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Note 3 - Segment Reporting (Notes) | 6 Months Ended
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Jun. 30, 2015
Segment Reporting [Abstract] |
Segment Reporting Disclosure | Segment Reporting We currently have two strategic business units that we manage separately—Mortgage Insurance and, effective with the June 30, 2014 acquisition of Clayton, our Services segment. Adjusted pretax operating income for each segment represents segment results on a standalone basis; therefore, inter-segment eliminations and reclassifications required for consolidated GAAP presentation have not been reflected. The operating results of Radian Asset Assurance are classified as discontinued operations for all periods presented in our condensed consolidated statements of operations. Previously, Radian Asset Assurance had represented substantially all of the financial guaranty segment; therefore, we no longer report a financial guaranty business segment. Certain corporate income and expenses that were previously allocated to the financial guaranty segment but were not reclassified to discontinued operations, such as corporate investment income, interest expense and corporate overhead expenses, have been reallocated to the Mortgage Insurance segment. Prior periods have been revised to conform to the current period presentation for these changes. See Note 2 for additional information related to discontinued operations. We allocate to our Mortgage Insurance segment: (i) corporate expenses based on an allocated percentage of time spent on the Mortgage Insurance segment; (ii) all corporate cash and investments; (iii) all interest expense except for interest expense related to the Senior Notes due 2019 that were issued to purchase Clayton; and (iv) for periods prior to the April 1, 2015 sale of Radian Asset Assurance, corporate income and expenses that were previously allocated to our financial guaranty segment and were not allocated to discontinued operations. We allocate to our Services segment: (i) corporate expenses based on an allocated percentage of time spent on the Services segment; and (ii) as noted above, all interest expense related to the Senior Notes due 2019. No corporate cash or investments are allocated to the Services segment. We have included Clayton’s results of operations from the June 30, 2014 date of acquisition. Inter-segment activities are recorded at market rates for segment reporting and eliminated in consolidation. Effective with the fourth quarter of 2014, our Services segment undertook the management responsibilities of certain additional loan servicer surveillance functions that were previously considered part of our Mortgage Insurance segment. As a result, these services and activities are now reported in our Services segment for all periods presented. Adjusted Pretax Operating Income (Loss) Our senior management, including our Chief Executive Officer (our chief operating decision maker), uses adjusted pretax operating income (loss) as our primary measure to evaluate the fundamental financial performance of each of Radian’s business segments and to allocate resources to the segments. Adjusted pretax operating income (loss) is defined as pretax income (loss) from continuing operations excluding the effects of: net gains (losses) on investments and other financial instruments; loss on induced conversion and debt extinguishment; acquisition-related expenses; amortization and impairment of intangible assets; and net impairment losses recognized in earnings. Although adjusted pretax operating income (loss) excludes certain items that have occurred in the past and are expected to occur in the future, the excluded items represent those that are: (1) not viewed as part of the operating performance of our primary activities; or (2) not expected to result in an economic impact equal to the amount reflected in pretax income (loss) from continuing operations. These adjustments, along with the reasons for their treatment, are described below.
(1) | Net gains (losses) on investments and other financial instruments. The recognition of realized investment gains or losses can vary significantly across periods as the activity is highly discretionary based on the timing of individual securities sales due to such factors as market opportunities, our tax and capital profile and overall market cycles. Unrealized investment gains and losses arise primarily from changes in the market value of our investments that are classified as trading. These valuation adjustments may not necessarily result in economic gains or losses.
Trends in the profitability of our fundamental operating activities can be more clearly identified without the fluctuations of these realized and unrealized gains or losses. We do not view them to be indicative of our fundamental operating activities. Therefore, these items are excluded from our calculation of adjusted pretax operating income (loss). However, we include the change in expected economic loss or recovery associated with our consolidated VIEs, if any, in the calculation of adjusted pretax operating income (loss).
(2) | Loss on induced conversion and debt extinguishment. Gains or losses on early extinguishment of debt or losses incurred to purchase our convertible debt prior to maturity are discretionary activities that are undertaken in order to take advantage of market opportunities to strengthen our financial and capital positions; therefore, these activities are not viewed as part of our operating performance. Such transactions do not reflect expected future operations and do not provide meaningful insight regarding our current or past operating trends. Therefore, these items are excluded from our calculation of adjusted pretax operating income (loss).
(3) | Acquisition-related expenses. Acquisition-related expenses represent the costs incurred to effect an acquisition of a business (i.e., a business combination). Because we pursue acquisitions on a strategic and selective basis and not in the ordinary course of our business, we do not view acquisition-related expenses as a consequence of a primary business activity. Therefore, we do not consider these expenses to be part of our operating performance and they are excluded from our calculation of adjusted pretax operating income (loss).
(4) | Amortization and impairment of intangible assets. Amortization of intangible assets represents the periodic expense required to amortize the cost of intangible assets over their estimated useful lives. Intangible assets with an indefinite useful life are also periodically reviewed for potential impairment, and impairment adjustments are made whenever appropriate. These charges are not viewed as part of the operating performance of our primary activities and therefore are excluded from our calculation of adjusted pretax operating income (loss).
(5) | Net impairment losses recognized in earnings. The recognition of net impairment losses on investments can vary significantly in both size and timing, depending on market credit cycles. We do not view these impairment losses to be indicative of our fundamental operating activities. Therefore, whenever these losses occur, we exclude them from our calculation of adjusted pretax operating income (loss).
Summarized operating results for our segments as of and for the periods indicated, are as follows:
| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) | 2015 |  | 2014 |  | 2015 |  | 2014
Mortgage Insurance |  |  |  |  |  |  |
Net premiums written—insurance | $ | 251,082 |  |  | $ | 221,947 |  |  | $ | 492,990 |  |  | $ | 434,900 |
Increase in unearned premiums | (13,645 | ) |  | (18,301 | ) |  | (30,958 | ) |  | (32,492 | )
Net premiums earned—insurance | 237,437 |  |  | 203,646 |  |  | 462,032 |  |  | 402,408 |
Net investment income (1) | 19,285 |  |  | 16,663 |  |  | 36,613 |  |  | 31,981 |
Other income (1) | 1,743 |  |  | 1,620 |  |  | 3,074 |  |  | 2,616 |
Total | 258,465 |  |  | 221,929 |  |  | 501,719 |  |  | 437,005 |
Provision for losses | 31,637 |  |  | 64,648 |  |  | 77,488 |  |  | 114,274 |
Change in expected economic loss or recovery for consolidated VIEs | — |  |  | 180 |  |  | — |  |  | 319 |
Policy acquisition costs | 6,963 |  |  | 6,746 |  |  | 14,713 |  |  | 13,763 |
Other operating expenses before corporate allocations | 41,853 |  |  | 36,356 |  |  | 75,903 |  |  | 74,120 |
Total (2) | 80,453 |  |  | 107,930 |  |  | 168,104 |  |  | 202,476 |
Adjusted pretax operating income before corporate allocations | 178,012 |  |  | 113,999 |  |  | 333,615 |  |  | 234,529 |
Allocation of corporate operating expenses (1) | 12,516 |  |  | 17,021 |  |  | 22,274 |  |  | 32,905 |
Allocation of interest expense (1) | 20,070 |  |  | 22,348 |  |  | 40,023 |  |  | 42,275 |
Adjusted pretax operating income | $ | 145,426 |  |  | $ | 74,630 |  |  | $ | 271,318 |  |  | $ | 159,349 |
____________
(1) | For periods prior to the April 1, 2015 sale of Radian Asset Assurance, includes certain corporate income and expenses that have been reallocated to the Mortgage Insurance segment that were previously allocated to the former financial guaranty segment, but were not reclassified to discontinued operations, as follows:
| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) | 2015 |  | 2014 |  | 2015 |  | 2014
Net investment income | $ | — |  |  | $ | 1,392 |  |  | $ | 882 |  |  | $ | 2,689 |
Other income | — |  |  | 113 |  |  | 26 |  |  | 182 |
Allocation of corporate operating expenses | — |  |  | 4,412 |  |  | 2,074 |  |  | 8,561 |
Allocation of interest expense | — |  |  | 15,943 |  |  | 9,918 |  |  | 30,498 |
(2) | Includes inter-segment expenses as follows:
| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) | 2015 |  | 2014 |  | 2015 |  | 2014
Inter-segment expenses | $ | 1,092 |  |  | $ | — |  |  | $ | 1,994 |  |  | $ | — |
| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) | 2015 |  | 2014 |  | 2015 |  | 2014
Services |  |  |  |  |  |  |
Services revenue | $ | 44,595 |  |  | $ | — |  |  | $ | 76,127 |  |  | $ | — |
Other income | — |  |  | 119 |  |  | — |  |  | 249 |
Total (1) | 44,595 |  |  | 119 |  |  | 76,127 |  |  | 249 |
Direct cost of services | 25,501 |  |  | — |  |  | 44,754 |  |  | — |
Other operating expenses before corporate allocations | 11,522 |  |  | 642 |  |  | 20,379 |  |  | 1,501 |
Total | 37,023 |  |  | 642 |  |  | 65,133 |  |  | 1,501 |
Adjusted pretax operating income (loss) before corporate allocations | 7,572 |  |  | (523 | ) |  | 10,994 |  |  | (1,252 | )
Allocation of corporate operating expenses | 1,307 |  |  | — |  |  | 2,288 |  |  | — |
Allocation of interest expense | 4,431 |  |  | — |  |  | 8,863 |  |  | — |
Adjusted pretax operating income (loss) | $ | 1,834 |  |  | $ | (523 | ) |  | $ | (157 | ) |  | $ | (1,252 | )
____________
(1) | Includes inter-segment revenues as follows:
| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) | 2015 |  | 2014 |  | 2015 |  | 2014
Inter-segment revenues | $ | 1,092 |  |  | $ | — |  |  | $ | 1,994 |  |  | $ | — |
Selected balance sheet information for our segments as of the periods indicated, is as follows:
| At June 30, 2015
(In thousands) | Mortgage Insurance |  | Services |  | Total
Total assets | $ | 5,384,224 |  |  | $ | 352,280 |  |  | $ | 5,736,504 |
| At December 31, 2014
(In thousands) | Mortgage Insurance |  | Services |  | Total
Assets held for sale (1) | $ | — |  |  | $ | — |  |  | $ | 1,736,444 |
Total assets | 4,769,014 |  |  | 336,878 |  |  | 6,842,336 |
________________
(1) | Assets held for sale are not part of the Mortgage Insurance or Services segments.
The reconciliation of adjusted pretax operating income to consolidated pretax income from continuing operations is as follows:
| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) | 2015 |  | 2014 |  | 2015 |  | 2014
Adjusted pretax operating income (loss): |  |  |  |  |  |  |
Mortgage Insurance (1) (2) | $ | 145,426 |  |  | $ | 74,630 |  |  | $ | 271,318 |  |  | $ | 159,349 |
Services (2) | 1,834 |  |  | (523 | ) |  | (157 | ) |  | (1,252 | )
Total adjusted pretax operating income | 147,260 |  |  | 74,107 |  |  | 271,161 |  |  | 158,097 |
Net gains on investments and other financial instruments (3) | 28,448 |  |  | 25,512 |  |  | 45,227 |  |  | 68,619 |
Loss on induced conversion and debt extinguishment | (91,876 | ) |  | — |  |  | (91,876 | ) |  | — |
Acquisition-related expenses | (567 | ) |  | (6,732 | ) |  | (774 | ) |  | (6,732 | )
Amortization and impairment of intangible assets | (3,281 | ) |  | — |  |  | (6,304 | ) |  | — |
Consolidated pretax income from continuing operations | $ | 79,984 |  |  | $ | 92,887 |  |  | $ | 217,434 |  |  | $ | 219,984 |
______________
(1) | For periods prior to the April 1, 2015 sale of Radian Asset Assurance, includes certain corporate income and expenses that have been reallocated to the Mortgage Insurance segment, as listed in the preceding tables. These amounts represent items that were previously allocated to the former financial guaranty segment, but were not reclassified to discontinued operations.
(2) | Includes inter-segment expenses and revenues as listed in the notes to the preceding tables.
(3) | The change in expected economic loss or recovery associated with our previously owned VIEs is included in adjusted pretax operating income above, although it represents amounts that are not included in net income. Therefore, for purposes of this reconciliation, net gains on investments and other financial instruments has been adjusted by $0.2 million and $0.3 million for the three and six months ended June 30, 2014, respectively, to reverse this item.
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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