Statutory Information

Radian Guaranty's statutory net loss, statutory policyholders' surplus and contingency reserve as of or for the periods indicated were as follows:



(In millions)	As of or for the Nine Months Ended September 30, 2011			As of or for the Year Ended December 31, 2010
Statutory net loss	$	(370.2	)	$	(535.2	)
Statutory policyholders' surplus	937.1			1,295.7
Contingency reserve	—			19.6
Risk-to-capital ratio	21.4			16.8

The increase in Radian Guaranty's risk-to-capital ratio in 2011, was primarily due to Radian Guaranty's statutory net loss, which was partially offset by the effect of an excess-of-loss reinsurance agreement between Radian Guaranty and its subsidiary, 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. Radian Group contributed approximately $30 million to Radian Guaranty in November 2011, in order to maintain compliance with Radian Guaranty's Statutory RBC Requirements in certain states, as discussed below.

As of September 30, 2011, Radian Asset Assurance maintained claims paying resources of $2.1 billion, including statutory surplus of approximately $1.0 billion. In June 2011, Radian Asset Assurance paid an ordinary dividend of $53.4 million to Radian Guaranty. We expect that Radian Asset Assurance will continue to have the capacity to pay ordinary dividends to Radian Guaranty in 2012 and 2013, although these dividends are expected to be at or below the 2011 level.

Under Texas insurance regulations, to be an authorized insurer, Commonwealth Mortgage Assurance Company of Texas ("CMAC of Texas"), an affiliated reinsurer of Radian Guaranty, is required to maintain a minimum statutory surplus of $20 million. CMAC of Texas had a statutory net loss of $52.4 million for the nine months ended September 30, 2011. Radian Group and Radian Guaranty made contributions totaling approximately $23 million to CMAC of Texas in October 2011, in order to maintain the required minimum statutory capital level. CMAC of Texas had a policyholders' surplus of $20.3 million as of September 30, 2011.

We and our insurance subsidiaries are subject to comprehensive, detailed regulation, principally designed for the protection of our insured 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 state agencies or officials 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 GSEs and state insurance regulators impose various capital requirements as well as capital and risk-based measurements on our insurance subsidiaries. These include risk-to-capital ratios, risk-based capital measures and surplus requirements that limit the amount of insurance that each of our insurance subsidiaries may write. Failure to maintain adequate levels of capital 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, mortgage insurers are required to maintain minimum surplus levels and, in certain states, a minimum amount of statutory capital relative to the level of risk in force, or “risk-to-capital.” Sixteen states (the risk-based capital or “RBC States”) currently have a statutory or regulatory risk-based capital requirement (a "Statutory RBC Requirement"), the most common of which (imposed by 11 of the RBC States) is a requirement that a mortgage insurer's risk-to-capital ratio may not exceed 25 to 1. Radian Guaranty's domiciliary state, Pennsylvania, is not one of the RBC States. In the first nine months of 2011, the RBC States accounted for approximately 53.5% of Radian Guaranty's total primary new insurance written. If Radian Guaranty is not in compliance with the applicable Statutory RBC Requirement in any RBC State, it would be prohibited from writing new business in that state until it is back in compliance or it receives a waiver of the requirement from the applicable state insurance regulator, as discussed in more detail below. 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 fails 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 reduce current business levels) or impose restrictions on Radian Guaranty while its risk-to-capital ratio remained at elevated levels. The franchise value of our mortgage insurance business would likely be significantly diminished if Radian Guaranty was prohibited from writing new business or restricted in the amount of new business it could write in one or more states.

As a result of the significant losses we experienced in our mortgage insurance business during the last four years and despite significant capital contributions to this business, Radian Guaranty's risk-to-capital ratio has increased from 8.1 to 1 at December 31, 2006, to an estimated 21.4 to 1 at September 30, 2011. Based on our current projections, which are based on various assumptions that are subject to inherent uncertainty and require judgment by management, Radian Guaranty's risk-to-capital ratio is expected to continue to increase and, absent any future capital contributions from Radian Group, exceed 25 to 1 in the near term. The ultimate amount of losses and the timing of these 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. In addition, establishing loss reserves in our businesses requires significant judgment by management with respect to the likelihood, magnitude and timing of anticipated losses. This judgment has been made more difficult in the current period of prolonged economic uncertainty. 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 hurt our capital position and increase Radian Guaranty's risk-to-capital position.

Radian Guaranty's risk-to-capital position also is dependent on the performance of our financial guaranty portfolio. During the third quarter of 2008, we contributed our ownership interest in Radian Asset Assurance to Radian Guaranty. While this reorganization provided Radian Guaranty with substantial regulatory capital and dividends, it also makes the capital adequacy of our mortgage insurance business dependent, to a significant degree, on the performance of our financial guaranty business. If the performance of our financial guaranty portfolio deteriorates materially, including if we are required to establish one or more significant statutory reserves as a result of defaults on obligations that we insure, or if we make net commutation payments to terminate insured obligations in excess of the then posted statutory reserves for such obligations, the regulatory capital of Radian Guaranty also would be negatively impacted. Any decrease in the capital support from our financial guaranty business could, therefore, have a negative impact on Radian Guaranty's risk-to-capital position and its ability to remain in compliance with the Statutory RBC Requirements. Radian Asset Assurance provides credit protection on the senior-most tranche of a CDO of ABS transaction (the “CDO of ABS” or the “Insured CDO”) with $450.6 million in net par outstanding as of September 30, 2011. In the fourth quarter of 2011, the CDO of ABS experienced an interest shortfall. Based on our estimates, we currently expect to establish a statutory reserve for the CDO of ABS that will negatively impact Radian Guaranty's statutory capital in the fourth quarter of 2011 in an amount between $88 million and $109 million. See Note 17 regarding subsequent events for additional information.

We actively manage Radian Guaranty's risk-to-capital position in various ways, including: (1) through reinsurance arrangements with our subsidiaries; (2) by seeking opportunities to reduce our risk exposure through commutations or other negotiated transactions; and (3) by contributing additional capital from Radian Group to our mortgage insurance operations. Radian Group currently has unrestricted cash and liquid investments of approximately $600 million, which may be used to further support Radian Guaranty's risk-to-capital position. Depending on the extent of our future losses, the amount of capital contributions required for Radian Guaranty to remain in compliance with the Statutory RBC Requirements could be substantial and could exceed amounts maintained at Radian Group.

Our ability to continue to manage Radian Guaranty's risk-to-capital through reinsurance may be limited. Our existing inter-company reinsurance arrangements are conducted through affiliated insurance subsidiaries, and therefore, remain subject to regulation by state insurance regulators who could decide to limit, or require the termination of, such arrangements. In addition, certain of these affiliated reinsurance companies currently are operating at or near minimum capital levels and have required, and may continue to require, additional capital contributions from Radian Group in the future. One of these affiliated insurance companies, which provides reinsurance to Radian Guaranty for coverage on loans in excess of 25%, is a sister company of Radian Guaranty, and therefore, most of any contributions to this insurer would not be consolidated with Radian Guaranty's capital for purposes of calculating Radian Guaranty's risk-to-capital position. In the recent past, the Federal National Housing Mortgage Association ("Fannie Mae") has proposed amendments to its mortgage insurance eligibility guidelines, which if implemented without revision or a waiver for existing arrangements, may prohibit the use of certain of our inter-company reinsurance arrangements. If we are limited in, or prohibited from, using inter-company reinsurance arrangements to manage Radian Guaranty's risk-to-capital level, it would adversely impact Radian Guaranty's risk-to-capital position.

In order to maximize our financial flexibility, we have applied for waivers or similar relief for Radian Guaranty in each of the RBC States. For the past several years, we, along with others in our industry, have pursued regulatory changes or relief in the RBC States, primarily through new legislation or other means by which the insurance regulator in these states is granted discretionary authority to waive the Statutory RBC Requirement. As a result of these efforts, we now believe that all of the RBC States other than New York have the flexibility to permit a waiver of their Statutory RBC Requirements. To date, Radian Guaranty has been granted future relief from two states - Illinois has granted a waiver that expires December 31, 2012, and Kentucky has informed us that it would not take immediate action in the event Radian Guaranty's risk-to-capital ratio exceeded 25 to 1. The state of Kansas has not granted waivers to any mortgage insurance companies at this time, including Radian Guaranty. We are actively pursuing waivers in the remaining 12 RBC States. There can be no assurance: (1) that Radian Guaranty will be granted a waiver in any of the remaining RBC States; (2) that if a waiver is granted, such regulator will not revoke or terminate the waiver, which the regulator generally has the authority to do at any time; or (3) regarding what, if any, requirements may be imposed as a condition to such waivers, and whether we would be able to comply with any such conditions.

In addition to filing for waivers in the RBC States, we are also preparing our wholly-owned subsidiary, Radian Mortgage Assurance Inc. ("Radian Mortgage Assurance," a sister company of Radian Guaranty formerly named Amerin Guaranty Corporation) to write new first-lien mortgage insurance business. If necessary, we may use Radian Mortgage Assurance to write mortgage insurance only in those states that do not permit Radian Guaranty to continue writing insurance while it is out of compliance with Statutory RBC Requirements. We have received approval from the Pennsylvania Department of Insurance to use Radian Mortgage Assurance as a first-lien mortgage insurance provider. In addition, we intend to submit a request to the GSEs to have Radian Mortgage Assurance approved as an eligible mortgage insurer for purposes of writing business in each of the RBC States. As part of this submission, we expect to commit to making an initial capital contribution of $50 million to supplement Radian Mortgage Assurance's existing $17 million of capital. The GSEs could require a greater level of capitalization for Radian Mortgage Assurance and/or a capital contribution to Radian Guaranty as a condition to their approval, any of which would limit our financial flexibility and could make it more difficult for Radian Group to meet its obligations in the future, including future principal payments on our long-term debt.

We cannot provide any assurance as to whether we will obtain waivers in the remaining RBC States or whether the GSEs will approve Radian Mortgage Assurance as an eligible mortgage insurer. As part of our waiver requests in the remaining RBC States and our request to the GSEs, we are required to submit financial projections for Radian Guaranty to the various insurance departments and the GSEs, including projections performed by an independent third party.

One of our competitors, Republic Mortgage Insurance Company (“RMIC”), ceased writing new insurance commitments after the waiver it received from its domiciliary state expired on August 31, 2011; and in October 2011, RMIC went into run-off. Another competitor, PMI Mortgage Insurance Co. (“PMI”) and the subsidiary it established to write new business if PMI was no longer able to do so (“PMAC”), ceased issuing new mortgage insurance commitments effective August 2011 when PMI was placed under the supervision of the insurance department of its domiciliary state. Subsequently, on October 20, 2011, the Superior Court of the State of Arizona issued an order directing the Director of the Arizona Department of Insurance (the “Director”) to take possession and control of the property and business of PMI pending a hearing on various matters that include the appointment of the Director as receiver for PMI. Both Fannie Mae and Freddie Mac suspended RMIC, PMI and PMAC as approved mortgage insurers. We are uncertain how such events, including the actions taken by the GSEs, will impact the status of Radian Guaranty's waiver requests and the GSE's approval process for Radian Mortgage Assurance.

Our existing capital resources may not be sufficient to successfully manage Radian Guaranty's risk-to-capital ratio. If permitted by the RBC States and the GSEs, our ability to use waivers and Radian Mortgage Assurance to allow Radian Guaranty to continue to write business with a risk-to-capital position in excess of the Statutory RBC Requirements will likely be subject to a maximum risk-to-capital ratio and potentially other restrictions, which we may be unable to satisfy. As a result, even if we are successful in implementing this strategy, additional capital contributions could be necessary, which we may not have the ability to provide. Further, regardless of whether the waivers or Radian Mortgage Assurance are available to us, we may choose to use our existing capital at Radian Group to maintain compliance with the Statutory RBC Requirements. Depending on the extent of our future mortgage insurance losses along with other factors, the amount of capital contributions that may be required to maintain compliance with the Statutory RBC Requirements could be significant and could exceed all of our remaining available capital. In the event we contribute a significant amount of Radian Group's available capital to Radian Guaranty, our financial flexibility would be significantly reduced, making it more difficult for Radian Group to meet its obligations in the future, including future principal payments on our long-term debt.

Radian Group's U.S. Consolidated federal income tax returns, which include CMAC of Texas's federal tax returns, were under examination by the Internal Revenue Service (“IRS”) for tax years 2000 through 2007. We are currently contesting proposed adjustments resulting from the IRS examination of these tax years. As described in more detail below, we have reached a tentative settlement agreement with the IRS Appeals Office (“Appeals”) relating to tax years 2000 through 2007.

As a result of its examination, the IRS opposed the recognition of certain tax losses and deductions that were generated through the Company's investment in a portfolio of residual interests in Real Estate Mortgage Investment Conduits and proposed adjustments denying the associated tax benefits from these items. The originally proposed adjustments relating to the 2000 through 2007 tax years, if sustained, would have increased CMAC of Texas's original tax liability for those years by approximately $128 million, in addition to any associated penalties and interest. CMAC of Texas appealed these proposed adjustments and made "qualified deposits" with the U.S. Department of the 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, to avoid the accrual of above-market-rate interest with respect to the proposed adjustments.

In late December 2010, CMAC of Texas reached a tentative settlement agreement with Appeals. In August 2011, CMAC of Texas executed a closing agreement, which Appeals has submitted to the Joint Committee on Taxation for approval. As part of the closing agreement, CMAC of Texas and Appeals agreed on a more detailed computation of the additional tax liability and utilization of net operating losses related to this matter. Under the terms of this agreement, CMAC of Texas believes that it will be entitled to a return of a majority of its qualified deposits.

In connection with a financial examination of CMAC of Texas by the Texas Department of Insurance (“TXDOI”) for the five-year period ended December 31, 2008, the TXDOI examiners notified us that they do not agree with our statutory accounting treatment pertaining to proposed tax adjustments resulting from the IRS examination of Radian Group's 2000 through 2007 tax years. The TXDOI examiners originally proposed a reduction to CMAC of Texas's statutory surplus of approximately $128 million as a result of our dispute with the IRS. In August 2011, the TXDOI issued its final examination report of CMAC of Texas's business practices, management, operations and financial condition for the five-year period ended December 31, 2008. Based on the tentative settlement with the IRS as described above, the TXDOI reduced their proposed additional tax liability relating to the IRS dispute from $128 million to $27.5 million as of December 31, 2008. The amount of the adjustment was based on the estimated liability at the issuance date of the TXDOI's report, utilizing the statutory federal tax rate of 35% and prior to consideration of potential net operating loss utilization. As mentioned above, in August 2011, the Company executed a closing agreement, which Appeals has submitted to the Joint Committee on Taxation for approval. The tax liability and estimated interest expense associated with the executed closing agreement are reflected within CMAC of Texas's policyholders' surplus as of September 30, 2011. CMAC of Texas does not expect the Joint Committee on Taxation to approve its executed final closing agreement for several months and until such time, there can be no complete assurance that the terms of the Company's closing agreement will not change materially; however, the Company has no basis to believe that there will be a material change. Based on the tentative settlement and issuance of the TXDOI's final examination report, CMAC of Texas was able to file its overdue audited statutory financial statements for 2009 and 2010 in October 2011.