders (which may include then existing or other lenders), up to a total of $300 million.
Subject to certain limitations, borrowings under the credit facility may be used for working capital and general corporate purposes, including capital contributions to Radian Group’s insurance and reinsurance subsidiaries as well as growth initiatives. The credit facility contains customary representations, warranties, covenants, terms and conditions. Our ability to borrow under the credit facility is conditioned on the satisfaction of certain financial and other covenants, including covenants related to minimum net worth and statutory surplus, a maximum debt-to-capitalization level, limits on certain types of indebtedness and liens, minimum liquidity levels and Radian Guaranty’s eligibility as a private mortgage insurer with the GSEs. At December 31, 2019, Radian Group was in compliance with all the covenants and there were no amounts outstanding under this revolving credit facility.
We are routinely involved in a number of legal actions and proceedings, including reviews, audits and inquiries by various regulatory entities, as well as litigation and other disputes arising in the ordinary course of our business. These proceedings could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief that could require significant expenditures or have other effects on our business. Management believes, based on current knowledge and after consultation with counsel, that the outcome of such actions will not have a material adverse effect on our consolidated financial condition. The outcome of litigation and other legal and regulatory matters and proceedings is inherently uncertain, and it is possible that one or more of the matters currently pending or threatened could have an adverse effect on our liquidity, financial condition or results of operations for any particular period. In accordance with applicable accounting standards and guidance, we establish accruals only when we determine both that it is probable that a loss has been incurred and the amount of the loss is reasonably estimable. We accrue the amount that represents our best estimate of the probable loss; however, if we can only determine a range of estimated losses, we accrue an amount within the range that, in our judgment, reflects the most likely outcome, and if none of the estimates within the range is more likely, we accrue the minimum amount of the range.
On August 31, 2018, Nationstar Mortgage LLC d/b/a Mr. Cooper (“Nationstar”) filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania against Radian Guaranty (the “Complaint”) alleging breach of contract, bad faith, equitable indemnification, unjust enrichment, and conversion claims and seeking monetary damages and declaratory relief. Exhibit 1 to the Complaint lists 3,014 mortgage insurance certificates issued under multiple insurance policies as subject to disputes involving insurance coverage decisions (the “Coverage Disputed Loans”). Exhibit 2 to the Complaint further lists 2,231 mortgage insurance certificates issued under multiple insurance policies as subject to disputes involving premium refund requests. In December 2018, Radian Guaranty filed a motion to dismiss the Complaint. In March 2019, the trial judge issued an order granting in part, and denying in part, our motion to dismiss, and dismissed Nationstar’s unjust enrichment and conversion claims. In May 2019, Radian Guaranty filed an answer, with affirmative defenses and counterclaims, in response to the Complaint. On September 23, 2019, the trial judge entered as an order a joint stipulation submitted by Nationstar and Radian Guaranty that narrowed the scope of the dispute involving Coverage Disputed Loans to claims relating to 1,704 mortgage insurance certificates. Radian Guaranty believes that Nationstar’s allegations and claims in the legal proceedings described above are without merit and legally deficient, and continues to defend against these claims vigorously.
The following tables provide additional information related to our leases, including: (i) the components of our total lease cost; (ii) the cash flows arising from our lease transactions; (iii) supplemental balance sheet information; (iv) the weighted-average remaining lease term; (v) the weighted-average discount rate used for our leases; and (vi) the remaining maturities of our lease liabilities, as of and for the periods indicated:
Pursuant to the previous lease accounting standard, rent expense for each of the years ended December 31, 2018 and 2017 was $9.7 million and $5.7 million, respectively. Our commitment for non-cancelable leases in future years as of December 31, 2018, as disclosed in our 2018 Form 10-K, was as follows (in thousands):
Subsequent to December 31, 2019, the Company purchased 2,738,462 shares of its common stock under its share repurchase program at an average price of $24.03 per share, including commissions. As of February 25, 2020, purchase authority of up to $359.2 million remained available under this program.
For performance-based RSUs, amount represents the probable outcome at grant date.
In 2019 and 2018, the vesting of the performance-based RSUs granted to each executive officer and non-executive will be based upon the cumulative growth in Radian’s book value per share, adjusted for certain defined items, over a three-year performance period. In 2017, approximately 50% of the performance-based RSUs granted to each executive and non-executive officer will vest based on the cumulative growth in Radian book value per share, adjusted for certain defined items over a three-year period. The vesting of the remaining 50% of each performance-based RSU granted in 2017 is dependent upon: (i) Radian Group’s total stockholder return (“TSR”) compared to the median TSR of a designated peer group of companies as of the date of grant and (ii) Radian Group’s absolute TSR, in each case measured over a three-year performance period and subject to certain conditions.
Time-Vested RSUs. With the exception of certain time-vested RSUs granted in 2019 and 2018 to non-employee directors, the time-vested RSU awards granted in 2019, 2018 and 2017 are scheduled to vest in: (i) pro rata installments on each of the first three anniversaries of the grant date or (ii) generally at the end of three years. Certain time-vested RSU awards granted in 2019 and 2018 to non-employee directors generally are subject to one-year cliff vesting.
Generally, the stock option awards have a four-year vesting period, with 50% of the award vesting on or after the third anniversary of the grant date and the remaining 50% of the award vesting on or after the fourth anniversary of the grant date, provided the applicable stock price performance hurdle is met. The fair value of stock options vested during the year ended December 31, 2019 was $30 thousand, as compared to $1.3 million in 2018 and $3.3 million in 2017.
There were no stock options granted in 2017, 2018 and 2019.
On May 9, 2018, stockholders of Radian approved the Amended and Restated Radian Group Inc. ESPP, which amended and restated the Radian Group Inc. 2008 Employee Stock Purchase Plan. Under this plan, we issued 107,009; 103,668; and 105,476 shares to employees during the years ended December 31, 2019, 2018 and 2017, respectively, and when amended in 2018, an additional 1,250,000 shares of our authorized but unissued common stock were reserved for issuance. In January 2020, we issued 39,332 shares from the shares available for issuance under our Amended and Restated Radian Group Inc. ESPP. As a result, 1,902,459 shares currently remain available for issuance under the Amended and Restated Radian Group Inc. ESPP.
The Amended and Restated Radian Group Inc. ESPP is designed to allow eligible employees to purchase shares of our common stock at a discount of 15% off the lower of the fair market value of our common stock at the beginning or end of a six-month offering period (each period being the first and second six months in a calendar year).
provides for the immediate vesting of matching contributions (including existing unvested matching contributions attributable to prior periods) and the elimination of all restrictions (other than Radian Group’s Insider Trading Policy) on a participant’s ability to diversify his/her position in matching contributions; and
Less: Reclassification adjustment for liquidation of foreign subsidiary and other adjustments included in net income (2)
Our mortgage insurance subsidiaries’ statutory net income, statutory policyholders’ surplus and contingency reserve as of and for the years ended December 31, 2019, 2018 and 2017 were as follows:
Radian Guaranty was in compliance with the Statutory RBC Requirements or MPP Requirements, as applicable, in each of the RBC States as of December 31, 2019. 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.
The NAIC is in the process of reviewing the minimum capital and surplus requirements for mortgage insurers and considering changes to the Model Act. In December 2019, a working group of state regulators released exposure drafts of a revised Model Act, including new proposed mortgage guaranty insurance capital requirements for mortgage insurers. The process for developing this framework is ongoing, and the outcome of this process remains uncertain. As proposed, the capital requirements set forth in the current exposure draft are impacted, among other things, by changes in the economic and housing environment, including changes in home prices and incomes. Given the current economic and housing environment, if the exposure draft of the new Model Act was adopted and in effect today, we do not believe that the capital requirements imposed by the new Model Act would exceed those of the current PMIERs financial requirements described below.
As of December 31, 2019, the amount of restricted net assets held by our consolidated insurance subsidiaries (which represents our equity investment in those insurance subsidiaries) totaled $4.2 billion of our consolidated net assets. Despite holding assets above the minimum statutory capital thresholds and PMIERs financial requirements, the ability of Radian’s mortgage insurance subsidiaries to pay dividends on their common stock is restricted by certain provisions of the insurance laws of Pennsylvania, their state of domicile. Under Pennsylvania’s insurance laws, ordinary dividends and distributions may only be paid out of an insurer’s positive unassigned surplus, measured as of the end of the prior fiscal year, unless the Pennsylvania Insurance Department approves the payment of extraordinary dividends or other distributions from another source.
As of December 31, 2019, Radian Guaranty and Radian Reinsurance had negative unassigned surplus of $503.3 million and $50.4 million, respectively. Therefore, no dividends or other ordinary distributions can be paid by these subsidiaries in 2020. In light of Radian Guaranty’s negative unassigned surplus related to operating losses in prior periods and the ongoing need to set aside contingency reserves, we do not anticipate that Radian Guaranty will be permitted under applicable insurance laws to pay ordinary dividends to Radian Group for the foreseeable future. As discussed above, Radian Guaranty is scheduled to release contingency reserves to unassigned surplus in material amounts beginning in 2024, which should accelerate the reduction of its negative unassigned surplus. Under Pennsylvania’s insurance laws, an insurer may request approval to pay an
The surplus additions (distributions) between Radian Group and Radian Guaranty and our other insurance subsidiaries for the years ended December 31, 2019, 2018 and 2017 were as follows: