Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-Q
_____________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 1-11356
_______________________________
image00radianlogoa02.jpg
Radian Group Inc.
(Exact name of registrant as specified in its charter)
_______________________________
 
Delaware
 
23-2691170
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1601 Market Street, Philadelphia, PA
 
19103
(Address of principal executive offices)
 
(Zip Code)
(215) 231-1000
(Registrant’s telephone number, including area code)
_____________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
 
Accelerated filer  o
 
Non-accelerated filer  o
 
Smaller reporting company  o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 214,427,037 shares of common stock, $0.001 par value per share, outstanding on November 2, 2016.




TABLE OF CONTENTS
 
 
Page
Number
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
 
 


2



GLOSSARY OF ABBREVIATIONS AND ACRONYMS
The following list defines various abbreviations and acronyms used throughout this report, including the Condensed Consolidated Financial Statements, the Notes to Unaudited Condensed Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Term
Definition
2014 Master Policy
Radian Guaranty’s Master Policy that became effective October 1, 2014
2015 Form 10-K
Annual Report on Form 10-K for the year ended December 31, 2015
ABS
Asset-backed securities
Alt-A
Alternative-A loan where the documentation is generally limited as compared to fully documented loans (considered a non-prime loan grade)
AOCI
Accumulated other comprehensive income (loss)
Appeals
Internal Revenue Service Office of Appeals
Assured
Assured Guaranty Corp., a subsidiary of Assured Guaranty Ltd.
Available Assets
As defined in the PMIERs, these assets primarily include the liquid assets of a mortgage insurer and its affiliated reinsurers, and exclude premiums received but not yet earned
BofA Settlement Agreement
The Confidential Settlement Agreement and Release dated September 16, 2014, by and among Radian Guaranty and Countrywide Home Loans, Inc. and Bank of America, N.A., as a successor to BofA Home Loan Servicing f/k/a Countrywide Home Loan Servicing LP, entered into in order to resolve various actual and potential claims or disputes as to mortgage insurance coverage on certain Subject Loans
Claim Curtailment
Our legal right, under certain conditions, to reduce the amount of a claim, including due to servicer negligence
Claim Denial
Our legal right, under certain conditions, to deny a claim
Claim Severity
The total claim amount paid divided by the original coverage amount
Clayton
Clayton Holdings LLC, a Delaware domiciled indirect non-insurance subsidiary of Radian Group
CMBS
Commercial mortgage-backed securities
Convertible Senior Notes due 2017
Our 3.000% convertible unsecured senior notes due November 2017 ($450 million original principal amount)
Convertible Senior Notes due 2019
Our 2.250% convertible unsecured senior notes due March 2019 ($400 million original principal amount)
Cures
Loans that were in default as of the beginning of a period and are no longer in default because payments were received and the loan is no longer past due
Default to Claim Rate
Rate at which defaulted loans result in a claim
Deficiency Amount
The assessed tax liabilities, penalties and interest associated with a formal notice of deficiency letter from the IRS
Exchange Act
Securities Exchange Act of 1934, as amended
Fannie Mae
Federal National Mortgage Association
FASB
Financial Accounting Standards Board
FHA
Federal Housing Administration
FICO
Fair Isaac Corporation
Foreclosure Stage Default
The Stage of Default indicating that the foreclosure sale has been scheduled or held
Freddie Mac
Federal Home Loan Mortgage Corporation
Freddie Mac Agreement
The Master Transaction Agreement between Radian Guaranty and Freddie Mac entered into in August 2013
Future Legacy Loans
With respect to the BofA Settlement Agreement, Legacy Loans where a claim decision has been or will be communicated by Radian Guaranty after February 13, 2013
GAAP
Accounting principles generally accepted in the United States of America


3



Term
Definition
Green River Capital
Green River Capital LLC, a wholly-owned subsidiary of Clayton
GSEs
Government-Sponsored Enterprises (Fannie Mae and Freddie Mac)
HARP
Home Affordable Refinance Program
IBNR
Losses incurred but not reported
IIF
Insurance in force
Initial QSR Transaction
Initial quota share reinsurance agreement entered into with a third-party reinsurance provider in the second quarter of 2012
Insureds
Insured parties with respect to the BofA Settlement Agreement, consisting of Countrywide Home Loans, Inc. and Bank of America, N.A., as a successor to BofA Home Loan Servicing f/k/a Countrywide Home Loans Servicing LP
IRS
Internal Revenue Service
LAE
Loss adjustment expense, which includes the cost of investigating and adjusting losses and paying claims
Legacy Loans
With respect to the BofA Settlement Agreement, loans that were originated or acquired by an Insured and were insured by Radian Guaranty prior to January 1, 2009, excluding such loans that were refinanced under HARP 2 (the Federal Housing Finance Agency’s extension of and enhancements to the HARP program)
Legacy Portfolio
Mortgage insurance written during the poor underwriting years of 2005 through 2008, together with business written prior to 2005
Loss Mitigation Activity/Activities
Activities such as Rescissions, Claim Denials, Claim Curtailments and cancellations
LTV
Loan-to-value ratio which is calculated as the percentage of the original loan amount to the original value of the property
Master Policies
The Prior Master Policy and the 2014 Master Policy, collectively
Minimum Required Assets
A risk-based minimum required asset amount, as defined in the PMIERs, calculated based on net RIF (RIF, net of credits permitted for reinsurance) and a variety of measures designed to evaluate credit quality
Model Act
Mortgage Guaranty Insurers Model Act
Monthly and Other
Insurance policies where premiums are paid on a monthly or other installment basis, excluding Single Premium Policies
Monthly Premium Policy/Policies
Insurance policies where premiums are paid on a monthly installment basis
Mortgage Insurance
Radian’s Mortgage Insurance business segment, which provides credit-related insurance coverage, principally through private mortgage insurance, to mortgage lending institutions
MPP Requirement
Certain states’ statutory or regulatory risk-based capital requirement that the mortgage insurer must maintain a minimum policyholder position, which is calculated based on both risk and surplus levels
NAIC
National Association of Insurance Commissioners
NIW
New insurance written
NOL
Net operating loss, calculated on a tax basis
Notices of Deficiency
Formal letters from the IRS informing the taxpayer of an IRS determination of tax deficiency and appeal rights
OCI
Other comprehensive income (loss)
Persistency Rate
The percentage of insurance in force that remains on our books over a period of time
PMIERs
Private Mortgage Insurer Eligibility Requirements effective on December 31, 2015, issued by the GSEs under oversight of the Federal Housing Finance Agency to set forth requirements an approved insurer must meet and maintain to provide mortgage guaranty insurance on loans acquired by the GSEs


4



Term
Definition
PMIERs Financial Requirements
Financial requirements of the PMIERs
Prior Master Policy
Radian Guaranty’s master insurance policy in effect prior to the effective date of its 2014 Master Policy
QSR
Quota share reinsurance
QSR Transactions
The Initial QSR Transaction and Second QSR Transaction, collectively
Radian
Radian Group Inc. together with its consolidated subsidiaries
Radian Asset Assurance
Radian Asset Assurance Inc., a New York domiciled insurance company that was formerly a subsidiary of Radian Guaranty
Radian Asset Assurance Stock Purchase Agreement
The Stock Purchase Agreement dated December 22, 2014, between Radian Guaranty and Assured, to sell 100% of the issued and outstanding shares of Radian Asset Assurance, Radian’s financial guaranty insurance subsidiary, to Assured
Radian Group
Radian Group Inc., the registrant
Radian Guaranty
Radian Guaranty Inc., a Pennsylvania domiciled insurance subsidiary of Radian Group
RBC States
Risk-based capital states, which are those states that currently impose a statutory or regulatory risk-based capital requirement
Red Bell
Red Bell Real Estate, LLC, a wholly-owned subsidiary of Clayton
Reinstatements
Reversals of previous Rescissions, Claim Denials and Claim Curtailments
REMIC
Real Estate Mortgage Investment Conduit
REO
Real estate owned
Rescission
Our legal right, under certain conditions, to unilaterally rescind coverage on our mortgage insurance policies if we determine that a loan did not qualify for insurance
RIF
Risk in force is equal to the underlying loan unpaid principal balance multiplied by the insurance coverage percentage
Risk-to-capital
Under certain state regulations, a minimum ratio of statutory capital calculated relative to the level of RIF, net of both RIF ceded under reinsurance and RIF related to defaulted loans
RMBS
Residential mortgage-backed securities
S&P
Standard & Poor’s Financial Services LLC
SAPP
Statutory accounting principles and practices include those required or permitted, if applicable, by the insurance departments of the respective states of domicile of our insurance subsidiaries
SEC
United States Securities and Exchange Commission
Second QSR Transaction
Second quota share reinsurance transaction entered into with a third-party reinsurance provider in the fourth quarter of 2012
Second-lien
Second-lien mortgage loan
Senior Notes due 2017
Our 9.000% unsecured senior notes due June 2017 ($195.5 million principal amount)
Senior Notes due 2019
Our 5.500% unsecured senior notes due June 2019 ($300 million principal amount)
Senior Notes due 2020
Our 5.250% unsecured senior notes due June 2020 ($350 million principal amount)
Senior Notes due 2021
Our 7.000% unsecured senior notes due March 2021 ($350 million principal amount)
Services
Radian’s Mortgage and Real Estate Services business segment, which provides mortgage- and real estate-related products and services to the mortgage finance market
Servicing Only Loans
With respect to the BofA Settlement Agreement, loans other than Legacy Loans that were or are serviced by the Insureds and were 90 days or more past due as of July 31, 2014, or if servicing has been transferred to a servicer other than the Insureds, 90 days or more past due as of the transfer date


5



Term
Definition
SFR
Single family rental
Single Premium Policy/Policies
Insurance policies where premiums are paid in a single payment and 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)
Single Premium QSR Transaction
Quota share reinsurance agreement covering Single Premium Policies that was entered into with a panel of six third-party reinsurance providers in the first quarter of 2016, effective January 1, 2016
Stage of Default
The stage a loan is in relative to the foreclosure process, based on whether a foreclosure sale has been scheduled or held
Statutory RBC Requirement
Risk-based capital requirement imposed by the RBC States, requiring a minimum surplus level and, in certain states, a minimum ratio of statutory capital relative to the level of risk
Subject Loans
Loans covered under the BofA Settlement Agreement, comprising Legacy Loans and Servicing Only Loans
Surplus Note
An intercompany 0.000% surplus note due December 31, 2025 ($325 million principal amount), issued by Radian Guaranty to Radian Group in December 2015 and repaid by Radian Guaranty on June 30, 2016
Time in Default
The time period from the point a loan reaches default status (based on the month the default occurred) to the current reporting date
TRID
Truth in Lending Act - Real Estate Settlement Procedures Act of 1974 (“RESPA”) Integrated Disclosure
U.S.
The United States of America
U.S. Treasury
United States Department of the Treasury
VA
U.S. Department of Veterans Affairs
ValuAmerica
ValuAmerica, Inc., a wholly-owned subsidiary of Clayton
VIE
Variable interest entity is a legal entity subject to the variable interest entity subsections of the accounting standard regarding consolidation, and generally includes a corporation, trust or partnership in which, by design, equity investors do not have a controlling financial interest or do not have sufficient equity at risk to finance activities without additional subordinated financial support




6



Cautionary Note Regarding Forward Looking Statements—Safe Harbor Provisions
All statements in this report that address events, developments or results that we expect or anticipate may occur in the future are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Exchange Act and the U.S. Private Securities Litigation Reform Act of 1995. In most cases, forward-looking statements may be identified by words such as “anticipate,” “may,” “will,” “could,” “should,” “would,” “expect,” “intend,” “plan,” “goal,” “contemplate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “seek,” “strategy,” “future,” “likely” or the negative or other variations on these words and other similar expressions. These statements, which may include, without limitation, projections regarding our future performance and financial condition, are made on the basis of management’s current views and assumptions with respect to future events. Any forward-looking statement is not a guarantee of future performance and actual results could differ materially from those contained in the forward-looking statement. These statements speak only as of the date they were made, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We operate in a changing environment. New risks emerge from time to time and it is not possible for us to predict all risks that may affect us. The forward-looking statements, as well as our prospects as a whole, are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. These risks and uncertainties include, without limitation:
changes in general economic and political conditions, including in particular but without limitation, unemployment rates, interest rates and changes in housing and mortgage credit markets, that impact the size of the insurable market and the credit performance of our insured portfolio;
changes in the way customers, investors, regulators or legislators perceive the performance and financial strength of private mortgage insurers;
Radian Guaranty’s ability to remain eligible under the PMIERs and other applicable requirements imposed by the Federal Housing Finance Agency and by the GSEs to insure loans purchased by the GSEs;
our ability to successfully execute and implement our capital plans and to maintain sufficient holding company liquidity to meet our short- and long-term liquidity needs;
our ability to successfully execute and implement our business plans and strategies, including in particular but without limitation, plans and strategies that require GSE and/or regulatory approvals;
our ability to maintain an adequate level of capital in our insurance subsidiaries to satisfy existing and future state regulatory requirements;
changes in the charters or business practices of, or rules or regulations imposed by or applicable to the GSEs, including the GSEs’ interpretation and application of the PMIERs to Radian Guaranty;
changes in the current housing finance system in the U.S., including in particular but without limitation, the role of the FHA, the GSEs and private mortgage insurers in this system;
any disruption in the servicing of mortgages covered by our insurance policies, as well as poor servicer performance;
a significant decrease in the Persistency Rates of our Monthly Premium Policies;
competition in our mortgage insurance business, including in particular but without limitation, price competition and competition from the FHA, VA and other forms of credit enhancement;
the effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act on the financial services industry in general, and on our businesses in particular;
the adoption of new laws and regulations, or changes in existing laws and regulations, or the way they are interpreted;
the outcome of legal and regulatory actions, reviews, audits, inquiries and investigations that could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief that could require significant expenditures or have other effects on our business;
the amount and timing of potential payments or adjustments associated with federal or other tax examinations, including deficiencies assessed by the IRS resulting from its examination of our 2000 through 2007 tax years, which we are currently contesting;


7



the possibility that we may fail to estimate accurately the likelihood, magnitude and timing of losses in connection with establishing loss reserves for our mortgage insurance business;
volatility in our results of operations caused by changes in the fair value of our assets and liabilities, including a significant portion of our investment portfolio;
changes in GAAP or SAPP rules and guidance, or their interpretation;
legal and other limitations on dividends and other amounts we may receive from our subsidiaries; and
the possibility that we may need to impair the carrying value of goodwill established in connection with our acquisition of Clayton.
For more information regarding these risks and uncertainties as well as certain additional risks that we face, you should refer to the Risk Factors detailed in Item 1A of our 2015 Form 10-K, and in our subsequent quarterly and other reports filed from time to time with the SEC. We caution you not to place undue reliance on these forward-looking statements, which are current only as of the date on which we issued this report. We do not intend to, and we disclaim any duty or obligation to, update or revise any forward-looking statements to reflect new information or future events or for any other reason.


8



PART I—FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Radian Group Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
($ in thousands, except per-share amounts)
September 30,
2016
 
December 31,
2015
 
 
 
 
Assets
 
 
 
Investments (Note 5)
 
 
 
Fixed-maturities available for sale—at fair value (amortized cost $2,655,791 and $1,893,356)
$
2,757,508

 
$
1,865,461

Equity securities available for sale—at fair value (cost $1,330 and $75,538)
1,330

 
75,430

Trading securities—at fair value
969,657

 
1,279,137

Short-term investments—at fair value
835,960

 
1,076,944

Other invested assets
1,293

 
1,714

Total investments
4,565,748

 
4,298,686

Cash
46,356

 
46,898

Restricted cash
10,312

 
13,000

Accounts and notes receivable
94,692

 
61,734

Deferred income taxes, net (Note 9)
401,442

 
577,945

Goodwill and other intangible assets, net (Note 6)
279,400

 
289,417

Prepaid reinsurance premium
229,754

 
40,491

Other assets (Note 8)
422,123

 
313,929

Total assets
$
6,049,827

 
$
5,642,100

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Unearned premiums
$
680,973

 
$
680,300

Reserve for losses and loss adjustment expense (“LAE”) (Note 10)
821,934

 
976,399

Long-term debt (Note 11)
1,067,666

 
1,219,454

Reinsurance funds withheld (Note 1)
177,147

 

Other liabilities
413,401

 
269,016

Total liabilities
3,161,121

 
3,145,169

Commitments and contingencies (Note 12)

 

Stockholders’ equity
 
 
 
Common stock: par value $.001 per share; 485,000,000 shares authorized at September 30, 2016 and December 31, 2015; 231,967,395 and 224,432,465 shares issued at September 30, 2016 and December 31, 2015, respectively; 214,405,103 and 206,871,768 shares outstanding at September 30, 2016 and December 31, 2015, respectively
232

 
224

Treasury stock, at cost: 17,562,292 and 17,560,697 shares at September 30, 2016 and December 31, 2015, respectively
(893,197
)
 
(893,176
)
Additional paid-in capital
2,778,860

 
2,716,618

Retained earnings
937,338

 
691,742

Accumulated other comprehensive income (loss) (“AOCI”) (Note 14)
65,473

 
(18,477
)
Total stockholders’ equity
2,888,706

 
2,496,931

Total liabilities and stockholders’ equity
$
6,049,827

 
$
5,642,100





See Notes to Unaudited Condensed Consolidated Financial Statements.




9



Radian Group Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
 
Three Months Ended
September 30,

Nine Months Ended
September 30,
(In thousands, except per-share amounts)
2016

2015

2016

2015
Revenues:
 
 
 
 
 
 
 
Net premiums earned—insurance
$
238,149


$
227,433


$
688,184


$
689,465

Services revenue
43,096


42,189


112,990


116,322

Net investment income
28,430

 
22,091

 
84,470

 
58,704

Net gains (losses) on investments and other financial instruments
7,711

 
3,868

 
69,524

 
49,095

Other income
3,497

 
1,711

 
8,835

 
4,785

Total revenues
320,883

 
297,292

 
964,003

 
918,371

Expenses:
 
 
 
 
 
 
 
Provision for losses
55,785

 
64,192

 
148,501

 
141,780

Policy acquisition costs
6,119

 
2,880

 
17,901

 
17,593

Direct cost of services
26,704

 
24,949

 
73,311

 
67,722

Other operating expenses
64,862

 
65,082

 
189,531

 
186,587

Interest expense
19,783


21,220


63,863

 
70,106

Loss on induced conversion and debt extinguishment (Note 11)
17,397

 
11

 
75,075

 
91,887

Amortization and impairment of intangible assets
3,292


3,273


9,931


9,577

Total expenses
193,942

 
181,607

 
578,113

 
585,252

Pretax income from continuing operations
126,941


115,685


385,890


333,119

Income tax provision
44,138


45,594


138,726

 
126,108

Net income from continuing operations
82,803


70,091


247,164


207,011

Income (loss) from discontinued operations, net of tax

 

 

 
5,385

Net income
$
82,803

 
$
70,091


$
247,164


$
212,396

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Net income from continuing operations
$
0.39

 
$
0.34

 
$
1.17

 
$
1.05

Income (loss) from discontinued operations, net of tax

 

 

 
0.03

Net income
$
0.39

 
$
0.34

 
$
1.17

 
$
1.08

 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
Net income from continuing operations
$
0.37

 
$
0.29

 
$
1.09

 
$
0.88

Income (loss) from discontinued operations, net of tax

 

 

 
0.02

Net income
$
0.37

 
$
0.29

 
$
1.09

 
$
0.90

 
 
 


 
 
 


Weighted-average number of common shares outstanding—basic
214,387

 
207,938

 
210,858

 
197,562

Weighted-average number of common and common equivalent shares outstanding—diluted
225,968

 
250,795

 
230,672

 
246,993

Dividends per share
$
0.0025

 
$
0.0025

 
$
0.0075

 
$
0.0075



See Notes to Unaudited Condensed Consolidated Financial Statements.


10



Radian Group Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In thousands)
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net income
$
82,803

 
$
70,091

 
$
247,164

 
$
212,396

Other comprehensive income (loss), net of tax (Note 14):
 
 
 
 
 
 
 
Unrealized gains (losses) on investments:
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period
6,943

 
4,012

 
86,614

 
(11,154
)
Less: Reclassification adjustment for net gains (losses) included in net income
3,695

 
(223
)
 
2,296

 
44,408

Net unrealized gains (losses) on investments
3,248

 
4,235

 
84,318

 
(55,562
)
Net foreign currency translation adjustments
(36
)
 
(120
)
 
(346
)
 
(88
)
Activity related to investments recorded as assets held for sale

 

 

 
(3,254
)
Net actuarial gains (losses)
156

 

 
(22
)
 

Other comprehensive income (loss), net of tax
3,368

 
4,115

 
83,950

 
(58,904
)
Comprehensive income
$
86,171

 
$
74,206

 
$
331,114

 
$
153,492
































See Notes to Unaudited Condensed Consolidated Financial Statements.


11



Radian Group Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY (UNAUDITED)
 
Nine Months Ended September 30,
(In thousands)
2016
 
2015
Common Stock
 
 
 
Balance, beginning of period
$
224

 
$
209

Impact of extinguishment of Convertible Senior Notes due 2017 and 2019 (Note 11)
17

 
28

Issuance of common stock under incentive and benefit plans

 
1

Termination of capped calls (Note 11)

 
(3
)
Shares repurchased under share repurchase program (Note 13)
(9
)
 
(11
)
Balance, end of period
232

 
224

 
 
 
 
Treasury Stock
 
 
 
Balance, beginning of period
(893,176
)
 
(892,961
)
Repurchases of common stock under incentive plans
(21
)
 
(215
)
Balance, end of period
(893,197
)
 
(893,176
)
 
 
 
 
Additional Paid-in Capital
 
 
 
Balance, beginning of period
2,716,618

 
2,531,513

Issuance of common stock under incentive and benefit plans
1,711

 
2,394

Stock-based compensation
17,632

 
13,214

Impact of extinguishment of Convertible Senior Notes due 2017 and 2019 (Note 11)
143,078

 
349,191

Termination of capped calls (Note 11)

 
11,976

Change in equity component of currently redeemable convertible senior notes

 
11,911

Shares repurchased under share repurchase program (Note 13)
(100,179
)
 
(201,989
)
Balance, end of period
2,778,860

 
2,718,210

 
 
 
 
Retained Earnings
 
 
 
Balance, beginning of period
691,742

 
406,814

Net income
247,164

 
212,396

Dividends declared
(1,568
)
 
(1,479
)
Balance, end of period
937,338

 
617,731

 
 
 
 
Accumulated Other Comprehensive Income (Loss) (“AOCI”)
 
 
 
Balance, beginning of period
(18,477
)
 
51,485

Net foreign currency translation adjustment, net of tax
(346
)
 
(88
)
Net unrealized gains (losses) on investments, net of tax
84,318

 
(58,816
)
Net actuarial gains (losses)
(22
)
 

Balance, end of period
65,473

 
(7,419
)
 
 
 
 
Total Stockholders’ Equity
$
2,888,706

 
$
2,435,570


See Notes to Unaudited Condensed Consolidated Financial Statements.


12




Radian Group Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
 
 
(In thousands)
Nine Months Ended
September 30,
2016
 
2015
Cash flows from operating activities:
 
 
 
Net cash provided by (used in) operating activities, continuing operations
$
290,137

 
$
(5,993
)
Net cash provided by (used in) operating activities, discontinued operations

 
(1,759
)
Net cash provided by (used in) operating activities
290,137

 
(7,752
)
Cash flows from investing activities:
 
 
 
Proceeds from sales of:
 
 
 
Fixed-maturity investments available for sale
537,679

 
16,208

Equity securities available for sale
74,868

 
145,550

Trading securities
178,227

 
13,566

Proceeds from redemptions of:
 
 
 
Fixed-maturity investments available for sale
220,126

 
64,747

Trading securities
106,589

 
169,991

Purchases of:
 
 
 
Fixed-maturity investments available for sale
(1,419,431
)
 
(1,006,985
)
Equity securities available for sale
(830
)
 
(500
)
Sales, redemptions and (purchases) of:
 
 
 
Short-term investments, net
241,579

 
(160,874
)
Other assets and other invested assets, net
2,390

 
13,596

Proceeds from the sale of investment in affiliate, net of cash transferred

 
784,866

Purchases of property and equipment, net
(28,252
)
 
(19,264
)
Acquisitions, net of cash acquired

 
(6,449
)
Net cash provided by (used in) investing activities, continuing operations
(87,055
)
 
14,452

Net cash provided by (used in) investing activities, discontinued operations

 
4,999

Net cash provided by (used in) investing activities
(87,055
)
 
19,451

Cash flows from financing activities:
 
 
 
Dividends paid
(1,568
)
 
(1,479
)
Issuance of long-term debt, net
343,417

 
343,479

Purchases and redemptions of long-term debt
(445,069
)
 
(128,486
)
Proceeds from termination of capped calls

 
11,973

Issuance of common stock
343

 

Purchase of common shares
(100,188
)
 
(202,000
)
Excess tax benefits from stock-based awards
115

 
3,000

Repayment of other borrowings
(292
)
 

Net cash provided by (used in) financing activities, continuing operations
(203,242
)
 
26,487

Net cash provided by (used in) financing activities, discontinued operations

 

Net cash provided by (used in) financing activities
(203,242
)
 
26,487

Effect of exchange rate changes on cash
(382
)
 
(42
)
Increase (decrease) in cash
(542
)
 
38,144

Cash, beginning of period
46,898

 
30,465

Less: Increase (decrease) in cash of business held for sale

 
(421
)
Cash, end of period
$
46,356

 
$
69,030


See Notes to Unaudited Condensed Consolidated Financial Statements.


13



Radian Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements




1. Condensed Consolidated Financial Statements—Business Overview and Significant Accounting Policies
Business Overview
We provide mortgage insurance and products and services to the real estate and mortgage finance industries through our two business segments—Mortgage Insurance and Services.
Mortgage Insurance
Our Mortgage Insurance segment provides credit-related insurance coverage, principally through private mortgage insurance, to mortgage lending institutions nationwide. Private mortgage insurance helps protect mortgage lenders by mitigating default-related losses on residential mortgage loans made to home buyers who generally make downpayments of less than 20% of the purchase price for their homes. Private mortgage insurance also facilitates the sale of these low-downpayment mortgage loans in the secondary mortgage market, most of which are sold to the GSEs.
Our Mortgage Insurance segment currently offers primary mortgage insurance coverage on residential first-lien mortgage loans, which comprised 97.8% of our $47.3 billion total direct RIF at September 30, 2016. At September 30, 2016, pool insurance represented 2.1% of our total direct RIF. We provide our mortgage insurance products mainly through our wholly-owned subsidiary, Radian Guaranty.
The GSEs and state insurance regulators impose capital and financial requirements on our insurance subsidiaries. These include Risk-to-capital, other risk-based capital measures and surplus requirements, as well as the PMIERs Financial Requirements discussed below. Failure to comply with these capital and financial requirements may limit the amount of insurance that our insurance subsidiaries may write. The GSEs and our state insurance regulators also possess significant discretion with respect to our insurance subsidiaries. See Note 16 for additional regulatory information.
Private mortgage insurers, including Radian Guaranty, are required to comply with the PMIERs to remain eligible insurers of loans purchased by the GSEs. At September 30, 2016, Radian Guaranty was in compliance with the PMIERs.
The PMIERs Financial Requirements, among other things, require that a mortgage insurer’s Available Assets meet or exceed its Minimum Required Assets. The GSEs may amend the PMIERs at any time, and they have broad discretion to interpret the requirements, which could impact the calculation of our Available Assets and/or Minimum Required Assets. The PMIERs specifically provide that the factors that are applied to calculate and determine a mortgage insurer’s Minimum Required Assets will be updated every two years following a minimum of 180 days’ notice (with the next review scheduled to take place in 2017), or more frequently, as determined by the GSEs, to reflect changes in macroeconomic conditions or loan performance. We have entered into reinsurance transactions as part of our capital and risk management activities, including to manage Radian Guaranty’s position under the PMIERs Financial Requirements, and the credit that we receive under the PMIERs Financial Requirements for these transactions is subject to the periodic review of the GSEs. In addition, it is our understanding that while a more comprehensive review of the PMIERs Financial Requirements is expected to take place in 2017, the GSEs currently are considering interim guidance for the industry that would negatively impact the amount of credit that we receive for our Single Premium QSR Transaction but also would give credit to certain liquid investments that are readily available to pay claims that previously were not permitted to be included in our Available Assets. As a result, we do not expect that this potential interim guidance, if and when issued, will impact Radian Guaranty’s compliance with the PMIERs.
Under the PMIERs, Radian Guaranty’s Available Assets and Minimum Required Assets are determined on an aggregate basis, taking into account the assets and insured risk of Radian Guaranty and its affiliated reinsurers. Therefore, developments that impact the assets and insured risk of Radian Guaranty’s affiliated reinsurers individually also will impact the aggregate Available Assets and Minimum Required Assets, and importantly, Radian Guaranty’s compliance with the PMIERs Financial Requirements. As a result, references to Radian Guaranty’s Available Assets and Minimum Required Assets take into consideration both Radian Guaranty and its affiliated reinsurers.


14



Radian Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)
 

Services
Our Services segment provides outsourced services, information-based analytics and specialty consulting for buyers and sellers of, and investors in, mortgage- and real estate-related loans and securities as well as other ABS. These services and solutions are provided primarily through Clayton and its subsidiaries, including Green River Capital, Red Bell and ValuAmerica. The primary lines of business in our Services segment include:
loan review and due diligence;
surveillance, including RMBS surveillance, loan servicer oversight, loan-level servicing compliance reviews and operational reviews of mortgage servicers and originators;
real estate valuation and component services that provide outsourcing and technology solutions for the SFR and residential real estate markets; as well as outsourced solutions for appraisal, title and closing services;
REO management services; and
services for the United Kingdom and European mortgage markets through our EuroRisk operations.
2016 Developments
Capital Management
During the first nine months of 2016, we completed a series of transactions to strengthen our financial position. The combination of these actions had the impact of decreasing diluted shares, improving Radian Group’s debt maturity profile and improving Radian Guaranty’s position under the PMIERs Financial Requirements. This series of capital management transactions consists of:
the issuance of $350 million aggregate principal amount of Senior Notes due 2021;
the purchases of aggregate principal amounts of $30.1 million and $322.0 million, respectively, of our outstanding Convertible Senior Notes due 2017 and 2019;
the termination of the portion of the capped call transactions related to the purchased Convertible Senior Notes due 2017;
the completion of the share repurchase program announced in January 2016, by purchasing an aggregate of 9.4 million shares of Radian Group common stock for $100.2 million, including commissions;
the execution of the Single Premium QSR Transaction, which had the effect of increasing the amount by which Radian Guaranty’s Available Assets exceed its Minimum Required Assets under the PMIERs Financial Requirements; and
the early redemption of the remaining $195.5 million aggregate principal amount of our Senior Notes due 2017.
The purchases of Convertible Senior Notes due 2017 and 2019 and the early redemption of the Senior Notes due 2017 resulted in a pretax charge of $75.1 million during the first nine months of 2016, recorded as a loss on induced conversion and debt extinguishment.
On June 29, 2016, Radian Group’s board of directors authorized a new share repurchase program of up to $125 million of Radian Group common stock. As of September 30, 2016, the full purchase authority remained available under this share repurchase program, which expires on June 30, 2017. See Notes 7, 11 and 13 for additional information.
Significant Accounting Policies
Basis of Presentation
Our condensed consolidated financial statements include the accounts of Radian Group Inc. and its subsidiaries. We refer to Radian Group Inc. together with its consolidated subsidiaries as “Radian,” the “Company,” “we,” “us” or “our,” unless the context requires otherwise. We generally refer to Radian Group Inc. alone, without its consolidated subsidiaries, as “Radian Group.” Unless otherwise defined in this report, certain terms and acronyms used throughout this report are defined in the Glossary of Abbreviations and Acronyms included as part of this report.


15



Radian Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)
 

Our condensed consolidated financial statements are prepared in accordance with GAAP and include the accounts of all wholly-owned subsidiaries. All intercompany accounts and transactions, and intercompany profits and losses, have been eliminated. We have condensed or omitted certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP pursuant to the instructions set forth in Article 10 of Regulation S-X of the SEC.
The financial information presented for interim periods is unaudited; however, such information reflects all adjustments that are, in the opinion of management, necessary for the fair statement of the financial position, results of operations, comprehensive income and cash flows for the interim periods presented. Such adjustments are of a normal recurring nature. The year-end condensed balance sheet data was derived from our audited financial statements, but does not include all disclosures required by GAAP. These interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in our 2015 Form 10-K. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year or for any other period. Certain prior period amounts have been reclassified to conform to current period presentation.
As previously disclosed in our 2015 Form 10-K, for the nine months ended September 30, 2015, certain cash flows were incorrectly classified in the Company’s Condensed Consolidated Statements of Cash Flows. The Company has determined that these misclassifications are not material to the financial statements of any period. These amounts (shown below in thousands) have been corrected herein. These adjustments affected certain line items within cash flows from investing activities, but had no net impact to net cash provided by (used in) investing activities. For the nine months ended September 30, 2015, these adjustments to the affected line items within the Consolidated Statements of Cash Flows consist of the following: (i) proceeds from sales of fixed-maturity investments available for sale reported as $96,684 has been adjusted to $16,208; and (ii) purchases of fixed-maturity investments available for sale reported as $1,087,461 has been adjusted to $1,006,985.
Use of Estimates
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 condensed consolidated financial statements include our best estimates and assumptions, actual results may vary materially.
Other Significant Accounting Policies
2016 Purchases of Convertible Debt Prior to Maturity. We accounted for the 2016 purchases of a portion of our outstanding convertible debt in exchange for cash and shares of Radian Group common stock as induced conversions of convertible debt in accordance with the accounting standard regarding derecognition of debt with conversion and other options, and the accounting standard regarding debt modifications and extinguishments. The accounting standards require the recognition through earnings of an inducement charge equal to the fair value of the consideration delivered in excess of the consideration issuable under the original conversion terms. The remaining consideration delivered and transaction costs incurred are required to be allocated between the extinguishment of the liability component and the reacquisition of the equity component. As a result, we recognized a loss on induced conversion and debt extinguishment equal to: (i) the inducement charges; (ii) the differences between the fair value and the carrying value of the liability component of the purchased debt; (iii) transaction costs allocated to the debt components; and (iv) unamortized debt issuance costs related to the purchased debt.
Reinsurance. In accordance with the terms of the Single Premium QSR Transaction, rather than making a cash payment or transferring investments for ceded premiums written, Radian Guaranty holds the related amounts to collateralize the reinsurers’ obligations and has established a corresponding funds withheld liability. Any loss recoveries and any potential profit commission to Radian Guaranty will be realized from this account. This liability also includes an interest credit on funds withheld, which is recorded as ceded premiums at a rate specified in the agreement and, depending on experience under the contract, may be paid to either Radian Guaranty or the reinsurers. As described in Note 2 of our 2015 Form 10-K, ceded premiums written are recorded on the balance sheet as prepaid reinsurance premiums and amortized to ceded premiums earned in a manner consistent with the recognition of income on direct premiums. See Note 7 for further discussion of our reinsurance transactions.
See Note 2 in our 2015 Form 10-K for information regarding other significant accounting policies.


16



Radian Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)
 

Recent Accounting Pronouncements
Accounting Standards Adopted During 2016. In April 2015, the FASB issued an update to the accounting standard for the accounting of internal-use software. The update provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with its treatment of the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The provisions of this update are effective for interim and annual periods beginning after December 15, 2015. The implementation of this update did not have a material impact to our financial position, results of operations or cash flows.
Accounting Standards Not Yet Adopted. In May 2014, the FASB issued an update to the accounting standard regarding revenue recognition. This update is intended to provide a consistent approach in recognizing revenue. In accordance with the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services, in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This update is not expected to change revenue recognition principles related to investments and our insurance products, which represents a significant portion of total revenues. This update is primarily applicable to revenues from our Services segment. In July 2015, the FASB delayed the effective date for this updated standard for public companies to interim and annual periods beginning after December 15, 2017, and in March, April and May 2016, issued clarifying updates. We are currently evaluating the impact to our financial statements and future disclosures as a result of these updates, if any.
In May 2015, the FASB issued an update to the accounting standard for the accounting of short-duration insurance contracts by insurance entities. The amendments in this update require insurance entities to disclose certain information about the liability for unpaid claims and claim adjustment expenses. The additional information required is focused on improving disclosures regarding insurance liabilities, including the timing, nature and uncertainty of future cash flows related to insurance liabilities and the effect of those cash flows on the statement of comprehensive income. The disclosures required by this update are effective for public companies for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016; early adoption is permitted. We are currently evaluating the additional disclosures required in our financial statements as a result of this update.
In January 2016, the FASB issued an update to the standard for the accounting of financial instruments. Among other things, the update requires: (i) equity investments to be measured at fair value with changes in fair value recognized in net income; (ii) the use of an exit price (i.e., the price that would be received to sell the asset) when measuring the fair value of financial instruments for disclosure purposes; (iii) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset; and (iv) separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The update also eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. This update is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is not permitted, with the exception of the “own credit” provision. We are currently evaluating the impact to our financial statements and future disclosures as a result of this update.


17



Radian Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)
 

In February 2016, the FASB issued an update that replaces the existing accounting and disclosure requirements for leases of property, plant and equipment. The update requires lessees to recognize, as of the lease commencement date, assets and liabilities for all such leases with lease terms of more than 12 months, which is a change from the current GAAP requirement to recognize only capital leases on the balance sheet. Pursuant to the new standard, the liability initially recognized for the lease obligation is equal to the present value of the lease payments not yet made, discounted over the lease term at the implicit interest rate of the lease, if available, or otherwise at the lessee’s incremental borrowing rate. The lessee is also required to recognize an asset for its right to use the underlying asset for the lease term, based on the liability subject to certain adjustments, such as for initial direct costs. Leases are required to be classified as either operating or finance, with expense on operating leases recorded as a single lease cost on a straight-line basis. For finance leases, interest expense on the lease liability is required to be recognized separately from the straight-line amortization of the right-of-use asset. Quantitative disclosures are required for certain items, including the cost of leases, the weighted-average remaining lease term, the weighted-average discount rate and a maturity analysis of lease liabilities. Additional qualitative disclosures are also required regarding the nature of the leases, such as basis, terms and conditions of: (i) variable interest payments; (ii) extension and termination options; and (iii) residual value guarantees. This update is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted by applying the new guidance as of the beginning of the earliest comparative period presented, using a modified retrospective transition approach with certain optional practical expedients. We are currently evaluating the impact to our financial statements and future disclosures as a result of this update.
In March 2016, the FASB issued an update seeking to reduce complexity in the accounting standards for share-based payment transactions, including: (i) accounting for income taxes; (ii) classification of excess tax benefits on the statement of cash flows; (iii) forfeitures; (iv) minimum statutory tax withholding requirements; (v) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes; (vi) the practical expedient for estimating the expected term; and (vii) intrinsic value. Among other things, the update requires: (i) all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement as they occur; (ii) recognition of excess tax benefits, regardless of whether the benefits reduce taxes payable in the current period; and (iii) excess tax benefits to be classified along with other cash flows as an operating activity, rather than separated from other income tax cash flows as a financing activity. For companies with significant share-based compensation, these changes may result in more volatile effective tax rates and net earnings, and result in additional dilution in earnings per share calculations. This update is effective for public companies for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted in any annual or interim period; however, an entity electing early adoption must adopt all amendments in the same period. We are currently evaluating the impact to our financial statements, earnings per share and future disclosures as a result of this update.
In June 2016, the FASB issued an update to the accounting standard regarding the measurement of credit losses on financial instruments. This update requires that financial assets measured at amortized cost basis be presented at the net (of allowance for credit losses) amount expected to be collected. Credit losses relating to available-for-sale debt securities are to be recorded through an allowance for credit losses, rather than a write-down of the asset, with the amount of the allowance limited to the amount by which fair value is less than amortized cost. This update is effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the impact to our financial statements and future disclosures as a result of this update.


18



Radian Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)
 

In August 2016, the FASB issued an update to the accounting standard regarding the statement of cash flows. This update reduces differences in practice over the presentation and classification of certain cash receipts and cash payments. The revision provides guidance related to eight specific identified cash flow issues. The guidance will be applied on a retrospective basis beginning with the earliest period presented. This update is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the impact to our financial statements as a result of this update.
In October 2016, the FASB issued an update to the accounting standard regarding the accounting for income taxes. This update is intended to reduce complexity in accounting for the income tax consequences from intra-entity transfers of assets other than inventory. This update requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This update will be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. This update is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in the first interim period of the adoption year. We are currently evaluating the impact to our financial statements as a result of this update.

2. Net Income Per Share
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 shareholders by the sum of the weighted average number of common shares outstanding and all dilutive potential common shares outstanding. Dilutive potential common shares relate to our stock-based compensation arrangements and our outstanding convertible senior notes. For all calculations, the determination of whether potential common shares are dilutive or anti-dilutive is based on net income from continuing operations.


19



Radian Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)
 

The calculation of the basic and diluted net income per share was as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In thousands, except per-share amounts)
2016
 
2015
 
2016
 
2015
Net income from continuing operations:
 
 
 
 
 
 
 
Net income from continuing operations - basic
$
82,803

 
$
70,091

 
$
247,164

 
$
207,011

Adjustment for dilutive Convertible Senior Notes due 2019, net of tax (1) 
848

 
3,714

 
5,151

 
11,094

Net income from continuing operations - diluted
$
83,651

 
$
73,805

 
$
252,315

 
$
218,105

 
 
 
 
 
 
 
 
Net income:
 
 
 
 
 
 
 
Net income from continuing operations - basic
$
82,803

 
$
70,091

 
$
247,164

 
$
207,011

Income (loss) from discontinued operations, net of tax

 

 

 
5,385

Net income - basic
82,803

 
70,091


247,164


212,396

Adjustment for dilutive Convertible Senior Notes due 2019, net of tax (1) 
848

 
3,714

 
5,151

 
11,094

Net income - diluted
$
83,651

 
$
73,805


$
252,315


$
223,490

 
 
 
 
 
 
 
 
Average common shares outstanding - basic
214,387

 
207,938

 
210,858

 
197,562

Dilutive effect of Convertible Senior Notes due 2017 (2) 
178

 
1,798

 
71

 
8,620

Dilutive effect of Convertible Senior Notes due 2019
8,274

 
37,736

 
16,897

 
37,736

Dilutive effect of stock-based compensation arrangements (2) 
3,129

 
3,323

 
2,846

 
3,075

Adjusted average common shares outstanding - diluted
225,968


250,795

 
230,672

 
246,993

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Net income from continuing operations
$
0.39

 
$
0.34

 
$
1.17

 
$
1.05

Income (loss) from discontinued operations, net of tax

 

 

 
0.03

Net income
$
0.39

 
$
0.34

 
$
1.17

 
$
1.08

 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
Net income from continuing operations
$
0.37

 
$
0.29

 
$
1.09

 
$
0.88

Income (loss) from discontinued operations, net of tax

 

 

 
0.02

Net income
$
0.37

 
$
0.29

 
$
1.09

 
$
0.90

______________________
(1)
As applicable, includes coupon interest, amortization of discount and fees, and other changes in income or loss that would result from the assumed conversion.
(2)
The following number of shares of our common stock equivalents issued under our stock-based compensation arrangements and convertible debt were not included in the calculation of diluted net income per share because they were anti-dilutive:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in thousands)
2016
 
2015
 
2016
 
2015
Shares of common stock equivalents
1,045

 
469

 
1,045

 
730

Shares of Convertible Senior Notes due 2017

 

 
1,902

 


3. Segment Reporting
We have two strategic business units that we manage separately—Mortgage Insurance and Services. Adjusted pretax operating income (loss) for each segment represents segment results on a standalone basis; therefore, inter-segment eliminations and reclassifications required for consolidated GAAP presentation have not been reflected.


20



Radian Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)
 

We allocate to our Mortgage Insurance segment: (i) corporate expenses based on an allocated percentage of time spent on the Mortgage Insurance segment; (ii) all interest expense except for interest expense related to the Senior Notes due 2019 that were issued to fund our purchase of Clayton; and (iii) all corporate cash and investments.
We allocate to our Services segment: (i) corporate expenses based on an allocated percentage of time spent on the Services segment; and (ii) as noted above, all interest expense related to the Senior Notes due 2019. No corporate cash or investments are allocated to the Services segment. Inter-segment activities are recorded at market rates for segment reporting and eliminated in consolidation.
Adjusted Pretax Operating Income (Loss)
Our senior management, including our Chief Executive Officer (our chief operating decision maker), uses adjusted pretax operating income (loss) as our primary measure to evaluate the fundamental financial performance of each of Radian’s business segments and to allocate resources to the segments. Adjusted pretax operating income (loss) is defined as pretax income (loss) from continuing operations excluding the effects of net gains (losses) on investments and other financial instruments, loss on induced conversion and debt extinguishment, acquisition-related expenses, amortization and impairment of intangible assets, and net impairment losses recognized in earnings.
Although adjusted pretax operating income (loss) excludes certain items that have occurred in the past and are expected to occur in the future, the excluded items represent those that are: (1) not viewed as part of the operating performance of our primary activities; or (2) not expected to result in an economic impact equal to the amount reflected in pretax income (loss) from continuing operations. These adjustments, along with the reasons for their treatment, are described below.
(1)
Net gains (losses) on investments and other financial instruments. The recognition of realized investment gains or losses can vary significantly across periods as the activity is highly discretionary based on the timing of individual securities sales due to such factors as market opportunities, our tax and capital profile and overall market cycles. Unrealized investment gains and losses arise primarily from changes in the market value of our investments that are classified as trading. These valuation adjustments may not necessarily result in economic gains or losses.
Trends in the profitability of our fundamental operating activities can be more clearly identified without the fluctuations of these realized and unrealized gains or losses. We do not view them to be indicative of our fundamental operating activities. Therefore, these items are excluded from our calculation of adjusted pretax operating income (loss). However, we include the change in expected economic loss or recovery associated with our consolidated VIEs, if any, in the calculation of adjusted pretax operating income (loss).
(2)
Loss on induced conversion and debt extinguishment. Gains or losses on early extinguishment of debt and losses incurred to purchase our convertible debt prior to maturity are discretionary activities that are undertaken in order to take advantage of market opportunities to strengthen our financial and capital positions; therefore, we do not view these activities as part of our operating performance. Such transactions do not reflect expected future operations and do not provide meaningful insight regarding our current or past operating trends. Therefore, these items are excluded from our calculation of adjusted pretax operating income (loss).
(3)
Acquisition-related expenses. Acquisition-related expenses represent the costs incurred to effect an acquisition of a business (i.e., a business combination). Because we pursue acquisitions on a strategic and selective basis and not in the ordinary course of our business, we do not view acquisition-related expenses as a consequence of a primary business activity. Therefore, we do not consider these expenses to be part of our operating performance and they are excluded from our calculation of adjusted pretax operating income (loss).
(4)
Amortization and impairment of intangible assets. Amortization of intangible assets represents the periodic expense required to amortize the cost of intangible assets over their estimated useful lives. Intangible assets with an indefinite useful life are also periodically reviewed for potential impairment, and impairment adjustments are made whenever appropriate. These charges are not viewed as part of the operating performance of our primary activities and therefore are excluded from our calculation of adjusted pretax operating income (loss).
(5)
Net impairment losses recognized in earnings. The recognition of net impairment losses on investments can vary significantly in both size and timing, depending on market credit cycles. We do not view these impairment losses to be indicative of our fundamental operating activities. Therefore, whenever these losses occur, we exclude them from our calculation of adjusted pretax operating income (loss).


21



Radian Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)
 

Summarized operating results for our segments as of and for the periods indicated, are as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In thousands)
2016
 
2015
 
2016
 
2015
Mortgage Insurance
 
 
 
 
 
 
 
Net premiums written—insurance (1) 
$
240,999

 
$
242,168

 
$
499,662

 
$
735,158

Decrease (increase) in unearned premiums
(2,850
)
 
(14,735
)
 
188,522

 
(45,693
)
Net premiums earned—insurance
238,149

 
227,433

 
688,184

 
689,465

Net investment income
28,430

 
22,091

 
84,470

 
58,704

Other income
3,511

 
1,711

 
8,850

 
4,785

Total (2) 
270,090

 
251,235

 
781,504

 
752,954

 
 
 
 
 
 
 
 
Provision for losses
56,151

 
64,128

 
149,500

 
141,616

Policy acquisition costs
6,119

 
2,880

 
17,901

 
17,593

Other operating expenses before corporate allocations
38,081

 
36,632

 
108,036

 
112,535

Total (3) 
100,351

 
103,640

 
275,437

 
271,744

Adjusted pretax operating income before corporate allocations
169,739

 
147,595

 
506,067

 
481,210

Allocation of corporate operating expenses
11,911

 
14,893

 
35,526

 
37,167

Allocation of interest expense
15,360

 
16,797

 
50,596

 
56,820

Adjusted pretax operating income
$
142,468

 
$
115,905

 
$
419,945

 
$
387,223

______________________
(1)
Net of ceded premiums written under the QSR Transactions and the Single Premium QSR Transaction. See Note 7 for additional information.
(2)
Excludes net gains on investments and other financial instruments of $7.7 million and $69.5 million, respectively, for the three and nine months ended September 30, 2016, and $3.9 million and $49.1 million, respectively, for the three and nine months ended September 30, 2015, not included in adjusted pretax operating income.
(3)
Includes inter-segment expenses as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In thousands)
2016
 
2015
 
2016
 
2015
Inter-segment expenses
$
718

 
$
925

 
$
2,023

 
$
2,919









22



Radian Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)
 

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In thousands)
2016
 
2015
 
2016
 
2015
Services
 
 
 
 
 
 
 
Services revenue (1) 
$
43,800

 
$
43,114

 
$
114,998

 
$
119,241

 
 
 
 
 
 
 
 
Direct cost of services
26,911

 
25,870

 
74,188

 
70,624

Other operating expenses before corporate allocations
12,740

 
11,533

 
39,160

 
31,912

Total
39,651

 
37,403

 
113,348

 
102,536

Adjusted pretax operating income before corporate allocations
4,149

 
5,711

 
1,650

 
16,705

Allocation of corporate operating expenses
2,265

 
1,567

 
6,795

 
3,855

Allocation of interest expense
4,423

 
4,423

 
13,267

 
13,286

Adjusted pretax operating income (loss)
$
(2,539
)
 
$
(279
)

$
(18,412
)

$
(436
)
______________________
(1)
Includes inter-segment revenues as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In thousands)
2016
 
2015
 
2016
 
2015
Inter-segment revenues
$
718

 
$
925

 
$
2,023

 
$
2,919


Selected balance sheet information for our segments as of the periods indicated, is as follows:
 
At September 30, 2016
(In thousands)
Mortgage Insurance
 
Services
 
Total
Total assets
$
5,686,726

 
$
363,101

 
$
6,049,827

 
At December 31, 2015
(In thousands)
Mortgage Insurance
 
Services
 
Total
Total assets
$
5,281,597

 
$
360,503

 
$
5,642,100





23



Radian Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)
 

The reconciliation of adjusted pretax operating income to consolidated pretax income from continuing operations is as follows:
 
Three Months Ended
September 30,

Nine Months Ended
September 30,
(In thousands)
2016

2015

2016

2015
Adjusted pretax operating income (loss):
 
 
 
 
 
 
 
Mortgage Insurance (1) 
$
142,468

 
$
115,905

 
$
419,945

 
$
387,223

Services (1) 
(2,539
)
 
(279
)
 
(18,412
)
 
(436
)
Total adjusted pretax operating income
139,929


115,626


401,533

 
386,787

 
 
 
 
 
 
 
 
Net gains (losses) on investments and other financial instruments
7,711

 
3,868

 
69,524

 
49,095

Loss on induced conversion and debt extinguishment
(17,397
)
 
(11
)
 
(75,075
)
 
(91,887
)
Acquisition-related (expenses) benefits (2) 
(10
)
 
(525
)
 
(161
)
 
(1,299
)
Amortization and impairment of intangible assets
(3,292
)
 
(3,273
)
 
(9,931
)
 
(9,577
)
Consolidated pretax income from continuing operations
$
126,941


$
115,685


$
385,890

 
$
333,119

______________________
(1)
Includes inter-segment expenses and revenues as listed in the notes to the preceding tables.
(2)
Acquisition-related (expenses) benefits represent expenses incurred to effect the acquisition of a business, net of adjustments to accruals previously recorded for acquisition expenses.
On a consolidated basis, “adjusted pretax operating income (loss)” is a measure not determined in accordance with GAAP. Total adjusted pretax operating income (loss) is not a measure of total profitability, and therefore should not be viewed as a substitute for GAAP pretax income (loss) from continuing operations. Our definition of adjusted pretax operating income (loss) may not be comparable to similarly-named measures reported by other companies.

4. Fair Value of Financial Instruments
Available for sale securities, trading securities and certain other assets are recorded at fair value. All changes in the fair value of trading securities and certain other assets are included in our condensed consolidated statements of operations. All changes in the fair value of available for sale securities are recorded in AOCI. There were no significant changes to our fair value methodologies during the nine months ended September 30, 2016.
In accordance with GAAP, we established a three-level valuation hierarchy for disclosure of fair value measurements based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I measurements) and the lowest priority to unobservable inputs (Level III measurements). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the measurement in its entirety. The three levels of the fair value hierarchy are defined below:
Level I
—    Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level II
—    Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities; and
Level III
—    Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Level III inputs are used to measure fair value only to the extent that observable inputs are not available.
The level of market activity used to determine the fair value hierarchy is based on the availability of observable inputs market participants would use to price an asset or a liability, including market value price observations. We provide a qualitative description of the valuation techniques and inputs used for Level II recurring and non-recurring fair value measurements in our audited annual financial statements as of December 31, 2015. For a complete understanding of the valuation techniques and inputs used as of September 30, 2016, these unaudited condensed consolidated financial statements should be read in conjunction with the audited annual financial statements and notes thereto included in our 2015 Form 10-K.


24



Radian Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)
 

The following is a list of assets that are measured at fair value by hierarchy level as of September 30, 2016:
(In thousands)
Level I
 
Level II
 
Level III
 
Total
Assets at Fair Value
 
 
 
 
 
 
 
Investment Portfolio:
 
 
 
 
 
 
 
U.S. government and agency securities
$
152,805

 
$

 
$

 
$
152,805

State and municipal obligations

 
384,609

 

 
384,609

Money market instruments
587,628

 

 

 
587,628

Corporate bonds and notes

 
1,909,060

 

 
1,909,060

RMBS

 
433,474

 

 
433,474

CMBS

 
556,250

 

 
556,250

Other ABS

 
450,853

 

 
450,853

Foreign government and agency securities

 
41,627

 

 
41,627

Equity securities

 
830

 
500

 
1,330

Other investments (1) 

 
46,319

 
500

 
46,819

Total Investments at Fair Value (2) 
740,433

 
3,823,022

 
1,000

 
4,564,455

Total Assets at Fair Value
$
740,433

 
$
3,823,022

 
$
1,000

 
$
4,564,455

______________________
(1)
Comprising short-term certificates of deposit and commercial paper, included within Level II, and private convertible notes, included within Level III.
(2)
Does not include certain other invested assets ($1.3 million), primarily invested in limited partnerships, accounted for as cost-method investments and not measured at fair value.
At September 30, 2016, total Level III assets of $1.0 million accounted for less than 0.1% of total assets measured at fair value. Within other investments is a Level III investment which was purchased during the three months ended June 30, 2016, and there were no related gains or losses recorded during the quarter. Within equity securities is a Level III investment which was purchased during the three months ended June 30, 2015, and there were no related gains or losses recorded during the quarter. There were no Level III liabilities at September 30, 2016.
The following is a list of assets that are measured at fair value by hierarchy level as of December 31, 2015:
(In thousands)
Level I
 
Level II
 
Level III
 
Total
Assets at Fair Value
 
 
 
 
 
 
 
Investment Portfolio:
 
 
 
 
 
 
 
U.S. government and agency securities
$
670,328

 
$
8,000

 
$

 
$
678,328

State and municipal obligations

 
341,845

 

 
341,845

Money market instruments
443,272

 

 

 
443,272

Corporate bonds and notes

 
1,383,186

 

 
1,383,186

RMBS

 
297,097

 

 
297,097

CMBS

 
544,588

 

 
544,588

Other ABS

 
371,625

 

 
371,625

Foreign government and agency securities

 
37,576

 

 
37,576

Equity securities
74,930

 
25,016

 
500

 
100,446

Other investments (1) 

 
99,009

 

 
99,009

Total Investments at Fair Value (2) 
1,188,530

 
3,107,942

 
500

 
4,296,972

Total Assets at Fair Value
$
1,188,530

 
$
3,107,942

 
$
500

 
$
4,296,972

______________________
(1)
Comprising short-term certificates of deposit and commercial paper.
(2)
Does not include certain other invested assets ($1.7 million), primarily invested in limited partnerships, accounted for as cost-method investments and not measured at fair value.


25



Radian Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)
 

At December 31, 2015, total Level III assets of $0.5 million accounted for less than 0.1% of total assets measured at fair value. This investment was purchased during the three months ended June 30, 2015, and there were no related gains or losses recorded during the year ended December 31, 2015. There were no Level III liabilities at December 31, 2015.
There were no transfers between Level I and Level II for the three and nine months ended September 30, 2016 and 2015. There were also no transfers involving Level III assets or liabilities for the three and nine months ended September 30, 2016 and 2015.
Other Fair Value Disclosure
The carrying value and estimated fair value of other selected assets and liabilities not carried at fair value on our condensed consolidated balance sheets were as follows as of the dates indicated:
 
September 30, 2016
 
December 31, 2015
(In thousands)
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
Assets:
 
 
 
 
 
 
 
Other invested assets
$
1,293

 
$
3,692

 
$
1,714

 
$
4,901

Liabilities:
 
 
 
 
 
 
 
Long-term debt
1,067,666

 
1,195,740

 
1,219,454

 
1,414,875


5. Investments
Available for Sale Securities
Our available for sale securities within our investment portfolio consisted of the following as of the dates indicated:
 
September 30, 2016
(In thousands)
Amortized
Cost
 
Fair Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
Fixed-maturities available for sale:
 
 
 
 
 
 
 
U.S. government and agency securities
$
42,213

 
$
45,035

 
$
2,846

 
$
24

State and municipal obligations
68,520

 
75,320

 
6,800

 

Corporate bonds and notes
1,249,233

 
1,315,525

 
66,683

 
391

RMBS
384,867

 
391,701

 
7,054

 
220

CMBS
446,102

 
462,750

 
17,090

 
442

Other ABS
435,695

 
437,026

 
2,335

 
1,004

Foreign government and agency securities
27,161

 
28,151

 
1,041

 
51

Other investments
2,000

 
2,000

 

 

Total fixed-maturities available for sale
2,655,791

 
2,757,508

 
103,849

 
2,132

Equity securities available for sale (1) 
1,330

 
1,330

 

 

Total debt and equity securities
$
2,657,121

 
$
2,758,838

 
$
103,849

 
$
2,132

______________________
(1)
Comprised primarily of investments in Federal Home Loan Bank stock required in connection with the memberships of Radian Guaranty and Radian Reinsurance in the Federal Home Loan Bank of Pittsburgh.



26



Radian Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)
 

 
December 31, 2015
(In thousands)
Amortized
Cost
 
Fair Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
Fixed-maturities available for sale:
 
 
 
 
 
 
 
U.S. government and agency securities
$
13,773

 
$
13,752

 
$

 
$
21

State and municipal obligations
36,920

 
37,900

 
1,100

 
120

Corporate bonds and notes
815,024

 
802,193

 
4,460

 
17,291

RMBS
226,744

 
224,905

 
625

 
2,464

CMBS
415,780

 
406,910

 
69

 
8,939

Other ABS
359,452

 
355,494

 
16

 
3,974

Foreign government and agency securities
25,663

 
24,307

 
27

 
1,383

Total fixed-maturities available for sale
1,893,356

 
1,865,461

 
6,297

 
34,192

Equity securities available for sale (1) 
75,538

 
75,430

 

 
108

Total debt and equity securities
$
1,968,894

 
$
1,940,891

 
$
6,297

 
$
34,300

______________________
(1)
Comprised primarily of a multi-sector exchange-traded fund.

Gross Unrealized Losses and Fair Value of Available for Sale Securities
The following tables show the gross unrealized losses and fair value of our securities deemed “available for sale” aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of the dates indicated:
September 30, 2016: ($ in thousands) Description of Securities
 
Less Than 12 Months
 
12 Months or Greater
 
Total
# of
securities
 
Fair Value
 
Unrealized
Losses
 
# of
securities
 
Fair Value
 
Unrealized
Losses
 
# of
securities
 
Fair Value
 
Unrealized
Losses
U.S. government and agency securities
 
4

 
$
3,536

 
$
24

 

 
$

 
$

 
4

 
$
3,536

 
$
24

Corporate bonds and notes
 
14

 
29,166

 
115

 
6

 
18,271

 
276

 
20

 
47,437

 
391

RMBS
 
9

 
92,845

 
220

 

 

 

 
9

 
92,845

 
220

CMBS
 
19

 
54,676

 
442

 

 

 

 
19

 
54,676

 
442

Other ABS
 
28

 
60,953

 
147

 
30

 
79,609

 
857

 
58

 
140,562

 
1,004

Foreign government and agency securities
 
1

 
254

 

 
3

 
3,601

 
51

 
4

 
3,855

 
51

Total
 
75

 
$
241,430

 
$
948

 
39

 
$
101,481

 
$
1,184

 
114

 
$
342,911

 
$
2,132




27



Radian Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements — (Continued)
 

December 31, 2015: ($ in thousands) Description of Securities
 
Less Than 12 Months
 
12 Months or Greater
 
Total
# of
securities
 
Fair Value
 
Unrealized
Losses
 
# of
securities
 
Fair Value
 
Unrealized
Losses
 
# of
securities
 
Fair Value
 
Unrealized
Losses
U.S. government and agency securities
 
1

 
$
5,752

 
$
21

 

 
$

 
$

 
1

 
$
5,752

 
$
21

State and municipal obligations
 
2

 
11,674

 
120

 

&#