Fair Value of Financial Instruments

Our fair value measurements are intended to reflect the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and the risks inherent in the inputs to the model. We define fair value as the current amount that would be exchanged to sell an asset or transfer a liability, other than in a forced liquidation. In the event that our investments or derivative contracts were sold or transferred in a forced liquidation, the amounts received or paid may be materially different than those determined in accordance with the accounting standard regarding fair value measurements. There have been no significant changes to our fair value methodologies during the six months ended June 30, 2011.

When determining the fair value of our liabilities, we are required to incorporate into the fair value of those liabilities an adjustment that reflects our own non-performance risk. Radian Group's five-year credit default swap ("CDS") spread is the only observable quantitative measure of our non-performance risk and is used by typical market participants to determine the likelihood of default. As Radian Group's CDS spread tightens or widens, it has the effect of increasing or decreasing, respectively, the fair value of our liabilities.

The following table quantifies the impact of our non-performance risk on our derivative assets, derivative liabilities (in aggregate by type, excluding assumed financial guaranty derivatives) and VIE liabilities presented in our condensed consolidated balance sheets. Radian Group's five-year CDS spread is presented as an illustration of the market's view of our non-performance risk; the CDS spread actually used in the valuation of specific fair value liabilities is typically based on the remaining term of the instrument.



(In basis points)	June 30, 2011	December 31, 2010	June 30, 2010	December 31, 2009
Radian Group's five-year CDS spread	968	465	701	1,530



(In millions)	Fair Value Liability before Consideration of Radian Non-Performance Risk June 30, 2011			Impact of Radian Non-Performance Risk June 30, 2011		Fair Value Liability Recorded June 30, 2011
Product
Corporate CDOs	$	(220.2	)	$	214.1	$	(6.1	)
Non-Corporate CDO-related (1)	(1,579.1		)	1,188.9		(390.2		)
NIMS-related (2)	(57.6		)	6.1		(51.5		)
Total	$	(1,856.9	)	$	1,409.1	$	(447.8	)



(In millions)	Fair Value Liability before Consideration of Radian Non-Performance Risk December 31, 2010			Impact of Radian Non-Performance Risk December 31, 2010		Fair Value Liability Recorded December 31, 2010
Product
Corporate CDOs	$	(387.1	)	$	281.5	$	(105.6	)
Non-Corporate CDO-related (1)	(1,696.2		)	934.1		(762.1		)
NIMS-related (2)	(134.1		)	4.8		(129.3		)
Total	$	(2,217.4	)	$	1,220.4	$	(997.0	)

________________


(1)	Includes the net liability recorded within derivative assets and derivative liabilities, and the net liability recorded within VIE debt and other financial statement line items for consolidated VIEs.


(2)	Includes NIMS VIE debt and NIMS derivative assets.

The cumulative impact attributable to the market's perception of our non-performance risk increased by $188.7 million during the first six months of 2011, as presented in the table above. This increase was primarily the result of the widening of Radian Group's CDS spreads during this period.

We established a fair value hierarchy by prioritizing the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I measurements) and the lowest priority to unobservable inputs (Level III measurements). The three levels of the fair value hierarchy under this standard are described below:

Level I—Unadjusted quoted prices or valuations in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level II—Quoted prices or valuations in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and

Level III—Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

The level of market activity in determining the fair value hierarchy is based on the availability of observable inputs market participants would use to price an asset or a liability, including market value price observations. For markets in which inputs are not observable or limited, we use significant judgment and assumptions that a typical market participant would use to evaluate the market price of an asset or liability. These assets and liabilities are classified in Level III of our fair value hierarchy.

A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At June 30, 2011, our total Level III assets were approximately 4.5% of total assets measured at fair value and total Level III liabilities accounted for 100% of total liabilities measured at fair value.

Available for sale securities, trading securities, VIE debt, derivative instruments, and certain other assets are recorded at fair value. All derivative instruments and contracts are recognized in our condensed consolidated balance sheets as either derivative assets or derivative liabilities. All changes in the fair value of trading securities, VIE debt, derivative instruments and certain other assets are included in our condensed consolidated statements of operations. All changes in the fair value of available for sale securities are recorded in accumulated other comprehensive income (loss).

The following is a list of those assets and liabilities that are measured at fair value by hierarchy level as of June 30, 2011:



(In millions)	Level I		Level II		Level III		Total
Assets and Liabilities at Fair Value
Investment Portfolio:
U.S. government and agency securities	$	618.2	$	672.6	$	—	$	1,290.8
State and municipal obligations	—		1,015.1		23.6		1,038.7
Money market instruments	360.4		—		—		360.4
Corporate bonds and notes	—		865.2		—		865.2
Residential mortgage-backed securities ("RMBS")	—		954.6		61.4		1,016.0
CMBS	—		190.4		29.4		219.8
CDO	—		—		3.9		3.9
Other ABS	—		114.1		2.0		116.1
Foreign government securities	—		101.6		—		101.6
Hybrid securities	—		367.8		—		367.8
Equity securities (1)	176.9		198.5		5.6		381.0
Other investments (2)	—		151.6		5.8		157.4
Total Investments at Fair Value (3)	1,155.5		4,631.5		131.7		5,918.7
Derivative Assets	—		0.4		26.9		27.3
Other Assets (4)	—		—		113.7		113.7
Total Assets at Fair Value	$	1,155.5	$	4,631.9	$	272.3	$	6,059.7
Derivative Liabilities	$	—	$	—	$	313.7	$	313.7
VIE debt (5)	—		—		393.7		393.7
Total Liabilities at Fair Value	$	—	$	—	$	707.4	$	707.4

______________________


(1)	Comprised of broadly diversified domestic equity mutual funds included within Level I and various preferred and common stocks invested across numerous companies and industries included within Levels II and III.


(2)	Comprised of short-term commercial paper within CPS trusts ($150.0 million) and short-term CDs ($1.6 million) included within Level II, and lottery annuities ($1.8 million) and TruPs held by consolidated VIEs ($4.0 million) included within Level III.


(3)	Does not include fixed-maturities held to maturity ($7.8 million) and other invested assets ($62.3 million), primarily invested in limited partnerships, accounted for as cost-method investments and not measured at fair value.


(4)	Comprised of manufactured housing loan collateral related to two consolidated financial guaranty VIEs.


(5)	Comprised of consolidated debt related to NIMS VIEs ($56.2 million) and amounts related to financial guaranty VIEs ($337.5 million).

The following is a list of those assets and liabilities that are measured at fair value by hierarchy level as of December 31, 2010:



(In millions)	Level I		Level II		Level III		Total
Assets and Liabilities at Fair Value
Investment Portfolio:
U.S. government and agency securities	$	1,075.0	$	731.4	$	—	$	1,806.4
State and municipal obligations	—		1,159.7		23.2		1,182.9
Money market instruments	310.9		—		—		310.9
Corporate bonds and notes	—		1,060.4		—		1,060.4
RMBS	—		913.5		52.5		966.0
CMBS	—		173.6		23.0		196.6
CDO	—		—		2.4		2.4
Other ABS	—		131.1		3.3		134.4
Foreign government securities	—		83.5		—		83.5
Hybrid securities	—		318.9		—		318.9
Equity securities (1)	168.4		168.6		2.9		339.9
Other investments (2)	—		150.0		4.6		154.6
Total Investments at Fair Value (3)	1,554.3		4,890.7		111.9		6,556.9
Derivative Assets	—		—		26.2		26.2
Other Assets (4)	—		—		109.7		109.7
Total Assets at Fair Value	$	1,554.3	$	4,890.7	$	247.8	$	6,692.8
Derivative Liabilities	$	—	$	—	$	723.6	$	723.6
VIE debt (5)	—		—		520.1		520.1
Total Liabilities at Fair Value	$	—	$	—	$	1,243.7	$	1,243.7

______________________


(1)	Comprised of broadly diversified domestic equity mutual funds included within Level I and various preferred and common stocks invested across numerous companies and industries included within Levels II and III.


(2)	Comprised of short-term commercial paper within CPS trusts included within Level II, and lottery annuities ($2.6 million) and TruPs held by consolidated VIEs ($2.0 million) included within Level III.


(3)	Does not include fixed-maturities held to maturity ($10.8 million), certain short-term investments ($1.6 million), primarily invested in CDs and time deposits, and other invested assets ($59.6 million), primarily invested in limited partnerships, accounted for as cost-method investments and not measured at fair value.


(4)	Comprised of manufactured housing loan collateral related to two consolidated financial guaranty VIEs.


(5)	Comprised of consolidated debt related to NIMS VIEs ($141.0 million) and amounts related to financial guaranty VIEs ($379.1 million) that required consolidation as of January 1, 2010, under the accounting standard update regarding improvements to financial reporting by enterprises involving VIEs.

The following is a rollforward of Level III assets and liabilities measured at fair value for the quarter ended June 30, 2011:



(In millions)	Beginning Balance at April 1, 2011			Realized and Unrealized Gains (Losses) Recorded in Earnings (1)			Purchases		Sales			Issuances		Settlements			Transfers Into (Out of) Level III (2)			Ending Balance at June 30, 2011
Investments:
State and municipal obligations	$	23.2		$	0.4		$	—	$	—		$	—	$	—		$	—		$	23.6
RMBS	55.3			7.6			—		(1.6		)	—		0.1			—			61.4
CMBS	24.0			5.4			—		—			—		—			—			29.4
CDO	4.1			(0.3		)	—		0.1			—		—			—			3.9
Other ABS	4.7			(2.7		)	—		—			—		—			—			2.0
Hybrid securities	—			0.6			—		—			—		—			(0.6		)	—
Equity securities	4.3			(0.7		)	2.1		(0.1		)	—		—			—			5.6
Other investments	3.9			1.9			—		—			—		—			—			5.8
Total Level III Investments	119.5			12.2			2.1		(1.6		)	—		0.1			(0.6		)	131.7
NIMS derivative assets	9.0			0.4			—		—			—		(4.7		)	—			4.7
Other assets	106.3			14.4			—		—			—		(7.0		)	—			113.7
Total Level III Assets, net	$	234.8		$	27.0		$	2.1	$	(1.6	)	$	—	$	(11.6	)	$	(0.6	)	$	250.1
Derivative liabilities, net	$	(472.2	)	$	188.3		$	—	$	—		$	—	$	(7.6	)	$	—		$	(291.5	)
VIE debt	(373.0		)	(44.0		)	—		—			—		23.3			—			(393.7		)
Total Level III Liabilities, net	$	(845.2	)	$	144.3		$	—	$	—		$	—	$	15.7		$	—		$	(685.2	)

_______________________


(1)	Includes unrealized gains (losses) relating to assets and liabilities still held as of June 30, 2011, as follows: $10.6 million for investments, $(1.5) million for NIMS derivative assets, $11.2 million for other assets, $173.4 million for derivative liabilities, and $(9.8) million for VIE debt.


(2)	Transfers are recognized at the end of the period as the availability of market observed inputs change from period to period.

The following is a rollforward of Level III assets and liabilities measured at fair value for the six months ended June 30, 2011:



(In millions)	Beginning Balance at January 1, 2011			Realized and Unrealized Gains (Losses) Recorded in Earnings (1)			Purchases		Sales			Issuances		Settlements			Transfers Into (Out of) Level III (2)			Ending Balance at June 30, 2011
Investments:
State and municipal obligations	$	23.2		$	0.4		$	—	$	—		$	—	$	—		$	—		$	23.6
RMBS	52.5			11.6			—		(1.6		)	—		(1.1		)	—			61.4
CMBS	23.0			6.4			—		—			—		—			—			29.4
CDO	2.4			1.3			—		0.1			—		0.1			—			3.9
Other ABS	3.3			(1.3		)	—		—			—		—			—			2.0
Hybrid securities	—			(0.1		)	0.7		—			—		—			(0.6		)	—
Equity securities	2.9			(0.3		)	3.2		(0.2		)	—		—			—			5.6
Other investments	4.6			2.0			—		(0.5		)	—		(0.3		)	—			5.8
Total Level III Investments	111.9			20.0			3.9		(2.2		)	—		(1.3		)	(0.6		)	131.7
NIMS derivative assets	11.7			(2.0		)	0.1		—			—		(4.7		)	(0.4		)	4.7
Other assets	109.7			18.3			—		—			—		(14.3		)	—			113.7
Total Level III Assets, net	$	233.3		$	36.3		$	4.0	$	(2.2	)	$	—	$	(20.3	)	$	(1.0	)	$	250.1
Derivative liabilities, net	$	(709.1	)	$	433.0		$	—	$	—		$	—	$	(15.4	)	$	—		$	(291.5	)
VIE debt	(520.1		)	28.9			—		—			—		97.5			—			(393.7		)
Total Level III Liabilities, net	$	(1,229.2	)	$	461.9		$	—	$	—		$	—	$	82.1		$	—		$	(685.2	)

_______________________


(1)	Includes unrealized gains (losses) relating to assets and liabilities still held as of June 30, 2011, as follows: $18.1 million for investments, $(2.1) million for NIMS derivative assets, $12.0 million for other assets, $399.1 million for derivative liabilities, and $(17.1) million for VIE debt.


(2)	Transfers are recognized at the end of the period as the availability of market observed inputs change from period to period.

There were no investment transfers between Level I and Level II during the first six months of 2011 or 2010.

The following is a rollforward of Level III assets and liabilities measured at fair value for the quarter ended June 30, 2010:



(In millions)	Beginning Balance at April 1, 2010			Realized and Unrealized Gains(Losses) Recorded in Earnings (1)			Purchases			Sales			Issuances		Settlements			Transfers Into (Out of) Level III (2)			Ending Balance at June 30, 2010
Investments:
State and municipal obligations	$	24.4		$	—		$	—		$	—		$	—	$	—		$	—		$	24.4
RMBS	54.1			6.7			—			(3.5		)	—		—			—			57.3
CMBS	24.3			(1.1		)	—			—			—		—			—			23.2
CDO	3.8			(1.4		)	—			—			—		—			—			2.4
Other ABS	3.5			(0.2		)	—			—			—		—			—			3.3
Hybrid securities	1.1			—			—			—			—		—			(1.1		)	—
Equity securities	1.5			(0.2		)	0.1			—			—		—			0.3			1.7
Other investments	6.7			(1.7		)	—			—			—		(0.2		)	—			4.8
Total Level III Investments	119.4			2.1			0.1			(3.5		)	—		(0.2		)	(0.8		)	117.1
NIMS and CPS derivative assets	42.5			(4.5		)	(26.7		)	—			—		—			—			11.3
Other assets	118.3			8.9			(11.1		)	—			—		—			—			116.1
Total Level III Assets, net	$	280.2		$	6.5		$	(37.7	)	$	(3.5	)	$	—	$	(0.2	)	$	(0.8	)	$	244.5
Derivative liabilities, net	$	(210.2	)	$	(520.1	)	$	(7.1	)	$	—		$	—	$	—		$	—		$	(737.4	)
VIE debt	(596.1		)	(63.4		)	31.9			—			—		—			—			(627.6		)
Total Level III Liabilities, net	$	(806.3	)	$	(583.5	)	$	24.8		$	—		$	—	$	—		$	—		$	(1,365.0	)

______________________


(1)	Includes unrealized gains (losses) relating to assets and liabilities still held as of June 30, 2010, as follows: $1.5 million for investments, $(4.1) million for NIMS and CPS derivative assets, $1.3 million for other assets, $(528.1) million for derivative liabilities, and $(11.4) million for VIE debt.


(2)	Transfers are recognized at the end of the period as the availability of market observed inputs change from period to period.

The following is a rollforward of Level III assets and liabilities measured at fair value for the six months ended June 30, 2010:



(In millions)	Beginning Balance at January 1, 2010			VIE Consolidation at January 1, 2010 (1)			Realized and Unrealized Gains(Losses) Recorded in Earnings (2)			Purchases		Sales			Issuances		Settlements			Transfers Into (Out of) Level III (3)			Ending Balance at June 30, 2010
Investments:
State and municipal obligations	$	24.4		$	—		$	—		$	—	$	—		$	—	$	—		$	—		$	24.4
RMBS	—			44.3			18.7			—		(5.7		)	—		—			—			57.3
CMBS	—			23.8			(0.6		)	—		—			—		—			—			23.2
CDO	—			3.8			(1.5		)	—		0.1			—		—			—			2.4
Other ABS	—			3.5			(0.2		)	—		—			—		—			—			3.3
Hybrid securities	0.6			—			—			—		—			—		—			(0.6		)	—
Equity securities	1.7			—			(0.5		)	0.2		—			—		—			0.3			1.7
Other investments	3.8			3.7			(1.7		)	—		(0.8		)	—		(0.2		)	—			4.8
Total Level III Investments	30.5			79.1			14.2			0.2		(6.4		)	—		(0.2		)	(0.3		)	117.1
NIMS and CPS derivative assets	44.7			—			(7.3		)	0.2		(0.1		)	—		(26.2		)	—			11.3
Other assets	—			119.7			10.9			—		—			—		(14.5		)	—			116.1
Total Level III Assets, net	$	75.2		$	198.8		$	17.8		$	0.4	$	(6.5	)	$	—	$	(40.9	)	$	(0.3	)	$	244.5
Derivative liabilities, net	$	(214.9	)	$	51.8		$	(595.2	)	$	—	$	—		$	—	$	20.9		$	—		$	(737.4	)
VIE debt	(296.1		)	(253.5		)	(170.4		)	—		—			—		92.4			—			(627.6		)
Total Level III Liabilities, net	$	(511.0	)	$	(201.7	)	$	(765.6	)	$	—	$	—		$	—	$	113.3		$	—		$	(1,365.0	)

______________________


(1)	Represents the impact of our adoption of the accounting standard update regarding improvements to financial reporting by enterprises involving VIEs.


(2)	Includes unrealized gains (losses) relating to assets and liabilities still held as of June 30, 2010, as follows: $13.1 million for investments, $(5.9) million for NIMS and CPS derivative assets, $3.3 million for other assets, $(635.2) million for derivative liabilities, and $(42.1) million for VIE debt.


(3)	Transfers are recognized at the end of the period as the availability of market observed inputs change from period to period.

Other Fair Value Disclosure

The carrying value and estimated fair value of other selected assets and liabilities not carried at fair value on our condensed consolidated balance sheets were as follows:



	June 30, 2011				December 31, 2010
(In millions)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Assets:
Fixed-maturities held to maturity	$	7.8	$	8.3	$	10.8	$	11.4
Short-term investments (carried at cost)	—		—		1.6		1.6
Other invested assets	62.3		66.2		59.6		58.4
Liabilities:
Long-term debt	811.3		767.9		964.8		1,082.5
Non-derivative financial guaranty liabilities	377.2		477.2		406.1		531.1