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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-Q
_____________________________
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022
OR
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☐ | 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
_______________________________
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.) |
550 East Swedesford Road, Suite 350, Wayne, PA 19087
(Address of principal executive offices) (Zip Code)
(215) 231-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.001 par value per share | RDN | New York Stock Exchange |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Large Accelerated Filer | ☒ | | Accelerated filer | ☐ | | Non-accelerated filer | ☐ | | Smaller reporting company | ☐ | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
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: 157,025,431 shares of common stock, $0.001 par value per share, outstanding on November 2, 2022.
Table of Contents
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PART I—FINANCIAL INFORMATION | |
Item 1 | | |
Item 2 | | |
Item 3 | | |
Item 4 | | |
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PART II—OTHER INFORMATION | |
Item 1 | | |
Item 1A | | |
Item 2 | | |
Item 6 | | |
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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 |
2021 Form 10-K | Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022 |
2014 Master Policy | Radian Guaranty’s master insurance policy, setting forth the terms and conditions of our mortgage insurance coverage, which became effective October 1, 2014 |
2020 Master Policy | Radian Guaranty’s master insurance policy, setting forth the terms and conditions of our mortgage insurance coverage, which became effective March 1, 2020 |
2012 QSR Agreements | The quota share reinsurance agreements entered into with a third-party reinsurance provider in the second and fourth quarters of 2012, collectively |
2022 QSR Agreement | Quota share reinsurance arrangement entered into with a panel of third-party reinsurance providers to cede, starting July 1, 2022, a portion of NIW, which includes both Recurring Premium Policies and Single Premium Policies, originated between January 1, 2022, and June 30, 2023 |
2016 Single Premium QSR Agreement | Quota share reinsurance agreement entered into with a panel of third-party reinsurance providers in the first quarter of 2016 and subsequently amended in the fourth quarter of 2017 |
2018 Single Premium QSR Agreement | Quota share reinsurance agreement entered into with a panel of third-party reinsurance providers in October 2017 to cede a portion of Single Premium NIW beginning January 1, 2018 |
2020 Single Premium QSR Agreement | Quota share reinsurance agreement entered into with a panel of third-party reinsurance providers in January 2020 to cede a portion of Single Premium NIW beginning January 1, 2020 |
ABS | Asset-backed securities |
All Other | Radian’s non-reportable operating segments and other business activities, including: (i) income (losses) from assets held by Radian Group; (ii) related general corporate operating expenses not attributable or allocated to our reportable segments; and (iii) certain investments in new business opportunities, including activities and investments associated with Radian Mortgage Capital, and other immaterial activities |
ASU | Accounting Standards Update, issued by the FASB to communicate changes to GAAP |
Available Assets | As defined in the PMIERs, assets primarily including the most liquid assets of a mortgage insurer, and reduced by, among other items, premiums received but not yet earned and reinsurance funds withheld |
BMO | Bank of Montreal, a Canadian Chartered bank acting through its Chicago Branch |
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 |
CLO | Collateralized loan obligations |
CMBS | Commercial mortgage-backed securities |
COVID-19 | The coronavirus disease declared a pandemic by the World Health Organization and the Centers for Disease Control and Prevention in March 2020 |
Cures | Loans that were in default as of the beginning of a period and are no longer in default because payments were received such that the loan is no longer 60 or more days past due |
Default to Claim Rate | The percentage of defaulted loans that are assumed to result in a claim |
Demotech | Demotech, Inc. |
Disaster Related Capital Charge | Under the PMIERs, multiplier of 0.30 applied to the required asset amount factor for each non-performing loan: (i) backed by a property located in a FEMA Designated Area and (ii) either subject to a certain forbearance plan or with an initial default date occurring within a certain timeframe |
Eagle Re Issuer(s) | A group of unaffiliated special purpose insurers (VIEs) domiciled in Bermuda, comprising Eagle Re 2018-1 Ltd., Eagle Re 2019-1 Ltd., Eagle Re 2020-1 Ltd., Eagle Re 2021-1 Ltd. and/or Eagle Re 2021-2 Ltd., which provide reinsurance coverage under Radian Guaranty’s Excess-of-Loss Program. The issuers also included Eagle Re 2020-2 Ltd. prior to its termination in September 2022. |
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Term | Definition |
Excess-of-Loss Program | The credit risk protection obtained by Radian Guaranty in the form of excess-of-loss reinsurance, which indemnifies the ceding company against loss in excess of a specific agreed limit, up to a specified sum. The program includes reinsurance agreements with the Eagle Re Issuers in connection with various issuances of mortgage insurance-linked notes. The program also included a separate agreement with a third-party reinsurer, prior to its termination in December 2021, representing a pro rata share of the credit risk alongside the risk assumed by Eagle Re 2018-1 Ltd., an Eagle Re Issuer. |
Exchange Act | Securities Exchange Act of 1934, as amended |
Extraordinary Distribution | A dividend or distribution of capital that is required to be approved by an insurance company’s primary regulator that is greater than would be permitted as an ordinary distribution (which does not require regulatory approval) |
Fannie Mae | Federal National Mortgage Association |
FASB | Financial Accounting Standards Board |
FEMA | Federal Emergency Management Agency, an agency of the U.S. Department of Homeland Security |
FEMA Designated Area | Generally, an area that has been subject to a disaster, designated by FEMA as an individual assistance disaster area for the purpose of determining eligibility for various forms of federal assistance |
FHA | Federal Housing Administration |
FHFA | Federal Housing Finance Agency |
FHLB | Federal Home Loan Bank of Pittsburgh |
FICO | Fair Isaac Corporation (“FICO”) credit scores, for Radian’s portfolio statistics, represent the borrower’s credit score at origination and, in circumstances where there are multiple borrowers, the lowest of the borrowers’ FICO scores is utilized |
Fitch | Fitch Ratings, Inc. |
Foreclosure Stage Defaulted Loans | Loans in the stage of default in which a foreclosure sale has been scheduled or held |
Freddie Mac | Federal Home Loan Mortgage Corporation |
GAAP | Generally accepted accounting principles in the U.S., as amended from time to time |
Goldman Sachs | Goldman Sachs Bank USA |
GSE(s) | Government-Sponsored Enterprises (Fannie Mae and Freddie Mac) |
HARP | Home Affordable Refinance Program |
homegenius | Radian’s business segment that offers an array of title, real estate and technology products and services to consumers, mortgage lenders, mortgage and real estate investors, GSEs, real estate brokers and agents |
IBNR | Losses incurred but not reported |
IIF | Insurance in force, equal to the aggregate unpaid principal balances of the underlying loans |
LAE | Loss adjustment expenses, which include the cost of investigating and adjusting losses and paying claims |
LIBOR | London Inter-bank Offered Rate |
LTV | Loan-to-value ratio, calculated as the ratio of the original loan amount to the original value of the property, expressed as a percentage |
Minimum Required Asset(s) | 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 related to expected credit performance and other factors, including the impact of the Disaster Related Capital Charge |
Model Act | Mortgage Guaranty Insurance Model Act, as issued by the National Association of Insurance Commissioners to establish minimum capital and surplus requirements for mortgage insurers |
Monthly and Other Recurring Premiums (or Recurring Premium Policies) | Insurance premiums or policies, respectively, where premiums are paid on a monthly or other installment basis, in contrast to Single Premium Policies |
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Term | Definition |
Monthly Premium Policies | Insurance policies where premiums are paid on a monthly installment basis |
Moody’s | Moody’s Investors Service |
Mortgage | Radian’s mortgage insurance and risk services business segment, which provides credit-related insurance coverage, principally through private mortgage insurance on residential first-lien mortgage loans, as well as contract underwriting and other credit risk management solutions, to mortgage lending institutions and mortgage credit investors |
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 |
NIW | New insurance written, representing the aggregate original principal amount of the mortgages underlying the Primary Mortgage Insurance |
NOL | Net operating loss; for tax purposes, accumulated during years a company reported more tax deductions than taxable income. NOLs may be carried back or carried forward a certain number of years, depending on various factors which can reduce a company’s tax liability. |
Persistency Rate | The percentage of IIF that remains in force over a period of time |
PMIERs | Private Mortgage Insurer Eligibility Requirements issued by the GSEs under oversight of the FHFA to set forth requirements an approved insurer must meet and maintain to provide mortgage guaranty insurance on loans acquired by the GSEs. The current PMIERs requirements, sometimes referred to as PMIERs 2.0, incorporate the most recent revisions to the PMIERs that became effective on March 31, 2019, as amended. |
PMIERs Cushion | Under PMIERs, Radian Guaranty’s excess of Available Assets over Minimum Required Assets |
Pool Mortgage Insurance | Insurance that provides a lender or investor protection against default on a group or “pool” of mortgages, rather than on an individual mortgage loan basis, generally subject to an aggregate exposure limit, or “stop loss,” and/or deductible applied to the initial aggregate loan balance of the entire pool, pursuant to the terms of the applicable insurance agreement |
Primary Mortgage Insurance | Insurance that provides a lender or investor protection against default on an individual mortgage loan basis, at a specified coverage percentage for each loan, pursuant to the terms of the applicable Master Policy |
QSR Program | The Single Premium QSR Program, the 2012 QSR Agreements and the 2022 QSR Agreement, collectively |
Radian | Radian Group Inc. together with its consolidated subsidiaries |
Radian Group | Radian Group Inc., our insurance holding company |
Radian Guaranty | Radian Guaranty Inc., a Pennsylvania domiciled insurance subsidiary of Radian Group and our approved insurer under the PMIERs, through which we provide mortgage insurance products and services |
Radian Mortgage Capital | Radian Mortgage Capital LLC, a Delaware limited liability company, and an indirect wholly-owned subsidiary of Radian Group, is a mortgage conduit formed to aggregate and then distribute residential mortgage loans into the capital markets through private label securitizations or sell directly to mortgage investors |
Radian Reinsurance | Radian Reinsurance Inc., a Pennsylvania domiciled insurance subsidiary of Radian Group, through which we provide mortgage credit risk insurance and reinsurance, including through participation in credit risk transactions issued by the GSEs |
Radian Title Insurance | Radian Title Insurance Inc., an Ohio domiciled insurance company and an indirect subsidiary of Radian Group, through which we offer title insurance |
RBC States | Risk-based capital states, which are those states that currently impose a statutory or regulatory risk-based capital requirement |
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; for Primary Mortgage Insurance, RIF is equal to the underlying loan unpaid principal balance multiplied by the insurance coverage percentage, whereas for Pool Mortgage Insurance, it represents the remaining exposure under the agreements |
Risk-to-capital | Under certain state regulations, a maximum ratio of net RIF calculated relative to the level of statutory capital |
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Term | Definition |
RMBS | Residential mortgage-backed securities |
RSU | Restricted stock unit |
S&P | Standard & Poor’s Financial Services LLC |
SaaS | Software-as-a-Service |
SAP | Statutory accounting principles and practices, including 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 |
Securities Act | Securities Act of 1933, as amended |
Senior Notes due 2024 | Our 4.500% unsecured senior notes due October 2024 ($450 million original principal amount) |
Senior Notes due 2025 | Our 6.625% unsecured senior notes due March 2025 ($525 million original principal amount) |
Senior Notes due 2027 | Our 4.875% unsecured senior notes due March 2027 ($450 million original principal amount) |
Single Premium NIW / IIF | NIW or IIF, respectively, on Single Premium Policies |
Single Premium Policy / Policies | Insurance policies where premiums are paid in a single payment, which 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 shortly after the loans have been originated) |
Single Premium QSR Program | The 2016 Single Premium QSR Agreement, the 2018 Single Premium QSR Agreement and the 2020 Single Premium QSR Agreement, collectively |
SOFR | Secured Overnight Financing Rate |
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 |
Surplus Note due 2027 | The $100 million 0.0% intercompany surplus note issued by Radian Guaranty to Radian Group, due December 31, 2027 |
VIE | Variable interest entity |
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, Section 21E of the Exchange Act and the 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. 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 where 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 are not guarantees of future performance, and 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:
■the health of the U.S. housing market generally and changes in economic conditions that impact the size of the insurable mortgage market, the credit performance of our insured mortgage portfolio and our business prospects, including more recently, changes resulting from inflationary pressures, the rising interest rate environment and the risk of a recession and higher unemployment rates, as well as other macroeconomic stresses such as those that may arise from the Russia-Ukraine conflict or other geopolitical events or as a result of the COVID-19 pandemic;
■changes in the way customers, investors, ratings agencies, regulators or legislators perceive our performance, financial strength and future prospects;
■Radian Guaranty’s ability to remain eligible under the PMIERs to insure loans purchased by the GSEs;
■our ability to maintain an adequate level of capital in our insurance subsidiaries to satisfy current and future regulatory requirements;
■changes in the charters or business practices of, or rules or regulations imposed by or applicable to, the GSEs or loans purchased by the GSEs, which may include changes in furtherance of housing policy objectives such as the accessibility and affordability of homeownership for low- and moderate-income borrowers and underrepresented communities, or changes in the requirements for Radian Guaranty to remain an approved insurer to the GSEs, such as changes in the PMIERs or the GSEs’ interpretation and application of the PMIERs or other applicable requirements;
■the effects of the Enterprise Capital Framework, which establishes a new regulatory capital framework for the GSEs, and which, as finalized, increases the capital requirements for the GSEs, and among other things, could impact the GSEs’ operations and pricing as well as the size of the insurable mortgage market, and which may form the basis for future changes to the PMIERs;
■changes in the current housing finance system in the United States, including the roles of the FHA, the GSEs and private mortgage insurers in this system;
■our ability to successfully execute and implement our capital plans, including our risk distribution strategy through the capital markets and traditional reinsurance markets, and to maintain sufficient holding company liquidity to meet our liquidity needs;
■our ability to successfully execute and implement our business plans and strategies, including plans and strategies that may require GSE and/or regulatory approvals and licenses, that are subject to complex compliance requirements that we may be unable to satisfy, or that may expose us to new risks, including those that could impact our capital and liquidity positions;
■uncertainty from the discontinuance of LIBOR and transition to one or more alternative benchmarks that could cause interest rate volatility and, among other things, impact our investment portfolio, cost of debt and cost of reinsurance through mortgage insurance-linked notes transactions;
■risks related to the quality of third-party mortgage underwriting and mortgage servicing;
■a decrease in the Persistency Rates of our mortgage insurance on Monthly Premium Policies;
■competition in the private mortgage insurance industry generally, and more specifically: price competition in our mortgage insurance business, including the prevalence of formulaic, granular risk-based pricing methodologies that are less transparent than historical rate-card-based pricing practices; and competition from the FHA and the U.S. Department of Veterans Affairs as well as from other forms of credit enhancement, such as GSE-sponsored alternatives to traditional mortgage insurance;
■U.S. political conditions and legislative and regulatory activity (or inactivity), including the adoption of (or failure to adopt) new laws and regulations, or changes in existing laws and regulations, or the way they are interpreted or applied;
■legal and regulatory claims, assertions, actions, reviews, audits, inquiries and investigations that could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief that could require significant expenditures, new or increased reserves or have other effects on our business;
■the amount and timing of potential payments or adjustments associated with federal or other tax examinations;
■the possibility that we may fail to estimate accurately, especially in the event of an extended economic downturn or a period of extreme market volatility and economic uncertainty, the likelihood, magnitude and timing of losses in establishing loss reserves for our mortgage insurance business or to accurately calculate and/or project our Available Assets and Minimum Required Assets under the PMIERs, which will be impacted by, among other things, the size and mix of our IIF, the level of defaults in our portfolio, the reported status of defaults in our portfolio (including whether they are subject to mortgage forbearance, a repayment plan or a loan modification trial period), the level of cash flow generated by our insurance operations and our risk distribution strategies;
■volatility in our financial results caused by changes in the fair value of our assets and liabilities, including with respect to our use of derivatives and within our investment portfolio;
■changes in GAAP or SAP rules and guidance, or their interpretation;
■risks associated with investments to grow our existing businesses, or to pursue new lines of business or new products and services, including our ability and related costs to develop, launch and implement new and innovative technologies and digital products and services, whether these products and services will receive broad customer acceptance or will disrupt existing customer relations, and additional financial risks related to these investments, including required changes in our investment, financing and hedging strategies, risks associated with our increased use of financial leverage, which could expose us to liquidity risks resulting from changes in the fair values of assets, and the risk that we may fail to achieve forecasted results which could result in lower or negative earnings contribution and/or impairment charges associated with intangible assets;
■the effectiveness and security of our information technology systems and digital products and services, including the risk that these systems, products or services fail to operate as expected or planned or expose us to cybersecurity or third-party risks, including due to malware, unauthorized access, cyber-attack, ransomware or other similar events;
■our ability to attract and retain key employees; and
■legal and other limitations on amounts we may receive from our subsidiaries, including dividends or ordinary course distributions under our internal tax- and expense-sharing arrangements.
For more information regarding these risks and uncertainties as well as certain additional risks that we face, you should refer to “Item 1A. Risk Factors” in this report and “Item 1A. Risk Factors” in our 2021 Form 10-K, and to subsequent reports and registration statements 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.
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Index to Condensed Consolidated Financial Statements
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Notes to Unaudited Condensed Consolidated Financial Statements | |
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Radian Group Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
| | | | | | | | | | | | | | |
(In thousands, except per-share amounts) | | September 30, 2022 | | December 31, 2021 |
Assets | | | | |
Investments (Notes 5 and 6) | | | | |
Fixed-maturities available for sale—at fair value (amortized cost of $5,535,532 and $5,367,729) | | $ | 4,909,232 | | | $ | 5,517,078 | |
Trading securities—at fair value (amortized cost of $146,446 and $234,382) | | 139,901 | | | 256,546 | |
Equity securities—at fair value (cost of $162,320 and $176,229) | | 145,155 | | | 184,245 | |
Short-term investments—at fair value (includes $85,777 and $48,652 of reinvested cash collateral held under securities lending agreements) | | 392,514 | | | 551,508 | |
Other invested assets—at fair value | | 5,079 | | | 4,165 | |
Total investments | | 5,591,881 | | | 6,513,542 | |
Cash | | 54,701 | | | 151,145 | |
Restricted cash | | 1,107 | | | 1,475 | |
Accrued investment income | | 38,596 | | | 32,812 | |
Accounts and notes receivable | | 174,041 | | | 124,016 | |
Reinsurance recoverables (includes $12 and $51 for paid losses) | | 30,569 | | | 67,896 | |
Deferred policy acquisition costs | | 17,920 | | | 16,317 | |
Property and equipment, net | | 75,740 | | | 75,086 | |
Goodwill and other acquired intangible assets, net (Note 7) | | 16,873 | | | 19,593 | |
Prepaid federal income taxes (Note 10) | | 526,123 | | | 354,123 | |
Other assets (Note 9) | | 458,292 | | | 483,180 | |
Total assets | | $ | 6,985,843 | | | $ | 7,839,185 | |
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Liabilities and stockholders’ equity | | | | |
Liabilities | | | | |
Unearned premiums | | $ | 285,290 | | | $ | 329,090 | |
Reserve for losses and LAE (Note 11) | | 483,664 | | | 828,642 | |
Senior notes (Note 12) | | 1,412,473 | | | 1,409,473 | |
FHLB advances (Note 12) | | 153,550 | | | 150,983 | |
Reinsurance funds withheld | | 218,777 | | | 228,078 | |
Net deferred tax liability (Note 10) | | 335,374 | | | 337,509 | |
Other liabilities | | 358,665 | | | 296,614 | |
Total liabilities | | 3,247,793 | | | 3,580,389 | |
Commitments and contingencies (Note 13) | | | | |
Stockholders’ equity | | | | |
Common stock ($0.001 par value; 485,000 shares authorized; 2022: 176,497 and 157,058 shares issued and outstanding, respectively; 2021: 194,408 and 175,421 shares issued and outstanding, respectively) | | 176 | | | 194 | |
Treasury stock, at cost (2022: 19,440 shares; 2021: 18,987 shares) | | (930,396) | | | (920,798) | |
Additional paid-in capital | | 1,513,615 | | | 1,878,372 | |
Retained earnings | | 3,656,870 | | | 3,180,935 | |
Accumulated other comprehensive income (loss) (Note 15) | | (502,215) | | | 120,093 | |
Total stockholders’ equity | | 3,738,050 | | | 4,258,796 | |
Total liabilities and stockholders’ equity | | $ | 6,985,843 | | | $ | 7,839,185 | |
See Notes to Unaudited Condensed Consolidated Financial Statements.
10
Radian Group Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands, except per-share amounts) | | 2022 | | 2021 | | 2022 | | 2021 |
Revenues | | | | | | | | |
Net premiums earned (Note 8) | | $ | 240,222 | | | $ | 249,118 | | | $ | 748,304 | | | $ | 775,746 | |
Services revenue (Note 4) | | 20,146 | | | 37,773 | | | 76,775 | | | 90,132 | |
Net investment income | | 51,414 | | | 35,960 | | | 136,567 | | | 110,502 | |
Net gains (losses) on investments and other financial instruments (includes net realized gains (losses) on investments of $(4,139), $14,246, $(8,454) and $18,330) (Note 6) | | (16,252) | | | 2,098 | | | (87,578) | | | 12,578 | |
Other income | | 659 | | | 809 | | | 1,934 | | | 2,607 | |
Total revenues | | 296,189 | | | 325,758 | | | 876,002 | | | 991,565 | |
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Expenses | | | | | | | | |
Provision for losses | | (96,964) | | | 17,305 | | | (294,640) | | | 67,096 | |
Policy acquisition costs | | 5,442 | | | 7,924 | | | 17,987 | | | 21,758 | |
Cost of services | | 18,717 | | | 30,520 | | | 66,230 | | | 75,381 | |
Other operating expenses | | 91,327 | | | 86,479 | | | 271,363 | | | 243,210 | |
Interest expense | | 21,183 | | | 21,027 | | | 62,860 | | | 63,207 | |
Amortization of other acquired intangible assets | | 1,023 | | | 862 | | | 2,721 | | | 2,587 | |
Total expenses | | 40,728 | | | 164,117 | | | 126,521 | | | 473,239 | |
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Pretax income | | 255,461 | | | 161,641 | | | 749,481 | | | 518,326 | |
Income tax provision | | 57,181 | | | 35,229 | | | 168,877 | | | 111,100 | |
Net income | | $ | 198,280 | | | $ | 126,412 | | | $ | 580,604 | | | $ | 407,226 | |
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Net income per share | | | | | | | | |
Basic | | $ | 1.22 | | | $ | 0.68 | | | $ | 3.39 | | | $ | 2.13 | |
Diluted | | $ | 1.20 | | | $ | 0.67 | | | $ | 3.34 | | | $ | 2.11 | |
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Weighted-average number of common shares outstanding—basic | | 162,506 | | | 186,741 | | | 171,116 | | | 191,357 | |
Weighted-average number of common and common equivalent shares outstanding—diluted | | 164,738 | | | 188,042 | | | 173,618 | | | 192,902 | |
See Notes to Unaudited Condensed Consolidated Financial Statements.
11
Radian Group Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Net income | | $ | 198,280 | | | $ | 126,412 | | | $ | 580,604 | | | $ | 407,226 | |
Other comprehensive income (loss), net of tax (Note 15) | | | | | | | | |
Unrealized holding gains (losses) on investments arising during the period for which an allowance for expected losses has not been recognized | | (176,391) | | | (23,394) | | | (630,348) | | | (106,286) | |
Less: Reclassification adjustment for net gains (losses) on investments included in net income | | | | | | | | |
Net realized gains (losses) on disposals and non-credit related impairment losses | | (3,281) | | | 3,238 | | | (7,956) | | | 4,490 | |
Net decrease (increase) in expected credit losses | | — | | | — | | | — | | | 725 | |
Net unrealized gains (losses) on investments | | (173,110) | | | (26,632) | | | (622,392) | | | (111,501) | |
Other adjustments to comprehensive income (loss), net | | — | | | — | | | 84 | | | — | |
Other comprehensive income (loss), net of tax | | (173,110) | | | (26,632) | | | (622,308) | | | (111,501) | |
Comprehensive income (loss) | | $ | 25,170 | | | $ | 99,780 | | | $ | (41,704) | | | $ | 295,725 | |
See Notes to Unaudited Condensed Consolidated Financial Statements.
12
Radian Group Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Common Stockholders’ Equity (Unaudited)
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Common stock | | | | | | | | |
Balance, beginning of period | | $ | 186 | | | $ | 207 | | | $ | 194 | | | $ | 210 | |
Issuance of common stock under incentive and benefit plans | | — | | | — | | | 2 | | | 1 | |
Shares repurchased under share repurchase program (Note 14) | | (10) | | | (7) | | | (20) | | | (11) | |
Balance, end of period | | 176 | | | 200 | | | 176 | | | 200 | |
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Treasury stock | | | | | | | | |
Balance, beginning of period | | (930,284) | | | (920,225) | | | (920,798) | | | (910,115) | |
Repurchases of common stock under incentive plans | | (112) | | | (130) | | | (9,598) | | | (10,240) | |
Balance, end of period | | (930,396) | | | (920,355) | | | (930,396) | | | (920,355) | |
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Additional paid-in capital | | | | | | | | |
Balance, beginning of period | | 1,698,490 | | | 2,161,857 | | | 1,878,372 | | | 2,245,897 | |
Issuance of common stock under incentive and benefit plans | | 1,525 | | | 1,007 | | | 3,163 | | | 2,944 | |
Share-based compensation | | 7,714 | | | 8,282 | | | 31,280 | | | 20,996 | |
Shares repurchased under share repurchase program (Note 14) | | (194,114) | | | (158,276) | | | (399,200) | | | (256,967) | |
Balance, end of period | | 1,513,615 | | | 2,012,870 | | | 1,513,615 | | | 2,012,870 | |
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Retained earnings | | | | | | | | |
Balance, beginning of period | | 3,491,675 | | | 2,913,138 | | | 3,180,935 | | | 2,684,636 | |
Net income | | 198,280 | | | 126,412 | | | 580,604 | | | 407,226 | |
Dividends and dividend equivalents declared | | (33,085) | | | (26,553) | | | (104,669) | | | (78,865) | |
Balance, end of period | | 3,656,870 | | | 3,012,997 | | | 3,656,870 | | | 3,012,997 | |
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Accumulated other comprehensive income (loss) | | | | | | | | |
Balance, beginning of period | | (329,105) | | | 178,856 | | | 120,093 | | | 263,725 | |
Net unrealized gains (losses) on investments, net of tax | | (173,110) | | | (26,632) | | | (622,392) | | | (111,501) | |
Other adjustments to other comprehensive income (loss) | | — | | | — | | | 84 | | | — | |
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Balance, end of period | | (502,215) | | | 152,224 | | | (502,215) | | | 152,224 | |
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Total stockholders’ equity | | $ | 3,738,050 | | | $ | 4,257,936 | | | $ | 3,738,050 | | | $ | 4,257,936 | |
See Notes to Unaudited Condensed Consolidated Financial Statements.
13
Radian Group Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
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| | Nine Months Ended September 30, |
(In thousands) | | 2022 | | 2021 |
Cash flows from operating activities | | | | |
Net cash provided by (used in) operating activities | | $ | 282,148 | | | $ | 403,304 | |
| | | | |
Cash flows from investing activities | | | | |
Proceeds from sales of: | | | | |
Fixed-maturities available for sale | | 395,976 | | | 536,387 | |
Trading securities | | 8,829 | | | 7,952 | |
Equity securities | | 7,645 | | | 29,289 | |
Proceeds from redemptions of: | | | | |
Fixed-maturities available for sale | | 663,255 | | | 917,027 | |
Trading securities | | 78,462 | | | 11,703 | |
Purchases of: | | | | |
Fixed-maturities available for sale | | (1,238,636) | | | (1,413,445) | |
| | | | |
Equity securities | | (23,225) | | | (102,956) | |
Sales, redemptions and (purchases) of: | | | | |
Short-term investments, net | | 168,933 | | | (17,474) | |
Other assets and other invested assets, net | | (534) | | | 6,253 | |
| | | | |
Additions to property and equipment | | (12,149) | | | (8,720) | |
| | | | |
Net cash provided by (used in) investing activities | | 48,556 | | | (33,984) | |
| | | | |
Cash flows from financing activities | | | | |
Dividends and dividend equivalents paid | | (103,721) | | | (78,165) | |
| | | | |
| | | | |
Issuance of common stock | | 1,118 | | | 1,225 | |
Repurchases of common stock | | (387,111) | | | (251,482) | |
Credit facility commitment fees paid | | (574) | | | (710) | |
Change in secured borrowings, net (with terms three months or less) | | 60,204 | | | 38,241 | |
Proceeds from secured borrowings (with terms greater than three months) | | 26,568 | | | 32,000 | |
Repayments of secured borrowings (with terms greater than three months) | | (24,000) | | | (48,000) | |
| | | | |
Net cash provided by (used in) financing activities | | (427,516) | | | (306,891) | |
| | | | |
| | | | |
Increase (decrease) in cash and restricted cash | | (96,812) | | | 62,429 | |
Cash and restricted cash, beginning of period | | 152,620 | | | 94,146 | |
Cash and restricted cash, end of period | | $ | 55,808 | | | $ | 156,575 | |
See Notes to Unaudited Condensed Consolidated Financial Statements.
14
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| Radian Group Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements
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1. Description of Business
We are a diversified mortgage and real estate business, providing both credit-related mortgage insurance coverage and an array of other mortgage, risk, title, real estate and technology products and services. We have two reportable business segments—Mortgage and homegenius.
Mortgage
Our Mortgage segment provides credit-related insurance coverage, principally through private mortgage insurance on residential first-lien mortgage loans, as well as contract underwriting and other credit risk management 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 mortgage investors, as well as other beneficiaries such as the GSEs, 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, almost all of which are currently sold to the GSEs.
Our total direct primary mortgage IIF and RIF were $259.1 billion and $65.3 billion, respectively, as of September 30, 2022, compared to $246.0 billion and $60.9 billion, respectively, as of December 31, 2021. In addition to providing private mortgage insurance, we have participated 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 $276.2 million as of September 30, 2022, compared to $417.7 million as of December 31, 2021.
The GSEs and state insurance regulators impose various capital and financial requirements on our mortgage insurance subsidiaries. These include the PMIERs financial requirements as well as risk-to-capital and other risk-based capital measures and surplus requirements. Failure to comply with these capital and financial requirements may limit the amount of insurance that our mortgage insurance subsidiaries write, or may prohibit them from writing insurance altogether. The GSEs and state insurance regulators possess significant discretion with respect to our mortgage insurance subsidiaries and most aspects of their business. See Note 16 for additional information on PMIERs and other regulatory information.
homegenius
Our homegenius segment is primarily a fee-for-service business that offers an array of products and services to market participants across the real estate value chain. Our homegenius products and services include title, real estate and technology products and services offered primarily to consumers, mortgage lenders, mortgage and real estate investors, GSEs, real estate brokers and agents. These products and services help lenders, investors, consumers and real estate agents evaluate, manage, monitor, acquire and sell properties. They include SaaS solutions and platforms, as well as managed services, such as real estate owned asset management, single family rental services and real estate valuation services. In addition, we provide title insurance and non-insurance title, closing and settlement services to mortgage lenders, GSEs and mortgage investors, as well as directly to consumers for residential mortgage loans.
See Note 4 for additional information about our reportable segments and All Other business activities.
Risks and Uncertainties
In assessing the Company’s current financial condition and developing forecasts of future operations, management has made significant judgments and estimates with respect to potential factors impacting our financial and liquidity position. These judgments and estimates are subject to risks and uncertainties that could affect amounts reported in our financial statements in future periods and that could cause actual results to be materially different from our estimates, including as a result of macroeconomic stresses such as inflation, slower economic growth and higher levels of unemployment.
The U.S. economy is currently experiencing a high rate of inflation and slower economic growth, with annual inflation reaching a 40-year high in September 2022. Recent actions taken by the U.S. Federal Reserve to increase interest rates in response to these inflationary pressures led to a sharp and significant increase in mortgage interest rates during the first nine months of 2022. The U.S. Federal Reserve raised rates further in the fourth quarter of 2022 and has signaled that it expects to continue to increase rates in future periods. While we expect these interest rate increases to continue to negatively impact certain aspects of our results, including through lower NIW, lower homegenius revenues and lower investment fair values, we also expect to benefit from the rate increases due to higher Persistency Rates that will favorably impact our IIF, as well as through the recognition of higher net investment income. The current economic conditions have negatively impacted the U.S. housing market, which has experienced decreasing home prices in recent months in many markets, significantly reduced
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| Radian Group Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements
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refinance activity and a reduced amount of new purchase transactions. Further, risk of a recession and the likelihood of an increase in unemployment rates increase the likelihood that we will experience greater default activity and lower levels of Cures in our mortgage insurance portfolio.
2. Significant Accounting Policies
Basis of Presentation
Our condensed consolidated financial statements are prepared in accordance with GAAP and include the accounts of Radian Group Inc. and its 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.
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.
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 (loss) and cash flows for the interim periods presented. Such adjustments are of a normal recurring nature. The year-end condensed consolidated balance sheet data was derived from our audited financial statements, but does not include all disclosures required by GAAP.
To fully understand the basis of presentation, these interim financial statements and related notes contained herein should be read in conjunction with the audited financial statements and notes thereto included in our 2021 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.
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
See Note 2 of Notes to Consolidated Financial Statements in our 2021 Form 10-K for information regarding other significant accounting policies. There have been no significant changes in our significant accounting policies from those discussed in our 2021 Form 10-K.
Recent Accounting Pronouncements
Accounting Standards Not Yet Adopted
In August 2018, the FASB issued ASU 2018-12, Financial Services—Insurance—Targeted Improvements to the Accounting for Long-Duration Contracts. The new standard: (i) requires that assumptions used to measure the liability for future policy benefits be reviewed at least annually; (ii) defines and simplifies the measurement of market risk benefits; (iii) simplifies the amortization of deferred acquisition costs; and (iv) enhances the required disclosures about long-duration contracts. This update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. We continue to evaluate the impact the new accounting guidance will have on our financial statements and disclosures but do not expect the adoption of these amendments to have a material impact on our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform—Facilitation of the Effects of Reference Reform on Financial Reporting. This new guidance provides optional expedients and exceptions for applying GAAP requirements to investments, derivatives, or other transactions affected by reference rate reform such as those that impact the assessment of contract modifications. The amendments in this update are optional and may be elected from the date of issuance through December 31, 2022, as reference rate reform activities occur. We continue to monitor the impact the discontinuance of LIBOR
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| Radian Group Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements
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and the new accounting guidance will have on our financial statements and disclosures but do not expect the adoption of these amendments to have a material impact on our consolidated financial statements.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. In addition, this update introduces new disclosure requirements for equity securities subject to contractual sale restrictions measured at fair value. The amendments in this update are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this ASU to have a material effect on our consolidated operating results or financial position.
3. 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 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 to our share-based compensation arrangements.
The calculation of basic and diluted net income per share is as follows.
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Net income per share |
| | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands, except per-share amounts) | | 2022 | | 2021 | | 2022 | | 2021 |
Net income—basic and diluted | | $ | 198,280 | | | $ | 126,412 | | | $ | 580,604 | | | $ | 407,226 | |
| | | | | | | | |
Average common shares outstanding—basic | | 162,506 | | | 186,741 | | | 171,116 | | | 191,357 | |
Dilutive effect of share-based compensation arrangements | | 2,232 | | | 1,301 | | | 2,502 | | | 1,545 | |
Adjusted average common shares outstanding—diluted | | 164,738 | | | 188,042 | | | 173,618 | | | 192,902 | |
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Net income per share | | | | | | | | |
Basic | | $ | 1.22 | | | $ | 0.68 | | | $ | 3.39 | | | $ | 2.13 | |
Diluted | | $ | 1.20 | | | $ | 0.67 | | | $ | 3.34 | | | $ | 2.11 | |
4. Segment Reporting
We have two strategic business units that we manage separately—Mortgage and homegenius. Our Mortgage segment derives its revenue from mortgage insurance and other mortgage and risk services, including contract underwriting solutions provided to mortgage lending institutions and mortgage credit investors. Our homegenius segment offers an array of title, real estate and technology products and services to consumers, mortgage lenders, mortgage and real estate investors, GSEs, real estate brokers and agents.
In addition, we report as All Other activities that include: (i) income (losses) from assets held by Radian Group, our holding company; (ii) related general corporate operating expenses not attributable or allocated to our reportable segments; and (iii) certain investments in new business opportunities, including activities and investments associated with Radian Mortgage Capital, and other immaterial activities.
We allocate corporate operating expenses to both reportable segments based primarily 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.
With the primary exception of goodwill and other acquired intangible assets, which all relate to our homegenius segment, and are reviewed as part of our annual goodwill impairment assessment, we do not manage assets by segment.
See Note 1 for additional details about our Mortgage and homegenius businesses.
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| Radian Group Inc. and Subsidiaries Notes to Unaudited Condensed Consolidated Financial Statements
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Adjusted Pretax Operating Income (Loss)
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) excluding the effects of: (i) net gains (losses) on investments and other financial instruments, except for certain investments attributable to our reportable segments; (ii) gains (losses) 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 impairment of internal-use software, gains (losses) from the sale of lines of business and acquisition-related income and expenses. See Note 4 of Notes to Consolidated Financial Statements in our 2021 Form 10-K for detailed information regarding items excluded from adjusted pretax operating income (loss), including the reasons for their treatment.
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: (i) not viewed as part of the operating performance of our primary activities or (ii) not expected to result in an economic impact equal to the amount reflected in pretax income (loss).
The reconciliation of adjusted pretax operating income (loss) for our reportable segments to consolidated pretax income (loss) is as follows.