RADIAN GROUP INC

Table of ContentsGlossaryPart I. Item 1A. Risk Factors

Risks Related to the Economic Environment

The credit performance of our mortgage insurance portfolio is impacted by macroeconomic conditions and specific events that affect the ability of borrowers to pay their mortgages.

Mortgage defaults occur due to a variety of specific events affecting individual borrowers, including death or illness, divorce or other family-related factors and unemployment, among other events. While mortgage defaults can and do occur in any economic environment, there is a high correlation between the overall health of the economy and the performance of our mortgage insurance portfolio. As a result, our results are particularly influenced by macroeconomic conditions and specific events that impact the housing finance and real estate markets, including events that impact mortgage originations and the credit performance of our mortgage insurance portfolio, most of which are beyond our control, including housing prices, inflationary pressures, unemployment levels, interest rate changes, the availability of credit and other national and regional economic conditions. These conditions may be created or exacerbated by: acts of terrorism, war or other geopolitical conditions and conflicts; event-specific economic depressions; U.S. debt ceiling and budget deficit concerns; severe weather events and natural disasters, which may continue to increase in severity and frequency due to climate change; and other catastrophic events such as pandemics or epidemics. In general, challenging economic conditions increase the likelihood that borrowers will not have sufficient income to satisfy their mortgage obligations.

A decline in home prices can occur due to deteriorating economic conditions or other factors that reduce the demand for homes, such as changes in buyers’ perceptions of the potential for future home price appreciation, restrictions on and the cost of mortgage credit due to more stringent underwriting standards, higher interest rates, changes to the tax deductibility of mortgage interest, decreases in the rate of household formations, or other factors. Declining housing values can influence the willingness of borrowers to continue to make mortgage payments despite having the financial resources to do so. A decline in home values typically makes it more difficult for borrowers to sell or refinance their homes, increasing the likelihood that a default will result in a claim. Declining housing values also may impact the effectiveness of our loss mitigation actions. The amount of the loss we could suffer depends in part on whether the home of a borrower who defaults on a mortgage can be sold for an amount that will cover the unpaid principal balance, interest and the expenses of the sale. Any of these events may have a material adverse effect on our business, results of operations and financial condition.

Currently, inflation and interest rates in the U.S. continue to be elevated, although inflation has moderated from its 40-year high in 2022 and interest rates have decreased from their recent peak in the latter part of 2023. In addition to these macroeconomic conditions, future volatility may occur due to, among other factors, declining home prices, the risk of higher unemployment rates and political conditions. Unfavorable macroeconomic developments and the other factors cited above have had in the past, and in the future may have again, a material negative impact on our results of operations and financial condition.

Our success depends, in part, on our ability to manage risks in our investment portfolio.

Our investment portfolio is an important source of revenue and is our primary source of claims paying resources. Although our investment portfolio consists primarily of highly-rated fixed income investments, we may not achieve our investment objectives because our investment strategy is affected by factors beyond our control, such as general macroeconomic conditions, geopolitical events, domestic political conditions and tax policies, which may adversely affect the markets for credit and interest-rate-sensitive securities, including the extent and timing of investor participation in these markets, the level and volatility of interest rates and credit spreads and, consequently, the value of our fixed income securities and the level of our net investment income.

Volatility or lack of liquidity in the markets in which we invest has at times reduced the market value of some of our investments, including as a result of the disruption in the financial markets following the onset of the COVID-19 pandemic and more recently, inflationary and interest rate trends and actual or perceived instability in the financial services industry. The value of our investment portfolio is subject to market risk and may be adversely affected by other factors outside of our control, such as ratings downgrades, bankruptcies and credit spreads widening, any of which may cause unrealized or realized losses. When the credit environment deteriorates, the risk of impairments of our investments increases. Disruption and volatility in the financial markets, including the sharp increases in market interest rates we experienced in 2022 and 2023, could also have a material adverse effect on our liquidity, financial condition and results of operations. See “Our reported earnings, stockholders’ equity and book value per share are subject to fluctuations based on changes in our investments that require us to adjust their fair market value.”

Many of our investment securities are issued by the U.S. government and government agencies and sponsored entities. As a result of uncertain domestic political conditions, potential political instability or the perceived inability of the U.S. government to legislate on matters in a timely fashion, there is the threat that potential future federal government shutdowns or the possibility of the federal government defaulting on its obligations for a short period of time due to debt ceiling limitations or other issues could pose general credit and liquidity risks for investments in financial instruments issued or guaranteed by the federal government. Any potential downgrades by rating agencies in long-term sovereign credit ratings, as well as sovereign debt issues facing the governments of other countries, could have a material adverse impact on financial markets and economic conditions worldwide.

Table of ContentsGlossaryPart I. Item 1A. Risk Factors

For the significant portion of our investment portfolio held by our insurance subsidiaries, to receive favorable treatment under insurance regulatory requirements and full credit as Available Assets under the PMIERs, we generally are limited to investing in investment grade fixed income investments with yields that reflect their lower credit risk profile. Because we depend on our investments as a source of revenue, a prolonged period of lower than expected investment yields has an adverse impact on our revenues and could adversely affect our results of operations. Further, future updates to the insurance regulatory requirements or the PMIERs could restrict our investment choices, which could negatively impact our investment strategy.

In addition, we structure the maturities of investments in our investment portfolio to satisfy our expected liabilities, including claim payments in our mortgage insurance business. If we underestimate our future claim payments or other liabilities or improperly structure our investments to meet these liabilities, we could have unexpected losses resulting from the forced liquidation of investments before their maturity, which could adversely affect our results of operations.

Climate change and extreme weather events could adversely affect our businesses, results of operations and financial condition.

Our businesses, results of operations and financial performance could be adversely impacted by climate change and extreme weather events, especially if these occurrences negatively impact the overall real estate market and the broader economy. Climate change may increase the frequency and severity of natural disasters such as hurricanes, tornadoes, floods and forest fires and drive other ecologically related changes such as rising sea waters, which in turn could negatively affect regional economies in ways that impact home values or unemployment, and therefore, the credit performance of the mortgages we insure in affected areas. In addition, the inability of a borrower to obtain hazard and/or flood insurance, or the increased cost of such insurance, could lead to an increase in delinquencies or a decrease in home prices in the affected areas. If we were to attempt to limit our new insurance written in affected areas, lenders may choose not to do business with us. Natural disasters could also lead to increased reinsurance rates or reduced availability of reinsurance. This may cause us to retain more risk than we otherwise would retain and could negatively affect our compliance with financial requirements.

The FHFA has previously instructed the GSEs to designate climate change as a priority concern and actively consider its effects in their decision making. More recently, including as part of the 2024 GSE Scorecard, the FHFA has instructed the GSEs to explore the affordability and availability of property insurance to identify opportunities to mitigate risk while furthering sustainable homeownership. It is uncertain whether these efforts will result in any GSE guideline or mortgage insurance policy changes that could materially impact the volume and characteristics of our NIW (including the terms of our Master Policy), home prices in certain areas and defaults by borrowers in certain areas.

Further, climate change and natural disasters may impact the value of and cause volatility in our investment portfolio, and we might not achieve our investment objectives. Climate change and the frequency, severity, duration, and geography of severe weather events and other ecological-related changes are inherently uncertain, and we cannot predict the ultimate impact these events may have on our business and financial condition.

Our reported earnings, stockholders’ equity and book value per share are subject to fluctuations based on changes in our investments that require us to adjust their fair market value.

We have holdings of trading securities, equity securities, mortgage loans held for sale and short-term investments that we carry at fair value. Because the changes in fair value of these financial instruments are reflected on our statements of operations each period, they affect our reported earnings and can create earnings volatility. In addition, we increase or decrease our stockholders’ equity by the amount of change in the unrealized gain or loss (the difference between the fair value and the amortized cost) of our available for sale securities portfolio, net of related tax, under the category of accumulated other comprehensive income (loss). As a result, a decline in the fair value of our available for sale portfolio may result in a decline in reported stockholders’ equity, as well as book value per common share. Among other factors, interest rate changes, market volatility and declines in the value of underlying collateral will impact the value of our investments, potentially resulting in unrealized losses that could negatively impact our results of operations and stockholders’ equity. These negative impacts will occur even though the securities are not sold. Also, in the event there are credit loss-related impairments, the credit loss component and subsequent recoveries, if any, are recognized in earnings.