RADIAN GROUP INC

Legislation and administrative and regulatory changes and interpretations could impact our businesses.

Our businesses are subject to comprehensive insurance regulations and other requirements and may be impacted by regulatory and legislative developments and changes. Changes in these laws and regulations or the way they are interpreted or applied, as well as changes in other laws and regulations that may affect corporations more generally, could adversely affect our results of operations, financial condition and business prospects. In addition, our businesses could be impacted by new legislation or regulations at any time, including changes that are not currently contemplated or that conflict among different jurisdictions. While we have established policies and procedures to comply with applicable laws and regulations, many such laws and regulations are complex, and it is not possible to predict the eventual scope, duration or outcome of any reviews or investigations nor is it possible to predict their effect on us or the industries in which we participate.

Radian Guaranty may fail to maintain its eligibility status with the GSEs, and the additional capital required to support Radian Guaranty’s eligibility could reduce our available liquidity.

To be eligible to insure loans purchased by the GSEs, mortgage insurers such as Radian Guaranty must meet the GSEs’ eligibility requirements, or PMIERs. The PMIERs are comprehensive, covering virtually all aspects of the business of a private mortgage insurer, including extensive risk management and operational requirements and the financial requirements discussed below. See “Item 1. Business—Regulation—Federal Regulation—GSE Requirements for Mortgage Insurance Eligibility.” If Radian Guaranty is unable to satisfy the requirements set forth in the PMIERs, including the financial requirements discussed below, the GSEs have significant discretion to impose various remedial measures on Radian Guaranty, including restricting Radian Guaranty from conducting certain types of business with them or in the extreme, suspending or terminating Radian Guaranty’s eligibility to insure loans purchased by the GSEs.

The PMIERs include financial requirements incorporating a risk-based framework that requires a mortgage insurer’s Available Assets to meet or exceed its Minimum Required Assets. To ensure ongoing compliance, mortgage insurers typically have maintained a PMIERs Cushion, meaning an amount of Available Assets significantly in excess of their Minimum Required Assets. While a PMIERs Cushion is not required under the PMIERs, the amount of cushion that a mortgage insurer maintains is a point of focus for various stakeholders, including the GSEs, in evaluating the financial strength of a mortgage insurer, including when compared to the cushion maintained by other mortgage insurers. Any perceived weakness in the level of PMIERs Cushion maintained by Radian Guaranty could result in negative consequences for our Mortgage Insurance business and Radian Group, including the potential imposition of additional regulatory requirements to maintain eligibility to continue to conduct our Mortgage Insurance business or a diminished level of investor confidence in our financial condition.

The PMIERs financial requirements include increased financial requirements for defaulted loans, with increasing Minimum Required Assets as defaults age, as well as for performing loans that present a higher likelihood of default and/or certain credit characteristics, such as higher LTVs and lower FICO credit scores. In addition, while the PMIERs do not prohibit a mortgage insurer from holding any type of assets, the PMIERs financial requirements impose limitations on the credit that is granted for certain Available Assets based on several factors, including, among others, asset class and credit rating.

Radian Guaranty’s PMIERs Cushion, and ultimately, its ability to continue to comply with the PMIERs financial requirements could be impacted by, among other factors: (i) the volume and product mix of our NIW; (ii) factors affecting the performance of our mortgage insurance portfolio, including the level of new defaults and prepayments; (iii) for existing defaults, the aging of these existing defaults and the ultimate losses we incur on new or existing defaults; (iv) the amount of credit that we receive for investments in Radian Guaranty’s investment portfolio based on, among other things, asset class and credit rating; (v) the amount of credit that we receive for our third-party reinsurance transactions; and (vi) potential amendments or updates to the PMIERs.

The GSEs frequently evaluate the PMIERs for interim changes to address various specific matters. The GSEs may amend the PMIERs at any time and also have broad discretion to interpret the PMIERs, which could impact the calculation of Radian Guaranty’s Available Assets and/or Minimum Required Assets. The most recent large-scale revisions to PMIERs became effective in 2019, and the PMIERs have been further updated since then to address specific matters, including the COVID-19 pandemic and, more recently, for the credit that is granted for certain Available Assets. We expect the GSEs to continue to update the PMIERs in the future as they may deem necessary. For further information, see “Item 1. Business—Regulation—Federal Regulation—GSE Requirements for Mortgage Insurance Eligibility.”

If Radian Guaranty’s PMIERs Cushion is materially decreased, we may be required or otherwise choose to: (i) retain capital in Radian Guaranty and/or contribute additional capital to Radian Guaranty; (ii) alter our strategy with respect to our NIW by limiting the type and volume of business we are willing to write for certain products; (iii) alter our investment policies or strategies; or (iv) seek additional capital relief through reinsurance or otherwise, which may not be available on acceptable terms or at all.

Compliance with the PMIERs financial requirements could impact our holding company liquidity if additional capital support for Radian Guaranty is required for Radian Guaranty to increase its PMIERs Cushion or maintain compliance. The amount of capital that Radian Group could be required to contribute to Radian Guaranty for these purposes is uncertain but could be significant. See “Our sources of liquidity may be insufficient to fund our obligations.” Further, if Radian Guaranty becomes capital constrained, it may be more difficult for Radian Guaranty to return capital to Radian Group, which would compound the negative liquidity impact to Radian Group of the contributions it may be required to make to Radian Guaranty and leave less liquidity to satisfy Radian Group’s other obligations. Depending on the amount of Radian Group liquidity used, we may be required (or may decide) to seek additional capital by incurring additional debt, issuing additional equity or selling assets, which we may not be able to do on favorable terms, if at all.

The PMIERs prohibit Radian Guaranty from engaging in certain activities and require Radian Guaranty to obtain the prior consent of the GSEs before taking many actions, which may include, among other things, approval for certain transactions such as a change in control/beneficial ownership, changes to corporate or legal structure, transferring assets to any affiliate or subsidiary, providing capital or capital support to any affiliate or subsidiary that is either an approved insurer or an exclusive affiliated reinsurer, entering into certain intercompany agreements, settling loss mitigation disputes with customers and commuting risk. These restrictions could prohibit or delay Radian Guaranty from taking certain actions that would be advantageous to it or to Radian Group.

Loss or threat of loss of Radian Guaranty’s eligibility status with the GSEs would have an immediate and material adverse impact on the franchise value of our Mortgage Insurance business and our future prospects, as well as a material negative impact on our future results of operations and financial condition. Further, while we seek to optimize capital at Radian Guaranty, the need to satisfy the PMIERs’ financial requirements and to maintain an appropriate level of PMIERs Cushion could restrict our ability to utilize capital at Radian Guaranty to take advantage of potential strategic opportunities and to generate greater returns.

Our insurance subsidiaries are subject to comprehensive insurance regulations and other requirements, which we may fail to satisfy. Changes to existing regulation and supervisory standards, or failure to comply with them, could have a material adverse effect on our business, results of operations and financial condition.

Our insurance subsidiaries conduct business globally and are subject to extensive laws, regulations and other requirements that are complex, subject to change and sometimes conflict in their approach or intended outcomes. The laws and regulations of the jurisdictions and markets in which our insurance subsidiaries are domiciled or operate, which for Inigo includes oversight and supervision by Lloyd’s, require, among other things, that our subsidiaries maintain minimum levels of statutory capital and liquidity, meet solvency and operating standards, participate in guaranty funds and submit to periodic examinations of their financial condition and compliance with underwriting and other regulations. These laws and regulations also limit or restrict payments of dividends and reductions in capital. Generally, the purpose of insurance laws and regulations is not to protect Radian Group’s investors, rather these laws are generally intended to protect policyholders and, in the case of our subsidiaries that provide reinsurance, to protect ceding insurance companies. Regulatory authorities have broad supervisory powers 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 entity’s license or ability to write new business.

With respect to our U.S. mortgage insurance subsidiaries specifically, such subsidiaries are subject to comprehensive, detailed regulation by the insurance regulators in the states where they are domiciled or licensed to transact business. Among other matters, the state insurance regulators impose various financial requirements on our mortgage insurance subsidiaries, including Risk-to-capital ratios, other risk-based capital measures and surplus requirements that may limit the amount of insurance that our mortgage insurance subsidiaries write or the ability of our mortgage insurance subsidiaries to distribute capital to Radian Group. State insurance financial requirements also limit the credit that our mortgage insurance subsidiaries may receive for holding various assets, which could restrict Radian Guaranty’s ability to pursue various strategic opportunities or to generate greater returns.

Among other things, our failure to maintain adequate levels of capital in our mortgage insurance subsidiaries could lead to intervention by the various insurance regulatory authorities, which could materially and adversely affect our business, business prospects and financial condition. In addition, the GSEs and our mortgage insurance customers may decide not to conduct new business with Radian Guaranty (or may reduce current business levels) or impose restrictions on Radian Guaranty if it is not in compliance with applicable state insurance requirements. The franchise value of our Mortgage Insurance business likely would be significantly diminished if we were prohibited from writing new business or restricted in the amount of new business we could write in one or more states. For additional information about statutory surplus and other state insurance requirements, see “Item 1. Business—Regulation—State Regulation” and Note 16 of Notes to Consolidated Financial Statements.

Our mortgage insurance subsidiaries’ premium rates and policy forms are generally subject to regulation in every state in which they are licensed to transact business. These regulations are intended to protect policyholders against the adverse effects of excessive, inadequate or unfairly discriminatory rates and to encourage fair competition in the insurance marketplace. For example, state regulators assess rates to ensure that “similarly situated” customers are receiving similar rates without unjustifiable differentiation, and state regulators also may evaluate general default experience in the mortgage insurance industry in assessing the premium rates charged by mortgage insurers. In addition, the increased use by the insurance industry generally of risk-based pricing systems that establish premium rates based on more attributes than previously considered, and of algorithms, artificial intelligence and data and analytics, has led to additional regulatory scrutiny of premium rates and of other matters such as discrimination in pricing and underwriting, data privacy and access to insurance. We may be subject to regulatory inquiries or examinations with respect to our mortgage insurance premium rates and policy forms.

See “Item 1. Business—Regulation—State Regulation” for more information on regulatory requirements applicable to our mortgage insurance subsidiaries and potential further changes to existing requirements.

Our newly acquired international subsidiaries are subject to the laws and regulations of the relevant jurisdictions in which they operate, including for Inigo Managing Agent Limited the requirements of the PRA and the Financial Conduct Authority in the U.K. Our Lloyd’s syndicate, Syndicate 1301, is also subject to management and supervision by the Society of Lloyd’s, which has wide discretionary powers to regulate members’ underwriting at Lloyd’s, as well as international regulations imposed by regulators where the Lloyd’s syndicate conducts business. As we grow our Specialty Insurance business and operations, we expect continued and enhanced regulatory oversight, including increased expectations of Lloyd’s Principles-based Oversight Framework and the PRA.

Changes in the charters, business practices or role of the GSEs in the U.S. housing finance market generally, could significantly impact our Mortgage Insurance business.

Changes in the GSEs’ business practices and other actions of the FHFA and GSEs can significantly impact the functioning of the housing finance system. Because traditional mortgage insurance is an important component of this system and because our Mortgage Insurance business depends on the health of the housing finance system and housing markets in particular, these actions have impacted, and future actions could further impact, our business operations and performance. The FHFA has been the conservator of the GSEs since 2008 and has the authority to control and direct their operations. Given that the Director of the FHFA is removable by the President at will, the agency’s agenda and its policies and actions are influenced by the Administration in office at any given time. The increased role that the federal government has assumed in the residential housing finance system through the GSE conservatorships may increase the likelihood that the business practices of the GSEs change, including through Administration changes and actions.

Our current Mortgage Insurance business is highly dependent on the GSEs, which are the primary beneficiaries of most of our mortgage insurance policies. Changes in the business practices of the GSEs, which can be implemented by the GSEs acting independently or through the FHFA, could negatively impact our business and financial performance. Examples of potential changes that could impact our business may include, without limitation:

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eligibility requirements for a mortgage insurer to become and remain an approved eligible insurer for the GSEs;

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underwriting standards on mortgages they purchase;

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policies or requirements that may result in a reduction in the number of mortgages they acquire, including benchmarks established by the FHFA for the amount of certain loans that may be purchased by the GSEs;

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the national conforming loan limit for mortgages they acquire, in particular as this limit compares to loan limits set by the FHA;

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the level of mortgage insurance they require;

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the terms on which mortgage insurance coverage may be canceled before reaching the cancellation thresholds established by law, including if the GSEs change or expand their cancellation practices as a result of policy goals, changing risk tolerances or otherwise;

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the terms required to be included in mortgage insurance policies that cover the loans they acquire, including limitations on the ability of mortgage insurers to mitigate losses on insured mortgages that are in default;

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the programs established by the GSEs that are intended to avoid or mitigate loss on insured loans;

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the amount of loan level price adjustments or guarantee fees, which may result in a higher cost to borrowers, that the GSEs charge on loans that require mortgage insurance; and

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the degree of influence that the GSEs have over a mortgage lender’s selection of the mortgage insurer providing coverage.

Under both Trump Administrations, the FHFA has explored, and taken certain actions directed towards, the potential future release of the GSEs from conservatorship. During the first Trump Administration, these actions included, among others, adopting the Enterprise Regulatory Capital Framework (“ERCF”), allowing the GSEs to retain capital up to the ERCF capital requirements and limiting the credit risk that the GSEs could acquire. During the current Trump Administration, there have been further efforts to explore recapitalizing the GSEs, including exploring a potential limited public offering of equity interests in the GSEs. While it remains uncertain if, when and how the GSEs might be released from conservatorship, actions taken in pursuit of this objective, including a potential public offering of GSE stock, could impact the business and operations of the GSEs, and as a result, could impact our Mortgage Insurance business.

The GSEs may pursue new products and activities, or alter existing policies and practices, including in ways that could negatively impact Radian Guaranty’s IIF, results of operations or financial condition. The GSEs have in the past and may in the future offer new products and activities in pursuit of their business strategies, including structures that compete with traditional private mortgage insurance. It is difficult to predict what types of new products and activities may be proposed by the GSEs in the future and, if applicable, whether they may be approved by the FHFA, including programs that may provide an alternative to traditional private mortgage insurance. If any existing or future credit risk transfer transactions and structures were to displace primary loan level or standard levels of mortgage insurance, the amount of mortgage insurance we write may be reduced, which could negatively impact our franchise value, results of operations and financial condition. See “Item 1. Business—Regulation—Federal Regulation—Housing Finance Reform and the GSEs’ Business Practices—Administrative Reform” for further discussion regarding these and other changes to the GSEs’ business practices.

The structure of the residential housing finance system could be altered in the future, including as a result of comprehensive housing reform legislation or action by the current or future Administrations. Since the FHFA was appointed as conservator of the GSEs, there has been a wide range of legislative proposals to reform the U.S. housing finance market. In conjunction with these proposals, there has been ongoing debate about the roles that the federal government and private capital should play in the housing finance system. To the extent new legislative action alters the existing GSE charters without explicit preservation of the role of private mortgage insurance for high-LTV loans, our business could be adversely affected. See “Item 1. Business—Regulation—Federal Regulation—Housing Finance Reform and the GSEs’ Business Practices” for a discussion of the future of housing finance in the U.S., including potential objectives for future reform.

Developments in the practices of the GSEs, including potentially new federal legislation, changes to existing statutes, rules or regulations, or changes in the GSEs’ business practices that reduce the level of private mortgage insurance coverage used by the GSEs as credit enhancement, or even eliminate the requirement, may diminish the franchise value of our Mortgage Insurance business and materially and adversely affect our business prospects, results of operations and financial condition.