Segment Reporting

We currently have two strategic business units that we manage separately—mortgage insurance and, effective with the June 30, 2014 acquisition of Clayton, MRES. As a result of the Radian Asset Assurance Stock Purchase Agreement to sell 100% of the issued and outstanding shares of Radian Asset Assurance, we have reclassified the operating results related to the pending disposition as discontinued operations for all periods presented in our consolidated statements of operations and no longer present a financial guaranty segment. Certain corporate income and expenses that were previously allocated to the financial guaranty segment but were not reclassified to discontinued operations, such as investment income, interest expense and corporate overhead expenses, have been reallocated to the mortgage insurance segment. Prior periods have been revised to conform to the current period presentation for these changes. See Note 3 for additional information related to discontinued operations.

In addition to amounts previously allocated to the financial guaranty segment, we allocate corporate expenses to our mortgage insurance segment based on an allocated percentage of time spent on the mortgage insurance segment. In addition, we have allocated all corporate cash and investments to our mortgage insurance segment, as well as all interest expense other than the expense related to the Senior Notes due 2019.

We allocate to our MRES segment: (i) corporate expenses based on an allocated percentage of time spent on the MRES segment; and (ii) as noted above, all interest expense related to the Senior Notes due 2019 as the issuance proceeds funded our acquisition of Clayton. No corporate cash or investments are allocated to the MRES segment. Because the Clayton acquisition occurred on June 30, 2014, we have included its results of operations from the date of acquisition. Inter-segment activities are recorded at market rates for segment reporting and eliminated in consolidation.

Effective with the fourth quarter of 2014, the MRES business undertook the management responsibilities of certain additional loan servicer surveillance functions previously considered part of the mortgage insurance segment. As a result, these activities are now reported in the MRES segment for all periods presented.

Adjusted Pretax Operating Income (Loss)

Our senior management, including our Chief Executive Officer (our chief operating decision maker), uses adjusted pretax operating income (loss) as our primary measure to evaluate the fundamental financial performance of Radian’s business segments and to allocate resources to the segments. Adjusted pretax operating income (loss) is defined as pretax income (loss) from continuing operations excluding the effects of net gains (losses) on investments and other financial instruments, acquisition-related expenses, amortization and impairment of intangible assets and net impairment losses recognized in earnings. It also excludes gains and losses related to changes in fair value estimates on insured credit derivatives and instead includes the impact of changes in the present value of expected insurance claims and recoveries on insured credit derivatives, based on our ongoing insurance loss monitoring. Management’s use of this measure as its primary measure to evaluate segment performance began with the quarter ended March 31, 2014. Accordingly, for comparison purposes, we also present the applicable measures from the corresponding periods of 2013 and 2012 on a basis consistent with the current year presentation.

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: (1) not viewed as part of the operating performance of our primary activities; or (2) not expected to result in an economic impact equal to the amount reflected in pretax income (loss) from continuing operations. These adjustments, along with the reasons for their treatment, are described below.

(1)

Change in fair value of derivative instruments. Gains and losses related to changes in the fair value of insured credit derivatives are subject to significant fluctuation based on changes in interest rates, credit spreads, credit ratings and other market, asset-class and transaction-specific conditions and factors that may be unrelated or only indirectly related to our obligation to pay future claims. With the exception of the estimated present value of net credit (losses) recoveries incurred discussed in item 2 below, we believe these gains and losses will reverse over time and consequently these changes are not expected to result in economic gains or losses. Therefore, these gains and losses are excluded from our calculation of adjusted pretax operating income (loss).

(2)

Estimated present value of net credit (losses) recoveries incurred. The change in present value of insurance claims we expect to pay or recover on insured credit derivatives represents the amount of the change in credit derivatives from item 1 above, that we expect to result in an economic loss or recovery based on our ongoing loss monitoring analytics. Therefore, this item is expected to have an economic impact and is included in our calculation of adjusted pretax operating income (loss). Also included in this item is the change in expected economic loss or recovery associated with our consolidated VIEs.

(3)

Net gains (losses) on investments and other financial instruments. The recognition of realized investment gains or losses can vary significantly across periods as the activity is highly discretionary based on the timing of individual securities sales due to such factors as market opportunities, our tax and capital profile and overall market cycles. Unrealized investment gains and losses arise primarily from changes in the market value of our investments that are classified as trading. These valuation adjustments may not necessarily result in economic gains or losses. We do not view them to be indicative of our fundamental operating activities. Trends in the profitability of our fundamental operating activities can be more clearly identified without the fluctuations of these realized and unrealized gains or losses. Therefore, these items are excluded from our calculation of adjusted pretax operating income (loss).

(4)

Acquisition-related expenses. Acquisition-related expenses represent the costs incurred to effect an acquisition of a business (i.e., a business combination). Because we pursue acquisitions on a limited and selective basis and not in the ordinary course of our business, we do not view acquisition-related expenses as a consequence of a primary business activity. Therefore, we do not consider these expenses to be part of our operating performance and they are excluded from our calculation of adjusted pretax operating income (loss).

(5)

Amortization and impairment of intangible assets. Amortization of intangible assets represents the periodic expense required to amortize the cost of intangible assets over their estimated useful lives. Intangible assets with an indefinite useful life are also periodically reviewed for potential impairment and impairment adjustments are made whenever appropriate. These charges are not viewed as part of the operating performance of our primary activities and therefore are excluded from our calculation of adjusted pretax operating income (loss).

(6)

Net impairment losses recognized in earnings. The recognition of net impairment losses on investments can vary significantly in both size and timing, depending on market credit cycles. We do not view these impairment losses to be indicative of our fundamental operating activities. Therefore, whenever these losses occur, we exclude them from our calculation of adjusted pretax operating income (loss).

Summarized financial information concerning our operating segments, as of and for the periods indicated, is as follows:



	December 31, 2014
(In thousands)	Mortgage Insurance			MRES (1)		Total
Net premiums written—insurance	$	925,181		$	—	$	925,181
Increase in unearned premiums	(80,653		)	—		(80,653		)
Net premiums earned—insurance	844,528			—		844,528
Services revenue (2)	—			76,709		76,709
Net investment income (3)	65,655			—		65,655
Other income (3)	5,321			1,265		6,586
Total	915,504			77,974		993,478			(4)

Provision for losses (5)	246,865			—		246,865
Estimated present value of net credit recoveries incurred	113			—		113
Policy acquisition costs	24,446			—		24,446
Direct cost of services	—			43,605		43,605
Other operating expenses (3) (6)	225,544			20,059		245,603
Interest expense (3)	81,600			8,864		90,464
Total	578,568			72,528		651,096

Adjusted pretax operating income	$	336,936		$	5,446	$	342,382

Cash and investments	$	3,649,582		$	10,182	$	3,659,764
Restricted cash	11,508			2,523		14,031
Deferred policy acquisition costs	12,003			—		12,003
Goodwill	—			191,932		191,932
Other intangible assets, net	137			96,171		96,308
Assets held for sale (7)	—			—		1,736,444
Total assets	4,786,641			336,878		6,859,963
Unearned premiums	644,504			—		644,504
Reserve for losses and LAE	1,560,032			—		1,560,032

NIW (in millions)	$	37,349

________________


(1)	Includes the acquisition of Clayton, effective June 30, 2014.


(2)	Includes a de minimis amount of inter-segment revenues in the MRES segment.

(3)

Includes corporate income and expenses that have been reallocated to the mortgage insurance segment that were previously allocated to the financial guaranty segment, but were not reclassified to discontinued operations. These items include net investment income of $4.8 million, other income of $0.3 million, interest expense of $53.3 million and corporate overhead expenses of $13.5 million for the year ended December 31, 2014.


(4)	Excludes the following revenue items not included in adjusted pretax operating income: (a) net gains on investments of $83.9 million; and (b) net losses on other financial instruments of $3.9 million. Includes inter-segment revenues of $0.8 million in the MRES segment.


(5)	Includes inter-segment expenses of $0.8 million in the mortgage insurance segment.


(6)	Excludes $6.7 million of acquisition-related expenses not included in segment other operating expenses.


(7)	Assets held for sale are not part of the mortgage insurance or MRES segments.



	Mortgage Insurance
	December 31,
(In thousands)	2013			2012
Net premiums written—insurance	$	950,998		$	806,305
Increase in unearned premiums	(169,578		)	(103,920		)
Net premiums earned—insurance	781,420			702,385
Net investment income (1)	68,121			72,679
Other income (2) (3)	6,255			5,787
Total (4)	855,796			780,851

Provision for losses	562,747			921,548
Estimated present value of net credit (recoveries) losses incurred	(21		)	933
Policy acquisition costs	28,485			34,131
Other operating expenses (5)	257,402			167,660
Interest expense (6)	74,618			51,832
Total	923,231			1,176,104

Adjusted pretax operating loss	$	(67,435	)	$	(395,253	)

Cash and investments	$	3,384,558		$	3,447,201
Restricted cash	22,527			24,225
Deferred policy acquisition costs	29,741			38,478
Total assets (7)	3,853,630			3,937,588
Unearned premiums	567,072			382,413
Reserve for losses and LAE	2,164,353			3,083,608

NIW (in millions)	$	47,255		$	37,061

________________


(1)	Net investment income of $6.5 million and $9.5 million has been reallocated to the mortgage insurance segment for the years ended December 31, 2013 and 2012, respectively.


(2)	Other income of $0.2 million has been reallocated to the mortgage insurance segment for each of the years ended December 31, 2013 and 2012.


(3)	Does not include change in fair value of derivative instruments of $0.6 million and ($0.2) million for the years ended December 31, 2013 and 2012, respectively.

(4)

For the year ended December 31, 2013, excludes the following revenue items not included in adjusted pretax operating loss: (a) net losses on investments of $98.9 million; (b) net losses on other financial instruments of $7.6 million; and (c) change in fair value of derivative instruments of $0.6 million. For the year ended December 31, 2012, excludes the following revenue items not included in adjusted pretax operating loss: (a) net gains on investments of $114.3 million;(b) net losses on other financial instruments of $7.8 million; and (c) change in fair value of derivative instruments of ($0.2) million.


(5)	Corporate overhead expenses of $20.5 million and $15.2 million have been reallocated to the mortgage insurance segment for the years ended December 31, 2013 and 2012, respectively.


(6)	Interest expense of $56.6 million and $44.4 million has been reallocated to the mortgage insurance segment for the years ended December 31, 2013 and 2012, respectively.


(7)	Does not include assets held for sale of $1.8 billion and $2.0 billion for the years ended December 31, 2013 and 2012, respectively, which are not a part of the mortgage insurance segment.

Certain corporate income and expenses have been reallocated to the mortgage insurance segment as listed above in notes (1) through (4) to the table. These amounts represent items that were previously allocated to the financial guaranty segment but were not reclassified to discontinued operations.

The reconciliation of adjusted pretax operating income (loss) to consolidated pretax income (loss) from continuing operations is as follows:



	December 31,
(In thousands)	2014				2013			2012
Adjusted pretax operating income (loss):
Mortgage insurance (2)	$	336,936		(1)	$	(67,435	)	$	(395,253	)
MRES	5,446			(3)	—			—
Total adjusted pretax operating income (loss)	$	342,382			$	(67,435	)	$	(395,253	)

Change in fair value of derivative instruments	—				635			(192		)
Less: Estimated present value of net credit (losses) recoveries incurred	(113		)		21			(933		)
Change in fair value of derivative instruments expected to reverse over time	113				614			741

Net gains (losses) on investments	83,869				(98,945		)	114,282
Net (losses) gains on other financial instruments	(3,880		)		(7,580		)	7,802
Acquisition-related expenses	(6,680		)		—			—
Amortization and impairment of intangible assets	(8,648		)		—			—
Consolidated pretax income (loss) from continuing operations	$	407,156			$	(173,346	)	$	(272,428	)

________________


(1)	Includes inter-segment expenses of $0.8 million for the year ended December 31, 2014.


(2)	Includes certain corporate income and expenses that have been reallocated to the mortgage insurance segment for all periods presented, as listed in the preceding detailed tables. These amounts represent items that were previously allocated to the financial guaranty segment but were not reclassified to discontinued operations.


(3)	Includes inter-segment revenues of $0.8 million for the year ended December 31, 2014.

On a consolidated basis, “adjusted pretax operating income (loss)” is a measure not determined in accordance with GAAP. Total adjusted pretax operating income (loss) is not a measure of total profitability, and therefore should not be viewed as a substitute for GAAP pretax income (loss) from continuing operations. Our definition of adjusted pretax operating income (loss) may not be comparable to similarly-named measures reported by other companies.

Concentration of Risk

Net premiums earned attributable to foreign countries and long-lived assets located in foreign countries were immaterial for the periods presented.

As of December 31, 2014, California is the only state that accounted for more than 10% of our mortgage insurance business measured by primary RIF. California accounted for 13.7% of our mortgage insurance segment’s primary RIF at December 31, 2014 and at December 31, 2013. California also accounted for 9.8% of our mortgage insurance segment’s pool RIF at December 31, 2014, compared to 10.0% at December 31, 2013. California accounted for 17.2% of our mortgage insurance segment’s direct primary NIW for the year ended December 31, 2014, compared to 18.4% and 17.1% for the years ended December 31, 2013 and 2012, respectively.

The largest single mortgage insurance customer (including branches and affiliates), measured by primary NIW, accounted for 4.0% of NIW during 2014, compared to 5.8% and 6.2% from the largest single customer in 2013 and 2012, respectively. Earned premiums from one mortgage insurance customer represented 19%, 21% and 19% of our consolidated revenues in 2014, 2013 and 2012, respectively. Earned premiums from an additional customer represented 17% of our consolidated revenues in 2012.