10-Q 1 rdn10q06302011.htm RDN.10Q.06.30.2011

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
 FORM 10-Q
 _______________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
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)
_____________________________________________
 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
 
Accelerated filer  o
  
Non-accelerated filer  o
 
Smaller reporting company  o
 
 
 
  
(Do not check if a smaller reporting company)
 
 
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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 133,212,075 shares of common stock, $0.001 par value per share, outstanding on July 29, 2011.


Radian Group Inc.
INDEX
 
 
 
 
Page
Number
 
 
 
 
 
Item 1.
  
 
  
 
  
 
  
 
  
 
  
Item 2.
  
Item 3.
  
Item 4.
  
 
 
 
 
 
Item 1.
  
Item 1A.
  
Item 6.
  
 
 
 
 
 
 
 


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 Securities Exchange Act of 1934 and the United States ("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," 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 information. The forward-looking statements, as well as our prospects as a whole, are subject to risks and uncertainties, including the following:

changes in general financial and political conditions, including the recent downgrade of the U.S. credit rating, a failure of the U.S. economy to fully recover from the most recent recession or the U.S. economy reentering a recessionary period, a lack of meaningful liquidity in the capital markets or in the credit markets, a prolonged period of high unemployment rates and limited home price appreciation or further depreciation (which has resulted in some borrowers voluntarily defaulting on their mortgages when their mortgage balances exceed the value of their homes), changes or volatility in interest rates or consumer confidence, changes in credit spreads, each of which may be accelerated or intensified by the recent downgrade of the U.S. credit rating and any further actual or threatened downgrades of U.S. credit ratings or as a result of Congressional action following the recent decision to increase the U.S. debt ceiling;

changes in the way customers, investors, regulators or legislators perceive the strength of private mortgage insurers or financial guaranty providers, or investor concern over the credit quality and specific risks faced by the particular businesses, municipalities or pools of assets covered by our insurance;

catastrophic events or further economic changes in geographic regions, including governments and municipalities, where our mortgage insurance or financial guaranty insurance exposure is more concentrated;

our ability to successfully execute upon our capital plan for our mortgage insurance business (which depends, in part, on the performance of our financial guaranty portfolio), and if necessary, to obtain additional capital to support our mortgage insurance business and the long-term liquidity needs of our holding company;

a further reduction in, or prolonged period of depressed levels of, home mortgage originations due to reduced liquidity in the lending market, tighter underwriting standards, the risk retention requirements established under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and the decrease in housing demand throughout the U.S.;

our ability to maintain adequate risk-to-capital ratios and surplus requirements in our mortgage insurance business in light of ongoing losses in this business and potential further deterioration in our financial guaranty portfolio which, in the absence of new capital, could depend on our ability to execute strategies for which regulatory and other approvals are required and may not be obtained;

our ability to continue to effectively mitigate our mortgage insurance and financial guaranty losses;

reduced opportunities for loss mitigation in markets where housing values do not appreciate or continue to decline;

a more rapid than expected decrease in the level of insurance rescissions and claim denials from the current elevated levels (including as a result of successful challenges to previously rescinded policies or claim denials), which rescissions and denials have materially mitigated our paid losses and resulted in a significant reduction in our loss reserves;

the negative impact our insurance rescissions and claim denials may have on our relationships with customers and potential customers, including the potential loss of business and the heightened risk of disputes and litigation;

the need, in the event that we are unsuccessful in defending our rescissions or denials, to increase our loss reserves for, and reassume risk on, rescinded loans and pay additional claims;


3

the concentration of our mortgage insurance business among a relatively small number of large customers;

any disruption in the servicing of mortgages covered by our insurance policies and poor servicer performance;

the aging of our mortgage insurance portfolio and changes in severity or frequency of losses associated with certain of our products that are riskier than traditional mortgage insurance or financial guaranty insurance policies;

the performance of our insured portfolio of higher risk loans, such as Alternative-A and subprime loans, and of adjustable rate products, such as adjustable rate mortgages and interest-only mortgages;

a decrease in persistency rates of our mortgage insurance policies;

an increase in the risk profile of our existing mortgage insurance portfolio due to the availability of mortgage refinancing to only the most qualified borrowers in the current mortgage and housing market;

further downgrades or threatened downgrades of, or other ratings actions with respect to, our credit ratings or the ratings assigned by the major rating agencies to any of our rated insurance subsidiaries at any time (in particular, the credit rating of Radian Group Inc. and the financial strength ratings assigned to Radian Guaranty Inc.);

heightened competition for our mortgage insurance business from others such as the Federal Housing Administration (the "FHA"), the Veteran's Administration and private mortgage insurers (in particular, the FHA and those private mortgage insurers that have been assigned higher ratings from the major rating agencies or new entrants to the industry that are not burdened by legacy obligations);

changes in the charters or business practices of, or rules or regulations applicable to, Federal National Mortgage Association ("Fannie Mae") and Freddie Mac, the largest purchasers of mortgage loans that we insure, and our ability to remain an eligible provider to both Freddie Mac and Fannie Mae;

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 scope;

the effect of the Dodd-Frank Act on the financial services industry in general, and on our mortgage insurance and financial guaranty businesses in particular, including whether and to what extent loans with mortgage insurance are considered "qualified residential mortgages" for purposes of the Dodd-Frank Act securitization provisions or "qualified mortgages" for purposes of the ability to repay provisions of the Dodd-Frank Act and potential obligations to post collateral on our existing insured derivatives portfolio;

the application of existing federal or state consumer, lending, insurance, tax, securities and other applicable laws and regulations, or changes in these laws and regulations or the way they are interpreted; including, without limitation: (i) the outcome of existing, or the possibility of additional, lawsuits or investigations, and (ii) legislative and regulatory changes (a) affecting demand for private mortgage insurance, (b) limiting or restricting our use of (or increasing requirements for) additional capital and the products we may offer, or (c) affecting the form in which we execute credit protection or affecting our existing financial guaranty portfolio;

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 or financial guaranty businesses or premium deficiencies for our mortgage insurance business, or to estimate accurately the fair value amounts of derivative instruments in our mortgage insurance and financial guaranty businesses in determining gains and losses on these contracts;

the ability of our primary insurance customers in our financial guaranty reinsurance business to provide appropriate surveillance and to mitigate losses adequately with respect to our assumed insurance portfolio;

volatility in our earnings caused by changes in the fair value of our assets and liabilities carried at fair value, including our derivative instruments, and our need to reevaluate the possibility of a premium deficiency in our mortgage insurance business on a quarterly basis;

our ability to realize the tax benefits associated with our gross deferred tax assets, which will depend on our ability to generate sufficient sustainable taxable income in future periods;


4

our ability to successfully develop and implement a strategy to utilize the recently acquired Municipal and Infrastructure Assurance Corporation (the "FG Insurance Shell") in the public finance financial guaranty market, which strategy may depend on, among other items, our ability to obtain further necessary regulatory or other approvals, to attract third-party capital and to obtain ratings sufficient to support such a strategy;

changes in accounting guidance from the Securities and Exchange Commission or the Financial Accounting Standards Board; and

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.

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 Part I of our Annual Report on Form 10-K for the year ended December 31, 2010, and in Item 1A of Part II of our Quarterly Reports on Form 10-Q. We caution you not to place undue reliance on these forward-looking statements, which are current only as of the date on which we filed this report. We do not intend to, and we disclaim any duty or obligation to, update or revise any forward-looking statements made in this report to reflect new information or future events or for any other reason.



5



PART I—FINANCIAL INFORMATION
Item 1.     Financial Statements. (Unaudited)
Radian Group Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
June 30,
2011
 
December 31,
2010
(In thousands, except share and per share amounts)
 
 
 
ASSETS
 
 
 
Investments
 
 
 
Fixed-maturities held to maturity—at amortized cost (fair value $8,282 and $11,416)
$
7,781

 
$
10,773

Fixed-maturities available for sale—at fair value (amortized cost $160,085 and $340,795)
149,146

 
273,799

Equity securities available for sale—at fair value (cost $160,038 and $160,242)
193,965

 
184,365

Trading securities—at fair value (including variable interest entity (“VIE”) securities of $100,691 and $83,184)
4,445,335

 
4,562,821

Short-term investments—at fair value (including VIE investments of $149,984 and $149,981)
1,130,268

 
1,537,498

Other invested assets—at cost
62,344

 
59,627

Total investments
5,988,839

 
6,628,883

Cash
21,122

 
20,334

Restricted cash
28,568

 
31,413

Deferred policy acquisition costs
138,926

 
148,326

Accrued investment income
39,620

 
40,498

Accounts and notes receivable (less allowance of $0 and $50,000)
109,017

 
116,452

Property and equipment, at cost (less accumulated depreciation of $95,204 and $92,451)
15,999

 
13,024

Derivative assets (including VIE derivative assets of $4,653 and $10,855)
27,266

 
26,212

Deferred income taxes, net
27,531

 
27,531

Reinsurance recoverables
179,573

 
244,894

Other assets (including VIE other assets of $115,716 and $112,426)
352,335

 
323,320

Total assets
$
6,928,796

 
$
7,620,887

LIABILITIES AND STOCKHOLDERS’ EQUITY

 
 
Unearned premiums
$
629,813

 
$
686,364

Reserve for losses and loss adjustment expenses (“LAE”)
3,343,624

 
3,596,735

Reserve for premium deficiency
6,251

 
10,736

Long-term debt
811,319

 
964,788

VIE debt—at fair value (including $3,195 and $9,514 of non-recourse debt)
393,740

 
520,114

Derivative liabilities (including VIE derivative liabilities of $18,831 and $19,226)
313,708

 
723,579

Accounts payable and accrued expenses (including VIE accounts payable of $686 and $837)
301,031

 
258,791

Total liabilities
5,799,486

 
6,761,107

Commitments and Contingencies (Note 15)

 

Stockholders’ equity
 
 
 
Common stock: par value $.001 per share; 325,000,000 shares authorized; 150,574,956 and 150,507,853 shares issued at June 30, 2011 and December 31, 2010, respectively; 133,113,518 and 133,049,213 shares outstanding at June 30, 2011 and December 31, 2010, respectively
151

 
150

Treasury stock, at cost: 17,461,438 and 17,458,640 shares at June 30, 2011 and December 31, 2010, respectively
(892,036
)
 
(892,012
)
Additional paid-in capital
1,965,739

 
1,963,092

Retained earnings (deficit)
34,861

 
(204,926
)
Accumulated other comprehensive income (loss)
20,595

 
(6,524
)
Total stockholders’ equity
1,129,310

 
859,780

Total liabilities and stockholders’ equity
$
6,928,796

 
$
7,620,887

See notes to unaudited condensed consolidated financial statements.


6


Radian Group Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In thousands, except per share amounts)
2011

2010
 
2011
 
2010
Revenues:
 
 
 
 
 
 
 
Premiums written—insurance:
 
 
 
 
 
 
 
Direct
$
174,008

 
$
194,757

 
$
364,849

 
$
379,035

Assumed
(11,788
)
 
(7,923
)
 
(10,164
)
 
(9,171
)
Ceded
(9,442
)
 
(26,933
)
 
(19,158
)
 
(54,462
)
Net premiums written
152,778

 
159,901

 
335,527

 
315,402

Decrease in unearned premiums
36,156

 
43,545

 
56,430

 
86,312

Net premiums earned—insurance
188,934

 
203,446

 
391,957

 
401,714

Net investment income
43,823

 
48,619

 
86,063

 
93,977

Net gains on investments
44,236

 
57,262

 
81,671

 
115,210

Total other-than-temporary impairment ("OTTI") losses
(11
)
 
(38
)
 
(11
)
 
(56
)
Losses recognized in other comprehensive income (loss)

 

 

 

Net impairment losses recognized in earnings
(11
)
 
(38
)
 
(11
)
 
(56
)
Change in fair value of derivative instruments
188,726

 
(524,606
)
 
432,618

 
(602,560
)
Net gains (losses) on other financial instruments
5,047

 
(63,200
)
 
80,298

 
(164,764
)
Gain on sale of affiliate

 
34,815

 

 
34,815

Other income
1,196

 
(2,072
)
 
2,644

 
3,703

Total revenues
471,951

 
(245,774
)
 
1,075,240

 
(117,961
)
Expenses:
 
 
 
 
 
 
 
Provision for losses
263,566

 
435,166

 
690,939

 
979,046

Change in reserve for premium deficiency
(3,102
)
 
(7,354
)
 
(4,485
)
 
(8,585
)
Policy acquisition costs
14,387

 
16,797

 
28,518

 
31,665

Other operating expenses
45,954

 
35,165

 
92,173

 
100,221

Interest expense
16,079

 
8,245

 
33,103

 
19,049

Total expenses
336,884

 
488,019

 
840,248

 
1,121,396

Equity in net income of affiliates

 
6,570

 
65

 
14,668

Pretax income (loss)
135,067

 
(727,223
)
 
235,057

 
(1,224,689
)
Income tax benefit
(2,048
)
 
(252,143
)
 
(5,064
)
 
(439,254
)
Net income (loss)
$
137,115

 
$
(475,080
)
 
$
240,121

 
$
(785,435
)
Basic net income (loss) per share
$
1.04

 
$
(4.31
)
 
$
1.82

 
$
(8.15
)
Diluted net income (loss) per share
$
1.03

 
$
(4.31
)
 
$
1.80

 
$
(8.15
)
Weighted-average number of common shares outstanding—basic
132,185

 
110,282

 
132,185

 
96,420

Weighted-average number of common and common equivalent shares outstanding—diluted
133,614

 
110,282

 
133,724

 
96,420

Dividends per share
$
0.0025

 
$
0.0025

 
$
0.0050

 
$
0.0050


See notes to unaudited condensed consolidated financial statements.


7

Radian Group Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY (UNAUDITED)

    
(In thousands)
Common
Stock

Treasury
Stock

Additional Paid-in Capital

Retained
Earnings/(Deficit)

Foreign Currency Translation Adjustment

Unrealized Holding Gains/Losses

Other

Total

BALANCE, JANUARY 1, 2010
$
100

$
(889,496
)
$
1,363,255

$
1,602,143

$
18,285

$
(72,802
)
$
(16,491
)
$
2,004,994

Comprehensive loss:
















Net loss



(785,435
)



(785,435
)
Unrealized foreign currency translation adjustment, net of tax of $2,684




(3,986
)




Less: Reclassification adjustment for liquidation of foreign subsidiary and net gains on sales, net of tax of $240




(447
)




Net foreign currency translation adjustment, net of tax of $2,444




(4,433
)


(4,433
)
Unrealized holding gains arising during the period, net of tax of $11,165





20,736




Less: Reclassification adjustment for net gains included in net loss, net of tax of $673





(1,250
)



Net unrealized gain on investments, net of tax of $10,492





19,486


19,486

Comprehensive loss







(770,382
)
Sherman unrealized loss included in net loss






16,761

16,761

Repurchases of common stock under incentive plans

(2,484
)
108





(2,376
)
Issuance of common stock - stock offering
50


526,135





526,185

Issuance of common stock under benefit plans


1,938





1,938

Amortization of restricted stock


2,854





2,854

Stock-based compensation expense


191





191

Dividends declared



(536
)



(536
)
BALANCE, June 30, 2010
$
150

$
(891,980
)
$
1,894,481

$
816,172

$
13,852

$
(53,316
)
$
270

$
1,779,629

BALANCE, JANUARY 1, 2011
$
150

$
(892,012
)
$
1,963,092

$
(204,926
)
$
21,094

$
(27,857
)
$
239

$
859,780

Comprehensive income:
















Net income



240,121




240,121

Unrealized foreign currency translation adjustment, net of tax of $0




6,520





Less: Reclassification adjustment for liquidation of foreign subsidiary included in net income, net of tax of $11,617




27,954





Net foreign currency translation adjustment, net of tax of $11,617




(21,434
)


(21,434
)
Unrealized holding gains arising during the period, net of tax of $0





13,615


 
Less: Reclassification adjustment for net losses included in net income, net of tax benefit of $17,307 (See Note 6)





(34,938
)

 
Net unrealized gain on investments, net of tax benefit of $17,307





48,553


48,553

Comprehensive income







267,240

Repurchases of common stock under incentive plans

(24
)






(24
)
Issuance of common stock under benefit plans
1


404





405

Amortization of restricted stock


1,603





1,603

Additional convertible debt issuance costs, net


(22
)




(22
)
Stock-based compensation expense


995





995

Dividends declared


(333
)
(334
)



(667
)
BALANCE, June 30, 2011
$
151

$
(892,036
)
$
1,965,739

$
34,861

$
(340
)
$
20,696

$
239

$
1,129,310

See notes to unaudited condensed consolidated financial statements.

8

Radian Group Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(In thousands)
Six Months Ended
June 30,
2011
 
2010
Cash flows used in operating activities
$
(608,917
)
 
$
(460,719
)
Cash flows from investing activities:
 
 
 
Proceeds from sales of fixed-maturity investments available for sale
101,648

 
69,946

Proceeds from sales of equity securities available for sale
555

 
5,962

Proceeds from sales of trading securities
2,444,549

 
918,017

Proceeds from redemptions of fixed-maturity investments available for sale
28,032

 
30,492

Proceeds from redemptions of fixed-maturity investments held to maturity
3,195

 
2,635

Purchases of trading securities
(2,206,653
)
 
(1,338,204
)
Sales and redemptions of short-term investments, net
407,494

 
91,768

Purchases of other invested assets, net
(2,717
)
 
(955
)
Proceeds from the sale of investment in affiliate

 
172,017

Purchases of property and equipment, net
(5,729
)
 
(1,279
)
Net cash provided by (used in) investing activities
770,374

 
(49,601
)
Cash flows from financing activities:
 
 
 
Dividends paid
(667
)
 
(536
)
Redemption of long-term debt
(160,000
)
 
(29,348
)
Issuance of common stock

 
526,185

Net cash (used in) provided by financing activities
(160,667
)
 
496,301

Effect of exchange rate changes on cash
(2
)
 
(388
)
Increase (decrease) in cash
788

 
(14,407
)
Cash, beginning of period
20,334

 
41,574

Cash, end of period
$
21,122

 
$
27,167

Supplemental disclosures of cash flow information:
 
 
 
Income taxes (received) paid
$
(1,275
)
 
$
1,725

Interest paid
$
27,244

 
$
20,529

See notes to unaudited condensed consolidated financial statements.


9

Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

1. Condensed Consolidated Financial Statements—Basis of Presentation
Our condensed consolidated financial statements include the accounts of Radian Group Inc. and its subsidiaries. We refer to Radian Group Inc. together with its consolidated subsidiaries as "Radian," "we," "us" or "our," unless the context requires otherwise. We generally refer to Radian Group Inc. alone, without its consolidated subsidiaries, as "Radian Group."
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and include the accounts of all wholly-owned subsidiaries. Companies in which we, or one of our subsidiaries, own interests ranging from 20% to 50%, are accounted for in accordance with the equity method of accounting. VIEs where we are the primary beneficiary are consolidated. See Note 5 for further information. All intercompany accounts and transactions, and intercompany profits and losses, have been eliminated. We have condensed or omitted certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP pursuant to the instructions of Article 10 of Regulation S-X of the Securities and Exchange Commission ("SEC").
The financial information presented for interim periods is unaudited; however, such information reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the financial position, results of operations, and cash flows for the interim periods. These interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010. The total assets for our mortgage insurance segment as of June 30, 2010, reflected in Note 2 have been revised to conform to the presentation in the audited financial statements for the year ended December 31, 2010. The supplemental disclosure of income taxes paid for June 30, 2010, on our condensed consolidated statements of cash flows has been corrected from the amount reported in our 10Q for the quarter ended June 30, 2010. This error had no impact on any of our financial statements or any per-share amounts. The year-end condensed balance sheet data was derived from our audited financial statements, but does not include all disclosures required by GAAP.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. While the amounts included in our condensed consolidated financial statements include our best estimates and assumptions, actual results may vary materially.
Our future performance and financial condition is subject to significant risks and uncertainties, including but not limited to, the following:
Potential adverse effects on us of the failure or significant delay of the United States ("U.S.") economy to fully recover, including ongoing uncertainty in the housing and related credit markets and high unemployment, which could increase our mortgage insurance or financial guaranty losses beyond existing expectations (See Notes 7, 8 and 9).
Potential adverse effects if the capital and liquidity levels of Radian Group or our regulated subsidiaries' statutory capital levels are deemed inadequate to support current business operations and strategies. Radian Group had immediately available, directly or through an unregulated direct subsidiary, unrestricted cash and liquid investments of $680.2 million and $797.5 million at June 30, 2011 and December 31, 2010, respectively, which includes $150 million of investments contained in our committed preferred custodial trust securities ("CPS") as discussed in Note 5. Radian Guaranty Inc.'s ("Radian Guaranty") statutory policyholders' surplus declined from $1.3 billion at December 31, 2010, to $1.0 billion at June 30, 2011, driven primarily by a statutory net loss for the six months ended June 30, 2011, of approximately $273 million.

10


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)




Potential adverse effects if Radian Guaranty's regulatory risk-to-capital ratio were to increase above 25 to 1, including the possibility that insurance regulators or the Government Sponsored Enterprises ("GSEs") may limit or cause Radian Guaranty to cease underwriting new mortgage insurance risk, and Radian Guaranty's customers may decide not to insure loans with Radian Guaranty or may otherwise limit the type or amount of business done with Radian Guaranty. We have been preparing Radian Mortgage Assurance, Inc. ("Radian Mortgage Assurance", formerly Amerin Guaranty Corporation) to write new first-lien mortgage ("first-lien") insurance, if needed, and have been pursuing waivers from those states that impose a 25 to 1 limitation. If Radian Guaranty's risk-to-capital were to increase above 25 to 1, and we are unable to continue writing new first-lien insurance business through Radian Mortgage Assurance or obtain the necessary waivers from the risk-to-capital limitations, it will significantly impair our franchise value and reduce our cash flow associated with new business while we continue to honor and settle valid claims and related expenses. At June 30, 2011, Radian Guaranty's risk-to-capital ratio was 19.8 to 1, compared to 16.8 to 1 at December 31, 2010. This increase was primarily due to the statutory net loss discussed above, partially offset by an excess-of-loss reinsurance agreement with Radian Insurance Inc., under which Radian Guaranty transferred approximately $2 billion of risk in force to Radian Insurance Inc. in the second quarter of 2011.
Potential adverse effects if Radian Guaranty were to lose its eligibility status with the GSEs, which could occur at any time at the discretion of the GSEs. Loss of GSE eligibility would likely result in a significant curtailment of our ability to write new mortgage insurance business, which would significantly impair our franchise value and limit our cash flow arising from new business while we continue to honor and settle valid claims and related expenses.
Potential adverse effects from legislative efforts to reform the housing finance market, including the possibility that new federal legislation could reduce or eliminate the requirement for private mortgage insurance or place additional significant obligations or restrictions on mortgage insurers.
Potential impact on our businesses as a result of the implementation of regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), the effect of the Dodd-Frank Act on the financial services industry in general, and on our mortgage insurance and financial guaranty businesses in particular, including whether and to what extent loans with mortgage insurance are considered "qualified residential mortgages" for purposes of the Dodd-Frank Act securitization provisions or "qualified mortgages" for purposes of the ability to repay provisions of the Dodd-Frank Act and potential obligations to post collateral on our existing insured derivatives portfolio.
Potential adverse effects on Radian Group liquidity if regulators disallow or terminate our expense allocation agreements among Radian Group and its subsidiaries. In the first six months of 2011, Radian Group received $59.3 million in reimbursements from its subsidiaries under these agreements.
It is possible that the actual outcome of one or more of our plans or forecasts could be materially different, or that one or more of our estimates about the potential effects of the risks and uncertainties above or described elsewhere in this report, could prove to be materially different than our actual results. If one or more possible adverse outcomes were realized, there could be material adverse effects on our financial position, results of operations and cash flows.
Basic net income (loss) per share is based on the weighted-average number of common shares outstanding, while diluted net income (loss) per share is based on the weighted-average number of common shares outstanding and common share equivalents that would be issuable upon the exercise of stock options and other stock-based compensation. For the three and six months ended June 30, 2011, 3,268,525 shares of our common stock equivalents issued under our stock-based compensation plans were not included in the calculation of diluted net income per share as of such dates because they were anti-dilutive. As a result of our net loss for the three and six months ended June 30, 2010, 4,427,985 shares of our common stock equivalents issued under our stock-based compensations plans were not included in the calculation of diluted net loss per share as of such dates because they were anti-dilutive.
We have reflected in Note 4 the additional disclosures required by the update to the accounting standard regarding fair value measurements and disclosures effective January 1, 2011. The 2010 information has been revised to be consistent with the 2011 disclosure.



11


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)




2. Segment Reporting
Our mortgage insurance and financial guaranty segments are strategic business units that are managed separately. We allocate corporate income and expenses to our mortgage insurance and financial guaranty segments based on either an allocated percentage of time spent or internally allocated capital. We allocate corporate cash and investments to our segments based on internally allocated capital. The results for each segment for each reporting period can cause significant volatility in allocated capital.
Prior to January 1, 2011, we also had a third reportable segmentfinancial services. Our financial services segment had consisted mainly of our ownership interest in Credit-Based Asset Servicing and Securitization LLC ("C-BASS"), which was a credit-based consumer asset business. We wrote off our entire investment in C-BASS in 2007. C-BASS filed for Chapter 11 bankruptcy protection on November 12, 2010, and was subsequently liquidated. Our equity interest in C-BASS, and a related note receivable from C-BASS that had also been previously written off, were extinguished pursuant to the Plan of Liquidation that was confirmed on April 25, 2011. In addition, until May 3, 2010, when we sold our remaining interest therein, our financial services segment included our interest in Sherman Financial Group LLC, a consumer asset and servicing firm specializing in credit card and bankruptcy-plan consumer assets. Consequently, as of January 1, 2011, we no longer had any on-going activity in this reporting segment.
Summarized financial information concerning our current and previous operating segments, as of and for the periods indicated, are as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In thousands)
2011
 
2010
 
2011
 
2010
Mortgage Insurance
 
 
 
 
 
 
 
Net premiums written—insurance
$
164,194

 
$
167,909

 
$
345,040

 
$
324,941

Net premiums earned—insurance
$
164,325

 
$
179,992

 
$
350,459

 
$
357,331

Net investment income
24,853

 
28,544

 
51,686

 
54,903

Net gains on investments
27,425

 
34,441

 
45,187

 
63,222

Net impairment losses recognized in earnings
(11
)
 
(38
)
 
(11
)
 
(56
)
Change in fair value of derivative instruments
258

 
(1,310
)
 
(136
)
 
(1,033
)
Net gains (losses) on other financial instruments
(631
)
 
(7,973
)
 
1,835

 
(38,173
)
Other income
1,124

 
1,623

 
2,524

 
3,422

Total revenues
217,343

 
235,279

 
451,544

 
439,616

Provision for losses
269,992

 
427,622

 
683,965

 
956,713

Change in reserve for premium deficiency
(3,102
)
 
(7,354
)
 
(4,485
)
 
(8,585
)
Policy acquisition costs
8,601

 
12,113

 
18,817

 
22,617

Other operating expenses
33,913

 
25,639

 
68,050

 
71,872

Interest expense
146

 
1,549

 
9,935

 
3,669

Total expenses
309,550

 
459,569

 
776,282

 
1,046,286

Equity in net income of affiliates

 

 

 

Pretax loss
(92,207
)
 
(224,290
)
 
(324,738
)
 
(606,670
)
Income tax provision (benefit)
5,374

 
(71,763
)
 
8,875

 
(217,610
)
Net loss
$
(97,581
)
 
$
(152,527
)
 
$
(333,613
)
 
$
(389,060
)
Cash and investments
$
3,334,789

 
$
3,886,819

 
 
 
 
Deferred policy acquisition costs
44,509

 
35,220

 
 
 
 
Total assets
3,688,720

 
5,367,065

 
 
 
 
Unearned premiums
191,737

 
207,354

 
 
 
 
Reserve for losses and LAE
3,268,582

 
3,656,746

 
 
 
 
VIE debt
56,239

 
253,178

 
 
 
 
Derivative liabilities

 
358

 
 
 
 

12


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)





 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In thousands)
2011
 
2010
 
2011
 
2010
Financial Guaranty
 
 
 
 
 
 
 
Net premiums written—insurance
$
(11,416
)
 
$
(8,008
)
 
$
(9,513
)
 
$
(9,539
)
Net premiums earned—insurance
$
24,609

 
$
23,454

 
$
41,498

 
$
44,383

Net investment income
18,970

 
20,075

 
34,377

 
39,074

Net gains on investments
16,811

 
22,821

 
36,484

 
51,988

Net impairment losses recognized in earnings

 

 

 

Change in fair value of derivative instruments
188,468

 
(523,296
)
 
432,754

 
(601,527
)
Net gains (losses) on other financial instruments
5,678

 
(55,227
)
 
78,463

 
(126,591
)
Other income
72

 
(3,695
)
 
120

 
218

Total revenues
254,608

 
(515,868
)
 
623,696

 
(592,455
)
Provision for losses
(6,426
)
 
7,544

 
6,974

 
22,333

Change in reserve for premium deficiency

 

 

 

Policy acquisition costs
5,786

 
4,684

 
9,701

 
9,048

Other operating expenses
12,041

 
9,476

 
24,123

 
28,149

Interest expense
15,933

 
6,696

 
23,168

 
15,380

Total expenses
27,334

 
28,400

 
63,966

 
74,910

Equity in net income of affiliates

 

 
65

 
78

Pretax income (loss)
227,274

 
(544,268
)
 
559,795

 
(667,287
)
Income tax benefit
(7,422
)
 
(194,848
)
 
(13,939
)
 
(238,889
)
Net income (loss)
$
234,696

 
$
(349,420
)
 
$
573,734

 
$
(428,398
)
Cash and investments
$
2,703,740

 
$
3,390,788

 
 
 
 
Deferred policy acquisition costs
94,417

 
113,403

 
 
 
 
Total assets
3,240,076

 
3,981,423

 
 
 
 
Unearned premiums
438,076

 
529,321

 
 
 
 
Reserve for losses and LAE
75,042

 
124,494

 
 
 
 
VIE debt
337,501

 
374,460

 
 
 
 
Derivative liabilities
313,708

 
747,736

 
 
 
 

13


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)





(In thousands)
Three Months Ended
June 30, 2010
 
Six Months Ended
June 30, 2010
Financial Services
 
 
 
Net premiums written—insurance
$

 
$

Net premiums earned—insurance
$

 
$

Net investment income

 

Net gains on investments

 

Net impairment losses recognized in earnings

 

Change in fair value of derivative instruments

 

Net (losses) gains on other financial instruments

 

Gain on sale of affiliate
34,815

 
34,815

Other income

 
63

Total revenues
34,815

 
34,878

Provision for losses

 

Change in reserve for premium deficiency

 

Policy acquisition costs

 

Other operating expenses
50

 
200

Interest expense

 

Total expenses
50

 
200

Equity in net income of affiliates
6,570

 
14,590

Pretax income
41,335

 
49,268

Income tax provision
14,468

 
17,245

Net income
$
26,867

 
$
32,023

Cash and investments
$

 
 
Deferred policy acquisition costs

 
 
Total assets

 
 
Unearned premiums

 
 
Reserve for losses and LAE

 
 
VIE debt

 
 
Derivative liabilities

 
 
A reconciliation of segment net income (loss) to consolidated net income (loss) is as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In thousands)
2011
 
2010
 
2011
 
2010
Consolidated
 
 
 
 
 
 
 
Net income (loss):
 
 
 
 
 
 
 
Mortgage Insurance
$
(97,581
)
 
$
(152,527
)
 
$
(333,613
)
 
$
(389,060
)
Financial Guaranty
234,696

 
(349,420
)
 
573,734

 
(428,398
)
Financial Services

 
26,867

 

 
32,023

Total
$
137,115

 
$
(475,080
)
 
$
240,121

 
$
(785,435
)



14


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)





3. Derivative Instruments
The following table sets forth our gross unrealized gains and gross unrealized losses on derivative assets and liabilities as of the dates indicated. Certain contracts are in an asset position because the net present value of the contractual premium we receive exceeds the net present value of our estimate of the expected future premiums that a financial guarantor of similar credit quality to us would charge to provide the same credit protection, assuming a transfer of our obligation to such financial guarantor as of the measurement date.
 
(In millions)
June 30,
2011
 
December 31,
2010
Balance Sheets
 
 
 
Derivative assets:
 
 
 
Financial Guaranty credit derivative assets
$
22.2

 
$
14.5

Net interest margin securities ("NIMS") assets
4.7

 
10.8

Other
0.4

 
0.9

Total derivative assets
27.3

 
26.2

Derivative liabilities:
 
 
 
Financial Guaranty credit derivative liabilities
294.9

 
704.4

Financial Guaranty VIE derivative liabilities
18.8

 
19.2

Total derivative liabilities
313.7

 
723.6

Total derivative liabilities, net
$
(286.4
)
 
$
(697.4
)
The notional value of our derivative contracts at June 30, 2011, and December 31, 2010, was $39.5 billion and $41.6 billion, respectively.
The components of the gains (losses) included in change in fair value of derivative instruments are as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In millions)
2011
 
2010
 
2011
 
2010
Statements of Operations
 
 
 
 
 
 
 
Net premiums earned—derivatives
$
10.5

 
$
12.0

 
$
21.4

 
$
24.1

Financial Guaranty credit derivatives
181.9

 
(524.2
)
 
416.5

 
(608.3
)
Financial Guaranty VIE derivatives
(4.0
)
 
(7.5
)
 
(4.9
)
 
(10.7
)
NIMS
0.4

 
(0.3
)
 
(1.5
)
 
(0.5
)
Mortgage Insurance domestic and international CDS

 
(0.4
)
 

 
(0.4
)
Put options on CPS

 
(4.2
)
 

 
(6.3
)
Other
(0.1
)
 

 
1.1

 
(0.5
)
Change in fair value of derivative instruments
$
188.7

 
$
(524.6
)
 
$
432.6

 
$
(602.6
)
The valuation of derivative instruments may result in significant volatility from period to period in gains and losses as reported on our condensed consolidated statements of operations. Generally, these gains and losses result from changes in corporate credit or asset-backed spreads and changes in the creditworthiness of underlying corporate entities or the credit performance of the assets underlying asset-backed securities ("ABS"). Additionally, 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 and consequently, changes in the market's perception of our non-performance risk also result in gains and losses on our derivative instruments. Any incurred gains or losses on our financial guaranty contracts that are accounted for as derivatives are recognized as a change in fair value of derivative instruments. See Note 4 for information on our fair value of financial instruments.
 




15


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)






The following table shows selected information about our derivative contracts:
 
($ in millions)
June 30, 2011
Number of
Contracts
 
Par/
Notional
Exposure
 
Total Net Asset/
(Liability)
Product
 
 
 
 
 
NIMS related and other (1)

 
$

 
$
5.1

Corporate collateralized debt obligations ("CDOs")
79

 
31,854.3

 
(6.1
)
Non-Corporate CDOs and other derivative transactions:
 
 
 
 
 
Trust Preferred Securities ("TruPs")
19

 
1,977.2

 
(77.7
)
CDOs of commercial mortgage-backed securities ("CMBS")
4

 
1,831.0

 
(70.3
)
Other:
 
 
 
 
 
Structured finance
9

 
815.0

 
(62.0
)
Public finance
27

 
1,794.0

 
(39.6
)
Total Non-Corporate CDOs and other derivative transactions
59

 
6,417.2

 
(249.6
)
Assumed financial guaranty credit derivatives:
 
 
 
 
 
Structured finance
264

 
1,036.1

 
(15.5
)
Public finance
10

 
166.6

 
(1.5
)
Total Assumed
274

 
1,202.7

 
(17.0
)
Financial Guaranty VIE derivative liabilities (2)

 

 
(18.8
)
Grand Total
412

 
$
39,474.2

 
$
(286.4
)
 ________________
(1)
Represents NIMS derivative assets related to consolidated NIMS VIEs. Also includes common stock warrants. Because none of these investments represent financial guaranty contracts that we issued, they cannot become liabilities, and therefore, do not represent additional par exposure.
(2)
Represents the fair value of an interest rate swap included in the consolidation of one of our financial guaranty transactions. The notional amount of the interest rate swap does not represent additional par exposure, and therefore, is excluded from this table. See Note 5 for information on our maximum exposure to loss from our consolidated financial guaranty transactions.

4. 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.




16


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)




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.





17


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)




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).
 


18


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)




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.















19


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)




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.

 

20


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)




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