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Note 3 - Segment Reporting | 9 Months Ended
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Sep. 30, 2019
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. Inter-segment activities are recorded at market rates for segment reporting and eliminated in consolidation. We allocate to our Mortgage Insurance segment: (i) corporate expenses based on the segment’s forecasted annual percentage of total revenue, which approximates the estimated percentage of time spent on the segment; (ii) except as described below for periods prior to January 1, 2019, all interest expense; and (iii) all net investment income from corporate cash and investments. Prior to January 1, 2019, interest expense related to the Clayton Intercompany Note was allocated to our Services segment. Effective January 1, 2019, Radian Group recapitalized the Services segment with a capital contribution that enabled the Services segment to repay the Clayton Intercompany Note and its accumulated allocated interest expense associated with the note, and effective as of the same date, all interest expense is allocated to our Mortgage Insurance segment. We allocate to our Services segment: (i) corporate expenses based on the segment’s forecasted annual percentage of total revenue, which approximates the estimated percentage of time spent on the segment and (ii) until January 1, 2019, the allocated interest expense related to the Clayton Intercompany Note as discussed above. With the exception of goodwill and other acquired intangible assets that relate to our Services segment, which are reviewed as part of our annual goodwill impairment assessment, we do not manage assets by segment. 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 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 losses from the sale of lines of business and acquisition-related expenses. See Note 4 of Notes to Consolidated Financial Statements in our 2018 Form 10-K for detailed information regarding items excluded from adjusted pretax operating income (loss), including the reasons for their treatment. 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). The reconciliation of adjusted pretax operating income (loss) for our reportable segments to consolidated pretax income is as follows:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
(In thousands) | 2019 |  | 2018 |  | 2019 |  | 2018
Adjusted pretax operating income (loss): |  |  |  |  |  |  |
Mortgage Insurance | $ | 214,256 |  |  | $ | 204,620 |  |  | $ | 641,791 |  | (1) | $ | 573,771 |
Services | (1,513 | ) |  | (7,921 | ) |  | (11,139 | ) |  | (21,960 | )
Total adjusted pretax operating income | 212,743 |  |  | 196,699 |  |  | 630,652 |  |  | 551,811 |
Net gains (losses) on investments and other financial instruments | 13,009 |  |  | (4,480 | ) |  | 47,462 |  |  | (30,771 | )
Loss on extinguishment of debt | (5,940 | ) |  | — |  |  | (22,738 | ) |  | — |
Amortization and impairment of other acquired intangible assets | (2,139 | ) |  | (3,472 | ) |  | (6,465 | ) |  | (8,968 | )
Impairment of other long-lived assets and other non-operating items | — |  |  | (4,059 | ) |  | (5,557 | ) |  | (4,371 | )
Consolidated pretax income | $ | 217,673 |  |  | $ | 184,688 |  |  | $ | 643,354 |  |  | $ | 507,701 |
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(1) | Includes a cumulative adjustment to unearned premiums recorded in the second quarter of 2019 related to an update to the amortization rates used to recognize revenue for Single Premium Policies, as further described below.
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. Our definition of adjusted pretax operating income may not be comparable to similarly-named measures reported by other companies. Our results for the nine months ended September 30, 2019 include a $32.9 million increase in net premiums earned and a $0.12 increase in net income per share, due to a reduction in our unearned premiums resulting from a cumulative adjustment in the second quarter of 2019 related to an update to the amortization rates used to recognize revenue for Single Premium Policies. The update to our earned premium recognition factors also resulted in a $6.2 million reduction in other operating expenses and a $0.02 increase in net income per share due to the acceleration of earned ceding commissions related to policies covered under our Single Premium QSR Program. This cumulative adjustment reflects a change in our estimate of the period over which we recognize premiums during the life of our mortgage insurance policies. We periodically review our premium recognition models, with adjustments to the estimate, if any, reflected in current period income. See Note 2 of Notes to Consolidated Financial Statements in our 2018 Form 10-K for additional information regarding our accounting policies for insurance premiums revenue recognition. We updated the amortization rates due to the continuing increase in the significance of borrower-paid Single Premium Policies in our portfolio following our rate reductions on borrower-paid Single Premium Policies in 2018. Under the Homeowners Protection Act of 1998 (“HPA”), borrower-paid policies must be canceled automatically on the date the LTV is scheduled to reach 78% of the original value (or, if the loan is not current on that date, on the date that the loan becomes current). As a result, given the shift in our mix of Single Premium Policies toward more borrower-paid Single Premium Policies than lender-paid, the average anticipated term of our Single Premium IIF is declining compared to historical levels. We updated our analysis to reflect not only this anticipated effect of HPA cancellations on borrower-paid policies, but also changes in observed and projected loss patterns for both borrower-paid and lender-paid policies. Revenue The reconciliation of our reportable segment revenues to consolidated revenues is as follows:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
(In thousands) | 2019 |  | 2018 |  | 2019 |  | 2018
Reportable segment revenues: |  |  |  |  |  |  |
Mortgage Insurance | $ | 321,056 |  |  | $ | 295,031 |  |  | $ | 968,215 |  | (1) | $ | 859,380 |
Services | 47,378 |  |  | 40,901 |  |  | 126,406 |  |  | 115,577 |
Total reportable segment revenues | 368,434 |  |  | 335,932 |  |  | 1,094,621 |  |  | 974,957 |
Add: Net gains (losses) on investments and other financial instruments | 13,009 |  |  | (4,480 | ) |  | 47,462 |  |  | (30,771 | )
Less: Inter-segment revenues (2) | 1,105 |  |  | 766 |  |  | 3,152 |  |  | 2,653 |
Total revenues | $ | 380,338 |  |  | $ | 330,686 |  |  | $ | 1,138,931 |  |  | $ | 941,533 |
______________________
(1) | Includes a cumulative adjustment to unearned premiums recorded in the second quarter of 2019 related to an update to the amortization rates used to recognize revenue for Single Premium Policies, as further described above.
(2) | Inter-segment revenues included in the Services segment.
The accounting standard on revenue from contracts with customers is primarily applicable to our services revenue and is not applicable to our investments and insurance products, which represent the majority of our revenue. See Notes 1 and 2 of Notes to Consolidated Financial Statements in our 2018 Form 10-K for additional information regarding our accounting policies and the services we offer. The table below represents the disaggregation of services revenues from external customers, by type:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
(In thousands) | 2019 |  | 2018 |  | 2019 |  | 2018
Services revenue |  |  |  |  |  |  |
Mortgage Services | $ | 19,218 |  |  | $ | 18,839 |  |  | $ | 51,531 |  |  | $ | 55,552 |
Real Estate Services | 17,865 |  |  | 15,984 |  |  | 50,640 |  |  | 44,948 |
Title Services | 5,426 |  |  | 1,743 |  |  | 12,394 |  |  | 6,058 |
Total services revenue | $ | 42,509 |  |  | $ | 36,566 |  |  | $ | 114,565 |  |  | $ | 106,558 |
Our services revenues are recognized over time and measured each period based on the progress to date as services are performed and made available to customers. Our contracts with customers, including payment terms, are generally short-term in nature; therefore, any impact related to timing is immaterial. Revenue expected to be recognized in any future period related to remaining performance obligations, such as contracts where revenue is recognized as invoiced and contracts with variable consideration related to undelivered performance obligations, is not material. Revenue recognized related to services made available to customers and billed is reflected in accounts and notes receivable. Revenue recognized related to services performed and not yet billed is recorded in unbilled receivables and reflected in other assets. Deferred revenue represents advance payments received from customers in advance of revenue recognition. We have no material bad-debt expense. The following represents balances related to services revenue contracts as of the dates indicated:
(In thousands) | September 30, 2019 |  | December 31, 2018
Accounts Receivable | $ | 18,956 |  |  | $ | 15,461 |
Unbilled Receivables | 25,110 |  |  | 19,917 |
Deferred Revenues | 3,036 |  |  | 3,204 |

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 280 -URI http://asc.fasb.org/topic&trid=2134510 + Details
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