As a seller of mortgage credit protection and other mortgage and credit risk management solutions, our Mortgage business results are subject to macroeconomic conditions and other events that impact the housing, real estate and housing finance markets, and the credit performance of our underlying insured assets as well as our future business opportunities. These include the current global pandemic as well as seasonal fluctuations that specifically affect the mortgage origination environment. The macroeconomic conditions, seasonality and other events that impact the housing, mortgage finance and related real estate markets also affect the demand for our products and services offered through our Real Estate segment.
Following the financial crisis of 2007-2008 and until the first quarter of 2020, our mortgage insurance business benefited from continued improvement in market conditions evidenced by, among other things, the strength of the U.S. economy and housing finance industry. Our NIW since 2008 has consisted primarily of high credit quality loans that have had significantly better credit performance than the loans originated during 2008 and prior periods. Significant contributors to the improved loan quality of our post-2008 insured portfolio include the greater risk discipline of loan originators and private mortgage insurance providers, the QM loan requirements under the Dodd Frank Act and the loan-level criteria of the PMIERs financial requirements.
Our Real Estate business, comprising real estate and title 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, mortgage volumes, interest rates, mortgage 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 market conditions such as new home sales, the sizes of the real estate purchase and refinance markets and interest rate fluctuations. See “Item 1. Business-Real Estate-Real Estate Business Overview” and Notes 1 and 4 of Notes to Consolidated Financial Statements for additional information regarding the Real Estate segment.
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. For further discussion of the PMIERs eligibility and other requirements, including the impact of the COVID-19 pandemic on our PMIERs Minimum Required Assets and the COVID-19 Amendment to the PMIERs, see “Item 1. Business-Regulation-GSE Requirements,” “Liquidity and Capital Resources-Mortgage” and Note 16 of Notes to Consolidated Financial Statements.
The COVID-19 pandemic has created periods of significant economic disruption, high unemployment, volatility and disruption in financial markets, and required adjustments in the housing finance system and real estate markets. In addition, the pandemic has resulted in travel restrictions, temporary business shutdowns, and stay-at-home, quarantine, and similar orders, and even as some businesses have been reopened, numerous operating limitations such as social distancing and extensive health and safety measures have limited operations, all of which contributed to the rapid and significant rise in unemployment. Although unemployment declined in the second half of 2020, it remains elevated compared to pre-pandemic levels, and may remain elevated or may rise if the current economic disruption is prolonged.
As a result of this material increase in new defaults, our primary default rate increased from 2.0% at December 31, 2019 to 5.2% at December 31, 2020, which is down from a peak of 6.5% at June 30, 2020. Favorable trends in the number of new defaults and Cures were the primary drivers of the decline in our default inventory and default rate in the second half of 2020, compared to June 30, 2020. As a result of these favorable trends in new defaults and Cures and assuming continued economic recovery, we currently expect our primary default rate to remain below 6%. However, the number, timing and duration of new defaults and, in turn, the number of defaults that ultimately result in claims will depend on a variety of factors, including the scope, severity and duration of the COVID-19 pandemic, the resulting impact on the economy, including with respect to unemployment and housing prices, and the effectiveness of forbearance and other government efforts such as financial stimulus programs, to provide economic and individual relief to assist homeowners. Consequently, the number and rate of total defaults is difficult to predict and will depend on the foregoing and other factors, including the number and timing of Cures and claims paid and the net impact on IIF from our Persistency Rate and future NIW. See “Item 1A. Risk Factors” for additional discussion of these factors and other risks and uncertainties.
The increase in new defaults resulting from the COVID-19 pandemic may also affect our ability to remain compliant with the PMIERs financial requirements. Our Master Policies generally provide that a default occurs when a borrower misses one monthly payment, regardless of why the payment was missed, including if the payment was deferred under a forbearance program. Once two missed payments have occurred, the PMIERs characterize a loan as “non-performing” and require us to establish an increased Minimum Required Asset factor for that loan regardless of the reason for the missed payments. Pursuant to the COVID-19 Amendment that temporarily amends the PMIERs, a Disaster Related Capital Charge that effectively reduces the
Minimum Required Asset factor by 70% is now applied nationwide to all COVID-19 Defaulted Loans for no longer than three calendar months beginning with the month the loan becomes non-performing (i.e., missed two monthly payments), or if greater, the period of time that the loan is subject to a forbearance plan, repayment plan or loan modification trial period granted in response to a financial hardship related to COVID-19. The current broad-based application of the Disaster Related Capital Charge has significantly reduced the total amount of assets that Radian Guaranty otherwise would be required to hold against COVID-19 Defaulted Loans under the PMIERs. Nonetheless, since March 31, 2020, the overall volume of new defaults resulting from the pandemic, even after giving effect to the Disaster Related Capital Charge, resulted in an increase in Radian Guaranty’s Minimum Required Assets and negatively impacted Radian Guaranty’s PMIERs Cushion as of December 31, 2020. While we expect Radian Guaranty to continue to maintain its eligibility status with the GSEs, there are possible scenarios in which the projected increase in new defaults could impact Radian Guaranty’s ability to comply with the PMIERs financial requirements. See “Item 1A. Risk Factors-Radian Guaranty may fail to maintain its eligibility status with the GSEs, and the additional capital required to support Radian Guaranty’s eligibility could reduce our available liquidity.”
Despite the risks and uncertainties posed by COVID-19, we believe that the steps we have taken in recent years, such as improving our debt maturity profile, enhancing our financial flexibility, implementing greater risk-based granularity into our pricing methodologies and increasing our use of risk distribution strategies to lower the risk profile and financial volatility of our mortgage insurance portfolio, has helped position the Company to better withstand the negative effects from macroeconomic stresses associated with the COVID-19 pandemic, which may continue in future periods.
Our Mortgage segment provides credit-related insurance coverage, principally through private mortgage insurance issued nationwide, as well as other credit risk management and contract underwriting solutions, to mortgage lending institutions and mortgage credit investors. The following sections discuss certain key drivers affecting our Mortgage revenue, as well as other key factors affecting our results.
Our IIF is one of the primary drivers of our future premiums that we expect to earn over time. Although not reflected in the current period financial statements, nor in our reported book value, we expect our IIF to generate substantial earnings in future periods, due to the high credit quality of our current mortgage insurance portfolio and expected Persistency Rate over multiple years.
Based on the composition of our mortgage insurance portfolio, with Monthly Premium Policies comprising a larger proportion of our total portfolio than Single Premium Policies, an increase or decrease in IIF generally has a corresponding impact on premiums earned. Cancellations of our insurance policies as a result of prepayments and other reductions of IIF, such as Rescissions of coverage and claims paid, generally have a negative effect on premiums earned over time. See “Mortgage Insurance Portfolio-Insurance and Risk in Force” for more information about the levels and characteristics of our IIF.
Private mortgage insurance penetration in the insurable market has generally been 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 these lower down payment loans 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-Competition.”
¢ Refinance $151 $130 $119 $110 $120 $193 $350 $435 $392 $660 $735 $779
Total $384 $474 $458 $388 $350 $558 $721 $754 $664 $999 $1,178 $1,208
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.
Our pricing is risk-based and is intended to generally align with the capital requirements under the PMIERs, while considering pricing trends within the private mortgage insurance industry. As a result, our pricing is expected to generate relatively consistent returns across the credit spectrum and to provide relatively stable expected loss ratios regardless of further credit expansion or contraction. In developing our strategies, we monitor various competitive and economic factors while seeking to enhance the long-term value of our portfolio by balancing credit risk, profitability and volume considerations, and aim to achieve an overall risk-adjusted rate of return on capital given our modeled performance expectations. We continued to generate strong NIW in 2020, while at the same time maintaining projected returns on NIW within our targeted ranges.
As described above, premiums on our mortgage insurance products are generally paid either on an installment basis, pursuant to Monthly Premium Policies, or in a single payment at the time of loan origination, pursuant to Single Premium Policies. See “Item 1. Business-Mortgage-Pricing-Primary Mortgage Insurance Premiums.” Our expected premium yield on our Single Premium Policies is lower than on our Monthly Premium Policies because our premium rates for the life of the policy are generally lower for our Single Premium Policies. However, as discussed above, the ultimate profitability of Single Premium Policies may be higher or lower than expected due to the impact of prepayment speeds. See “-IIF and Related Drivers” above.
Approximately 74.6% of the loans in our total Primary Mortgage Insurance portfolio at December 31, 2020 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, 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 distribution of claims over the life cycle of a portfolio (historically, claims are relatively low during the first two years after a loan is originated and then increase over a period of several years before declining; however, several factors can impact and change this cycle, including the economic environment, the quality of the underwriting of the loan, characteristics of the mortgage loan, the credit profile of the borrower, housing prices and unemployment rates).
■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 both the 2014 Master Policy and 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
When we enter into a quota share reinsurance agreement, the reinsurer receives a premium and, in exchange, agrees to insure an agreed upon portion of incurred losses. These arrangements reduce our earned premiums but also reduce our net RIF, which provides capital relief, including under the PMIERs financial requirements. Our incurred losses are reduced by any incurred losses ceded in accordance with the reinsurance agreement, and we often receive ceding commissions from the reinsurer as part of the transaction, which, in turn, reduce our reported operating expenses and policy acquisition costs.
contracts do not contain volume commitments and may be terminated by clients at any time. Access to Radian Guaranty’s mortgage insurance customer base provides additional opportunities to expand the Real Estate segment’s existing customers.
Our Real Estate revenue is primarily generated under fixed-price contracts. Under fixed-price contracts, we agree to perform the specified services and deliverables for a pre-determined per-unit price. To the extent our actual direct and allocated indirect costs decrease or increase from the estimates upon which the price was negotiated, we will generate more or less profit, respectively, or could incur a loss. See Note 2 of Notes to Consolidated Financial Statements for more information on revenue recognition policies for our Real Estate segment.
Our operating expenses primarily consist of salaries and benefits not classified as cost of services because they are related to employees, such as sales and corporate employees, who are not directly involved in providing client services. Operating expenses also include other selling, general and administrative expenses, depreciation, and allocations of corporate general and administrative expenses.
For information about our All Other activities that affect our consolidated results, see “Item 1. Business-All Other.” In addition, the following items also may impact our consolidated results in the ordinary course. The items listed are not representative of all potential items impacting our consolidated results. See “Item 1A. Risk Factors” for additional information on the risks affecting our business.
Impairment of Goodwill or Other Acquired Intangible Assets. The periodic review of goodwill and other acquired intangible assets for potential impairment may impact consolidated results. Our goodwill and other acquired intangible assets analysis is based on management’s assumptions, which are inherently subject to risks and uncertainties. See Note 7 of Notes to Consolidated Financial Statements for additional information.
(1)Policy years represent the original policy years, and have not been adjusted to reflect subsequent refinancing activity under HARP.
Among other factors, private mortgage insurance industry volumes are impacted by total mortgage origination volumes and the mix between mortgage originations that are for home purchases versus refinancings of existing mortgages, with the penetration rate for private mortgage insurance being generally three to five times higher for purchase transactions than for refinancings. According to industry estimates, total mortgage origination volume was higher in 2020 as compared to 2019, due to a strong purchase market and a significant increase in refinance originations driven largely by lower interest rates. Although it is difficult to project future volumes, recent market projections for 2021 estimate total mortgage originations of approximately three trillion dollars, which would represent a decline in the total mortgage origination market of 20-25%, with a private mortgage insurance market of 450 to 500 billion dollars. This outlook anticipates a significant decrease in refinance originations in the second half of 2021 resulting from expected increases in interest rates. While expectations for refinance volume vary, there is consensus around a large purchase market driven by increased home sales, which is a positive for mortgage insurers given the higher likelihood of purchase loans to utilize private mortgage insurance as compared to a refinance loan. If refinance volume declines we would expect the Persistency Rate for our portfolio to increase, benefiting the growth of our Insurance in Force portfolio. See "Overview-COVID-19 Impacts” and “Item 1A. Risk Factors” for more information.
The following table provides selected information as of and for the periods indicated related to our mortgage insurance NIW. For direct Single Premium Policies, NIW includes policies written on an individual basis (as each loan is originated) and on an aggregated basis (in which each individual loan in a group of loans is insured in a single transaction, typically after the loans have been originated).
(1)Lender-paid Single Premium Policies have higher Minimum Required Assets under the PMIERs as compared to borrower-paid Single Premium Policies. See “Item 1. Business-Regulation-GSE Requirements” for additional information.
(2)For loans with multiple borrowers, the percentage of NIW by FICO score represents the lowest of the borrowers’ FICO scores. Data for 2018 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.
IIF at December 31, 2020 increased 2.3% as compared to the same period last year, reflecting an 11.4% increase in Monthly Premium Policies in force, partially offset by a 20.9% decline in Single Premium Policies in force. As shown in the table below, our Persistency Rate at December 31, 2020 declined as compared to the same period in 2019. Historically, there is a close correlation between interest rates and Persistency Rates. Lower interest rate environments generally increase refinancings, which increase the cancellation rate of our insurance and negatively affect our Persistency Rates. The decline in our Persistency Rate at December 31, 2020 was primarily attributable to increased refinance activity resulting from historically low interest rates, and resulted in an increase in policy cancellations and a net decline in Single Premium Policies in force in particular.
(1)Represents inception-to-date losses incurred as a percentage of net premiums earned.
Throughout this report, unless otherwise noted, RIF is presented on a gross basis and includes the amount ceded under reinsurance. NIW, RIF and IIF for direct Single Premium Policies include policies written on an individual basis (as each loan is originated) and on an aggregated basis (in which each individual loan in a group of loans is insured in a single transaction, typically after the loans have been originated).
(2)Represents the borrower’s FICO score at origination. For loans with multiple borrowers, the percentage of primary RIF by FICO score represents the lowest of the borrowers’ FICO scores. Data for 2018 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.
(1)Excludes the impact of intercompany reinsurance agreement with Radian Reinsurance, which was terminated in January 2020. See Note 16 of Notes to Consolidated Financial Statements for additional information.
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 2020 primarily reflect the financial results and performance of our two business segments-Mortgage and Real Estate. See Note 4 of Notes to Consolidated Financial Statements for information regarding modifications to our segment reporting, including the related allocations and the impacts of the sale of Clayton in January 2020 and subsequent organizational changes made in the first quarter of 2020, as well as the wind down of our traditional appraisal
This section of our Annual Report on Form 10-K generally discusses our consolidated results of operations for the years ended December 31, 2020 and 2019 and a year-over-year comparison between 2020 and 2019. Detailed discussions of our consolidated results of operations for the year ended December 31, 2018, including the year-over-year comparisons between 2019 and 2018, that are not included in this Annual Report on Form 10-K can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 28, 2020.
Return on Equity. The changes in return on equity across all periods presented are primarily due to the changes in net income and, to a lesser extent, increases in stockholders’ equity. See “-Net Income” above for more information on the changes in net income.
Adjusted Net Operating Return on Equity. The changes in adjusted net operating return on equity across all periods presented are primarily due to the changes in our adjusted pretax operating income, partially offset by increases in stockholders’ equity.
Net Gains (Losses) on Investments and Other Financial Instruments. Net gains on investments and other financial instruments for 2020 increased as compared to 2019 primarily due to: (i) net realized gains on our fixed-maturities available for sale and (ii) higher gains on other financial instruments. These increases were partially offset by a decrease in unrealized gains in our equity and trading portfolio. See Note 6 of Notes to Consolidated Financial Statements for additional information on net gains (losses) on investments.
Income Tax Provision. Our 2020 effective tax rate was 17.9%, as compared to 20.8% for 2019. Our effective tax rate in 2020 was lower than the federal statutory tax rate primarily due to the accounting for uncertainty of income taxes, which we view as a Discrete Item. Our effective tax rate in 2019 approximated the federal statutory tax rate.
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.
Adjusted pretax operating income (loss) 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 gains (losses) from the sale of lines of business and acquisition-related expenses.
The following table provides a reconciliation of consolidated pretax income to our non-GAAP financial measure for the consolidated Company of adjusted pretax operating income.
(1)The amounts for the years ended December 31, 2020 and 2019 primarily relate to impairments of other long-lived assets and are included in other operating expenses on the consolidated statement of operations. The amount for the year ended December 31, 2018 is included within restructuring and other exit costs on the consolidated statements of operations, except for $1.6 million in 2018 related to the impairment of other long-lived assets, included in other operating expenses.
Adjusted diluted net operating income (loss) per share is calculated by dividing (i) adjusted pretax operating income (loss) 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. The following table provides a reconciliation of diluted net income (loss) per share to our non-GAAP financial measure for the consolidated company of adjusted diluted net operating income (loss) per share.
(3)Calculated using the Company’s federal statutory tax rates of 21%. Any permanent tax adjustments and state income taxes on these items have been deemed immaterial and are not included.
(4)The difference in 2018 includes the tax benefit related to the settlement of the IRS Matter, which includes both the impact of the settlement with the IRS as well as the reversal of certain related previously accrued state and local tax liabilities.
As noted above in Results of Operations-Consolidated and as further discussed in Note 4 of Notes to Consolidated Financial Statements, we made certain modifications to our segment reporting in 2020. These changes to our reportable segments have been reflected in our Mortgage segment operating results for all periods presented.
(1)Our senior management uses adjusted pretax operating income as our primary measure to evaluate the fundamental financial performance of our business segments. See Note 4 of Notes to Consolidated Financial Statements for more information.
Net Premiums Written and Earned. Net premiums written for 2020 decreased compared to 2019. The decrease reflects lower premium rates on our IIF portfolio compared to the same period in 2019, as well as a lower proportion of Single Premium Policies. In addition, net premiums written for 2020 reflect an increase in ceded premiums resulting from a reduction to accrued profit commissions, due to higher ceded losses primarily recorded in the second quarter of 2020.
Net premiums earned decreased for 2020 compared to 2019, primarily due to reduced profit commissions as a result of higher ceded losses. Also contributing to the decline for 2020 compared to 2019 was a $32.9 million cumulative adjustment in 2019 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. These decreases to net premiums earned for 2020 were partially offset by the increase in net premiums earned from Single Premium Policy cancellations, as compared to 2019.
(1)Does not include the benefit from ceding commissions on our Single Premium QSR Programs, which are included in other operating expenses on the consolidated statement of operations. See Note 8 of Notes to Consolidated Financial Statements for additional information.
Net Investment Income. Lower investment yields, partially offset by higher average investment balances, resulted in decreases in net investment income for 2020, compared to 2019. Our higher investment balances were a result of investing our positive cash flows from operations.
(1)Related to defaulted loans with a most recent default notice dated in the year indicated. For example, if a loan had defaulted in a prior year, but then subsequently cured and later re-defaulted in the current year, that default would be considered a current year default.
(3)Provision for losses as a percentage of net premiums earned. See below and “-Net Premiums Written and Earned” for further discussion of the components of this ratio.
(4)Calculated by dividing provision for losses for new defaults, net of reinsurance, by new primary defaults for each period.
Our mortgage insurance provision for losses for 2020 increased by $351.8 million as compared to 2019. Reserves established for new default notices were the primary driver of our total incurred losses for 2020 and 2019. Current year new primary defaults increased significantly for 2020, compared to 2019, as shown below. The increase primarily relates to a significant increase in the number of new default notices resulting from the COVID-19 pandemic, substantially all due to borrowers in forbearance programs. Our gross Default to Claim Rate assumption for new primary defaults was 8.5% at December 31, 2020, compared to 7.5% as of December 31, 2019. This increase reflects the estimated impact of a worsening macroeconomic environment, partially offset by the expected beneficial effects of mortgage relief options and protections, including forbearance programs under the CARES Act. See Notes 1 and 11 of Notes to Consolidated Financial Statements and “Item 1A. Risk Factors” for additional information. In addition, the new defaults reported in 2020 are concentrated in more recent origination vintages and have higher average loan balances, which in turn contributes to higher reserves per new default.
(1)Includes those charged to a deductible under Pool Mortgage Insurance arrangements, as well as commutations. Excludes the impact of claims settled in 2020 related to certain previously disclosed legal proceedings. See Note 13 of Notes to Consolidated Financial Statements for additional information.
2020 and 2019, respectively. This decrease was primarily due to a shift in the mix of defaults during 2020, given the larger proportion of more recent defaults, including defaults of loans subject to forbearance programs implemented in response to the COVID-19 pandemic. Our net Default to Claim Rate and loss reserve estimate incorporates our expectations with respect to future Rescissions, Claim Denials and Claim Curtailments. Our estimate of such net future Loss Mitigation Activities, inclusive of claim withdrawals, reduced our loss reserve as of December 31, 2020 and 2019 by $29 million and $19 million, respectively. These expectations are based primarily on recent claim withdrawal activity and our recent experience with respect to the number of claims that have been denied due to the policyholder’s failure to submit sufficient documentation to perfect a claim within the time period permitted under our Master Policies, as well as our recent experience with respect to the number of insurance certificates that have been rescinded due to fraud, underwriter negligence or other factors.
Our reported Rescission, Claim Denial and Claim Curtailments activity in any given period is subject to challenge by our lender and servicer customers through our claims rebuttal process. In addition, we are at times engaged in discussions with our lender and servicer customers regarding our Loss Mitigation Activities. Unless a liability associated with such activities or discussions becomes probable and can be reasonably estimated, we consider our claim payments and our Rescissions, Claim Denials and Claim Curtailments to be resolved for financial reporting purposes. In accordance with the accounting standard regarding contingencies, we accrue for an estimated loss when we determine that the loss is probable and can be reasonably estimated.
We expect that a portion of previously rescinded policies will be reinstated and previously denied claims will be resubmitted with the required documentation and ultimately paid; therefore, we have incorporated this expectation into our IBNR reserve estimate. Our IBNR reserve estimate was $10.0 million and $41.0 million at December 31, 2020 and 2019, respectively. The decrease in our IBNR reserve in 2020 as compared to 2019 is primarily related to claims paid in 2020 to settle certain previously disclosed legal proceedings. See Notes 11 and 13 of Notes to Consolidated Financial Statements for additional information.
The following table shows net claims paid by product and the average claim paid by product for the periods indicated.
(2)Includes payments to commute mortgage insurance coverage on certain performing and non-performing loans. For the year ended December 31, 2020, primarily includes payments made to settle certain previously disclosed legal proceedings.
Other Operating Expenses. The decrease in other operating expenses for 2020, as compared to 2019, is primarily due to: (i) a decrease in technology-related expenses; (ii) a decrease in compensation expense in 2020, including variable and share-based compensation; and (iii) an increase in ceding commissions. This decrease in expense was partially offset by higher allocated corporate operating expenses.
Interest Expense. The increase in interest expense for 2020, as compared to 2019, primarily reflects an increase in our senior notes outstanding in 2020. This increase in interest expense was partially offset by the positive impact of our net reduction in senior notes outstanding in 2019. See Note 12 of Notes to Consolidated Financial Statements for additional information on our senior notes.
As noted above in “Results of Operations-Consolidated” and as further discussed in Note 4 of Notes to Consolidated Financial Statements, we made certain modifications to our segment reporting in 2020. These changes to our reportable segments have been reflected in our Real Estate segment operating results for all periods presented. See “Item 1. Business-Real Estate-Real Estate Business Overview-Services Offered” and Note 1 of Notes to Consolidated Financial Statements for additional information regarding the Real Estate segment and the January 2020 sale of Clayton, as well as other changes impacting our reportable segments in 2020.
The following table summarizes our Real Estate segment’s results of operations for the years ended December 31, 2020, 2019 and 2018.
(2)Includes allocation of corporate operating expenses of $12.8 million, $10.2 million and $8.4 million for 2020, 2019 and 2018, respectively.
(1)Our senior management uses adjusted pretax operating income (loss) as our primary measure to evaluate the fundamental financial performance of each of the Company’s business segments. See Note 4 of Notes to Consolidated Financial Statements.
Adjusted pretax operating income increased in 2019 compared to an adjusted pretax operating loss in 2018 primarily as a result of: (i) a decrease in interest expense, as a result of the Clayton Intercompany Note repayment, and (ii) an increase in net investment income. Higher average investment balances, combined with higher investment yields, resulted in increases in investment income for 2019, compared to 2018. Our higher investment balances were primarily a result of investing the large Extraordinary Distributions received by Radian Group from Radian Guaranty in 2019 and 2018. See Note 16 of Notes to Consolidated Financial Statements for additional information.
Investing Activities. Net cash used in investing activities increased in 2020, compared to 2019, primarily as a result of: (i) an increase in purchases, net of proceeds from sales, of fixed-maturity investments available for sale; (ii) a decrease in proceeds from sales of trading securities; and (iii) an increase in net purchases of short-term investments.
See “Item 8. Financial Statements and Supplementary Data-Consolidated Statements of Cash Flows” for additional information.
At December 31, 2020 and December 31, 2019, the following tables include $57.5 million and $66.4 million, respectively, of securities loaned to third-party borrowers under securities lending agreements, which are classified as other assets in our consolidated balance sheets. See Note 6 of Notes to Consolidated Financial Statements for more information about our investment portfolio, including our securities lending agreements.
The composition of our investment portfolio, presented as a percentage of overall fair value at December 31, 2020 and December 31, 2019, was as follows.
The following table shows the scheduled maturities of the securities held in our investment portfolio at December 31, 2020 and December 31, 2019.
During 2020, Radian Group’s available liquidity increased by $450.1 million, due primarily to net proceeds of $515.6 million from the issuance of Senior Notes due 2025 (see “-Capitalization-Holding Company” below for details) and Radian Reinsurance’s return of $465 million of capital to Radian Group in January 2020, as approved by the Pennsylvania Insurance Department. The effects of the debt issuance and return of capital were partially offset by the cost of share repurchases and dividends, as described below, and the transfer of $200 million of cash and marketable securities to Radian Guaranty in exchange for a surplus note in the same amount. See “-Mortgage” below for additional information.
In addition to our ongoing short-term liquidity needs discussed above, our most significant need for liquidity beyond the next 12 months is the repayment of $1.4 billion aggregate principal amount of our senior debt due in future years. See “-Capitalization-Holding Company” below for details of our debt maturity profile. Radian Group’s liquidity demands for the next 12 months or in future periods could also include: (i) early repurchases or redemptions of portions of our debt obligations; (ii) the repurchase of shares of our common stock; (iii) potential additional investments to support our business strategy; and (iv) potential additional capital contributions to our subsidiaries, including due to the continuing impact that the COVID-19 pandemic could have on the liquidity, results of operations and financial condition of Radian Group and our subsidiaries. As a result of the COVID-19 pandemic and its impact on the economy, including the significant increase in unemployment, we experienced a material increase in new defaults in the second quarter of 2020, and to a lesser extent in the second half of 2020, substantially all related to defaulted loans subject to forbearance programs implemented in response to the COVID-19 pandemic. While we expect it will take a number of months or years before any new defaults resulting from the pandemic would require a claim payment, Radian Group may be required to contribute additional capital to support Radian Guaranty’s PMIERs Cushion due to increased minimum asset requirements on defaulted loans. See “Item 1A. Risk Factors,” including “-Radian Group’s sources of
liquidity may be insufficient to fund its obligations” and “-Radian Guaranty may fail to maintain its eligibility status with the GSEs, and the additional capital required to support Radian Guaranty’s eligibility could reduce our available liquidity” for additional discussion about the elevated risks and uncertainties associated with the COVID-19 pandemic and the potential impact to Radian Guaranty’s Minimum Required Assets. See also Notes 1 and 16 of Notes to Consolidated Financial Statements and “Overview-COVID-19 Impacts” for further information.
If Radian Group’s current sources of liquidity are insufficient to fund its obligations, or if we otherwise decide to increase our liquidity position, Radian Group may seek additional capital, including by incurring additional debt, issuing additional equity, or selling assets, which we may not be able to do on favorable terms, if at all.
In May 2020, we issued $525 million aggregate principal amount of Senior Notes due 2025 and received net proceeds of $515.6 million. These notes mature on March 15, 2025 and bear interest at a rate of 6.625% per annum, payable semi-annually on March 15 and September 15 of each year, which interest payments commenced on September 15, 2020. See Note 12 of Notes to Consolidated Financial Statements for additional information about these notes and our other senior notes.
As of December 31, 2020, our mortgage insurance subsidiaries maintained claims paying resources of $5.2 billion on a statutory basis, which consists of contingency reserves, statutory policyholders’ surplus, premiums received but not yet earned and loss reserves. In addition, our reinsurance programs are designed to provide additional claims-paying resources during times of economic stress and elevated losses. See Note 8 of Notes to Consolidated Financial Statements for additional information about our reinsurance programs.
Radian Guaranty’s Risk-to-capital as of December 31, 2020 was 12.7 to 1. Radian Guaranty is not expected to need additional capital to satisfy state insurance regulatory requirements in their current form. At December 31, 2020, Radian Guaranty had statutory policyholders’ surplus of $481.5 million. This balance includes a $210.9 million benefit from U.S. Mortgage Guaranty Tax and Loss Bonds issued by the U.S. Department of the Treasury, which mortgage guaranty insurers such as Radian Guaranty may purchase in order to be eligible for a tax deduction, subject to certain limitations, related to amounts required to be set aside in statutory contingency reserves. See Note 16 of Notes to Consolidated Financial Statements, “Overview-COVID-19 Impacts” and “Item 1A. Risk Factors” for more information about these bonds and the risks associated with potential corporate tax rate increases, our statutory and PMIERs requirements and the potential effects of increased defaults due to the COVID-19 pandemic.
Private mortgage insurers, including Radian Guaranty, are required to comply with the PMIERs to remain approved insurers of loans purchased by the GSEs. Radian Guaranty currently is an approved mortgage insurer under the PMIERs. At December 31, 2020, Radian Guaranty’s Available Assets under the current PMIERs financial requirements totaled approximately $4.7 billion, resulting in a PMIERs Cushion of $1.3 billion, or 40%, over its Minimum Required Assets of $3.4 billion.
(2)Represents Radian Group’s available liquidity, net of the $35 million minimum liquidity requirement under the unsecured revolving credit facility.
Our PMIERs Cushion at December 31, 2020, includes a benefit from the current broad-based application of the Disaster Related Capital Charge that has reduced the total amount of Minimum Required Assets that Radian Guaranty otherwise would have been required to hold against pandemic-related defaults as of December 31, 2020 by approximately $650.0 million, taking into consideration our existing risk distribution structures. We expect that application of the Disaster Related Capital Charge will continue to materially reduce Radian Guaranty’s PMIERs Minimum Required Assets; however, the benefit that Radian Guaranty currently is receiving from the Disaster Related Capital Charge is expected to diminish over time.
With respect to existing defaults occurring during the COVID-19 Crisis Period, the Disaster Related Capital Charge will continue to apply until: (i) they fail to enter a COVID-19 forbearance program within the period prescribed by the COVID-19 Amendment or (ii) for defaults subject to a COVID-19 forbearance plan, repayment plan or loan modification trial period, they exit the program, plan or trial period without curing the default status.
Our PMIERs Cushion as of December 31, 2020 includes the benefit from our reinsurance agreements, including the 2020 agreements with Eagle Re 2020-1 Ltd. and Eagle Re 2020-2 Ltd., effective February 2020 and October 2020, respectively. The PMIERs Cushion also includes the transfer of $200 million of cash and marketable securities from Radian Group in exchange for a surplus note in the same amount in January 2020, partially offset by an increase in Minimum Required Assets due to the termination of the intercompany reinsurance agreement with Radian Reinsurance. See Notes 8 and 16 of Notes to Consolidated
Financial Statements, respectively, for additional information on Eagle Re 2020-1 Ltd. and Eagle Re 2020-2 Ltd. and these intercompany actions.
In addition to the PMIERs Cushion held at Radian Guaranty, our excess available resources include our unsecured revolving credit facility and holding company liquidity. While these resources may be utilized to enhance Radian Guaranty’s PMIERs Cushion, the impact of the COVID-19 pandemic could affect our ability to remain compliant with the PMIERs financial requirements as the increase in defaults and resulting increase to our Minimum Required Assets could reduce or potentially exhaust our PMIERs Cushion or exceed our Available Assets. See “Item 1A. Risk Factors” for additional information.
Radian Guaranty and Radian Reinsurance are both members of the FHLB. As members, they may borrow from the FHLB, subject to certain conditions, which include requirements to post collateral and to maintain a minimum investment in FHLB stock. Advances from the FHLB may be used to provide low-cost, supplemental liquidity for various purposes, including to fund incremental investments. Radian’s current strategy includes using FHLB advances as financing for general cash management purposes and for purchases of additional investment securities that have similar durations, for the purpose of generating additional earnings from our investment securities portfolio with limited incremental risk. As of December 31, 2020, there were $176.5 million of FHLB advances outstanding. See Note 12 of Notes to Consolidated Financial Statements for additional information.
Title insurance companies, including Radian Title Insurance, are subject to comprehensive state regulations, including minimum net worth requirements. Radian Title Insurance was in compliance with its respective minimum net worth requirements at December 31, 2020. In the event the cash flows from operations of the Real Estate segment are not adequate to fund all of its needs, including the regulatory capital needs of Radian Title Insurance, Radian Group may provide additional funds to the segment in the form of an intercompany note or other capital contribution, and if needed for Radian Title Insurance subject to the approval of the Ohio Department of Insurance. Additional capital support may also be required for potential investments in new business initiatives to support our strategy of growing our businesses.
Liquidity levels may fluctuate depending on the levels and contractual timing of our invoicing and the payment practices of our Real Estate clients, in combination with the timing of our Real Estate segment’s payments for employee compensation and to external vendors. The amount, if any, and timing of the Real Estate segment’s dividend paying capacity will depend primarily on the amount of excess cash flow generated by the segment.
Radian Group, Radian Guaranty and Radian Reinsurance have been assigned the ratings set forth in the chart below. We believe that ratings often are considered by others in assessing our credit strength and the financial strength of our Primary Mortgage Insurance subsidiaries. The following ratings have been independently assigned by third-party statistical rating organizations, are for informational purposes only and are subject to change. See “Item 1A. Risk Factors-The current financial
(1)Based on the July 14, 2020 update, Moody’s outlook for Radian Group and Radian Guaranty currently is Stable.
(2)Based on the November 17, 2020 update, S&P’s outlook for Radian Group, Radian Guaranty and Radian Reinsurance is currently Negative.
(3)Based on the August 27, 2020 release, Fitch’s outlook for Radian Group and Radian Guaranty is currently Negative.
SEC guidance defines Critical Accounting Estimates as those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operation of the registrant. These items require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing our consolidated financial statements in accordance with GAAP, management has made estimates, assumptions and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
We establish reserves to provide for losses and LAE, which include the estimated costs of settling claims in our mortgage insurance portfolio, in accordance with the accounting standard regarding accounting and reporting by insurance enterprises. In our mortgage insurance business, the default and claim cycle begins with the receipt of a default notice from the loan servicer. We maintain an extensive database of default and claim payment history, and use models based on a variety of loan characteristics to determine the likelihood that a default will reach claim status.
Premiums on mortgage insurance products are written on a recurring basis, either as monthly or annual premiums, or on a multi-year basis as a single premium. Monthly premiums written are earned as coverage is provided each month. For certain monthly policies where the billing is deferred for the first month’s coverage period, currently to the end of the policy, we record a net premium receivable representing the present value of such deferred premiums that we estimate will be collected at that future date. We recognize changes in this receivable based on changes in the estimated amount and timing of such collections, including as a result of changes in observed trends as well as our periodic review of our servicing guide and our operations and collections practices. Key assumptions supporting our estimate include a collection rate and average life. During 2020, we adjusted our assumptions for collectability and average life, which had an impact of increasing the net premium receivable and net premiums earned by $11.3 million and was the primary driver of the $12.3 million net change in the deferred premium receivable. If the collection rate assumption increased or decreased by 500 basis points, it would result in a $2.5 million increase or decrease, respectively, in the net premium receivable and net premiums earned. If the average life assumption increased or decreased by one year, it would result in an approximate $2.5 million decrease or increase, respectively, in the net premium receivable and net premiums earned. Additionally, given the difference between the present value of the net premium receivable recorded and the contractual premiums due, changes in our servicing guide, operations or collection practices, such as reductions in the deferral period, could have up to a $47.3 million pre-tax benefit to our results of operations in periods when any changes are implemented.
We review goodwill for impairment at the reporting unit level at least annually, and whenever events or changes in circumstances indicate that goodwill might be impaired. We review other acquired intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The estimated fair value of goodwill and other acquired intangible assets requires considerable judgment and is determined by an income approach using a discounted cash flow methodology. The discounted cash flow methodology is based on projections of the amounts and timing of future revenues and cash flows, assumed discount rates and other assumptions as deemed appropriate. In estimating future cash flows, we consider factors such as historical performance, anticipated market conditions, operating expense trends and capital expenditure requirements as well as management’s future changes in strategy.
We recognized a $4.8 million impairment of goodwill for the year ended December 31, 2019. As it relates to other acquired intangible assets, we recognized $1.3 million and $13.7 million in impairments for the year ended December 31, 2020 and 2019, respectively. As of December 31, 2020, our remaining goodwill and other acquired intangible assets were $9.8 million and $13.2 million, respectively. See Note 7 of Notes to Consolidated Financial Statements for additional information.
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
The principal considerations for our determination that performing procedures relating to the valuation of first-lien primary case reserves for mortgage insurance policies is a critical audit matter are (i) the significant judgment by management when developing their estimates of the default to claim rates and claim severity, which in turn led to a high degree of auditor subjectivity and judgment in performing procedures relating to such estimates, (ii) the significant audit effort and subjectivity in evaluating the audit evidence related to the default to claim rates and claim severity, and (iii) the audit effort included the involvement of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s valuation of first-lien primary case reserves for mortgage insurance policies, including controls over the development of the default to claim rates and claim severity. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent estimate of the case reserves for first-lien primary mortgage insurance policies using actual historical data, comparing this independent estimate to management’s determined case reserves, and evaluating the reasonableness of management’s assumptions related to the default to claim rates and claim severity. Performing these procedures involved testing the completeness and accuracy of data provided by management.
We are a diversified mortgage and real estate business, providing both credit-related mortgage insurance coverage and a broad array of other mortgage, risk, title, valuation, asset management and other real estate services. We have two reportable business segments-Mortgage and Real Estate.
Our Mortgage segment provides credit-related insurance coverage, principally through private mortgage insurance on residential first-lien mortgage loans, as well as other credit risk management and contract underwriting solutions, to mortgage lending institutions and mortgage credit investors. We provide our mortgage insurance products and services mainly through our wholly-owned subsidiary, Radian Guaranty. Private mortgage insurance plays an important role in the U.S. housing finance system because it promotes affordable home ownership and helps protect mortgage lenders and investors, as well as other beneficiaries by mitigating default-related losses on residential mortgage loans. Generally, these loans are made to homebuyers who make down payments of less than 20% of the purchase price for their home or, in the case of refinancings, have less than 20% equity in their home. Private mortgage insurance also facilitates the sale of these low down payment loans in the secondary mortgage market, most of which are currently sold to the GSEs. Our total direct primary mortgage IIF and RIF were $246.1 billion and $60.7 billion, respectively, as of December 31, 2020, compared to $240.6 billion and $60.9 billion, respectively, as of December 31, 2019. In addition to providing private mortgage insurance, we participate in credit risk transfer programs developed by the GSEs as part of their initiative to distribute mortgage credit risk and increase the role of private capital in the mortgage market. Our additional RIF under credit risk transfer transactions, resulting from our participation in these programs with the GSEs, totaled $392.0 million as of December 31, 2020 compared to $275.2 million as of December 31, 2019.
As a seller of mortgage credit protection, our results are subject to macroeconomic conditions and specific events that impact the housing finance and real estate markets, including events that impact mortgage originations and the credit performance of our RIF. Many of these conditions are beyond our control, including housing prices, unemployment, interest rate changes, the availability of credit and other factors that may be derived from national and regional economic conditions. In general, a deterioration in economic conditions increases the likelihood that borrowers will be unable to satisfy their mortgage obligations. A deteriorating economy can adversely affect housing values, which in turn can influence the willingness of borrowers to continue to make mortgage payments regardless of whether they have the financial resources to do so. Mortgage defaults can also occur due to a variety of specific events affecting borrowers, including death or illness, divorce or other family problems, unemployment, or other events. In addition, factors impacting regional economic conditions, acts of terrorism, war or other severe conflicts, event-specific economic depressions or other catastrophic events such as natural disasters and
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of our contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. While the amounts included in our consolidated financial statements include our best estimates and assumptions, actual results may vary materially.
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 are recorded at fair value with unrealized gains and losses reported in 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 recognize an impairment as a loss for fixed-maturities available for sale on the statement of operations if: (i) we intend to sell the impaired security; (ii) 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 (iii) the present value of cash flows we expect to collect is less than the amortized cost basis of a security. In those instances, we record an impairment loss through earnings that varies depending on specific circumstances. If a sale is likely, the full amount of the impairment is recognized as a loss in the statement of operations. Otherwise, unrealized losses on securities are separated into: (i) the portion of loss that represents the credit loss and (ii) the portion that is due to other factors. In evaluating whether a decline in value for other securities relates to an existing credit loss, we consider several factors, including, but not limited to, the following:
■reasons for the decline in value (e.g., adverse conditions related to industry or geographic area, changes in financial condition to the issuers or underlying loan obligors);
■our best estimate of the present value of cash flows expected to be collected.
Level II - Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities; and
market participant may derive a materially different estimate of fair value. These assets and liabilities are classified in Level III of our fair value hierarchy.
Available for sale securities, trading securities, equity securities and certain other assets are recorded at fair value as described in Note 5. All changes in fair value of trading securities, equity securities and certain other assets are included in our consolidated statements of operations.
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 rate, we adjust our estimate 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 on our mortgage insurance policies, which include the estimated costs of settling claims, 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.
that a loan goes into default. The Default to Claim Rate also includes our estimates with respect to expected Loss Mitigation Activities, which have the effect of reducing our Default to Claim Rates.
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. The models, assumptions and estimates we use to establish loss reserves may not prove to be accurate, especially in the event of an extended economic downturn or a period of extreme market volatility and economic uncertainty such as we are currently experiencing due to the COVID-19 pandemic. For example, the ultimate cure rate for loan defaults resulting from the pandemic may be lower or higher than our expectations. These assumptions require management to use considerable judgment in estimating the rate at which these loans will result in claims. As such, given the current environment, there is significant uncertainty around our reserve estimate.
We establish reserves for estimated future claims payments on our title insurance policies at the time the related policy revenue is recorded. Our title insurance reserve for losses and LAE comprises estimates of both known claims and incurred but unreported claims expected to be paid in the future for policies issued as of the balance sheet date. We provide for losses associated with these policies based upon our historical experience and other factors. However, by their nature, title claims can often be complex, vary greatly in dollar amounts, vary in number due to economic and market conditions such as an increase in mortgage foreclosures, and involve uncertainties as to ultimate exposure. Due to the length of time over which claim payments are made and regularly occurring changes in underlying economic and market conditions, these estimates are subject to variability.
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, 2020 and 2019, 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 $0.1 million and $0.2 million as of December 31, 2020 and 2019, respectively, is recorded as a component of other liabilities.
Annual premiums written are initially recorded as unearned premiums and amortized on a monthly, straight-line basis. Single premiums written are initially recorded as unearned premiums and earned over time based on the anticipated claim payment pattern, which includes historical industry experience and is updated periodically. During 2019, we updated the amortization rates due to the continuing increase in the significance of borrower-paid Single Premium Policies in our portfolio following our rate reductions on borrower-paid Single Premium Policies in 2018. Under HPA, most borrower-paid policies must be canceled automatically on the date the LTV is scheduled to reach 78% of the original value (or, if the loan is not current on that date, on the subsequent date that the loan becomes current). As a result, given the shift in our mix of Single Premium Policies toward more borrower-paid Single Premium Policies than lender-paid, the average anticipated term of our Single Premium IIF is declining compared to historical levels. We updated our analysis to reflect not only this anticipated effect of HPA cancellations on borrower-paid policies, but also changes in observed and projected loss patterns for both borrower-paid and lender-paid policies. Our results for 2019 include a $32.9 million increase in net premiums earned and a $0.12 increase in net income per share, resulting from a cumulative adjustment related to the updated amortization rates used to recognize revenue for Single Premium Policies.
With respect to our reinsurance transactions, ceded premiums written on an annual or multi-year basis are initially set up as prepaid reinsurance and are amortized in a manner consistent with the recognition of income on direct premiums.
Title insurance premiums are recognized as revenue upon closing and completion of the real estate transaction. Premiums generally are calculated with reference to the policy amount. Premiums are charged to customers based on rates predetermined in coordination with each state's respective Department of Insurance. Such regulations vary from state to state. Premium revenues from agency title operations are primarily comprised of premiums recognized upon title order and completion of real estate transaction closing.
Other title-related fees and income are closely related to title insurance premiums and are primarily associated with managing the closing of real estate transactions. As such, revenue is primarily recognized upon closing of the real estate transaction or completion and billing of services. We offer title services that include tax and title data services; centralized recording services; document retrieval; default curative title services; deed reports; property reports, and other real estate or title-related activities. Expenses typically associated with premiums include third-party agent commissions and premium taxes.
We recognize revenue representing the transfer of services to customers in an amount that reflects the consideration that we expect to be entitled to receive in exchange for those services, recognized as the performance obligations are satisfied. Due to the transactional nature of our business, our services revenue may fluctuate from period to period as transactions are commenced or completed.
Prior to our January 2020 sale of Clayton, our services included transaction management services related to loan acquisition, RMBS securitization and distressed asset reviews and servicer and loan surveillance services. Also, through December 2020, we offered residential real estate appraisal services through a panel of independent contractor appraisers; however, consistent with increased market demand for technology-driven solutions, in October 2020 we announced the wind down of this traditional appraisal business, in order to focus on our digital valuation services that are expected to produce higher growth. Our remaining services and related revenue recognition considerations are as follows:
Asset Management Services. We provide asset management services, which include management of the entire REO disposition process, services such as diligence and underwriting that serve the single family rental asset class, and a web-based workflow solution for task driven asset management, including the management of REO assets, rental properties, due diligence for bulk acquisitions, loss mitigation efforts and short sales. Revenue attributable to REO services provided is based on a percentage of the sale and recognized over time, measured based on the progress to date and typically coincides with the client’s successful closing on the property. In certain instances, fees are received at the time that an asset is assigned to Radian
We determine if an arrangement includes a lease at inception, and if it does, we recognize a right-of-use asset and lease liability in other assets and other liabilities, respectively, in our consolidated balance sheet. Right-of-use assets represent our right to use an underlying asset for the lease term and are recognized net of any payments made or received from the lessor. Lease liabilities represent our obligation to make lease payments arising from the lease and are based on the present value of lease payments over the lease term. In determining the net present value of lease payments, we use our incremental borrowing rate based on the information available at the lease commencement date.
Lease expense is recognized on a straight-line basis over the expected lease term. Lease and non-lease components are generally not accounted for separately. 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 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.
Acquired intangible assets, other than goodwill, primarily consist of customer relationships and represents the value of the specifically acquired customer relationships. 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.
The calculation of the estimated fair value of goodwill and other acquired intangibles is performed primarily using an income approach and requires the use of significant estimates and assumptions that are highly subjective in nature, such as future expected cash flows, discount rates, attrition rates and market conditions. The most significant assumptions relate to the valuation of customer relationships. For more information on our accounting for goodwill and other acquired intangibles, including our impairment analysis policy, see Note 7.
We capitalize certain costs associated with the development of internal-use software and the purchase of property and equipment. Software, property and equipment are carried at cost, net of accumulated depreciation and amortization. Amortization and depreciation are calculated on a straight-line basis over the estimated useful life of the respective assets and commence during the month of our placement of the assets into use. The estimated useful life used to calculate the amortization of internal-use software is generally seven years. Leasehold improvements are depreciated over the lesser of the estimated useful life of the asset improved or the remaining term of the lease. The estimated useful life used to calculate the depreciation of furniture and equipment is generally three years. Depreciation and amortization expense associated with property and equipment for the years ended December 31, 2020, 2019 and 2018 was $18.3 million, $20.8 million and $19.4 million, respectively.
Incremental, direct costs associated with the successful acquisition of mortgage insurance policies, consisting of compensation, premium tax, and other policy issuance and underwriting expenses, are initially deferred and reported as deferred policy acquisition costs. Consistent with industry accounting practice, amortization of these costs for each underwriting year book of business is recognized in proportion to estimated gross profits over the estimated life of the policies.
Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding, while diluted net income per share is computed by dividing net income attributable to common stockholders by the sum of the weighted-average number of common shares outstanding and the weighted-average number of dilutive potential common shares. Dilutive potential common shares relate primarily to our share-based compensation arrangements. For all calculations, the determination of whether potential common shares are dilutive or anti-dilutive is based on net income.
The cost related to share-based equity instruments is measured based on the grant-date fair value at the date of issuance, which for RSU awards is primarily determined by our common stock price on the date of grant. For share-based awards with performance conditions related to our own operations, the expense recognized is dependent on the probability of the performance measure being achieved. Compensation cost is generally recognized over the periods that an employee provides service in exchange for the award. Any forfeitures of awards are recognized as they occur. See Note 17 for further information.
We adopted ASU 2019-04, Codification Improvements related to Financial Instruments-Credit Losses, Derivatives and Hedging, and Financial Instruments on January 1, 2020. This update to the accounting standards regarding financial instruments and derivatives and hedging clarifies the accounting treatment for the measurement of credit losses and provides further clarification on previously issued updates. The adoption of this update did not have a material effect on our financial statements and disclosures.
In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs. This update clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310-20-35-33 for each reporting period. This update is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is not permitted. Entities are required to apply ASU 2020-08 on a prospective basis as of the beginning of the period of adoption for existing or newly purchased
The calculation of basic and diluted net income per share is as follows.
We have two strategic business segments that we manage separately-Mortgage and Real Estate. Our Mortgage segment derives its revenue from mortgage insurance and other mortgage and risk services, including contract underwriting services provided to lenders. Our Real Estate segment offers a broad array of title, valuation, asset management and other real estate services to market participants across the real estate value chain. In addition, we report as All Other activities that include: (i) income (losses) from assets held by our holding company; (ii) related general corporate operating expenses not attributable or allocated to our reportable segments; (iii) for all periods through its sale in January 2020, income and expenses related to Clayton; (iv) for all periods presented, the income and expenses related to our traditional appraisal services, which in October 2020 we announced we were winding down; and (v) other immaterial revenue and expense items, including entries to correct for certain immaterial adjustments.
Subsequent to the sale of Clayton, our Chief Executive Officer (Radian’s chief operating decision maker) implemented certain organizational changes that caused the composition of our reportable segments to change. As revised, the Company’s Mortgage and Real Estate segments are managed by our President of Mortgage and Co-Heads of Real Estate, respectively, who are responsible for the overall profitability of their respective segments and who are directly accountable to our chief operating decision maker.
We allocate corporate operating expenses to both reportable segments based on each segment’s forecasted annual percentage of total revenue, which approximates the estimated percentage of management time spent on each segment. In addition, we allocate all corporate interest expense to our Mortgage segment, due to the capital-intensive nature of our mortgage insurance business.
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: (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 gains (losses) from the sale of lines of business and acquisition-related expenses.
(3)Amortization and impairment of goodwill and other acquired intangible assets. Amortization of acquired intangible assets represents the periodic expense required to amortize the cost of acquired intangible assets over their estimated useful lives. Acquired intangible assets are also periodically reviewed for potential impairment, and impairment adjustments are made whenever appropriate. We do not view these charges as part of the operating performance of our primary activities.
The following tables reconcile reportable segment revenues to consolidated revenues and summarize interest expense, depreciation expense, allocation of corporate operating expenses and adjusted pretax operating income for our reportable segments as follows.
(1)Includes additional depreciation expense of $2.6 million, $0.3 million and $2.9 million allocated to Mortgage, Real Estate and Reportable Segment Total, respectively.
The table below represents the disaggregation of services revenues by revenue type.
(2)Does not include other invested assets of $2.0 million that are primarily invested in limited partnership investments valued using the net asset value as a practical expedient.
(3)Embedded derivatives related to our Excess-of-Loss Program are classified as other assets in our consolidated balance sheets. See Note 8 for more information about our reinsurance programs.
(4)Securities loaned to third-party borrowers under securities lending agreements are classified as other assets in our consolidated balance sheets. See Note 6 for more information.
The following are descriptions of our valuation methodologies for financial assets measured at fair value.
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.
Our available for sale securities within our investment portfolio consisted of the following as of the dates indicated.
(1)Included in Other assets in our consolidated balance sheet as further described below. See below for a discussion of our securities lending agreements.
The following table provides a rollforward of the allowance for credit losses on fixed-maturities available for sale, which relates entirely to corporate bonds and notes for the periods indicated.
For securities deemed “available for sale” that are in an unrealized loss position and for which an allowance for credit loss has not been established, the following tables show the gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of the dates indicated. Included in the amounts as of December 31, 2020 and 2019, are loaned securities under securities lending agreements that are classified as other assets in our consolidated balance sheets, as further described below.
unless the borrower is in default. Therefore, such securities collateral is not reflected in our consolidated financial statements given that the risks and rewards of ownership are not transferred to us from the borrowers.
(2)Includes RMBS, CMBS, CLO and Other ABS, which are not due at a single maturity date.
All of our goodwill and other acquired intangible assets relate to our Real Estate segment. The following table shows the changes in the carrying amount of goodwill as of and for the years ended December 31, 2020 and 2019.
As part of our 2020 annual goodwill impairment assessment performed during the fourth quarter, we estimated the fair value of the reporting unit using primarily an income approach. The key factor in our fair value analysis was forecasted future cash flows. We considered both positive and negative factors and concluded that, after considering all of the factors and evidence available, there was no impairment of goodwill indicated as of the measurement date because the estimated fair value of the reporting unit exceeded our carrying amount.
Based primarily on the wind down of the traditional appraisal business, as of December 31, 2020, we also evaluated the recoverability of certain asset groups in the fourth quarter, including other acquired intangible assets. Based on our analysis, we recognized an impairment of client relationships of $1.0 million and technology of $0.3 million as of December 31, 2020. There was no impairment indicated for the remaining other acquired intangible assets.
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
(1)Includes premiums from our participation in certain credit risk transfer programs.
(2)Net of profit commission, which is impacted by the level of ceded losses recoverable, if any, on reinsurance transactions. See Note 11 for additional information on our reserve for losses and reinsurance recoverables.
(3)Includes a cumulative adjustment to unearned premiums recorded in the second quarter of 2019 related to an update to the amortization rates used to recognize revenue for Single Premium Policies. See Note 4 for further information.
Each of the agreements is subject to a scheduled termination date as set forth in the table below; however, Radian Guaranty has the option, based on certain conditions and subject to a termination fee, to terminate any of the agreements at the end of any calendar quarter on or after the applicable optional termination date. 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 applicable agreement. Radian Guaranty also may terminate any of the agreements prior to the applicable scheduled termination date under certain circumstances, including if one or both of the GSEs no longer grant full PMIERs capital relief for the reinsurance.
The 2020 Single Premium QSR Agreement is the only QSR agreement under which Radian Guaranty is currently ceding NIW. Under the 2020 Single Premium QSR Agreement, NIW for policies issued between January 1, 2020 and December 31, 2021 is being ceded, subject to certain conditions and a limitation on ceded premiums written of $250 million. The parties may
mutually agree to increase the amount of ceded risk above this level. The following table sets forth additional details regarding the Single Premium QSR Program.
(1)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. Loans included in the 2012 through 2014 vintages, and any other loans subject to the agreement that were delinquent at the time of the amendment, were unaffected by the change and therefore the amount of ceded risk for those loans continues to range from 20% to 35%.
Radian Guaranty has entered into four fully collateralized reinsurance arrangements with the Eagle Re Issuers. For the respective coverage periods, Radian Guaranty retains the first-loss layer of aggregate losses, as well as any losses in excess of the outstanding reinsurance coverage amounts. The Eagle Re Issuers provide second layer coverage up to the outstanding coverage amounts. For each of these four reinsurance arrangements, the Eagle Re Issuers financed their coverage by issuing mortgage insurance-linked notes to eligible third-party capital markets investors in unregistered private offerings. The aggregate excess-of-loss reinsurance coverage for these transactions decreases over a 10-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. Radian Guaranty has rights to terminate the reinsurance agreements upon the occurrence of certain events.
In each of the insurance-linked notes transactions, 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, or triggers, are reached, including a trigger based on an elevated level of delinquencies as defined in the insurance-linked notes transaction agreements. With the exception of the most recent transaction, Eagle Re 2020-2 Ltd., the insurance-linked notes issued by the Eagle Re Issuers in connection with our Excess-of-Loss Program are currently subject to a delinquency trigger event, which was reported to the insurance-linked note investors on June 25, 2020. Both the amortization of the outstanding reinsurance coverage amount pursuant to our reinsurance arrangements with the Eagle Re Issuers and the amortization of the principal amount of the related insurance-linked notes issued by the Eagle Re Issuers have been suspended and will continue to be suspended during the pendency of the trigger event.
The Eagle Re Issuers represent our only VIEs as of December 31, 2020 and December 31, 2019. The following table presents the total assets and liabilities of the Eagle Re Issuers as of the dates indicated.
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 $381.8 million and $644.5 million as of December 31, 2020 and 2019, respectively.
The components of our consolidated income tax provision from continuing operations are as follows.
The reconciliation of taxes computed at the statutory tax rate of 21% in 2020, 2019 and 2018 to the provision for income taxes is as follows.
The significant components of our net deferred tax assets and liabilities from continuing operations are summarized as follows.
As of December 31, 2020, we recorded a net current income tax payable of $17.5 million, which primarily relates to applying the standards of accounting for uncertainty in income taxes.
Certain entities within our consolidated group have generated net deferred tax assets of approximately $74.9 million, relating primarily to state and local NOL carryforwards which, if unutilized, will expire during various future tax periods. We are required to establish a valuation allowance against our deferred tax assets when it is more likely than not that all or some portion of our deferred tax assets will not be realized. At each balance sheet date, we assess our need for a valuation allowance. Our assessment is based on all available evidence, both positive and negative. This requires management to exercise judgment and make assumptions regarding whether our deferred tax assets will be realized in future periods. We have determined that certain non-insurance entities within Radian may continue to generate taxable losses on a separate company basis in the near term and may not be able to fully utilize certain state and local NOLs on their state and local tax returns. Therefore, with respect to deferred tax assets relating to these state and local NOLs and other state timing adjustments, we retained a valuation allowance of $77.7 million at December 31, 2020 and $66.4 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.
(1)Related to ceded losses recoverable on reinsurance transactions. See Note 8 for additional information.
(2)Related to underlying defaulted loans with a most recent default notice dated in the year indicated. For example, if a loan had defaulted in a prior year, but then subsequently cured and later re-defaulted in the current year, that default would be considered a current year default.
For all periods presented, case reserves established for new default notices were the primary driver of our total incurred losses, and they were primarily impacted by the number of new primary default notices received in the period and our related gross Default to Claim Rate assumption applied to those new defaults. For the year ended December 31, 2020, we experienced a significant increase in the number of new primary default notices, substantially all related to defaults of loans subject to forbearance programs implemented in response to the COVID-19 pandemic. New primary default notices totaled 108,025 for the year ended December 31, 2020, compared to 40,985 for the year ended December 31, 2019. Our gross Default to Claim Rate assumption applied to new defaults was 8.5% as of December 31, 2020, compared to 7.5% as of December 31, 2019. This increase reflects the estimated impact of a worsening macroeconomic environment, partially offset by the expected beneficial effects of mortgage relief options and other protections, including forbearance programs under the CARES Act.
See also Note 1 for additional information on the elevated risks and uncertainties resulting from the COVID-19 pandemic to our business and Note 2 for discussion of the reserving methodology for the mortgage insurance industry, which requires that reserves for losses are generally not established until receipt of notification from servicers that a borrower has missed two payments.
(1)Represents reserves as of December 31, 2020 related to IBNR liabilities.
(2)Represents total number of new default notices received in each calendar year as compiled monthly based on reports received from loan servicers. As reflected in our Default to Claim Rate assumptions, a significant portion of reported defaults generally do not result in a claim. In certain instances, a defaulted loan may cure, and then re-default in a later period. Consistent with our reserving practice, each new event of default is treated as a unique occurrence and therefore certain loans that cure and re-default may be included as a reported default in multiple periods.
The following table provides a reconciliation of the net incurred losses and paid claims development tables above to the mortgage insurance reserve for losses and LAE at December 31, 2020.
(1)Excludes title insurance reserve for losses and LAE of $4.3 million.
The following is supplementary information about average historical claims duration as of December 31, 2020, representing the average distribution of when claims are paid relative to the year of default.
Repurchases of Senior Notes due 2020 and 2021. During the second quarter of 2019, pursuant to cash tender offers to purchase 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.
Redemption Terms in Senior Notes. We have the option to redeem the Senior Notes due 2024, 2025 and 2027, in whole or in part, at any time, or from time to time, prior to July 1, 2024 (the date that is three months prior to the maturity date of the Senior notes due 2024), September 15, 2024 (the date that is six months prior to the maturity date of the Senior notes due 2025) and September 15, 2026 (the date that is six months prior to the maturity date of the Senior notes due 2027) (in each case, the “Par Call Date”), respectively, at a redemption price equal to the greater of: (i) 100% of the aggregate principal amount of the notes to be redeemed and (ii) the make-whole amount, which is the sum of the present values of the remaining scheduled payments of principal and interest in respect of the notes to be redeemed from the redemption date to the Par Call Date discounted to the redemption date at the applicable treasury rate plus 50 basis points, plus, in each case, accrued and unpaid interest thereon to, but excluding, the redemption date. At any time on or after the Par Call Date, we may, at our option, redeem the notes in whole or in part, at a redemption price equal to 100% of the aggregate principal amount of the notes to be redeemed, plus accrued and unpaid interest thereon to, but excluding, the redemption date.
The principal balance of the FHLB advances is required to be collateralized by eligible assets with a market value that must be maintained generally within a range of 103% to 111% of market value, depending on the type of collateral pledged. Our fixed-maturities available for sale include securities totaling $188.0 million and $143.1 million at December 31, 2020 and 2019, respectively, which serve as collateral for our FHLB advances to satisfy this requirement.
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.
In the course of our regular review of pending legal and regulatory matters, we determine whether it is reasonably possible that a potential loss may have a material impact on our liquidity, results of operations or financial condition. If we determine such a loss is reasonably possible, we disclose information relating to such potential loss, including an estimate or range of loss or a statement that such an estimate cannot be made. On a quarterly basis, we review relevant information with respect to loss contingencies and update our accruals, disclosures and estimates of reasonably possible losses or range of losses based on such reviews. We are often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the court on motions or appeals, analysis by experts, and the progress of settlement negotiations. In addition, we generally make no disclosures for loss contingencies that are determined to be remote. For matters for which we disclose an estimated loss, the disclosed estimate reflects the reasonably possible loss or range of loss in excess of the amount accrued, if any.
Loss estimates are inherently subjective, based on currently available information, and are subject to management’s judgment and various assumptions. Due to the inherently subjective nature of these estimates and the uncertainty and unpredictability surrounding the outcome of legal and other proceedings, actual results may differ materially from any amounts that have been accrued.
On December 22, 2016, Ocwen Loan Servicing, LLC and Homeward Residential, Inc. (collectively, “Ocwen”) filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania against Radian Guaranty alleging breach of contract and bad faith claims and seeking monetary damages and declaratory relief (the “Litigation”). Ocwen has also initiated similar legal proceedings against several other mortgage insurers. On December 17, 2016, Ocwen separately filed a parallel arbitration petition against Radian Guaranty before the American Arbitration Association (“AAA”) asserting substantially the same allegations (the “Arbitration”). Ocwen’s filings together listed 9,420 mortgage insurance certificates issued under multiple insurance policies, including Pool Mortgage Insurance policies, as subject to the dispute. On June 5, 2017, Ocwen filed an amended complaint and an amended petition (collectively, the “Amended Filings”) with the court and the AAA, respectively, together listing 8,870 certificates as subject to the dispute. On April 11, 2018, the parties entered into a confidential agreement with respect to all certificates subject to the dispute. The confidential agreement resolved certain categories of claims involved in the dispute and, on April 12, 2018, the parties filed a stipulation of voluntary dismissal of the Litigation and the trial judge issued an order dismissing all claims and counterclaims in the Litigation. Radian Guaranty was not required to make any payment in connection with this confidential agreement. Pursuant to the confidential agreement, the parties: (i) dismissed the Litigation; (ii) narrowed the scope of the Arbitration to Ocwen’s breach of contract claims seeking payment of insurance benefits on approximately 2,500 certificates that Ocwen was previously pursuing through the Amended Filings; and (iii) agreed to resolve the Arbitration through an alternative dispute resolution process administered by the AAA (the “ADR Process”). Effective June 30, 2020, Radian Guaranty, PHH Mortgage Corporation, on behalf of itself, and as successor by merger to Ocwen (collectively, “PHH”), and Ocwen Financial Corporation entered into a Confidential Settlement Agreement and Release (the “Ocwen Settlement”) to fully resolve, among other things, all claims subject to the ADR Process. Implementation of the Ocwen Settlement, which was subject to the condition precedent that the GSEs consent to the settlement agreement, became effective on November 1, 2020 upon finalization of the consents. Pursuant to the Ocwen Settlement, among other things: (i) Radian made a cash settlement payment on November 6, 2020 and (ii) each party agreed to release the other with respect to all known or unknown claims with respect to the certificates subject to the ADR Process as well as with respect to all other certificates issued on loans serviced by PHH for which Radian decided claims prior to January 1, 2019. On November 13, 2020, the Arbitration and ADR Process was dismissed with prejudice.
which Radian decided claims prior to January 1, 2019. Implementation of the Nationstar Settlement remains subject to the condition precedent that the GSEs consent to the settlement agreement. On July 9, 2020, the trial judge granted the parties’ joint motion requesting to stay this litigation pending receipt of required consents. On January 5, 2021, counsel for Radian and Nationstar submitted a joint status report to the trial judge reporting that the parties anticipate receiving the GSE consents, and that the case will be dismissed in the near future.
Our Master Policies establish the timeline within which any suit or action arising from any right of an insured under the policy generally must be commenced. In general, any suit or action arising from any right of an insured under the policy must be commenced within two years after such right first arose for primary insurance and within three years for certain other policies, including certain Pool Mortgage Insurance policies. Although we believe that our Loss Mitigation Activities are justified under our policies, from time to time we face challenges from certain lender and servicer customers regarding our Loss Mitigation Activities. These challenges could result in additional arbitration or judicial proceedings and we may need to reassume the risk on, and increase loss reserves for, the associated policies or pay additional claims.
Our lease liability represents the present value of future lease payments over the lease term. Our leases do not provide a readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate, on a collateralized basis, to discount the lease payments based on information available at lease commencement. Our leases expire periodically through August 2032, and contain provisions for scheduled periodic rent increases. We estimate the incremental borrowing rate based on the yields of Radian Group corporate bonds, as adjusted to reflect a collateralized borrowing rate, resulting in discount rates ranging from 4.22% to 7.08%. While the majority of our lease population expires within one year of one of the Radian Group corporate bonds, our more significant leases do not. For those leases, we adjust the corporate bond rate for both U.S. Department of the Treasury rate yields and a corporate spread adjustment determined from recent market data.
(1)Classified in other assets in our consolidated balance sheets. See Note 9.
Pursuant to the previous lease accounting standard, rent expense for the year ended December 31, 2018 was $9.7 million. At December 31, 2020 and 2019, there were no future minimum receipts expected from sublease rental payments.
We provide contract underwriting to our mortgage insurance customers. Generally, under our current contract underwriting program the remedy we offer is limited indemnification. In 2020, payments for losses related to contract underwriting remedies were de minimis. In 2020, our provision for contract underwriting expenses was also de minimis. We monitor this risk and negotiate our underwriting fee structure and recourse agreements on a client-by-client basis. We also routinely audit the performance of our contract underwriters.
On August 16, 2018, Radian Group’s board of directors approved a share repurchase program that authorized the Company to repurchase up to $100 million of its common stock in the open market or in privately negotiated transactions, based on market and business conditions, stock price and other factors. On March 20, 2019, Radian Group’s board of directors approved a $150 million increase in authorization for this program, bringing the total authorization to repurchase shares up to $250 million, excluding commissions. Radian operated this program pursuant to a trading plan under Rule 10b5-1 of the Exchange Act to implement this program. During 2019, the Company completed this program by purchasing 11,258,574 shares, which represents 5.3% of the shares outstanding at the beginning of the program, at an average price of $22.22 per share including commissions, at which time no further purchase authority remained under this program.
On February 13, 2020, Radian Group’s board of directors authorized a $275 million increase in this program, bringing the total authorization to repurchase shares up to $475 million, excluding commissions, and extended the expiration of this program extension from July 31, 2020 to August 31, 2021. During the year ended December 31, 2020, the Company purchased 11,036,248 shares at an average price of $20.51, including commissions.
We may purchase shares on the open market to settle stock options exercised by employees and purchases under our Employee Stock Purchase Plan. 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.
Also beginning in first quarter of 2020, dividend equivalents are accrued on RSUs when dividends are declared on the Company’s common stock, subject to certain exclusions. See Note 17 for information about our dividend equivalents on RSU awards.
Radian Group serves as the holding company for our insurance subsidiaries, through which we conduct our mortgage insurance and title insurance businesses. These insurance subsidiaries are subject to comprehensive, detailed regulation by the insurance departments in the various states where our insurance subsidiaries are domiciled or licensed to transact business. Insurance laws vary from state to state, but generally grant broad supervisory powers to state agencies or officials to examine insurance companies and enforce rules or exercise discretion affecting almost every significant aspect of the insurance business, including the power to revoke or restrict an insurance company’s ability to write new business. In addition, 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 PMIERs are comprehensive, covering virtually all aspects of the business and operations of a private mortgage insurer, including internal risk management and quality controls, the relationship between the GSEs and the approved insurer, as well as the approved insurer’s financial condition. See “PMIERs” below for additional information.
As a mortgage guaranty insurer, we are eligible for a tax deduction, subject to certain limitations, related to amounts required to be set aside in statutory contingency reserves to the extent we purchase U.S. Mortgage Guaranty Tax and Loss Bonds issued by the U.S. Department of the Treasury. Under SAP, this deduction reduces the tax provision reflected in the statutory financial statements, which in turn increases statutory net income and surplus as well as Available Assets under the PMIERs. As of December 31, 2020, Radian Guaranty held $210.9 million of these bonds, which have a 10-year original maturity but may be redeemed in any tax year prior to maturity. If redeemed, the taxable income in the tax year of the redemption includes the previously deducted amount associated with the redeemed bond, and is subject to tax at the statutory tax rate applicable in the year of the redemption. Accordingly, if corporate income tax rates were to increase in a year subsequent to the tax year in which the deduction was taken, additional amounts of tax above what was paid originally for the bonds must be paid when those amounts are included in income in future years. If Radian Guaranty were to redeem its bonds early in anticipation of future corporate tax rate increases, its statutory surplus and PMIERs Available Assets would decline by the amount of the redemption only, which would be up to $210.9 million based on the amount held as of December 31, 2020. Under that scenario, Radian Guaranty would still remain in compliance with both minimum surplus requirements and the current PMIERs financial requirements, as described below.
In January 2020, in connection with the termination of an intercompany reinsurance agreement between Radian Reinsurance and Radian Guaranty, Radian Reinsurance transferred $6.0 billion in RIF to Radian Guaranty and released substantially all of its contingency reserves to unassigned surplus. In turn, Radian Guaranty established equivalent contingency reserves with a corresponding decrease to its unassigned surplus. As part of these actions, the Pennsylvania Insurance Department approved a $465 million return of capital from Radian Reinsurance to Radian Group as well as the transfer of $200 million of cash and marketable securities from Radian Group to Radian Guaranty in exchange for a surplus note. This intercompany surplus note has a 3% interest rate and a stated maturity of January 31, 2030; however, any principal or interest payments made by Radian Guaranty are subject to approval by the Pennsylvania Insurance Department. To date, no payments have been made related to this surplus note. The surplus note may be redeemed or converted to paid in capital at any time upon 30 days prior notice, subject to a request by Radian Guaranty for the approval of the Pennsylvania Insurance Department. Our mortgage insurance subsidiaries also include Radian Mortgage Assurance, Radian Insurance Inc., Radian Investor Surety Inc. and Radian Mortgage Guaranty Inc.
Additionally, as part of our title services, we offer title insurance through Radian Title Insurance, an Ohio domiciled title insurance underwriter and settlement services company that is licensed to issue title insurance policies in 39 states and the District of Columbia.
Radian Guaranty was in compliance with all applicable Statutory RBC Requirements or MPP Requirements, as applicable, in each of the RBC States as of December 31, 2020. Radian Guaranty’s Risk-to-capital calculation was 12.7:1 and 13.6:1 as of December 31, 2020 and 2019, respectively. 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.
Our other mortgage insurance and title insurance subsidiaries were also in compliance with all statutory and counterparty capital requirements as of December 31, 2020 and 2019.
As of December 31, 2020 and 2019, Radian Guaranty had contingency reserves of $3.4 billion and $2.6 billion, respectively. As discussed above, absent early releases related to elevated incurred losses such as occurred in 2020, 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 Extraordinary Distribution, subject to the approval of the Pennsylvania Insurance Department. Radian Guaranty sought and received such approval to return capital by paying Extraordinary Distributions to Radian Group in 2019 and 2018. As described above, Radian Reinsurance sought and received approval to return capital by paying an Extraordinary Distribution to Radian Group in January 2020.
There were 3,478,075 shares available for grant under the Amended and Restated Equity Compensation Plan as of December 31, 2020 (the “share reserve”). Each grant of restricted stock, RSUs, or performance share awards under the Amended and Restated Equity Compensation Plan (other than those settled in cash) reduces the share reserve available for grant under the Amended and Restated Equity Compensation Plan by 1.31 shares for every share subject to such grant. Absent this share reserve adjustment for outstanding restricted stock, RSUs, phantom stock or performance share awards, our shares remaining available for grant under the Amended and Restated Equity Compensation Plan would have been 8,050,843 shares as of December 31, 2020.
Most awards vest at the end of the performance or service period and will vest earlier under certain circumstances. In the event of a grantee’s death or disability, awards generally vest immediately. Upon retirement, if certain conditions are met, awards generally vest immediately or at the end of the performance period, if any. Certain time-based RSU awards granted to officers under our Amended and Restated Equity Compensation Plan will vest in whole or in part in the event the grantee’s employment is terminated by us without cause or for “good reason.” Awards granted to officers will vest in connection with a change of control only in the event the grantee’s employment is terminated by us without cause or the grantee terminates employment for “good reason,” in each case within 90 days before or one year after the change of control. Awards to our non-employee directors will vest in connection with a change of control only in the event the grantee fails to be appointed to the board of directors of the surviving entity or is not nominated for reelection, or fails to be reelected after nomination, to the board of directors of the Company or the surviving entity.
(1)Compensation cost is generally recognized over the periods that an employee provides service in exchange for the award. For purposes of calculating compensation cost recognized for retirement eligible grantees, we consider the service condition to be met (and recognize the full compensation costs) as of the date when a grantee becomes retirement eligible.
As of December 31, 2020, unrecognized compensation expense for all of our outstanding share-based awards was $22.7 million. Absent a change of control under the Equity Plans, this expense is expected to be recognized over a weighted-average period of approximately 1.9 years. The ultimate unrecognized expense associated with our outstanding awards could differ, depending upon whether or not the performance and service conditions are met.
(1)Outstanding RSUs represent shares that have not yet been issued because not all conditions necessary to earn the right to benefit from the instruments have been satisfied. The final amount of RSUs distributed depends on the employee’s level of performance achieved and, with the exception of certain retirement-eligible employees, continued service through the vesting date, which could result in changes in vested RSUs.
(3)For performance-based RSUs, represents the difference between the number of target shares at grant date and the number of shares vested at settlement, which can range from 0 to 200% of target depending on results over the applicable performance periods.
Performance-Based RSUs. In 2020, 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. The maximum payout at the end of the three-year performance period is 200% of the award’s target number of RSUs. Performance-based RSUs granted to executive officers are subject to a one-year post vesting holding period.
The grant date fair value of the performance-based RSUs that are based on the cumulative growth in Radian’s book value per share is calculated based on the stock price as of the grant date, discounted for executives for the one-year post-vesting holding period. The compensation cost that is recognized over the remaining requisite service period is based on our expectations of the probable level of achievement of the performance condition.
There were no stock options granted in 2020, 2019 and 2018.
Under this plan, we issued 100,022; 107,009; and 103,668 shares to employees during the years ended December 31, 2020, 2019 and 2018, respectively. As of February 2021, 1,776,532 shares remain available for issuance under the Amended and Restated Radian Group Inc. ESPP.