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Note 3 - Segment Reporting | 6 Months Ended
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Jun. 30, 2017
Segment Reporting [Abstract] |
Segment Reporting | Segment Reporting We have two strategic business units that we manage separately—Mortgage Insurance and Services. Adjusted pretax operating income (loss) 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. In the fourth quarter of 2016, we completed an organizational change that resulted in a change to our segment financial reporting structure. Previously, contract underwriting activities on behalf of third parties were reported in either the Mortgage Insurance segment or the Services segment, based on the customer relationship. Management responsibility for this contract underwriting business was moved entirely to the Services segment. This organizational change resulted in the reclassification to the Services segment of revenue and expenses for all contract underwriting performed on behalf of third parties. This change aligns with recent changes in personnel reporting lines and management oversight, and is consistent with the way the chief operating decision maker began assessing the performance of the reportable segments in the fourth quarter of 2016. The amounts reclassified did not have a material impact on adjusted pretax operating income. As a result, on a segment basis, Services revenue, cost of services and other operating expenses have increased, with offsetting reductions in Mortgage Insurance other income and other operating expenses. This change has been reflected in our segment operating results. Mortgage Insurance underwriting continues to be reported as an expense in the Mortgage Insurance segment. We include underwriting-related expenses for mortgage insurance, based on a pro-rata volume of mortgage applications excluding third-party contract underwriting services, in our Mortgage Insurance segment’s other operating expenses before corporate allocations. We include underwriting-related expenses for third-party contract underwriting services, based on a pro-rata volume of mortgage applications, in our Services segment’s cost of services and other operating expenses before corporate allocations, as applicable. 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 interest expense except for interest expense related to the Senior Notes due 2019 that were issued to fund our purchase of Clayton; and (iii) all corporate cash and investments. 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 material corporate cash or investments are allocated to the Services segment. Inter-segment activities are recorded at market rates for segment reporting and eliminated in consolidation. Adjusted Pretax Operating Income (Loss) Our senior management, including our Chief Executive Officer (Radian’s chief operating decision maker), uses adjusted pretax operating income (loss) as our primary measure to evaluate the fundamental financial performance of each of Radian’s business segments and to allocate resources to the segments. Adjusted pretax operating income (loss) is defined as pretax income (loss) excluding the effects of: (i) net gains (losses) on investments and other financial instruments; (ii) loss on induced conversion and debt extinguishment; (iii) acquisition-related expenses; (iv) amortization or impairment of goodwill and other intangible assets; and (v) 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: (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 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 securities. These valuation adjustments may not necessarily result in realized 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).
(2) | Loss on induced conversion and debt extinguishment. Gains or losses on early extinguishment of debt and 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, we do not view these activities 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 or impairment of goodwill and other 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) | 2017 |  | 2016 (1) |  | 2017 |  | 2016 (1)
Mortgage Insurance |  |  |  |  |  |  |
Net premiums written—insurance (2) | $ | 241,307 |  |  | $ | 232,353 |  |  | $ | 465,972 |  |  | $ | 258,663 |
(Increase) decrease in unearned premiums | (12,211 | ) |  | (3,268 | ) |  | (15,076 | ) |  | 191,372 |
Net premiums earned—insurance | 229,096 |  |  | 229,085 |  |  | 450,896 |  |  | 450,035 |
Net investment income | 30,071 |  |  | 28,839 |  |  | 61,103 |  |  | 56,040 |
Other income | 612 |  |  | 1,454 |  |  | 1,358 |  |  | 2,120 |
Total (3) | 259,779 |  |  | 259,378 |  |  | 513,357 |  |  | 508,195 |
Provision for losses | 17,714 |  |  | 50,074 |  |  | 64,946 |  |  | 93,349 |
Policy acquisition costs | 6,123 |  |  | 5,393 |  |  | 12,852 |  |  | 11,782 |
Other operating expenses before corporate allocations | 37,939 |  |  | 34,365 |  |  | 77,228 |  |  | 66,911 |
Total (4) | 61,776 |  |  | 89,832 |  |  | 155,026 |  |  | 172,042 |
Adjusted pretax operating income before corporate allocations | 198,003 |  |  | 169,546 |  |  | 358,331 |  |  | 336,153 |
Allocation of corporate operating expenses | 15,894 |  |  | 14,286 |  |  | 30,080 |  |  | 23,615 |
Allocation of interest expense | 11,748 |  |  | 18,124 |  |  | 23,257 |  |  | 35,236 |
Adjusted pretax operating income | $ | 170,361 |  |  | $ | 137,136 |  |  | $ | 304,994 |  |  | $ | 277,302 |
______________________
(1) | Reflects changes made during the fourth quarter of 2016 to align our segment reporting structure concurrent with changes in personnel reporting lines and management oversight related to contract underwriting performed on behalf of third parties. Revenue and expenses for this business are now reflected in the Services segment. As a result, Services revenue, cost of services and other operating expenses have increased, with offsetting reductions in Mortgage Insurance other income and other operating expenses.
(2) | Net of ceded premiums written under the QSR Transactions and the Single Premium QSR Transaction. See Note 7 for additional information.
(3) | Excludes net gains on investments and other financial instruments of $5.3 million and $2.5 million, respectively, for the three and six months ended June 30, 2017, and net gains on investments and other financial instruments of $30.5 million and $61.8 million, respectively, for the three and six months ended June 30, 2016, not included in adjusted pretax operating income.
(4)Includes inter-segment expenses as follows:
| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) | 2017 |  | 2016 |  | 2017 |  | 2016
Inter-segment expenses | $ | 2,173 |  |  | $ | 1,947 |  |  | $ | 4,235 |  |  | $ | 3,546 |
| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) | 2017 |  | 2016 (1) |  | 2017 |  | 2016 (1)
Services |  |  |  |  |  |  |
Services revenue (2) | $ | 39,975 |  |  | $ | 42,210 |  |  | $ | 80,064 |  |  | $ | 76,658 |
Cost of services | 25,962 |  |  | 27,730 |  |  | 54,652 |  |  | 51,584 |
Other operating expenses before corporate allocations | 12,803 |  |  | 13,030 |  |  | 25,407 |  |  | 27,398 |
Total | 38,765 |  |  | 40,760 |  |  | 80,059 |  |  | 78,982 |
Adjusted pretax operating income (loss) before corporate allocations | 1,210 |  |  | 1,450 |  |  | 5 |  |  | (2,324 | )
Allocation of corporate operating expenses | 3,404 |  |  | 2,779 |  |  | 7,122 |  |  | 4,530 |
Allocation of interest expense | 4,431 |  |  | 4,422 |  |  | 8,860 |  |  | 8,844 |
Adjusted pretax operating income (loss) | $ | (6,625 | ) |  | $ | (5,751 | ) |  | $ | (15,977 | ) |  | $ | (15,698 | )
______________________
(1) | Reflects changes made during the fourth quarter of 2016 to align our segment reporting structure concurrent with changes in personnel reporting lines and management oversight related to contract underwriting performed on behalf of third parties. Revenue and expenses for this business are now reflected in the Services segment. As a result, Services revenue, cost of services and other operating expenses have increased, with offsetting reductions in Mortgage Insurance other income and other operating expenses.
(2) | Includes inter-segment revenues as follows:
| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) | 2017 |  | 2016 |  | 2017 |  | 2016
Inter-segment revenues | $ | 2,173 |  |  | $ | 1,947 |  |  | $ | 4,235 |  |  | $ | 3,546 |
Selected balance sheet information for our segments, as of the periods indicated, is as follows:
| At June 30, 2017
(In thousands) | Mortgage Insurance |  | Services (1) |  | Total
Total assets | $ | 5,605,607 |  |  | $ | 211,499 |  |  | $ | 5,817,106 |
| At December 31, 2016
(In thousands) | Mortgage Insurance |  | Services |  | Total
Total assets | $ | 5,506,338 |  |  | $ | 356,836 |  |  | $ | 5,863,174 |
______________________
(1) | The decrease in total assets for the Services segment at June 30, 2017, as compared to December 31, 2016, is primarily due to the impairment of goodwill and other intangible assets. See Note 6 for further details.
The reconciliation of adjusted pretax operating income to consolidated pretax income (loss) is as follows:
| Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) | 2017 |  | 2016 |  | 2017 |  | 2016
Adjusted pretax operating income (loss): |  |  |  |  |  |  |
Mortgage Insurance (1) | $ | 170,361 |  |  | $ | 137,136 |  |  | $ | 304,994 |  |  | $ | 277,302 |
Services (1) | (6,625 | ) |  | (5,751 | ) |  | (15,977 | ) |  | (15,698 | )
Total adjusted pretax operating income | 163,736 |  |  | 131,385 |  |  | 289,017 |  |  | 261,604 |
Net gains (losses) on investments and other financial instruments | 5,331 |  |  | 30,527 |  |  | 2,480 |  |  | 61,813 |
Loss on induced conversion and debt extinguishment | (1,247 | ) |  | (2,108 | ) |  | (5,703 | ) |  | (57,678 | )
Acquisition-related expenses (2) | (64 | ) |  | 54 |  |  | (72 | ) |  | (151 | )
Impairment of goodwill | (184,374 | ) |  | — |  |  | (184,374 | ) |  | — |
Amortization and impairment of other intangible assets | (18,856 | ) |  | (3,311 | ) |  | (22,152 | ) |  | (6,639 | )
Consolidated pretax income (loss) | $ | (35,474 | ) |  | $ | 156,547 |  |  | $ | 79,196 |  |  | $ | 258,949 |
______________________
(1) | Includes inter-segment expenses and revenues as listed in the notes to the preceding tables.
(2) | Acquisition-related expenses represent expenses incurred to effect the acquisition of a business, net of adjustments to accruals previously recorded for acquisition expenses.
On a consolidated basis, “adjusted pretax operating income” is a measure not determined in accordance with GAAP. Total adjusted pretax operating income is not a measure of total profitability, and therefore should not be considered in isolation or viewed as a substitute for GAAP pretax income (loss). Our definition of adjusted pretax operating income 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 -URI http://asc.fasb.org/topic&trid=2134510 + Details
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