Note 19 - Statutory Information Level 1 (Notes)

12 Months Ended

Dec. 31, 2018

SEC Schedule, 12-16, Insurance Companies, Supplementary Insurance Information [Abstract]

Statutory Information

We prepare our statutory financial statements in accordance with the accounting practices required or permitted, if applicable, by the insurance departments of the respective states of domicile of our insurance subsidiaries. Required SAPP are established by a variety of NAIC publications, as well as state laws, regulations and general administrative rules. In addition, insurance departments have the right to permit other specific practices that may deviate from prescribed practices. As of December 31, 2018, we did not have any prescribed or permitted statutory accounting practices that resulted in reported statutory surplus or risk-based capital being different from what would have been reported had NAIC statutory accounting practices been followed.

Radian Group serves as the holding company for our insurance subsidiaries, through which we conduct our mortgage insurance business. These insurance subsidiaries are subject to comprehensive, detailed regulation by the insurance departments in the various states where our insurance subsidiaries are domiciled or licensed to transact business. Insurance laws vary from state to state, but generally grant broad supervisory powers to state agencies or officials to examine insurance companies and enforce rules or exercise discretion affecting almost every significant aspect of the insurance business, including the power to revoke or restrict an insurance company’s ability to write new business. The state insurance regulations include various capital requirements and dividend restrictions based on our insurance subsidiaries’ statutory financial position and results of operations, as described below. Our failure to maintain adequate levels of capital could lead to intervention by the various insurance regulatory authorities, which could materially and adversely affect our business, business prospects and financial condition. As of December 31, 2018, the amount of restricted net assets held by our consolidated insurance subsidiaries (which represents our equity investment in those insurance subsidiaries) totaled $3.6 billion of our consolidated net assets.

The ability of Radian’s mortgage insurance subsidiaries to pay dividends on their common stock is restricted by certain provisions of the insurance laws of Pennsylvania, their state of domicile. Under Pennsylvania’s insurance laws, dividends and other distributions may only be paid out of an insurer’s positive unassigned surplus, measured as of the end of the prior fiscal year, unless the Pennsylvania Insurance Commissioner approves the payment of dividends or other distributions from another source.

On March 31, 2017, we reallocated $175 million of capital, in the form of cash and marketable securities, from Radian Guaranty to Radian Reinsurance. The reallocation was accomplished by way of an Extraordinary Distribution, approved by the Pennsylvania Insurance Department, from Radian Guaranty to Radian Group, and a simultaneous capital contribution from Radian Group to Radian Reinsurance in the same amount. These transactions resulted in a $175 million decrease in Radian Guaranty’s statutory policyholders’ surplus (i.e., statutory capital and surplus) and a corresponding increase in Radian Reinsurance’s statutory policyholders’ surplus. Until September 30, 2017, the reallocation of capital had no impact on Radian Guaranty’s Available Assets under the PMIERs, because Radian Reinsurance was considered an exclusive affiliated reinsurer of

Radian Guaranty and, as such, Radian Guaranty’s Available Assets and Minimum Required Assets were determined on an aggregate basis, taking into account the assets and insured risk of Radian Guaranty and any exclusive affiliated reinsurers. However, effective in the third quarter of 2017, Radian Reinsurance is no longer considered an exclusive affiliated reinsurer of Radian Guaranty, due to its participation in the credit risk transfer programs with Fannie Mae and Freddie Mac. Although this change impacted Radian Guaranty’s Available Assets and Minimum Required Assets under the PMIERs, it did not affect Radian Guaranty’s compliance with the PMIERs financial requirements.

At December 31, 2018, although Radian Guaranty and Radian Reinsurance had statutory policyholders’ surplus of $814.1 million and $356.2 million, respectively, both companies had negative unassigned surplus balances, due primarily to the need for mortgage guaranty insurers to establish and maintain contingency reserves. Radian Guaranty had negative unassigned surplus of $701.9 million at December 31, 2018, compared to negative unassigned surplus of $765.0 million at December 31, 2017. Radian Reinsurance, which began operations in December 2015, had negative unassigned surplus of $84.8 million at December 31, 2018, compared to negative unassigned surplus of $112.1 million at December 31, 2017. If either of these insurers had positive unassigned surplus as of the end of the prior fiscal year, such insurer only may pay dividends or other distributions during any 12-month period in an aggregate amount less than or equal to the greater of: (i) 10% of the preceding year-end statutory policyholders’ surplus; or (ii) the preceding year’s statutory net income. Due to the negative unassigned surplus balances at the end of 2018, no dividends or other distributions can be paid from Radian Guaranty or Radian Reinsurance without approval from the Pennsylvania Insurance Commissioner. In addition to the payment of the $175 million Extraordinary Distribution by Radian Guaranty in 2017, as described above, on December 21, 2018, Radian Guaranty distributed $450 million in capital, in the form of cash and marketable securities, to Radian Group. This transfer was approved by the Pennsylvania Insurance Department as an Extraordinary Distribution and resulted in a $450 million decrease in Radian Guaranty’s statutory policyholders’ surplus. Radian Reinsurance did not pay any dividends or other distributions in 2018 or 2017.

Radian Guaranty

Radian Guaranty is domiciled and licensed in Pennsylvania as a stock casualty insurance company authorized to carry on the business of credit insurance, which includes the authority to write mortgage guaranty insurance. It is a monoline insurer, restricted to writing first-lien residential mortgage guaranty insurance.

Under state insurance regulations, Radian Guaranty is required to maintain minimum surplus levels and, in certain states, a minimum ratio of statutory capital relative to the level of net RIF, or Risk-to-capital. There are 16 RBC States that currently impose a Statutory RBC Requirement. The most common Statutory RBC Requirement is that a mortgage insurer’s Risk-to-capital may not exceed 25 to 1. In certain of the RBC States, a mortgage insurer must satisfy a MPP Requirement. The statutory capital requirements for the non-RBC States are de minimis (ranging from $1 million to $5 million); however, the insurance laws of these states generally grant broad supervisory powers to state agencies or officials to enforce rules or exercise discretion affecting almost every significant aspect of the insurance business, including the power to revoke or restrict an insurance company’s ability to write new business. Unless an RBC State grants a waiver or other form of relief, if a mortgage insurer, such as Radian Guaranty, is not in compliance with the Statutory RBC Requirement of that state, the mortgage insurer may be prohibited from writing new mortgage insurance business in that state. Radian Guaranty’s domiciliary state, Pennsylvania, is not one of the RBC States.

Radian Guaranty was in compliance with the Statutory RBC Requirements or MPP Requirements, as applicable, in each of the RBC States as of December 31, 2018. The NAIC is in the process of developing a new Model Act for mortgage insurers, which is expected to include, among other items, new capital adequacy requirements for mortgage insurers. In May 2016, a working group of state regulators released an exposure draft of this Model Act. The process for developing this framework is ongoing. While the outcome and timing of this process are uncertain, the new Model Act, if and when finalized by the NAIC, has the potential to increase capital requirements in those states that adopt the Model Act. However, we continue to believe the changes to the Model Act will not result in financial requirements that require greater capital than the level currently required under the PMIERs financial requirements. See Note 1 for information regarding the PMIERs, which set requirements for private mortgage insurers to remain approved insurers of loans purchased by the GSEs.

Radian Guaranty’s statutory net income, statutory policyholders’ surplus and contingency reserve as of or for the years ended December 31, 2018, 2017 and 2016 were as follows:



	December 31,
(In millions)	2018		2017		2016
Statutory net income	$	501.9	$	445.1	$	480.8
Statutory policyholders’ surplus	814.1		1,201.0		1,349.7
Contingency reserve	2,109.9		1,667.0		1,260.6

Radian Guaranty’s Risk-to-capital calculation appears in the table below. For purposes of the Risk-to-capital requirements imposed by certain states, statutory capital is defined as the sum of statutory policyholders’ surplus plus statutory contingency reserves.



	December 31,
($ in millions)	2018			2017
RIF, net (1)	$	40,711.3		$	36,793.5

Common stock and paid-in capital	$	1,416.0		$	1,866.0
Surplus Note	100.0			100.0
Unassigned earnings (deficit)	(701.9		)	(765.0		)
Statutory policyholders’ surplus	814.1			1,201.0
Contingency reserve	2,109.9			1,667.0
Statutory capital	$	2,924.0		$	2,868.0

Risk-to-capital	13.9:1			12.8:1

______________________


(1)	Excludes risk ceded through all reinsurance programs (including with affiliates) and RIF on defaulted loans.

Radian Guaranty’s statutory capital increased by $56.0 million in 2018, primarily due to Radian Guaranty’s statutory net income of $501.9 million during the year, partially offset by the $450 million in distribution of capital to Radian Group, as described above.

The net increase in Radian Guaranty’s Risk-to-capital in 2018 was primarily due to the growth in IIF combined with the smaller overall increase in statutory capital due to the $450 million distribution of capital to Radian Group. Radian Guaranty’s net RIF increased during the year due to strong growth in NIW and IIF, partially offset by the increased reinsurance benefit pursuant to the Single Premium QSR Program and the Excess-of-Loss Program.

We have actively managed Radian Guaranty’s capital position in various ways, including: (i) through internal and external reinsurance arrangements; (ii) by seeking opportunities to reduce our risk exposure through commutations and other negotiated transactions; and (iii) by contributing additional capital from Radian Group.

In December 2017, Radian Group transferred $100 million of cash and marketable securities to Radian Guaranty in exchange for a Surplus Note issued by Radian Guaranty. This Surplus Note has a 0% interest rate and is scheduled to mature on December 31, 2027. The Surplus Note may be redeemed at any time upon 30 days prior notice, subject to the approval of the Pennsylvania Insurance Department.

Radian Reinsurance

Radian Reinsurance is domiciled and licensed in Pennsylvania as a stock casualty insurance company authorized to carry on the business of credit insurance, which includes the authority to reinsure policies of mortgage guaranty insurance. Radian Reinsurance is only licensed or authorized to write direct mortgage guaranty insurance in Pennsylvania. Radian Reinsurance is required to maintain a minimum statutory surplus of $20 million to remain an authorized reinsurer in all states.

Radian Reinsurance’s statutory net income, statutory policyholders’ surplus and contingency reserve as of and for the years ended December 31, 2018, 2017 and 2016 were as follows:



	December 31,
(In millions)	2018		2017		2016
Statutory net income	$	86.1	$	64.3	$	60.3
Statutory policyholders’ surplus	356.2		328.9		147.6
Contingency reserve	293.5		234.0		180.3

Combined Risk-to-Capital Ratio and Other Mortgage Insurance Subsidiaries

The Risk-to-capital ratio for our combined mortgage insurance operations was 12.8 to 1 as of December 31, 2018, compared to 12.1 to 1 as of December 31, 2017. In addition to Radian Guaranty and Radian Reinsurance, this combined ratio also includes Radian Guaranty Reinsurance, Radian Mortgage Assurance, Radian Investor Surety Inc., Radian Insurance and Radian Mortgage Guaranty Inc. Radian Insurance is the only other entity that had any remaining RIF as of December 31, 2018, totaling $15.0 million. The aggregate statutory net income, statutory policyholders’ surplus and contingency reserve for these five subsidiaries as of and for the years ended December 31, 2018, 2017 and 2016 were as follows:



	December 31,
(In millions)	2018			2017		2016
Statutory net income (loss)	$	(2.8	)	$	0.1	$	(6.1	)
Statutory policyholders’ surplus	58.0			58.6		57.1
Contingency reserve	1.7			1.7		1.5

EnTitle Insurance

EnTitle Insurance’s statutory policyholders’ surplus and statutory net loss were $27.0 million and $1.8 million, respectively, as of and for the year ended December 31, 2018.

Through EnTitle Insurance, we maintain escrow deposits as a service to our customers. Amounts held in escrow and excluded from assets and liabilities in our consolidated balance sheets totaled $4.7 million as of December 31, 2018. These amounts were held at third-party financial institutions and not considered assets of the Company. Should one or more of the financial institutions at which escrow deposits are maintained fail, there is no guarantee that we would recover the funds deposited, whether through Federal Deposit Insurance Corporation coverage or otherwise. In the event of any such failure, we could be held liable for the disposition of these funds owned by third parties.

Principal Differences between GAAP and SAPP

The differences between the statutory financial statements and financial statements presented on a GAAP basis represent differences between GAAP and SAPP principally for the following reasons:


(a)	Under SAPP, mortgage insurance companies are required to establish a contingency reserve equal to 50% of premiums earned in each year, generally to be maintained for 10 years, whereas no such reserve is required under GAAP.


(b)	Under SAPP, insurance policy acquisition costs are charged against operations in the year incurred, and considered in the recognition of unearned premiums. Under GAAP, such costs are generally deferred and amortized.

(c)

Under SAPP, deferred tax assets are only recognized to the extent they are expected to be recovered within a one- to three-year period subject to a capital and surplus limitation. Changes in deferred tax assets and deferred tax liabilities are recognized as a direct benefit or charge to unassigned surplus, whereas under GAAP changes in deferred tax assets and deferred tax liabilities are generally recorded as a component of income tax expense.


(d)	Under SAPP, fixed-maturity investments are generally valued at amortized cost. Under GAAP, those investments are generally recorded at fair value.

(e)

Under SAPP, certain assets, designated as non-admitted assets, are charged directly against statutory surplus. Such assets are reflected on our GAAP financial statements.