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RADIAN GROUP INC – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
Edgar Glimpses
The following analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in Item 8 of this Annual Report on Form 10-K. Certain terms and acronyms used throughout this report are defined in the Glossary of Abbreviations and Acronyms included as part of this report. Some of the information in this discussion and analysis or included elsewhere in this report, including information with respect to our projections, plans and strategy for our business, are forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under "Cautionary Note Regarding Forward-Looking Statements-Safe Harbor Provisions" and in the Risk Factors detailed in Item 1A of this Annual Report on Form 10-K.
Index to Item 7
Item Page Overview 65 Key Factors Affecting Our Results 66 Mortgage Insurance Portfolio 71 Results of Operations-Consolidated 77 Results of Operations-Mortgage 81 Results of Operations-homegenius 87 Results of Operations-All Other 88 Liquidity and Capital Resources 89 Critical Accounting Estimates 95
Overview
We are a diversified mortgage and real estate business with two reportable
business segments-Mortgage and homegenius.
Our Mortgage segment aggregates, manages and distributesU.S. mortgage credit risk on behalf of mortgage lending institutions and mortgage credit investors, principally through private mortgage insurance on residential first-lien mortgage loans, and also provides other credit risk management, contract underwriting and fulfillment solutions to our customers. 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 and real estate brokers and agents. See Note 4 of Notes to Consolidated Financial Statements for additional information about our reportable segments, including the renaming of the homegenius segment in 2021 to align with updates to our brand strategy. See "Key Factors Affecting Our Results" for information about current business conditions and other factors that affect the performance of our Mortgage and homegenius businesses. COVID-19 Impacts The onset of the COVID-19 pandemic created periods of significant economic disruption, high unemployment, volatility and disruption in financial markets and required adjustments in the housing finance system and real estate markets. In addition, the pandemic has resulted in travel restrictions, temporary business shutdowns, and stay-at-home, quarantine, and similar orders, all of which contributed to a rapid and significant rise in unemployment that peaked in the second quarter of 2020. Many of these restrictions have been lifted and businesses have been reopening, but numerous limitations, such as extensive health and safety measures and overall supply constraints and labor shortages, continue to limit operations. Further, while unemployment levels have declined from their peak, they continue to remain elevated compared to pre-pandemic levels, and may remain elevated or may rise depending on the pandemic's scope, severity and duration, and its resulting impact on the economy. See Note 1 of Notes to Consolidated Financial Statements and "Item 1A. Risk Factors-The COVID-19 65
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pandemic adversely impacted us and, in the future, could again adversely affect
our business, results of operations or financial condition."
As a result of the COVID-19 pandemic and its impact on the economy, including the significant increase in unemployment, we experienced a material increase in new defaults in 2020, substantially all of which related to defaults of loans subject to forbearance programs implemented in response to the COVID-19 pandemic. Beginning in the second quarter of 2020, the increase in the number of new mortgage defaults resulting from the COVID-19 pandemic had a negative effect on our results of operations and our reserve for losses. However, more recent trends in Cures have been more favorable than original expectations, resulting in favorable loss reserve development in 2021. See Note 11 for details on reserve development trends. Our primary default rate was 2.9% atDecember 31, 2021 , down from a peak of 6.5% atJune 30, 2020 reflecting the material increase in new defaults in the three months endedJune 30, 2020 . Favorable trends in the number of new defaults and Cures were the primary drivers of the decline in our default inventory and default rate, compared to their peaks atJune 30, 2020 . The number, timing and duration of new defaults and, in turn, the number of defaults that ultimately result in claims will depend on a variety of factors, including the scope, severity and duration of the COVID-19 pandemic, the resulting impact on the economy, including with respect to unemployment and housing prices, and the effectiveness of forbearance and other government efforts such as financial stimulus programs, to provide long-term economic and individual relief to assist homeowners. Consequently, the number and rate of total defaults is difficult to predict and will depend on the foregoing and other factors, including the number and timing of Cures and claims paid and the net impact on IIF from our Persistency Rate and future NIW. See "Item 1A. Risk Factors" for additional discussion of these factors and other risks and uncertainties. Increases in new defaults may affect our ability to remain compliant with the PMIERs financial requirements. Once two missed payments have occurred on an insured loan, the PMIERs characterize the loan as "non-performing" and require us to establish an increased Minimum Required Asset factor for that loan regardless of the reason for the missed payments. During the COVID-19 Crisis Period, pursuant to the COVID-19 Amendment to the PMIERs, a Disaster Related Capital Charge that effectively reduces the Minimum Required Asset factor by 70% has been applied nationwide to all COVID-19 Defaulted Loans. For more information about the application of the Disaster Related Capital Charge see "Item 1. Business-Regulation-Federal Regulation-GSE Requirements for Mortgage Insurance Eligibility" for more information. The reduction in Radian Guaranty's Minimum Required Assets from this Disaster Related Capital Charge was approximately$300 million as ofDecember 31, 2021 , compared to approximately$650 million atDecember 31, 2020 . Inclusive of this benefit in both periods, Radian Guaranty's PMIERs Cushion increased to$2.1 billion as ofDecember 31, 2021 , from$1.3 billion as ofDecember 31, 2020 . While we expect Radian Guaranty to continue to maintain its eligibility status with the GSEs, there are possible scenarios in which the number of new defaults could impact Radian Guaranty's ability to comply with the PMIERs financial requirements. See "Item 1A. Risk Factors-Radian Guaranty may fail to maintain its eligibility status with the GSEs, and the additional capital required to support Radian Guaranty's eligibility could reduce our available liquidity." In response to the COVID-19 pandemic, we raised additional capital, temporarily suspended purchases under our share repurchase program, aligned our business with the temporary origination and servicing guidelines announced by the GSEs, and made adjustments to our pricing and our underwriting guidelines to account for the increased risk and uncertainty associated with the COVID-19 pandemic. In addition, we took a number of actions to focus on protecting and supporting our workforce, while continuing to serve our customers effectively and support our communities. We activated our business continuity program by transitioning to a work-from-home virtual workforce model with certain essential activities supported by limited staff in office environments that comply with CDC guidelines and applicable state and local requirements. Based on our successful transition to a virtual work environment, we made the decision to reduce our office space and exit our former corporate headquarters inPhiladelphia . See Note 9 of Notes to Consolidated Financial Statements for additional information on our lease right-of-use assets. In order to support our communities during this unprecedented time, we have, among other things, pledged financial support to certain charitable organizations focused on assisting first responders, health care workers and their families. Further actions to respond to the COVID-19 pandemic and comply with governmental regulations and government and GSE programs adopted in response to the pandemic may be necessary as conditions continue to evolve. Despite the risks and uncertainties posed by COVID-19, we believe that the steps we have taken in recent years, such as improving our debt maturity profile, enhancing our financial flexibility, implementing greater risk-based granularity into our pricing methodologies and increasing our use of risk distribution strategies to lower the risk profile and financial volatility of our mortgage insurance portfolio, has helped position the Company to better withstand the negative effects from macroeconomic stresses such as those that resulted from the COVID-19 pandemic.
Key Factors Affecting Our Results
The following sections discuss certain key drivers affecting our Mortgage and
homegenius businesses, as well as other key factors affecting our results.
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Mortgage
IIF and Related Drivers
Our IIF is one of the primary drivers of our future premiums that we expect to
earn over time. Although not reflected in the current period financial
statements, nor in our reported book value, we expect our IIF to generate
substantial earnings in future periods, due to the high credit quality of our
current mortgage insurance portfolio and expected Persistency Rate over multiple
years.
Based on the current composition of our mortgage insurance portfolio, with
Monthly Premium Policies comprising a larger proportion of our total portfolio
than Single Premium Policies, an increase or decrease in IIF generally has a
corresponding impact on premiums earned. Cancellations of our insurance policies
as a result of prepayments and other reductions of IIF, such as Rescissions of
coverage and claims paid, generally have a negative effect on premiums earned
over time. See "Mortgage Insurance Portfolio-Insurance and Risk in Force" for
more information about the levels and characteristics of our IIF.
The ultimate profitability of our mortgage insurance business is affected by the
impact of mortgage prepayment speeds on the mix of business we write. The
measure for assessing the impact of policy cancellations on our IIF is our
Persistency Rate, defined as the percentage of IIF that remains in force over a
period of time. Assuming all other factors remain constant, over the life of the
policies, prepayment speeds have an inverse impact on IIF and the expected
revenue from our Monthly Premium Policies. Slower loan prepayment speeds,
demonstrated by a higher Persistency Rate, result in more IIF remaining in
place, providing increased revenue from Monthly Premium Policies over time as
premium payments continue. Earlier than anticipated loan prepayments,
demonstrated by a lower Persistency Rate, reduce IIF and the revenue from our
Monthly Premium Policies. Among other factors, prepayment speeds may be affected
by changes in interest rates and other macroeconomic factors. A rising interest
rate environment generally will reduce refinancing activity and result in lower
prepayments, whereas a declining interest rate environment generally will
increase the level of refinancing activity and therefore increase prepayments.
In contrast to Monthly Premium Policies, when Single Premium Policies are
cancelled by the insured because the loan has been paid off or otherwise, we
accelerate the recognition of any remaining unearned premiums, net of any
refunds that may be owed to the borrower. Although these cancellations reduce
IIF, assuming all other factors remain constant, the profitability of our Single
Premium business increases when Persistency Rates are lower. As a result, we
believe that writing a mix of Single Premium Policies and Monthly Premium
Policies has the potential to moderate the overall impact on our results if
actual prepayment speeds are significantly different from expectations. However,
the impact of this moderating effect may be affected by the amount of
reinsurance we obtain on portions of our portfolio, with the Single Premium QSR
Program currently reducing the proportion of retained Single Premium Policies in
our portfolio.
NIW and Related Drivers
NIW increases our IIF and our premiums written and earned. NIW is affected by
the overall size of the mortgage origination market, the penetration percentage
of private mortgage insurance into the overall mortgage origination market and
our market share of the private mortgage insurance market. The overall mortgage
origination market is influenced by macroeconomic factors such as household
formation, household composition, home affordability, interest rates, housing
markets in general, credit availability and the impact of various legislative
and regulatory actions that may influence the housing and mortgage finance
industries. The penetration percentage of private mortgage insurance is mainly
influenced by: (i) the competitiveness of private mortgage insurance for GSE
conforming loans compared to FHA and VA insured loans and (ii) the relative
percentage of mortgage originations that are for purchased homes versus
refinances. We believe, for example, that better execution for borrowers with
higher FICO scores, lender preference and the inability to cancel FHA insurance
for certain loans are factors that currently provide a competitive advantage for
private mortgage insurers. See "Mortgage Insurance Portfolio-New Insurance
Written."
Private mortgage insurance penetration in the insurable market has generally
been significantly higher on new mortgages for purchased homes than on the
refinance of existing mortgages, because average LTVs are typically higher on
home purchases and therefore these lower down payment loans are more likely to
require mortgage insurance. Radian Guaranty's share of the private mortgage
insurance market is influenced by competition in that market. See "Item 1.
Business-Competition."
The following charts provide a historical perspective on certain key market
drivers, including:
?the mortgage origination volume from home purchases and refinancings; and
?private mortgage insurance penetration as a percentage of the mortgage
origination market.
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Mortgage origination market (1)
[[Image Removed: rdn-20211231_g2.jpg]]
Origination Market ($
in billions) Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021
¢ Refinance $120 $193 $350 $435 $412 $699 $773 $876 $858 $645 $579 $472
¢ Purchase $230 $365 $371 $319 $284 $353 $466 $444 $354 $492 $505 $454
Total $350 $558 $721 $754 $696 $1,052 $1,239 $1,320 $1,212 $1,137 $1,084 $926
Private mortgage insurance penetration of mortgage origination market (1)
[[Image Removed: rdn-20211231_g3.jpg]]
Market
Penetration (%) Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021
ò Purchase (2) 23.5% 23.2% 25.1% 24.1% 22.7% 24.3% 26.9% 27.0% 27.2% 26.2% 26.6% 26.3%
ò Overall (2) 17.0% 17.3% 16.4% 14.5% 13.5% 14.0% 14.6% 13.4% 12.2% 13.9% 13.7% 14.0%
ò Refinance (2) 4.6% 6.1% 7.1% 7.5% 7.2% 8.9% 7.1% 6.5% 6.1% 4.5% 2.5% 2.1%
(1)Based on actual dollars generated in the credit enhanced market as reported
by HUD and publicly reported industry information. Mortgage originations are
based upon the average of originations reported by the Mortgage Bankers
Association , Freddie Mac and Fannie Mae in their most recent published industry
reports.
(2)Excluding originations under HARP.
Premiums
The premium rates we charge for our insurance are based on a number of borrower, loan and property characteristics. The mortgage insurance industry is highly competitive and private mortgage insurers compete with each other and with the FHA andVA with respect to price and other factors. We expect price competition to continue throughout the mortgage insurance industry and future price changes from private mortgage insurers or the FHA could impact our future premium rates or our ability to compete. Our pricing is risk-based and is intended to generally align with the capital requirements under the PMIERs, while also considering pricing trends within the private mortgage insurance industry. As a result, our pricing is expected to generate relatively consistent returns across the credit spectrum and to provide stable expected loss ratios regardless of further credit expansion or contraction. In developing our pricing strategies, we monitor various competitive and economic factors while seeking to maximize the long-term economic value of our portfolio by balancing credit risk, profitability and volume 68
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considerations, and aim to achieve an overall risk-adjusted rate of return on
capital given our modeled performance expectations. Our actual portfolio returns
will depend on a number of factors, including economic conditions, the mix of
NIW that we are able to write, our pricing, the amount of reinsurance we use and
the level of capital required under the PMIERs financial requirements.
Our pricing actions gradually affect our results over time, as existing IIF
cancels and is replaced with NIW at current pricing. See "Liquidity and Capital
Resources-Mortgage" and "Mortgage Insurance Portfolio-New Insurance Written" for
additional information.
As described above, premiums on our mortgage insurance products are generally
paid either on an installment basis, pursuant to Monthly Premium Policies, or in
a single payment at the time of loan origination, pursuant to Single Premium
Policies. See "Item 1. Business-Mortgage-Pricing-Primary Mortgage Insurance
Premiums." Our expected premium yield on our Single Premium Policies is lower
than on our Monthly Premium Policies because our premium rates for the life of
the policy are generally lower for our Single Premium Policies. However, as
discussed above, the ultimate profitability of Single Premium Policies may be
higher or lower than expected due to the impact of prepayment speeds. See "-IIF
and Related Drivers" above.
Approximately 78.6% of the loans in our total Primary Mortgage Insurance
portfolio at December 31, 2021 are Monthly Premium Policies that provide a level
monthly premium for the first 10 years of the policy, followed by a lower level
monthly premium thereafter. For loans that have been refinanced under HARP, the
initial 10-year period is reset. Generally, a borrower is able to cancel the
policy when the LTV reaches 80% of the original value, and the policy
automatically cancels on the date the LTV is scheduled to reach 78% of the
original value. As a result, the volume of loans that remain insured after 10
years and would be subject to the premium reset is generally not material in
relation to the total loans originated. However, to the extent the volume of
loans resetting from year to year varies significantly, the trend in earned
premiums may also vary.
Losses
Incurred losses represent the estimated future claim payments on newly defaulted insured loans as well as any change in our claim estimates for existing defaults, including changes in the estimates we use to determine our expected losses, and estimates with respect to the frequency, magnitude and timing of anticipated losses on defaulted loans. Other factors influencing incurred losses include: ?The mix of credit characteristics in our total direct RIF (e.g., loans with higher risk characteristics, or loans with layered risk that combine multiple higher-risk attributes within the same loan, generally result in more delinquencies and claims). See "Mortgage Insurance Portfolio-Insurance and Risk in Force;"
?The average loan size (relatively higher priced properties with larger average
loan amounts may result in higher incurred losses);
?The percentage of coverage on insured loans (higher percentages of insurance
coverage generally correlate with higher incurred losses) and the presence of
structural mitigants such as deductibles or stop losses;
?Changes in housing values (declines in housing values generally make it more
difficult for borrowers to sell a home to avoid default or for the property to
be sold to mitigate a claim, and also may negatively affect a borrower's
willingness to continue to make mortgage payments when the home value is less
than the mortgage balance; conversely, increases in housing values tend to
reduce the level of defaults as well as make it more likely that foreclosures
will result in the loan being satisfied);
?The distribution of claims over the life cycle of a portfolio (historically,
claims are relatively low during the first two years after a loan is originated
and then increase over a period of several years before declining; however,
several factors can impact and change this cycle, including the economic
environment, the quality of the underwriting of the loan, characteristics of the
mortgage loan, the credit profile of the borrower, housing prices and
unemployment rates); and
?Our ability to mitigate potential losses through Rescissions, Claim Denials,
cancellations and Claim Curtailments on claims submitted to us. These actions
all reduce our incurred losses. However, if these Loss Mitigation Activities are
successfully challenged at rates that are higher than expected or we agree to
settle disputes related to our Loss Mitigation Activities, our incurred losses
will increase. We may enter into specific agreements that govern activities such
as claims decisions, claim payments, Loss Mitigation Activities and insurance
coverage. As our portfolio originated through 2008 has become a smaller
percentage of our overall insured portfolio, there has been a decrease in the
amount of Loss Mitigation Activity with respect to the claims we receive, and we
expect this trend to continue, particularly given the limitations on our Loss
Mitigation Activities imposed in both the 2014 Master Policy and 2020 Master
Policy. See Note 2 of Notes to Consolidated Financial Statements for additional
information on Loss Mitigation Activities and "Item 1A. Risk Factors-Our Loss
Mitigation Activity is not expected to mitigate mortgage insurance losses to the
same extent as in prior years; Loss Mitigation Activity could continue to
negatively impact our customer relationships."
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Risk Distribution
We use third-party reinsurance in our mortgage insurance business to manage
capital and risk in an effort to optimize the amounts and types of capital and
risk distribution deployed against insured risk. See "-IIF and Related Drivers"
above. Currently, we distribute risk in our mortgage insurance portfolio through
quota share and excess-of-loss reinsurance programs.
When we enter into a quota share reinsurance agreement, the reinsurer receives a
premium and, in exchange, agrees to insure an agreed upon portion of incurred
losses. These arrangements reduce our earned premiums but also reduce our net
RIF, which provides capital relief, including under the PMIERs financial
requirements. Our incurred losses are reduced by any incurred losses ceded in
accordance with the reinsurance agreement, and we often receive ceding
commissions from the reinsurer as part of the transaction, which, in turn,
reduce our reported operating expenses and policy acquisition costs.
Our Excess-of-Loss Program primarily accesses the capital markets (through the
Eagle Re Issuers' issuance of mortgage insurance-linked notes). Our
Excess-of-Loss Program reduces our earned premiums, but also reduces our net
RIF, PMIERs financial requirements and incurred losses, which are allocated in
accordance with the structure of the transaction. The Eagle Re Issuers are
special purpose VIEs that are not consolidated in our consolidated financial
statements because we do not have the unilateral power to direct those
activities that are significant to their economic performance.
Our use of risk distribution structures has reduced our required capital and
enhanced our projected return on capital, and we expect these structures to
provide a level of credit protection in periods of economic stress. As of
December 31, 2021 , 73% of our primary RIF is subject to a form of risk
distribution and our estimated reinsurance recoverables related to our mortgage
insurance portfolio was $66.7 million . See Note 8 of Notes to Consolidated
Financial Statements for more information about our reinsurance arrangements,
including the total assets and liabilities of the Eagle Re Issuers.
Investment Income
Investment income is determined primarily by the investment balances held and
the average yield on our overall investment portfolio.
Other Operating Expenses
Our other operating expenses are affected by the amount of our NIW, as well as the amount of IIF. Our other operating expenses may also be affected by the impact of performance on our incentive compensation programs, as a result of our pay-for-performance approach to compensation that is based on the level of achievement of both short-term and long-term goals.
homegenius
Premiums
We earn net premiums on title insurance throughRadian Title Insurance . Demand for title insurance may be impacted by general marketplace competition in the real estate title industry, coupled with housing market related conditions such as new home sales, the sizes of the real estate purchase and refinance markets and interest rate fluctuations.
Services Revenue
Our homegenius segment is dependent upon overall activity in the mortgage, real
estate and mortgage finance markets, as well as the overall health of the
related industries. Due, in part, to the transactional nature of the business,
revenues for our homegenius segment are subject to fluctuations from period to
period, including seasonal fluctuations that reflect the activities in these
markets. Sales volume is also affected by the number of competing companies and
alternative products offered in the market. We believe the diversity of services
we offer has the potential to produce fee income from the homegenius segment
throughout various mortgage finance environments and economic cycles, although
market conditions can significantly impact the mix and amount of fee income we
generate in any particular period. See "Item 1. Business-homegenius-homegenius
Business Overview" for more information on our homegenius services.
The homegenius segment is dependent on a limited number of large customers that
represent a significant portion of its revenues. Generally, our contracts do not
contain volume commitments and may be terminated by clients at any time. While
access to Radian Guaranty's mortgage insurance customer base provides additional
opportunities to expand the homegenius segment's existing customers, an
unexpected loss of a major customer could significantly impact the level of
homegenius revenue. Access to Radian Guaranty's mortgage insurance customer base
provides additional opportunities to expand the homegenius segment's existing
customers.
Our homegenius revenue is primarily generated under fixed-price contracts. Under
fixed-price contracts, we agree to perform the specified services and
deliverables for a predetermined per-unit price. To the extent our actual direct
and allocated indirect costs decrease or increase from the estimates upon which
the price was negotiated, we will generate more or less profit, respectively, or
could incur a loss. See Note 2 of Notes to Consolidated Financial Statements for
more information on revenue recognition policies for our homegenius segment.
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Cost of Services
Our cost of services is primarily affected by our level of services revenue and
the number of employees providing products and services for our homegenius
businesses. Our cost of services primarily consists of employee compensation and
related payroll benefits, and to a lesser extent, other costs of providing
services such as travel and related expenses incurred in providing client
services, costs paid to outside vendors, data acquisition costs and other
compensation-related expenses to maintain software application platforms that
directly support our businesses. The level of these costs may fluctuate as
market rates of compensation change, or if there is decreased availability or a
loss of qualified employees.
Operating Expenses
Our operating expenses primarily consist of salaries and benefits not classified
as cost of services because they are related to employees, such as sales and
corporate employees, who are not directly involved in providing client services.
Operating expenses also include other selling, general and administrative
expenses, depreciation and allocations of corporate general and administrative
expenses.
See "Item 1. Business-homegenius-homegenius Business Overview" and Note 1 of
Notes to Consolidated Financial Statements for additional information regarding
the homegenius segment.
Other Factors Affecting Consolidated Results
In addition, the following items also may impact our consolidated results in the ordinary course. The items listed are not representative of all potential items impacting our consolidated results. See "Item 1A. Risk Factors" for additional information on the risks affecting our business.Net Gains (Losses) on Investments and Other Financial Instruments. The recognition of realized investment gains or losses can vary significantly across periods, as the activity is highly discretionary based on the timing of individual securities sales due to such factors as market opportunities, our tax and capital profile and overall market cycles. Unrealized gains and losses arise primarily from changes in the market value of our investments that are classified as trading or equity securities. These valuation adjustments may not necessarily result in realized economic gains or losses. Loss on Extinguishment of Debt. Gains or losses on early extinguishment of debt and losses incurred to purchase our 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. Impairment ofGoodwill or Other Acquired Intangible Assets. The periodic review of goodwill and other acquired intangible assets for potential impairment may impact consolidated results. Our goodwill and other acquired intangible assets analysis is based on management's assumptions, which are inherently subject to risks and uncertainties. See Note 7 of Notes to Consolidated Financial Statements for additional information.
Mortgage Insurance Portfolio
IIF by origination vintage (1)
[[Image Removed: rdn-20211231_g4.jpg]]
Insurance in Force as of:
Vintage written in: December 31, 2021 December 31, 2020 December 31, 2019
($ in billions)
¢ 2021 $87.4 35.5 % $- - % $- - %
¢ 2020 74.3 30.2 98.8 40.2 - -
¢ 2019 24.0 9.8 44.6 18.1 67.3 28.0
¢ 2018 12.4 5.0 23.5 9.5 42.9 17.8
¢ 2017 11.5 4.7 21.2 8.6 37.9 15.8
¢ 2016 10.1 4.1 17.5 7.1 29.5 12.2
¢ 2009 - 2015 14.9 6.1 25.7 10.5 44.0 18.3
¢ 2008 & Prior (2) 11.4 4.6 14.8 6.0 19.0 7.9
Total $246.0 100.0 % $246.1 100.0 % $240.6 100.0 %
(1)Policy years represent the original policy years and have not been adjusted
to reflect subsequent refinancing activity under HARP.
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(2)Adjusted to reflect subsequent refinancing activity under HARP, this
percentage would decrease to 3.0%, 3.7%, and 4.7% as of
New Insurance Written
A key component of our current business strategy is to write NIW that we believe will generate future earnings and economic value while effectively maintaining the portfolio's health, balance and profitability. Consistent with this objective, we wrote$91.8 billion of primary new mortgage insurance in 2021, compared to$105.0 billion of NIW in 2020. The NIW written in 2021 was Radian's second highest volume in its history. Our 2021 NIW, offset by cancellations and amortization within our existing portfolio, resulted in IIF of$246.0 billion atDecember 31, 2021 , compared to$246.1 billion atDecember 31, 2020 , as shown in the chart above. Our NIW decreased by 12.6% in 2021 as compared to 2020, due to lower refinance activity and lower private mortgage insurance penetration on refinances as well as lower market share, partially offset by increased purchase originations. Among other factors, private mortgage insurance industry volumes are impacted by total mortgage origination volumes and the mix between mortgage originations that are for home purchases versus refinancings of existing mortgages. Historically, the penetration rate for private mortgage insurance was generally three to five times higher for purchase transactions than for refinancings. However, with significant home price appreciation in the past year, penetration on purchase transactions has increased while penetration on refinancings has decreased, and the penetration rate for private mortgage insurance has shifted to six to ten times higher for purchase transactions than for refinancings. According to industry estimates, total mortgage origination volume was slightly lower in 2021 as compared to 2020 due to lower refinance activity, partially offset by a strong purchase market. Although it is difficult to project future volumes, recent market projections for 2022 estimate total mortgage originations of approximately$3.0 trillion , which would represent a decline in the total annual mortgage origination market of approximately 31% as compared to 2021, with a private mortgage insurance market of$500 to$550 billion . This outlook anticipates a decrease in refinance originations in 2022 resulting from expected increases in interest rates. While expectations for refinance volume vary, there is consensus around a large purchase market driven by increased home sales, which is a positive for mortgage insurers given the higher likelihood that purchase loans will utilize private mortgage insurance as compared to refinance loans. If refinance volume declines, we would expect the Persistency Rate for our portfolio to increase, benefiting the size of our IIF portfolio. See "Item 1A. Risk Factors" for more information. Our total mix of Single Premium Policies decreased to 7.2% of our NIW for 2021, compared to 12.3% for 2020. Borrower-paid Single Premium Policies were 96.3% of our total direct Single Premium NIW for 2021 compared to 90.2% for 2020. We expect our production level for Single Premium Policies to fluctuate over time based on various factors, which include risk/return considerations and market conditions. The following table provides selected information as of and for the periods indicated related to our mortgage insurance NIW. For direct Single Premium Policies, NIW includes policies written on an individual basis (as each loan is originated) and on an aggregated basis (in which each individual loan in a group of loans is insured in a single transaction, typically after the loans have been originated). 72
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NIW
Years Ended December 31,
($ in millions) 2021 2020 2019
NIW $ 91,830 $ 105,024 $ 71,327
Primary risk written $ 22,591 $ 24,540 $ 17,163
Average coverage percentage 24.6 % 23.4 % 24.1 %
NIW by loan purpose
Purchases 80.5 % 64.8 % 81.1 %
Refinances 19.5 % 35.2 % 18.9 %
Total borrower-paid 99.2 % 98.2 % 96.7 %
NIW by premium type
Direct Monthly and Other Recurring Premiums 92.8 % 87.7 % 83.5 %
Direct single premiums (1) 7.2 % 12.3 % 16.5 %
NIW by FICO score (2)
>=740 58.6 % 66.0 % 63.3 %
680-739 34.2 % 30.8 % 31.9 %
620-679 7.2 % 3.2 % 4.8 %
NIW by LTV
95.01% and above 12.0 % 9.2 % 16.7 %
90.01% to 95.00% 40.7 % 37.1 % 37.7 %
85.01% to 90.00% 28.3 % 29.4 % 28.0 %
85.00% and below 19.0 % 24.3 % 17.6 %
(1)Borrower-paid Single Premium Policies were 6.9%, 11.1% and 14.2% of NIW for
the periods indicated, respectively. See "Item 1. Business-Regulation-Federal
Regulation-GSE Requirements for Mortgage Insurance Eligibility" for additional
information.
(2)For loans with multiple borrowers, the percentage of NIW by FICO score
represents the lowest of the borrowers' FICO scores.
Insurance and Risk in Force
Our IIF is the primary driver of the future premiums that we expect to earn over time. IIF atDecember 31, 2021 was flat as compared to the same period last year, as the positive impact from our NIW in 2021 was offset primarily by cancellations of existing policies associated with refinancings, as reflected in our Persistency Rates and further discussed below. Historically, there is a close correlation between interest rates and Persistency Rates. Lower interest rate environments generally increase refinancings, which increase the cancellation rate of our insurance and negatively affect our Persistency Rates. As shown in the table further below, our 12-month Persistency Rate atDecember 31, 2021 increased as compared to the same period in 2020 but remains lower than Persistency Rates experienced prior to the pandemic. The increase in our Persistency Rate in 2021 was primarily attributable to the decline in refinance activity as compared to the prior year. As refinance activity began to moderate in the second half of 2021, those trends contributed to the increase in our Persistency Rate atDecember 31, 2021 as compared to the same period in 2020, as well as growth in our IIF in the second half of 2021. The net change in our IIF during 2021 reflects a 5.8% increase in Monthly Premium Policies in force, offset by a 21.1% decline in Single Premium Policies in force. Single Premium Policy cancellations were the primary driver of the decrease in unearned premiums on our consolidated balance sheet atDecember 31, 2021 as compared toDecember 31, 2020 . We continue to believe that the long-term housing market fundamentals and outlook remain positive, including low interest rates, demographics supporting growth in the population of first-time homebuyers and a relatively constrained supply of homes available for sale. However, our earnings in future periods are subject to elevated risks and uncertainties related to macroeconomic conditions and specific events that impact the housing finance and real estate markets, including housing prices, inflationary pressures, unemployment levels, interest rate changes and the availability of credit, as well as the potential impact of the unprecedented and continually evolving social and economic impacts associated with the COVID-19 pandemic. 73
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For additional information about the COVID-19 pandemic, see "Overview-COVID-19
Impacts," Note 1 of Notes to Consolidated Financial Statements and "Item 1A.
Risk Factors-The credit performance of our mortgage insurance portfolio is
impacted by macroeconomic conditions and specific events that affect the ability
of borrowers to pay their mortgages."
Historical loan performance data indicates that credit scores and underwriting
quality are key drivers of credit performance. As of December 31, 2021 , our
portfolio of business written subsequent to 2008, including refinancings under
HARP, represented approximately 97.0% of our total primary RIF. Loan
originations after 2008 have consisted primarily of high credit quality loans
with significantly better credit performance than loans originated during 2008
and prior periods. However, the impact to our future losses from, among other
things, the COVID-19 pandemic remains uncertain, although trends in 2021 have
been positive.
The following table illustrates the trends of our cumulative incurred loss
ratios by year of origination and development year.
Cumulative incurred loss ratio by vintage (1)
Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec
Vintage 2012 2013 2014 2015 2016 2017 2018 2019 2020 (2) 2021 (2)
2012 2.0% 3.2% 3.6% 2.7% 2.9% 2.8% 2.8% 2.8% 3.2% 3.0%
2013 2.5% 4.0% 3.4% 3.7% 3.5% 3.4% 3.3% 4.2% 4.1%
2014 2.7% 4.1% 4.9% 5.0% 5.1% 5.2% 6.9% 6.8%
2015 2.1% 4.8% 5.2% 5.0% 4.7% 7.4% 6.8%
2016 2.9% 5.0% 4.8% 4.7% 9.7% 8.0%
2017 4.7% 5.1% 6.1% 14.3% 11.9%
2018 3.0% 6.4% 22.8% 19.0%
2019 2.8% 35.6% 23.5%
2020 25.6% 14.9%
2021 7.9%
(1)Represents inception-to-date losses incurred as a percentage of net premiums
earned.
(2)Losses incurred in 2020 and 2021 across all vintages were elevated due to the
impact of the COVID-19 pandemic.
Throughout this report, unless otherwise noted, RIF is presented on a gross
basis and includes the amount ceded under reinsurance. RIF and IIF for direct
Single Premium Policies include policies written on an individual basis (as each
loan is originated) and on an aggregated basis (in which each individual loan in
a group of loans is insured in a single transaction, typically after the loans
have been originated).
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The following tables provide selected information as of and for the periods
indicated related to mortgage insurance IIF and RIF.
IIF and RIF
Years Ended December 31,
($ in millions) 2021 2020 2019
Primary IIF $ 245,972 $ 246,144 $ 240,558
Primary RIF $ 60,913 $ 60,656 $ 60,921
Average coverage percentage 24.8 %
24.6 % 25.3 %
Persistency Rate (12 months ended) 64.3 % 61.2 % 78.2 %
Persistency Rate (quarterly, annualized) (1) 71.7 % 60.4 % 75.0 %
Total borrower-paid RIF 90.6 % 86.3 % 78.9 %
Primary RIF by Premium Type
Direct Monthly and Other Recurring Premiums 83.9 % 79.1 % 72.4 %
Direct single premiums (2) 16.1 % 20.9 % 27.6 %
Primary RIF by FICO score (3)
>=740 56.9 % 57.5 % 56.9 %
680-739 35.0 % 34.6 % 34.2 %
620-679 7.6 % 7.3 % 8.2 %
<=619 0.5 % 0.6 % 0.7 %
Primary RIF by LTV
95.01% and above 15.1 % 14.4 % 14.2 %
90.01% to 95.00% 48.9 % 49.3 % 51.3 %
85.01% to 90.00% 27.7 % 28.0 % 27.9 %
85.00% and below 8.3 % 8.3 % 6.6 %
(1)The Persistency Rate on a quarterly, annualized basis is calculated based on
loan-level detail for the quarter ending as of the date shown. It may be
impacted by seasonality or other factors, including the level of refinance
activity during the applicable periods and may not be indicative of full-year
trends.
(2)Borrower-paid Single Premium Policies were 8.5%, 9.4% and 9.1% of primary RIF
for the periods indicated, respectively.
(3)For loans with multiple borrowers, the percentage of primary RIF by FICO
score represents the lowest of the borrowers' FICO scores.
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The following table shows our direct Primary Mortgage Insurance RIF by year of
origination and selected information related to that risk as of December 31,
2021 and 2020.
Year of origination - RIF
December 31,
2021 2020
Percentage of Percentage of
($ in millions) RIF Number of Defaults Delinquency Rate Reserve for Losses RIF Number of Defaults Delinquency Rate Reserve for Losses
2008 and prior $ 2,865 7,385 9.3 % 24.5 % $ 3,733 12,046 12.1 % 26.2 %
2009-2015 3,904 3,719 4.4 13.7 6,840 7,948 5.7 14.3
2016 2,684 2,255 4.3 8.5 4,616 5,243 6.2 9.6
2017 2,998 3,399 5.7 12.2 5,495 7,652 7.5 13.1
2018 3,158 4,342 6.8 16.4 5,973 9,974 9.0 16.7
2019 5,892 4,078 3.7 15.0 10,832 9,741 5.3 15.5
2020 17,789 2,938 1.1 8.3 23,167 2,933 0.9 4.6
2021 21,623 945 0.3 1.4 - - - -
Total $ 60,913 29,061 100.0 % $ 60,656 55,537 100.0 %
Geographic Dispersion
The following table shows, as of December 31, 2021 and 2020, the percentage of
our direct Primary Mortgage Insurance RIF and the associated percentage of our
mortgage insurance reserve for losses (by location of property) for the top 10
states in the U.S. (as measured by our direct Primary Mortgage Insurance RIF as
of December 31, 2021 ).
Top 10 U.S. states - RIF
December 31,
2021 2020
Top 10 States RIF Reserve for Losses RIF Reserve for Losses
California 9.3 % 11.0 % 9.9 % 11.2 %
Texas 8.5 9.7 8.7 10.0
Florida 6.9 10.8 7.5 11.4
Illinois 4.6 5.3 4.4 4.9
New York 4.4 7.7 3.8 7.0
Virginia 3.8 2.7 3.8 2.6
New Jersey 3.8 5.1 3.4 4.9
Pennsylvania 3.6 2.6 3.3 2.5
Washington 3.5 2.0 3.3 1.9
Maryland 3.3 3.9 3.4 3.4
Total 51.7 % 60.8 % 51.5 % 59.8 %
The following table shows, as of December 31, 2021 and 2020, the percentage of
our direct Primary Mortgage Insurance RIF and the associated percentage of our
mortgage insurance reserve for losses (by location of property) for the top 10
Core Based Statistical Areas, referred to as "CBSAs," in the U.S. (as measured
by our direct Primary Mortgage Insurance RIF as of December 31, 2021 ).
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Top 10 Core Based Statistical Areas - RIF
December 31,
2021 2020
Top 10 CBSAs (1) RIF Reserve for Losses RIF Reserve for Losses
New York-Newark-Jersey City, NY-NJ-PA 5.4 % 10.0 % 4.7 % 9.1 %
Chicago-Naperville-Elgin, IL-IN-WI 4.2 5.2 4.1 4.7
Washington-Arlington-Alexandria, DC-VA-MD-WV 4.0 4.1 4.0 3.7
Dallas-Fort Worth-Arlington, TX 2.9 3.4 3.2 3.5
Los Angeles-Long Beach-Anaheim, CA 2.6 3.3 2.6 3.4
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD 2.6 2.3 2.5 2.1
Houston-The Woodlands-Sugar Land, TX 2.5 3.3 2.3 3.3
Minneapolis-St. Paul-Bloomington, MN-WI 2.3 1.3 2.1 1.2
Miami-Fort Lauderdale-Pompano Beach, FL 2.2 4.4 2.2 4.8
Atlanta-Sandy Springs-Alpharetta, GA 2.1 3.3 2.5 3.6
Total 30.8 % 40.6 % 30.2 % 39.4 %
(1)CBSAs are metropolitan areas and include a portion of adjoining states as
noted above.
Risk Distribution We use third-party reinsurance in our mortgage insurance business as part of our risk distribution strategy, including to manage our capital position and risk profile. When we enter into a reinsurance agreement, the reinsurer receives a premium and, in exchange, insures an agreed upon portion of incurred losses. While these arrangements have the impact of reducing our earned premiums, they also reduce our required capital and are expected to increase our return on required capital for the related policies. The impact of these programs on our financial results will vary depending on the level of ceded RIF, as well as the levels of prepayments and incurred losses on the reinsured portfolios, among other factors. See "Key Factors Affecting Our Results-Mortgage-Risk Distribution" and Note 8 of Notes to Consolidated Financial Statements for more information about our reinsurance transactions.
The table below provides information about the amounts by which Radian
Guaranty's reinsurance programs reduced its Minimum Required Assets as of the
dates indicated.
PMIERs benefit from risk distribution
December 31,
($ in thousands) 2021 2020 2019
PMIERs impact - reduction in Minimum
Required Assets (1)
Excess-of-Loss Program $ 995,171 $ 912,734 $ 738,386
Single Premium QSR Program 314,183 423,712 511,695
QSR Program 12,541 22,712 35,382
Total PMIERs impact $ 1,321,895 $ 1,359,158 $ 1,285,463
Percentage of gross Minimum Required
Assets 28.4 % 28.8 % 27.4 %
(1)Excludes the impact of intercompany reinsurance agreement with Radian
Reinsurance, which was terminated in
Results of Operations-Consolidated
Radian Group serves as the holding company for our operating subsidiaries and does not have any operations of its own. Our consolidated operating results for 2021 primarily reflect the financial results and performance of our two business segments-Mortgage and homegenius. See "Results of Operations-Mortgage," and "Results of Operations-homegenius" for the operating results of these business segments. In addition to the results of our operating segments, pretax income (loss) is also affected by other factors. See "Key Factors Affecting Our Results-Other Factors Affecting Consolidated Results" and "-Use of Non-GAAP Financial Measures" below for more information regarding items that are excluded from the operating results of our operating segments. 77
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The following table highlights selected information related to our consolidated
results of operations for the years ended
Summary results of operations - Consolidated
$ Change
Years Ended December 31, Favorable (Unfavorable)
($ in millions, except per-share 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
amounts)
Pretax income $ 764.8 $ 479.4 $ 849.0 $ 285.4 $ (369.6)
Net income 600.7 393.6 672.3 207.1 (278.7)
Diluted net income per share 3.16 2.00 3.20 1.16 (1.20)
Book value per share at December 31 24.28 22.36 20.13 1.92 2.23
Net premiums earned (1) 1,037.2 1,115.3 1,145.3 (78.1) (30.0)
Services revenue (2) 125.8 105.4 154.6 20.4 (49.2)
Net investment income (1) 147.9 154.0 171.8 (6.1) (17.8)
Net gains on investments and other
financial instruments 15.6 60.3 51.7 (44.7) 8.6
Provision for losses (1) 20.9 485.1 132.0 464.2 (353.1)
Cost of services (2) 103.7 86.1 108.3 (17.6) 22.2
Other operating expenses (3) 323.7 280.7 306.1 (43.0) 25.4
Interest expense (1) 84.3 71.2 56.3 (13.1) (14.9)
Loss on extinguishment of debt - - 22.7 - 22.7
Impairment of goodwill - - 4.8 - 4.8
Amortization and impairment of other
acquired intangible assets 3.5 5.1 22.3 1.6 17.2
Income tax provision 164.2 85.8 176.7 (78.4) 90.9
Adjusted pretax operating income (4) 757.7 432.1 854.6 325.6 (422.5)
Adjusted diluted net operating income
per share (4) 3.15 1.74 3.21 1.41 (1.47)
Return on equity 14.1 % 9.4 % 17.8 % 4.7 % (8.4) %
Adjusted net operating return on equity
(4) 14.0 % 8.2 % 17.9 % 5.8 % (9.7) %
(1)Relates primarily to the Mortgage segment. See "Results of
Operations-Mortgage" for more information.
(2)Relates primarily to our homegenius segment. See "Results of
Operations-homegenius" and "Results of Operations-All Other" for more
information.
(3)See "Results of Operations-Mortgage," "Results of Operations-homegenius" and
"Results of Operations-All Other" for more information on both direct and
allocated operating expenses.
(4)See "-Use of Non-GAAP Financial Measures" below.
This section of our Annual Report on Form 10-K generally discusses our
consolidated results of operations for the years ended December 31, 2021 and
2020 and a year-over-year comparison between 2021 and 2020. Detailed discussions
of our consolidated results of operations for the year ended December 31, 2019 ,
including the year-over-year comparisons between 2020 and 2019, that are not
included in this Annual Report on Form 10-K can be found in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Annual Report on Form 10-K for the year ended December 31,
2020 filed with the SEC on February 26, 2021 .
Net Income. As discussed in more detail below, our net income increased for 2021
compared to 2020, primarily reflecting a decrease in provision for losses
related to our Mortgage segment. Partially offsetting this item was: (i) an
increase in our income tax provision; (ii) a decrease in our Mortgage segment
net premiums earned; (iii) a decrease in net gains on investments and other
financial instruments; and (iv) an increase in other operating expenses.
Diluted Net Income Per Share. The increase in diluted net income per share for
2021 compared to 2020 is primarily due to the change in net income, as discussed
above.
Adjusted Diluted Net Operating Income Per Share. The increase in adjusted
diluted net operating income per share for 2021 compared to 2020 is primarily
due to the increase in our Mortgage segment's adjusted pretax operating income,
which increased to $781.5 million in 2021, from $453.3 million in 2020. See
"Results of Operations-Mortgage-Year Ended December 31, 2021 Compared to Year
Ended December 31 , 2020-Adjusted Pretax Operating Income" for more information
on our Mortgage segment's results.
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Book Value Per Share. The increase in book value per share from $22.36 at
December 31, 2020 to $24.28 at December 31, 2021 , is primarily due to our net
income for the year ended December 31, 2021 . Partially offsetting this item is:
(i) a decrease of $0.75 per share due to unrealized losses in our available for
sale securities, recorded in accumulated other comprehensive income and (ii) a
decrease of $0.54 per share from the impact of dividends and dividend
equivalents.
Return on Equity. The changes in return on equity across all periods presented
are primarily due to the changes in net income and, to a lesser extent, changes
in stockholders' equity. See "-Net Income " above for more information on the
changes in net income.
Adjusted Net Operating Return on Equity. The changes in adjusted net operating
return on equity across all periods presented are primarily due to the changes
in our adjusted pretax operating income.
Net Gains on Investments and Other Financial Instruments. Net gains on
investments and other financial instruments for 2021 decreased as compared to
2020 primarily due to: (i) a decrease in net realized gains on our
fixed-maturities available for sale; (ii) a decrease in net unrealized gains on
our trading securities; (iii) a decrease in gains on other financial
instruments; and (iv) a decrease in the fair value of our embedded derivatives.
These decreases were partially offset by: (i) an increase in net realized gains
on equity securities and (ii) a decrease in impairments recorded in earnings.
The primary driver of the decreased gains on our fixed-income securities in 2021
was the impact of the rising interest rate environment experienced during the
year, as compared to the positive effects of a declining interest rate
environment in 2020. See Note 6 of Notes to Consolidated Financial Statements
for additional information about our net gains on investments.
Income Tax Provision. Variations in our effective tax rates, combined with
differences in pretax income, were the drivers of the changes in our income tax
provision between periods. Our 2021 effective tax rate was 21.5%, which
approximated the federal statutory rate of 21%, as compared to 17.9% for 2020.
Our effective tax rate in 2020 was lower than the federal statutory tax rate of
21% primarily due to decreases in our liability for uncertain tax positions.
Use of Non-GAAP Financial Measures. In addition to the traditional GAAP
financial measures, we have presented "adjusted pretax operating income (loss),"
"adjusted diluted net operating income (loss) per share" and "adjusted net
operating return on equity," which are non-GAAP financial measures for the
consolidated company, among our key performance indicators to evaluate our
fundamental financial performance. These non-GAAP financial measures align with
the way our business performance is evaluated by both management and by our
board of directors. These measures have been established in order to increase
transparency for the purposes of evaluating our operating trends and enabling
more meaningful comparisons with our peers. Although on a consolidated basis
"adjusted pretax operating income (loss)," "adjusted diluted net operating
income (loss) per share" and "adjusted net operating return on equity" are
non-GAAP financial measures, for the reasons discussed above we believe these
measures aid in understanding the underlying performance of our operations.
Total adjusted pretax operating income (loss), adjusted diluted net operating
income (loss) per share and adjusted net operating return on equity are not
measures of overall profitability, and therefore should not be considered in
isolation or viewed as substitutes for GAAP pretax income (loss), diluted net
income (loss) per share or return on equity. Our definitions of adjusted pretax
operating income (loss), adjusted diluted net operating income (loss) per share
and adjusted net operating return on equity, as discussed and reconciled below
to the most comparable respective GAAP measures, may not be comparable to
similarly-named measures reported by other companies.
Our senior management, including our Chief Executive Officer (Radian's chief
operating decision maker), uses adjusted pretax operating income (loss) as our
primary measure to evaluate the fundamental financial performance of the
Company's business segments and to allocate resources to the segments.
Adjusted pretax operating income (loss) is defined as GAAP consolidated 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) loss on extinguishment of debt; (iii) amortization
and impairment of goodwill and other acquired intangible assets; and (iv)
impairment of other long-lived assets and other non-operating items, such as
impairment of internal-use software, gains (losses) from the sale of lines of
business and acquisition-related income and expenses.
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). These
adjustments, along with the reasons for their treatment, are described in Note 4
of Notes to Consolidated Financial Statements.
The following table provides a reconciliation of consolidated pretax income to
our non-GAAP financial measure for the consolidated Company of adjusted pretax
operating income.
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Reconciliation of consolidated pretax income to adjusted pretax operating income
Years Ended December 31,
(In thousands) 2021 2020 2019
Consolidated pretax income $ 764,832 $ 479,441 $ 848,993
Less income (expense) items:
Net gains on investments and other financial instruments 14,094 60,277 51,719
Loss on extinguishment of debt - - (22,738)
Impairment of goodwill - - (4,828)
Amortization and impairment of other acquired intangible
assets
(3,450) (5,144) (22,288) Impairment of other long-lived assets and other non-operating items (3,561) (7,759) (7,507) Total adjusted pretax operating income (1)$ 757,749
(1)Total adjusted pretax operating income on a consolidated basis consists of
adjusted pretax operating income (loss) for our Mortgage segment, homegenius
segment and All Other activities, as further detailed in Note 4 of Notes to
Consolidated Financial Statements.
Adjusted diluted net operating income (loss) per share is calculated by dividing
(i) adjusted pretax operating income (loss) attributable to common stockholders,
net of taxes computed using the Company's statutory tax rate, by (ii) the sum of
the weighted average number of common shares outstanding and all dilutive
potential common shares outstanding. The following table provides a
reconciliation of diluted net income (loss) per share to our non-GAAP financial
measure for the consolidated Company of adjusted diluted net operating income
(loss) per share.
Reconciliation of diluted net income per share to adjusted diluted net operating income per share
Years Ended December 31,
2021 2020 2019
Diluted net income per share $ 3.16 $ 2.00 $ 3.20
Less per-share impact of reconciling income (expense)
items:
Net gains on investments and other financial instruments
0.08 0.31 0.25 Loss on extinguishment of debt - - (0.11) Impairment of goodwill - - (0.02)
Amortization and impairment of other acquired intangible
assets
(0.02) (0.03) (0.11) Impairment of other long-lived assets and other non-operating items (0.02) (0.04) (0.04)
Income tax (provision) benefit on other income (expense)
items (1)
(0.01) (0.05) 0.01 Difference between statutory and effective tax rate (0.02) 0.07 0.01 Per-share impact of other income (expense) items 0.01 0.26 (0.01) Adjusted diluted net operating income per share (1)$ 3.15 $ 1.74 $ 3.21
(1)Calculated using the Company's federal statutory tax rate of 21%. Any
permanent tax adjustments and state income taxes on these items have been deemed
immaterial and are not included.
Adjusted net operating return on equity is calculated by dividing annualized
adjusted pretax operating income (loss), net of taxes computed using the
Company's statutory tax rate, by average stockholders' equity, based on the
average of the beginning and ending balances for each period presented. The
following table provides a reconciliation of return on equity to our non-GAAP
financial measure for the consolidated Company of adjusted net operating return
on equity.
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Reconciliation of return on equity to adjusted net operating return on equity
Years Ended December 31,
2021 2020 2019
Return on equity (1) 14.1 % 9.4 % 17.8 %
Less impact of reconciling income (expense) items: (2)
Net gains on investments and other financial instruments
0.4 1.4 1.4 Loss on extinguishment of debt - - (0.6) Impairment of goodwill - - (0.1)
Amortization and impairment of other acquired intangible
assets
(0.1) (0.1) (0.6)
Impairment of other long-lived assets and other non-operating
items
(0.1) (0.2) (0.2)
Income tax (provision) benefit on reconciling income (expense)
items (3)
- (0.2) - Difference between statutory and effective tax rate (3) (0.1) 0.3 - Impact of reconciling income (expense) items 0.1 1.2 (0.1) Adjusted net operating return on equity 14.0 % 8.2 % 17.9 %
(1)Calculated by dividing net income by average stockholders' equity.
(2)As a percentage of average stockholders' equity.
(3)Calculated using the Company's federal statutory tax rates of 21%. Any
permanent tax adjustments and state income taxes on these items have been deemed
immaterial and are not included.
Results of Operations-Mortgage
The following table summarizes our Mortgage segment's results of operations for
the years ended
Summary results of operations - Mortgage
$ Change
Years Ended December 31, Favorable (Unfavorable)
(In millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Adjusted pretax operating income (1) $ 781.5 $ 453.3
Net premiums written
944.5 1,011.0 1,075.5 (66.5) (64.5) Decrease in unearned premiums 53.7 81.8 58.8 (28.1) 23.0 Net premiums earned 998.3 1,092.8 1,134.2 (94.5) (41.4) Services revenue 17.7 14.8 8.1 2.9 6.7 Net investment income 132.9 137.2 151.5 (4.3) (14.3) Provision for losses 19.4 483.3 131.5 463.9 (351.8) Policy acquisition costs 29.0 31.0 25.3 2.0 (5.7) Cost of services 13.9 10.0 5.0 (3.9) (5.0) Other operating expenses 223.3 198.7 225.7 (24.6) 27.0 Interest expense 84.3 71.2 56.3 (13.1) (14.9)
(1)Our senior management uses adjusted pretax operating income as our primary
measure to evaluate the fundamental financial performance of our business
segments. See Note 4 of Notes to Consolidated Financial Statements for more
information.
Year Ended
Adjusted Pretax Operating Income. The increase in our Mortgage segment's
adjusted pretax operating income for 2021, compared to 2020, primarily reflects
a decrease in provision for losses. Partially offsetting this item is: (i) a
decrease in net premiums earned; (ii) an increase in other operating expenses
and (iii) an increase in interest expense.
Net Premiums Written and Earned. Net premiums written for 2021 decreased
compared to 2020. This decrease primarily reflects lower direct premium rates on
our IIF portfolio compared to 2020, as well as a lower proportion of Single
Premium Policies, partially offset by improvement in accrued profit commissions
in 2021. For 2020, higher recorded ceded
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losses resulted in elevated ceded premiums due to a reduction in accrued profit
commissions, which lowered net premiums written in that period.
Net premiums earned decreased for 2021 compared to 2020, primarily due to: (i) a decrease in premiums earned on our in-force Single Premium Policies and Monthly Premium Policies and (ii) a decrease in the impact, net of reinsurance, from Single Premium Policy cancellations, due to decreased refinance activity as compared to 2020. These decreases were partially offset by a decrease in ceded premiums, which were elevated in 2020 due to reduced profit commissions as a result of higher ceded losses in 2020. The table below provides additional information about the components of mortgage insurance net premiums earned for the periods indicated, including the effects of our reinsurance programs.
Net premiums earned
Years Ended December 31,
($ in thousands, except as otherwise indicated) 2021 2020 2019
Direct
Premiums earned, excluding revenue from cancellations
$ 1,070,335 $ 1,154,045 (1) Single Premium Policy cancellations 116,224 193,349 79,483 Direct 1,104,696 1,263,684 1,233,528 (1) Assumed (2) 7,066 12,214 10,382 Ceded
Premiums earned, excluding revenue from cancellations (108,692)
(107,451) (134,946) (1) Single Premium Policy cancellations (3) (33,388) (55,483) (23,766) Profit commission-other (4) 28,600 (20,197) 49,016 (1) Ceded premiums, net of profit commission (113,480) (183,131) (109,696) (1) Total net premiums earned$ 998,282
In force portfolio premium yield (in basis points)
(5)
40.5 44.5 50.4 (1) Direct premium yield (in basis points) (6) 45.2 52.4 53.8 (1) Net premium yield (in basis points) (7) 40.6 44.9 49.1 (1) Average primary IIF (in billions)$ 246.1
(1)Includes a cumulative adjustment to unearned premiums recorded in the second quarter of 2019 related to an update to the amortization rates used to recognize revenue for Single Premium Policies. This adjustment increased the 2019 direct premium yield and net premium yield by 1.9 and 1.4 basis points, respectively. See Note 2 of Notes to Consolidated Financial Statements for further information. (2)Primarily includes premiums from our participation in certain credit risk transfer programs. (3)Includes the impact of related profit commissions. (4)Represents the profit commission on the Single Premium QSR Program, excluding the impact of Single Premium Policy cancellations. (5)Calculated by dividing direct premiums earned, including assumed revenue and excluding revenue from cancellations, by average primary IIF. (6)Calculated by dividing direct premiums earned, including assumed revenue, by average primary IIF. (7)Calculated by dividing net premiums earned by average primary IIF. The calculation for all periods presented incorporates the impact of profit commission adjustments related to our Single Premium QSR Program. For the year endedDecember 31, 2020 , these profit commission adjustments were significantly impacted by the increased ceded losses in 2020. See Note 8 of Notes to Consolidated Financial Statements for further information. Over the past several years, we have experienced a decline in our in force portfolio premium yield due to a number of factors, including the pricing and credit mix of recent NIW compared to the policies that have cancelled. Based on the characteristics of more recent vintages in our portfolio coupled with expectations for higher interest rates that we believe will increase Persistency Rates, we currently expect a decline in our in force portfolio premium yield in 2022 of approximately two basis points, which is a slower rate of decline than we have experienced in recent years. Assuming current pricing levels and our current expectations for future NIW, Persistency Rates and other assumptions, which could change over time, we expect the rate of any future declines in the in force portfolio premium yield after 2022 to further diminish. Due to the impacts of Single Premium Policy cancellations and reinsurance, among other things, the net premium yield may continue to fluctuate from period to period. The level of mortgage prepayments affects the revenue ultimately produced by our mortgage insurance business and is influenced by the mix of business we write. We believe that writing a mix of Single Premium Policies and Monthly Premium Policies has the potential to moderate the overall impact on our results if actual prepayments are significantly different from expectations. However, the impact of this moderating effect is affected by the amount of reinsurance we obtain on portions of 82
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our portfolio, with the Single Premium QSR Program currently reducing the
proportion of retained Single Premium Policies in our portfolio. See "Key
Factors Affecting Our Results-Mortgage-IIF and Related Drivers" for more
information.
The following table provides information related to the impact of our
reinsurance transactions on premiums earned. See Note 8 of Notes to Consolidated
Financial Statements for more information about our reinsurance programs.
Ceded premiums earned
Years Ended December 31,
($ in thousands) 2021 2020 2019
Excess-of-Loss Program $ 62,153 $ 37,053 $ 25,483
Single Premium QSR Program 47,226 137,198 69,632
QSR Program 3,675 8,418 13,979
Other 426 462 602
Total ceded premiums earned (1) $ 113,480
Percentage of total direct and assumed premiums earned 9.9 % 14.2 % 8.8 % (1)Does not include the benefit from ceding commissions on our Single Premium QSR Programs, which are included in other operating expenses on the consolidated statements of operations. See Note 8 of Notes to Consolidated Financial Statements for additional information. Net Investment Income. Lower investment yields, partially offset by higher average investment balances, resulted in decreases in net investment income for 2021 compared to 2020. Our higher investment balances were a result of investing our positive cash flows from operations.
Provision for Losses. The following table details the financial impact of the
significant components of our provision for losses for the periods indicated.
Provision for losses
Years Ended December 31,
($ in millions, except reserve per new default) 2021 2020 2019
Current year defaults (1) $ 160.5 $ 517.8 $ 146.7
Prior year defaults (2) (141.1) (34.5) (14.7)
Second-lien mortgage loan PDR and other - - (0.5)
Provision for losses $ 19.4 $ 483.3 $ 131.5
Loss ratio (3) 1.9 % 44.2 % 11.6 %
Reserve per new default (4) $ 4,283 $ 4,793 $ 3,579
(1)Related to defaulted loans with a most recent default notice dated in the
year indicated. For example, if a loan had defaulted in a prior year, but then
subsequently cured and later re-defaulted in the current year, that default
would be considered a current year default.
(2)Related to defaulted loans with a default notice dated in a year earlier than
the year indicated, which have been continuously in default since that time.
(3)Provision for losses as a percentage of net premiums earned. See below and
"-Net Premiums Written and Earned" for further discussion of the components of
this ratio.
(4)Calculated by dividing provision for losses for new defaults, net of
reinsurance, by new primary defaults for each period.
Our mortgage insurance provision for losses for 2021 decreased by $463.9 million
as compared to 2020. Reserves established for new default notices were the
primary driver of our total incurred losses for 2021 and 2020. Current year new
primary defaults decreased significantly for 2021, compared to 2020, as shown
below. The decreases primarily relate to a decrease in the number of new default
notices related to the effects of the COVID-19 pandemic, as compared to last
year. Our gross Default to Claim Rate assumption for new primary defaults was
8.0% at December 31, 2021 , compared to 8.5% as of December 31, 2020 .
Our provision for losses during 2021, most notably in the fourth quarter,
benefited from favorable reserve development on prior period defaults, primarily
as a result of more favorable trends in Cures than originally estimated, due to
favorable outcomes resulting from forbearance programs implemented in response
to the COVID-19 pandemic as well as positive trends in home price appreciation.
Among other assumption changes, these favorable observed trends resulted in
reductions in our Default to Claim Rate assumptions for prior year default
notices, particularly for those defaults first reported in 2020 following the
start of the COVID-19 pandemic. See Notes 1 and 11 of Notes to Consolidated
Financial Statements and "Item 1A. Risk Factors" for additional information.
To a lesser extent, our provision for losses during 2020 also benefited from
favorable reserve development on prior period defaults, primarily due to
favorable cure activity.
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Our primary default rate at
primary loans in default.
Rollforward of primary loans in default
Years Ended
2021 2020 2019 Beginning default inventory 55,537 21,266 21,093 New defaults 37,470 108,025 40,985 Cures (62,970) (72,404) (38,005) Claims paid (1) (937) (1,330) (2,747)
Rescissions and Claim Denials, net of (Reinstatements)
(2)
(39) (20) (60) Ending default inventory 29,061 55,537 21,266 (1)Includes those charged to a deductible underPool Mortgage Insurance arrangements as well as commutations. Excludes the impact of claims settled related to certain previously disclosed legal proceedings. (2)Net of any previous Rescission and Claim Denials that were reinstated during the period. Such reinstated Rescissions and Claim Denials may ultimately result in a paid claim. We develop our Default to Claim Rate estimates on defaulted loans based on models that use a variety of loan characteristics to determine the likelihood that a default will reach claim status. Our gross Default to Claim Rate estimates on defaulted loans are mainly developed based on the Stage of Default and Time in Default of the underlying defaulted loans, as measured by the progress toward foreclosure sale and the number of months in default. See Note 11 of Notes to Consolidated Financial Statements for the table detailing our Default to Claim Rate assumptions. 84
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The following tables show additional information about our primary loans in
default as of the dates indicated.
Primary loans in default - additional information
December 31, 2021
Foreclosure Stage Cure % During Reserve for
Total Defaulted Loans the 4th Quarter Losses % of Reserve
($ in thousands) # % # % $ %
Missed payments
Three payments or less 7,267 25.0 % 47 39.4 % $ 62,103 7.9 %
Four to eleven payments 8,088 27.8 84 27.6 146,872 18.6
Twelve payments or more 13,389 46.1 784 29.0 565,192 71.5
Pending claims 317 1.1 N/A 10.4 16,213 2.0
Total 29,061 100.0 % 915 790,380 100.0 %
IBNR and other 2,886
LAE 19,859
Total primary reserves $ 813,125
December 31, 2020
Foreclosure Stage Cure % During Reserve for
Total Defaulted Loans the 4th Quarter Losses % of Reserve
($ in thousands) # % # % $ %
Missed payments
Three payments or less 12,504 22.5 % 64 36.5 % $ 99,491 12.4 %
Four to eleven payments 37,691 67.9 190 26.3 512,248 64.1
Twelve payments or more 5,067 9.1 861 5.4 172,161 21.5
Pending claims 275 0.5 N/A 8.2 15,614 2.0
Total 55,537 100.0 % 1,115 799,514 100.0 %
IBNR and other 9,966
LAE 20,172
Total primary reserves $ 829,652
N/A - Not applicable
Our aggregate weighted-average net Default to Claim Rate assumption for our
primary loans used in estimating our reserve for losses, which is net of
estimated Claim Denials and Rescissions, was approximately 46% and 24%, at
shift in the mix of defaults as of
proportion of loans with more missed payments.
Our net Default to Claim Rate and loss reserve estimate incorporate our expectations with respect to future Rescissions, Claim Denials and Claim Curtailments. Our estimate of such net future Loss Mitigation Activities, inclusive of claim withdrawals, reduced our loss reserve as ofDecember 31, 2021 and 2020 by$27.3 million and$29.1 million , respectively. These expectations are based primarily on recent claim withdrawal activity and our recent experience with respect to the number of claims that have been denied due to the policyholder's failure to submit sufficient documentation to perfect a claim within the time period permitted under our Master Policies, as well as our recent experience with respect to the number of insurance certificates that have been rescinded due to fraud, underwriter negligence or other factors. Our reported Rescission, Claim Denial and Claim Curtailments activity in any given period is subject to challenge by our lender and servicer customers through our claims rebuttal process. In addition, we are at times engaged in discussions with our lender and servicer customers regarding our Loss Mitigation Activities. Unless a liability associated with such activities or discussions becomes probable and can be reasonably estimated, we consider our claim payments and our Rescissions, Claim Denials and Claim Curtailments to be resolved for financial reporting purposes. In accordance with the accounting standard regarding contingencies, we accrue for an estimated loss when we determine that the loss is probable and can be reasonably estimated. We expect that a portion of previously rescinded policies will be reinstated and previously denied claims will be resubmitted with the required documentation and ultimately paid; therefore, we have incorporated this expectation into our 85
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IBNR reserve estimate. Our IBNR reserve estimate was
million
Consolidated Financial Statements for additional information.
Factors that impact the severity of a claim include, but are not limited to: (i) the size of the loan; (ii) the amount of mortgage insurance coverage placed on the loan; (iii) the amount of time between default and claim during which we are expected to cover interest (capped at two years under ourPrior Master Policy and capped at three years under our 2014 Master Policy and 2020 Master Policy) and certain expenses; and (iv) the impact of certain loss management activities with respect to the loan. The average Claim Severity experienced for loans covered by our primary insurance was 83.2% for 2021, compared to 101.4% in 2020. Given the low volume of claims paid in 2021 due to the ongoing effects of foreclosure moratoriums, our average Claim Severity for claims paid in 2021 may not be indicative of future results. Our mortgage insurance total loss reserve as a percentage of our mortgage insurance total RIF was 1.4% at bothDecember 31, 2021 and 2020, respectively. See Note 11 of Notes to Consolidated Financial Statements for information regarding our reserves for losses and a reconciliation of our Mortgage segment's beginning and ending reserves for losses and LAE. Total mortgage insurance claims paid in 2021 of$35.3 million have decreased from claims paid of$97.6 million in 2020. The decrease in claims paid is primarily attributable to COVID-19-related forbearance plans and moratoriums suspending foreclosures and evictions. Claims paid in both periods also include the impact of commutations and settlements, including for payments made in 2021 and 2020 to settle certain previously disclosed legal proceedings. Although expected claims are included in our reserve for losses, the timing of claims paid is subject to fluctuation from quarter to quarter, based on the rate that defaults cure and other factors, including the impact of foreclosure moratoriums (as further described in "Item 1. Business-Mortgage-Defaults and Claims"), that make the timing of paid claims difficult to predict.
The following table shows net claims paid by product and the average claim paid
by product for the periods indicated.
Claims paid
Years Ended December 31,
(In thousands) 2021 2020 2019
Net claims paid (1)
Total primary claims paid $ 21,111 $ 66,186 $ 118,548
Total pool and other (258) (432) 3,162
Subtotal 20,853 65,754 121,710
Impact of commutations and settlements (2) 14,464 31,847
10,517
Total net claims paid$ 35,317 $ 97,601
Total average net primary claim paid (1) (3)
$ 49.0 Average direct primary claim paid (3) (4)$ 46.3 $ 49.4
(1)Net of reinsurance recoveries. (2)Includes payments to commute mortgage insurance coverage on certain performing and non-performing loans. For the year endedDecember 31, 2020 , primarily includes payments made to settle certain previously disclosed legal proceedings. (3)Calculated without giving effect to the impact of commutations and settlements. (4)Before reinsurance recoveries.
Other Operating Expenses. The increase in other operating expenses for 2021, as
compared to 2020, is primarily due to: (i) an increase in variable and
share-based compensation expense in 2021, including as part of allocated
corporate operating expenses and (ii) a decrease in ceding commissions.
Our expense ratio on a net premiums earned basis represents our Mortgage
segment's operating expenses (which include policy acquisition costs and other
operating expenses, as well as allocated corporate operating expenses),
expressed as a percentage of net premiums earned. Our expense ratio on this
basis was 25.3% for 2021, compared to 21.0% for 2020. The increase in the
expense ratio for 2021 as compared to 2020 was driven by: (i) an increase in
total other operating expenses and (ii) a decrease in net premiums earned during
2021, both as compared to 2020.
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The following tables show additional information about Mortgage other operating
expenses.
Other operating expenses
Years Ended December 31,
(In millions) 2021 2020 2019
Direct
Salaries and other base employee expenses $ 52.5 $ 57.6 $ 60.3
Variable and share-based incentive compensation 17.2 13.7 21.5
Other general operating expenses 50.8 53.7 74.0
Ceding commissions (24.7) (41.1) (34.2)
Total direct 95.8 83.9 121.6
Allocated (1)
Salaries and other base employee expenses $ 42.5 $ 37.5 $ 31.0
Variable and share-based incentive compensation 33.9 23.7 26.5
Other general operating expenses 51.1 53.6 46.6
Total allocated 127.5 114.8 104.1
Total Mortgage $ 223.3 $ 198.7 $ 225.7
(1)See Note 4 of Notes to Consolidated Financial Statements for more information
about our allocation of corporate operating expenses.
Interest Expense. The increase in interest expense for 2021, as compared to 2020, primarily reflects an increase in our average senior notes outstanding for the full year in 2021 compared to 2020. See Note 12 of Notes to Consolidated Financial Statements for additional information on our senior notes.
Results of Operations-homegenius
The following table summarizes our homegenius segment's results of operations
for the years ended
Summary results of operations - homegenius
$ Change
Years Ended December 31, Favorable (Unfavorable)
(In millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Adjusted pretax operating income
(loss) (1) $ (27.3) $ (23.2) $ (18.0) $ (4.1) $ (5.2)
Net premiums earned 38.9 22.6 12.0 16.3 10.6
Services revenue 108.3 79.5 76.9 28.8 2.6
Cost of services 89.7 61.5 56.6 (28.2) (4.9)
Other operating expenses 85.1 62.3 50.2 (22.8) (12.1)
(1)Our senior management uses adjusted pretax operating income (loss) as our
primary measure to evaluate the fundamental financial performance of each of our
business segments. See Note 4 of Notes to Consolidated Financial Statements.
Year Ended
Adjusted Pretax Operating Loss. As described in more detail below, the increase in our homegenius segment's adjusted pretax operating loss for 2021, compared to 2020, primarily reflects increases in: (i) cost of services and (ii) other operating expenses. Partially offsetting these items were increases in: (i) services revenue and (ii) net premiums earned.
Net Premiums Earned. Net premiums earned for 2021 increased compared to 2020.
This increase reflects an increase in new title policies written and closed
orders in our title insurance business.
Services Revenue. Services revenue for 2021 increased compared to 2020,
primarily due to the increase in closed orders in our title services business.
In addition, we increased revenue in our real estate services, including
increases from valuation and single family rental products and services, as
compared to 2020.
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Cost of Services. Cost of services for 2021 increased compared to 2020,
primarily due to the increase in services revenue and a corresponding increase
in staffing levels to help build capacity to accommodate the growing demand for
our homegenius products and services. Our cost of services is primarily affected
by our level of services revenue and the number of employees providing those
services.
Other Operating Expenses. The increase in other operating expenses for 2021, as
compared to 2020, primarily reflects: (i) an increase in variable and
share-based incentive compensation expense in 2021, including as part of
allocated corporate operating expenses; (ii) continued strategic investments
focused on our title and digital real estate businesses, including an increase
in staffing levels; and (iii) an increase in title agent commissions.
The following tables show additional information about homegenius other
operating expenses.
Other operating expenses
Years Ended December 31,
(In millions) 2021 2020 2019
Direct
Salaries and other base employee expenses $ 24.0 $ 21.1 $ 14.9
Variable and share-based incentive compensation 14.6 7.2 6.6
Other general operating expenses 21.3 16.0 14.4
Title agent commissions 6.7 5.2 4.1
Total direct 66.6 49.5 40.0
Allocated (1)
Salaries and other base employee expenses $ 6.3 $ 3.8 $ 1.5
Variable and share-based incentive compensation 4.9 3.1 4.1
Other general operating expenses 7.3 5.9 4.6
Total allocated 18.5 12.8 10.2
Total homegenius $ 85.1 $ 62.3 $ 50.2
(1)See Note 4 of Notes to Consolidated Financial Statements for more information
about our allocation of corporate operating expenses.
Results of Operations-All Other
The following table summarizes our All Other results of operations for the years
ended
Summary results of operations - All
Other
$ Change
Years Ended December 31, Favorable (Unfavorable)
2021 2020 2019 2021 vs. 2020 2020 vs.
(In millions) 2019
Adjusted pretax operating income (1)
$ 19.8 $ 1.5 $ (17.8) Services revenue 0.2 12.5 71.0 (12.3) (58.5) Net investment income 14.6 16.5 19.6 (1.9) (3.1) Cost of services 0.1 15.6 47.6 15.5 32.0 Other operating expenses 11.9 11.9 23.0 - 11.1 (1)Our senior management uses adjusted pretax operating income (loss) as our primary measure to evaluate the fundamental financial performance of each of the Company's business segments. See Note 4 of Notes to Consolidated Financial Statements.
Year Ended
Adjusted pretax operating income increased in 2021 as compared to 2020 primarily as a result of the net changes in services revenue and cost of services due to the sale ofClayton in 2020 as well as the wind down of the traditional appraisal business starting in the fourth quarter of 2020, among other adjustments that impacted services revenue. Partially offsetting these items was a decrease in net investment income, resulting from lower investment yields in 2021 compared to 2020. 88
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Liquidity and Capital Resources
Consolidated Cash Flows
The following table summarizes our consolidated cash flows from operating,
investing and financing activities.
Summary cash flows - Consolidated
Years Ended December 31,
(In thousands) 2021 2020 2019
Net cash provided by (used in):
Operating activities $ 557,112 $ 658,434 $ 694,431
Investing activities (1,862) (883,180) (302,049)
Financing activities (496,776) 222,618 (403,106)
Effect of exchange rate changes on cash and
restricted cash - - (4)
Increase (decrease) in cash and restricted cash
Operating Activities. Our most significant source of operating cash flows is from premiums received from our mortgage insurance policies, while our most significant uses of operating cash flows are for our operating expenses and claims paid on our mortgage insurance policies. Net cash provided by operating activities totaled$557.1 million for 2021, compared to$658.4 million in 2020. This decrease was principally due to lower direct premiums written, partially offset by a reduction in claims paid. See Notes 8 and 11 of Notes to Consolidated Financial Statements for additional information on direct premiums written and claims paid, respectively. Investing Activities. Net cash used in investing activities decreased in 2021, compared to 2020, primarily as a result of: (i) a decrease in purchases of fixed-maturity investments available for sale and (ii) an increase in sales and redemptions, net of purchases, of short-term investments. Financing Activities. Net cash used in financing activities for 2021 was$496.8 million , as compared to net cash provided by financing activities for 2020 of$222.6 million . For 2021, our primary financing activities included: (i) repurchases of our common shares; (ii) payment of dividends; and (iii) net changes in secured borrowings. For 2020, cash provided by financing activities included the issuance of Senior Notes due 2025, partially offset by: (i) repurchases of our common shares and (ii) payments of dividends. See Notes 12 and 14 of Notes to Consolidated Financial Statements for additional information regarding our borrowings and share repurchases, respectively.
See "Item 8. Financial Statements and Supplementary Data-Consolidated Statements
of Cash Flows" for additional information.
Investment Portfolio
AtDecember 31, 2021 andDecember 31, 2020 , the following tables include$104.0 million and$57.5 million , respectively, of securities loaned to third-party borrowers under securities lending agreements, which are classified as other assets in our consolidated balance sheets. See Note 6 of Notes to Consolidated Financial Statements for more information about our investment portfolio, including our securities lending agreements. 89
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The composition of our investment portfolio, presented as a percentage of
overall fair value at
Investment portfolio diversification
December 31,
2021 2020
Fair Fair
($ in millions) Value Percent Value Percent
Corporate bonds and commercial paper $ 3,261.4 49.3 % $ 3,527.7 51.5 %
RMBS 714.5 10.8 846.9 12.4
CMBS 745.5 11.3 715.5 10.5
CLO 530.0 8.0 568.6 8.3
State and municipal obligations (1) 284.2 4.3 307.5 4.5
Money market instruments and certificates of
deposit 275.6 4.2 270.0 3.9
Other ABS 211.2 3.2 252.7 3.7
U.S. government and agency securities 316.4 4.8 174.1 2.5
Equity securities 222.2 3.3 172.5 2.5
Mortgage insurance-linked notes (2) 47.0 0.7 - -
Other investments 9.5 0.1 10.4 0.2
Total $ 6,617.5 100.0 % $ 6,845.9 100.0 %
(1)Primarily consists of taxable state and municipal investments.
(2)Comprises the notes purchased by
Excess-of-Loss Program. See Note 8 for more information about our reinsurance
programs.
The following table shows the scheduled maturities of the securities held in our
investment portfolio at
Investment portfolio scheduled maturity
December 31,
2021 2020
Fair Fair
($ in millions) Value Percent Value Percent
Short-term investments $ 551.5 8.3 % $ 618.0 9.0 %
Due in one year or less (1) 254.3 3.8 132.5 1.9
Due after one year through five years (1) 1,176.9 17.8 1,165.0 17.0
Due after five years through 10 years (1) 1,246.6 18.8 1,357.5 19.8
Due after 10 years (1) 916.5 13.9 1,014.9 14.8
Asset-backed and mortgage-backed securities (2) 2,245.3 33.9 2,383.5 34.9
Equity securities (3) 222.2 3.4 172.5 2.5
Other investments (3) 4.2 0.1 2.0 0.1
Total $ 6,617.5 100.0 % $ 6,845.9 100.0 %
(1)Actual maturities may differ as a result of calls before scheduled maturity.
(2)Includes RMBS, CMBS, CLO, Other ABS and mortgage insurance-linked notes,
which are not due at a single maturity date.
(3)No stated maturity date.
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The following table provides the ratings of our investment portfolio, from a
nationally recognized statistical ratings organization, presented as a
percentage of overall fair value, as of
Investment portfolio by rating
December 31,
2021 2020
Fair Fair
($ in millions) Value Percent Value Percent
U.S. government / AAA $ 2,476.4 37.4 % $ 2,420.6 35.4 %
AA 1,016.0 15.3 1,095.5 16.0
A 1,940.2 29.3 2,128.6 31.1
BBB 894.6 13.5 999.7 14.6
BB and below 63.9 1.0 24.0 0.3
Equity securities 222.2 3.4 172.5 2.5
Other invested assets 4.2 0.1 5.0 0.1
Total $ 6,617.5 100.0 % $ 6,845.9 100.0 %
Radian Group serves as the holding company for our operating subsidiaries and does not have any operations of its own. AtDecember 31, 2021 ,Radian Group had available, either directly or through unregulated subsidiaries, unrestricted cash and liquid investments of$604.9 million . Available liquidity atDecember 31, 2021 excludes certain additional cash and liquid investments that have been advanced toRadian Group from our subsidiaries to pay for corporate expenses and interest payments. In addition, available liquidity atDecember 31, 2021 does not take into consideration transactions subsequent toDecember 31, 2021 , including a$500 million return of capital from Radian Guaranty toRadian Group paid inFebruary 2022 . Total liquidity, which includes our undrawn$275.0 million unsecured revolving credit facility, as described below, was$879.9 million as ofDecember 31, 2021 .
During 2021,
primarily to payments for share repurchases and dividends, as described below.
In addition to available cash and marketable securities,Radian Group's principal sources of cash to fund future liquidity needs include: (i) payments made toRadian Group by its subsidiaries under expense- and tax-sharing arrangements; (ii) net investment income earned on its cash and marketable securities; (iii) to the extent available, dividends or other distributions from its subsidiaries; and (iv) amounts, if any, that Radian Guaranty is able to repay under the Surplus Note due 2027. InDecember 2021 ,Radian Group entered into a new$275.0 million unsecured revolving credit facility with a syndicate of bank lenders. The revolving credit facility has a five year term, provided that under certain conditionsRadian Group is required to offer to terminate the facility earlier than the maturity date. This facility replacedRadian Group's $267.5 million unsecured revolving credit facility with a syndicate of bank lenders, which had a maturity date ofJanuary 2022 . Subject to certain limitations, borrowings under the credit facility may be used for working capital and general corporate purposes, including, without limitation, capital contributions to our insurance subsidiaries as well as growth initiatives. AtDecember 31, 2021 , the full$275.0 million remains undrawn and available under the facility. See Note 12 of Notes to Consolidated Financial Statements for additional information on the unsecured revolving credit facility. We expectRadian Group's principal liquidity demands for the next 12 months to be: (i) the payment of corporate expenses, including taxes; (ii) interest payments on our outstanding debt obligations; (iii) subject to approval by our board of directors and our ongoing assessment of our financial condition and potential needs related to the execution and implementation of our business plans and strategies, the payment of quarterly dividends on our common stock, which we increased inMay 2021 from$0.125 to$0.14 per share and inFebruary 2022 to$0.20 per share; and (iv) the potential continued repurchases of shares of our common stock pursuant to share repurchase authorizations, as described below. In addition to our ongoing short-term liquidity needs discussed above, our most significant need for liquidity beyond the next 12 months is the repayment of$1.4 billion aggregate principal amount of our senior debt due in future years. See "-Capitalization-Holding Company " below for details of our debt maturity profile.Radian Group's liquidity demands for the next 12 months or in future periods could also include: (i) early repurchases or redemptions of portions of our debt obligations; (ii) additional investments to support our business strategy; and (iii) additional capital contributions to its subsidiaries. See "Item 1A. Risk Factors," including "-Radian Group's sources of liquidity may be insufficient to fund its obligations." and "-Radian Guaranty may fail to maintain its eligibility status with the GSEs, and the additional capital required to support Radian Guaranty's eligibility could reduce our available liquidity." See also Note 1 of Notes to Consolidated Financial Statements and "Overview-COVID-19 Impacts" for further information. 91
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We believe that Radian Group has sufficient current sources of liquidity to fund
its obligations. If we otherwise decide to increase our liquidity position,
Radian Group may seek additional capital, including by incurring additional
debt, issuing additional equity, or selling assets, which we may not be able to
do on favorable terms, if at all.
Share Repurchases. During 2021 and 2020, the Company repurchased 17.8 million
shares and 11.0 million shares of Radian Group common stock, respectively, under
programs authorized by Radian Group's board of directors, at a total cost of
$399.1 million and $226.3 million , respectively, including commissions. No
purchase authority remains available under these programs. On February 9, 2022 ,
Radian Group's board of directors approved a new share repurchase program
authorizing the company to spend up to $400 million , excluding commissions, to
repurchase Radian Group common stock. See Note 14 of Notes to Consolidated
Financial Statements for additional details on our share repurchase programs.
Dividends and Dividend Equivalents. Throughout 2020, and for the first quarter
of 2021, our quarterly common stock dividend was $0.125 per share. Effective May
4, 2021 , Radian Group's board of directors authorized an increase in the
Company's quarterly dividend to $0.14 per share. On February 9, 2022 , Radian
Group's board of directors authorized an increase to the Company's quarterly
dividend from $0.14 to $0.20 per share. Based on our current outstanding shares
of common stock and RSUs, we expect to require approximately $140 million in the
aggregate to pay dividends and dividend equivalents for the next 12 months.
Radian Group is not subject to any limitations on its ability to pay dividends
except those generally applicable to corporations that are incorporated in
Delaware . Delaware corporation law provides that dividends are only payable out
of a corporation's capital surplus or (subject to certain limitations) recent
net profits. As of December 31, 2021 , our capital surplus was $4.2 billion ,
representing our dividend limitation under Delaware law. The declaration and
payment of future quarterly dividends remains subject to the board of directors'
determination.
Corporate Expenses and Interest Expense. Radian Group has expense-sharing
arrangements in place with its principal operating subsidiaries that require
those subsidiaries to pay their allocated share of certain holding-company-level
expenses, including interest payments on Radian Group's outstanding debt
obligations. Corporate expenses and interest expense on Radian Group's debt
obligations allocated under these arrangements during 2021 of $147.4 million and
$82.8 million , respectively, were substantially all reimbursed by its
subsidiaries. We expect substantially all of our holding company expenses to
continue to be reimbursed by our subsidiaries under our expense-sharing
arrangements. The expense-sharing arrangements between Radian Group and its
mortgage insurance subsidiaries, as amended, have been approved by the
Pennsylvania Insurance Department , but such approval may be modified or revoked
at any time.
Taxes. Pursuant to our tax-sharing agreements, our operating subsidiaries pay
Radian Group an amount equal to any federal income tax the subsidiary would have
paid on a standalone basis if they were not part of our consolidated tax return.
As a result, from time to time, under the provisions of our tax-sharing
agreements, Radian Group may pay to or receive from its operating subsidiaries
amounts that differ from Radian Group's consolidated federal tax payment
obligation. During 2021, Radian Group received $11.7 million of tax-sharing
agreement payments from its operating subsidiaries.
The following table presents our holding company capital structure.
Capital structure
December 31,
($ in thousands) 2021 2020
Debt
Senior Notes due 2024 $ 450,000 $ 450,000
Senior Notes due 2025 525,000 525,000
Senior Notes due 2027 450,000 450,000
Deferred debt costs on senior notes (15,527) (19,326)
Revolving credit facility - -
Total 1,409,473 1,405,674
Stockholders' equity 4,258,796 4,284,353
Total capitalization $ 5,668,269 $ 5,690,027
Debt-to-capital ratio 24.9 % 24.7 %
Stockholders' equity decreased by $25.6 million from December 31, 2020 to
December 31, 2021 . The net decrease in stockholders' equity resulted primarily
from share repurchases of $399.1 million , net unrealized losses on investments
of $143.6 million primarily as a result of an increase in market interest rates
during the year, and dividends of $104.4 million , partially offset by our net
income of $600.7 million .
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We regularly evaluate opportunities, based on market conditions, to finance our
operations by accessing the capital markets or entering into other types of
financing arrangements with institutional and other lenders and financing
sources, and consider various measures to improve our capital and liquidity
positions, as well as to strengthen our balance sheet, improve Radian Group's
debt maturity profile and maintain adequate liquidity for our operations. In the
past we have repurchased and exchanged, prior to maturity, some of our
outstanding debt, and in the future, we may from time to time seek to redeem,
repurchase or exchange for other securities, or otherwise restructure or
refinance some or all of our outstanding debt prior to maturity in the open
market through other public or private transactions, including pursuant to one
or more tender offers or through any combination of the foregoing, as
circumstances may allow. The timing or amount of any potential transactions will
depend on a number of factors, including market opportunities and our views
regarding our capital and liquidity positions and potential future needs. There
can be no assurance that any such transactions will be completed on favorable
terms, or at all.
Mortgage
The principal demands for liquidity in our Mortgage business currently include:
(i) the payment of claims and potential claim settlement transactions, net of
reinsurance; (ii) expenses (including those allocated from Radian Group ); (iii)
repayments of FHLB advances; (iv) repayments, if any, associated with the
Surplus Note due 2027; and (v) taxes, including potential additional purchases
of U.S. Mortgage Guaranty Tax and Loss Bonds. See Notes 10 and 16 of Notes to
Consolidated Financial Statements for additional information related to these
non-interest bearing instruments. In addition to the foregoing liquidity
demands, other payments have included and, in the future could include, returns
of capital from Radian Guaranty to Radian Group , subject to approval by the
Pennsylvania Insurance Department , as discussed below.
The principal sources of liquidity in our mortgage insurance business currently
include insurance premiums, net investment income and cash flows from: (i)
investment sales and maturities; (ii) FHLB advances; and (iii) capital
contributions from Radian Group . We believe that the operating cash flows
generated by each of our mortgage insurance subsidiaries will provide these
subsidiaries with a substantial portion of the funds necessary to satisfy their
needs for the foreseeable future. However, see "Overview-COVID-19 Impacts" and
Note 1 of Notes to Consolidated Financial Statements for discussion about the
elevated risks and uncertainties associated with the COVID-19 pandemic,
including the impact on our PMIERs Cushion.
As of December 31, 2021 , our mortgage insurance subsidiaries maintained claims
paying resources of $5.9 billion on a statutory basis, which consist of
contingency reserves, statutory policyholders' surplus, premiums received but
not yet earned and loss reserves. In addition, our reinsurance programs are
designed to provide additional claims-paying resources during times of economic
stress and elevated losses. See Note 8 of Notes to Consolidated Financial
Statements for additional information.
Radian Guaranty's Risk-to-capital as of December 31, 2021 was 11.1 to 1. Radian
Guaranty is not expected to need additional capital to satisfy state insurance
regulatory requirements in their current form. At December 31, 2021 , Radian
Guaranty had statutory policyholders' surplus of $778.1 million . This balance
includes a $354.1 million benefit from U.S. Mortgage Guaranty Tax and Loss Bonds
issued by the U.S. Department of the Treasury , which mortgage guaranty insurers
such as Radian Guaranty may purchase in order to be eligible for a tax
deduction, subject to certain limitations, related to amounts required to be set
aside in statutory contingency reserves. See Note 16 of Notes to Consolidated
Financial Statements and "Item 1A. Risk Factors" for more information.
Radian Guaranty currently is an approved mortgage insurer under the PMIERs.
Private mortgage insurers, including Radian Guaranty, are required to comply
with the PMIERs to remain approved insurers of loans purchased by the GSEs. At
December 31, 2021 , Radian Guaranty's Available Assets under the PMIERs financial
requirements totaled approximately $5.4 billion , resulting in a PMIERs Cushion
of $2.1 billion , or 62%, over its Minimum Required Assets. Those amounts compare
to Available Assets and a PMIERs cushion of $4.7 billion and $1.3 billion ,
respectively, at December 31, 2020 .
The primary driver of the increase in Radian Guaranty's PMIERs Cushion during
2021 is the increase in Available Assets, reflecting positive cash flows from
operating activities, combined with a decrease in Minimum Required Assets.
During 2021, Radian Guaranty's Minimum Required Assets decreased primarily as a
result of a decrease in the number of primary loans in default. Radian
Guaranty's Minimum Required Assets include a benefit as a result of reinsurance
agreements, including the addition of the Eagle Re 2021-1 Ltd. and Eagle Re
2021-2 Ltd. reinsurance agreements in April 2021 and November 2021 ,
respectively. See Note 8 of Notes to Consolidated Financial Statements for
additional information on our reinsurance agreements.
Our PMIERs Cushion at December 31, 2021 also includes a benefit from the current
broad-based application of the Disaster Related Capital Charge that has reduced
the total amount of Minimum Required Assets that Radian Guaranty otherwise would
have been required to hold against pandemic-related defaults by approximately
$300 million and $650 million as of December 31, 2021 and 2020, respectively,
taking into consideration our risk distribution structures in effect as of those
dates. We expect that application of the Disaster Related Capital Charge will
continue to reduce Radian Guaranty's PMIERs Minimum Required Assets, but this
impact will diminish over time.
Notwithstanding the continued application of the Disaster Related Capital
Charge, the total amount of Minimum Required Assets we may be required to hold
against defaulted loans will increase over time, because the 0.30 multiplier is
applied to a higher base factor for the defaulting loans (including those in
forbearance) as they age, with increases taking place upon four,
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six and 12 missed monthly payments. Additionally, given the lack of an
expiration date under the CARES Act, it is difficult to estimate how long the
GSEs may continue to offer COVID-19 forbearance programs for new defaults. It is
also difficult to assess how long the GSEs may continue to apply the COVID-19
Amendment to loans in a COVID-19-related forbearance program. The COVID-19
Crisis Period expired March 31, 2021 .
See "Item 1. Business-Regulation-Federal Regulation-GSE Requirements for
Mortgage Insurance Eligibility." for more information about the Disaster Related
Capital Charge, and for further information, including on the expiration of the
COVID-19 Crisis Period.
Even though they hold assets in excess of the minimum statutory capital
thresholds and PMIERs financial requirements, the ability of Radian's mortgage
insurance subsidiaries to pay dividends on their common stock is restricted by
certain provisions of the insurance laws of Pennsylvania , their state of
domicile. Under Pennsylvania's insurance laws, ordinary dividends and other
distributions may only be paid out of an insurer's positive unassigned surplus
unless the Pennsylvania Insurance Department approves the payment of dividends
or other distributions from another source.
In light of Radian Guaranty's negative unassigned surplus related to operating
losses in prior periods, the ongoing need to set aside contingency reserves, and
the current ongoing economic uncertainty related to the COVID-19 pandemic, which
increased losses in 2020 and could cause losses in future periods, we do not
anticipate that Radian Guaranty will be permitted under applicable insurance
laws to pay dividends or other distributions for the next several years without
prior approval from the Pennsylvania Insurance Department . Under Pennsylvania's
insurance laws, an insurer must obtain the Pennsylvania Insurance Department's
approval to pay an Extraordinary Distribution. Radian Guaranty has sought and
received such approval to return capital by paying Extraordinary Distributions
to Radian Group , most recently in February 2022 . See Note 16 of Notes to
Consolidated Financial Statements for additional information on our
Extraordinary Distributions, statutory dividend restrictions and contingency
reserve requirements.
Radian Guaranty and Radian Reinsurance are both members of the FHLB. As members,
they may borrow from the FHLB, subject to certain conditions, which include
requirements to post collateral and to maintain a minimum investment in FHLB
stock. Advances from the FHLB may be used to provide low-cost, supplemental
liquidity for various purposes, including to fund incremental investments.
Radian's current strategy includes using FHLB advances as financing for general
cash management purposes and for purchases of additional investment securities
that have similar durations, for the purpose of generating additional earnings
from our investment securities portfolio with limited incremental risk. As of
December 31, 2021 , there were $151.0 million of FHLB advances outstanding. See
Note 12 of Notes to Consolidated Financial Statements for additional
information.
homegenius
As of
investments totaling
Title insurance companies, includingRadian Title Insurance , are subject to comprehensive state regulations, including minimum net worth requirements.Radian Title Insurance was in compliance with all of its minimum net worth requirements atDecember 31, 2021 . In the event the cash flows from operations of the homegenius segment are not adequate to fund all of its needs, including the regulatory capital needs ofRadian Title Insurance ,Radian Group may provide additional funds to the homegenius segment in the form of an intercompany note or other capital contribution, and if needed forRadian Title Insurance , subject to the approval of theOhio Department of Insurance . Additional capital support may also be required for potential investments in new business initiatives to support our strategy of growing our businesses. Liquidity levels may fluctuate depending on the levels and contractual timing of our invoicing and the payment practices of our homegenius clients, in combination with the timing of our homegenius segment's payments for employee compensation and to external vendors. The amount, if any, and timing of the homegenius segment's dividend paying capacity will depend primarily on the amount of excess cash flow generated by the segment.
Ratings
Radian Group , Radian Guaranty,Radian Reinsurance and Radian Title Insurance have been assigned the financial strength ratings set forth in the chart below. We believe that ratings often are considered by others in assessing our credit strength and the financial strength of our primary insurance subsidiaries. The following ratings have been independently assigned by third-party statistical rating organizations, are for informational purposes only and are subject to change. See "Item 1A. Risk Factors-The current financial strength ratings assigned to our mortgage insurance subsidiaries could weaken our competitive position and potential downgrades by rating agencies to these ratings and the ratings assigned toRadian Group could adversely affect the Company." 94
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Ratings
Subsidiary Moody's (1) S&P (2) Fitch (3) Demotech (4)
Radian Group Ba1 BB+ BBB- N/A
Radian Guaranty Baa1 BBB+ A- N/A
Radian Reinsurance N/A BBB+ N/A N/A
Radian Title Insurance N/A N/A N/A A
(1)Based on the August 27, 2021 update, Moody's outlook for Radian Group and
Radian Guaranty currently is Stable.
(2)Based on the April 28, 2021 update, S&P's outlook for Radian Group , Radian
Guaranty and Radian Reinsurance is currently Stable.
(3)Based on the May 3, 2021 release, Fitch's outlook for Radian Group and Radian
Guaranty is currently Stable.
(4)Based on the December 1, 2021 release.
Critical Accounting Estimates
SEC guidance defines Critical Accounting Estimates as those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operation of the registrant. These items require the application of management's most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing our consolidated financial statements in accordance with GAAP, management has made estimates, assumptions and judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing these financial statements, management has utilized available information, including our past history, industry standards and the current and projected economic and housing environments, among other factors, in forming its estimates, assumptions and judgments, giving due consideration to materiality. Because the use of estimates is inherent in GAAP, actual results could differ from those estimates. In addition, other companies may utilize different estimates, which may impact comparability of our results of operations to those of companies in similar businesses. A summary of the accounting estimates that management believes are critical to the preparation of our consolidated financial statements is set forth below. See Note 2 of Notes to Consolidated Financial Statements for additional disclosures regarding our significant accounting policies. Mortgage Insurance Portfolio Reserve for Losses and LAE We establish reserves to provide for losses and LAE, which include the estimated costs of settling claims in our mortgage insurance portfolio, in accordance with the accounting standard regarding accounting and reporting by insurance enterprises. In our mortgage insurance business, the default and claim cycle begins with the receipt of a default notice from the loan servicer. We maintain an extensive database of default and claim payment history, and use models based on a variety of loan characteristics to determine the likelihood that a default will reach claim status. With respect to loans that are in default, considerable judgment is exercised as to the adequacy of reserve levels. We use an actuarial projection methodology referred to as a "roll rate" analysis that uses historical claim frequency information to determine the projected ultimate Default to Claim Rates based on the Stage of Default and Time in Default as well as the date that a loan goes into default. The Default to Claim Rate also includes our estimates with respect to expected Rescissions and Claim Denials, which have the effect of reducing our Default to Claim Rates. See Note 11 of Notes to Consolidated Financial Statements for the table detailing our Default to Claim Rate assumptions. After estimating the Default to Claim Rate, we estimate Claim Severity based on recently observed severity rates within product type, type of insurance and Time in Default cohorts, as adjusted to account for anticipated differences in future results compared to recent trends. These severity estimates are then applied to individual loan coverage amounts to determine reserves. Similar to the Default to Claim Rate, Claim Severity also is impacted by the length of time that loans are in default and by our Loss Mitigation Activity. For claims under ourPrimary Mortgage Insurance , the coverage percentage is applied to the claim amount, which consists of the unpaid loan principal, plus past due interest (for which our liability is contractually capped in accordance with the terms of our Master Policies) and certain expenses associated with the default, to determine our maximum liability. Therefore, Claim Severity generally increases the longer that a loan is in default. We considered the sensitivity of first-lien loss reserve estimates atDecember 31, 2021 by assessing the potential changes resulting from a parallel shift in Claim Severity and Default to Claim Rate estimates for primary loans, excluding any potential benefits from reinsurance. For example, assuming all other factors remain constant, for every one percentage point change in primary Claim Severity (which we estimate to be 98.7% of defaulted risk exposure atDecember 31, 2021 ), we estimated that our loss reserves would change by approximately$8.0 million atDecember 31, 2021 . Assuming all other factors remain constant, for every one percentage point change in our overall primary net Default to Claim Rate (which we estimate to 95
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be 46% at
Mitigation Activities), we estimated a
at
Senior management regularly reviews the modeled frequency, Claim Severity and Loss Mitigation Activity estimates, which are based on historical trends, as described above. If recent emerging or projected trends differ significantly from the historical trends used to develop the modeled estimates, management evaluates these trends and determines how they should be considered in its reserve estimates. Estimating our case reserve for losses involves significant reliance upon assumptions and estimates with regard to the likelihood, magnitude and timing of each potential loss. The models, assumptions and estimates we use to establish loss reserves may prove to be inaccurate, especially during an extended economic downturn or a period of market volatility and economic uncertainty such as we have experienced due to the COVID-19 pandemic. These assumptions require management to use considerable judgment in estimating the rate at which these loans will result in claims. As such, given the current environment, there is significant uncertainty around our reserve estimate.
Premium Revenue Recognition
Premiums on mortgage insurance products are written on a recurring basis, either as monthly or annual premiums, or on a multi-year basis as a single premium. Monthly premiums written are earned as coverage is provided each month. For certain monthly policies where the billing is deferred for the first month's coverage period, currently to the end of the policy, we record a net premium receivable representing the present value of such deferred premiums that we estimate will be collected at that future date. We recognize changes in this receivable based on changes in the estimated amount and timing of such collections, including as a result of changes in observed trends as well as our periodic review of our servicing guide and our operations and collections practices. Key assumptions supporting our estimate include a collection rate and average life. During 2021 and 2020, we adjusted our assumptions for collectability and average life, which had an impact of increasing the net premium receivable and net premiums earned by$2.3 million and$11.3 million , respectively. If the collection rate assumption increased or decreased by 500 basis points, it would result in a$2.5 million increase or decrease, respectively, in the net premium receivable and net premiums earned. If the average life assumption increased or decreased by one year, it would result in an approximate$2.5 million decrease or increase, respectively, in the net premium receivable and net premiums earned. Additionally, given the difference between the present value of the net premium receivable recorded and the contractual premiums due, changes in our servicing guide, operations or collection practices could have up to a$43.7 million pre-tax benefit to our results of operations in periods when any changes are implemented. Single premiums written are initially recorded as unearned premiums and earned over time based on the anticipated loss pattern and the estimated period of risk exposure, which is primarily derived from historical experience and other factors such as projected losses, premium type and projected contractual periods of risk based on original LTV. Our estimate for the single premium earnings pattern is updated periodically and subject to change given uncertainty as to the underlying loss development and duration of risk. During 2019, we updated our estimated period of risk exposure due to the continuing increase in the significance of borrower-paid Single Premium Policies as well as our estimated anticipated loss pattern due to changes in observed and projected losses. During 2019, this change in estimate resulted in a$32.9 million increase in net premiums earned. There were no changes to our single premium earnings pattern estimate in 2020 or 2021. Actual future experience that is different than expected loss development or policy cancellations could result in further material increases or decreases in the recognition of net premiums earned. Based on historical experience, losses are relatively low during the first two years after a loan is originated and then increase over a period of several years before declining; however, several factors can impact and change this cycle, including the economic environment, the quality of the underwriting of the loan, characteristics of the mortgage loan, the credit profile of the borrower, housing prices and unemployment rates. If the timing of losses were to shift, it could accelerate or decelerate our recognition of net premiums earned and could have a material impact on our results of operations.
Credit Losses and Other Impairments
Investments
We perform an evaluation of fixed-maturity securities available for sale each quarter to assess whether any decline in their fair value below cost is deemed to be a credit impairment recognized in earnings. Factors considered in our assessment for impairment include the extent to which the amortized cost basis is greater than fair value and the reasons for the decline in value. As ofDecember 31, 2021 , our gross unrealized losses on available for sale securities was$38.0 million , which can fluctuate materially over time based on changes in market conditions. During 2021 and 2020, we recognized a$0.7 million credit recovery and a$1.0 million credit loss, respectively, related to our fixed-maturity securities available for sale. See Note 6 of Notes to Consolidated Financial Statements for additional information regarding impairments related to investments. 96
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Fair Value of Financial Instruments
Our estimated fair value measurements are intended to reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and the risks inherent in the inputs to the model. Changes in economic conditions and capital market conditions, including but not limited to, benchmark interest rate changes, credit spread changes, market volatility and changes in the value of underlying collateral, could cause actual results to differ materially from our estimated fair value measurements. Nearly all of our financial instruments recorded at fair value relate to our investment portfolio, which totaled$6.5 billion as ofDecember 31, 2021 . The primary risks in our investment portfolio are interest-rate risk and credit-spread risk, namely the fair value sensitivity of our fixed income securities to changes in interest rates and credit spreads, respectively. We regularly analyze our exposure to interest-rate risk and credit-spread risk and have determined that the fair value of our investments is materially exposed to changes in both interest rates and credit spreads. For additional information regarding the sensitivity of our investment portfolio to these inputs, see "Item 7A. Quantitative and Qualitative Disclosures About Market Risk." See also Note 5 of Notes to Consolidated Financial Statements for additional information pertaining to financial instruments at fair value and our valuation methodologies.
Liability for Legal Contingencies
As discussed in Note 13 of Notes to Consolidated Financial Statements, we are subject to various legal proceedings and claims that arise in the ordinary course of business. We establish accruals only when we determine both that it is probable that a loss has been incurred and the amount of the loss is reasonably estimable, which requires significant judgment. As described in Note 13 of Notes to Consolidated Financial Statements, we believe there was not at least a reasonable possibility we may have incurred a material loss, or a material loss greater than a recorded accrual, concerning loss contingencies for asserted legal and other claims. Due to the inherently subjective nature of these estimates and the uncertainty and unpredictability surrounding the outcome of legal and other proceedings, actual results may differ materially from any amounts that have been accrued. If one or more legal matters were resolved against the Company in a reporting period for amounts above management's expectations, actual results could differ materially from any amounts that have been accrued.
Income Taxes
We are required to establish a valuation allowance against our deferred tax assets when it is more likely than not that all or some portion of our deferred tax assets will not be realized. At each balance sheet date, we assess our need for a valuation allowance and this assessment is based on all available evidence, both positive and negative, and requires management to exercise judgment and make assumptions regarding whether such deferred tax assets will be realized in future periods. Future realization of our deferred tax assets will ultimately depend on the existence of sufficient taxable income of the appropriate character (ordinary income or capital gains) within the applicable carryback and carryforward periods provided under the tax law. In making our assessment of the more likely than not standard, the weight assigned to the effect of both positive and negative evidence is commensurate with the extent to which such evidence can be objectively verified. We have determined that certain non-insurance entities within Radian may continue to generate taxable losses on a separate company basis in the near term and may not be able to fully utilize certain state and local NOLs on their state and local tax returns. Therefore, with respect to deferred tax assets relating to these state and local NOLs and other state timing adjustments, we retained a valuation allowance of$83.4 million atDecember 31, 2021 and$77.7 million atDecember 31, 2020 . Estimated factors in this assessment include, but are not limited to, forecasts of future income and actual and planned business and operational changes. An amount up to the total valuation allowance currently recorded could be recognized if our assessment of realizability changes. Our assumptions around these items and the weight assigned to them have remained consistent in recent periods. See Note 10 of Notes to Consolidated Financial Statements for additional information. 97
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