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Note 2 - Segment Reporting (Notes) | 6 Months Ended
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Jun. 30, 2014
Segment Reporting [Abstract] |
Segment Reporting Disclosure | Segment Reporting Our mortgage insurance, financial guaranty and, effective with the June 30, 2014 acquisition of Clayton, the mortgage and real estate services segments, are strategic business units that are managed separately. We allocate corporate income and expenses to our mortgage insurance and financial guaranty segments based on either an allocated percentage of time spent on each segment or internally allocated capital, which is based on the relative GAAP equity of each segment. We allocate corporate cash and investments to our mortgage insurance and financial guaranty segments based on internally allocated capital. Because the Clayton acquisition occurred on June 30, 2014, the results of operations for Clayton are not included in these financial statements. Beginning in the third quarter of 2014, we will include its results of operations from the date of acquisition and will also allocate to our mortgage and real estate services segment: (i) corporate expenses based on an allocated percentage of time spent on the mortgage and real estate services segment; and (ii) all interest expense related to the Senior Notes due 2019. The results of operations for each segment for each reporting period can cause significant volatility in internally allocated capital based on relative GAAP equity, which can impact the allocations of income and expenses to our mortgage insurance and financial guaranty segments. Adjusted Pretax Operating Income (Loss) Our senior management, including our Chief Executive Officer (our chief operating decision maker), uses adjusted pretax operating income (loss) as our primary measure to evaluate the fundamental financial performance of the Company’s business segments and to allocate resources to the segments. Adjusted pretax operating income (loss) is defined as pretax income (loss) excluding the effects of net gains (losses) on investments and other financial instruments, acquisition-related expenses, amortization of intangible assets and net impairment losses recognized in earnings. It also excludes gains and losses related to changes in fair value estimates on insured credit derivatives and instead includes the impact of changes in the present value of insurance claims and recoveries on insured credit derivatives, based on our ongoing insurance loss monitoring, as well as premiums earned on insured credit derivatives. Management’s use of this measure as its primary measure to evaluate segment performance began with the quarter ended March 31, 2014. Accordingly, for comparison purposes, we also present the applicable measures from the corresponding periods of 2013 on a basis consistent with the current year presentation. Although adjusted pretax operating income (loss) excludes certain items that have occurred in the past and are expected to occur in the future, the excluded items represent those that are: (1) not viewed as part of the operating performance of our primary activities; or (2) not expected to result in an economic impact equal to the amount reflected in pretax income (loss). These adjustments, along with the reasons for their treatment, are described below.
(1) | Change in fair value of derivative instruments. Gains and losses related to changes in the fair value of insured credit derivatives are subject to significant fluctuation based on changes in interest rates, credit spreads (of both the underlying collateral as well as our credit spread), credit ratings and other market, asset-class and transaction-specific conditions and factors that may be unrelated or only indirectly related to our obligation to pay future claims. With the exception of the estimated present value of net credit (losses) recoveries incurred and net premiums earned on derivatives, discussed in items 2 and 3 below, we believe these gains and losses will reverse over time and consequently these changes are not expected to result in economic gains or losses. Therefore, these gains and losses are excluded from our calculation of adjusted pretax operating income (loss).
(2) | Estimated present value of net credit (losses) recoveries incurred. The change in present value of insurance claims we expect to pay or recover on insured credit derivatives represents the amount of the change in credit derivatives from item 1 above, that we expect to result in an economic loss or recovery based on our ongoing loss monitoring analytics. Therefore, this item is expected to have an economic impact and is included in our calculation of adjusted pretax operating income (loss). Also included in this item is the expected recovery of miscellaneous operating expenses associated with our consolidated VIEs.
(3) | Net premiums earned on derivatives. The net premiums earned on insured credit derivatives are classified as part of the change in fair value of derivative instruments discussed in item 1 above. However, since net premiums earned on derivatives are considered part of our fundamental operating activities, these premiums are included in our calculation of adjusted pretax operating income (loss).
(4) | Net gains (losses) on investments and other financial instruments. The recognition of realized investment gains or losses can vary significantly across periods as the activity is highly discretionary based on the timing of individual securities sales due to such factors as market opportunities, our tax and capital profile and overall market cycles. Unrealized investment gains and losses arise primarily from changes in the market value of our investments that are classified as trading. These valuation adjustments may not necessarily result in economic gains or losses. We do not view them to be indicative of our fundamental operating activities. Trends in the profitability of our fundamental operating activities can be more clearly identified without the fluctuations of these realized and unrealized gains or losses. Therefore, these items are excluded from our calculation of adjusted pretax operating income (loss).
(5) | Acquisition-related expenses. Acquisition-related expenses represent the costs incurred to effect an acquisition of a business (i.e., a business combination). Because we pursue acquisitions on a limited and selective basis and not in the ordinary course of our business, we do not view acquisition-related expenses as a consequence of a primary business activity. Therefore, we do not consider these expenses to be part of our operating performance and they are excluded from our calculation of adjusted pretax operating income (loss).
(6) | Amortization of intangible assets. Amortization of intangible assets represents the periodic expense required to amortize the cost of intangible assets over their estimated useful lives. These charges are not viewed as part of the operating performance of our primary activities and therefore are excluded from our calculation of adjusted pretax operating income (loss).
(7) | Net impairment losses recognized in earnings. The recognition of net impairment losses on investments can vary significantly in both size and timing, depending on market credit cycles. Intangible assets with an indefinite useful life are also periodically reviewed for potential impairment and impairment adjustments are made whenever appropriate. We do not view impairment losses on investments or intangibles to be indicative of our fundamental operating activities. Therefore, these losses are excluded from our calculation of adjusted pretax operating income (loss).
Summarized financial information concerning our operating segments as of and for the periods indicated, is as follows:
|  | Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) |  | 2014 |  | 2013 |  | 2014 |  | 2013
Mortgage Insurance |  |  |  |  |  |  |  |
Net premiums written—insurance |  | $ | 221,947 |  |  | $ | 251,159 |  |  | $ | 434,900 |  |  | $ | 468,445 |
Net premiums earned—insurance |  | $ | 203,646 |  |  | $ | 197,952 |  |  | $ | 402,408 |  |  | $ | 380,944 |
Net premiums earned on derivatives |  | — |  |  | — |  |  | — |  |  | — |
Net investment income |  | 15,271 |  |  | 15,266 |  |  | 29,292 |  |  | 30,368 |
Other income |  | 1,626 |  |  | 2,159 |  |  | 2,683 |  |  | 3,871 |
Total revenues |  | 220,543 |  |  | 215,377 |  |  | 434,383 |  |  | 415,183 |
Provision for losses |  | 64,265 |  |  | 136,410 |  |  | 113,425 |  |  | 268,366 |
Estimated present value of net credit losses incurred |  | 180 |  |  | 323 |  |  | 319 |  |  | 24 |
Change in PDR |  | 383 |  |  | 1,251 |  |  | 849 |  |  | 622 |
Policy acquisition costs |  | 6,746 |  |  | 6,501 |  |  | 13,763 |  |  | 18,233 |
Other operating expenses |  | 49,607 |  |  | 51,295 |  |  | 99,965 |  |  | 117,075 |
Interest expense |  | 6,405 |  |  | 3,704 |  |  | 11,777 |  |  | 6,373 |
Total expenses |  | 127,586 |  |  | 199,484 |  |  | 240,098 |  |  | 410,693 |
Adjusted pretax operating income |  | $ | 92,957 |  |  | $ | 15,893 |  |  | $ | 194,285 |  |  | $ | 4,490 |
New Insurance Written (“NIW”) (in millions) |  | $ | 9,322 |  |  | $ | 13,377 |  |  | $ | 16,130 |  |  | $ | 24,283 |
|  | Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) |  | 2014 |  | 2013 |  | 2014 |  | 2013
Financial Guaranty |  |  |  |  |  |  |  |
Net premiums written—insurance |  | $ | 420 |  |  | $ | 70 |  |  | $ | 1,173 |  |  | $ | (10,031 | )
Net premiums earned—insurance |  | $ | 10,468 |  |  | $ | 15,172 |  |  | $ | 17,371 |  |  | $ | 24,768 |
Net premiums earned on derivatives |  | 3,346 |  |  | 4,857 |  |  | 6,791 |  |  | 9,849 |
Net investment income |  | 10,466 |  |  | 12,349 |  |  | 20,674 |  |  | 24,120 |
Other income |  | 191 |  |  | 75 |  |  | 261 |  |  | 134 |
Total revenues |  | 24,471 |  |  | 32,453 |  |  | 45,097 |  |  | 58,871 |
Provision for losses |  | 5,078 |  |  | 3,881 |  |  | 10,727 |  |  | 3,984 |
Estimated present value of net credit losses (recoveries) incurred |  | 11,279 |  |  | (618 | ) |  | 10,778 |  |  | (3,463 | )
Change in PDR |  | — |  |  | — |  |  | — |  |  | — |
Policy acquisition costs |  | 1,675 |  |  | 3,505 |  |  | 3,272 |  |  | 8,968 |
Other operating expenses |  | 9,212 |  |  | 9,686 |  |  | 18,763 |  |  | 24,006 |
Interest expense |  | 15,943 |  |  | 15,716 |  |  | 30,498 |  |  | 28,928 |
Total expenses |  | 43,187 |  |  | 32,170 |  |  | 74,038 |  |  | 62,423 |
Equity in net (loss) income of affiliates |  | — |  |  | — |  |  | (13 | ) |  | 1 |
Adjusted pretax operating (loss) income |  | $ | (18,716 | ) |  | $ | 283 |  |  | $ | (28,954 | ) |  | $ | (3,551 | )
| At June 30, 2014
(In thousands) | Mortgage Insurance |  | Financial Guaranty |  | Mortgage and Real Estate Services (1) |  | Total
Cash and investments | $ | 2,747,960 |  |  | $ | 2,240,149 |  |  | $ | 18,112 |  |  | $ | 5,006,221 |
Deferred policy acquisition costs | 26,443 |  |  | 34,333 |  |  | — |  |  | 60,776 |
Goodwill and other intangible assets, net | 2,266 |  |  | — |  |  | 294,682 |  |  | 296,948 |
Total assets | 3,153,482 |  |  | 2,438,418 |  |  | 340,651 |  |  | 5,932,551 |
Unearned premiums | 597,860 |  |  | 183,800 |  |  | — |  |  | 781,660 |
Reserve for losses and LAE | 1,714,681 |  |  | 34,754 |  |  | — |  |  | 1,749,435 |
VIE debt | 3,237 |  |  | 90,394 |  |  | — |  |  | 93,631 |
Derivative liabilities | — |  |  | 200,227 |  |  | — |  |  | 200,227 |
____________________
(1) | Comprising the acquisition of Clayton effective June 30, 2014. For additional information, see Note 1.
| At June 30, 2013
(In thousands) | Mortgage Insurance |  | Financial Guaranty |  | Total
Cash and investments | $ | 2,962,997 |  |  | $ | 2,403,636 |  |  | $ | 5,366,633 |
Deferred policy acquisition costs | 29,138 |  |  | 41,289 |  |  | 70,427 |
Total assets | 3,431,444 |  |  | 2,622,556 |  |  | 6,054,000 |
Unearned premiums | 483,303 |  |  | 229,403 |  |  | 712,706 |
Reserve for losses and LAE | 2,690,861 |  |  | 25,629 |  |  | 2,716,490 |
VIE debt | 10,963 |  |  | 95,804 |  |  | 106,767 |
Derivative liabilities | — |  |  | 350,576 |  |  | 350,576 |
The reconciliation of adjusted pretax operating income (loss) to consolidated pretax income (loss) and consolidated net income (loss) is as follows:
|  | Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) |  | 2014 |  | 2013 |  | 2014 |  | 2013
Adjusted pretax operating income (loss): |  |  |  |  |  |  |  |
Mortgage insurance |  | $ | 92,957 |  |  | $ | 15,893 |  |  | $ | 194,285 |  |  | $ | 4,490 |
Financial guaranty |  | (18,716 | ) |  | 283 |  |  | (28,954 | ) |  | (3,551 | )
Total adjusted pretax operating income |  | $ | 74,241 |  |  | $ | 16,176 |  |  | $ | 165,331 |  |  | $ | 939 |
Change in fair value of derivative instruments |  | 57,477 |  |  | 86,535 |  |  | 107,563 |  |  | (81,135 | )
Less: Estimated present value of net credit (losses) recoveries incurred |  | (11,459 | ) |  | 295 |  |  | (11,097 | ) |  | 3,439 |
Less: Net premiums earned on derivatives |  | 3,346 |  |  | 4,857 |  |  | 6,791 |  |  | 9,849 |
Change in fair value of derivative instruments expected to reverse over time |  | 65,590 |  |  | 81,383 |  |  | 111,869 |  |  | (94,423 | )
Net gains (losses) on investments |  | 47,219 |  |  | (130,254 | ) |  | 111,670 |  |  | (135,759 | )
Net (losses) gains on other financial instruments |  | (1,909 | ) |  | 1,188 |  |  | (1,211 | ) |  | (4,487 | )
Acquisition-related expenses |  | (6,732 | ) |  | — |  |  | (6,732 | ) |  | — |
Consolidated pretax income (loss) |  | 178,409 |  |  | (31,507 | ) |  | 380,927 |  |  | (233,730 | )
Income tax provision (benefit) |  | 3,576 |  |  | 1,665 |  |  | 3,335 |  |  | (13,058 | )
Consolidated net income (loss) |  | $ | 174,833 |  |  | $ | (33,172 | ) |  | $ | 377,592 |  |  | $ | (220,672 | )
On a consolidated basis, “adjusted pretax operating income (loss)” is a measure not determined in accordance with GAAP. Total adjusted pretax operating income (loss) is not a measure of total profitability, and therefore should not be viewed as a substitute for GAAP pretax income (loss). Our definition of adjusted pretax operating income (loss) may not be comparable to similarly-named measures reported by other companies.

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- Definition The entire disclosure for reporting segments including data and tables. Reportable segments include those that meet any of the following quantitative thresholds a) it's reported revenue, including sales to external customers and intersegment sales or transfers is 10 percent or more of the combined revenue, internal and external, of all operating segments b) the absolute amount of its reported profit or loss is 10 percent or more of the greater, in absolute amount of 1) the combined reported profit of all operating segments that did not report a loss or 2) the combined reported loss of all operating segments that did report a loss c) its assets are 10 percent or more of the combined assets of all operating segments. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 280 -SubTopic 10 -Section 50 -Paragraph 29 -URI http://asc.fasb.org/extlink&oid=6534315&loc=d3e8864-108599 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 280 -SubTopic 10 -Section 50 -Paragraph 32 -URI http://asc.fasb.org/extlink&oid=6534315&loc=d3e8933-108599 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 280 -SubTopic 10 -Section 50 -Paragraph 26 -URI http://asc.fasb.org/extlink&oid=6534315&loc=d3e8844-108599 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 280 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=6534315&loc=d3e8538-108599 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 280 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6534315&loc=d3e8380-108599 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 280 -SubTopic 10 -Section 50 -Paragraph 34 -URI http://asc.fasb.org/extlink&oid=6534315&loc=d3e8981-108599 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 280 -SubTopic 10 -Section 50 -Paragraph 35 -URI http://asc.fasb.org/extlink&oid=6534315&loc=d3e8984-108599 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 280 -SubTopic 10 -Section 50 -Paragraph 41 -URI http://asc.fasb.org/extlink&oid=6534315&loc=d3e9038-108599 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 280 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6534315&loc=d3e8906-108599 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 280 -SubTopic 10 -Section 50 -Paragraph 42 -URI http://asc.fasb.org/extlink&oid=6534315&loc=d3e9054-108599 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 280 -SubTopic 10 -Section 50 -Paragraph 31 -URI http://asc.fasb.org/extlink&oid=6534315&loc=d3e8924-108599 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 280 -SubTopic 10 -Section 50 -Paragraph 40 -URI http://asc.fasb.org/extlink&oid=6534315&loc=d3e9031-108599 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 280 -SubTopic 10 -Section 50 -Paragraph 33 -URI http://asc.fasb.org/extlink&oid=6534315&loc=d3e8971-108599 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 280 -SubTopic 10 -Section 50 -Paragraph 12 -URI http://asc.fasb.org/extlink&oid=6534315&loc=d3e8595-108599 + Details
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