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RADIAN GROUP INC – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
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 66 Key Factors Affecting Our Results 68 Mortgage Insurance Portfolio 72 Results of Operations-Consolidated 78 Results of Operations-Mortgage 83 Results of Operations-homegenius 89 Results of Operations-All Other 91 Liquidity and Capital Resources 91 Critical Accounting Estimates 97
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 for the benefit of mortgage lending institutions and mortgage credit investors, principally through private mortgage insurance on residential first-lien mortgage loans, and also provides contract underwriting and other credit risk management 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, real estate brokers and agents.
See Note 4 of Notes to Consolidated Financial Statements for additional
information about our reportable segments. See "Key Factors Affecting Our
Results" below for information about current business conditions and other
factors that affect the performance of our Mortgage and homegenius businesses.
Current Operating Environment
As a seller of mortgage credit protection and other mortgage and credit risk management solutions and real estate products and services, our business results are subject to macroeconomic conditions and specific events that impact the housing, housing finance and related real estate markets, the credit performance of our mortgage insurance portfolio and our future business opportunities, as well as seasonal fluctuations that specifically affect the mortgage origination and real estate environments. The performance of our Mortgage business is particularly influenced by housing prices, inflationary pressures, interest rate changes, unemployment levels, mortgage originations and the availability of credit, national and regional economic conditions and other events that impact housing and real estate markets and the ability of borrowers to remain current on their mortgages, most of which are beyond our control. TheU.S. economy is currently experiencing a high rate of inflation, with annual inflation reaching a 40-year high in 2022, as well as slower economic growth, declining home prices and the risks of a recession and of higher unemployment rates. 66
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Recent actions taken by the U.S. Federal Reserve to increase interest rates in
response to the inflationary trends that started in 2021 resulted in a sharp and
significant increase in mortgage interest rates during 2022, with mortgage rates
more than doubling to nearly 7% at the end of 2022. The U.S. Federal Reserve
raised rates further in the first quarter of 2023 and has signaled that it
expects to continue to increase rates in future periods. These economic
conditions have negatively impacted the U.S. housing market, broadly reducing
refinance activity and new purchase transactions and resulting in decreasing
home prices in recent months in many markets. As further discussed below, we
expect that the current economic environment will continue to negatively impact
certain aspects of our results, including lower NIW, lower homegenius revenues,
higher mortgage insurance defaults and lower investment fair values. At the same
time, we also expect to benefit from the higher interest rate environment
through higher Persistency Rates that will favorably impact our IIF, as well as
through the recognition of higher net investment income, as further discussed
below.
In light of the current economic and operating environments, throughout 2022 we
have taken steps to align our workforce to the current and expected needs of the
business. As such, as of February 22, 2023 , we had approximately 30% fewer
employees than we had at year end 2021. See "Results of
Operations-Consolidated-Expenses-Other Operating Expenses" for additional
information.
The cooling effect of current economic conditions on U.S. housing markets
throughout 2022 has resulted in a smaller insurable market compared to 2021,
reducing our NIW. We wrote NIW of $68.0 billion in 2022, a decrease of 26%
compared to our NIW in 2021. We expect these conditions to continue to
negatively impact our NIW volumes in future periods. Longer-term, however, we
continue to believe that the housing market fundamentals and outlook remain
favorable, including demographics supporting growth in the population of
first-time homebuyers and a constrained supply of homes available for sale.
While the recent increases in mortgage interest rates have significantly reduced
refinance demand, they have also resulted in a decrease in policy cancellations,
which has increased our Persistency Rate, and in turn contributed to growth in
our IIF. See "Mortgage Insurance Portfolio" below for additional details on our
NIW and IIF.
The same inflationary pressures and higher interest rate environment that are
impacting mortgage refinance demand and our NIW are also impacting our
homegenius businesses, including a significant decrease in our title revenues
beginning in the second quarter of 2022, due to the rapid decline in
industry-wide refinance volumes. The current macroeconomic trends, and the
corresponding softening in demand for home sales and mortgage refinancings, have
also impacted the market demand for our new proprietary real estate technology
products and services, which in some cases have been delayed by longer than
anticipated launch timelines.
The recent sharp increases in interest rates also materially affected the fair
value of our investment portfolio in 2022, resulting in significant unrealized
losses on investments. Given our intent and ability as of December 31, 2022 , to
hold these securities until recovery of their amortized cost basis, we do not
expect to realize a loss on any of our investments in an unrealized loss
position. The decrease in the fair value of our investments due to higher market
interest rates negatively affected our net income and stockholders' equity
during 2022. Conversely, this higher interest rate environment resulted in the
recognition of higher net investment income in 2022, which is expected to
continue in future periods. See Note 6 of Notes to Consolidated Financial
Statements for additional information about our investments.
The onset of the COVID-19 pandemic resulted in a significant increase in
unemployment, which had a negative impact on the economy. As a result, we
experienced a material increase in new defaults in 2020, substantially all of
which related to defaults of loans subject to mortgage 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 for that year. However, subsequent trends in Cures
have been more favorable than original expectations, resulting in favorable loss
reserve development on prior period defaults in 2021 and in 2022. See Note 11 of
Notes to Consolidated Financial Statements for additional information on our
reserve for losses.
As noted above, at the start of the pandemic, we experienced a material increase
in new defaults and our primary default rate increased sharply to 6.5% at June
30, 2020 . Since then, favorable trends in the number of new defaults and Cures
have led to a decline in our default inventory and default rate, resulting in a
primary default rate of 2.2% at December 31, 2022 . However, deteriorating
economic conditions, including declining home prices and the risks of a
recession and of higher unemployment rates, have increased the likelihood that
we will experience higher levels of new default activity and lower levels of
Cures in our mortgage insurance portfolio. 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 overall economic
environment and on the number and timing of Cures 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.
Despite risks and uncertainties, we believe that the steps we have taken in
recent years, including by improving our capital and liquidity positions,
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, have helped position the Company to better withstand the
negative effects from the macroeconomic stresses discussed above, including
those resulting from the high rate of inflation and higher interest rates, as
well as the other risks described in "Item 1A. Risk Factors."
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In particular, we believe that the range of risk distribution transactions and
strategies that we utilize have increased our financial strength and flexibility
by mitigating credit risk and financial volatility through varying economic
cycles. As of December 31, 2022 , 70% of our primary RIF is subject to a form of
risk distribution and our estimated reinsurance recoverable related to our
mortgage insurance portfolio was $25 million . 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. See "Mortgage Insurance Portfolio-Risk
Distribution" for additional information.
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.
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 our expectations for future Persistency Rates. 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. 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 positive (increase in IIF) or negative (decrease in IIF) 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.
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, which are subject to seasonality, 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 andVA insured loans and (ii) the relative percentage of mortgage originations that are for purchased homes versus refinances. We believe, for example, that given current pricing levels, which are subject to change, the generally better execution available through the GSEs for borrowers with higher FICO scores, lender preferences 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." 68
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Private mortgage insurance penetration in the insurable market has generally
been 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.
Mortgage origination market (1)
[[Image Removed: rdn-20221231_g2.jpg]]
Origination Market ($
in billions) Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022
¢ Refinance $412 $699 $773 $876 $896 $650 $606 $539 $330 $186 $95 $66
¢ Purchase $284 $353 $466 $444 $377 $532 $527 $489 $388 $492 $411 $330
Total $696 $1,052 $1,239 $1,320 $1,273 $1,182 $1,133 $1,028 $718 $678 $506 $396
Private mortgage insurance penetration of mortgage origination market (1)
[[Image Removed: rdn-20221231_g3.jpg]]
Market
Penetration (%) Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022
ò Purchase (2) 22.7% 24.3% 26.9% 27.0% 25.5% 24.3% 25.5% 24.4% 25.1% 24.0% 24.9% 22.7%
ò Overall (2) 13.5% 14.0% 14.6% 13.4% 11.7% 13.4% 13.1% 12.6% 14.5% 17.9% 20.6% 19.2%
ò Refinance (2) 7.2% 8.9% 7.1% 6.5% 5.8% 4.5% 2.4% 1.9% 2.0% 1.6% 1.8% 2.0%
(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.
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Premiums
The premium rates we charge for our insurance are based on a number of borrower,
loan and property characteristics. The mortgage insurance industry is highly
competitive and private mortgage insurers compete with each other and with the
FHA and VA with respect to price and other factors.
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 among other factors. As a result, our
pricing is expected to generate relatively consistent returns across the credit
spectrum. 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, lender and geographic concentration
risk, profitability and volume 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 "Mortgage Insurance
Portfolio-New Insurance Written" and "Liquidity and Capital Resources-Mortgage"
below 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 82% of the loans in our total Primary Mortgage Insurance portfolio
at December 31, 2022 , 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 servicer is required to
review the policy for automatic cancellation 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 our 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. In "Item 1A.
Risk Factors," see "-Our Loss Mitigation Activity could 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
and PMIERs financial requirements, and potentially our 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.
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 include salaries and other base employee costs, variable and share-based incentive compensation and other general operating expenses, such as fees for professional and consulting services, software, rent and depreciation, among other costs. Employee related expenses are driven by our headcount, which can fluctuate due to the amount of our NIW and IIF, as well as our plans for other business initiatives. Our other operating expenses may also fluctuate due to 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. These operating expenses are reported net of ceding commissions associated with our QSR Program. As a result, changes to our QSR Program and the amount of our ceded premiums earned also can impact our other operating expenses.
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
finance and real estate markets, as well as market receptivity to the products
we offer. 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-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.
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
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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.
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-Overview" and Note 1 of Notes to Consolidated
Financial Statements for additional information regarding the homegenius
segment.
In addition, net gains (losses) on investments and other financial instruments also may impact our consolidated results in the ordinary course. 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.
Mortgage Insurance Portfolio
Insurance in Force
IIF by origination vintage (1)
[[Image Removed: rdn-20221231_g4.jpg]]
Insurance in Force as of:
Vintage written in: December 31, 2022 December 31, 2021 December 31, 2020
($ in billions)
¢ 2022 $65.2 25.0 % $- - % $- - %
¢ 2021 77.3 29.6 87.4 35.5 - -
¢ 2020 57.7 22.1 74.3 30.2 98.8 40.2
¢ 2019 17.9 6.8 24.0 9.8 44.6 18.1
¢ 2018 9.0 3.5 12.4 5.0 23.5 9.5
¢ 2017 8.2 3.1 11.5 4.7 21.2 8.6
¢ 2009 - 2016 16.7 6.4 25.0 10.2 43.2 17.6
¢ 2008 & Prior (2) 9.0 3.5 11.4 4.6 14.8 6.0
Total $261.0 100.0 % $246.0 100.0 % $246.1 100.0 %
(1)Policy years represent the original policy years and have not been adjusted
to reflect subsequent refinancing activity under HARP.
(2)Includes loans that were subsequently refinanced under HARP.
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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 $68.0 billion of primary new mortgage insurance in 2022,
compared to $91.8 billion of NIW in 2021.
Our 2022 NIW, offset by policy cancellations and amortization within our
existing portfolio, resulted in IIF of $261.0 billion at December 31, 2022 ,
compared to $246.0 billion at December 31, 2021 , as shown in the chart above.
Our NIW decreased by 26% in 2022 as compared to 2021, due primarily to lower
refinance originations and a reduction in the size of the overall insurable
market, partially offset by an increase in our market share in 2022.
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 generally has
been three to five times higher for purchase transactions than for refinancings.
However, with significant home price appreciation in recent years, penetration
on purchase transactions has increased while penetration on refinancings has
decreased, and the penetration rate for private mortgage insurance has shifted
to 12 to 16 times higher for purchase transactions than for refinancings.
According to industry estimates, total mortgage origination volume was
significantly lower in 2022 as compared to 2021 due to a significant decline in
refinance activity and a smaller decline in home purchases. Although it is
difficult to project future volumes, recent industry projections for 2023
estimate total mortgage originations of approximately $1.8 trillion , which would
represent a decline in the total annual mortgage origination market of
approximately 23% as compared to 2022. Factoring in our projections of private
mortgage insurance penetration in the overall insurable mortgage market, we
estimate that the private mortgage insurance market will be between $275 billion
and $325 billion in 2023. This outlook anticipates a further decrease in
refinance originations in 2023 resulting from increased interest rates. While
expectations for refinance volume vary, there is an industry-wide consensus that
we should expect a healthy purchase market in 2023 driven by ongoing homebuyer
demand, which is a positive for mortgage insurers given the higher likelihood
that purchase loans will utilize private mortgage insurance as compared to
refinance loans. If refinance volume declines, we would expect the Persistency
Rate for our portfolio to increase, benefiting the size of our IIF portfolio.
See "Item 1A. Risk Factors" for more information.
Our total mix of Single Premium Policies decreased to 5% of our NIW for 2022,
compared to 7% for 2021. Borrower-paid Single Premium Policies were 96% of our
total direct Single Premium NIW for both 2022 and 2021. We expect our production
level for Single Premium Policies to fluctuate over time based on various
factors, which include risk/return considerations and market conditions.
The following table provides selected information as of and for the periods
indicated related to our mortgage insurance NIW. For direct Single Premium
Policies, NIW includes policies written on an individual basis (as each loan is
originated) and on an aggregated basis (in which each individual loan in a group
of loans is insured in a single transaction, typically after the loans have been
originated).
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NIW
Years Ended December 31,
($ in millions) 2022 2021 2020
NIW $ 67,954 $ 91,830 $ 105,024
Primary risk written $ 17,368 $ 22,591 $ 24,540
Average coverage percentage 25.6 % 24.6 % 23.4 %
NIW by loan purpose
Purchases 96.1 % 80.5 % 64.8 %
Refinances 3.9 % 19.5 % 35.2 %
Total borrower-paid NIW 99.2 % 99.2 % 98.2 %
NIW by premium type
Direct Monthly and Other Recurring Premiums 95.1 % 92.8 % 87.7 %
Direct single premiums (1) 4.9 % 7.2 % 12.3 %
NIW by FICO score (2)
>=740 59.8 % 58.6 % 66.0 %
680-739 32.4 % 34.2 % 30.8 %
620-679 7.8 % 7.2 % 3.2 %
NIW by LTV
95.01% and above 16.6 % 12.0 % 9.2 %
90.01% to 95.00% 39.9 % 40.7 % 37.1 %
85.01% to 90.00% 28.4 % 28.3 % 29.4 %
85.00% and below 15.1 % 19.0 % 24.3 %
(1)Borrower-paid Single Premium Policies were 4.7%, 6.9% and 11.1% 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, 2022 , increased as compared to the same period last year, due to the positive impact from our NIW in 2022 and higher Persistency Rates, as further discussed below. Historically, there has been a close correlation between interest rates and Persistency Rates. Higher interest rate environments generally decrease refinancings, which decrease the cancellation rate of our insurance and positively affect our Persistency Rates. As shown in the table below, our 12-month Persistency Rate atDecember 31, 2022 , increased as compared to the same period in 2021. The increase in our Persistency Rate in 2022 was primarily attributable to the decline in refinance activity due to increases in mortgage interest rates, as compared to the prior year. As ofDecember 31, 2022 , 5% of our IIF had a mortgage note interest rate greater than 6.0%. Excluding the 2022 vintage, less than 1% of our IIF had a mortgage note interest rate greater than 6.0%. Given the recent increase in market mortgage interest rates, which, based on reported industry averages, now exceed that level, we would expect a continued positive impact on our Persistency Rates. As discussed above, 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. For additional information, in "Item 1A. Risk Factors," see "-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." While these risks and uncertainties are elevated in the near-term, we continue to believe that the long-term housing market fundamentals and outlook remain positive, including demographics supporting growth in the population of first-time 74
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homebuyers and a relatively constrained supply of homes available for sale. In
addition, historical loan performance data indicates that credit scores and
underwriting quality are key drivers of credit performance, and 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.
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 2013 2014 2015 2016 2017 2018 2019 2020 (2) 2021 (2) 2022
2013 2.5% 4.0% 3.4% 3.7% 3.5% 3.4% 3.3% 4.2% 4.1% 2.9%
2014 2.7% 4.1% 4.9% 5.0% 5.1% 5.2% 6.9% 6.8% 4.5%
2015 2.1% 4.8% 5.2% 5.0% 4.7% 7.4% 6.8% 3.8%
2016 2.9% 5.0% 4.8% 4.7% 9.7% 8.0% 3.7%
2017 4.7% 5.1% 6.1% 14.3% 11.9% 5.1%
2018 3.0% 6.4% 22.8% 19.0% 7.2%
2019 2.8% 35.6% 23.5% 6.8%
2020 25.6% 14.9% 6.0%
2021 7.9% 10.9%
2022 9.4%
(1)Represents inception-to-date losses incurred as a percentage of net premiums
earned.
(2)Losses incurred in 2021 and 2020 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) 2022 2021 2020
Primary IIF $ 260,994 $ 245,972 $ 246,144
Primary RIF $ 66,094 $ 60,913 $ 60,656
Average coverage percentage 25.3 %
24.8 % 24.6 %
Persistency Rate (12 months ended) 79.6 % 64.3 % 61.2 %
Persistency Rate (quarterly, annualized) (1) 84.1 % 71.7 % 60.4 %
Total borrower-paid RIF 93.3 % 90.6 % 86.3 %
Primary RIF by Premium Type
Direct Monthly and Other Recurring Premiums 87.1 % 83.9 % 79.1 %
Direct single premiums (2) 12.9 % 16.1 % 20.9 %
Primary RIF by FICO score (3)
>=740 57.4 % 56.9 % 57.5 %
680-739 34.6 % 35.0 % 34.6 %
620-679 7.6 % 7.6 % 7.3 %
<=619 0.4 % 0.5 % 0.6 %
Primary RIF by LTV
95.01% and above 17.1 % 15.1 % 14.4 %
90.01% to 95.00% 48.4 % 48.9 % 49.3 %
85.01% to 90.00% 27.2 % 27.7 % 28.0 %
85.00% and below 7.3 % 8.3 % 8.3 %
(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 7.7%, 8.5% and 9.4% 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,
2022 and 2021.
Year of origination - RIF
December 31,
2022 2021
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 $ 2,277 5,692 9.0 % 29.2 % $ 2,865 7,385 9.3 % 24.5 %
2009-2016 4,406 3,342 3.5 16.9 6,588 5,974 4.4 22.2
2017 2,173 1,966 4.4 8.6 2,998 3,399 5.7 12.2
2018 2,319 2,512 5.2 11.7 3,158 4,342 6.8 16.4
2019 4,439 2,279 2.7 9.7 5,892 4,078 3.7 15.0
2020 14,255 2,292 1.1 10.1 17,789 2,938 1.1 8.3
2021 19,528 2,865 1.1 11.3 21,623 945 0.3 1.4
2022 16,697 965 0.5 2.5 - - - -
Total $ 66,094 21,913 100.0 % $ 60,913 29,061 100.0 %
Geographic Dispersion
The following table shows, as of December 31, 2022 and 2021, 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, 2022 ).
Top 10 U.S. states - RIF
December 31,
2022 2021
Top 10 States RIF Reserve for Losses RIF Reserve for Losses
Texas 9.4 % 8.4 % 8.5 % 9.7 %
California 8.7 9.3 9.3 11.0
Florida 6.3 9.1 6.9 10.8
Illinois 4.7 6.0 4.6 5.3
New York 4.5 10.0 4.4 7.7
Virginia 3.9 2.3 3.8 2.7
New Jersey 3.8 5.3 3.8 5.1
Pennsylvania 3.8 3.3 3.6 2.6
Washington 3.6 1.7 3.5 2.0
Maryland 3.5 3.6 3.3 3.9
Total 52.2 % 59.0 % 51.7 % 60.8 %
The following table shows, as of December 31, 2022 and 2021, 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, 2022 ).
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Top 10 Core Based Statistical Areas - RIF
December 31,
2022 2021
Top 10 CBSAs (1) RIF Reserve for Losses RIF Reserve for Losses
New York-Newark-Jersey City, NY-NJ-PA 5.5 % 12.2 % 5.4 % 10.0 %
Chicago-Naperville-Elgin, IL-IN-WI 4.3 5.7 4.2 5.2
Washington-Arlington-Alexandria, DC-VA-MD-WV 4.0 3.4 4.0 4.1
Dallas-Fort Worth-Arlington, TX 3.1 2.7 2.9 3.4
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD 2.7 2.5 2.6 2.3
Houston-The Woodlands-Sugar Land, TX 2.7 3.0 2.5 3.3
Los Angeles-Long Beach-Anaheim, CA 2.4 2.6 2.6 3.3
Minneapolis-St. Paul-Bloomington, MN-WI 2.3 1.5 2.3 1.3
Seattle-Tacoma-Bellevue, WA 2.1 0.9 2.1 1.3
Miami-Fort Lauderdale-Pompano Beach, FL 2.0 3.3 2.2 4.4
Total 31.1 % 37.8 % 30.8 % 38.6 %
(1)CBSAs are metropolitan areas and may 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, potentially mitigate losses, 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" above 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) 2022 2021 2020
PMIERs impact - reduction in Minimum Required
Assets
Excess-of-Loss Program $ 665,617 $ 995,171 $ 912,734
Single Premium QSR Program 231,339 314,183 423,712
2022 QSR Agreement 233,532 - -
2012 QSR Agreements 8,357 12,541 22,712
Total PMIERs impact $ 1,138,845 $ 1,321,895 $ 1,359,158
Percentage of gross Minimum Required Assets 22.9 % 28.4 % 28.8 %
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 2022 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. 78
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In addition to the results of our operating segments, pretax income (loss) is
also affected by other factors. See "Key Factors Affecting Our Results-Net Gains
(Losses) on Investments and Other Financial Instruments" above and "-Use of
Non-GAAP Financial Measures" below for more information regarding items that are
excluded from the operating results of our operating segments.
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 thousands, except per-share
amounts) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Revenues
Net premiums earned $ 981,131 $ 1,037,183 $ 1,115,321 $ (56,052) $ (78,138)
Services revenue 92,216 125,825 105,385 (33,609) 20,440
Net investment income 195,658 147,909 154,037 47,749 (6,128)
Net gains (losses) on investments and
other financial instruments (80,733) 15,603 60,277 (96,336) (44,674)
Other income 2,454 3,412 3,597 (958) (185)
Total revenues 1,190,726 1,329,932 1,438,617 (139,206) (108,685)
Expenses
Provision for losses (338,239) 20,877 485,117 359,116 464,240
Policy acquisition costs 23,918 29,029 30,989 5,111 1,960
Cost of services 82,358 103,714 86,066 21,356 (17,648)
Other operating expenses 381,148 323,686 280,710 (57,462) (42,976)
Interest expense 84,454 84,344 71,150 (110) (13,194)
Amortization of other acquired
intangible assets 4,308 3,450 5,144 (858) 1,694
Total expenses 237,947 565,100 959,176 327,153 394,076
Pretax income 952,779 764,832 479,441 187,947 285,391
Income tax provision 209,845 164,161 85,815 (45,684) (78,346)
Net income $ 742,934 $ 600,671 $ 393,626 $ 142,263 $ 207,045
Diluted net income per share $ 4.35 $ 3.16 $ 2.00 $ 1.19 $ 1.16
Return on equity 18.2 % 14.1 % 9.4 % 4.1 % 4.7 %
Non-GAAP Financial Measures (1)
Adjusted pretax operating income $ 1,052,717 $ 757,749
Adjusted diluted net operating
income per share
$ 4.87 $ 3.15
Adjusted net operating return on
equity
20.3 % 14.0 % 8.2 % 6.3 % 5.8 %
(1)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 endedDecember 31, 2022 and 2021, and a year-over-year comparison between 2022 and 2021. Detailed discussions of our consolidated results of operations for the year endedDecember 31, 2021 , including the year-over-year comparisons between 2021 and 2020, 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 endedDecember 31, 2021 , filed with theSEC onFebruary 25, 2022 . 79
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Revenues
Net Premiums Earned. The decrease in net premiums earned for 2022 compared to
2021 is primarily driven by a decrease in net premiums earned in both our
mortgage insurance and title insurance businesses in 2022. See "Results of
Operations-Mortgage-Year Ended
Operations-homegenius-Year Ended
Services Revenue. Services revenue for 2022 decreased compared to 2021, primarily driven by the general market decline in mortgage origination volume as well as other market and macroeconomic conditions, as further described above in "Overview-Current Operating Environment." See "Results of Operations-Mortgage-Year EndedDecember 31, 2022 , Compared to Year EndedDecember 31 , 2021-Services Revenue" and "Results of Operations-homegenius-Year EndedDecember 31, 2022 , Compared to Year EndedDecember 31 , 2021-Revenues-Services Revenue" for more information. Net Investment Income. The increase in net investment income for 2022 compared to 2021 is primarily attributable to higher market interest rates in 2022. See "Overview-Current Operating Environment" and "Results of Operations-Mortgage-Year EndedDecember 31, 2022 , Compared to Year EndedDecember 31 , 2021-Revenues-Net Investment Income" for more information.Net Gains (Losses) on Investments and Other Financial Instruments. The net losses on investments and other financial instruments for 2022, as compared to net gains in 2021, is primarily due to the impact of higher interest rates in 2022, as well as other market and macroeconomic conditions, as further discussed above in "Overview-Current Operating Environment." See Note 6 of Notes to Consolidated Financial Statements for additional information about net gains (losses) on investments and other financial instruments by investment category.
Expenses
Provision for Losses. The change in provision for losses for 2022 compared to 2021 is primarily driven by favorable development on prior year defaults, which impacted our mortgage insurance reserves. See "Results of Operations-Mortgage-Year EndedDecember 31, 2022 , Compared to Year EndedDecember 31 , 2021-Expenses-Provision for Losses" for more information.
Cost of Services. Cost of services for 2022 decreased as compared to 2021,
primarily driven by the decrease in services revenue as discussed above in
"Overview-Current Operating Environment." See "Results of
Operations-Mortgage-Year Ended
Operations-homegenius-Year Ended
Other Operating Expenses. The increase in other operating expenses for 2022 compared to 2021 is primarily due to: (i) an increase in salaries and other base employee expenses, including$14.7 million of severance and related expenses in 2022; (ii) an increase in other general operating expenses; (iii) an increase in impairment of other long-lived assets and other non-operating items including$14.9 million in 2022, primarily related to our lease agreements; and (iv) a decrease in ceding commissions. These increases in other operating expenses were partially offset by a net decrease in variable and share-based incentive compensation expense. See "Results of Operations-Mortgage-Year EndedDecember 31, 2022 , Compared to Year EndedDecember 31 , 2021-Expenses-Other Operating Expenses" and "Results of Operations-homegenius-Year EndedDecember 31, 2022 , Compared to Year EndedDecember 31 , 2021-Expenses-Other Operating Expenses" for more information. Income Tax Provision
Our 2022 effective tax rate was 22%, higher than the statutory rate of 21%
primarily due to the impact of state income taxes and certain permanent
book-to-tax adjustments. See Note 10 of Notes to Consolidated Financial
Statements for a reconciliation of our provision for income taxes.
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.
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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 our
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 and All Other activities; (ii) gains (losses) on
extinguishment of debt; (iii) amortization and impairment of goodwill and other
acquired intangible assets; and (iv) impairment of other long-lived assets and
other non-operating items, such as impairment of internal-use software, gains
(losses) from the sale of lines of business and acquisition-related income and
expenses.
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.
Reconciliation of consolidated pretax income to adjusted pretax operating income
Years Ended December 31,
(In thousands) 2022 2021 2020
Consolidated pretax income $ 952,779 $ 764,832 $ 479,441
Less income (expense) items:
Net gains (losses) on investments and other financial
instruments (1) (80,780) 14,094 60,277
Amortization of other acquired intangible assets (4,308) (3,450) (5,144)
Impairment of other long-lived assets and other
non-operating items (2) (14,850) (3,561) (7,759)
Total adjusted pretax operating income (3) $ 1,052,717
(1)For 2022 and 2021, excludes certain net gains (losses) on investments that
are attributable to specific operating segments and therefore included in
adjusted pretax operating income (loss).
(2)Amounts primarily relate to impairment of other long-lived assets and are
included in other operating expenses on the consolidated statements of
operations. See Note 9 of Notes to Consolidated Financial Statements.
(3)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.
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Reconciliation of diluted net income per share to adjusted diluted net operating income per share
Years Ended December 31,
2022 2021 2020
Diluted net income per share $ 4.35 $ 3.16 $ 2.00
Less per-share impact of reconciling income (expense)
items:
Net gains (losses) on investments and other financial
instruments
(0.47) 0.08 0.31 Amortization of other acquired intangible assets (0.03) (0.02) (0.03) Impairment of other long-lived assets and other non-operating items (0.09) (0.02) (0.04)
Income tax (provision) benefit on other income (expense)
items (1)
0.12 (0.01) (0.05) Difference between statutory and effective tax rate (0.05) (0.02) 0.07 Per-share impact of other income (expense) items (0.52) 0.01 0.26 Adjusted diluted net operating income per share (1)$ 4.87 $ 3.15 $ 1.74
(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.
Reconciliation of return on equity to adjusted net operating return on equity
Years Ended
2022 2021 2020
Return on equity (1) 18.2 % 14.1 % 9.4 %
Less impact of reconciling income (expense) items: (2)
Net gains (losses) on investments and other financial
instruments
(2.0) 0.4 1.4 Amortization of other acquired intangible assets (0.1) (0.1) (0.1)
Impairment of other long-lived assets and other non-operating
items
(0.4) (0.1) (0.2)
Income tax (provision) benefit on reconciling income
(expense) items (3)
0.5 - (0.2) Difference between statutory and effective tax rate (0.1) (0.1) 0.3 Impact of reconciling income (expense) items (2.1) 0.1 1.2 Adjusted net operating return on equity (3) 20.3 % 14.0 % 8.2 %
(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.
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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 thousands) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Revenues
Net premiums written $ 959,872 $ 944,546 $ 1,010,954 $ 15,326 $ (66,408)
(Increase) decrease in unearned
premiums (2,659) 53,736 81,813 (56,395) (28,077)
Net premiums earned 957,213 998,282 1,092,767 (41,069) (94,485)
Services revenue 7,390 17,670 14,765 (10,280) 2,905
Net investment income 171,221 132,929 137,195 38,292 (4,266)
Other income 2,376 2,678 2,816 (302) (138)
Total revenues 1,138,200 1,151,559 1,247,543 (13,359) (95,984)
Expenses
Provision for losses (339,374) 19,437 483,332 358,811 463,895
Policy acquisition costs 23,918 29,029 30,989 5,111 1,960
Cost of services 5,951 13,928 10,043 7,977 (3,885)
Other operating expenses 231,322 223,275 198,735 (8,047) (24,540)
Interest expense 84,440 84,344 71,150 (96) (13,194)
Total expenses 6,257 370,013 794,249 363,756 424,236
Adjusted pretax operating income (1)
$ 453,294 $ 350,397 $ 328,252
(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
Revenues
Net Premiums Earned. Net premiums earned decreased for 2022 compared to 2021,
primarily due to: (i) a decrease in the impact, net of reinsurance, from Single
Premium Policy cancellations due to lower refinance activity and (ii) a decrease
in premiums earned on our Monthly Premium Policies due to lower average premium
yields. These items were partially offset by an increase in the profit
commission retained by the Company under our reinsurance programs, due to
favorable reserve development in 2022.
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.
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Net premiums earned
Change
Years Ended December 31, Favorable (Unfavorable)
($ in thousands, except as otherwise 2022 vs. 2021 2021 vs. 2020
indicated) 2022 2021 2020
Direct
Premiums earned, excluding revenue from cancellations$ 991,556 $ 988,472 $ 1,070,335 $ 3,084 $ (81,863) Single Premium Policy cancellations 34,051 116,224 193,349 (82,173) (77,125) Direct 1,025,607 1,104,696 1,263,684 (79,089) (158,988) Assumed (1) 4,025 7,066 12,214 (3,041) (5,148) Ceded Premiums earned, excluding revenue from cancellations (130,556) (108,692) (107,451) (21,864) (1,241) Single Premium Policy cancellations (2) (9,677) (33,388) (55,483) 23,711 22,095 Profit commission-other (3) 67,814 28,600 (20,197) 39,214 48,797 Ceded premiums, net of profit commission (72,419) (113,480) (183,131) 41,061 69,651 Total net premiums earned$ 957,213 $ 998,282 $ 1,092,767 $ (41,069) $ (94,485) In force portfolio premium yield (in basis points) (4) 39.3 40.5 44.5 (1.2) (4.0) Direct premium yield (in basis points) (5) 40.6 45.2 52.4 (4.6) (7.2) Net premium yield (in basis points) (6) 37.8 40.6 44.9 (2.8) (4.3)
Average primary IIF (in billions) (7)
$ 243.4 $ 7.4 $ 2.7 (1)Includes premiums earned primarily from our participation in certain credit risk transfer programs. InDecember 2022 , we novated this insured risk to an unrelated third-party reinsurer, which assumed all rights, interests, liabilities and obligations related to our participation in these programs on a prospective basis. See Note 16 of Notes to Consolidated Financial Statements for more information about this novation. (2)Includes the impact of related profit commissions. (3)Represents the profit commission on the Single Premium QSR Program and 2022 QSR Agreement, excluding the impact of Single Premium Policy cancellations. (4)Calculated by dividing direct premiums earned, including assumed revenue and excluding revenue from cancellations, by average primary IIF. (5)Calculated by dividing direct premiums earned, including assumed revenue, by average primary IIF. (6)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 reinsurance programs. 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. (7)The average of beginning and ending balances of primary IIF, for each period presented. 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 been cancelled. Based on current NIW pricing and the impact of higher Persistency Rates we have been experiencing, we currently expect our in force portfolio premium yield in 2023 to be relatively stable; however, due to the potential 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. See "Key Factors Affecting Our Results-Mortgage-IIF and Related Drivers" above for more information. 84
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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) 2022 2021 2020
Excess-of-Loss Program $ 76,988 $ 62,153 $ 37,053
Single Premium QSR Program (15,379) (1) 47,226 137,198
2022 QSR Agreement 8,947 - -
Other 1,863 4,101 8,880
Total ceded premiums earned (2) $ 72,419
Percentage of total direct and assumed premiums earned 6.8 % 9.9 % 14.2 % (1)Includes the impact of changes in the profit commission retained by the Company due to changes in loss reserves. See "-Expenses-Provision for Losses" below for additional information on the favorable reserve development. (2)Does not include the benefit from ceding commissions from the reinsurance agreements in our QSR Program, which is primarily included in other operating expenses on the consolidated statements of operations. See Note 8 of Notes to Consolidated Financial Statements for additional information.
Services Revenue. Services revenue for 2022 decreased as compared to 2021,
primarily driven by the termination of a large mortgage fulfillment services
contract with a customer as well as a decrease in demand for our contract
underwriting services as a result of the general market decline in mortgage
origination volume.
Net Investment Income. Increasing yields from higher interest rates were the primary driver of the increases in net investment income for 2022 compared to 2021.
The following table provides information related to our Mortgage subsidiaries'
investment balances and investment yields.
Investment balances and yields
Change
Years Ended December 31, Favorable (Unfavorable)
($ in thousands) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Investment income $ 177,478 $ 139,208 $ 142,910 $ 38,270 $ (3,702)
Investment expenses (6,257) (6,279) (5,715) 22 (564)
Net investment income $ 171,221 $ 132,929 $ 137,195 $ 38,292 $ (4,266)
Average investments (1) $ 5,546,198 $
5,595,270
Average investment yield (2)
3.1 % 2.4 % 2.7 % 0.7 % (0.3) %
(1) The average of the beginning and ending amortized cost, for each period
presented, of investments held by our Mortgage subsidiaries.
(2) Calculated by dividing net investment income by average investments
balance.
Expenses
Provision for Losses. The following table details the financial impact of the
significant components of our provision for losses for the periods indicated.
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Provision for losses
Change
Years Ended December 31, Favorable (Unfavorable)
($ in thousands, except reserve 2022 vs. 2021 2021 vs. 2020
per new default) 2022 2021 2020 Current year defaults (1)$ 160,049 $ 160,565 $ 517,807 $ 516 $ 357,242 Prior year defaults (2) (499,423) (141,128) (34,475) 358,295 106,653 Provision for losses$ (339,374) $ 19,437
Loss ratio (3) (35.5) % 1.9 % 44.2 % 37.4 % 42.3 % Reserve per new default (4)$ 4,241 $ 4,285 $ 4,793 $ 44 $ 508 (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 "-Revenues-Net Premiums Earned" above for additional information on the changes in net premiums earned. (4)Calculated by dividing provision for losses for new defaults, net of reinsurance, by the number of new primary defaults for each period. Our mortgage insurance provision for losses improved by$358.8 million during 2022 compared to 2021, resulting in a benefit of$339.4 million for the year endedDecember 31, 2022 . Current year new primary defaults were relatively flat for 2022, as compared to 2021, as shown below. Our gross Default to Claim Rate assumption for new primary defaults was 8.0% at bothDecember 31, 2022 and 2021, as we continue to closely monitor the trends in Cures and claims paid for our default inventory, while also weighing the risks and uncertainties associated with the current economic environment. Our provision for losses during 2022 and 2021 was positively impacted by favorable reserve development on prior year defaults, primarily as a result of more favorable trends in Cures than originally estimated due to favorable outcomes resulting from mortgage forbearance programs implemented in response to the COVID-19 pandemic as well as positive trends in home price appreciation. 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.
Our primary default rate at
primary loans in default.
Rollforward of primary loans in default
Years Ended
2022 2021 2020
Beginning default inventory 29,061 55,537 21,266
New defaults 37,738 37,470 108,025
Cures (44,136) (62,970) (72,404)
Claims paid (659) (937) (1,330)
Rescissions and Claim Denials, net of (Reinstatements)
(1) (91) (39) (20)
Ending default inventory 21,913 29,061 55,537
(1)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.
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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, 2022
Foreclosure Stage Cure % During Reserve for
Total Defaulted Loans the 4th Quarter Losses % of Reserve
($ in thousands) # % # % $ %
Missed payments
Three payments or less 9,584 43.7 % 8 35.5 % $ 77,987 19.5 %
Four to eleven payments 6,842 31.2 189 27.4 114,537 28.7
Twelve payments or more 5,158 23.6 750 22.9 190,148 47.7
Pending claims 329 1.5 N/A 23.5 16,202 4.1
Total 21,913 100.0 % 947 398,874 100.0 %
LAE 10,041
IBNR 2,128
Total primary reserve (1) $ 411,043
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 %
LAE 19,859
IBNR 2,886
Total primary reserve (1) $ 813,125
N/A - Not applicable
(1) Excludes pool and other reserves. See Note 11 of Notes to Consolidated
Financial Statements for additional information.
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. See Note 11 of Notes to Consolidated Financial Statements for additional details about our Default to Claim Rate assumptions. Our aggregate weighted-average net Default to Claim Rate assumption for our primary defaulted loans used in estimating our reserve for losses, which is net of estimated Claim Denials and Rescissions, was approximately 30% and 46%, atDecember 31, 2022 and 2021, respectively. This decrease was primarily due to a shift in the mix of defaults as ofDecember 31, 2022 , given the larger proportion of loans with fewer missed payments. See Note 11 of Notes to Consolidated Financial Statements for information regarding our reserve for losses and a reconciliation of our Mortgage segment's beginning and ending reserves for losses and LAE. 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"), which make the timing of paid claims difficult to predict. 87
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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) 2022 2021 2020
Net claims paid (1)
Primary $ 16,239 $ 21,111 $ 66,186
Pool and other (1,280) (258) (432)
Subtotal 14,959 20,853 65,754
Impact of commutations and settlements (2) 5,899 14,464
31,847
Total net claims paid$ 20,858 $ 35,317
Total average net primary claim paid (1) (3)
$ 46.7 Average direct primary claim paid (3) (4)$ 44.9 $ 46.3
(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.
Cost of Services. Cost of services for 2022 decreased compared to 2021,
primarily due to the decrease in services revenue, as discussed above. Our cost
of services is primarily affected by our level of services revenue.
Other Operating Expenses. The increase in other operating expenses for 2022, as compared to 2021, is primarily due to: (i) a decrease in ceding commissions, due primarily to a decline in Single Premium Policy cancellations covered by our Single Premium QSR Program and (ii) an increase in salaries and other base employee expenses primarily driven by$8.2 million in severance-related expenses in 2022, most notably in the fourth quarter. These items were partially offset by a decrease in performance-based variable and share-based compensation expense in 2022. The following tables show additional information about Mortgage other operating expenses. Other operating expenses Change Years Ended December 31, Favorable (Unfavorable) ($ in thousands) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Direct Salaries and other base employee expenses$ 51,537 $ 50,076
Variable and share-based incentive
compensation
16,937 19,672 14,652 2,735 (5,020) Other general operating expenses 40,446 50,752 53,715 10,306 2,963 Ceding commissions (16,164) (24,707) (41,146) (8,543) (16,439) Total direct 92,756 95,793 83,933 3,037 (11,860) Allocated (1) Salaries and other base employee expenses$ 46,955 $ 42,081
Variable and share-based incentive
compensation
31,889 34,303 23,819 2,414 (10,484) Other general operating expenses 59,722 51,098 53,587 (8,624) 2,489 Total allocated 138,566 127,482 114,802 (11,084) (12,680) Total Mortgage$ 231,322 $ 223,275 $ 198,735 $ (8,047) $ (24,540) Expense ratio (2) 26.7 % 25.3 % 21.0 % (1.4) % (4.3) %
(1)See Note 4 of Notes to Consolidated Financial Statements for more information
about our allocation of corporate operating expenses.
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(2)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. See "-Revenues-Net Premiums
Earned" above for additional information on the changes in net premiums earned.
Results of Operations-homegenius
The following table summarizes our homegenius segment's results of operations for the years endedDecember 31, 2022 , 2021 and 2020. As discussed in "Overview-Current Operating Environment," the macroeconomic stresses beginning in the second quarter of 2022 impacted our homegenius businesses, including in particular a decrease in our title revenues due to the rapid decline in industrywide refinance volumes. We expect this trend to continue to impact the results of our homegenius segment in at least the near-term based on current market conditions and our expectation that overall refinance volumes will remain low.
Summary results of operations - homegenius
$ Change
Years Ended December 31, Favorable (Unfavorable)
(In thousands) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Revenues
Net premiums earned $ 23,918 $ 38,901 $ 22,554 $ (14,983) $ 16,347
Services revenue 85,158 108,282 79,524 (23,124) 28,758
Net investment income 729 358 361 371 (3)
Net gains (losses) on investments - 1,509 - (1,509) 1,509
Other income 170 - - 170 -
Total revenues 109,975 149,050 102,439 (39,075) 46,611
Expenses
Provision for losses 1,135 1,540 1,931 405 391
Cost of services 76,407 89,722 61,461 13,315 (28,261)
Other operating expenses 120,631 85,112 62,287 (35,519) (22,825)
Total expenses 198,173 176,374 125,679 (21,799) (50,695)
Adjusted pretax operating income
(loss) (1) $ (88,198) $ (27,324) $ (23,240) $ (60,874) $ (4,084)
(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
Revenues
Net Premiums Earned. Net premiums earned for 2022 decreased compared to 2021, primarily due to a decrease in new title policies written in our title insurance business.
Services Revenue. Services revenue for 2022 decreased compared to 2021,
primarily due to a decrease in title services revenues resulting from the recent
macroeconomic stresses, as described above.
Expenses
Cost of Services. Cost of services for 2022 decreased compared to 2021,
primarily due to the decrease in services revenue. 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 2022 as compared to 2021 reflects an increase in salaries and other base employee expenses, driven primarily: (i) through the first half of the year by higher staffing levels and (ii) beginning in the second half of the year, and in light of the current economic and operating environments, by steps taken to align our workforce to the current and expected needs of this business, which resulted in$6.4 million of 89
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severance-related expenses in 2022, most notably in the fourth quarter of 2022.
In addition, other general operating expenses were also higher in 2022 as
compared to 2021 as a result of additional strategic investments in 2022 focused
on title and real estate technology businesses.
The following tables show additional information about homegenius other
operating expenses.
Other operating expenses
Change
Years Ended December 31, Favorable (Unfavorable)
(In thousands) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Direct
Salaries and other base employee
expenses $ 45,504 $ 23,783 $ 20,893 $ (21,721) $ (2,890)
Variable and share-based incentive
compensation 13,727 14,790 7,364 1,063 (7,426)
Other general operating expenses 32,717 21,301 16,043 (11,416) (5,258)
Title agent commissions 5,827 6,756 5,180 929 (1,576)
Total direct 97,775 66,630 49,480 (31,145) (17,150)
Allocated (1)
Salaries and other base employee
expenses $ 7,864 $ 6,176 $ 3,750 $ (1,688) $ (2,426)
Variable and share-based incentive
compensation 5,148 4,996 3,125 (152) (1,871)
Other general operating expenses 9,844 7,310 5,932 (2,534) (1,378)
Total allocated 22,856 18,482 12,807 (4,374) (5,675)
Total homegenius $ 120,631 $ 85,112 $ 62,287 $ (35,519) $ (22,825)
(1)See Note 4 of Notes to Consolidated Financial Statements for more information
about our allocation of corporate operating expenses.
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Results of Operations-All Other
The following table summarizes our results of operations for our All Other
activities for the years ended
Summary results of operations - All
Other
$ Change
Years Ended December 31, Favorable (Unfavorable)
(In thousands) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Revenues
Services revenue $ - $ 154 $ 12,535 $ (154) $ (12,381)
Net investment income 23,708 14,622 16,481 9,086 (1,859)
Net gains (losses) on investments and
other financial instruments 47 - - 47 -
Other income 78 734 534 (656) 200
Total revenues 23,833 15,510 29,550 8,323 (14,040)
Expenses
Cost of services - 64 15,639 64 15,575
Other operating expenses 14,847 11,919 11,898 (2,928) (21)
Interest expense 14 - - (14) -
Total expenses 14,861 11,983 27,537 (2,878) 15,554
Adjusted pretax operating income (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.
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) 2022 2021 2020
Net cash provided by (used in):
Operating activities $ 388,298 $ 557,112 $ 658,434
Investing activities (5,175) (1,862) (883,180)
Financing activities (479,183)
(496,776) 222,618
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 typically for our operating expenses, claims paid on our mortgage insurance policies and taxes. The$169 million decline in cash provided by operating activities for 2022, as compared to the same period in 2021, was principally due to higher purchases ofU.S. Mortgage Guaranty Tax and Loss Bonds and higher other operating expenses. Investing Activities. Net cash used in investing activities increased in 2022, compared to 2021, primarily as a result of a decrease in sales and redemptions, net of purchases, on fixed-maturity investments available for sale, partially offset by: (i) an 91
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increase in sales and redemptions of trading securities; (ii) an increase in
sales and redemptions, net of purchases, of short-term investments; and (iii) a
decrease in purchases of equity securities.
Financing Activities. For 2022, our primary financing activities included: (i)
repurchases of our common shares; (ii) payment of dividends; and (iii) net
changes in secured borrowings. 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, 2022 and 2021, the following tables include$112.1 million and$104.0 million , respectively, of securities loaned to third-party borrowers under securities lending agreements, which are classified as other assets in our consolidated balance sheets. See Note 6 of Notes to Consolidated Financial Statements for more information about our investment portfolio, including our securities lending agreements.
The composition of our investment portfolio, presented as a percentage of
overall fair value at
Investment portfolio diversification
December 31,
2022 2021
Fair Fair
($ in millions) Value Percent Value Percent
Corporate bonds and commercial paper $ 2,727.8 47.0 % $ 3,261.4 49.3 %
RMBS 935.2 16.1 714.5 10.8
CMBS 598.9 10.3 745.5 11.3
CLO 498.2 8.6 530.0 8.0
Money market instruments and certificates of
deposit 242.5 4.1 275.6 4.2
State and municipal obligations (1) 215.7 3.7 284.2 4.3
Equity securities 213.5 3.7 222.2 3.3
Other ABS 161.4 2.8 211.2 3.2
U.S. government and agency securities 145.4 2.5 316.4 4.8
Mortgage insurance-linked notes (2) 53.0 0.9 47.0 0.7
Mortgage loans held for sale 3.5 0.1 - -
Other investments 10.5 0.2 9.5 0.1
Total $ 5,805.6 100.0 % $ 6,617.5 100.0 %
(1)Primarily consists of taxable state and municipal investments.
(2)Includes mortgage insurance-linked notes purchased by
connection with the Excess-of-Loss Program. See Note 8 of Notes to Consolidated
Financial Statements for more information.
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The following table shows the scheduled maturities of the securities held in our
investment portfolio at
Investment portfolio scheduled maturity
December 31,
2022 2021
Fair Fair
($ in millions) Value Percent Value Percent
Short-term investments $ 402.5 6.9 % $ 551.5 8.3 %
Due in one year or less (1) 110.4 1.9 254.3 3.8
Due after one year through five years (1) 1,210.7 20.8 1,176.9 17.8
Due after five years through 10 years (1) 871.5 15.0 1,246.6 18.8
Due after 10 years (1) 741.3 12.8 916.5 13.9
Asset-backed securities and mortgage-related
assets (2) 2,250.2 38.8 2,245.3 33.9
Equity securities (3) 213.5 3.7 222.2 3.4
Other invested assets (3) 5.5 0.1 4.2 0.1
Total $ 5,805.6 100.0 % $ 6,617.5 100.0 %
(1)Actual maturities may differ as a result of calls before scheduled maturity.
(2)Includes RMBS, CMBS, CLO, Other ABS, mortgage insurance-linked notes and
mortgage loans, which are not due at a single maturity date.
(3)No stated maturity date.
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
2021
Investment portfolio by rating
December 31,
2022 2021
Fair Fair
($ in millions) Value Percent Value Percent
U.S. government / AAA $ 2,208.5 38.0 % $ 2,476.4 37.4 %
AA 885.0 15.2 1,016.0 15.3
A 1,609.5 27.7 1,940.2 29.3
BBB 806.8 13.9 894.6 13.5
BB and below 64.7 1.1 63.9 1.0
Not rated (1) 231.1 4.1 226.4 3.5
Total $ 5,805.6 100.0 % $ 6,617.5 100.0 %
(1)Primarily consists of equity securities.
Radian Group serves as the holding company for our operating subsidiaries and does not have any operations of its own. AtDecember 31, 2022 ,Radian Group had available, either directly or through unregulated subsidiaries, unrestricted cash and liquid investments of$903 million . Available liquidity atDecember 31, 2022 , excludes certain additional cash and liquid investments that have been advanced toRadian Group from our subsidiaries to pay for corporate expenses and interest payments. Total liquidity, which includes our undrawn$275 million unsecured revolving credit facility, as described below, was$1.2 billion as ofDecember 31, 2022 . During 2022,Radian Group's available liquidity increased by$298 million , due primarily to: (i) the return of capital from Radian Guaranty toRadian Group of$500 million and$282 million paid inFebruary 2022 andDecember 2022 , respectively, and (ii) the$100 million repayment inDecember 2022 by Radian Guaranty toRadian Group of the Surplus Note due 2027. These increases were partially offset by payments for share repurchases and dividends. See Notes 14 and 16 of Notes to Consolidated Financial Statements for addition information. 93
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In addition to available cash and marketable securities, Radian Group's
principal sources of cash to fund future liquidity needs include: (i) payments
made to Radian Group by its subsidiaries under expense- and tax-sharing
arrangements; (ii) net investment income earned on its cash and marketable
securities; and (iii) to the extent available, dividends or other distributions
from its subsidiaries.
Radian Group has in place a $275 million unsecured revolving credit facility
with a syndicate of bank lenders. The revolving credit facility matures in
December 2026 , although under certain conditions Radian Group may need to offer
to repay any outstanding amounts and terminate lender commitments earlier than
the maturity date. 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. At December 31, 2022 , the full $275
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.
In connection with our new mortgage conduit, Radian Mortgage Capital has entered
into the Master Repurchase Agreements, each of which is an uncommitted $300
million mortgage loan repurchase facility to finance the acquisition of
residential mortgage loans and related mortgage loan assets. Radian Group has
entered into separate Parent Guarantees to guaranty the obligations under the
Master Repurchase Agreements. Under these Parent Guarantees, Radian Group is
subject to negative and affirmative covenants customary for this type of
financing transaction, including compliance with financial covenants that are
generally consistent with the comparable covenants in the Company's revolving
credit facility. See Note 12 of Notes to Consolidated Financial Statements for
additional information. In addition to financing the acquisition of mortgage
loan assets under the Master Repurchase Agreements, Radian Mortgage Capital may
fund such purchases directly using capital contributed from Radian Group .
We expect Radian 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) the payment of quarterly
dividends on our common stock, which were $0.20 per share in 2022 and
subsequently increased to $0.225 per share for the first quarterly dividend in
2023, and which remain 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; (iv) the
potential continued repurchases of shares of our common stock pursuant to share
repurchase authorizations, as described below; (v) investments to support our
business strategy, including capital contributions to our subsidiaries; and (vi)
potential payments pursuant to the Parent Guarantees.
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 and (ii) additional investments to support our business
strategy, including additional capital contributions to its subsidiaries. For
additional information about related risks and uncertainties, see "Item 1A. Risk
Factors," including "-Our sources of liquidity may be insufficient to fund our
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 "Overview" above and
Note 1 of Notes to Consolidated Financial Statements for further information.
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 2022 and 2021, the Company repurchased 19.5 million
shares and 17.8 million shares of Radian Group common stock, respectively, under
programs authorized by Radian Group's board of directors, at a total cost of
$400 million and $399 million , respectively, including commissions. No purchase
authority remains available under these programs. In January 2023 , Radian
Group's board of directors approved a new share repurchase program authorizing
the Company to spend up to $300 million , excluding commissions, to repurchase
Radian Group common stock through January 2025 . See Note 14 of Notes to
Consolidated Financial Statements for additional details on our share repurchase
programs.
Dividends and Dividend Equivalents. Throughout 2022, our quarterly common stock
dividend was $0.20 per share. On February 15, 2023 , Radian Group's board of
directors authorized an increase to our quarterly dividend from $0.20 to $0.225
per share. Based on our current outstanding shares of common stock and RSUs, we
expect to require approximately $141 million in the aggregate to pay dividends
and dividend equivalents for the next 12 months. So long as no default or event
of default exists under our revolving credit facility or the Parent Guarantees,
Radian Group is not subject to any legal or contractual 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, 2022 , our capital surplus
was $3.8 billion , representing our dividend limitation under Delaware law. The
declaration and payment of future quarterly dividends remains subject to the
board of directors' discretion and 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
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expense on Radian Group's debt obligations allocated under these arrangements
during 2022 of $163 million and $83 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 2022, Radian Group received $15 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, except per-share amounts and ratios) 2022 2021
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 (11,496) (15,527)
Revolving credit facility - -
Total 1,413,504 1,409,473
Stockholders' equity 3,919,327 4,258,796
Total capitalization $ 5,332,831 $ 5,668,269
Debt-to-capital ratio 26.5 % 24.9 %
Shares outstanding 157,056 175,421
Book value per share $ 24.95 $ 24.28
Stockholders' equity decreased by $339 million from December 31, 2021 , to
December 31, 2022 . The net decrease in stockholders' equity resulted primarily
from net unrealized losses on investments of $577 million , primarily as a result
of an increase in market interest rates during the year, share repurchases of
$400 million , and dividends of $137 million , partially offset by our net income
of $743 million . Given our intent and ability as of December 31, 2022 , to hold
these investments until recovery of their amortized cost basis, we do not expect
to realize a loss on any of our investments in an unrealized loss position.
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. We also regularly
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. Among other things,
these measures may include borrowing agreements or arrangements, such as
securities or other master repurchase agreements and revolving credit
facilities. 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
Historically, one of the primary demands for liquidity in our Mortgage business
is the payment of claims, net of reinsurance, including from commutations and
settlements. See Note 11 of Notes to Consolidated Financial Statements for
information on our mortgage insurance reserve for losses and LAE, which
represents our best estimate for the costs of settling
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future claims on currently defaulted mortgage loans. Other principal demands for
liquidity in our Mortgage business include: (i) expenses (including those
allocated from Radian Group ); (ii) repayments of FHLB advances; and (iii) 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, distributions from Radian Guaranty to Radian Group ,
including returns of capital or recurring ordinary dividends, as discussed
below.
The principal sources of liquidity in our Mortgage business currently include
insurance premiums, net investment income and cash flows from: (i) investment
sales and maturities; (ii) FHLB advances; and (iii) if necessary, capital
contributions from Radian Group . We believe that the operating cash flows
generated by each of our mortgage subsidiaries will provide these subsidiaries
with the funds necessary to satisfy their needs for the foreseeable future.
As of December 31, 2022 , our mortgage insurance subsidiaries maintained claims
paying resources of $5.7 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, 2022 , was 10.7 to 1. Radian
Guaranty is not expected to need additional capital to satisfy state insurance
regulatory requirements in their current form. At December 31, 2022 , Radian
Guaranty had statutory policyholders' surplus of $758 million . This balance
includes a $596 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, 2022 , Radian Guaranty's Available Assets under the PMIERs financial
requirements totaled approximately $5.6 billion , resulting in a PMIERs Cushion
of $1.7 billion , or 45%, over its Minimum Required Assets. Those amounts compare
to Available Assets and a PMIERs cushion of $5.4 billion and $2.1 billion ,
respectively, at December 31, 2021 .
The primary driver of the decrease in Radian Guaranty's PMIERs Cushion during
2022 is the increase in Minimum Required Assets, partially offset by the
increase in Available Assets, reflecting positive cash flows from operating
activities. During 2022, Radian Guaranty's Minimum Required Assets increased
primarily as a result of an increase in primary RIF.
Our PMIERs Cushion at December 31, 2022 , 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 $200 million and $300 million as of December 31, 2022 and 2021,
respectively, taking into consideration our risk distribution structures in
effect as of those dates. The application of the Disaster Related Capital Charge
has reduced Radian Guaranty's PMIERs Minimum Required Assets, but we expect this
impact will diminish over time.
See "Item 1. Business-Regulation-Federal Regulation-GSE Requirements for
Mortgage Insurance Eligibility" for more information about the Disaster Related
Capital Charge.
Despite holding assets above the minimum statutory capital thresholds and PMIERs financial requirements, the ability of Radian's mortgage insurance subsidiaries to pay dividends on their common stock is restricted by certain provisions of the insurance laws ofPennsylvania , their state of domicile. As a result of Radian Guaranty's negative unassigned surplus position in recent years, any distributions toRadian Group required the prior approval of thePennsylvania Insurance Department . Radian Guaranty sought and received such approval during 2022 to return capital by paying Extraordinary Distributions toRadian Group , including a$500 million distribution inFebruary 2022 and a$282 million distribution inDecember 2022 , which were paid in cash and marketable securities in the form of returns of paid-in capital. Aided by the positive impacts of its merger with Radian Reinsurance inDecember 2022 , Radian Guaranty had positive unassigned surplus of$258 million as ofDecember 31, 2022 . As a result, Radian Guaranty now has the ability to pay ordinary dividends beginning in the first quarter of 2023, subject to the preceding year's statutory net income and other limitations underPennsylvania's insurance laws. See Note 16 of Notes to Consolidated Financial Statements for additional information on Radian Guaranty's merger with Radian Reinsurance and statutory dividend restrictions. Radian Guaranty is a member of the FHLB. As a member, it 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 and liquidity purposes. As ofDecember 31, 2022 , there were$154 million of FHLB advances outstanding. See Note 12 of Notes to Consolidated Financial Statements for additional information. 96
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homegenius
As of
investments totaling
Insurance
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, 2022 . 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 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. In "Item 1A. Risk Factors," see "-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." Ratings Subsidiary Moody's (1) S&P (2) Fitch (3) Demotech (4) Radian Group Baa3 BB+ BBB- N/A Radian Guaranty A3 BBB+ A- N/A Radian Title Insurance N/A N/A N/A A (1)Based on theJuly 2022 report, Moody's outlook forRadian Group and Radian Guaranty currently is Stable. (2)Based on theNovember 2022 report, S&P's outlook forRadian Group and Radian Guaranty is currently Stable. (3)Based on theMay 2022 report, Fitch's outlook forRadian Group and Radian Guaranty is currently Stable. (4)Based on theDecember 2022 report.
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. 97
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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 that a borrower has missed two consecutive monthly mortgage payments. 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, 2022 , 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% of defaulted risk exposure atDecember 31, 2022 ), we estimated that our loss reserves would change by approximately$4 million atDecember 31, 2022 . 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 be 30% atDecember 31, 2022 , including our assumptions related to Loss Mitigation Activities), we estimated a$13 million change in our loss reserves atDecember 31, 2022 . 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, including related to current and future macroeconomic conditions, 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. These assumptions require management to use considerable judgment in estimating the rate at which these loans will result in claims and the amount of such claims. As such, there is 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 of this receivable include a collection rate and average life. During 2022, we made no changes to these assumptions. During 2021, we adjusted our assumptions for collectability and average life, which had an impact of increasing each of the net premium receivable and net premiums earned by$2 million . If the collection rate assumption increased or decreased by 500 basis points, it would result in a$4 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$3 million decrease or increase, respectively, in the net premium receivable and net premiums earned. 98
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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. There were no changes to
our single premium earnings pattern estimate in 2022 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, 2022 , our gross unrealized losses on available for sale securities were$581 million , which can fluctuate materially over time based on changes in market conditions. See Note 6 of Notes to Consolidated Financial Statements for additional information regarding impairments related to investments.
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, including securities loaned to third-party borrowers under securities lending agreements, totaled$5.8 billion as ofDecember 31, 2022 . 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. 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$70 million and$83 million atDecember 31, 2022 and 2021, respectively. 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. 99
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HARTFORD FINANCIAL SERVICES GROUP, INC. – 10-K –
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