RADIAN GROUP INC

Table of ContentsGlossaryPart II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations—Mortgage Insurance

The following table summarizes our Mortgage Insurance segment’s results of operations for the periods indicated.

(1)Our senior management uses adjusted pretax operating income as our primary measure to evaluate the fundamental financial performance of our business segments. See Note 4 of Notes to Consolidated Financial Statements for more information.

Year Ended December 31, 2023, Compared to Year Ended December 31, 2022

Net Premiums Earned. Net premiums earned decreased for 2023 compared to 2022, primarily due to: (i) a decrease in the profit commission retained by the Company under our reinsurance programs, due to less favorable reserve development in 2023; (ii) an increase in ceded premiums earned under the 2022 QSR Agreement, which began ceding a portion of NIW in the third quarter of 2022, as well as the 2023 QSR Agreement, which began ceding a portion of NIW in the third quarter of 2023; and (iii) a decrease in the benefit, net of reinsurance, from Single Premium Policy cancellations due to lower refinance activity. These impacts were partially offset by an increase in direct premiums earned excluding revenue from cancellations, which benefited 2023 as compared to 2022 due primarily to higher IIF.

Table of ContentsGlossaryPart II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The table below provides additional information about the components of mortgage insurance net premiums earned for the periods indicated, including the effects of our reinsurance programs.

(1)Includes premiums earned primarily from our participation in certain credit risk transfer programs. In December 2022, we novated this insured risk to an unrelated third-party reinsurer, which assumed all rights, interests, liabilities and obligations related to our participation in these programs on a prospective basis.

(2)Includes the impact of related profit commissions.

(3)Represents the profit commission on the Single Premium QSR Program and 2022 and 2023 QSR Agreements, excluding the impact of Single Premium Policy cancellations.

(4)Calculated by dividing direct premiums earned, including assumed revenue and excluding revenue from cancellations, by average primary IIF.

(5)Calculated by dividing direct premiums earned, including assumed revenue, by average primary IIF.

(6)Calculated by dividing net premiums earned by average primary IIF. The calculation for all periods presented incorporates the impact of profit commission adjustments related to our reinsurance programs. See Note 8 of Notes to Consolidated Financial Statements for further information.

(7)The average of beginning and ending balances of primary IIF, for each period presented.

Our in force portfolio premium yield was relatively stable for 2023, as compared to 2022. Based on current NIW pricing and the impact of higher Persistency Rates we have been experiencing, we currently expect our in force portfolio premium yield in 2024 to remain stable; however, due to the potential impacts of Single Premium Policy cancellations and reinsurance, among other things, the net premium yield may continue to fluctuate from period to period.

The level of mortgage prepayments affects the revenue ultimately produced by our mortgage insurance business and is influenced by the mix of business we write. See “Key Factors Affecting Our Results—Mortgage Insurance—IIF and Related Drivers” for more information.

Table of ContentsGlossaryPart II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following table provides information related to the impact of our reinsurance transactions on premiums earned. See Note 8 of Notes to Consolidated Financial Statements for more information about our reinsurance programs.

(1)Consists primarily of 2022 and 2023 QSR Agreements.

(2)Includes the impact of changes in the profit commission retained by the Company due to changes in loss reserves. See “Expenses—Provision for Losses” below for additional information on the favorable reserve development, particularly in 2022.

(3)Does not include the benefit from ceding commissions from the reinsurance agreements in our QSR Program, which is primarily included in other operating expenses on the consolidated statements of operations. See Note 8 of Notes to Consolidated Financial Statements for additional information.

Services Revenue. Services revenue for 2023 decreased as compared to 2022, primarily driven by the termination of a large mortgage fulfillment services contract with a customer in the second quarter of 2022, as well as a decrease in demand for our contract underwriting services as a result of the general market decline in mortgage origination volume.

Net Investment Income. Increasing yields from higher interest rates were the primary driver of the increases in net investment income for 2023 compared to 2022.

The following table provides information related to our Mortgage Insurance subsidiaries’ investment balances and investment yields for the periods indicated.

(1) The average of the beginning and ending amortized cost, for each period presented, of investments held by our Mortgage Insurance subsidiaries.

(2) Calculated by dividing net investment income by average investments balance.

Provision for Losses. The following table details the financial impact of the significant components of our provision for losses for the periods indicated.

Table of ContentsGlossaryPart II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(1)Related to defaulted loans with a most recent default notice dated in the year indicated. For example, if a loan had defaulted in a prior year, but then subsequently cured and later re-defaulted in the current year, that default would be considered a current year default.

(2)Related to defaulted loans with a default notice dated in a year earlier than the year indicated, which have been continuously in default since that time.

(3)Provision for losses as a percentage of net premiums earned. See “Revenues—Net Premiums Earned” above for additional information on the changes in net premiums earned.

(4)Calculated by dividing provision for losses for new defaults, net of reinsurance, by the number of new primary defaults for each period.

Current year new primary defaults increased by 17% for 2023, as compared to 2022, consistent with our expectations regarding the natural seasoning of the portfolio given the increase in our IIF in recent years. Our gross Default to Claim Rate assumption for new primary defaults was 8.0% at both December 31, 2023 and 2022. We continue to closely monitor the trends in Cures and claims paid for our default inventory, while also weighing the risks and uncertainties associated with the current economic environment.

Our provision for losses during 2023 and 2022 was positively impacted by favorable reserve development on prior year defaults, primarily as a result of more favorable trends in Cures than originally estimated. These Cures have been due primarily to favorable outcomes resulting from mortgage forbearance programs implemented in response to the COVID-19 pandemic as well as positive trends in home price appreciation, which has also contributed to a higher rate of claims that result in no ultimate loss and that are withdrawn by servicers as a result. These favorable observed trends resulted in reductions in our Default to Claim Rate and other reserve adjustments for prior year default notices. See Notes 1 and 11 of Notes to Consolidated Financial Statements and “Item 1A. Risk Factors” for additional information.

Our primary default rate at both December 31, 2023 and 2022, was 2.2%. The following table shows a rollforward of the number of our primary loans in default.

(1)Includes submitted claims that resolved without a claim payment.

(2)Net of any previous Rescission and Claim Denials that were reinstated during the period. Such reinstated Rescissions and Claim Denials may ultimately result in a paid claim.

Table of ContentsGlossaryPart II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following tables show additional information about our primary loans in default as of the dates indicated.

N/A – Not applicable

(1) Excludes pool and other reserves. See Note 11 of Notes to Consolidated Financial Statements for additional information.

We develop our Default to Claim Rate estimates on defaulted loans based on models that use a variety of loan characteristics to determine the likelihood that a default will reach claim status. See Note 11 of Notes to Consolidated Financial Statements for additional details about our Default to Claim Rate assumptions.

Our aggregate weighted-average net Default to Claim Rate assumption for our primary defaulted loans used in estimating our reserve for losses, which is net of estimated Claim Denials and Rescissions, was 25% and 30%, at December 31, 2023 and 2022, respectively. This decrease was primarily due to a shift in the mix of defaults as of December 31, 2023, given the larger proportion of loans with fewer missed payments, as well as reduced claim rate assumptions for prior period defaults due to more favorable trends in Cures than originally estimated. See Note 11 of Notes to Consolidated Financial Statements for information regarding our reserve for losses and a reconciliation of our Mortgage Insurance segment’s beginning and ending reserves for losses and LAE.

Although expected claims are included in our reserve for losses, the timing of claims paid is subject to fluctuation from quarter to quarter, based on the rate that defaults cure and other factors, including the impact of foreclosure moratoriums (as further described in “Item 1. Business—Mortgage Insurance—Defaults and Claims”), which make the timing of paid claims difficult to predict.

Table of ContentsGlossaryPart II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following table shows net claims paid by product and the average claim paid by product for the periods indicated.

(1)Net of reinsurance recoveries.

(2)Includes payments to commute mortgage insurance coverage on certain performing and non-performing loans.

(3)Calculated excluding the impact of: (i) LAE; (ii) commutations and settlements; and (iii) claims resolved without payment, including claims subsequently withdrawn by the servicer.

(4)Before reinsurance recoveries.

Cost of Services. Cost of services for 2023 decreased compared to 2022, primarily due to the decrease in services revenue, as discussed above. Our cost of services is primarily affected by our level of services revenue.

Other Operating Expenses. The decrease in other operating expenses for 2023, as compared to 2022, is primarily related to reductions in headcount and other expense savings actions implemented for the segment during the past year. These items were partially offset by an increase in performance-based variable and share-based compensation expense in 2023, primarily as a part of allocated corporate operating expenses.

The following tables show additional information about other operating expenses for our Mortgage Insurance segment for the periods indicated.

(1)See Note 4 of Notes to Consolidated Financial Statements for more information about our allocation of corporate operating expenses.

(2)Operating expenses (which consist of policy acquisition costs and other operating expenses), expressed as a percentage of net premiums earned. See “Revenues—Net Premiums Earned” above for additional information on the changes in net premiums earned.