10-K 1 rdn10k12312014.htm 10-K RDN.10K.12.31.2014

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                    
Commission file number 1-11356 
_______________________________
RADIAN GROUP INC.
(Exact name of registrant as specified in its charter)
_______________________________
Delaware
23-2691170
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1601 Market Street, Philadelphia, PA
19103
(Address of principal executive offices)
(Zip Code)
(215) 231-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $.001 par value per share
New York Stock Exchange
Preferred Stock Purchase Rights
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
_______________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.       YES  x    NO  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  o    NO  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   x    NO  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer  x
 
Accelerated filer
o
Non-accelerated filer    o
(Do not check if a smaller reporting company)
Smaller reporting company
  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
As of June 30, 2014, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $2,809,401,966 based on the closing sale price as reported on the New York Stock Exchange. Excluded from this amount is the value of all shares beneficially owned by executive officers and directors of the registrant. These exclusions should not be deemed to constitute a representation or acknowledgment that any such individual is, in fact, an affiliate of the registrant or that there are not other persons or entities who may be deemed to be affiliates of the registrant.
The number of shares of common stock, $.001 par value per share, of the registrant outstanding on February 24, 2015 was 191,135,153 shares.
_______________________________ 
DOCUMENTS INCORPORATED BY REFERENCE
 
Form 10-K  Reference Document
Definitive Proxy Statement for the Registrant’s 2014 Annual Meeting of Stockholders
Part III
(Items 10 through 14)
 



TABLE OF CONTENTS
 
 
 
Page
Number
 
 
 
 
PART I
 
 
 
 
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1A
 
Item 1B
 
Item 2
 
Item 3
 
Item 4
PART II
 
 
 
 
Item 5
 
Item 6
 
Item 7
 
Item 7A
 
Item 8
 
Item 9
 
Item 9A
 
Item 9B
PART III
 
 
 
 
Item 10
 
Item 11
 
Item 12
 
Item 13
 
Item 14
PART IV
 
 
 
 
Item 15


2


GLOSSARY OF ABBREVIATIONS AND ACRONYMS
The list which follows includes the definitions of various abbreviations and acronyms used throughout this report, including the Business Section, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Consolidated Financial Statements and the Notes to Consolidated Financial Statements.
Term
Definition
1995 Equity Plan
The Radian Group Inc. 1995 Equity Compensation Plan
2008 Equity Plan
The Radian Group Inc. 2008 Equity Compensation Plan
2008 ESPP
The Radian Group Inc. 2008 Employee Stock Purchase Plan
2014 Equity Plan
The Radian Group Inc. 2014 Equity Compensation Plan
2014 Master Policy
Radian Guaranty’s Master Policy that became effective October 1, 2014
ABS
Asset-backed securities
Alt-A
Alternative-A loan where the documentation is generally limited as compared to fully documented loans (considered a non-prime loan grade)
AOCI
Accumulated other comprehensive income (loss)
Appeals
Internal Revenue Service Office of Appeals
APR
Annual percentage rate
ARM
Adjustable rate mortgage
Assured
Assured Guaranty Corp., a subsidiary of Assured Guaranty Ltd.
Available Assets
As defined in the proposed PMIERs, these assets primarily include the liquid assets of an insurer and exclude: (i) an amount equal to Unearned Premium Reserves; and (ii) certain subsidiary capital, including Radian Guaranty’s capital that is attributable to its ownership of Radian Asset Assurance
Basel I
The Basel Capital Accord, developed by the Basel Committee on Banking Supervision in 1988, which established international benchmarks for assessing banks’ capital adequacy requirements
Basel II
The June 2005 update to the Basel Capital Accord
Basel III
The September 2010 update to the Basel Capital Accord
BCBS
Basel Committee on Banking Supervision
Board
Radian Group’s Board of Directors
BofA Settlement Agreement
The Confidential Settlement Agreement and Release dated September 16, 2014, by and among Radian Guaranty and Countrywide Home Loans, Inc. and Bank of America, N.A., as a successor to BofA Home Loan Servicing f/k/a Countrywide Home Loan Servicing LP, in order to resolve various actual and potential claims or disputes as to mortgage insurance coverage on certain Subject Loans
Carryforwards
Net operating loss carryforward and tax credit carryforward, collectively
CD
Certificate of deposit
CFPB
Consumer Financial Protection Bureau
Claim Curtailment
Our legal right, under certain conditions, to reduce the amount of a claim, including due to servicer negligence
Claim Denial
Our legal right, under certain conditions, to deny a claim
Claim Severity
The total claim amount paid divided by the original coverage amount
Clayton
Clayton Holdings LLC, a Delaware domiciled indirect non-insurance subsidiary of Radian Group
CMBS
Commercial mortgage-backed security
Convertible Senior Notes due 2017
Our 3.000% convertible unsecured senior notes due November 2017 ($450 million principal amount)
Convertible Senior Notes due 2019
Our 2.250% convertible unsecured senior notes due March 2019 ($400 million principal amount)
COSO
Committee of Sponsoring Organizations of the Treadway Commission


3


Term
Definition
Cures
Loans that were in default as of the beginning of a period and are no longer in default because payments were received and the loan is no longer past due
Default to Claim Rate
Rate at which defaulted loans result in a claim
Deficiency Amount
The assessed tax liabilities, penalties and interest associated with a formal Notice of Deficiency
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
DTA
Deferred tax asset
DTL
Deferred tax liability
Early Stage Default
A default for which the foreclosure sale has not been scheduled or held
Equity Plans
The 1995 Equity Compensation Plan, the 2008 Equity Compensation Plan and the 2014 Equity Compensation Plan, together
ESPP
Employee Stock Purchase Plan
Exchange Act
Securities and Exchange Act of 1934, as amended
Extraordinary Dividend
A dividend distribution required to be approved by an insurance company’s primary regulator that is greater than would be permitted as an ordinary dividend, which does not require regulatory approval
Fannie Mae
Federal National Mortgage Association
FASB
Financial Accounting Standards Board
FCRA
Fair Credit Reporting Act of 1970
FDCPA
Fair Debt Collection Practices Act
FHA
Federal Housing Administration
FHFA
Federal Housing Finance Agency
FICO
Fair Isaac Corporation
First-liens
First-lien mortgage loans
Flow Business
With respect to mortgage insurance, transactions in which mortgage insurance is provided on mortgages on an individual loan basis as they are originated. Flow Business contrasts with Structured Transactions, in which mortgage insurance is provided on a group of mortgages after they have been originated
Foreclosure Stage Default
The Stage of Default indicating that the foreclosure sale has been scheduled or held
Freddie Mac
Federal Home Loan Mortgage Corporation
Freddie Mac Agreement
The Master Transaction Agreement between Radian Guaranty and Freddie Mac entered into in August 2013
Future Legacy Loans
With respect to the BofA Settlement Agreement, Legacy Loans where a claim decision has been or will be communicated by Radian Guaranty after February 13, 2013
GAAP
Accounting principles generally accepted in the United States of America
Ginnie Mae
Government National Mortgage Association
Green River Capital
Green River Capital LLC, a wholly-owned subsidiary of Clayton Holdings LLC
GSEs
Government-Sponsored Enterprises (Fannie Mae and Freddie Mac)
HAFA
Home Affordable Foreclosure Alternatives Program
HAMP
Homeowner Affordable Modification Program
HARP
Home Affordable Refinance Program
HARP 2
The FHFA’s extension of and enhancements to the HARP program
HPA
Homeowners Protection Act
HUD
U.S. Department of Housing and Urban Development
IBNR
Losses incurred but not reported
IIF
Insurance in force


4


Term
Definition
Implementation Date
The February 1, 2015 commencement date for activities pursuant to the BofA Settlement Agreement
Initial QSR Transaction
Initial quota share reinsurance agreement entered into with a third-party reinsurance provider in the second quarter of 2012
Insureds
Insured parties, with respect to the BofA Settlement Agreement, Countrywide Home Loans, Inc. and Bank of America, N.A., as a successor to BofA Home Loan Servicing f/k/a Countrywide Home Loans Servicing LP
IRS
Internal Revenue Service
JPMorgan
JPMorgan Chase Bank, N.A. and its affiliates
LAE
Loss adjustment expenses, which include the cost of investigating and adjusting losses and paying claims
Legacy Loans
With respect to the BofA Settlement Agreement, loans that were originated or acquired by an Insured and were insured by Radian Guaranty prior to January 1, 2009, excluding such loans that were refinanced under HARP 2
Legacy Portfolio
Mortgage insurance written during the poor underwriting years of 2005 through 2008, together with business written prior to 2005
LLPA
Loan level price adjustments, based on various risk characteristics, that are charged by the GSEs
Loss Mitigation Activity/Activities
Activities such as rescissions, denials, claim curtailments and cancellations
LTV
Loan-to-value ratio which is calculated as the percentage of the original loan amount to the original value of the property
Master Policies
The Prior Master Policy and the 2014 Master Policy, collectively
MBS
Mortgage-backed security
Minimum Required Assets
A risk-based minimum required asset amount as defined in the proposed PMIERs
Model Act
Mortgage Guaranty Insurers Model Act
Monthly Premium
Premiums on mortgage insurance products paid on a monthly installment basis
Moody’s
Moody’s Investors Service
MPP Requirement
Certain states’ statutory or regulatory risk-based capital requirement that the mortgage insurer must maintain a minimum policyholder position, which is calculated based on both risk and surplus levels
MRES
Radian’s Mortgage and Real Estate Services business segment, which provides mortgage- and real estate-related products and services to the mortgage finance market
NAIC
National Association of Insurance Commissioners
NIW
New insurance written
NOL
Net operating loss, calculated on a tax basis
NRSRO
Nationally recognized statistical ratings organization
NYSDFS
New York State Department of Financial Services
NYSE
New York Stock Exchange
Notice of Deficiency
A formal letter from the IRS informing the taxpayer of an IRS determination of tax deficiency and appeal rights with the U.S. Tax Court
OCI
Other comprehensive income (loss)
Option ARM
Adjustable rate mortgage that provides the borrower with different payment options
ORSA
Own Risk and Solvency Assessment, an internal process to assess the adequacy of an insurer’s risk management framework and current and prospective solvency positions under both normal and severe stress scenarios
PDR
Premium deficiency reserve
Persistency Rate
The percentage of insurance in force that remains on our books after any 12-month period


5


Term
Definition
PMIERs
Private Mortgage Insurer Eligibility Requirements issued by the FHFA for public comment on July 10, 2014
PMIERs Financial Requirements
Financial requirements of the PMIERs
Prior Master Policy
Radian Guaranty’s master insurance policy in effect prior to the effective date of its 2014 Master Policy
QM
Qualified mortgage
QM Rule
Rule issued by the CFPB on January 10, 2013, defining qualified mortgage and ability to repay requirements
QRM
Qualified residential mortgage
QSR
Quota share reinsurance
QSR Reinsurance Transactions
The Initial QSR Transaction and Second QSR Transaction, collectively
Radian
Radian Group Inc. together with its consolidated subsidiaries
Radian Asset Assurance
Radian Asset Assurance Inc., a New York domiciled insurance subsidiary of Radian Guaranty
Radian Asset Assurance Stock Purchase Agreement
The Stock Purchase Agreement dated December 22, 2014, between Radian Guaranty and Assured Guaranty Corp., a subsidiary of Assured Guaranty Ltd. (“Assured”), to sell 100% of the issued and outstanding shares of Radian Asset Assurance, Radian’s financial guaranty insurance subsidiary, to Assured
Radian Group
Radian Group Inc., the registrant
Radian Guaranty
Radian Guaranty Inc., a Pennsylvania domiciled insurance subsidiary of Radian Group
Radian Insurance
Radian Insurance Inc., a Pennsylvania domiciled insurance subsidiary of Radian Guaranty
Radian Mortgage Insurance
Radian Mortgage Insurance Inc., a Pennsylvania domiciled subsidiary of Radian Guaranty
RBC States
Risk-based capital states, which are those states that currently impose a statutory or regulatory risk-based capital requirement
REMIC
Real Estate Mortgage Investment Conduit
REO
Real Estate Owned
Rescission
Our legal right, under certain conditions, to unilaterally rescind coverage on our mortgage insurance policies if we determine that a loan did not qualify for insurance
RESPA
Real Estate Settlement Procedures Act of 1974
RGRI
Radian Guaranty Reinsurance Inc., a Pennsylvania domiciled insurance subsidiary of Enhance Financial Services Group Inc., a New York domiciled non-insurance subsidiary of Radian Group
RIF
Risk in force, which approximates the maximum loss exposure at any point in time
Risk-to-capital
Under certain state regulations, a minimum ratio of statutory capital calculated relative to the level of net risk in force
RMAI
Radian Mortgage Assurance Inc., a Pennsylvania domiciled insurance subsidiary of Radian Guaranty
RMBS
Residential mortgage-backed securities
RSU
Restricted stock unit
S&P
Standard & Poor’s Financial Services LLC
SAP
Statutory accounting practices include those required or permitted, if applicable, by the insurance departments of the respective states of domicile of our insurance subsidiaries
SARs
Stock appreciation rights
SEC
United States Securities and Exchange Commission
Second QSR Transaction
Second Quota share reinsurance transaction entered into with a third-party reinsurance provider in the fourth quarter of 2012
Second-liens
Second-lien mortgage loans


6


Term
Definition
Senior Notes due 2013
Our 5.625% unsecured senior notes due February 2013 ($250 million principal amount)
Senior Notes due 2015
Our 5.375% unsecured senior notes due June 2015 ($250 million principal amount)
Senior Notes due 2017
Our 9.000% unsecured senior notes due June 2017 ($195.5 million principal amount)
Senior Notes due 2019
Our 5.500% unsecured senior notes due June 2019 ($300 million principal amount)
Servicing Only Loans
With respect to the BofA Settlement Agreement, loans other than Legacy Loans that were or are serviced by the Insureds and were 90 days or more past due as of July 31, 2014, or if servicing has been transferred to a servicer other than the Insureds, 90 days or more past due as of the transfer date
Single Premium
Premiums on mortgage insurance products paid in a single payment at origination
Smart Home
A Radian-developed program for reinsuring risk associated with non-prime mortgages through the use of VIE structures, which transferred risk to investors in the capital markets
Sovereign
Sovereign or independent governmental units, including various levels of government (sub-sovereign), collectively
Stage of Default
The stage a loan is in relative to the foreclosure process, based on whether or not a foreclosure sale has been scheduled or held (i.e., Early Stage Defaults and Foreclosure Stage Defaults)
Statutory RBC Requirement
Risk-based capital requirement imposed by the RBC States, requiring a minimum surplus level and, in certain states, a minimum ratio of statutory capital relative to the level of risk
Structured Transactions
With respect to mortgage insurance, transactions in which mortgage insurance is provided on a group of mortgages after they have been originated. Structured Transactions contrast with Flow Business, in which mortgage insurance is provided on mortgages on an individual loan basis as they are originated
Subject Loans
Loans covered under the BofA Settlement Agreement, comprising Legacy Loans and Servicing Only Loans
TILA
Truth in Lending Act
Time in Default
The time period from the point a loan reaches default status (based on the month the default occurred) to the current reporting date
TSR
Total stockholder return
U.S.
The United States of America
U.S. Treasury
United States Department of the Treasury
Unearned Premium Reserves
Premiums received but not yet earned
VA
U.S. Department of Veterans Affairs
VIE
Variable interest entity is a legal entity subject to the variable interest entity subsections of the accounting standard regarding consolidation, and generally includes a corporation, trust or partnership in which, by design, equity investors do not have a controlling financial interest or do not have sufficient equity at risk to finance activities without additional subordinated financial support



7



Cautionary Note Regarding Forward Looking Statements—Safe Harbor Provisions
All statements in this report that address events, developments or results that we expect or anticipate may occur in the future are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Exchange Act and the U.S. Private Securities Litigation Reform Act of 1995. In most cases, forward-looking statements may be identified by words such as “anticipate,” “may,” “will,” “could,” “should,” “would,” “expect,” “intend,” “plan,” “goal,” “contemplate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “seek,” “strategy,” “future,” “likely” or the negative or other variations on these words and other similar expressions. These statements, which may include, without limitation, projections regarding our future performance and financial condition, are made on the basis of management’s current views and assumptions with respect to future events. Any forward-looking statement is not a guarantee of future performance and actual results could differ materially from those contained in the forward-looking statement. These statements speak only as of the date they were made, and we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We operate in a changing environment. New risks emerge from time to time and it is not possible for us to predict all risks that may affect us. The forward-looking statements, as well as our prospects as a whole, are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements including:
changes in general economic and political conditions, including unemployment rates, changes in the U.S. housing and mortgage credit markets (including declines in home prices and property values), the performance of the U.S. or global economies, the amount of liquidity in the capital or credit markets, changes or volatility in interest rates or consumer confidence and changes in credit spreads, all of which may be impacted by, among other things, legislative activity or inactivity, actual or threatened downgrades of U.S. government credit ratings, or actual or threatened defaults on U.S. government obligations;
changes in the way customers, investors, regulators or legislators perceive the strength of private mortgage insurers, in particular in light of the fact that certain of our former competitors have ceased writing new insurance business and have been placed under supervision or receivership by insurance regulators;
catastrophic events, increased unemployment, home price depreciation or other negative economic changes in geographic regions where our mortgage insurance exposure is more concentrated;
our ability to maintain sufficient holding company liquidity to meet our short- and long-term liquidity needs;
our ability to maintain an adequate Risk-to-capital position, minimum policyholder position and other surplus requirements for Radian Guaranty, our principal mortgage insurance subsidiary, and an adequate minimum policyholder position and surplus for our insurance subsidiaries that provide reinsurance or capital support to Radian Guaranty;
Radian Guaranty’s ability to comply with the financial requirements of the PMIERs (once adopted) within the applicable transition period which, based on the proposed PMIERs, may require us to contribute a substantial portion of our holding company cash and investments to Radian Guaranty, and could depend on our ability to, among other things: (1) successfully consummate the transactions contemplated by the Radian Asset Assurance Stock Purchase Agreement; and (2) successfully leverage other options such as commutations or external reinsurance for a portion of our mortgage insurance risk in force in a manner that provides capital relief that is compliant with the PMIERs. Contributing a substantial portion of our holding company cash and investments to Radian Guaranty would leave Radian Group with less liquidity to carry out its overall business strategy and satisfy its obligations, and we may be required or we may decide to seek additional capital by incurring additional debt, by issuing additional equity, or by selling assets, which we may not be able to do on favorable terms, if at all. The ultimate form of the PMIERs and the timeframe for their implementation remain uncertain;


8



changes in the charters or business practices of, or rules or regulations applicable to the GSEs, including the adoption of the PMIERs, which in their current proposed form: (1) would require Radian Guaranty to hold significantly more capital than is currently required and could negatively impact our returns on equity; (2) could limit the type of business that Radian Guaranty and other private mortgage insurers are willing to write, which could reduce our NIW; (3) could increase the cost of private mortgage insurance, including as compared to the FHA’s pricing, or result in the emergence of other forms of credit enhancement; and (4) could require changes to our business practices that may result in substantial additional costs in order to achieve and maintain compliance with the PMIERs;
our ability to continue to effectively mitigate our mortgage insurance losses, including a decrease in net rescissions or denials resulting from an increase in the number of successful challenges to previously rescinded policies or claim denials (including as part of one or more settlements of disputed rescissions or denials), or as a result of the GSEs intervening in or otherwise limiting our loss mitigation practices, including settlements of disputes regarding Loss Mitigation Activities;
the negative impact that our Loss Mitigation Activities may have on our relationships with our customers and potential customers, including the potential loss of current or future business and the heightened risk of disputes and litigation;
any disruption in the servicing of mortgages covered by our insurance policies, as well as poor servicer performance;
adverse changes in the severity or frequency of losses associated with certain products that we formerly offered (and which constitute a small part of our insured portfolio) that are riskier than traditional mortgage insurance policies;
a substantial decrease in the Persistency Rates of our mortgage insurance policies, which has the effect of reducing our premium income on our Monthly Premium policies and could decrease the profitability of our mortgage insurance business;
heightened competition for our mortgage insurance business from others such as the FHA, the VA and other private mortgage insurers (including with respect to other private mortgage insurers, those that have been assigned higher ratings than we have, that may be perceived as having a greater ability to comply with the PMIERs Financial Requirements than we do, that may have access to greater amounts of capital than we do, that are less dependent on capital support from their subsidiaries than we are or that are new entrants to the industry, and therefore, are not burdened by legacy obligations) and the impact such heightened competition may have on our returns and our NIW;
changes to the current system of housing finance, including the possibility of a new system in which private mortgage insurers are not required or their products are significantly limited in effect or scope;
the effect of the Dodd-Frank Act on the financial services industry in general, and on our businesses in particular;
the adoption of new or application of existing federal or state laws and regulations, or changes in these laws and regulations or the way they are interpreted, including, without limitation: (1) the resolution of existing, or the possibility of additional, lawsuits or investigations; (2) changes to the Model Act being considered by the NAIC that could include more stringent capital and other requirements for Radian Guaranty in states that adopt the new Mortgage Guaranty Insurers Model Act in the future; and (3) legislative and regulatory changes (a) impacting the demand for our products, (b) limiting or restricting the products we may offer or increasing the amount of capital we are required to hold, (c) affecting the form in which we execute credit protection, or (d) otherwise impacting our existing businesses or future prospects;
the amount and timing of potential payments or adjustments associated with federal or other tax examinations, including deficiencies assessed by the IRS resulting from the examination of our 2000 through 2007 tax years, which we are currently contesting;
the possibility that we may fail to estimate accurately the likelihood, magnitude and timing of losses in connection with establishing loss reserves for our mortgage insurance businesses;
volatility in our earnings caused by changes in the fair value of our assets and liabilities carried at fair value, including a significant portion of our investment portfolio and certain of our long-term incentive compensation awards;
changes in GAAP or SAP, rules and guidance, or their interpretation;
legal and other limitations on amounts we may receive from our subsidiaries as dividends or through our tax- and expense-sharing arrangements with our subsidiaries;


9



the possibility that we may need to impair the estimated fair value of goodwill established in connection with our acquisition of Clayton, the valuation of which requires the use of significant estimates and assumptions with respect to the estimated future economic benefits arising from certain assets acquired in the transaction such as the value of expected future cash flows of Clayton, Clayton’s workforce, expected synergies with our other affiliates and other unidentifiable intangible assets; and
our ability to consummate the transactions contemplated by the Radian Asset Assurance Stock Purchase Agreement which depends on, among other things, obtaining certain regulatory approvals.
For more information regarding these risks and uncertainties as well as certain additional risks that we face, you should refer to the Risk Factors detailed in Item 1A of this Annual Report on Form 10-K. We caution you not to place undue reliance on these forward-looking statements, which are current only as of the date on which we issued this report. We do not intend to, and we disclaim any duty or obligation to, update or revise any forward-looking statements to reflect new information or future events or for any other reason.


10



PART I
Item 1.
Business.

I.
General
We provide mortgage insurance on domestic residential First-liens and other products and services to the mortgage and real estate industries. We currently have two business segments—mortgage insurance and MRES. Our mortgage insurance segment provides credit-related insurance coverage, principally through private mortgage insurance, to mortgage lending institutions. We conduct our mortgage insurance business primarily through Radian Guaranty, our principal mortgage insurance subsidiary. Our MRES segment provides services and solutions to the mortgage and real estate industries primarily through Clayton, which we acquired on June 30, 2014. A summary of financial information for our business segments, for each of the last three fiscal years for our mortgage insurance segment, and since June 30, 2014 (the date of our acquisition of Clayton) for our MRES segment, is included in Note 4 of Notes to Consolidated Financial Statements.
We have also provided direct insurance and reinsurance on credit-based risks through Radian Asset Assurance, our principal financial guaranty subsidiary that is a wholly-owned subsidiary of Radian Guaranty. On December 22, 2014, Radian Guaranty entered into the Radian Asset Assurance Stock Purchase Agreement to sell 100% of the issued and outstanding shares of Radian Asset Assurance to Assured. As a result, 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 we no longer present a financial guaranty segment.
Radian Group serves as the holding company for our insurance and other subsidiaries and does not have any significant operations of its own.
Business Strategy. Currently, our business strategy is focused on: (1) growing our mortgage insurance business by writing insurance on high-quality mortgages in the U.S.; (2) diversifying our revenue sources by pursuing other potential opportunities for providing credit-related and other services to the mortgage finance market; (3) growing our fee-based revenues as a percentage of Radian’s total revenues, primarily by expanding Clayton’s presence in the real estate and mortgage finance industries; (4) continuing to manage losses and reduce our legacy exposure; (5) continuing to effectively manage our capital and liquidity positions, including efforts to ensure compliance with the PMIERs Financial Requirements and with other regulatory requirements, as well as strengthening our balance sheet with the objective of regaining investment grade credit ratings in the future. See Note 1 of Notes to Consolidated Financial Statements for information regarding the new, proposed GSE eligibility requirements that were issued in the form of proposed PMIERs for public comment on July 10, 2014.
Below are highlights of several accomplishments during 2014 that furthered our strategic objectives:
In 2014, we wrote $37.3 billion of primary mortgage insurance. Substantially all of our portfolio of insurance written after 2008, including our 2014 insured portfolio, is of high credit quality and is expected to generate strong returns on allocated capital.
We grew our IIF from $161.2 billion as of December 31, 2013 to $171.8 billion as of December 31, 2014.
We continued to diversify and expand our customer base, adding almost 200 new customers during 2014 to a current total of close to 1,300 customers. Customers added since 2009 accounted for approximately 50% of our NIW during 2014.
Consistent with our objective to diversify revenue sources, on June 30, 2014, we acquired all of the outstanding equity interests of Clayton for a purchase price of approximately $312 million. Radian Group funded the entire purchase price and related expenses through a portion of the net proceeds from our May 2014 issuance of debt and equity securities discussed below. See Notes 1 and 7 of Notes to Consolidated Financial Statements for further information.
During 2014, Radian Group executed the following transactions in order to manage our liquidity position:
-
Issued $300 million of 5.500% Senior Notes due 2019, resulting in net proceeds of approximately $293.8 million. See Note 11 of Notes to Consolidated Financial Statements for further information.
-
Redeemed all of the remaining Senior Notes due 2015. See Note 11 of Notes to Consolidated Financial Statements for further information.
-
Sold 17.825 million shares of common stock in a public offering for $14.50 per share, resulting in net proceeds of approximately $247.2 million.


11



We continued to actively manage and reduce our Legacy Portfolio of mortgage insurance risk and exposure by, among other things, entering into the BofA Settlement Agreement. The agreement resolves various actual and potential claims and disputes related to mortgage insurance covering a large population of Legacy Loans. Implementation of the BofA Settlement Agreement commenced on February 1, 2015. See Notes 1 and 10 of Notes to Consolidated Financial Statements for more information.
As proposed, the PMIERs Financial Requirements do not provide Radian Guaranty with any credit for its investment in Radian Asset Assurance. As a result, we entered into the Radian Asset Assurance Stock Purchase Agreement, as discussed above. The transaction, which is expected to close in the first half of 2015, is subject to receipt of insurance regulatory approvals and satisfaction of other customary closing conditions. See Note 3 of Notes to Consolidated Financial Statements for more information.
Operating Environment. As a seller of mortgage credit protection and mortgage and real estate products and services, our results are subject to macroeconomic conditions and specific events that impact the mortgage origination environment and the credit performance of our underlying insured assets. The financial crisis and the downturn in the housing and related credit markets that began in 2007 had a significant negative impact on the operating environment and results of operations for our businesses. More recently, the operating environment has improved as the U.S. economy and housing market have been recovering, evidenced by a reduction in unemployment, a reduction in foreclosures, and appreciation in home prices. We have written a significant amount of NIW in this improving environment, which has resulted in our Legacy Portfolio becoming a smaller proportion of our total mortgage insurance portfolio. Further, the improving environment has contributed to a reduction in our incurred losses and claims submitted and paid in our mortgage insurance business, with new primary mortgage insurance defaults declining by 18% in 2014 compared to the number of new defaults in 2013.
The credit performance of post-crisis loan originations also has improved significantly. In response to the financial crisis, including the adoption of new lending laws and regulations, credit for home financing has remained restrictive. As a result of this restrictive credit environment, together with our stricter underwriting requirements, our post-2008 loan originations have consisted primarily of high credit quality loans. At the same time, this restrictive credit environment has limited the growth of the mortgage industry and made it more challenging for many first-time homebuyers to finance a home.
The improvement in macroeconomic and credit trends has encouraged new entrants into the private mortgage insurance industry, while further improving the financial strength of existing private mortgage insurers. This has resulted in an increasingly competitive environment for private mortgage insurers. See “—Competition.” During the past several years, we have been focused on managing our businesses through the negative effects of the financial crisis while at the same time pursuing a number of strategic initiatives designed to strengthen and grow our mortgage insurance franchise to capitalize on improving trends. In particular, following the crisis, we expanded and diversified our customer base, wrote a significant amount of high-quality NIW and pursued a reduction of our Legacy Portfolio through loss mitigation and settlements. As of December 31, 2014, our Legacy Portfolio had been reduced to approximately 31% of our total primary RIF, while insurance on loans written after 2008 constituted approximately 69% of our total primary RIF. During this period of time, as the negative impact from losses in our Legacy Portfolio has been reduced and we have continued to write a high volume of insurance on high credit quality loans, our results of operations have improved. This improvement continued in 2014 and we returned to full year profitability for the first time since the financial crisis.
Regulatory Environment. Our insurance subsidiaries are subject to comprehensive regulations and other requirements. State insurance regulators impose various capital requirements on our insurance subsidiaries. For our mortgage insurance subsidiaries, these include Risk-to-capital, other risk-based capital measures and surplus requirements. The NAIC is in the process of reviewing the minimum capital and surplus requirements for mortgage insurers and changes in these requirements could increase the capital requirements for our mortgage insurance subsidiaries in states that adopt the Model Act. Freddie Mac and Fannie Mae are the primary beneficiaries of the majority of our mortgage insurance policies and the FHA is currently our primary competitor outside of the private mortgage insurance industry. As a result, changes in the charters or business practices of the GSEs, including the implementation of the PMIERs, can have a significant impact on our business. Since 2011, there have been numerous legislative proposals and recommendations focused on reforming the U.S. housing finance industry, including proposals that are intended to wind down the GSEs or to otherwise limit or restrict the activities and businesses of the GSEs. Our businesses have been and may continue to be significantly impacted by these and other legislative or regulatory developments and proposals. See “—Regulation.”
Corporate Background.  Radian Group has been incorporated as a business corporation under the laws of the State of Delaware since 1991. Our principal executive offices are located at 1601 Market Street, Philadelphia, Pennsylvania 19103, and our telephone number is (215) 231-1000.


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Additional Information.  Our website address is www.radian.biz. Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, as well as any amendments to those reports, are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. In addition, our guidelines of corporate governance, code of business conduct and ethics (which includes the code of ethics applicable to our chief executive officer, principal financial officer and principal accounting officer) and the governing charters for each committee of our Board are available free of charge on our website, as well as in print, to any stockholder upon request.
The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC and the address of that site is www.sec.gov.
The above references to our website and the SEC’s website do not constitute incorporation by reference of the information contained on the websites and such information should not be considered part of this document.

II.
Mortgage Insurance

A.
Business
Our mortgage insurance segment provides credit-related insurance coverage, principally through private mortgage insurance, to mortgage lending institutions. We provide our mortgage insurance products and services mainly through our wholly-owned subsidiary, Radian Guaranty. Private mortgage insurance protects mortgage lenders from all or a portion of default-related losses on residential mortgage loans made to home buyers who generally make down payments of less than 20% of the home’s purchase price. Private mortgage insurance also facilitates the sale of these mortgage loans in the secondary mortgage market, most of which are sold to the GSEs.
1.
Traditional Risk
Traditional types of private mortgage insurance include “primary mortgage insurance” and “pool insurance.”
Primary Mortgage Insurance. Primary mortgage insurance provides protection against mortgage defaults at a specified coverage percentage. When there is a valid claim under primary mortgage insurance, the maximum liability is determined by multiplying the claim amount, which consists of the unpaid loan principal, plus past due interest and certain expenses associated with the default, by the coverage percentage. Claims may be settled for the maximum liability or for other amounts. See “—Claims Management” below.
The terms of our primary mortgage insurance coverage are set forth in a master insurance policy that we enter into with each of our customers. Our Master Policies are filed in each of the jurisdictions in which we conduct business. Among other things, our Master Policies set forth: loan eligibility requirements; premium payment requirements; coverage term; provisions for policy administration; exclusions or reductions in coverage; claims payment and settlement procedures; and dispute resolution procedures.
Following the financial crisis, the FHFA and the GSEs identified specific principles for inclusion by all private mortgage insurers in their Master Policies, including among others, specific requirements related to loss mitigation and claims processing activities. Radian Guaranty and other private mortgage insurers engaged in dialogue with the FHFA and GSEs regarding the incorporation of these principles into the new 2014 Master Policy.
The 2014 Master Policy became effective for all new mortgage insurance applications received on or after October 1, 2014. Loans that were already insured prior to the October 1, 2014 effective date of the 2014 Master Policy will continue to be subject to and administered in accordance with the terms and conditions of Radian Guaranty’s Prior Master Policy. Any material changes to the 2014 Master Policy are subject to approval by the GSEs and state regulatory approval.
 




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One of the significant changes under the 2014 Master Policy is the inclusion of new rescission relief programs. Subject to certain limited exceptions, including fraud and misrepresentation, the 2014 Master Policy provides that we will not rescind coverage on a loan after 36 months if it meets the following criteria: no loan payment has been 60-days or more delinquent and not more than two loan payments were 30-days delinquent or more in the first 36 months; the 36th loan payment is not 30-days or more delinquent; all loan payments are made from a borrower’s own funds; and the loan is not subject to a workout. In addition, Radian Guaranty’s Confident CoverageSM program allows lenders to opt in for earlier rescission relief at 12 months if certain additional conditions are satisfied, including that the lender submits specific origination and closing loan file documents for Radian Guaranty’s review and the first 12 months of payments were timely and from the borrower’s own funds.
We provide primary mortgage insurance on a flow basis and we also provide primary mortgage insurance on a “structured” basis, which includes business that we have written to insure a group of individual loans. In flow transactions, mortgages typically are insured as they are originated, while in our Structured Transactions, we typically provide insurance on a group of mortgages after they have been originated. A portion of our structured business was written in a “second loss” position, meaning that we are not required to make a payment until a certain aggregate amount of losses have already been recognized on a given set of loans. Prior to 2008, most of the mortgage insurance we wrote on Structured Transactions involved non-prime mortgages (i.e., non-prime mortgages include Alt-A, A minus and B/C mortgages) and mortgages with higher than average loan balances. See “—Direct Risk in Force—Mortgage Loan Characteristics.” A single structured mortgage insurance transaction may be provided on a primary basis or, as discussed below, on a pool basis; and some Structured Transactions include both primary and pool insured mortgages.
We wrote $37.3 billion and $47.3 billion of First-lien primary mortgage insurance in 2014 and 2013, respectively. Substantially all of our primary mortgage insurance written during 2014 and 2013 was written on a flow basis. Primary insurance on First-liens made up $43.2 billion or 96.8% of our total direct First-lien insurance RIF at December 31, 2014, compared to $40.0 billion or 96.1% at December 31, 2013.
Pool Insurance. Prior to 2008, we wrote pool insurance on a limited basis. Pool insurance differs from primary insurance in that our maximum liability is not limited to a specific coverage percentage on an individual mortgage loan. Instead, an aggregate exposure limit, or “stop loss” (generally between 1% and 10%), is applied to the initial aggregate loan balance on a group or “pool” of mortgages. In addition to a stop loss, many of our pool policies were written in a second loss position. We believe the stop loss and second loss features have been important in limiting our ultimate liability on individual pool transactions.
We wrote much of our pool insurance in the form of Structured Transactions, such as credit enhancement on loans in pools purchased by the GSEs as well as loans included in RMBS transactions. An insured pool of mortgages may contain mortgages that are already covered by primary mortgage insurance. In these transactions, pool insurance is secondary to any primary mortgage insurance that exists on mortgages within the pool.
Pool insurance made up approximately $1.4 billion or 3.2% of our total direct First-lien insurance RIF at December 31, 2014, as compared to $1.6 billion or 3.9% at December 31, 2013.
2.
Non-Traditional Risk
In addition to traditional mortgage insurance, in the past, we also provided other forms of credit enhancement on residential mortgage assets. Our non-traditional products, which included mortgage insurance on Second-liens, generally have higher risk characteristics. We stopped writing these forms of “non-traditional” business before 2008. Since 2007, we have been pursuing opportunities to reduce our non-traditional mortgage insurance RIF through commutations and transaction settlements and terminations. Our total amount of non-traditional RIF, including our international RIF discussed below, was $73 million at December 31, 2014, as compared to $97 million at December 31, 2013.
We also provided mortgage insurance on an international basis. In 2008, we stopped writing new international business and have terminated most of our international mortgage insurance risk, with the exception of our insured portfolio in Hong Kong. While we are no longer writing new business in Hong Kong, we continue to insure the existing book of business, which has experienced a low default rate. At December 31, 2014, our total amount of RIF in Hong Kong was $11 million, as compared to $19 million at December 31, 2013.


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3.
Premium Rates
We set our premium rates at origination when coverage is established. Premiums for our mortgage insurance products are established based on performance models that consider a broad range of borrower, loan and property characteristics. Premium levels are set to be competitive within the mortgage insurance industry and to achieve an overall risk-adjusted rate of return on capital given our modeled performance expectations. Our actual returns may differ from our expectations based on market conditions. The sensitivity of our returns to these market conditions will vary based on factors such as whether the insurance is borrower-paid or lender-paid, and whether the payments are made monthly or in a single premium payment at the time of origination. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Factors Affecting Our Results — Mortgage Insurance — Premiums.
We set our premium rates commensurate with anticipated policy performance assumptions, including, without limitation, our expectations and assumptions about the following factors: (1) the likelihood of default; (2) how long the policy will remain in place; (3) the costs of acquiring and maintaining the insurance; (4) taxes; and (5) the capital that is required to support the insurance. Our performance assumptions for claim frequency and policy life are developed based on internally developed data, as well as data generated from independent, third-party sources.
Premiums on our mortgage insurance products are paid either on a monthly installment basis (Monthly Premiums), in a single payment at origination (Single Premiums), as a combination of up-front premium at origination plus a monthly renewal (split premium), or in some cases as an annual or multi-year premium. For Monthly Premiums, we receive monthly premium payments that provide for the ongoing renewal of our insurance coverage as long as the premiums continue to be paid. For Single Premium insurance, we receive a single premium payment that is paid at origination and, subject to certain conditions, provides coverage for the life of the loan. In addition, for our split premium products, we receive an upfront premium payment when the loan is made, plus ongoing monthly renewal premiums. There are many factors that influence the form of premiums we receive, including, without limitation: (1) the percentage of mortgage originations derived from refinance transactions versus new home purchases (refinancing transactions often are conducted with Single Premiums); (2) the customers with whom we do business (with some customers having a greater tendency to pursue Single Premium originations); and (3) the relative premium levels we and our competitors set for the various forms of premiums offered. Approximately 72% of our NIW in 2014 was written with Monthly Premiums or split premiums, and 28% was written with Single Premiums.
Mortgage insurance premiums can be financed through a number of methods and can either be paid by the borrower or by the lender. Borrower-paid mortgage insurance premiums are paid either through separate escrowed amounts or financed as a component of the mortgage loan amount. Lender paid mortgage insurance premiums are paid by the lender and are typically passed through to the borrower in the form of additional origination fees or a higher interest rate on the mortgage note. Our monthly and other installment mortgage insurance premiums are established as either: (1) a fixed percentage of the loan’s amortizing balance over the life of the policy; or (2) as a fixed percentage of the initial loan balance for a set period of time (typically ten years), which declines to a lower fixed percentage for the remaining life of the policy.
4.
Underwriting
Mortgage loan applications are underwritten to determine whether they are eligible for our mortgage insurance. We perform this function directly or, alternatively, we delegate to our customers the ability to underwrite the loans based on our underwriting guidelines.
Delegated Underwriting.  Through our delegated underwriting program we approve certain customers to underwrite loans based on our mortgage insurance underwriting guidelines. Our delegated underwriting program currently involves only lenders that are approved by our risk management group. Delegated underwriting allows our customers to commit us to insure loans that meet our underwriting guidelines. This enables us to meet lenders’ demands for immediate insurance coverage and increases the efficiency of the underwriting process. We use quality control sampling and performance monitoring to manage the risks associated with delegated underwriting. Because the delegated underwriting is performed by third parties, we have certain rights to rescind coverage if there has been a deviation from our underwriting guidelines. For a discussion of these limited rescission rights, see “ Claims Management—Rescissions.As of December 31, 2014, approximately 72% of our total First-lien insurance in force had been originated on a delegated basis, compared to 74% as of December 31, 2013. See “Item 1A. Risk FactorsOur delegated underwriting program may subject our mortgage insurance business to unanticipated claims.


15



Non-Delegated Underwriting. In addition to our delegated underwriting program, lenders also can submit loan files to us and we will perform the mortgage insurance underwriting. In general, for mortgage applications that we underwrite for mortgage insurance, we do not exercise our rescission rights with respect to underwriting errors. As a result, following a period of high rescissions after the financial crisis, we have seen an increase in the amount of business being submitted to us on a non-delegated basis. Given the professional resources we need to maintain to underwrite loans, an increase in non-delegated underwriting demand generally increases our operating costs to support this program. We mitigate the risk of employee underwriting error through quality control sampling and performance monitoring. As of December 31, 2014, approximately 28% of our total First-lien insurance in force had been originated on a non-delegated basis, compared to 26% as of December 31, 2013.
Contract Underwriting.  In our mortgage insurance business, we also have a contract underwriting program through which we provide an outsourced credit underwriting service to our customers. For a fee, we underwrite our customers’ mortgage loan files for secondary market compliance (e.g., for sale to the GSEs), and may concurrently assess the file for mortgage insurance eligibility. During 2014, mortgage loans underwritten through contract underwriting accounted for 2.0% of insurance certificates issued as part of our Flow Business. These mortgage loans are included within the non-delegated underwriting percentages discussed above.
We offer limited indemnification to our contract underwriting customers with respect to those loans that we simultaneously underwrite for both secondary market compliance and for potential mortgage insurance eligibility and may, in certain circumstances, offer limited indemnification when we underwrite a loan only for secondary market compliance. We provide our contract underwriting services through an entity that is licensed under, or otherwise compliant with, the SAFE Act in 45 states. We train our underwriters, require continuing education and routinely audit their performance to monitor the accuracy and consistency of underwriting practices.

B.
Direct Risk in Force
Our business traditionally has involved taking credit risk in various forms across a range of asset classes, products and geographies. Exposure in our mortgage insurance business is measured by RIF, which approximates the maximum loss exposure that we have at any point in time.
The following table shows the direct RIF (by form of insurance and loan type), before consideration of reinsurance, associated with our mortgage insurance segment as of December 31, 2014 and 2013:
 
December 31,
(In millions)
2014
 
2013
Primary:
 
 
 
  Prime
$
40,326

 
$
36,613

  Alt-A
1,720

 
2,017

  A minus and below
1,193

 
1,387

Total Primary
43,239

 
40,017

Pool
1,445

 
1,604

Second-lien and other
73

 
97

Total Direct Mortgage Insurance RIF
$
44,757

 
$
41,718

The following discussion mainly focuses on our direct primary RIF, which represents approximately 96.6% of our total mortgage insurance RIF at December 31, 2014. For additional information regarding our pool and non-traditional mortgage insurance RIF, see “—Business—Traditional Risk” and “—Business—Non-Traditional Risk.”


16



We analyze our mortgage insurance portfolio in a number of ways to identify any concentrations or imbalances in risk dispersion. We believe the performance of our mortgage insurance portfolio is affected significantly by:
general economic conditions (in particular home prices and unemployment);
the age of the loans insured;
the geographic dispersion of the properties securing the insured loans and the condition of the housing market;
the quality of underwriting decisions at loan origination; and
the credit characteristics of the borrower and the characteristics of the loans insured (including LTV, purpose of the loan, type of loan instrument, source of down payment, and type of underlying property securing the loan).
1.
Direct Primary RIF by Year of Policy Origination
The following table shows our direct primary mortgage insurance RIF by year of origination and selected information related to that risk as of December 31, 2014:
 
 
December 31, 2014
($ in millions)
RIF
 
Number of Defaults
 
Delinquency Rate
 
Percentage of Reserve for Losses
 
Average FICO (1) at Origination
 
Original Average LTV
2005 and prior
$
3,540

 
17,971

 
15.2
%
 
34.0
%
 
678

 
89.9
%
2006
2,001

 
7,602

 
14.7

 
18.0

 
689

 
91.3

2007
4,592

 
12,169

 
12.2

 
33.1

 
701

 
92.7

2008
3,394

 
5,040

 
7.2

 
11.4

 
724

 
90.9

2009
1,081

 
586

 
2.4

 
1.0

 
752

 
90.0

2010
925

 
209

 
1.1

 
0.3

 
761

 
91.3

2011
1,809

 
286

 
0.8

 
0.5

 
758

 
91.8

2012
6,534

 
561

 
0.5

 
0.8

 
756

 
91.9

2013
10,265

 
701

 
0.4

 
0.8

 
751

 
92.2

2014
9,098

 
194

 
0.1

 
0.1

 
741

 
92.5

Total
$
43,239

 
45,319

 


 
100.0
%
 
 
 
 
____________________
(1) Represents the borrower’s credit score at origination. In circumstances where there is more than one borrower, the average FICO at origination is the FICO score for the primary borrower.
A significant portion of our total mortgage insurance in force (and consequently, our premiums earned) is derived from policies written prior to 2014. The amount of time that our insurance certificates remain in force, which is affected by loan repayments and terminations of our insurance, can have a significant impact on our revenues and our results of operations. Our Persistency Rate, which is the percentage of insurance in force that remains on our books after any 12-month period, is one key measure for assessing the impact that insurance terminations resulting in certificate cancellations have on our insurance in force. Because most of our insurance premiums are earned over time, higher Persistency Rates on Monthly Premium policies increase the premiums we receive and generally result in increased profitability and returns. Conversely, assuming all other factors remain constant, higher persistency on Single Premium business lowers the overall returns from our insured portfolio, as the premium revenue for our Single Premium policies is the same regardless of the actual life of the insurance policy and we are required to maintain regulatory capital supporting the insurance for the life of the policy. The Persistency Rate of our primary mortgage insurance was 83.4% at December 31, 2014, compared to 81.1% at December 31, 2013. Historically, there is a close correlation between interest rate environments and Persistency Rates, primarily as a result of refinance activity that tends to be more prevalent in lower interest rate environments. 


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2.
Geographic Dispersion
The following table shows, as of December 31, 2014 and 2013, the percentage of our direct primary mortgage insurance RIF and the associated percentage of our mortgage insurance reserve for losses (by location of property) for the top 10 states in the U.S. (as measured by our direct primary mortgage insurance RIF as of December 31, 2014):
 
December 31,
 
2014
 
2013
Top Ten States
RIF
 
Reserve for Losses
 
RIF
 
Reserve for Losses
California
13.7
%
 
6.8
%
 
13.7
%
 
8.2
%
Texas
7.1

 
3.1

 
6.5

 
3.0

Florida
6.0

 
16.8

 
6.2

 
18.3

Illinois
5.6

 
6.1

 
5.6

 
6.8

Georgia
4.3

 
3.2

 
4.4

 
3.4

New Jersey
3.9

 
9.8

 
4.0

 
7.8

Virginia
3.4

 
1.5

 
3.4

 
1.4

Pennsylvania
3.2

 
3.8

 
3.3

 
3.5

Colorado
3.2

 
1.0

 
3.0

 
1.0

Ohio
3.2

 
3.2

 
3.4

 
3.3

Total
53.6
%
 
55.3
%
 
53.5
%
 
56.7
%
The following table shows, as of December 31, 2014 and 2013, the percentage of our direct primary mortgage insurance RIF and the associated percentage of our mortgage insurance reserve for losses (by location of property) for the top 15 Metropolitan Statistical Areas, referred to as “MSAs,” in the U.S. (as measured by our direct primary mortgage insurance RIF as of December 31, 2014):
 
December 31,
 
2014
 
2013
Top Fifteen MSAs
RIF
 
Reserve for Losses
 
RIF
 
Reserve for Losses
Chicago, IL
4.6
%
 
5.0
%
 
4.6
%
 
5.7
%
Atlanta, GA
3.4

 
2.4

 
3.4

 
2.6

Los Angeles - Long Beach, CA
3.0

 
1.7

 
2.9

 
1.8

Washington, DC-MD-VA
2.8

 
1.9

 
2.8

 
1.8

Phoenix/Mesa, AZ
2.3

 
1.0

 
2.4

 
1.2

Denver, CO
2.1

 
0.5

 
1.9

 
0.5

Houston, TX
2.1

 
1.0

 
2.0

 
1.0

Minneapolis-St. Paul, MN-WI
1.9

 
0.9

 
1.9

 
0.9

Dallas, TX
1.9

 
0.8

 
1.8

 
0.7

New York, NY
1.8

 
5.7

 
1.9

 
4.6

Riverside-San Bernardino, CA
1.7

 
1.3

 
1.6

 
1.6

Philadelphia, PA
1.6

 
1.4

 
1.6

 
1.2

San Diego, CA
1.5

 
0.5

 
1.5

 
0.6

Portland, OR
1.4

 
0.9

 
1.4

 
0.9

Seattle, WA
1.3

 
1.3

 
1.4

 
1.4

Total
33.4
%
 
26.3
%
 
33.1
%
 
26.5
%
3.
Mortgage Loan Characteristics
In addition to geographic dispersion, other factors also contribute significantly to our overall risk diversification and the credit quality of our RIF, including product distribution and our risk management and underwriting practices. We consider a number of borrower and loan characteristics in evaluating the credit quality of our portfolio and developing our pricing and risk management strategies.


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LTV. An important indicator of claim incidence in our mortgage insurance business is the relative amount of a borrower’s equity that exists in a home. Generally, absent other mitigating factors such as high FICO scores and other credit factors, loans with higher LTVs at inception (i.e., smaller down payments) are more likely to result in a claim than lower LTV loans. The average LTV of our primary NIW in 2014 was 91.6%, compared to 91.1% and 90.6% in 2013 and 2012, respectively. See the “Percentage of primary NIW” table in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance—NIW, IIF, RIF” for a breakdown of the composition of our NIW by LTV.
Loan Grade/FICO Score. The risk of claim on non-prime loans is significantly higher than that on prime loans. We use our proprietary models to classify a loan as either prime or non-prime on the basis of a borrower’s FICO score, the level of loan file documentation and other factors. In general we consider a loan to be a prime loan if the borrower’s FICO score is 620 or higher and the loan file meets “fully documented” standards of our credit guidelines and/or the GSE guidelines for fully documented loans. Substantially all of our NIW after 2008 has been on prime loans. See the “Percentage of primary RIF” table in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance—NIW, IIF, RIF” for a breakdown of the composition of our RIF by FICO Score.
Loans that we categorize as Alt-A, A minus loans or B/C loans are considered non-prime loans due to lower FICO scores, reduced loan file documentation, and/or the presence of other risk characteristics. See the “Percentage of primary RIF” table in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance—NIW, IIF, RIF” for a breakdown of the composition of our RIF by loan grade.
Loan TypeARMs; Interest-Only Mortgages. ARMs are loans that have an initial interest rate that will reset during the life of such loans. Our claim frequency on insured ARMs has been higher than on fixed-rate loans. It has been our experience that the credit performance of loans subject to reset five years or later from origination are less likely to result in a claim than ARMs with shorter initial fixed periods. Approximately 67.3% of the ARMs we insure, including Option ARMs (discussed below), have already had initial interest rate resets. An additional 3.0%, 2.2% and 2.6% of the ARMs we insure are scheduled to have initial interest rate resets during 2015, 2016 and 2017, respectively.
We also have insured Option ARMs that provide the borrower with different payment options. One of these options is a minimum payment that is below the fully amortizing payment, which results in interest being capitalized and added to the loan balance so that the loan balance continually increases, which is also referred to as negative amortization. In addition, we have insured interest-only mortgages, where the borrower pays only the interest charge on a mortgage for a specified period of time, usually five to ten years, after which the loan payment increases to include principal payments. We have not written any insurance on Option ARMs or interest-only mortgages since 2007 and 2011, respectively.
See the “Percentage of primary RIF” table in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance—NIW, IIF, RIF” for a breakdown of the composition of our RIF by loan type.
Loan Purpose. Loan purpose may also impact our risk of loss. For example, cash-out refinance loans, where a borrower receives cash in connection with refinancing a loan, have been more likely to result in a claim than new purchase loans or loans that are refinanced only to adjust rate and term. See the “Percentage of primary RIF” table in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Mortgage Insurance—NIW, IIF, RIF” for the percentage of our NIW and our RIF comprised of refinances.
Loan Size. Higher-priced properties with larger mortgage loan amounts generally have experienced wider fluctuations in value than moderately priced residences and have been more likely to result in a claim. The average loan size of our direct primary mortgage insurance in force (by product) as of December 31, 2014, 2013 and 2012 was as follows:
 
 
December 31,
(In thousands)
2014
 
2013
 
2012
Prime
$
200.2

 
$
195.8

 
$
184.9

Alt-A
190.3

 
190.0

 
193.2

A minus and below
129.5

 
129.9

 
131.4

Total portfolio
196.8

 
192.1

 
182.1



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We consider other factors, including property type and occupancy type, in assessing our risk of loss. In general, it has been our experience that our risk of claim is lower on loans secured by single family detached housing than loans on other types of properties, and is higher on non-owner occupied homes purchased for investment purposes than on either primary or second homes.

C.
Defaults and Claims
Defaults. In our mortgage insurance segment, the default and claim cycle begins with the receipt of a default notice from the loan servicer. We consider a loan to be in default for financial statement and internal tracking purposes upon receipt of notification by servicers that a borrower has missed two monthly payments. Defaults can occur due to a variety of factors, including death or illness, divorce or other family problems, unemployment, overall changes in economic conditions, housing value changes that cause the outstanding mortgage amount to exceed the value of a home or other events.
The default rate in our mortgage insurance business is subject to seasonality. Historically, our mortgage insurance business experiences a fourth quarter seasonal increase in the number of defaults and a first quarter seasonal decline in the number of defaults and increase in the number of cures. While this historically has been the case, macroeconomic factors in any given period may influence the default rate in our mortgage insurance business more than seasonality.
The following graph shows the trend of the number of primary defaults by each vintage year as of the end of each quarter following the year of original policy issuance.
The business we wrote in 2005 through 2008 contained a significant number of poorly underwritten and higher risk loans. As a result of these loan characteristics and the economic downturn that began in 2007, we have experienced substantially higher ultimate loss ratios for this portfolio than in previous policy years. In 2008, we implemented a number of changes to our underwriting guidelines aimed at improving the risk characteristics of the loans we insure. As a result of our more restrictive underwriting guidelines, the mortgage insurance we have been writing is predominantly prime credit quality fully documented loans, with FICO scores of 740 or above. We have observed significantly improved risk characteristics of these loans, including significant improvement in the default rates for RIF originated beginning in 2009, in particular when compared to the 2005 through 2008 portfolios.


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The following table shows the states that have generated the highest number of primary insurance defaults (measured as of December 31, 2014) in our insured portfolio and the corresponding percentage of total defaults as of the dates indicated:
 
December 31,
 
2014
 
2013
 
2012
States with highest number of defaults:
 
 
 
 
 
 
 
 
 
 
 
Florida
6,122

 
13.5
%
 
9,530

 
15.6
%
 
15,415

 
16.5
%
New York
3,161

 
7.0

 
3,632

 
6.0

 
4,586

 
4.9

New Jersey
3,103

 
6.8

 
3,503

 
5.8

 
4,587

 
4.9

Illinois
2,600

 
5.7

 
3,776

 
6.2

 
6,034

 
6.5

Ohio
2,408

 
5.3

 
3,130

 
5.1

 
4,601

 
4.9

Claims. Defaulted loans that fail to become current, or “cure,” may result in a claim under our mortgage insurance policies. Mortgage insurance claim volume is influenced by the circumstances surrounding the default. The rate at which defaults cure, or do not go to claim, depends in large part on a borrower’s financial resources and circumstances (including whether the borrower is eligible for a loan modification), local housing prices and housing supply (i.e., whether borrowers are able to cure defaults by selling the property in full satisfaction of all amounts due under the mortgage), interest rates and regional economic conditions. In our First-lien primary insurance business, the insured lender must acquire title to the property (typically through a foreclosure proceeding) before submitting a claim. The time for a lender to acquire title to a property through foreclosure varies depending on the state. Following the financial crisis, the time between a default and a request for claim payment increased, largely as a result of foreclosure delays due to, among other factors, increased scrutiny within the mortgage servicing industry and foreclosure process. Delays in foreclosures have continued to extend the timing of claim submissions, in particular as compared to historical standards. In our Second-lien insurance business, which is a small percentage of our RIF, foreclosure is not required and claims are typically submitted based on a contractual number of days that a borrower is in default. As a result, we typically are required to pay a claim much earlier, generally within approximately 150 days of a borrower’s missed payment. For our pool insurance business, loans were insured under policies separate from the Master Policies used in our primary mortgage insurance business. Typically, our pool policies require the insured to not only acquire title but also to actively market and ultimately liquidate the real estate asset before filing a claim, which generally lengthens the time between a default and a claim submission.
Claim activity is not spread evenly throughout the coverage period of a book of business. Historically, relatively few claims on prime business are received during the first two years following issuance of a policy, and on non-prime business during the first year.
The following table shows the gross amount of direct claims paid by policy origination year for the periods indicated. Direct claims paid represent First-lien claims paid prior to reinsurance recoveries and captive termination payments and exclude LAE expenses paid and amounts paid under settlement agreements.
 
Year Ended December 31,
($ in millions)
2014
 
2013
 
2012
Direct claims paid by origination year (First-lien):
 
2005 and prior
$
219

 
27.0
%
 
$
303

 
25.7
%
 
$
268

 
26.4
%
2006
163

 
20.1

 
239

 
20.3

 
194

 
19.1

2007
302

 
37.1

 
446

 
37.9

 
403

 
39.8

2008
107

 
13.2

 
169

 
14.3

 
137

 
13.5

2009
12

 
1.5

 
15

 
1.3

 
11

 
1.1

2010
4

 
0.5

 
4

 
0.3

 
1

 
0.1

2011
3

 
0.3

 
2

 
0.2

 

 

2012
2

 
0.2

 

 

 

 

2013
1

 
0.1

 

 

 

 

Total direct claims paid
$
813

 
100.0
%
 
$
1,178

 
100.0
%
 
$
1,014

 
100.0
%


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The following table shows the states with the highest direct claims paid (measured as of December 31, 2014) for the periods indicated:
 
Year Ended December 31,
(In millions)
2014
 
2013
 
2012
States with highest direct claims paid (First-lien):
 
 
 
 
 
Florida
$
166.3

 
$
247.6

 
$
138.8

California
80.8

 
201.5

 
168.0

Illinois
73.5

 
108.2

 
56.8

Georgia
35.4

 
63.5

 
57.1

Ohio
33.6

 
50.4

 
34.0

Claim Severity. In addition to claim volume, Claim Severity is another significant factor affecting losses. We calculate the Claim Severity by dividing the claim paid amount by the original coverage amount. Factors that impact the severity of a claim include, but are not limited to, the size of the loan, the amount of mortgage insurance coverage placed on the loan and the impact of our loss management activities with respect to the loan. Pre-foreclosure sales, acquisitions and other early workout efforts help to reduce overall Claim Severity, as do actions we may take to reduce claim payment due to servicer negligence, as discussed below in “Claims Management.” The average Claim Severity for loans covered by our primary insurance was 100.2% for 2014, compared to 97.8% in 2013.

D.
Claims Management
Our claims management process is focused on promptly analyzing and processing claims to ensure that valid claims are paid in a timely and accurate manner. In addition, our mortgage insurance claims management department pursues opportunities to mitigate losses both before and after claims are received. We dedicate significant resources to mortgage insurance claims management.
We have a dedicated loss mitigation group that works with servicers to identify and pursue loss mitigation opportunities for loans in both our performing and non-performing (defaulted) portfolios. This work includes regular surveillance and benchmarking of servicer performance with respect to default reporting, borrower retention efforts, foreclosure alternatives and foreclosure processing. Through this process, we seek to hold servicers accountable for their performance and communicate to servicers identified best practices for servicer performance. We evaluate and consider a number of factors that assess the quality of the loan origination and the loan servicing in determining the extent of our loss mitigation reviews and which loss mitigation strategies to pursue.
Claims. In our traditional mortgage insurance business, upon receipt of a valid claim, we generally have the following three settlement options:
(1)
pay the maximum liability and allow the insured lender to keep title to the property. The maximum liability is determined by multiplying (x) the claim amount (which consists of the unpaid loan principal, plus past due interest for a period of time specified in our Master Policies and certain expenses associated with the default) by (y) the applicable coverage percentage;
(2)
pay the amount of the claim required to make the lender whole (not to exceed our maximum liability), following an approved sale; or
(3)
pay the full claim amount and acquire title to the property.


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Approved sales in which the underlying property has been sold for less than the outstanding loan amount are commonly referred to as “short sales.” Although short sales may have the effect of reducing our ultimate claim obligation, in some cases, a short sale will result in the payment of a claim in an amount that is equal to the maximum liability amount. Under our Master Policies, we retain the right to consent prior to the consummation of any short sales. Historically, we have consented to a short sale only after reviewing various factors, including among other items, the sale price relative to market and the ability of the borrower to contribute to any shortfall in the sale proceeds as compared to the outstanding loan amount. We have entered into agreements with each of the GSEs, pursuant to which we delegated to the GSEs our prior consent rights with respect to short sales on loans owned by the GSEs, as long as the short sales meet the GSE guidelines and processes for short sales and subject to certain other factors set forth in these agreements. As a result, instead of reviewing each individual transaction prior to short sale with respect to GSE loans, we instead perform a post-claim quality review of these short sales to ensure that they are meeting the specified requirements. We have the ability to terminate our delegated short sale agreements with the GSEs upon 60 days notice. We also provide for limited delegation authority to certain loan servicers for short sales under specific circumstances. For loans that are not owned by the GSEs and for which we have not granted specific delegation authority to the loan servicer, we continue to perform an individual analysis of each proposed short sale and provide our consent to these sales when appropriate.
After a claim is received, our loss management specialists focus on:
a review to determine compliance with applicable loan origination programs and our mortgage insurance policy requirements, including: (i) whether the loan qualified for insurance at the time the certificate of coverage was issued; and (ii) whether the insured has satisfied its obligation in meeting all necessary conditions in order for us to pay a claim (commonly referred to as “claim perfection”), including submitting all necessary documentation in connection with the claim;
analysis and prompt processing to ensure that valid claims are paid in an accurate and timely manner;
responses to loss mitigation opportunities presented by the insured; and
aggressive management and disposal of acquired real estate.
Claim Denials. We have the legal right under our Master Policies to deny a claim if the loan servicer does not produce documents necessary to perfect a claim, including evidence that the insured has acquired title to the property, within the time period specified in our Master Policies. Most often, a claim denial is the result of a servicer’s inability to provide the loan origination file or other servicing documents for review. If, after requests by us, the loan origination file or other servicing documents are not provided to us, we generally deny the claim. The terms of our Master Policies establish the timeline within which the insured must provide the necessary documents to perfect a claim. If we deny a claim, we continue to allow the insured the ability to perfect the claim for a period of time specified in our Master Policies. If the insured successfully perfects the claim within our specified timelines, we will process the claim, including a review of the loan to ensure appropriate underwriting and loan servicing.
Rescissions. Under the terms of our Master Policies we have the legal right, under certain conditions, to unilaterally rescind coverage on our mortgage insurance policies. If we rescind coverage based on a determination that a loan did not qualify for insurance, we provide the insured with a period of time to challenge, or rebut, our decision.
Typical events that may give rise to our right to rescind coverage include the following: (1) we insure a loan under one of our Master Policies in reliance upon an application for insurance that contains a material misstatement, misrepresentation or omission, whether intentional or otherwise, or that was issued as a result of any act of fraud, subject to certain exceptions; or (2) we find that there was negligence in the origination of a loan that we insured. We also have rights of rescission arising from a breach of the insured’s representations and warranties contained in an endorsement to our Master Policies that is required with our delegated underwriting program. In certain circumstances, we may seek to rescind Structured Transactions for breach of representations and warranties pertaining to the insured loans having been underwritten in accordance with the agreed underwriting guidelines and in the absence of any fraud or misrepresentation.
If a rebuttal to our rescission is received and the insured provides additional information supporting the continuation (i.e., non-rescission) of coverage, we have the claim re-examined internally by a second, independent group. If the additional information supports the continuation of coverage, the insurance is reinstated and the claim is paid. After completion of this process, if we determine that the loan did not qualify for coverage, the insurance certificate is rescinded (and the premium refunded) and we consider the rescission to be final and resolved. Although we may make a final determination internally with respect to a rescission, it is possible that a legal challenge to our decision to rescind coverage may be brought after we have rescinded coverage during a period of time that is specified under the terms of our Master Policies.


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During the first quarter of 2012, we began offering a limited rescission waiver program under our Prior Master Policy for our delegated underwriting customers, in which we agree not to rescind coverage due to non-compliance with our underwriting guidelines so long as the borrower makes 36 consecutive payments (commencing with the initial required payment) from his or her own funds. This program does not restrict our rights to rescind coverage in the event of fraud or misrepresentation in the origination of the loans we insure. As part of our 2014 Master Policy for new insurance written after October 1, 2014, we now offer 12-month and 36-month rescission relief programs in accordance with the specified terms and conditions set forth in the new policy. For a discussion of the 2014 Master Policy, see “—Business—Traditional Risk.”
Claim Curtailments. We also have rights under our Master Policies to curtail, and in some circumstances, deny claims due to servicer negligence. Examples of servicer negligence may include, without limitation:
a failure to report information to us on a timely basis as required under our Master Policies;
a failure to pursue loss mitigation opportunities presented by borrowers, realtors and/or any other interested parties;
a failure to pursue loan modifications and/or refinancings through programs available to borrowers or an undue delay in presenting claims to us (including as a result of improper handling of foreclosure proceedings), which increases the interest or other components of a claim we are required to pay; and
a failure to initiate and diligently pursue foreclosure or other appropriate proceedings within the timeframe specified in our Master Policies.
Although we could seek post-claim recoveries from the beneficiaries of our policies if we later determine that a claim was not valid, because our loss mitigation process is designed to ensure compliance with our policies prior to payment of claim, we have not sought, nor do we currently expect to seek, recoveries from the beneficiaries of our mortgage insurance policies once a claim payment has been made.

E.
Risk Management
Our mortgage insurance business employs a comprehensive risk management function, which is responsible for establishing our credit and counterparty risk policies, monitoring compliance with our policies, managing our insured portfolio and communicating credit related issues to management and the Credit Committee of our Board.
1.
Risk Origination and Servicing
We believe that understanding our business partners and customers is a key component of managing risk. Accordingly, we assign risk managers to our customers so that they can more effectively perform ongoing business-level due diligence. This also allows us to better customize our credit and servicing policies to address individual lender-specific and servicer-specific strengths and weaknesses.
2.
Portfolio Management
We manage the allocation of capital within our mortgage insurance business by, among other things, establishing portfolio limits for product type, loan attributes, geographic concentration and counterparties. We also identify, evaluate and negotiate potential transactions for terminating insurance risk and for distributing risk to others through commutations and external reinsurance arrangements discussed below under “—Reinsurance—Ceded.”
As part of our portfolio management function, we monitor and analyze the performance of various risks in our mortgage insurance portfolio. We use this information to develop our mortgage credit risk and counterparty risk policies, and as a component of our default and prepayment analytics.
We have a valuation group that analyzes the current composition of our mortgage insurance portfolio and monitors for compliance with our internally defined risk parameters. This analysis involves assessing risks to the portfolio from the market (e.g., the effects of changes in home prices and interest rates) and analyzing risks from particular lenders, products and geographic locales.


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3.
Credit Policy
We establish and maintain mortgage-related, credit risk policies that reflect our willingness to accept risk regarding counterparty, portfolio, operational and structured risks involving mortgage collateral. We establish risk guidelines for product types and loan attributes. Quality control is a key element of our credit policy function, and as part of our quality control program, we audit individual loan files to examine underwriting decisions for compliance with agreed-upon underwriting guidelines. These audits are conducted across loans submitted through our delegated and non-delegated underwriting channels.
4.
Reinsurance—Ceded
We use reinsurance as a risk management tool in our mortgage insurance business.
Third-Party Quota Share Transactions. During 2012, Radian Guaranty entered into two quota share reinsurance agreements with a third-party reinsurance provider in order to proactively manage Radian Guaranty’s Risk-to-capital. Through the Initial QSR Transaction, Radian Guaranty agreed to cede to the third-party reinsurance provider 20% of its NIW beginning with the business written in the fourth quarter of 2011. As of December 31, 2014, RIF ceded under the Initial QSR Transaction was $1.1 billion. In the fourth quarter of 2012 Radian Guaranty and the same third-party reinsurance provider entered into the Second QSR Transaction. The limitation on ceded risk in the Second QSR Transaction was $750 million initially and increased by mutual agreement of the parties up to $1.6 billion, which was the RIF ceded under this transaction as of December 31, 2014. Effective January 1, 2015, having ceded the maximum amounts permitted under the QSR Reinsurance Transactions, Radian Guaranty is no longer ceding NIW under these agreements. Each of the quota share reinsurance agreements provide Radian Guaranty with an option to reassume a portion of the related RIF in exchange for a payment of a predefined commutation amount from the reinsurer under certain circumstances and on specified dates. Under the Initial QSR Transaction Radian Guaranty had the option to recapture a portion of the ceded risk on December 31, 2014. Instead of exercising its right to recapture that risk, Radian Guaranty negotiated an amendment with the third-party reinsurance provider to leave the reinsurance in place and received a $9.2 million profit commission based on experience to date, as well as a $15.0 million upfront supplemental ceding commission. The primary purpose of this amendment was to provide Radian Guaranty continued capital relief in anticipation of a need to comply with the PMIERs Financial Requirements. See Note 8 of Notes to Consolidated Financial Statements for information regarding these two transactions.
Affiliate Reinsurance. Certain states limit the amount of risk a mortgage insurer may retain on a single loan to 25% of the total loan amount. Radian Guaranty currently uses reinsurance from affiliated companies to remain in compliance with these insurance regulations. See “—Regulation—State Regulation—Reinsurance.” In addition, Radian Guaranty has used reinsurance with its subsidiaries to reduce its net RIF.
Captive Reinsurance. We and other companies in the mortgage insurance industry participated in reinsurance arrangements with mortgage lenders commonly referred to as “captive reinsurance arrangements.” Under captive reinsurance arrangements, a mortgage lender typically established a reinsurance company that assumed part of the risk associated with the portfolio of that lender’s mortgages insured by us on a flow basis (as compared to mortgages insured in Structured Transactions, which typically are not eligible for captive reinsurance arrangements). In return for the reinsurance company’s assumption of a portion of the risk, we ceded to the reinsurance company a portion of the mortgage insurance premiums that otherwise would have been paid to us. Captive reinsurance typically was conducted on an “excess-of-loss” basis, with the captive reinsurer paying losses only after a certain level of losses had been incurred. In addition, on a limited basis, we participated in “quota share” captive reinsurance arrangements under which the captive reinsurance company assumed a pro rata share of all losses in return for a pro rata share of the premiums collected. For additional information about our captive reinsurance arrangements, see “Item 3. Legal Proceedings.”
As a result of the housing and related credit market downturn that began in 2007, most captive reinsurance arrangements have “attached,” meaning that losses have exceeded the threshold so that we are now entitled to cash recoveries from the captive. Ceded losses recoverable related to captives at December 31, 2014 were $24.7 million. We expect that most of the actual cash recoveries from those captives that have not yet been terminated will be received over the next few years.


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We have terminated a significant portion of our remaining captive reinsurance arrangements on a “cut-off” basis, meaning that the terminated captive arrangements were dissolved and all outstanding liabilities were settled. All of our existing captive reinsurance arrangements are operating on a run-off basis, meaning that no new business is being placed in these captives.
As of December 31, 2014, we have received total cash reinsurance recoveries of approximately $909.6 million (including recoveries from the termination of captive arrangements discussed above) from captive reinsurance arrangements and our former Smart Home Program for reinsuring risk on non-prime mortgages, with most of these recoveries coming from captive reinsurance arrangements.

F.
Customers
The principal customers of our mortgage insurance business are mortgage originators such as mortgage bankers, mortgage brokers, commercial banks, savings institutions, credit unions and community banks.
Beginning in 2009, we launched an initiative to significantly diversify our customer base, including increasing the amount of business we were conducting with credit unions and community banks. Since 2010, we have added more than 900 new customers and significantly increased the amount of business derived from mid-sized mortgage banks. These efforts have contributed to an increase in our market share since 2010 and to the corresponding levels of NIW that we have generated. In addition, we believe our diversification efforts have helped to reduce the potential impact to our business from the loss of any one customer.
Our top 10 mortgage insurance customers, measured by primary NIW, represented 22.9% of our primary NIW in 2014, compared to 25.8% and 24.8% in 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% in 2013 and 2012, respectively. Earned premiums attributable to Wells Fargo accounted for more than 10% of our consolidated revenues in 2014, 2013 and 2012. See “Item 1A. Risk Factors—Our NIW and franchise value could decline if we lose business from significant customers.”

G.
Sales, Marketing and Customer Support
Our sales and account management team is organized in various geographic regions across the U.S. We have a business development group that is focused on the creation of new mortgage insurance relationships and an account management group that is responsible for supporting our existing mortgage insurance relationships. Mortgage insurance sales and account management personnel are compensated by salary, commissions for NIW and the creation or development of customer relationships and other incentive-based pay, which may be tied to the achievement of certain sales goals or the promotion of certain products. Commissions vary based on product in order to incent a sales person to achieve an appropriate mix of products in accordance with our business objectives.
We have developed training programs for our customers to help their employees develop the skills to respond to changing market demands and regulatory requirements. Our training is provided to customers to promote the role of private mortgage insurance in the marketplace as well as to promote Radian Guaranty’s specific products and offerings. We offer training in three format options: instructor-led classroom sessions, instructor-led webinars and self-directed web-based training. In 2014, we trained more than 30,000 mortgage professionals both in-person and online, an increase of 25% from 2013.



26



H.
Competition
We operate in the highly competitive U.S. mortgage insurance industry. Our competitors include other private mortgage insurers and federal and state governmental and quasi-governmental agencies.
We compete with other private mortgage insurers on the basis of price, terms and conditions, customer relationships, reputation, perceived ability to comply with applicable capital and other financial strength requirements (including projected compliance with the PMIERs) and overall service. Service-based competition includes effective and timely delivery of products, timeliness of claims payments, training, loss mitigation efforts and management and field service expertise. We currently compete directly with the following six private mortgage insurers: Arch U.S. MI (acquired CMG Mortgage Company effective January 30, 2014), Essent Guaranty Inc., Genworth Financial Inc., Mortgage Guaranty Insurance Corporation, NMI Holdings, Inc. and United Guaranty Corporation. Certain of our private mortgage insurance competitors are subsidiaries of larger corporations that may have access to greater amounts of capital and financial resources than we do and may have better financial strength ratings than we have. In addition, three of our competitors are new entrants to the industry and are not burdened by legacy credit risks.
We also compete with various federal and state governmental and quasi-governmental agencies, principally the FHA, and to a lesser extent, the VA. Beginning in 2008, the FHA, which historically had not been a significant competitor, substantially increased its market share of the insured mortgage market. Since 2010, the private mortgage insurance industry has been recapturing market share from the FHA, primarily due to improvements in the financial strength of certain private mortgage insurers, the development of new products and marketing efforts directed at competing with the FHA, increases in the FHA’s pricing, the pursuit of legal remedies against FHA approved lenders related to loans insured by the FHA, as well as various policy changes at the FHA and the general elimination of the premium cancellation provision. For 2014, the FHA’s market share was 32.0% of the insured market. Recently, in January 2015, the FHA announced a 50 basis point reduction to its annual mortgage insurance premium. The FHA’s reduction in annual premiums may impact our competitiveness with respect to certain high LTV loans to borrowers with FICO scores below 720. See “Item 1A. Risk Factors—Our mortgage insurance business faces intense competition.”



27



III.
Mortgage and Real Estate Services (“MRES”)

A.
Acquisition of Clayton
On June 30, 2014, we acquired Clayton, a leading provider of services and solutions to the mortgage and real estate industries. In connection with the acquisition of Clayton, we introduced a new reporting segment — Mortgage and Real Estate Services, also referred to as “MRES.”

B.
Business
1.
Services Offered
Our MRES segment consists primarily of Clayton and provides services and solutions to the mortgage and real estate industries, including outsourced services, mortgage-related analytics and specialized consulting and surveillance services for buyers and sellers of, and investors in, mortgage and real estate-related loans and securities and other debt instruments. Our MRES segment provides information and services that financial institutions, investors and government entities, among others, use to evaluate, acquire, securitize, service and monitor loans and asset-backed securities. The primary services offered are described further below and include: loan review and due diligence; surveillance; component services and REO management services offered through Clayton’s subsidiary, Green River Capital; and services for the European mortgage market offered through Clayton’s EuroRisk business.
Loan Review & Due Diligence. Our loan review and due diligence services include loan-level due diligence for various asset classes and securitizations, with a primary focus on the residential mortgage and RMBS markets. We utilize skilled professionals and proprietary technology, with offerings focused on credit underwriting, regulatory compliance and collateral valuation. These services help our clients understand the risk contained in a loan file, and provide them with information to help them price, acquire, securitize or service the assets we review. We believe that we have the leading market share among the providers of due diligence services for non-GSE RMBS issuance and GSE risk-sharing transactions.
As part of our due diligence and review services, we offer credit underwriting reviews and compliance reviews to verify that loan file documentation conforms to specified guidelines and regulatory requirements. We leverage our underwriting expertise to offer mortgage fraud review and re-verification, including identifying breaches in representations and warranties made by sellers of the loans. In addition, we offer data integrity services and legal document review services. For the year ended December 31, 2014, loan review and due diligence services contributed 36% of total services revenue for our MRES segment.
Surveillance. Our surveillance services utilize proprietary technology and skilled professionals to provide ongoing, independent monitoring of loan quality and loan servicer performance. Our offerings include RMBS surveillance, loan servicer oversight and consulting services. RMBS surveillance services monitor the servicers of mortgage loans underlying outstanding RMBS. Loan servicer oversight provides regular monitoring of servicing operations to measure and assess compliance with applicable policies and regulations, and also includes monthly loan-level testing of loss-mitigation and other servicing activities. Our consulting services are focused on regulatory compliance and operational reviews of both mortgage servicers and loan originators. For the year ended December 31, 2014, surveillance services contributed 17% of total services revenue for our MRES segment.
Component Services. Our component service offerings are primarily focused on the single family rental market, and include valuations, property inspections, title reviews, lease reviews and tax lien reviews. We provide these services and due diligence reviews to issuers of single family rental securitizations as well as to lenders and investors in the single family rental market. In addition, we provide valuation services, which primarily consist of broker price opinions, to investors and servicers of non-performing mortgage loans and REO properties. For the year ended December 31, 2014, component services contributed 23% of total services revenue for our MRES segment.
REO Management. Our REO management services provide management of the entire REO disposition process, including management of the eviction and redemption process, management of property preservation and repairs, property valuation, title reviews and curative work, marketing, offer negotiation and closing services. For the year ended December 31, 2014, REO management services contributed 16% of total services revenue for our MRES segment.


28



EuroRisk. Our EuroRisk operations provide outsourced mortgage services in the United Kingdom and Europe, with offerings that include due diligence services, quality control reviews, valuation reviews and consulting services. EuroRisk provides services to mortgage originators and servicers, as well as to investors in performing and non-performing mortgage loans. For the year ended December 31, 2014, EuroRisk contributed 8% of total services revenue for our MRES segment. All of the EuroRisk services revenue is generated in foreign countries, primarily the United Kingdom and Greece, and represents the only revenue that Radian derives from foreign countries.
Sales volume in our MRES business segment depends in part on the overall activity in the mortgage finance market and the health of related industries. We believe the diversity of the services offered by MRES, which are intended to cover all phases of the mortgage value chain, will help to sustain a demand for services throughout various economic and mortgage finance environments. For example, the demand for due diligence services may decrease due to unfavorable economic conditions resulting in lower mortgage origination and securitization volumes, whereas the demand for REO management services may tend to increase in such an environment. In addition, while the size of the mortgage finance market may be adversely impacted by increased regulatory requirements, such as the recently adopted CFPB mortgage servicing standards and the new regulatory requirements for third-party review of loans in asset-backed securities, these requirements may increase the demand for certain of our services.
2.
Fee-for-Service Contracts
Our MRES segment is a fee-for-service business. Our services revenue is generated under three basic types of contracts:
Fixed-Price Contracts. Under a fixed-price contract, we agree to perform the specified work for a pre-determined per-unit or per-file price. We use fixed-price contracts in our component services and our loan review and due diligence services. These contracts are also used in our surveillance business for our servicer oversight services and RMBS surveillance services, as well as in our REO management business.
Time-and-Expense Contracts. Under a time-and-expense contract, we are paid a fixed hourly rate for each direct labor hour expended, and we are reimbursed for billable out-of-pocket expenses as work is performed. These contracts are used in our loan review and due diligence and EuroRisk services offerings, as well as in the consulting services that we offer as part of our surveillance business.
Percentage-of-Sale Contracts. A portion of REO management services are provided under percentage-of-sale contracts, in which we are paid a contractual percentage of the sale proceeds upon the sale of each property. These contracts are only used for our REO management services.
In most cases, our contracts with our clients do not include minimum volume commitments and can be terminated at any time by our clients. Although some of our contracts and assignments are recurring in nature, and include repetitive monthly assignments, a significant portion of our engagements are transactional in nature and may be performed in connection with securitizations, loan sales, loan purchases or other transactions. Due to the transactional nature of our business, our MRES revenues may fluctuate from period to period as transactions are commenced or completed.

C.
Customers
We have a broad range of customers for our MRES segment due to the breadth of services we are able to offer across the mortgage value chain. Our principal customers are buyers and sellers of, and investors in, mortgage- and real estate-related loans and securities and other debt instruments. These customers comprise:
Banks, credit unions, mortgage banks and other originators of mortgage loans;
RMBS issuers, securitization trusts, the GSEs, investment banks and other investors in mortgage-related debt instruments and other securities;
Mortgage servicers; and
Regulators and rating agencies involved in the mortgage, real estate and housing finance markets.
Our clients include many of the largest financial institutions and participants in the mortgage sector and, as such, our MRES revenue is concentrated among our largest clients. The top ten clients for our MRES business contributed 64% of the total services revenues for MRES during the year ended December 31, 2014. The loss of a significant client could have a material impact on the results of operations for our MRES segment.



29



D.
Competition
We believe that we are uniquely positioned as a single provider of an array of outsourced services and solutions to participants in the mortgage value chain. We are not aware of any other firm that provides a comparable range of services to the residential mortgage and real estate industries. However, we have multiple competitors within each of our individual lines of business. Our competitors mainly include small privately-held companies and subsidiaries of large publicly-traded companies. Significant competitors within each of our business lines include:
Loan review & due diligence – American Mortgage Consultants, Inc., Digital Risk, LLC, JCIII & Associates, LenderLive Network, Inc., Opus Capital Markets Consultants, LLC and Stewart Lender Services, Inc.
Surveillance – CoreLogic, Inc., Digital Risk, LLC, FTI Consulting, Inc., Pentalpha Surveillance LLC and Promontory Financial Group, LLC
Component services – Carrington Property Services, LLC, ClearCapital.com, Inc., CoreLogic, Inc., Pro Teck Valuation Services and ServiceLink
REO management – Altisource Portfolio Solutions S.A., Atlas Nationwide, Inc., Solutionstar Holdings LLC, Stewart Lender Services, Inc. and VRM Mortgage Services
EuroRisk – Deloitte LLP, PricewaterhouseCoopers LLP, Ernst & Young LLP, KPMG LLP, Situs Group, LLC, Euristix Ltd and Rockstead Ltd
Across all business lines, we compete on the basis of industry expertise, price, technology, service levels and relationships.

IV.
Discontinued Operations — Financial Guaranty

A.
Business
Radian Asset Assurance provides direct insurance and reinsurance on credit-based structured finance and public finance risks. Radian expects to complete the sale of Radian Asset Assurance to Assured in the first half of 2015 pursuant to the Radian Asset Assurance Stock Purchase Agreement, subject to satisfaction of customary closing conditions including regulatory approvals. For additional information related to discontinued operations, see Note 3 of Notes to Consolidated Financial Statements.
Although closing under the Radian Asset Stock Purchase Agreement is subject to conditions, the purchase price is not subject to adjustment based on Radian Asset Assurance’s results of operations, changes in valuation or market conditions occurring after December 31, 2014 through the closing date. Therefore, assuming satisfaction of the closing conditions, which we expect will be satisfied, the financial results of Radian Asset Assurance are not expected to have an impact on Radian’s financial condition or results of operations after December 31, 2014. See “Item 1A. Risk FactorsFailure to complete the sale of Radian Asset Assurance pursuant to the Radian Asset Assurance Stock Purchase Agreement could negatively impact our business and our financial condition, and could adversely impact our ability to comply with the PMIERs Financial Requirements.

V.
Investment Policy and Portfolio
Our investment portfolio is our primary source of liquidity to satisfy our insured obligations and to support our ongoing operations.
We follow an investment policy that is applied on a consolidated risk and asset allocation basis and requires the following:
At least 75% of our investment portfolio, based on market value, must consist of investment securities that are assigned a quality designation of NAIC 1 by the NAIC or equivalent ratings by a NRSRO (i.e., “A-” or better by S&P and “A3” or better by Moody’s);
A maximum of 15% of our investment portfolio, based on market value, may consist of investment securities that are assigned a quality designation of NAIC 2 by the NAIC or equivalent ratings by a NRSRO (i.e., “BBB+” to “BBB-” by S&P and “Baa1” to “Baa3” by Moody’s); and


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A maximum of 10% of our investment portfolio, based on market value, may consist of investment securities that are assigned quality designations NAIC 3 through 6 or equivalent ratings by a NRSRO (i.e., “BB+” and below by S&P and “Ba1” and below by Moody’s) and other investments not assigned NAIC quality designations (generally equity).
Portfolio construction is modeled to maximize long-term expected return while maintaining an acceptable risk level. Our investment objectives are to generate tax-efficient income, to preserve capital, and to utilize appropriate risk management. We manage the level of our short-term investments to meet our expected short-term cash requirements.
Our investment policies and strategies are subject to change, depending on regulatory, economic and market conditions and our then-existing or anticipated financial condition and operating requirements, including our tax position. The investments held at our insurance subsidiaries are also subject to insurance regulatory requirements applicable to such insurance subsidiaries.
Oversight responsibility of our investment portfolio rests with management, and allocations are set by periodic asset allocation studies, calibrated by risk and return and after-tax considerations. We manage approximately 40% of the investment portfolio (the portion of the portfolio largely consisting of U.S. Treasury obligations and short-term investments) internally, with the remainder managed by six external managers. External managers are selected by management based primarily upon the selected allocations, as well as factors such as historical returns and stability of their management teams. Management’s selections are presented to and approved by the Investment and Finance Committee of our Board.
At December 31, 2014, our investment portfolio (excluding assets held for sale related to discontinued operations) had a cost basis of $3.55 billion and carrying value of $3.63 billion, including $1.30 billion of short-term investments. Our investment portfolio did not include any real estate or whole mortgage loans at December 31, 2014. The portfolio included 112 privately placed, investment grade securities with an aggregate carrying value of $316.6 million at December 31, 2014. At December 31, 2014, 93.5% of our investment portfolio was rated investment grade.
A.
Investment Portfolio Diversification
The diversification of our investment portfolio, excluding assets held for sale, at December 31, 2014 was as follows:
 
 
Fair
Value
 
Percent
($ in millions)
 
 
 
U.S. government and agency securities (1)
$
140.3

 
3.9
%
State and municipal obligations
362.8

 
10.0

Money market instruments
600.3

 
16.5

Corporate bonds and notes
992.8

 
27.3

RMBS (2)
132.3

 
3.6

CMBS
246.8

 
6.8

Other ABS (3)
185.5

 
5.1

Foreign government and agency securities
37.7

 
1.0

Equity securities (4)
215.6

 
5.9

Other investments (5)
20.5

 
0.6

Short-term investments—U.S. government treasury bills
700.6

 
19.3

Total
$
3,635.2

 
100.0
%
___________________
(1)
Substantially all of these securities are backed by the full faith and credit of the U.S. government.
(2)
These RMBS are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.
(3)
Primarily comprised of AAA-rated obligations.
(4)
Comprised of broadly diversified domestic equity mutual funds ($143.0 million fair value) and various preferred and common stocks invested across numerous companies and industries ($72.6 million fair value).
(5)
Includes $20.5 million (fair value) of investments that have a carrying value of $14.6 million, which represents amortized cost.


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B.
Investment Portfolio Scheduled Maturity
The weighted average duration of the assets in our investment portfolio as of December 31, 2014 was 3.5 years. The following table shows the scheduled maturities of the securities held in our investment portfolio at December 31, 2014:
 
 
Fair
Value
 
Percent
($ in millions)
 
 
 
Short-term investments
$
1,300.9

 
35.8
%
Due in one year or less (1)
87.7

 
2.4

Due after one year through five years (1)
304.9

 
8.4

Due after five years through ten years (1)
680.0

 
18.7

Due after ten years (1)
461.0

 
12.7

RMBS (2)
132.3

 
3.6

CMBS (2)
246.8

 
6.8

Other ABS (2)
185.5

 
5.1

Other investments (3)
236.1

 
6.5

Total
$
3,635.2

 
100.0
%
___________________
(1)
Actual maturities may differ as a result of calls before scheduled maturity.
(2)
RMBS, CMBS and other ABS are shown separately, as they are not due at a single maturity date.
(3)
No stated maturity date.
C.
Investment Portfolio by Rating
The following table shows the ratings of our investment portfolio as of December 31, 2014:
 
Fair
Value
 
Percent
($ in millions)
 
 
 
Rating (1)
 
 
 
AAA (2) 
$
1,920.4

 
52.9
%
AA
376.1

 
10.3

A
772.2

 
21.2

BBB
330.4

 
9.1

Equity securities
215.6

 
5.9

Other invested assets (3)
20.5

 
0.6

Total
$
3,635.2

 
100.0
%
___________________
(1)
Reflects the highest NRSRO rating assigned to the security as of December 31, 2014.
(2)
Includes $832.3 million of AAA-rated U.S. government and agency securities, $68.6 million in Ginnie Mae securities, $42.7 million in Freddie Mac securities, and $28.6 million in Fannie Mae securities that have not been rated by a NRSRO as of December 31, 2014.
(3)
Includes limited partnership investments.
D.
Investment Risk Concentration
As of December 31, 2014 we did not have any investment in any person and its affiliates that exceeded 10% of our total stockholders’ equity.



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VI.
Regulation
A.
State Regulation
We and our insurance subsidiaries are subject to comprehensive regulation principally designed for the protection of policyholders, rather than for the benefit of investors, by the insurance departments in the various states where our insurance subsidiaries are licensed to transact business. Insurance laws vary from state to state, but generally grant broad supervisory powers to agencies or officials to examine insurance companies and enforce rules or exercise discretion affecting almost every significant aspect of the insurance business.
Insurance regulations address, among other things, the licensing of companies to transact business, claims handling, reinsurance requirements, premium rates and policy forms offered to customers, financial statements, periodic reporting, permissible investments and adherence to financial standards relating to surplus, dividends and other measures of solvency intended to assure the satisfaction of obligations to policyholders.
Our 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 competition in the insurance marketplace. In most states where our insurance subsidiaries are licensed, premium rates and policy forms must be filed with the state insurance regulatory authority and, in some states, must be approved, before their use. Changes in premium rates may be subject to actuarial justification, generally on the basis of the insurer’s loss experience, expenses and future projections. In addition, states may consider general default experience in the mortgage insurance industry in assessing the premium rates charged by mortgage insurers.
Each insurance subsidiary is required by the insurance regulatory authority of its state of domicile, and the insurance regulatory authority of each other jurisdiction in which it is licensed to transact business, to make various filings with those insurance regulatory authorities and with the NAIC, including quarterly and annual financial statements prepared in accordance with statutory accounting principles. In addition, our insurance subsidiaries are subject to examination by the insurance regulatory authorities of each of the states in which they are licensed to transact business.
Given the significant losses incurred by many mortgage and financial guaranty insurers in the recent past, our insurance subsidiaries have been subject to heightened scrutiny by insurance regulators, and in particular, the insurance regulatory authorities of the states in which our subsidiaries are domiciled.
The following represent our principal insurance companies:
Radian Guaranty. Radian Guaranty is domiciled and licensed in Pennsylvania as a stock casualty insurance company authorized to carry on the business of credit insurance, which includes the authority to write mortgage guaranty insurance. It is a monoline insurer, restricted to writing only residential mortgage guaranty insurance. In addition to Pennsylvania, Radian Guaranty is authorized to write mortgage guaranty insurance (or in states where there is no specific authorization for mortgage guaranty insurance, the applicable line of insurance under which mortgage guaranty insurance is regulated) in each of the other 49 states, the District of Columbia and Guam. Radian Guaranty is a direct subsidiary of Radian Group.
Radian Asset Assurance. Radian Asset Assurance is domiciled and licensed in New York as a monoline financial guaranty insurer. Radian Asset Assurance is also licensed under New York insurance law to write some types of surety insurance and credit insurance. Radian Asset Assurance is a direct subsidiary of Radian Guaranty.
In addition to New York, Radian Asset Assurance is authorized to write financial guaranty or surety insurance (or in one state where there is no specific authorization for financial guaranty insurance, credit insurance) in each of the other 49 states, the District of Columbia, Guam, the U.S. Virgin Islands and the Commonwealth of Puerto Rico. See, “ — Discontinued Operations — Financial Guaranty.”
RGRI. Radian Guaranty Reinsurance Inc. is domiciled and licensed in Pennsylvania as a stock casualty insurance company authorized to carry on the business of credit insurance, which includes the authority to reinsure policies of mortgage guaranty insurance. It is a monoline insurer restricted to writing only mortgage guaranty insurance or reinsurance. RGRI is not licensed or authorized to write direct mortgage guaranty insurance in any states other than Pennsylvania and Texas. RGRI is a wholly-owned subsidiary of Radian Group.


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Radian Insurance. Radian Insurance is domiciled and licensed in Pennsylvania as a stock casualty insurance company authorized to carry on the business of credit insurance, which includes the authority to write mortgage guaranty and financial guaranty insurance, as well as the authority to reinsure policies of mortgage guaranty insurance. Radian Insurance is also authorized in Hong Kong to carry on the business of credit insurance, suretyship and miscellaneous financial loss (including mortgage guaranty insurance) through its Hong Kong branch office. Radian Insurance is not licensed or authorized to write direct credit insurance in any locality other than Pennsylvania and Hong Kong. Radian Insurance is a direct subsidiary of Radian Guaranty.
Radian Mortgage Insurance. Radian Mortgage Insurance is domiciled and licensed in Pennsylvania as a stock casualty insurance company authorized to carry on the business of credit insurance, which includes the authority to reinsure policies of mortgage guaranty insurance. Radian Mortgage Insurance is a monoline insurer restricted to writing only mortgage guaranty insurance or reinsurance. Radian Mortgage Insurance is not licensed or authorized to write direct mortgage guaranty insurance in any states other than Pennsylvania and Arizona. Radian Mortgage Insurance is a direct subsidiary of Radian Guaranty.
Radian Investor Surety Inc. Radian Investor Surety Inc. is domiciled and licensed in Pennsylvania as a stock casualty insurance company authorized to carry on the business of mortgage credit-related products. Radian Investor Surety Inc. is not licensed in any jurisdiction other than Pennsylvania. Radian Investor Surety Inc. is an indirect subsidiary of Radian Group.
1.
Insurance Holding Company Regulation
Radian Group is an insurance holding company and our insurance subsidiaries belong to an insurance holding company system. All states have enacted legislation regulating insurance holding company systems, including the non-insurer holding company within that system. These laws generally require each insurance subsidiary within an insurance holding company system to register with the insurance regulatory authority of its domiciliary state, and to furnish to the regulators in these states applicable financial statements, statements related to intercompany transactions and other information concerning the holding company and its affiliated companies within the holding company system that may materially affect the operations, management or financial condition of insurers or the holding company system.
We currently have insurance subsidiaries domiciled in Pennsylvania and New York. As a result, Radian Group is considered an insurance holding company and the insurance holding company laws of Pennsylvania and New York regulate, among other things, certain transactions between Radian Group, our insurance subsidiaries and other parties affiliated with us. These laws also govern certain transactions involving Radian Group’s common stock, including transactions that constitute a “change of control” of Radian Group and, consequently, a “change of control” of our insurance subsidiaries. Specifically, no person may, directly or indirectly, seek to acquire “control” of Radian Group or any of its insurance subsidiaries unless that person files a statement and other documents with the commissioners of insurance of the states in which our insurance subsidiaries are domiciled and each commissioner’s prior approval is obtained. “Control” generally is defined broadly in these statutes. For example, under Pennsylvania’s insurance statutes, control is “presumed to exist if any person, directly or indirectly, owns, controls, holds with power to vote or holds proxies representing ten percent (10%) or more of the voting securities” of a holding company of a Pennsylvania domestic insurer. The statute further defines “control” as the “possession, direct or indirect, of the power to direct or cause the direction of the management and policies of” an insurer.
In addition, material transactions between us or our affiliates and our insurance subsidiaries or among our insurance subsidiaries are subject to certain conditions, including that they be “fair and reasonable.” These conditions generally apply to all persons controlling, or who are under common control with, us or our insurance subsidiaries. Certain transactions between us or our affiliates and our insurance subsidiaries may not be entered into unless the applicable commissioner of insurance is given 30 days’ prior notification and does not disapprove the transaction during that 30-day period.
In 2012, Pennsylvania adopted amendments to its insurance holding company statutes that impose more extensive informational and reporting requirements on parents and other affiliates of Pennsylvania-domiciled insurers with the purpose of protecting them from enterprise risk. Pennsylvania also adopted the Risk Management and Own Risk and Solvency Assessment Act, which is effective January 1, 2015 and requires, among other things, that Pennsylvania-domiciled insurers maintain a risk management framework and conduct an Own Risk and Solvency Assessment (“ORSA”) in accordance with applicable NAIC requirements.


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2.
Dividends
Radian Guaranty, Radian Insurance, RMAI, Radian Mortgage Insurance, RGRI and Radian Investor Surety Inc. Under Pennsylvania’s insurance laws, dividends and other distributions may only be paid out of an insurer’s positive unassigned surplus, measured as of the end of the prior fiscal year, unless the Pennsylvania Insurance Commissioner approves the payment of dividends or other distributions from another source. Radian Guaranty, Radian Insurance, RMAI, Radian Mortgage Insurance and RGRI each had negative unassigned surplus at December 31, 2014 of $715.7 million, $279.5 million, $161.5 million, $46.0 million and $341.2 million, respectively. In addition, Radian Investor Surety Inc. was formed during 2014 and had an immaterial amount of negative unassigned surplus at December 31, 2014. Therefore, no dividends or other distributions can be paid by these subsidiaries in 2015 without approval from the Pennsylvania Insurance Commissioner. Similarly, Radian Guaranty, Radian Insurance, RMAI, Radian Mortgage Insurance and RGRI did not have positive unassigned surplus as of the end of 2013, and therefore did not have the ability to pay any dividends in 2014.
While all proposed dividends and distributions to shareholders must be filed with the Pennsylvania Insurance Department prior to payment, if a Pennsylvania domiciled insurer had positive unassigned surplus as of the end of the prior fiscal year, then unless the prior approval of the Pennsylvania Insurance Commissioner is obtained, such insurer could only pay dividends or other distributions during any 12-month period in an aggregate amount less than or equal to the greater of: (i) 10% of the preceding year-end statutory policyholders’ surplus; or (ii) the preceding year’s statutory net income.
Radian Asset Assurance. Under New York insurance laws, Radian Asset Assurance may only pay dividends from statutory earned surplus. While all proposed dividends and distributions to shareholders must be filed with the NYSDFS prior to payment, Radian Asset Assurance may pay “ordinary dividends” without prior approval of the NYSDFS when the total of all other dividends declared or distributed by it during the preceding 12 months, is the lesser of 10% of its statutory surplus to policyholders, as shown on its last statement on file with the NYSDFS, or 100% of statutory adjusted net investment income during such period. In addition the NYSDFS, in its discretion, may approve a dividend distribution greater than would be permitted as an ordinary dividend. In the third quarter of 2014, Radian Asset Assurance, upon receipt of approval from the NYSDFS, declared and paid an Extraordinary Dividend of $150 million to Radian Guaranty. As a result of the pending sale of Radian Asset Assurance to Assured, which is expected to occur in the first half of 2015, we do not expect Radian Asset Assurance to have the capacity to distribute any additional ordinary dividends to Radian Guaranty or to request any further NYSDFS approval for an Extraordinary Dividend prior to the completion of the sale.
3.
Risk-to-Capital
Under state insurance regulations, Radian Guaranty is required to maintain minimum surplus levels and, in certain states, a minimum ratio of statutory capital relative to the level of net RIF, or “risk-to-capital.” The sixteen RBC States currently impose a Statutory RBC Requirement. The most common Statutory RBC Requirement is that a mortgage insurer’s Risk-to-capital may not exceed 25 to 1. In certain of the RBC States there is a Statutory RBC Requirement that Radian Guaranty must satisfy a MPP Requirement. The statutory capital requirements for the non-RBC States are de minimis (ranging from $1 million to $5 million); however, the insurance laws of these states generally grant broad supervisory powers to state agencies or officials to enforce rules or exercise discretion affecting almost every significant aspect of insurance business, including the power to revoke or restrict an insurance company’s ability to write new business. Unless an RBC State grants a waiver or other form of relief, if a mortgage insurer is not in compliance with the Statutory RBC Requirement of such state, it may be prohibited from writing new mortgage insurance business in that state. Radian Guaranty’s domiciliary state, Pennsylvania, is not one of the RBC States. In 2014 and 2013, the RBC States accounted for approximately 56.3% and 55.7%, respectively, of Radian Guaranty’s total primary NIW.
The NAIC is in the process of reviewing the minimum capital and surplus requirements for mortgage insurers and considering changes to the Model Act. While the outcome of this process is not known, it is possible that the NAIC will recommend and adopt more stringent capital requirements that could increase the capital requirements for Radian Guaranty in states that adopt the new Model Act. If the NAIC proposals include more onerous capital requirements, we may need to provide additional capital support to, or arrange additional capital relief for, Radian Guaranty. See “Item 1A. Risk Factors—Radian Group’s sources of liquidity may be insufficient to fund its obligations.”


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As of December 31, 2014, Radian Guaranty’s Risk-to-capital, after giving effect to a $100 million capital contribution from Radian Group in February 2015, was 17.9 to 1 and Radian Guaranty was in compliance with all applicable Statutory RBC Requirements. See “Item 1A. Risk Factors — Our insurance subsidiaries are subject to comprehensive state insurance regulations and other requirements, including capital adequacy measures, which if we fail to satisfy, could limit our ability to write new insurance and increase restrictions and requirements placed on our insurance subsidiaries.”
4.
Contingency Reserves
For statutory reporting, mortgage insurance companies are required annually to set aside contingency reserves in an amount equal to 50% of earned premiums. Such amounts cannot be released into surplus for a period of 10 years, except when loss ratios exceed 35%, in which case the amount above 35% can be released under certain circumstances. The contingency reserve, which is designed to be a reserve against catastrophic losses, essentially restricts dividends and other distributions by mortgage insurance companies. We classify the contingency reserves of our mortgage insurance subsidiaries as a statutory liability. At December 31, 2014, Radian Guaranty, Radian Insurance, Radian Mortgage Insurance and RGRI had contingency reserves of $389.4 million, $46.7 million, $12.6 million and $81.4 million, respectively.
Our financial guaranty business also is required to establish contingency reserves. The contingency reserve on direct financial guaranty business written is established net of reinsurance, in an amount equal to the greater of 50% of premiums written or a stated percentage (based on the type of obligation insured or reinsured) of the net amount of principal guaranteed, ratably over 15 to 20 years, depending on the category of obligation insured. The contingency reserve may be released with regulatory approval to the extent that losses in any calendar year exceed a pre-determined percentage of earned premiums for such year, with the percentage threshold dependent upon the category of obligation insured. Such reserves may also be released, subject to regulatory approval in certain instances, upon demonstration that the reserve amount is excessive in relation to the outstanding obligation.
In 2014, 2013 and 2012 we received approval from the NYSDFS to release approximately $102.5 million, $61.1 million and $54.5 million, respectively, from the contingency reserves of Radian Asset Assurance to statutory surplus as a result of certain policies that had matured and other insurance coverage that was terminated, in addition to an aggregate of $93.2 million of contingency reserves that were released in 2012 and 2013 as a result of reinsurance commutations.
At December 31, 2014, Radian Asset Assurance had contingency reserves of $189.1 million.
5.
Reinsurance
Certain states limit the amount of risk a mortgage insurer may retain on a single loan to 25% of the total loan amount. Coverage in excess of 25% (i.e., deep coverage) must be reinsured. Radian Guaranty currently reinsures coverage in excess of 25% with RGRI, Radian Insurance and Radian Mortgage Insurance in order to remain in compliance with these insurance regulations.
B.
Direct Federal Regulation
1.
GSE Requirements
As the largest purchasers of conventional mortgage loans, and therefore, the main beneficiaries of private mortgage insurance, the GSEs impose eligibility requirements that private mortgage insurers must satisfy in order to be approved to insure loans purchased by the GSEs.
Current Eligibility Requirements. The current eligibility requirements, among other things, impose limitations on the type of risk insured, standards for the geographic and customer diversification of risk, procedures for claims handling, standards for acceptable underwriting practices, standards for certain reinsurance cessions and financial requirements, including capital adequacy standards. In order to maintain the highest level of eligibility with the GSEs, mortgage insurers historically had to maintain an insurance financial strength rating of AA- or Aa3 from at least two of the three rating agencies by which they are customarily rated. Although our ratings have been substantially below these required ratings for several years, the GSEs have allowed Radian Guaranty and certain other private mortgage insurers to operate under business and financial remediation plans and retain their eligibility status. If the GSEs were to determine that our remediation plans are not satisfactory, including in particular that our plans will not provide the level of capital required by our mortgage insurance business, we could lose our eligibility with the GSEs. See “Item 1A. Risk Factors — Radian Guaranty may be unable to comply with applicable GSE eligibility requirements, including the final PMIERs, which if adopted in their current proposed form, could negatively impact Radian Guaranty’s expected return on equity, decrease Radian Guaranty’s NIW, and subject Radian Guaranty to extensive and more stringent operational requirements.


36



As discussed below, the GSEs are in the process of revising their eligibility requirements for private mortgage insurers. In September 2014, Fannie Mae notified us (and other private mortgage insurers operating under remediation plans), that for the period until the new eligibility requirements are finalized, Fannie Mae would impose additional terms and conditions for Radian Guaranty to maintain eligibility as a Fannie Mae approved mortgage insurer. In the event that Radian Guaranty fails to comply with the additional requirements, Fannie Mae may impose further conditions on Radian Guaranty, or may suspend or terminate its status as an eligible insurer. These additional requirements provide that Radian Guaranty must obtain Fannie Mae’s prior written approval before taking any of the following actions:
enter into any new or alter any existing capital support agreement, assumption of liabilities, or guaranty agreement (except for contractual agreements in the normal course of business);
enter into any new arrangements or alter any existing arrangements under lease, tax-sharing, and intercompany expense-sharing agreements;
make any investment, contribution, or loan to any affiliates, subsidiaries or non-affiliated entities;
pay dividends to its affiliates or its holding company;
enter into any new risk novation or commutation transaction;
incur or assume an obligation or indebtedness, contingent or otherwise, including, without limitation, an obligation to provide additional insurance, or related service or product, or to provide remedy to an obligation of a subsidiary;
permit a material change in, or acquisition of, control or beneficial ownership (deemed to occur if any person or entity or group of persons or entities acquires or seeks to acquire 10% or more of the voting securities or securities convertible into voting securities);
make changes to its corporate or legal structure;
transfer or otherwise shift its assets, risk, or liabilities to any subdivision, segment, or segregated or separate account or a U.S. mortgage insurance affiliate or subsidiary;
assume any material risk other than directly providing mortgage guaranty insurance;
provide capital, capital support, or financial guaranty to any U.S. mortgage insurance affiliate or subsidiary that is either an approved insurer or an exclusive affiliated reinsurer;
enter into any new or alter any existing reinsurance or risk sharing transaction; and
with respect to lender captive reinsurance arrangements:
allow lender captive reinsurance providers to pay dividends or distribute funds to the parent or affiliates of the lender captive reinsurer in amounts greater than permitted by the lender captive reinsurance contract;
effect a material or economically adverse alteration or amendment to a lender captive reinsurance contract; and
terminate any lender captive reinsurance contract unless it would receive at least 80% of the value of assets in the captive trust.
We expect the foregoing additional requirements to remain in effect until the PMIERs are finalized and become effective.
PMIERs Private Mortgage Insurer Eligibility Requirements. The GSEs are in the process of revising their eligibility requirements for private mortgage insurers. As part of this process, the FHFA released proposed PMIERs for public comment on July 10, 2014. The PMIERs, when finalized and adopted, will establish the revised requirements that the GSEs will impose on private mortgage insurers, including Radian Guaranty, to remain eligible insurers of mortgage loans purchased by the GSEs. The proposed PMIERs include the PMIERs Financial Requirements that are expected to replace the capital adequacy standards under the current GSE eligibility requirements. The proposed PMIERs Financial Requirements require a mortgage insurer’s Available Assets to meet or exceed Minimum Required Assets that are calculated based on RIF and a variety of measures designed to evaluate credit quality. Among other things, the proposed PMIERs exclude from Available Assets: (i) an amount equal to Unearned Premium Reserves; and (ii) certain subsidiary capital, including Radian Guaranty’s capital that is attributable to its ownership of Radian Asset Assurance.


37



The public comment period for the proposed PMIERs ended on September 8, 2014. The FHFA is currently reviewing and considering input before adopting the final PMIERs. All aspects of the final PMIERs are expected to become effective 180 days after their final publication. Approved insurers who fail to meet the PMIERs Financial Requirements when they become effective 180 days after their publication may, at the discretion of the GSEs, operate under a transition plan during an extended transition period of up to two years from the final publication date, and would continue to be eligible insurers during that period. We expect the final PMIERs to be published during the first half of 2015 and to become effective by the end of 2015. See “Item 1A. Risk Factors — Radian Guaranty may be unable to comply with applicable GSE eligibility requirements, including the final PMIERs, which if adopted in their current proposed form, could negatively impact Radian Guaranty’s expected return on equity, decrease Radian Guaranty’s NIW, and subject Radian Guaranty to extensive and more stringent operational requirements.
Other GSE Business Practices and Requirements. The GSEs acting independently or through their conservator, the FHFA, have the ability to change their business practices and requirements in ways that impact our business. Recent examples of changes in the GSEs’ business practices and requirements that impact our business are:
implementation of new minimum requirements for master insurance policies for loans the GSEs acquire that include, among other requirements, specific standards for loss mitigation and claims processing activities; and
the proposed PMIERs which, once adopted, will implement new GSE eligibility requirements for private mortgage insurers.
Other changes in the business practices or requirements of the GSEs that could impact our business include changes in the underwriting standards for mortgages they purchase, changes in the terms on which mortgage insurance coverage may be cancelled and changes in the LLPAs and guarantee fees for loans they purchase. See “Item 1A. Risk Factors—Because most of the mortgage loans that we insure are sold to Freddie Mac and Fannie Mae, changes in their charters or business practices could significantly impact our mortgage insurance business.
The GSEs had discontinued programs to acquire loans with LTV ratios at or above 97% in January 2013. However, in December 2014, the GSEs announced new lending guidelines that enable them to acquire loans with LTV ratios of 97% for certain qualifying borrowers. Although most of these loans will require private mortgage insurance coverage, we expect that FHA pricing for a portion of these loans will be more favorable than our pricing.
In January 2014, the FHFA delayed the implementation of planned increases in the GSEs’ guarantee fees in order to further review and consider the impact that these increases might have on the availability of mortgage credit. The review is expected to consider responses that were provided to a FHFA Request for Comment on guarantee fees. We expect the FHFA to make a decision about whether to change the GSEs’ LLPAs and guarantee fees in 2015. If the FHFA were to lower these fees, it could positively impact the competitiveness of our pricing in relation to the FHA’s pricing.
C.
Other Federal Regulation
1.
Housing Finance Reform
Presently, the federal government plays a dominant role in the U.S. housing finance system through, among other things, the involvement of the FHFA and GSEs, the FHA and the VA. There has been ongoing debate about the roles that the federal government and private capital should play in the housing finance system, and in recent years there generally has been broad policy consensus that there is a need to increase the role of private capital. Since FHFA was appointed as conservator of the GSEs in September 2008, there has been a wide range of legislative proposals to reform the U.S. housing finance market, including proposals for GSE reform ranging from some that advocate nearly complete privatization and elimination of the role of the GSEs to others that support a system that combines a federal role with private capital.
In February 2011, the Obama Administration released a proposal to reform the U.S. housing finance market. In its proposal, the Obama Administration sought to gradually reduce the federal government’s role in housing finance, including the ultimate wind-down of the GSEs, and to increase the role of private capital. The Obama Administration’s proposal has shaped the debate in Congress as the Senate Banking Committee and the House Financial Services Committee have each introduced and considered legislation to reform the housing finance market. The placement of the GSEs into the conservatorship of the FHFA increases the likelihood that Congress will address the role and purpose of the GSEs in the U.S. housing finance market, however, it remains unclear whether housing finance reform legislation will be adopted and, if so, what form it will ultimately take.


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As the regulator and conservator of the GSEs, the FHFA has made changes to the business and operations of the GSEs. Both Fannie Mae and Freddie Mac have reported profits for the past several quarters and this development may impact the timing and outcome of efforts to reform the GSEs and the housing finance system in the U.S. The FHFA annually releases a strategic plan for the next phase of the conservatorship. The strategic plan announced for 2015 includes development of a single platform infrastructure for the mortgage market, planned regulations for the treatment of long-delinquent non-performing loans, revised private mortgage insurance eligibility guidelines, review of LLPA and guarantee fees, efforts to increase the size and diversity of risk share transactions to try and reduce the role of the GSEs, increasing private sector participation and maintaining liquidity in the mortgage market and general mortgage credit availability.
There is a possibility that new federal legislation could change the role of private mortgage insurance by, among other items, changing the combined LTV ratio for which private mortgage insurance or other loan level credit enhancement is required by the GSEs, changing the role of the GSEs in the secondary mortgage market, or continuing to change the GSE LLPA and guarantee fees and FHA premium pricing. See “Item 1A. Risk Factors — Because most of the mortgage loans that we insure are sold to Freddie Mac and Fannie Mae, changes in their charters or business practices could significantly impact our mortgage insurance businessand “— Our mortgage insurance business faces intense competition.”
2.
FHA
Private mortgage insurance competes with the single-family mortgage insurance programs of the FHA. As such, the FHA is one of our biggest competitors. We compete on the basis of loan limits, pricing and credit guidelines. Historically, the loan limits for FHA-insured loans and the loan limits for GSE conforming loans have been substantially the same, as is the case presently. However, in 2011 Congress increased FHA loan limits for certain high cost areas to $729,750, while the GSE limits for high-cost areas remained at $625,500, resulting in loan limits for FHA-insured loans that were higher than loan limits for privately-insured loans for the first time in history, enabling the FHA to insure a broader range of loans than private mortgage insurers. These higher FHA loan limits expired December 31, 2013. It is possible that, in the future, Congress could again impose different loan limits for FHA loans than for GSE conforming loans, which could impact the competitiveness of private mortgage insurance in relation to FHA programs.
In November 2011, HUD released its annual report to Congress on the financial condition of the FHA Mutual Mortgage Insurance Fund, which found that the FHA’s single family mortgage and reverse mortgage insurance programs had fallen below the statutorily-required 2% capital reserve ratio. The FHA remains below the statutorily-required 2% capital ratio today, based on the most recent actuarial report and is likely to remain well below the required level for the next two to five years, based on industry estimates.
Despite being below the 2% capital ratio, the FHA reduced its annual mortgage insurance premium by 50 basis points for loans entering the origination process on or after January 26, 2015, including refinancings. The FHA’s upfront mortgage insurance premium was not changed. The FHA’s reduction in annual premiums may impact our competitiveness on certain high LTV loans to borrowers with FICO scores below 720.
Congress has been considering FHA reform in addition to GSE reform. Legislation to significantly change the solvency of the FHA has been introduced in Congress. Among other things, the proposed legislation seeks to raise the minimum capital ratio for the FHA. Given that FHA and GSE reform have significant impacts on each other, as well as on borrower access to credit and the housing market more broadly, policymakers may consider both GSE reform and FHA reform together. It is unclear whether FHA reform legislation will be adopted and, if so, what provisions it might ultimately contain and how it might impact the private mortgage insurance industry.
3.
The Dodd-Frank Act
The Dodd-Frank Act contains many requirements and mandates significant rulemaking by several regulatory agencies to implement the Dodd-Frank Act’s provisions. The full scope of the Dodd-Frank Act and its impact on our mortgage insurance business remain uncertain. The Dodd-Frank Act established the CFPB to regulate the offering and provision of consumer financial products and services, including residential mortgages, under federal law and transferred authority to the CFPB to enforce many existing consumer related federal laws, including TILA and RESPA. Among the most significant provisions for private mortgage insurers under the Dodd-Frank Act are the ability to repay (“ATR”) mortgage provisions, the securitization risk retention provisions and the expanded mortgage servicing requirements under TILA and RESPA. Each of these is more fully discussed below.


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Qualified Mortgage Requirements - Ability to Repay Requirements. Under the Dodd-Frank Act, the CFPB is authorized to issue regulations prohibiting a creditor from making a residential mortgage loan unless the creditor makes a reasonable and good faith determination that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan (the “Ability to Repay rule”). The Dodd-Frank Act provides that a creditor may presume that a borrower will be able to repay a loan if the loan has certain low-risk characteristics that meet the definition of a QM.
On January 10, 2013, the CFPB issued the CFPB QM Rule. The CFPB QM Rule became effective on January 10, 2014. Under the CFPB QM Rule, a loan is deemed to be a QM if, among other factors:
the term of the loan is less than or equal to 30 years;
there are no negative amortization, interest-only or balloon features;
the lender properly documents the loan in accordance with the requirements;
the total “points and fees” do not exceed certain thresholds (as further discussed below); and
the total debt-to-income ratio of the borrower does not exceed 43%.
Loans that meet the definition of a QM under the CFPB’s QM Rule receive either a rebuttable or conclusive presumption of compliance with the rule’s ability to repay requirements depending upon the pricing of the loan relative to the Average Prime Offer Rate. The CFPB’s QM Rule provides a “safe harbor” for loans that otherwise satisfy the CFPB’s QM requirements and have APRs below the threshold of 150 basis points over the Average Prime Offer Rate, and a “rebuttable presumption” for loans that otherwise satisfy the CFPB QM requirements and have an APR at or above that threshold.
Significantly for private mortgage insurers, as noted above, for a loan to satisfy the CFPB QM Rule, the points and fees payable in connection with the loan may not exceed 3% of the total loan amount (for loans of $100,000 or more; different limitations apply to smaller balance loans). As it relates to private mortgage insurance, any premium charges payable after closing (e.g., monthly premiums) are excluded from the points and fees calculation. With regard to up-front private mortgage insurance premiums (premium charges payable at or before closing), the portion of the premium that is not in excess of the then current up-front FHA premium at the time of the loan’s origination is also excluded from the points and fees calculation (so long as the charges meet certain refundability criteria), while any portion that is in excess of the current up-front FHA premium is included in the calculation of points and fees. We offer mortgage insurance products that provide for up-front premiums and to the extent that these products cause a loan not to meet the CFPB’s QM Rule requirements, it may impact the structure, marketability and pricing of these products which could impact the amount and mix of new insurance we write and our share of the private mortgage insurance market.
Most notably for the private mortgage insurance industry, however, is that the CFPB QM Rule establishes a temporary alternative QM definition applicable to any loans that are eligible to be purchased, guaranteed or insured by the GSEs. Loans acquired by the GSEs are allowed QM status under this temporary rule if they meet requirements to avoid certain loan features that are considered as increasing the risk of default (e.g., no negative amortization and generally no balloons or interest-only features) and the limitation on points and fees discussed above. Under the temporary alternative QM definition, loans acquired by the GSEs do not need to satisfy the debt-to-income ratio of 43% requirement that is part of the CFPB QM Rule. With regard to GSE-eligible loans, the temporary alternative QM definition will expire on the earlier of seven years from the effective date of the rule or when GSE conservatorship or receivership ends.
The Dodd-Frank Act separately granted statutory authority to HUD (for FHA-insured loans), the VA (for VA-guaranteed loans), the U.S. Department of Agriculture (“USDA”) and the Rural Housing Service (“RHS”) to develop their own definitions of a qualified mortgage in consultation with the CFPB. In December 2013, HUD adopted a separate definition of a qualified mortgage for loans insured by the FHA. HUD’s qualified mortgage definition is less restrictive than the CFPB QM Rule in certain respects. To the extent other government agencies that guarantee residential mortgage loans also adopt their own definitions of a qualified mortgage and those definitions are more favorable to lenders and mortgage holders than the CFPB QM Rule that applies to the GSEs and the markets in which we operate, it could have a negative impact on our mortgage insurance business.


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Qualified Residential Mortgage Regulations - Securitization Risk Retention Requirements. The Dodd-Frank Act requires securitizers to retain some of the credit risk associated with mortgage loans that they transfer, sell or convey, unless the mortgage loans are QRMs or are insured by the FHA or another federal agency. In October 2014, federal regulators published the final risk retention rules which generally define a QRM as a mortgage meeting the requirements of a qualified mortgage under the CFPB QM Rule (including the temporary alternative QM definition) described above. Because of the capital support provided by the U.S. Government to the GSEs, the GSEs satisfy the proposed risk retention requirements of the Dodd-Frank Act while they are in conservatorship, so sellers of loans to the GSEs will not be subject to the risk retention requirements referenced above. This means that lenders that originate loans that are sold to or securitized with the GSEs while the GSEs are in conservatorship would not be required to retain risk under the final QRM rule.
Mortgage Servicing Rules. The Dodd-Frank Act amended and expanded upon mortgage servicing requirements under TILA and RESPA. The CFPB was required to amend Regulation Z (promulgated under TILA) and Regulation X (promulgated under RESPA) to conform these regulations to the new statutory requirements. The final rules implementing these expanded and detailed mortgage servicing requirements became effective in January 2014. Among other things, the rules include new or enhanced requirements for handling loans that are in default. For example, a provision of the required loss mitigation procedures prohibits a loan holder from commencing foreclosure until 120 days after the borrower’s delinquency. Complying with the new rules has been challenging and costly for many loan servicers. Our MRES segment provides services to financial institutions that are focused on evaluating compliance with and establishing processes and procedures to implement compliance with national and state servicing standards, including the CFPB’s new servicing regulations.
Other. In addition to the foregoing, the Dodd-Frank Act establishes a Federal Insurance Office within the U.S. Treasury. While not having a general supervisory or regulatory authority over the business of insurance, the director of this office performs various functions with respect to insurance, including serving as a non-voting member of the Financial Stability Oversight Council and making recommendations to the Financial Stability Oversight Council regarding insurers to be designated as systemically important institutions and subject to more stringent regulation. In December 2013, the Federal Insurance Office published a study on how to modernize and improve the system of insurance regulation in the U.S., which recommended the development and implementation of federal oversight for private mortgage insurers. To the extent these recommendations are acted upon by legislators or other executive action, a divergence from the current system of state regulation could increase compliance burdens and possibly impact our financial condition.
We cannot predict the requirements of the remaining final regulations ultimately adopted under the Dodd-Frank Act, the full effect such regulations will have on financial markets generally, or on our mortgage insurance business, the additional costs associated with compliance with such regulations or changes to our operations that may be necessary to comply with the Dodd-Frank Act and the rules adopted thereunder, any of which could have a material adverse effect on our business, and business prospects.
4.
RESPA
Settlement service providers in connection with the origination or refinance of a federally regulated mortgage loan are subject to RESPA. Mortgage insurance may be considered to be a settlement service for purposes of RESPA under applicable regulations. As a result, mortgage insurers are subject to the anti-referral fee provisions of Section 8(a) of RESPA which, among other things, generally provide that mortgage insurers are prohibited from paying or accepting any thing of value in connection with the referral of a settlement service. Under the Dodd-Frank Act, the authority to implement and enforce RESPA was transferred to the CFPB. RESPA authorizes the CFPB, Department of Justice, state attorneys general and state insurance commissioners to bring civil enforcement actions, and also provides for criminal penalties and private rights of action.
We and other mortgage insurers are currently facing private lawsuits alleging, among other things, that our captive reinsurance arrangements constitute unlawful payments to mortgage lenders under RESPA, and in the past, we have been subject to lawsuits alleging that our pool insurance and contract underwriting services violated RESPA. In addition, we and other mortgage insurers have been subject to inquiries and investigative demands from state and federal governmental agencies, including the CFPB, requesting information relating to captive reinsurance. In April 2013, we reached a settlement with the CFPB that concluded its investigation with respect to Radian Guaranty without any findings of wrongdoing. For additional information about litigation and governmental inquiries regarding RESPA and our captive reinsurance arrangements, see “Item 3. Legal Proceedings” and “Item 1A. Risk Factors — Legislation and regulatory changes and interpretations could impact our businesses” and “— We are subject to the risk of litigation and regulatory proceedings.” We have not entered into any new captive reinsurance arrangement since 2007.


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5.
Homeowner Assistance Programs
The Emergency Economic Stimulus Act of 2008 (“EESA”) included provisions that require the U.S. Secretary of the Treasury (“Treasury Secretary”) to encourage further use of the Hope for Homeowners program. Under EESA, the Treasury Secretary is required to “maximize assistance to homeowners and encourage mortgage servicers to take advantage of available programs (including the Hope for Homeowners program) to minimize foreclosures.” In 2008, the U.S. Treasury announced the Homeowner Affordability and Stability Plan to restructure or refinance mortgages to avoid foreclosures through: (i) refinancing mortgage loans through HARP; (ii) modifying First- and Second-lien mortgage loans through HAMP and the Second Lien Modification Program; and (iii) offering other alternatives to foreclosure through HAFA. Details of these programs are as follows:
In 2009, the GSEs began offering the HARP program, which allows a borrower who is not delinquent to refinance his or her mortgage to a more stable or affordable loan if such borrower has been unable to take advantage of lower interest rates because his or her home has decreased in value. To be eligible, a borrower must meet certain conditions, including that the borrower must be current on the mortgage at the time of the refinance, with no late payment in the past six months and no more than one late payment in the past 12 months. In November 2011, the FHFA implemented the HARP 2 program which made enhancements to the HARP program that have increased the number of borrowers who can qualify for refinancing. The HARP 2 program has been extended to December 31, 2015 for loans that were originated or acquired by the GSEs by or before May 30, 2009. Importantly, the FHFA reached an agreement with private mortgage insurers to facilitate the transfer of mortgage insurance on loans to be refinanced without regard to LTV. The FHFA has the authority to make changes to the HARP program.
In February 2009, the U.S. Treasury established HAMP as a program to modify certain loans to make them more affordable to borrowers, with the goal of reducing the number of foreclosures. Under HAMP, an eligible borrower’s monthly payments may be lowered by lowering interest rates, extending the term of the mortgage or deferring principal. To be eligible, a borrower must meet certain conditions, including conditions with respect to the borrower’s current income and non-mortgage debt obligations. In June 2012, the HAMP program extended the population of eligible homeowners to (i) homeowners applying for a modification on a property that the homeowner currently rents or intends to rent; (ii) homeowners who were previously ineligible because their debt-to-income ratio was 31% or lower; (iii) homeowners who previously received a HAMP trial period plan, but defaulted in their trial payments; and (iv) homeowners who previously received a HAMP permanent modification, but defaulted in their payments, therefore losing good standing. The HAMP program has been extended to December 31, 2015.
HAFA, which became effective in April 2010, is intended to provide additional alternatives to foreclosures by providing incentives to encourage a borrower and servicer to agree that: (i) a borrower can sell his or her home for less than the full amount due on the mortgage and fully satisfy the mortgage; or (ii) a borrower can voluntarily transfer ownership of his or her home to the servicer in full satisfaction of the mortgage. Loans that are eligible for this program must have been originated prior to January 1, 2009.
The U.S. Treasury also has developed uniform guidance for loan modifications to be used by participating servicers in the private sector. The GSEs have incorporated material aspects of these guidelines for loans that they own and loans backing securities that they guaranty.
See “Item 1A. Risk Factors — Loan modification, refinancing and other similar programs may not continue to provide us with a material benefit.”


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6.
The SAFE Mortgage Licensing Act (“SAFE Act”)
The SAFE Act requires mortgage loan originators to be licensed and/or registered with the Nationwide Mortgage Licensing System and Registry (the “Registry”). The Registry is a database established by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators. Among other things, the database was established to support the licensing of mortgage loan originators by each state. As part of this licensing and registration process, loan originators who are employees of institutions other than depository institutions or certain of their subsidiaries that, in each case, are regulated by a federal banking agency, must generally be licensed under the SAFE Act guidelines enacted by each state in which they engage in loan originator activities and registered with the Registry. To the extent that the SAFE Act is interpreted to apply to our contract underwriters and we are unable to achieve compliance with the SAFE Act in one or more applicable states, we may seek to provide our services through a licensed third-party vendor, and if this is not feasible, we may be required to cease or limit our contract underwriting services in such applicable states. We provide our contract underwriting services through an entity that is currently licensed under, or otherwise compliant with, the SAFE Act in 45 states. See “Item 1A. Risk Factors — We face risks associated with our contract underwriting business.”
7.
Home Mortgage Disclosure Act of 1975 (“HMDA”)
HMDA requires most originators of mortgage loans (among others) to collect and report data relating to a mortgage loan applicant’s race, nationality, gender, marital status and census tract to their respective federal reporting agency. The purpose of the HMDA is to detect possible discrimination in home lending and, through disclosure, to discourage this discrimination. Mortgage insurers are not required pursuant to any law or regulation to report HMDA data. However, mortgage insurers, including Radian Guaranty, have voluntarily agreed to report the same data on loans submitted for insurance as is required for most mortgage lenders under HMDA.
8.
Mortgage Insurance Cancellation
The HPA imposes certain cancellation and termination requirements for borrower-paid private mortgage insurance and requires certain disclosures to borrowers regarding their rights under the law. The HPA also requires certain disclosures for loans covered by lender-paid private mortgage insurance. Specifically, the HPA provides that private mortgage insurance on most loans originated on or after July 29, 1999 may be cancelled at the request of the borrower once the LTV reaches 80% of the original unpaid principal balance, provided that certain conditions are satisfied. Under HPA, private mortgage insurance must be canceled automatically once the LTV reaches 78% of the unpaid principal balance (or, if the loan is not current on that date, on the date that the loan becomes current).
The HPA establishes special rules for the termination of private mortgage insurance in connection with loans that are “high risk.” The HPA does not define “high risk” loans, but leaves that determination to the GSEs for loans up to the GSE conforming loan limits and to lenders for any other loan. For “high risk” loans above the GSE conforming loan limits, private mortgage insurance must be terminated on the date that the LTV is first scheduled to reach 77% of the unpaid principal balance. In no case, however, may private mortgage insurance be required beyond the midpoint of the amortization period of the loan if the borrower is current on the payments required by the terms of the mortgage.
9.
The Fair Credit Reporting Act
The FCRA, as amended, imposes restrictions on the permissible use of credit report information. FCRA has been interpreted by some Federal Trade Commission (“FTC”) staff to require mortgage insurance companies to provide “adverse action” notices to consumers in the event an application for mortgage insurance is declined on the basis of a review of the consumer’s credit.


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10.
Privacy and Information Security - Gramm-Leach-Bliley Act of 1999 (the “GLB”)
The GLB imposes privacy requirements on financial institutions, including obligations to protect and safeguard consumers’ nonpublic personal information and records, and limitations on the re-use of such information. Federal regulatory agencies have issued the Interagency Guidelines Establishing Information Security Standards, or “Security Guidelines,” and interagency regulations regarding financial privacy, or “Privacy Rule,” implementing sections of GLB. The Security Guidelines establish standards relating to administrative, technical, and physical safeguards to ensure the security, confidentiality, integrity, and the proper disposal of consumer information. The Privacy Rule limits a financial institution’s disclosure of nonpublic personal information to unaffiliated third parties unless certain notice requirements are met and the consumer does not elect to prevent or “opt out” of the disclosure. Pursuant to the Privacy Rule, financial institutions that are required to provide privacy notices to their customers and consumers are required to describe the financial institutions’ policies and practices to protect the confidentiality and security of the information. With respect to our business, GLB is enforced by the FTC and state insurance regulators. Many states have enacted legislation implementing GLB and establishing information security regulation. Many states have enacted privacy and data security laws that impose compliance obligations beyond GLB, including obligations to protect social security numbers and provide notification in the event that a security breach results in a reasonable belief that unauthorized persons may have obtained access to consumer nonpublic information.
11.
Asset Backed Securitizations
Our MRES business provides services to issuers of and investors in asset backed securitizations and similar transactions. As a result, regulations impacting the asset backed securitization market may impact our MRES business directly, or indirectly through the regulation of our MRES customers.
In August 2014, the SEC adopted final rules under Regulation AB that substantially revise the offering process, disclosure and reporting requirements for offerings of ABS. The final Regulation AB II rules implement several key areas of reform. Specifically, Regulation AB II introduces several new requirements related to public offerings of ABS, including the following that are significant for our MRES business:
New asset-level disclosure requirements for ABS backed by residential mortgage loans, commercial mortgage loans, automobile loans or leases, re-securitizations of ABS backed by any of those asset types, and debt securities; and
A requirement that the transaction documents provide for the appointment of an “asset representations manager” to review the pool assets when certain trigger events occur.
Issuers of publicly offered ABS must comply with Regulation AB II’s new rules, forms and disclosures no later than November 23, 2015, except for the asset-level disclosure requirements which become applicable on November 23, 2016.
In August 2014, the SEC also adopted its final credit rating agency reform rules. These rules will become effective June 15, 2015. The new NRSRO rules include, among other things, new rules and forms that apply to providers of third-party due diligence services (such as our MRES business) for both publicly and privately issued Exchange Act-ABS (which includes CLOs, CDOs and synthetic securitizations). The new NRSRO rules require any issuer or underwriter of registered or unregistered ABS that are to be rated by a NRSRO, to furnish a form filed on the SEC’s EDGAR system that describes the findings and conclusions of any third-party due diligence report obtained by the issuer or underwriter. The rule also requires that a due diligence firm (such as our MRES business) that is engaged to perform services in connection with any rated ABS issuance furnish a form that describes the scope of due diligence services performed and a summary of their findings and conclusions. The form is required to be posted on the ABS issuer’s password-protected website that is required under Rule 17g-5 of the Exchange Act.


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12.
FDCPA
The FDCPA prohibits third party debt collectors from using abusive, unfair or deceptive practices to collect a debt. The FDCPA is enforced by the FTC. For purposes of the FDCPA, a debt collector is a person who regularly collects or attempts to collect consumer debts for another person or institution. The FDCPA specifies, among other things, the times and places where a debt collector may communicate with the consumer and which third parties a debt collector may contact other than the consumer, as well as the ways in which such communication may be conducted. Failure to comply with the FDCPA may result in liability for actual damages, punitive damages and other costs and fees, all as set forth in the FDCPA.
Certain of our MRES business activities involve direct communications with consumers who have defaulted on mortgage loans, primarily to determine their desire to explore their options with the loan servicer or investor, and to make these introductions, as necessary. These consumer-related interactions may be construed to constitute debt collection activities within the meaning of the FDCPA.
D.
Basel III
In 1988, the BCBS developed Basel I, which established international benchmarks for assessing banks’ capital adequacy requirements. In June 2005, the BCBS issued Basel II which, among other things, governs the capital treatment for mortgage insurance purchased by domestic and international banks in both their origination and securitization activities. Basel II was implemented by many banks in the U.S. and in many other countries in 2009 and 2010.
In September 2010, the BCBS released Basel III guidelines, which increased the capital requirements for certain banking organizations. In December 2010, the BCBS released a new bank capital framework, which we refer to as the Basel III capital adequacy guidelines, that raised minimum capital requirements for banks. Implementation of Basel III and the Basel III capital adequacy guidelines in the U.S. required formal regulations to be adopted by the three U.S. federal banking regulators.
In July 2013, the federal bank regulators published rules to implement Basel III. As published, these rules would have made extensive changes to the capital requirements for residential mortgages. In addition, the published rules would have eliminated existing capital recognition for certain low down payment mortgages if covered by mortgage insurance. After consideration of extensive comments on the published rules, the federal regulators revised the Basel III rules to retain the current treatment for residential mortgages under the general risk-based capital rules for U.S. banking institutions.
As discussed above, the revised Basel III rules, as implemented by the U.S. bank regulators, retain the existing risk-weighting for mortgage-backed pass-through securities guaranteed by the GSEs. However, these revised Basel III rules significantly change the calculation of risk weights for securitization exposures in which credit risk is tranched. Under the revised Basel III rules, the risk weighting for these securitization exposures is subject to a 20% floor and can increase to 1,250% for junior tranches. Under the QRM risk-retention rules, sponsors of securitizations of non-QRM loans will be required to retain an exposure to securitizations they sponsor. Therefore, under the final Basel III rules, it is possible that these bank sponsors will be required to hold greater amounts of capital with respect to a securitization of non-QRM loans than if the bank had retained the entire portfolio of loans. This may create a disincentive to originate non-QRM loans, which may decrease demand for our private mortgage insurance products in the non-QRM market.
On December 22, 2014, the BCBS released a new proposed guideline that revised the previous risk-weighting guideline. Unlike the previous international guidelines, this new proposal no longer assigns a 35% risk weight to residential real estate assets. Instead, risk weights vary based on LTV and DTI. In calculating LTV, the loan amount is gross of any credit risk mitigant such as private mortgage insurance. The proposal also includes revisions to provisions in Basel III that allow for the substitution of risk weighting of a credit enhancement for that of the underlying exposure. The BCBS is seeking comment on its December proposal through March 15, 2015. Following consideration of the comments received, it is possible that newly revised risk weighting guidelines may be proposed and that the U.S. bank regulators may consider changes to the existing rules. It is unclear whether new guidelines will be proposed or finalized.
See “Item 1A. Risk Factors — The implementation of the Basel III guidelines may discourage the use of mortgage insurance.”


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E.
Foreign Regulation
By reason of Radian Insurance’s authorization, in September 2006, to conduct insurance business through a branch in Hong Kong, we are subject to regulation by the Hong Kong Insurance Authority (“HKIA”). The HKIA’s principal purpose is to supervise and regulate the insurance industry, primarily for the protection of policyholders and the stability of the industry. Hong Kong insurers are required by the Insurance Companies Ordinance to maintain minimum capital as well as an excess of assets over liabilities of not less than a required solvency margin, which is determined on the basis of a statutory formula. Foreign-owned insurers are also required to maintain assets in Hong Kong in an amount sufficient to ensure that assets will be available in Hong Kong to meet the claims of Hong Kong policyholders if the insurer should become insolvent. The HKIA also reviews the backgrounds and qualifications of insurance companies’ directors and key local management to ensure that these “controllers” are “fit and proper” to hold their positions and has the authority to approve or disapprove key appointments.

VII.
Employees
At December 31, 2014, we had 1,702 employees, with 59 individuals employed by Radian Group, and 906, 702 and 35 individuals employed in our MRES, mortgage insurance and financial guaranty businesses, respectively. Management considers employee relations to be good.




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Item 1A.
Risk Factors.
Radian Guaranty may be unable to comply with applicable GSE eligibility requirements, including the final PMIERs, which if adopted in their current proposed form, could negatively impact Radian Guaranty’s expected return on equity, decrease Radian Guaranty’s NIW, and subject Radian Guaranty to extensive and more stringent operational requirements.
In order to be eligible to insure loans purchased by the GSEs, mortgage insurers must meet the GSEs’ eligibility requirements. If we are unable to satisfy one or more of these requirements, Freddie Mac and/or Fannie Mae could restrict Radian Guaranty from conducting certain types of business with them or take actions that may include not purchasing loans insured by Radian Guaranty.
The current GSE eligibility requirements, which are in the process of being revised, impose financial and capital requirements as well as limitations on the type of risk that may be insured, standards for the diversification of risk, procedures for claims handling, standards for acceptable underwriting practices, and standards for certain reinsurance cessions, among other things. In addition, under the existing GSE eligibility requirements, in order to maintain the highest level of eligibility, mortgage insurers are required to maintain certain specified financial strength ratings from at least two of the rating agencies. Because Radian Guaranty does not meet the financial strength rating requirements specified in the GSEs’ existing eligibility guidelines, Radian Guaranty currently is operating as an eligible insurer under remediation plans with the GSEs that describe how we intend to achieve consistent levels of operating profitability and ultimately regain higher financial strength ratings for Radian Guaranty. We cannot be certain whether, or for how long, either of the GSEs will continue to allow Radian Guaranty to operate as an eligible insurer under our remediation plans.
The GSEs are in the process of revising their eligibility requirements for private mortgage insurers. In September 2014, Fannie Mae notified us (and other private mortgage insurers operating under remediation plans), that for the period until the new eligibility requirements are finalized, Fannie Mae would be imposing additional terms and conditions for Radian Guaranty to maintain eligibility as a Fannie Mae approved mortgage insurer. In the event that Radian Guaranty fails to comply with the additional requirements, Fannie Mae may impose further conditions on Radian Guaranty, or may suspend or terminate its status as an eligible insurer. See Item 1. Business — Regulation — Direct Federal Regulation — GSE Requirements.”
On July 10, 2014, the FHFA released proposed PMIERs for public comment. The PMIERs, when finalized and effective, will establish the revised requirements that the GSEs will impose on private mortgage insurers, including Radian Guaranty, to remain eligible insurers of mortgage loans purchased by the GSEs. The proposed PMIERs include the PMIERs Financial Requirements that are expected to replace the capital adequacy standards under the current GSE eligibility requirements. The proposed PMIERs Financial Requirements require a mortgage insurer’s Available Assets to meet or exceed its Minimum Required Assets, which is an amount that is calculated based on net RIF and a variety of measures designed to evaluate credit quality. Among other things, the proposed PMIERs exclude from Available Assets: (i) an amount equal to Unearned Premium Reserves; and (ii) certain subsidiary capital, including Radian Guaranty’s capital that is attributable to its ownership of Radian Asset Assurance.
The public comment period for the proposed PMIERs ended on September 8, 2014. The FHFA is currently reviewing and considering input before adopting the final PMIERs. All aspects of the final PMIERs are expected to become effective 180 days after their final publication. Approved mortgage insurers that fail to meet the PMIERs Financial Requirements when they become effective may, at the GSE’s discretion, operate under a transition plan during an extended transition period of up to two years from the final publication date, and would continue to be eligible insurers during that period. We expect the final PMIERs to be published in the first half of 2015 and to become effective by the end of 2015. Based on an assumed final publication date of June 30, 2015, with an effective date of December 31, 2015, Radian Guaranty’s estimated net shortfall in Available Assets would be approximately $350 million as of December 31, 2015, after giving consideration to existing holding company cash balances of $670 million and approximately $790 million in anticipated proceeds from the pending sale of Radian Asset Assurance. We have derived these estimates independently and without verification from the GSEs. It is possible that the GSEs may apply the PMIERs differently than we have, which could change the size of our projected net shortfall in Available Assets. In order for Radian Guaranty to comply with the PMIERs Financial Requirements as proposed, we expect to contribute a substantial portion of our holding company cash and investments to Radian Guaranty, and also that we will be successful in: (1) completing the pending sale of Radian Asset Assurance to Assured pursuant to the Radian Asset Assurance Stock Purchase Agreement; and (2) leveraging other options such as commutations of existing risk or external reinsurance for a portion of our mortgage insurance RIF in a manner that provides capital relief and is compliant with the PMIERs. In the event we are unable to successfully execute these or similar transactions or strategies, or such transactions are not available on terms that are attractive to us, we may seek additional capital by incurring additional debt, by issuing additional equity, or by selling assets, which we may not be able to do on favorable terms, if at all.


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The amount of capital or capital relief that may be required to comply with the PMIERs also may be impacted by: (1) the performance of our mortgage insurance business, including our level of defaults, the losses we incur on new or existing defaults and the amount and credit characteristics of new business we write, among other factors; and (2) changes in the final PMIERs Financial Requirements from their proposed form that affect the amount of Radian Guaranty’s Minimum Required Assets or its Available Assets.
Although we expect to be able to retain Radian Guaranty’s eligibility status with the GSEs and to be able to comply with the final PMIERs, we cannot provide any assurance that this will occur. Loss of Radian Guaranty’s eligibility status with the GSEs would likely have an immediate and material adverse impact on the franchise value of our mortgage insurance business and our future prospects and a material negative impact on our results of operations and financial condition.
Absent a change in our mortgage insurance pricing, the more onerous financial requirements in the proposed PMIERs for NIW would likely have a negative impact on our returns on equity. Any potential change in our mortgage insurance pricing likely will depend on competition and our evaluation of projected risk-adjusted returns on the business we write, among other factors. An increase in pricing may not be feasible for a number of reasons, including competition from other private mortgage insurers, the FHA or other credit enhancement products.
The PMIERs Financial Requirements are most pronounced for delinquent loans, loans written between 2005 and 2008 that have not been refinanced through HARP and loans with higher LTVs and lower FICO scores. As a result, there is a possibility that we may choose to limit the type of business we are willing to write to avoid the increased financial requirements and the higher likelihood of default that are associated with loans with higher LTVs and lower FICO scores. This could reduce the amount of NIW we write, which could reduce our revenues.
The proposed PMIERs contain requirements related to the operations of our mortgage insurance business, including extensive and more stringent operational requirements in areas such as claim processing, loss mitigation, document retention, underwriting, quality control, reporting and monitoring, among others. The requirements in the proposed PMIERs, if adopted in their current form, could require changes to our business practices that may result in substantial additional costs in order to achieve and maintain compliance with the PMIERs.
Our insurance subsidiaries are subject to comprehensive state insurance regulations and other requirements, including capital adequacy measures, which if we fail to satisfy, could limit our ability to write new insurance and increase restrictions and requirements placed on our insurance subsidiaries.
We and our insurance subsidiaries are subject to comprehensive, detailed regulation by the insurance departments in each of the states where they are licensed to transact business. These regulations are principally designed for the protection of our insurance policyholders rather than for the benefit of investors. Insurance laws vary from state to state, but generally grant 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 company’s ability to write new business.
The state insurance regulators impose various capital requirements on our insurance subsidiaries. These include risk-to-capital ratios, other risk-based capital measures and surplus requirements that potentially may limit the amount of insurance that our insurance subsidiaries may write. State insurance regulators also possess significant discretion with respect to our insurance subsidiaries. Our failure to maintain adequate levels of capital, among other things, could lead to intervention by the various insurance regulatory authorities, which could materially and adversely affect our business, business prospects and financial condition.
Under state insurance regulations, Radian Guaranty is required to maintain minimum surplus levels and, in certain states, a minimum ratio of statutory capital relative to the level of net RIF, or “risk-to-capital.” The sixteen RBC States currently impose a Statutory RBC Requirement. The most common Statutory RBC Requirement is that a mortgage insurer’s Risk-to-capital may not exceed 25 to 1. In certain of the RBC States, there is a Statutory RBC Requirement that the mortgage insurer must satisfy a MPP Requirement. The statutory capital requirements for the non-RBC States are de minimis (ranging from $1 million to $5 million); however, the insurance laws of these states generally grant broad supervisory powers to state agencies or officials to enforce rules or exercise discretion affecting almost every significant aspect of the insurance business, including the power to revoke or restrict an insurance company’s ability to write new business. Unless an RBC State grants a waiver or other form of relief, if a mortgage insurer is not in compliance with the Statutory RBC Requirement of such state, that mortgage insurer may be prohibited from writing new mortgage insurance business in that state. Radian Guaranty’s domiciliary state, Pennsylvania, is not one of the RBC States. As of December 31, 2014, Radian Guaranty’s Risk-to-capital, after giving effect to a $100 million capital contribution from Radian Group in February 2015, was 17.9 to 1 and Radian Guaranty was in compliance with all applicable Statutory RBC Requirements.


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Absent an increase in capital, including through statutory income, Radian Guaranty’s Risk-to-capital generally increases if we increase our net RIF or if we incur operating losses. With respect to incurred losses, the ultimate amount and timing of any future incurred losses will depend, in part, on general economic conditions and other factors, including the health of credit markets, home prices and unemployment rates, all of which are difficult to predict and beyond our control. Our mortgage insurance incurred losses are driven primarily by new mortgage insurance defaults and changes in the assumptions used to determine our loss reserves. Establishing loss reserves in our businesses requires significant judgment by management with respect to the likelihood, magnitude and timing of anticipated losses. If the actual losses we ultimately realize are in excess of the loss estimates we use in establishing loss reserves, we may be required to take unexpected charges to income, which could adversely affect Radian Guaranty’s statutory capital position.
We use reinsurance from affiliated companies to support Radian Guaranty’s risk-to-capital ratio. Certain of these affiliated reinsurance companies have required, and may in the future require, additional capital contributions from Radian Group. If we are limited in, or prohibited from, using these reinsurance arrangements to reduce Radian Guaranty’s risk, including as a result of any new eligibility requirements adopted by the GSEs, it would adversely affect Radian Guaranty’s risk-to-capital position.
In addition to the proposed new GSE eligibility guidelines, the NAIC is in the process of reviewing the minimum capital and surplus requirements for mortgage insurers and considering changes to the Model Act. While the outcome of this process is not known, it is possible that among other changes, the NAIC will recommend and adopt more stringent capital requirements that could increase the capital requirements for Radian Guaranty in states that adopt the new Model Act.
If Radian Guaranty is not in compliance with a state’s applicable Statutory RBC Requirement, it may be prohibited from writing new business in that state until it is back in compliance or it receives a waiver of, or similar relief from, the requirement. In those states that do not have a Statutory RBC Requirement, it is not clear what actions the applicable state regulators would take if a mortgage insurer fails to meet the Statutory RBC Requirement established by another state. Accordingly, if Radian Guaranty were to fail to meet the Statutory RBC Requirement in one or more states, it could be required to suspend writing business in some or all of the states in which it does business. In addition, the GSEs and our mortgage lending customers may decide not to conduct new business with Radian Guaranty (or may reduce current business levels) or impose restrictions on Radian Guaranty while its capital position remained at such levels. The franchise value of our mortgage insurance business would likely 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.
Our existing capital resources may not be sufficient to successfully manage Radian Guaranty’s regulatory capital requirements. See “Radian Group’s sources of liquidity may be insufficient to fund its obligations.
Failure to complete the sale of Radian Asset Assurance pursuant to the Radian Asset Assurance Stock Purchase Agreement could negatively impact our business and our financial condition, and could adversely impact Radian Guaranty’s ability to comply with the PMIERs Financial Requirements.
On December 22, 2014, Radian Guaranty entered into the Radian Asset Assurance Stock Purchase Agreement to sell 100% of the issued and outstanding shares of Radian Asset Assurance to Assured, for a purchase price of approximately $810 million, subject to certain adjustments. After closing costs and other adjustments, we expect net cash proceeds of approximately $790 million from the sale. The completion of the sale is subject to customary closing conditions, including regulatory approval from the state insurance departments of Maryland, New York and California. The Radian Asset Assurance Stock Purchase Agreement also may be terminated by either party, subject to certain conditions, if the sale has not been completed by September 22, 2015. Although we currently expect to complete the sale of Radian Asset Assurance during the first half of 2015, we can provide no assurance that the closing conditions will be satisfied, including the receipt of required regulatory approvals, or whether the transaction otherwise will be completed.


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The sale of Radian Asset Assurance is a critical component of our strategy to accelerate Radian Guaranty’s ability to comply with the proposed PMIERs Financial Requirements. Although we expect that the conditions to closing will be satisfied and that the sale of Radian Asset Assurance will be completed pursuant to the Radian Asset Assurance Stock Purchase Agreement, there can be no assurance that this will occur. If we are unable to complete the sale of Radian Asset Assurance in time to satisfy the PMIERs Financial Requirements once they become effective, there can be no assurance that we will be able to implement an alternative transaction to successfully monetize Radian Asset Assurance or to otherwise utilize the capital in Radian Asset Assurance such that we are provided credit for such capital under the PMIERs Financial Requirements. If we are able to implement an alternative transaction, there can be no assurance that we would receive the same or greater value for Radian Asset Assurance than is provided for under the Radian Asset Assurance Stock Purchase Agreement. If we are unable to complete the transaction under the terms of the Radian Asset Assurance Stock Purchase Agreement or an alternative transaction, in order to comply with the PMIERs Financial Requirements, we may be required to seek additional capital or capital relief by increasing the amount of reinsurance we are planning to utilize or by incurring additional debt, by issuing additional equity, or by selling assets, which we may not be able to do on favorable terms, if at all.
In the past, the assets and liabilities associated with the financial guaranty business have been a source of significant volatility to our results of operations due to various factors, including fluctuations in fair value and credit risk. As a result of the Radian Asset Assurance Stock Purchase Agreement, we have reclassified the operating results related to the pending disposition of Radian Asset Assurance as discontinued operations. In addition, due to the pending disposition, we are no longer reporting a financial guaranty business segment and we do not expect the financial results of Radian Asset Assurance to have an impact on Radian’s consolidated net income after December 31, 2014. In the event that the sale is not completed and Radian Asset Assurance is no longer classified as held for sale, we would not realize a loss on the sale of Radian Asset Assurance and the financial results of Radian Asset Assurance would have an impact on Radian Group’s consolidated net income. In addition, failure to complete the sale of Radian Asset Assurance pursuant to the Radian Asset Assurance Stock Purchase Agreement would likely make it more difficult, and potentially more costly, for Radian Guaranty to comply with the PMIERs Financial Requirements and could negatively impact the franchise value of our mortgage insurance business.
The credit performance of our insured portfolio is impacted by macroeconomic conditions and specific events that affect the ability of borrowers to satisfy mortgage obligations.
As a seller of credit protection, our results are subject to macroeconomic conditions and specific events that impact the credit performance of our underlying insured assets. Many of these conditions are beyond our control, including national and regional economic conditions, housing prices, unemployment levels, interest rate changes, the availability of credit and other factors. In general, favorable economic conditions increase the likelihood that borrowers will be able to satisfy their mortgage obligations and also have a positive impact on the value of homes. Conversely, a deterioration in economic conditions generally decreases the likelihood that borrowers will have sufficient income to satisfy their mortgage obligations and can also adversely affect housing values, which in turn can influence the willingness of borrowers to continue to make mortgage payments despite having the financial resources to do so.
Mortgage defaults also can occur due to a variety of specific events affecting borrowers, including death or illness, divorce or other family problems, unemployment, increases in the interest rates of adjustable rate mortgages, changes in regional economic conditions, and housing value changes that cause the outstanding mortgage amount to exceed the value of a home or other events.
The financial crisis and the downturn in the U.S. housing and related credit markets that began in 2007 had a significant negative impact on the operating environment and results of operations for our mortgage insurance business. Although there has been continued improvement in the U.S. economy and the operating environment for our mortgage insurance business, the U.S. economy and certain housing markets are still recovering and, in many areas, are still weak compared to historical standards. As a result, it is difficult to predict with any degree of certainty the ultimate loss performance on our insured portfolio. While we expect the economy and housing market will continue to recover and strengthen in 2015 and that our mortgage insurance incurred losses will continue to improve, these expectations are based on factors that are beyond our control, and therefore, we can provide no assurance whether our projections will prove to be accurate.
In addition to the factors cited above, our results of operations and financial condition could be negatively impacted by natural disasters or other catastrophic events, acts of terrorism, war or other severe conflicts, event-specific economic depressions or other harmful events in the regions, including in foreign countries, where we do business or have insured exposure.


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The length of time that our policies remain in force could decline and result in a decrease in our actual versus projected revenue.
In each year, most of our earned premiums are derived from insurance that was written in prior years. As a result, the length of time insurance remains in force, which is also generally referred to as persistency, is a significant determinant of our revenues. The factors affecting the length of time that our insurance remains in force include:
the mortgage interest rates being offered in the market compared to the mortgage rates on our insurance in force, which affects the vulnerability of our insurance in force to refinancings (i.e., lower current interest rates make it more attractive for borrowers to refinance and receive a lower interest rate);
applicable policies for mortgage insurance cancellation, along with the current value of the homes underlying the mortgages in our insurance in force;
the credit policies of lenders, which may make it more difficult for homeowners to refinance loans; and
economic conditions that can affect a borrower’s decision to pay-off a mortgage earlier than required.
Current mortgage interest rates are at or near historic lows, and therefore, the risk of refinancing remains elevated in today’s mortgage market. Our revenues might be negatively impacted if the length of time that our policies remain in force declines as a result of any of the factors highlighted above.
Our loss mitigation strategies are less effective during poor economic environments and in weaker housing markets.
The amount of mortgage insurance loss we suffer depends in part on the extent to which the home of a borrower who has defaulted on a mortgage can be sold for an amount that will cover the unpaid principal and interest on the mortgage and the expenses of the sale. In the event of a claim under our Master Policies, we generally have the option of paying the entire loss amount and taking title to a mortgaged property or paying our coverage percentage. In the past, during strong housing markets, we were able to take title to properties underlying certain defaulted loans and sell the properties at prices that allowed us to recover some or all of our losses. However, in more recent years, our ability to mitigate our losses in this manner has been significantly reduced. Further, in certain cases and subject to certain conditions, we consent to a sale of the property by the borrower for less than the amount needed to cover the borrower’s mortgage obligation (a “short sale”), which often has the effect of reducing our ultimate claim payment obligation. Under our Master Policies, we retain the right to consent prior to the consummation of any short sales. However, we have entered into agreements with each of the GSEs (with respect to loans owned by the GSEs) and with certain loan servicers pursuant to which we have delegated to them our prior consent rights with respect to short sales, subject to certain conditions, and as a result, we do not review the transactions effected pursuant to this delegated authority prior to the short sale. If housing values decline on either a broad geographic basis or in the regions where our business is concentrated, the frequency of defaulted loans resulting in claims under our policies could increase and our ability to mitigate our losses on defaulted mortgages through short sales or through the resale of properties we acquire may be reduced, which could have a material adverse effect on our business, financial condition and results of operations.
We expect a reduced level of Loss Mitigation Activity with respect to the claims we receive and further Loss Mitigation Activities may negatively impact our relationships with customers.
Following the financial crisis, the amount of insurance we rescinded due to fraud, misrepresentation, underwriting negligence or other non-compliance with our insurance policies increased significantly. Likewise, the number of claims that we denied also increased, primarily due to the inability of our servicing customers to provide the loan origination file or other servicing records that are necessary for our review in order to perfect a claim. These rescissions and denials have materially mitigated our paid losses and resulted in a significant reduction in our loss reserves. More recently, our level of Loss Mitigation Activity has been decreasing, although it still remains elevated compared to historical levels.
In addition, as part of our claims review process, we assess whether defaulted loans were serviced appropriately in accordance with our insurance policies and servicing guidelines. To the extent a servicer has failed to satisfy its servicing obligations, our policies provide that we may curtail the claim payment for such default, and in some circumstances, cancel coverage or deny the claim. Since 2011, claim curtailments have increased both in frequency and in size, which has contributed to a reduction in the severity of our claim payments during this period. We cannot give assurance regarding the extent or level at which such claim curtailments will continue.
As our Legacy Portfolio has become a smaller percentage of our overall insured portfolio, there has been a decrease in the amount of Loss Mitigation Activity with respect to the claims we receive, and we expect this trend to continue. As a result, our future Loss Mitigation Activity is not expected to mitigate our paid losses to the same extent as in prior years.


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Our Loss Mitigation Activities have resulted in disputes with our customers, which has heightened the risk of litigation and in some cases, damaged our relationships with certain customers. While we have resolved many of our disputes, a risk remains that our Loss Mitigation Activities could have a negative impact on our relationships with customers or potential customers, including the potential loss of business. Further, if ongoing disputes continue and are not resolved, it could result in arbitration or judicial proceedings.
Because most of the mortgage loans that we insure are sold to Freddie Mac and Fannie Mae, changes in their charters or business practices could significantly impact our mortgage insurance business.
The GSEs are the beneficiaries of the majority of our mortgage insurance policies. The GSEs’ federal charters generally prohibit them from purchasing any mortgage with a loan amount that exceeds 80% of a home’s value, unless that mortgage is insured by a qualified mortgage insurer, the mortgage seller retains at least a 10% participation in the loan or the seller agrees to repurchase or replace the loan in the event of a default. As a result, high-LTV mortgages purchased by the GSEs generally are insured with private mortgage insurance. Changes in the charters or business practices of either of the GSEs, including as a result of developments in the regulatory environment in which they operate, could reduce the number of mortgages they purchase that are insured by us and consequently diminish our franchise value.
The GSEs’ business practices may be impacted by their results of operations, as well as by legislative or regulatory changes governing their operations. In July 2008, an overhaul of regulatory oversight of the GSEs was enacted, and in September 2008, the FHFA was appointed as the conservator of the GSEs to control and direct the operations of the GSEs. The FHFA annually releases a strategic plan for the next phase of the conservatorship. The strategic plan announced for 2015 includes development of a single platform infrastructure for the mortgage market, planned regulations for the treatment of long-delinquent non-performing loans, the PMIERs, review of LLPAs and guarantee fees, efforts to increase the size and diversity of risk share transactions to reduce the role of the GSEs, increasing private sector participation and maintaining liquidity in the mortgage market and general mortgage credit availability. The continued role of the conservator may increase the likelihood that the business practices of the GSEs will be changed, and potentially in ways that may have an adverse effect on us.
With respect to loans purchased by the GSEs, changes in the business practices of the GSEs which can be implemented by the GSEs acting independently or through their conservator, the FHFA, could negatively impact our mortgage insurance business and financial performance, including:
implementation of new eligibility requirements for mortgage insurers, including more onerous capital standards (see “Radian Guaranty may be unable to comply with applicable GSE eligibility requirements, including the final PMIERs, which if adopted in their current proposed form, could negatively impact Radian Guaranty’s expected return on equity, decrease Radian Guaranty’s NIW, and subject Radian Guaranty to extensive and more stringent operational requirements.”);
changing the underwriting standards on mortgages they purchase;
establishing policies or requirements that may result in a reduction in the number of mortgages they acquire;
altering the national conforming loan limit for mortgages acquired by them;
altering the terms on which mortgage insurance coverage may be canceled before reaching the cancellation thresholds established by law;
changing the terms required to be included in mortgage insurance policies they acquire;
requiring private mortgage insurers to perform specified activities intended to avoid or mitigate loss on insured mortgages that are in default;
changing the amount of LLPAs or guarantee fees (which may result in a higher cost to borrowers) that the GSEs charge on loans that require mortgage insurance (see “Our mortgage insurance business faces intense competition.”);
intervening in mortgage insurers’ rescission practices or settlements with servicers; and
influencing a mortgage lender’s selection of the mortgage insurer providing coverage.


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Certain of the GSEs’ programs require less insurance coverage than they historically have required, and they have the ability to further reduce coverage requirements, which could reduce the amount of mortgage insurance they purchase from us, and consequently could adversely affect our results of operations. For a number of years, the GSEs have had programs under which lenders could choose, for certain loans, a mortgage insurance coverage percentage that was the minimum required by the GSEs’ charters, with the GSEs paying a lower price for these loans (“charter coverage”). In 2010, Fannie Mae broadly expanded the types of loans eligible for charter coverage. To the extent lenders selling loans to Fannie Mae choose charter coverage for loans that we insure, our revenues would likely be reduced.
The future structure of the residential housing finance system remains uncertain, including the impact of any changes on our business. In February 2011, the Obama Administration released a proposal to reform the U.S. housing finance market. In its proposal, the Obama Administration sought to gradually reduce the federal government’s role in housing finance, including the ultimate wind-down of the GSEs, and to increase the role of private capital. The Obama Administration’s proposal has shaped the debate in Congress as the Senate Banking Committee and the House Financial Services Committee have each introduced and considered legislation to reform the housing finance market. The placement of the GSEs into the conservatorship of the FHFA increases the likelihood that Congress will address the role and purpose of the GSEs in the U.S. housing finance market, however, it remains unclear whether housing finance reform legislation will be adopted and, if so, what form it will ultimately take.
Although we believe that traditional private mortgage insurance will continue to play an important role in any future housing finance structure, new federal legislation could reduce the level of private mortgage insurance coverage used by the GSEs as credit enhancement, or even eliminate the requirement, which would reduce our available market and could adversely affect our mortgage insurance business.
A decrease in the volume of home mortgage originations could result in fewer opportunities for us to write new insurance business and reduce our NIW.
The amount of new business we write depends, among other things, on a steady flow of low down payment mortgages that require our mortgage insurance. Factors that affect the volume of low down payment mortgage originations include:
restrictions on mortgage credit due to more stringent lender underwriting standards, more restrictive regulatory requirements such as the required ability-to-pay determination prior to extending credit and liquidity issues affecting lenders;
the level of home mortgage interest rates;
the health of the domestic economy as well as conditions in regional and local economies;
housing affordability;
population trends, including the rate of household formation;
the rate of home price appreciation, which can affect whether refinance loans have loan-to-value ratios that require private mortgage insurance;
government housing policy encouraging loans to first-time homebuyers; and
the extent to which the guaranty fees, LLPAs, credit underwriting guidelines and other business terms provided by the GSEs affect lenders’ willingness to extend credit for low down payment mortgages.
In addition, losses from the financial crisis and housing downturn caused lenders to substantially reduce the availability of these low down payment loans and to significantly tighten their underwriting standards. Fewer loan products and more restrictive loan qualifications, while improving the overall quality of new mortgage originations, have in turn reduced the number of qualified homebuyers and made it more difficult for buyers (in particular first-time buyers) to obtain mortgage financing or to refinance their existing mortgages. In addition, the significant disruption in the housing and related credit markets that began in 2007 led to reduced investor demand for mortgage loans and MBS in the secondary market, which historically has been a source of funding for many mortgage lenders. This significantly reduced liquidity in the mortgage funding marketplace has forced many lenders to retain a larger portion of their mortgage loans and MBS and has left them with less capacity to continue to originate new mortgages.


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Total domestic mortgage originations have decreased significantly from the $2.7 trillion in 2006 (pre-dating the housing downturn) to approximately $1.2 trillion. If the volume of new mortgage originations continues to remain at low levels for a prolonged period, we will likely experience a reduced opportunity to write new insurance business and will be subject to increased competition with respect to that opportunity, which could reduce the size of our mortgage insurance business and have a significant negative effect on our returns on new business, our ability to execute our business plans and our overall franchise value. See “Our mortgage insurance business faces intense competition.” Further, the Dodd-Frank Act’s reforms to strengthen lending standards, improve underwriting standards and increase accountability in the loan origination and securitization processes could further reduce the total number of mortgage originations in the future, in particular with respect to the high-LTV market.
Our NIW and franchise value could decline if we lose business from significant customers.
Our mortgage insurance business depends on our relationships with our customers, and in particular, our relationships with our largest lending customers. Our customers place insurance with us directly on loans that they originate and they also do business with us indirectly through purchases of loans that already have our mortgage insurance coverage. Our relationships with our customers may influence both the amount of business they do with us directly and also their willingness to continue to approve us as a mortgage insurance provider for loans that they purchase. The loss of business from significant customers could have an adverse effect on the amount of new business we are able to write, and consequently, our franchise value.
During 2014, our top 10 mortgage insurance customers (measured by NIW) were generally responsible for 22.9% of our primary NIW in that year. For the past several years we have been focused on expanding and diversifying our customer base. While we have been successful in this initiative, maintaining our business relationships and business volumes with our largest lending customers remains critical to the success of our business.
In response to the financial crisis and the related deterioration in housing markets, we tightened our underwriting guidelines, and as a result, we declined to insure some of the loans originated by our larger customers. We also increased our Loss Mitigation Activities to enforce our rights under our mortgage insurance policies with respect to loans originated during a period of historically poor underwriting and a subsequent period of servicing problems that increased our risk of loss. Our more restrictive underwriting guidelines and increased level of Loss Mitigation Activity have negatively affected our relationships with certain of our customers and in some cases have resulted in customers choosing to limit the amount of business they conduct with us or ceasing to do business with us entirely. While we have taken steps to resolve our past disputes with many of our customers, a risk remains that customers will choose to reduce the amount of business they do with us due to our past Loss Mitigation Activities or actions we may take in the future. See “We expect a reduced level of Loss Mitigation Activity with respect to the claims we receive and further Loss Mitigation Activities may negatively impact our relationships with customers.
Although we have taken steps to significantly expand and diversify our customer base in recent years, we cannot be certain that any loss of business from significant customers, or any single lender, would be replaced by other customers, existing or new. As a result of current market conditions and increased regulatory requirements, our lending customers may decide to write business only with a limited number of mortgage insurers or only with certain mortgage insurers, based on their views with respect to an insurer’s pricing, service levels, underwriting guidelines, loss mitigation practices, financial strength or other factors. Alternatively, in light of the increased number of participants in the private mortgage insurance industry, certain of our customers have chosen for risk management purposes to diversify and expand the number of mortgage insurers with which they do business, which has negatively affected our level of NIW and market share with such customers. Given the amount of business we currently do with many of our customers, it is possible that further diversification could continue, which could have a negative impact on our NIW if we are unable to mitigate the market share loss through new customers or increases in business with other customers.
Our mortgage insurance business faces intense competition.
The U.S. mortgage insurance industry is highly competitive. Our competitors include other private mortgage insurers and federal and state governmental and quasi-governmental agencies, principally the FHA.


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We compete with other private mortgage insurers on the basis of price, terms and conditions, customer relationships, reputation, perceived ability to comply with applicable capital and other financial strength requirements (including projected compliance with the PMIERs) and overall service. The improvement in the credit quality of new loans being insured in the current market, combined with the deterioration of the financial positions of many existing private mortgage insurance companies during the financial crisis (which led insurance regulators to take action with respect to certain companies) has brought new entrants to our industry and could encourage additional new competitors. Radian Guaranty currently competes with six other private mortgage insurers eligible to write business for the GSEs. Certain of our private mortgage insurance competitors have stronger financial strength ratings than Radian Guaranty and are subsidiaries of larger corporations that may have greater access to capital and financial resources than we do. In addition, three of our competitors who are new entrants to the industry are not burdened by legacy credit risks. If we are unable to compete with other providers, including new entrants that are not burdened by legacy credit risks or by Loss Mitigation Activities on legacy insurance portfolios, it could have a material adverse effect on our business position, financial condition and operating results.
We also compete with governmental and quasi-governmental entities that typically do not have the same capital requirements or business objectives that we and other private mortgage insurance companies have, and therefore, may have greater financial flexibility in their pricing guidelines and capacity that could put us at a competitive disadvantage. In the event that a government-owned entity in one of our markets decides to reduce prices significantly or alter the terms and conditions of its mortgage insurance or other credit enhancement products in furtherance of political, social or other goals rather than a profit motive, we may be unable to compete in that market effectively, which could have an adverse effect on our business, financial condition and operating results.
Beginning in 2008, the FHA, which historically had not been a significant competitor, substantially increased its share of the mortgage insurance market, including by insuring a number of loans that would meet our current underwriting guidelines, sometimes at a lower monthly cost to the borrower than a loan that carries our mortgage insurance. Since 2010, the private mortgage insurance industry has been recapturing market share from the FHA, primarily due to increases in the financial strength of private mortgage insurers, including Radian Guaranty, the development of new products and marketing efforts directed at competing with the FHA, increases in the FHA’s pricing, the Department of Justice’s pursuit of legal remedies against lenders doing business with the FHA, as well as various policy changes at the FHA, such as reversing a past FHA policy that cancelled premiums for mortgage insurance coverage on certain loans once the loans had been paid down below a certain percentage. More recently, in January 2015, the FHA announced a 50 basis point reduction to its annual mortgage insurance premium which may adversely impact our competitiveness on certain high LTV loans to borrowers with FICO scores below 720.
Although the FHA’s market share has been gradually declining, the FHA may continue to maintain a strong market position and could increase its market position again in the future. Factors that could cause the FHA to maintain or increase its share of the mortgage insurance market include:
governmental policy, including further decreases in the pricing of FHA insurance or changes in the terms of such insurance;
past and potential future capital constraints of the private mortgage insurance industry;
the tightening by private mortgage insurers of underwriting guidelines based on past loan performance or other risk concerns;
the increased levels of Loss Mitigation Activity by private mortgage insurers on older vintage portfolios compared to the FHA’s historical practice of engaging in limited Loss Mitigation Activities;
a decrease in the Department of Justice’s pursuit of remedies against lenders doing business with the FHA;
increases in the LLPAs charged by the GSEs on loans that require mortgage insurance and changes in the amount of guarantee fees for the loans that the GSEs acquire (which may result in higher cost to borrowers);
the perceived operational ease of using FHA insurance compared to the products of private mortgage insurers; and
the implementation of new regulations under the Dodd-Frank Act and the Basel III guidelines that may be more favorable to the FHA compared to private mortgage insurers (see “Item 1. Business—Regulation—Other Federal Regulation—The Dodd-Frank Act.” and The implementation of the Basel III guidelines may discourage the use of mortgage insurance).


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One or more private mortgage insurers may seek to regain market share from the FHA or other mortgage insurers by reducing pricing, loosening their underwriting guidelines, or relaxing their loss mitigation practices, which could, in turn, improve their competitive position in the industry and negatively impact our level of NIW. A decline in industry NIW might result in increased competition as certain private mortgage insurance companies may seek to maintain their NIW levels within a smaller market overall. In addition, as market conditions change, alternatives to traditional private mortgage insurance may develop which could reduce the demand for private mortgage insurance.
Our business depends, in part, on effective and reliable loan servicing.
We depend on reliable, consistent third-party servicing of the loans that we insure. Dependable servicing generally ensures timely billing and effective loss mitigation opportunities for delinquent or near-delinquent loans.
Challenging economic and market conditions following the financial crisis negatively affected the ability of many of our servicers to effectively maintain their servicing operations. In addition, the financial crisis and economic downturn led to a significant increase in the number of delinquent mortgage loans. These increases strained the resources of servicers, reducing their ability to undertake loss mitigation efforts in a timely manner, including the processing of potential loan modifications, which could help limit our losses. Further, due to the strain on the resources of servicers, delinquent loan servicing is increasingly being transferred to specialty servicers. The transfer of servicing can cause a disruption in the servicing of delinquent loans. Additionally, specialty servicers may not have sufficient resources to effectively handle the substantially higher volume of delinquent loans.
Recent state and federal inquiries and investigations into whether servicers have acted improperly in foreclosure proceedings, including the cost of and conditions imposed in settlements of such inquiries or investigations, have further strained the resources of servicers. In January 2014, the CFPB’s rules establishing national servicing standards for servicing residential mortgage loans became effective. These rules impose new and more burdensome requirements, procedures and standards and complying with the new rules may impact the servicing of mortgage loans covered by our insurance policies.
If a disruption occurs in the servicing of mortgage loans covered by our insurance policies, this, in turn, could contribute to a rise in delinquencies and/or claims among those loans, which could have a material adverse effect on our business, financial condition and operating results.
Loan modification, refinancing and other similar programs may not continue to provide us with a material benefit.
The Federal Deposit Insurance Corporation (“FDIC”), the GSEs and various lenders have adopted programs to modify loans to make them more affordable to borrowers with the goal of reducing the number of foreclosures. In 2008, the U.S. Treasury announced the Homeowner Affordability and Stability Plan to restructure or refinance mortgages to avoid foreclosures through: (1) refinancing mortgage loans through HARP; (2) modifying First- and Second-lien mortgage loans through HAMP and the Second Lien Modification Program; and (3) offering other alternatives to foreclosure through HAFA. For additional information about these loan modification programs and other initiatives, see “Item 1. Business—Regulation—Direct Federal Regulation.” These programs have benefited the composition and credit quality of our Legacy Portfolio. As of December 31, 2014, approximately 10% of our total primary mortgage insurance RIF had successfully completed a HARP refinance.
While modifications continue to be made under these programs, we expect the number of loans remaining in our mortgage insurance portfolio that will successfully complete a HARP refinance or other loan modification to decline. In addition, it is unclear how many successful loan modifications will result from these programs, in particular in light of the high level of re-default rates for loans that have been modified through these programs. To the extent modifications cure previously defaulted loans, our loss reserves do not account for potential re-defaults unless at the time the reserve is established, the re-default has already occurred. The expiration, termination or temporary cessation of any of these programs could result in an increased number of claims in our mortgage insurance business and could adversely affect our business and results of operations.
We cannot ascertain the total benefits we may derive from these loan modification programs, particularly given the uncertainty around the re-default rates for loans that have been modified through these programs. Re-defaults can result in losses that could be greater than we would have paid had the loan not been modified. If a mortgage balance is reduced as a result of a loan modification program, we may still be responsible under our Master Policies to pay the original balance if the borrower re-defaults on that mortgage after its balance has been reduced.


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The extended period of time that a loan remains in our delinquent loan inventory may increase the severity of claims we ultimately are required to pay.
Foreclosure backlogs may delay our receipt of claims, resulting in an increase in the period that a loan remains in our delinquent loan inventory, and may increase the severity of claims that we are ultimately required to pay. Over the past several years, the average time it takes to receive a claim associated with a defaulted loan has increased. This is, in part, due to new loss mitigation protocols established by servicers and to a significant backlog of foreclosure proceedings in many states, and especially in those states that impose a judicial process for foreclosures. Generally, foreclosure delays do not stop the accrual of interest or affect other expenses on a loan, and unless a loan is cured during such delay, once title to the property ultimately is obtained and a claim is filed, our paid claim amount may include additional interest and expenses, increasing the severity of claims we ultimately are required to pay.
Our success depends on our ability to assess and manage our underwriting risks; the premiums we charge may not be adequate to compensate us for our liability for losses and the amount of capital we are required to hold against our insured risks.
The estimates and expectations we use to establish premium rates are based on assumptions made at the time our insurance is written. See “Item 1. Business—Mortgage Insurance—Premium Rates.” Our mortgage insurance premiums are based on, among other items, the amount of capital we are required to hold against such risks and our long-term expected risk of claims on insured loans and take into account, among other factors, each loan’s LTV, type (e.g., prime vs. non-prime or fixed vs. variable payments), premium structure (e.g., single lump sum, monthly or other variations), term, coverage percentage and whether there is a deductible in front of our loss position. These assumptions may ultimately prove to be inaccurate. In particular, the predictive value of historical data may be less reliable during periods of greater economic stress and, accordingly, our ability to correctly estimate our premium requirements may be impaired during periods of economic uncertainty such as we have recently experienced.
We generally cannot cancel or elect not to renew the mortgage insurance we provide, and because we generally fix premium rates for the life of a policy when issued, we cannot adjust renewal premiums or otherwise adjust premiums during the life of a policy. Therefore, if the risk underlying many of the mortgage loans we have insured develops more adversely than we anticipated, including as a result of the ongoing weakness in many parts of the economy and in certain housing markets, and the premiums our customers are currently paying for similar coverage on new business from us and others has increased, we generally cannot increase the premium rates on this in-force business, or cancel coverage or elect not to renew coverage, to mitigate the effects of such adverse developments. Similarly, if the amount of capital we are required to hold against our insured risks increases from the amount we were required to hold at the time a policy was written, as we expect generally will be the case when the PMIERs Financial Requirements become effective, we cannot adjust the premiums to compensate for this, and, as a result, the returns on our business may be lower than we assumed or expected. Our premiums earned and the associated investment income on those premiums may ultimately prove to be inadequate to compensate for the losses that we may incur and may not provide an adequate return on increased capital that may be required. See The credit performance of our insured portfolio is impacted by macroeconomic conditions and specific events that affect the ability of borrowers to satisfy mortgage obligations.
Our delegated underwriting program may subject our mortgage insurance business to unanticipated claims.
In our mortgage insurance business, we enter into agreements with our mortgage lender customers that commit us to insure loans made by them using pre-established underwriting guidelines. Once we accept a lender into our delegated underwriting program, we generally insure a loan originated by that lender even if the lender has not followed our specified underwriting guidelines. Under this program, a lender could commit us to insure a material number of loans with unacceptable risk profiles before we discover the problem and terminate that lender’s delegated underwriting authority or pursue other rights that may be available to us, such as our rights to rescind coverage or deny claims.
We face risks associated with our contract underwriting business.
We provide contract underwriting services for certain of our mortgage lender customers, including on loans for which we are not providing mortgage insurance. Our contract underwriting program offers a limited indemnification in the event of a material underwriting error. We offer limited indemnification rights for underwriting errors with respect to those loans that we simultaneously underwrite for both secondary market compliance and for potential mortgage insurance eligibility and may, in certain circumstances, offer limited indemnification when we underwrite a loan only for secondary market compliance. See “Legislation and regulatory changes and interpretations could impact our businesses.”


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Our current credit ratings and the insurance financial strength ratings assigned to our mortgage insurance subsidiaries could weaken our competitive position.
Recently, the credit ratings of Radian Group and the insurance financial strength ratings assigned to our mortgage insurance subsidiaries have been subject to upgrades, reflecting the improvement in our overall financial condition and the operating environment for our business. Notwithstanding these upgrades, however, our ratings remain below investment grade and may be downgraded in the future. The current financial strength ratings for Radian Guaranty are Ba2 by Moody’s and BB- by S&P.
Historically, our ratings were critical to our ability to market our products and to maintain our competitive position and customer confidence in our products. In addition, in order to maintain the highest level of eligibility with the GSEs, mortgage insurers historically had to maintain an insurance financial strength rating of AA- or Aa3 from at least two of the three rating agencies by which they are customarily rated. Although Radian Guaranty’s ratings are substantially below those required ratings, the GSEs have allowed Radian Guaranty to operate under business and financial remediation plans and retain its eligibility status. In July 2014, the FHFA issued the proposed PMIERs, which do not include a specific ratings requirement.
Radian Guaranty’s financial strength ratings currently are below the ratings assigned to certain other private mortgage insurers, some of which have been assigned investment grade ratings. Despite this, we have been successful in competing in the private mortgage insurance market, and we do not believe our current ratings have had a material adverse affect on our relationships with customers. To the extent this changes, however, and financial strength ratings become a more prominent consideration for lenders, we may be competitively disadvantaged by customers choosing to do business with private mortgage insurers that have higher financial strength ratings.
We believe that financial strength ratings remain a significant consideration for participants seeking to secure credit enhancement in the non-GSE mortgage market, which includes most non-QM loans. While this market has remained limited since the financial crisis, we view this market as an area of potential future growth and our ability to participate in this market could depend on our ability to secure investment grade ratings for our mortgage insurance subsidiaries. In addition, if legislative or regulatory changes were to alter the current state of the housing finance industry such that the GSEs no longer operated in their current capacity, we may be forced to compete in a new marketplace in which financial strength ratings may play a greater role. If we are unable to compete effectively in the current or any future markets as a result of the financial strength ratings assigned to our mortgage insurance subsidiaries, the franchise value and future prospects for our mortgage insurance business could be negatively affected.
We expect to incur future losses beyond what we have recorded in our financial statements.
In accordance with industry practice, we do not establish reserves in our mortgage insurance business until we are notified that a borrower has failed to make at least two monthly payments when due. Because our mortgage insurance reserving does not account for the impact of future losses that we expect to incur with respect to performing (non-defaulted) loans, our obligation for ultimate losses that we expect to incur at any period end is not reflected in our financial statements, except to the extent that a premium deficiency exists. As a result, future losses beyond what we have recorded in our financial statements may have a material impact on future results as defaults occur.
If the estimates we use in establishing loss reserves are incorrect, we may be required to take unexpected charges to income, which could adversely affect our capital position.
We establish loss reserves in our mortgage insurance business to provide for the estimated cost of future claims. Because our reserves represent only our best estimate of claims to be paid in the future, these reserves may be insufficient to satisfy the full amount of claims that we ultimately have to pay. Setting our loss reserves requires significant judgment by management with respect to the likelihood, magnitude and timing of each potential loss, including an estimate of the impact of our Loss Mitigation Activities with respect to defaulted loans. The models, assumptions and estimates we use to establish loss reserves may not prove to be accurate, especially during an extended economic downturn or a period of extreme market volatility and uncertainty, such as we have recently experienced.


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Many of the programs and initiatives that have been implemented to prevent or forestall mortgage foreclosures, as well as the significant backlog of foreclosure proceedings in many states that impose a judicial process on such proceedings, have resulted in fewer defaulted loans moving to claim, and consequently, an increase in the aging of our inventory of defaulted loans. As a result, the number of our defaulted loans that have been in default for an extended period of time currently represent a much larger portion of our default inventory than has historically been the case. While these loans are generally assigned a higher loss reserve based on our belief that they are more likely to result in a claim, we also assume, based on historical trends, that a significant portion of these loans will cure or otherwise not result in a claim. Given the significant period of time that these loans have been in default, it is possible that the ultimate cure rate for these defaulted loans will be significantly less than historical rates, and therefore, less than our current estimates of cures for this inventory of defaults. Further, the foreclosure moratoriums and other delays have resulted in further aging of our defaulted loan portfolio, which has created additional uncertainty regarding the likelihood, magnitude and timing of anticipated losses. If our estimates are inadequate, we may be required to increase our reserves, which could have a material adverse effect on our financial condition, capital position and operating results.
In addition to establishing mortgage insurance loss reserves for defaulted loans, under GAAP, we are required to establish a premium deficiency reserve, or PDR, for our mortgage insurance products if the amount by which the net present value of expected future losses for a particular product and the expenses for such product exceeds the net present value of expected future premiums and existing reserves for such product. We evaluate whether a premium deficiency exists at the end of each fiscal quarter. As of December 31, 2014, a PDR of approximately $2.2 million existed for our Second-lien insurance business. Our evaluation of premium deficiency is based on our best estimate of future losses, expenses and premiums. This evaluation depends upon many significant assumptions, including assumptions regarding future macroeconomic conditions, and therefore, is inherently uncertain and may prove to be inaccurate. Although no premium deficiency existed on our First-lien insurance business at December 31, 2014, there can be no assurance that a PDR will not be required for this product or our other mortgage insurance products in future periods.
Our success depends, in part, on our ability to manage risks in our investment portfolio.
Our investment portfolio is our primary source of liquidity. We maintain an investment policy to manage our investments and those of our insurance subsidiaries. We may be forced to change our investments or investment policies depending upon regulatory, economic and market conditions and our existing or anticipated financial condition and operating requirements, including the tax position, of our business segments. In addition, if we underestimate our policy liabilities or improperly structure our investments to meet those liabilities, we could have unexpected losses, including losses resulting from the forced liquidation of investments before their maturity.
Our investment objectives may not be achieved. Although our portfolio consists mostly of highly-rated investments, the success of our investment strategy is affected by general economic conditions, 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, consequently, the value of our fixed-income securities. Volatility or lack of liquidity in the markets in which we hold positions has at times reduced the market value of some of our investments, and if this worsens substantially it could have a material adverse effect on our liquidity, financial condition and operating results.
Compared to historical averages, interest rates and investment yields on our investments generally have declined in recent years, which has reduced the investment income we generate. In addition, we have kept a larger portion of our investment portfolio in shorter maturity investments in order to meet the expected liquidity needs of our operating subsidiaries. This, in turn, has further reduced our investment income, as interest rates on short-term investments have been minimal. We depend on our investments as a source of revenue and a prolonged period of lower than expected investment yields would have an adverse impact on our revenues and could potentially adversely affect our results of operations.


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Radian Group’s sources of liquidity may be insufficient to fund its obligations.
Radian Group serves as the holding company for our operating subsidiaries and does not have any significant operations of its own. Radian Group’s principal liquidity demands are expected to include funds for: (i) additional capital support for Radian Guaranty; (ii) the payment of corporate expenses; (iii) interest payments on our outstanding long-term debt; (iv) the repayment of our outstanding long-term debt, including $195.5 million principal amount of outstanding debt due in June 2017, $450 million principal amount of convertible debt due in November 2017, and, at our option, any related conversion premium that we elect to settle in cash, potentially $400 million of convertible debt due in March 2019 for which the principal amount and any conversion premium may, at our option, be settled in cash, and $300 million principal amount of outstanding debt due in June 2019; (v) potential payments to the U.S. Treasury resulting from our dispute with the IRS relating to the examination of our 2000 through 2007 consolidated federal income tax returns by the IRS ( See “Resolution of our dispute with the IRS could adversely affect us..”); (vi) potential investments to support our long-term strategy of growing our fee-based businesses and diversifying our sources of revenues; and (vii) the payment of dividends on our common stock.
At December 31, 2014, Radian Group had immediately available, either directly or through an unregulated subsidiary, unrestricted cash and liquid investments of approximately $670 million, after giving effect to the $100 million capital contribution from Radian Guaranty in February 2015. The approximately $670 million of available cash and liquid investments as of December 31, 2014 excludes certain additional cash and liquid investments that have been advanced from our subsidiaries for corporate expenses and interest payments. Substantially all of Radian Group’s obligations to pay corporate expenses and interest payments on outstanding debt are reimbursed to Radian Group through the expense-sharing arrangements currently in place with its subsidiaries.
We expect the PMIERs Financial Requirements to be effective by the end of 2015. We currently expect that Radian Guaranty’s compliance with the PMIERs Financial Requirements as proposed will require Radian Group to contribute a substantial portion of its cash and investments to Radian Guaranty. The amount that we ultimately decide to contribute to Radian Guaranty will depend on, among other things, the amount of cash and investments that we plan to maintain at Radian Group to carry out our business strategy, and whether we are successful in: (1) completing the pending sale of Radian Asset Assurance to Assured pursuant to the Radian Asset Assurance Stock Purchase Agreement; and (2) leveraging other options such as commutations of existing risk or external reinsurance for a portion of our mortgage insurance RIF in a manner that provides capital relief and is compliant with the PMIERs. In the event we are unable to successfully execute these or similar transactions or strategies, or such transactions are not available on terms that are attractive to us, we may seek additional capital by incurring additional debt, by issuing additional equity, or by selling assets, which we may not be able to do on favorable terms, if at all.
Assuming that Radian Group contributes a substantial portion of its cash and investments to Radian Guaranty, our financial flexibility may be significantly reduced, leaving us with limited funds to satisfy our financial obligations, including our long-term debt that is scheduled to mature in June and November of 2017. In this case, we would expect to seek to refinance this long-term debt, which we may not be able to do on attractive terms, if at all.
Radian Group also could be required to provide capital support for Radian Guaranty and our other mortgage insurance subsidiaries if additional capital is required pursuant to insurance laws and regulations. The NAIC is in the process of reviewing the minimum capital and surplus requirements for mortgage insurers and considering changes to the Model Act. These changes could include more stringent capital requirements for Radian Guaranty, which, if adopted, could increase the capital requirements for Radian Guaranty in states that adopt the new Model Act. In addition, certain of our mortgage insurance subsidiaries that provide reinsurance to Radian Guaranty have required, and in the future may again require, additional capital contributions from Radian Group.
Cash flows from our investment portfolio, dividends from Clayton and Radian Guaranty and permitted payments to Radian Group under tax- and expense-sharing arrangements with our subsidiaries are Radian Group’s principal sources of cash. Radian Group expects to receive a modest amount of dividend payments over the next 12 months from positive cash flows generated by Clayton and these potential dividend payments would be adversely impacted if unanticipated events and circumstances were to result in lower earnings than expected. See “We face risks associated with our acquisition of Clayton and we may fail to realize the anticipated benefits of the Clayton acquisition.” We do not anticipate that Radian Guaranty will be permitted under applicable insurance laws to issue dividends to Radian Group for the foreseeable future in light of Radian Guaranty’s periods of operating losses. The expense-sharing arrangements between Radian Group and our insurance subsidiaries, as amended, have been approved by applicable state insurance departments, but such approval may be revoked at any time.


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In light of Radian Group’s long- and short-term needs, it is possible that our sources of liquidity could be insufficient to fund our obligations and could exceed currently available holding company funds. If this were to occur, we may need or otherwise may decide to increase our available liquidity by incurring additional debt, by issuing additional equity or by selling assets, any of which we may be unable to do on favorable terms, if at all.
Our reported earnings are subject to fluctuations based on changes in our trading securities and short-term investments that require us to adjust their fair market value and changes in our stock price impacting the fair value of certain stock-based compensation awards.
We have significant assets that we carry at fair value, with changes in fair market value recorded on our statements of operations each period. These assets include our trading securities and short-term investments. Because the changes in fair value of these financial instruments are reflected on our statements of operations, they have the potential to affect our reported earnings and create earnings volatility. Economic conditions, as well as adverse capital market conditions, including but not limited to, 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.
Under our long-term incentive compensation program, we currently have outstanding stock-based performance awards that are settled in cash. These awards mainly consist of performance-based RSU awards that were granted in 2012 and which vest in June 2015. For more information regarding these awards, see Note 15 of Notes to Consolidated Financial Statements. Because these awards are cash-settled, we are required to determine their fair value as of the end of each reporting period and to record any changes in their fair value within other operating expenses. As a result, any change in the fair value of these awards, which is highly correlated to changes in our stock price, can result in volatility in our results of operations during the periods that these awards remain outstanding.
Our information technology systems may fail or we may experience an interruption in their operation.
Our business is highly dependent on the effective operation of our information technology systems. Our information technology systems are vulnerable to damage or interruption from power outages, computer and telecommunications failures, computer viruses, cyber-attacks, security breaches, catastrophic events and errors in usage. Although we have disaster recovery and business continuity plans in place, we may not be able to adequately execute these plans in a timely fashion. We rely on our information technology systems for many enterprise-critical functions and a prolonged failure or interruption of these systems for any reason could cause significant disruption to our operations and have a material adverse effect on our business, financial condition and operating results.
We may lose business if we are unable to meet our customers’ technological demands.
Our ability to meet the needs of our customers is dependent on our ability to keep pace with technological advances and to invest in new technology as it becomes available or otherwise upgrade our technological capabilities. Participants in the mortgage insurance industry rely on e-commerce and other technologies to provide their products and services. Our customers generally require that we provide aspects of our products and services electronically and the percentage of our NIW and claims processing that we deliver electronically has continued to increase. We expect this trend to continue and, accordingly, we may not satisfy our customers’ requirements if we fail to invest sufficient resources or otherwise are unable to maintain and upgrade our technological capabilities. This may result in a decrease in the business we receive, which could negatively impact our business and results of operations.
Our information technology systems may become outdated and we may not be able to make timely modifications to support our products and services.
Our business is highly dependent on the effective operation of our information technology systems. Many of our information technology systems have been in place for a number of years. When we make changes to our existing products and services, or as new products with new features emerge, our systems require modification in order to support these products and process transactions appropriately. Making appropriate modifications to our systems involves inherent time lags and may require us to incur significant expenses. If we are unable to make necessary modifications to our systems in a timely and cost-effective manner or successfully upgrade our systems to avoid obsolescence of our information technology platform, our business, financial condition and operating results could be negatively affected.


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We are in the process of implementing a major technology project to improve our operating systems, including a new platform for our mortgage insurance underwriting, policy administration, claims management and billing processes. The project is intended to enhance our business and technological capabilities by increasing operational efficiencies and reducing complexity. The implementation of these technological improvements is complex, expensive, time consuming and, in certain respects, depends on the ability of third parties to perform their obligations in a timely manner. If we fail to timely and successfully implement the new technology systems and business processes, or if the systems do not operate as expected, it could have an adverse impact on our business, business prospects and results of operations.
The security of our information technology systems may be compromised and confidential information, including non-public personal information that we maintain, could be improperly disclosed.
Our information technology systems may be vulnerable to physical or electronic intrusions, computer viruses or other attacks. As part of our business, we, and certain of our subsidiaries and affiliates, maintain large amounts of confidential information, including non-public personal information on consumers and our employees. Breaches in security could result in the loss or misuse of this information, which could, in turn, result in potential regulatory actions or litigation, including material claims for damages, as well as interruption to our operations and damage to our reputation. While we believe we have appropriate information security policies and systems in place in order to prevent unauthorized use or disclosure of confidential information, including non-public personal information, there can be no assurance that such use or disclosure will not occur. Any compromise of the security of our information technology systems, or unauthorized use or disclosure of confidential information, could subject us to liability, damage our reputation and customer relationships and have a material adverse effect on our business, financial condition and operating results.
We are subject to the risk of litigation and regulatory proceedings.
We operate in highly regulated industries that inherently pose a heightened risk of litigation and regulatory proceedings. We currently are a party to material litigation and are subject to certain regulatory proceedings. The cost to defend these actions and the ultimate resolution of these matters could have a material adverse impact on our business, financial condition and results of operations. Additional lawsuits, regulatory proceedings and other matters may also arise in the future.
We and other private mortgage insurers currently are defendants in a series of putative class action lawsuits under RESPA with respect to our captive reinsurance agreements. In addition, we and other mortgage insurers have been, and with respect to the Minnesota Department of Commerce we currently are, subject to inquiries and investigative demands from state and federal governmental agencies requesting information relating to our captive reinsurance arrangements. See “Item 3. Legal Proceedings.” Various regulators, including the CFPB, state insurance commissioners or state attorneys general may bring additional actions or proceedings regarding our compliance with RESPA or other laws applicable to our businesses. We cannot predict whether additional actions or proceedings will be brought against us or the outcome of any such actions or proceedings.
During the period following the financial crisis, the amount of insurance we rescinded due to fraud, misrepresentation, underwriting negligence or other non-compliance with our insurance policies increased significantly and we denied a significant number of claims for failing to satisfy the claim perfection requirements under our Prior Master Policy. In more recent years, we have curtailed a significant number of claims as a result of servicers failing to satisfy the standards set forth in our Prior Master Policy and servicing guidelines, thereby increasing our risk of loss.
Our Loss Mitigation Activities and claim payment practices have resulted in disputes with our customers, which has heightened the risk of litigation and in some cases, damaged our relationships with certain customers. While we have resolved many of our remaining disputes, if we do not successfully resolve our continuing disputes, it could result in arbitration or judicial proceedings.
See also “Legislation and regulatory changes and interpretations could impact our businesses” and “Resolution of our dispute with the IRS could adversely affect us..”
Resolution of our dispute with the IRS could adversely affect us.
We are currently contesting proposed adjustments resulting from the examination by the IRS of our 2000 through 2007 consolidated federal income tax returns. The IRS opposes the recognition of certain tax losses and deductions that were generated through RGRI’s investment in a portfolio of non-economic REMIC residual interests and has proposed adjustments denying the associated tax benefits of these items. We appealed these proposed adjustments to Appeals and made “qualified deposits” with the U.S. Treasury in the amount of approximately $85 million in June 2008 relating to the 2000 through 2004 tax years and approximately $4 million in May 2010 relating to the 2005 through 2007 tax years to avoid the accrual of above-market-rate interest with respect to the proposed adjustments.


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Although we made several attempts to reach a compromised settlement with Appeals, on September 4, 2014, we received Notices of Deficiency covering the 2000 through 2007 tax years. The Notices of Deficiency exclude any potential benefit related to our NOL carryback ability and assert unpaid taxes and penalties related to the REMIC matters of approximately $157 million. As of December 31, 2014, there also would be interest of approximately $115 million related to these matters. Depending on the outcome, additional state income taxes, penalties and interest (in the aggregate estimated to be approximately $30 million) also may become due when a final resolution is reached. The Notices of Deficiency also reflected additional amounts due of approximately $105 million, which are primarily associated with the disallowance of the previously filed carryback of our 2008 NOL to the 2006 and 2007 tax years. We currently believe that the disallowance of our 2008 NOL carryback is a precautionary position by the IRS and that we will ultimately maintain the benefit of this NOL carryback claim.
On December 3, 2014, we petitioned the U.S. Tax Court to litigate the Deficiency Amount. The litigation could take several years to resolve and may result in substantial legal expenses. We can provide no assurance regarding the outcome of any such litigation or whether a compromised settlement with the IRS will ultimately be reached. If the ultimate resolution of this matter produces a result that differs materially from our current expectations, there could be a material impact on our effective tax rate, results of operations and cash flows.
Radian Group has assumed the obligation to pay RGRI’s portion of the liabilities associated with these tax matters by indemnifying RGRI for such liabilities, including any portion of the “qualified deposits” that is used to satisfy such liabilities. See “Radian Group’s sources of liquidity may be insufficient to fund its obligations.”
Our ability to recognize tax benefits on future U.S. tax losses and our existing U.S. loss positions may be limited under applicable tax laws.
We have generated substantial NOLs, loss carryforwards and other tax attributes for U.S. tax purposes that can be used to reduce our future federal income tax obligations. Our ability to fully utilize these tax assets (including NOLs of approximately $1.5 billion as of December 31, 2014) on a timely basis (i.e. to offset operating income as generated) will be adversely affected if we have an “ownership change” within the meaning of Section 382. An ownership change is generally defined as a greater than 50 percentage point increase in equity ownership by “five-percent shareholders” (as that term is defined for purposes of Section 382) in any three-year period. We may experience an “ownership change” in the future as a result of changes in our stock ownership.
On October 8, 2009, our Board adopted a Tax Benefit Preservation Plan (the “Plan”), which, as amended, was approved by our stockholders at our 2010 and 2013 annual meetings. We also adopted certain amendments to our amended and restated bylaws (the “Bylaw Amendment”) and at our 2010 and 2013 annual meetings, our stockholders approved certain amendments to our amended and restated certificate of incorporation (the “Charter Amendment”). The Plan, the Bylaw Amendment and the Charter Amendment were implemented in order to protect our ability to utilize our NOLs and other tax assets and prevent an “ownership change” under U.S. federal income tax rules by restricting or discouraging certain transfers of our common stock that would: (i) create or result in a person becoming a five-percent shareholder under Section 382; or (ii) increase the stock ownership of any existing five-percent shareholder under Section 382. The continued effectiveness of the Plan, the Bylaw Amendment and the Charter Amendment are subject to the reapproval of the Plan and the Charter Amendment by our stockholders every three years and there can be no assurance that if we elect to present them to our stockholders for reapproval in the future, our stockholders will reapprove them.
There is no guarantee that our tax benefit preservation strategy will be effective in protecting our NOLs and other tax assets. The amount of our NOLs has not been audited or otherwise validated by the IRS. The IRS could challenge the amount of our NOLs and other tax assets, which could result in an increase in our liability in the future for income taxes. In addition, determining whether an “ownership change” has occurred is subject to uncertainty, both because of the complexity and ambiguity of Section 382 and because of limitations on a publicly traded company’s knowledge as to the ownership of, and transactions in, its securities. Therefore, even though we currently have several measures in place to protect our NOLs (such as the Plan, the Bylaw Amendment and the Charter Amendment), we cannot provide any assurance that the IRS or other taxing authority will not claim that we have experienced an “ownership change” and attempt to reduce the benefit of our tax assets.
Legislation and regulatory changes and interpretations could impact our businesses.
Our businesses are subject to or may be impacted by many federal and state lending, insurance and consumer laws and regulations and may be affected by changes in these laws and regulations. In particular, our businesses may be significantly impacted by the following:
Legislation or regulatory action impacting the charters or business practices of the GSEs;
Legislative reform of the U.S. housing finance system;


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Legislation and regulation impacting the FHA and its competitive position versus private mortgage insurers. See “Our mortgage insurance business faces intense competition.”;
State insurance laws and regulations that address, among other items, licensing of companies to transact business, claims handling, reinsurance requirements, premium rates, policy forms offered to customers and requirements for Risk-to-capital, minimum policyholder positions, reserves (including contingency reserves), surplus, reinsurance and payment of dividends. See “Our insurance subsidiaries are subject to comprehensive state insurance regulations and other requirements, including capital adequacy measures, which if we fail to satisfy, could limit our ability to write new insurance and increase restrictions and requirements placed on our insurance subsidiaries.”;
The application of state, federal or private sector programs aimed at supporting borrowers and the housing market;
The application of RESPA, the FCRA and other laws to mortgage insurers, including with respect to captive reinsurance arrangements. See “We are subject to the risk of litigation and regulatory proceedings.”;
The amendments to Regulation AB (commonly referred to as Regulation AB II) that were adopted by the SEC in August 2014 to introduce several new requirements related to public offerings of ABS, including public offerings of RMBS for which our MRES business traditionally has provided due diligence and servicer surveillance services and new credit rating agency reform rules (the “NRSRO Rules”) adopted by the SEC in August 2014, including new requirements applicable to providers of third-party due diligence services, such as our MRES business, for both publicly and privately issued ABS;
New federal standards and oversight for mortgage insurers, including as a result of the Federal Insurance Office of the U.S. Treasury having published a study on how to modernize and improve the system of insurance regulation in the U.S. that, among other things, calls for federal standards and oversight for mortgage insurers to be developed and implemented. See “Item 1. Business—Regulation—Other Federal Regulation—The Dodd-Frank Act.”;
The implementation of new regulations under the Dodd-Frank Act. See “Item 1. Business—Regulation—Other Federal Regulation—The Dodd-Frank Act.”; and
The implementation in the U.S. of the Basel II capital adequacy requirements and the Basel III guidelines. See “The implementation of the Basel III guidelines may discourage the use of mortgage insurance.”
Any of the items discussed above could adversely affect our operating results, financial condition and business prospects. In addition, our mortgage insurance business could be impacted by new legislation or regulations, as well as changes to existing legislation or regulations, that are not currently contemplated and which could occur at any time.
The implementation of the Basel III guidelines may discourage the use of mortgage insurance.
In 1988, the BCBS developed Basel I, which established international benchmarks for assessing banks’ capital adequacy requirements. In June 2005, the BCBS issued Basel II which, among other things, governs the capital treatment for mortgage insurance purchased by domestic and international banks in both their origination and securitization activities. Basel II was implemented by many banks in the U.S. and in many other countries in 2009 and 2010.
In September 2010, the BCBS released Basel III guidelines, which increased the capital requirements for certain banking organizations. In December 2010, the BCBS released a new bank capital framework, which we refer to as the Basel III capital adequacy guidelines, that raised minimum capital requirements for banks. Implementation of Basel III and the Basel III capital adequacy guidelines in the U.S. required formal regulations to be adopted by the three U.S. federal banking regulators.
In July 2013, the federal bank regulators published rules to implement the Basel III guidelines. As published, these rules would have made extensive changes to the capital requirements for residential mortgages. In addition, the published rules would have eliminated existing capital recognition for certain low down payment mortgages if covered by mortgage insurance. After consideration of extensive comments on the published rules, the federal regulators revised the Basel III rules to retain the current treatment for residential mortgages under the general risk-based capital rules for U.S. banking institutions.
If implementation of the Basel III Rules increases the capital requirements of banking institutions with respect to the residential mortgages we insure, it could reduce the demand for our mortgage insurance. If the federal bank regulators revise their rules to implement Basel III to reduce or eliminate the capital benefit banks receive from insuring low down payment loans with private mortgage insurance, our business and business prospects could be adversely affected.


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We face risks associated with our acquisition of Clayton and we may fail to realize the anticipated benefits of the Clayton acquisition.
As a result of our acquisition of Clayton and our entry into the businesses of our MRES segment, we are exposed to certain risks that may negatively affect our financial results, including, among others, the following:
Our MRES revenue is dependent on a limited number of large customers that represent a significant proportion of our MRES total revenues. Radian Guaranty also does business with many of these significant customers. In the event of a dispute between a significant customer and either of our business segments, the overall customer relationship for Radian could be negatively impacted. The loss or reduction of business from one or more of these significant customers could adversely affect our revenues and results of operations.
While Clayton is not a defendant in litigation arising out of the financial crisis involving the issuance of RMBS in connection with which it has provided services, it has been in the past, and may again be in the future, subpoenaed by various parties to provide documents and information related to such litigation, and there can be no assurance that Clayton will not be subject to future claims against it, whether in connection with such litigation or otherwise. It is possible that our exposure to potential liabilities resulting from our MRES business, some of which may be material or unknown, could exceed amounts we can recover through indemnification claims.
Our goodwill and other intangible assets were established primarily in connection with our acquisition of Clayton. Goodwill represents the estimated future economic benefits arising from the assets we have acquired that did not qualify to be identified and recognized individually, and includes the value of expected future cash flows of Clayton, Clayton’s workforce, expected synergies with our other affiliates and other unidentifiable intangible assets. Goodwill is deemed to have an indefinite useful life and is subject to review for impairment annually, or more frequently, whenever circumstances indicate potential impairment. The value of goodwill is supported by revenue, which is driven primarily by transaction volume. Intangible assets other than goodwill primarily consist of customer relationships, client backlog, trade name and trademarks, software and non-competition agreements; and
The calculation of the estimated fair value of goodwill and other intangibles requires the use of significant estimates and assumptions that are highly subjective in nature, such as attrition rates, discount rates, future expected cash flows and market conditions. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. If actual results differ from our assumptions, we may not realize the full value of our intangible assets and goodwill.
For these and other reasons there can be no assurance that the anticipated benefits from the transaction will be realized fully or at all. If we fail to realize the anticipated benefits of the Clayton acquisition, we may not realize the full value of our intangible assets and goodwill related to the acquisition, in which case we may be required to write down or write off all such intangible assets or goodwill. Such an impairment of our goodwill or intangible assets could have a material adverse effect on our results of operations.



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Item 1B.
Unresolved Staff Comments.
None.

Item 2.
Properties.
At our corporate headquarters in Philadelphia, Pennsylvania, we lease approximately 151,197 square feet of office space and an additional 1,740 square feet of space for data storage under a lease that expires in August 2017. We also lease 23,453 square feet of office space in Philadelphia, Pennsylvania, separate from our headquarters, for various operational and IT personnel.
In addition, we lease office space for our mortgage insurance operations in: Worthington, Ohio; Dayton Ohio; and Hong Kong. Following the Clayton acquisition in 2014, we also have leases for office space for our MRES operations in various cities in Connecticut, Florida, Colorado, Georgia and Utah, as well as in Bristol, England.
We also currently lease 121,093 square feet of office space for our financial guaranty business in New York City, a portion of which is subleased to unrelated third parties. The lease for this space expires in August 2015 and, following the sale of Radian Asset to Assured we do not expect to renew this lease.
We currently have a co-location agreement with Xand that supports data center space and services. Xand serves as a production and disaster recovery location in Audubon, Pennsylvania. This agreement expires June 2015.
We believe our existing properties are well utilized, suitable and adequate for our present circumstances.

Item 3.
Legal Proceedings.
We are routinely involved in a number of legal actions and proceedings, the outcome of which are uncertain. The legal proceedings could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief that could require significant expenditures or have other effects on our business. In accordance with applicable accounting standards and guidance, we establish accruals for a legal proceeding only when we determine both that it is probable that a loss has been incurred and the amount of the loss is reasonably estimable. We accrue the amount that represents our best estimate of the probable loss; however, if we can only determine a range of estimated losses, we accrue an amount within the range that, in our judgment, reflects the most likely outcome, and if none of the estimates within the range is more likely, we accrue the minimum amount of the range.
In the course of our regular review of pending legal matters, we determine whether it is reasonably possible that a potential loss relating to a legal proceeding may have a material impact on our liquidity, results of operations or financial condition. If we determine such a loss is reasonably possible, we disclose information relating to any such potential loss, including an estimate or range of loss or a statement that such an estimate cannot be made. On a quarterly and annual basis, we review relevant information with respect to legal loss contingencies and update our accruals, disclosures and estimates of reasonably possible losses or range of losses based on such reviews. We are often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the court on motions or appeals, analysis by experts, and the progress of settlement negotiations. In addition, we generally make no disclosures for loss contingencies that are determined to be remote. For matters for which we disclose an estimated loss, the disclosed estimate reflects the reasonably possible loss or range of loss in excess of the amount accrued, if any.
Loss estimates are inherently subjective, based on currently available information, and are subject to management’s judgment and various assumptions. Due to the inherently subjective nature of these estimates and the uncertainty and unpredictability surrounding the outcome of legal proceedings, actual results may differ materially from any amounts that have been accrued.


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We have been named as a defendant in a number of putative class action lawsuits alleging, among other things, that our captive reinsurance agreements violate RESPA. On December 9, 2011, an action titled Samp v. JPMorgan (the “JPMorgan Case”) was filed in the U.S. District Court for the Central District of California. The defendants were JPMorgan and several mortgage insurers, including Radian Guaranty. The plaintiffs purported to represent a class of borrowers whose loans allegedly were referred to mortgage insurers by JPMorgan in exchange for reinsurance agreements between the mortgage insurers and JPMorgan’s captive reinsurer. Plaintiffs asserted violations of RESPA. On October 4, 2012, Radian Guaranty filed a motion to dismiss on a number of grounds, and on May 7, 2013, the court granted the motion and dismissed the plaintiffs’ claims with prejudice. The court ruled that the plaintiffs could not state a claim against Radian Guaranty because it did not insure their loans, and, in addition, ruled that their claims were barred by the statute of limitations. On June 5, 2013, plaintiffs appealed these rulings to the U.S. Court of Appeals for the Ninth Circuit. On November 9, 2013, plaintiffs voluntarily dismissed their appeal.
Each of the cases described below are putative class actions (with alleged facts substantially similar to the facts alleged in the JPMorgan Case discussed above) in which Radian Guaranty has been named as a defendant and has insured at least one loan of one of the plaintiffs:
On December 30, 2011, a putative class action under RESPA titled White v. PNC Financial Services Group (the “White Case”) was filed in the U.S. District Court for the Eastern District of Pennsylvania. On September 29, 2012, plaintiffs filed an amended complaint. On November 26, 2012, Radian Guaranty filed a motion to dismiss the plaintiffs’ claims as barred by the statute of limitations. On June 20, 2013, the court granted Radian Guaranty’s motion and dismissed plaintiffs’ claims, but granted plaintiffs leave to file a second amended complaint. Plaintiffs filed their second amended complaint on July 5, 2013, reasserting a putative claim under RESPA on substantially the same allegations. Radian Guaranty filed a motion to dismiss plaintiffs’ second amended complaint on July 22, 2013. The court denied Radian Guaranty’s motion on August 18, 2014, without prejudice to Radian Guaranty’s ability to raise the statute of limitations bar on a motion for summary judgment. On January 20, 2015, plaintiffs in the White Case filed a motion to strike certain of the affirmative defenses, but not the statute of limitations defense, that had been asserted by Radian Guaranty in its answer to plaintiffs’ second amended complaint. The parties are continuing to file procedural motions in this litigation. However, the White Case is currently stayed pending a decision by the Third Circuit Court of Appeals in the case Cunningham v. M&T Bank Corp., which is another putative class action under RESPA in which Radian Guaranty is not a party.
On January 13, 2012, a putative class action under RESPA titled Menichino, et al. v. Citibank, N.A., et al. (the “Menichino Case”), was filed in the U.S. District Court for the Western District of Pennsylvania. Radian Guaranty was not named as a defendant in the original complaint. On December 4, 2012, plaintiffs amended their complaint to add Radian Guaranty as an additional defendant. On February 4, 2013, Radian Guaranty filed a motion to dismiss the claims against it as barred by the statute of limitations. On July 19, 2013, the court granted Radian Guaranty’s motion and dismissed plaintiffs’ claims, but granted plaintiffs leave to file a second amended complaint. Plaintiffs filed their second amended complaint on August 16, 2013, reasserting a putative claim under RESPA on substantially the same allegations. Radian Guaranty filed a motion to dismiss plaintiffs’ second amended complaint on September 17, 2013. The court denied Radian Guaranty’s motion on February 4, 2014, without prejudice to Radian Guaranty’s ability to raise the statute of limitations bar on a motion for summary judgment. The Menichino Case is currently stayed pending a decision by the Third Circuit Court of Appeals in the case Cunningham v. M&T Bank Corp., which is another putative class action under RESPA in which Radian Guaranty is not a party.


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On April 5, 2012, a putative class action under RESPA titled Manners, et al. v. Fifth Third Bank, et al (the “Manners Case”) was filed in the U.S. District Court for the Western District of Pennsylvania. On November 28, 2012, Radian Guaranty moved to dismiss plaintiffs’ claims as barred by the statute of limitations. On July 19, 2013, the court granted Radian Guaranty’s motion and dismissed plaintiffs’ claims, but granted plaintiffs leave to file a second amended complaint. Plaintiffs filed their second amended complaint on August 16, 2013, reasserting a putative claim under RESPA on substantially the same allegations. Radian Guaranty filed a motion to dismiss plaintiffs’ second amended complaint on September 17, 2013. The court denied Radian Guaranty’s motion on February 5, 2014, without prejudice to Radian Guaranty’s ability to raise the statute of limitations bar on a motion for summary judgment. The Manners Case is currently stayed pending a decision by the Third Circuit Court of Appeals in the case Cunningham v. M&T Bank Corp., which is another putative class action under RESPA in which Radian Guaranty is not a party.
With respect to the putative class action cases discussed above, Radian Guaranty believes that the claims are without merit and intends to vigorously defend itself against these claims. We are not able to estimate the reasonably possible loss or range of loss, if any, for these matters because the proceedings are still in a preliminary stage and there is uncertainty as to the likelihood of a class being certified or the ultimate size of a class.
We are contesting adjustments resulting from the examination by the IRS of our 2000 through 2007 consolidated federal income tax returns. The IRS opposes the recognition of certain tax losses and deductions that were generated through our investment in a portfolio of non-economic REMIC residual interests and proposed adjustments denying the associated tax benefits of these items. We appealed the proposed adjustments to Appeals and made “qualified deposits” with the U.S. Treasury of approximately $85 million in June 2008 relating to the 2000 through 2004 tax years and approximately $4 million in May 2010 relating to the 2005 through 2007 tax years in order to avoid the accrual of above-market-rate interest with respect to the proposed adjustments.
Although we made several attempts to reach a compromised settlement with Appeals, on September 4, 2014, we received Notices of Deficiency covering the 2000 through 2007 tax years that assert unpaid taxes and penalties related to the REMIC matters of approximately $157 million and exclude any potential benefit related to our NOL carryback ability. As of December 31, 2014, there also would be interest of approximately $115 million related to these matters. Depending on the outcome, additional state income taxes, penalties and interest (estimated in the aggregate to be approximately $30 million as of December 31, 2014) also may become due when a final resolution is reached. The Notices of Deficiency also reflected additional amounts due of approximately $105 million, which are primarily associated with the disallowance of the previously filed carryback of our 2008 NOL to the 2006 and 2007 tax years. We currently believe that the disallowance of our 2008 NOL carryback is a precautionary position by the IRS and that we will ultimately maintain the benefit of this NOL carryback claim. On December 3, 2014, we petitioned the U.S. Tax Court to litigate the Deficiency Amount. We can provide no assurance regarding the outcome of any such litigation, which could take several years to resolve, or whether a compromised settlement with the IRS will ultimately be reached. We believe that an adequate provision for income taxes has been made for the potential liabilities that may result from this matter. However, if the ultimate resolution of this matter produces a result that differs materially from our current expectations, there could be a material impact on our effective tax rate, results of operations and cash flows.


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In addition to the litigation discussed above, we are involved in litigation that has arisen in the normal course of our business. We are contesting the allegations in each such pending action and management believes, based on current knowledge and after consultation with counsel, that the outcome of such litigation will not have a material adverse effect on our consolidated financial condition. However, the outcome of litigation and other legal and regulatory matters is inherently uncertain, and it is possible that one or more of the matters currently pending or threatened could have an unanticipated adverse effect on our liquidity, financial condition or results of operations for any particular period.
In addition to the private lawsuits discussed above, we and other mortgage insurers have been subject to inquiries from the Minnesota Department of Commerce requesting information relating to captive reinsurance. We have cooperated with these requests for information. In August 2013, Radian Guaranty and other mortgage insurers first received a draft Consent Order from the Minnesota Department of Commerce, containing proposed conditions and unspecified penalties, to resolve its outstanding inquiries related to captive reinsurance arrangements involving mortgage insurance in Minnesota. We continue to cooperate with the Minnesota Department of Commerce and are engaged in active discussions with them with respect to their inquiries, including the penalties they are seeking and various alternatives for resolving this matter. We cannot predict the outcome of this matter or whether additional actions or proceedings may be brought against us. We have not entered into any new captive reinsurance arrangements since 2007.
Through December 31, 2014, Radian Asset Assurance has received a series of claims totaling €13.5 million ($16.4 million) from one of its trade credit and surety ceding companies related to surety bonds for Spanish housing cooperative developments. The ceding company is still in the process of settling additional similar claims, so the ultimate amount the ceding company will claim is uncertain. Based on information we received from the ceding company and the advice of our legal advisors, we believe that these claims are subject to a number of defenses, including that the risk under these surety bonds was not eligible for cession to Radian Asset Assurance under the terms and conditions of the applicable reinsurance treaties. We have rejected all claims related to these surety bonds and, because we do not believe a loss is probable, we have not recorded a liability with respect to any of these claims. In May 2014, the ceding company sent us a demand to arbitrate this dispute. We are in the process of finalizing the arbitration panel and are preparing for this arbitration. Formal arbitration proceedings could commence before the end of 2015. Without giving any consideration to our defenses, we estimate the maximum aggregate potential liability for claims received and future claims related to these surety bonds to be €17.1 million ($20.8 million). This legal matter is part of our discontinued operations. See Note 3 of Notes to Consolidated Financial Statements.

Item 4.
Mine Safety Disclosures.
Not applicable.



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PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is listed on the NYSE under the symbol “RDN.” At February 24, 2015, there were 191,135,153 shares of our common stock outstanding and approximately 63 holders of record. The following table shows the high and low sales prices of our common stock on the NYSE for the financial quarters indicated:
 
2014
 
2013
 
High
 
Low
 
High
 
Low
1st Quarter
$
16.24

 
$
13.75

 
$
10.95

 
$
5.97

2nd Quarter
15.58

 
13.39

 
14.34

 
9.62

3rd Quarter
15.14

 
12.18

 
14.80

 
11.36

4th Quarter
17.50

 
13.96

 
15.15

 
12.57

In 2013 and 2014, we declared quarterly cash dividends on our common stock equal to $0.0025 per share. We presently expect to continue to declare a regular quarterly dividend on our common stock. For information on Radian Group’s ability to pay dividends, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Reference is made to the information in Item 12 of this report under the caption “Equity Compensation Plans,” which is incorporated herein by this reference.
Issuer Purchases of Equity Securities
During 2014, we did not repurchase any of our common stock; however, upon the vesting of certain restricted stock awards under our equity compensation plans, we withheld from such vested awards an aggregate of 10,033 shares of our common stock to satisfy the tax liability of the award recipients.



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Item 6.
Selected Financial Data.
The information in the following table should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in Item 8 and the information included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” As a result of the December 22, 2014 Radian Asset Assurance Stock Purchase Agreement to sell Radian Asset Assurance, Radian’s financial guaranty insurance subsidiary, we have reclassified the operating results related to the pending disposition as discontinued operations for all periods presented in our consolidated statements of operations. See Note 3 of Notes to Consolidated Financial Statements for additional information.
($ in millions, except per-share amounts and ratios)
2014
 
2013
 
2012
 
2011
 
2010
Consolidated Statements of Operations
 
 
 
 
 
 
 
 
 
Net premiums earned—insurance
$
844.5

 
$
781.4

 
$
702.4

 
$
680.9

 
$
739.6

Net investment income
65.7

 
68.1

 
72.7

 
105.3

 
109.1

Net gains (losses) on investments
83.9

 
(98.9
)
 
114.3

 
147.3

 
83.3

Services revenue
76.7

 

 

 

 

Total revenues
1,072.7

 
749.9

 
902.7

 
943.6

 
1,000.4

Provision for losses
246.1

 
562.7

 
921.5

 
1,286.8

 
1,716.2

Other operating expenses
252.3

 
257.4

 
167.7

 
144.5

 
157.1

Interest expense
90.5

 
74.6

 
51.8

 
61.4

 
41.8

Direct cost of services
43.6

 

 

 

 

Amortization and impairment of intangible assets
8.6

 

 

 

 

Pretax income (loss) from continuing operations
407.2

 
(173.3
)
 
(272.4
)
 
(585.0
)
 
(936.2
)
Income tax (benefit) provision
(852.4
)
 
(31.5