Share–Based and Other Compensation Programs

We have an equity compensation plan, the Radian Group Inc. 2008 Equity Compensation Plan (the “2008 Equity Plan”), pursuant to which we grant equity awards. The 2008 Equity Plan replaced our prior equity plan, the 1995 Equity Compensation Plan (the “1995 Equity Plan” and together with the 2008 Equity Plan, the “Equity Plans”). In adopting the 2008 Equity Plan, we agreed not to grant any new awards under the 1995 Equity Plan. The last awards granted pursuant to the 1995 Equity Plan were granted in 2008. All awards granted under the Equity Plans have been in the form of non-qualified stock options, restricted stock, restricted stock units (“RSUs”), stock appreciation rights (“SARs”) and phantom stock. The maximum contractual term for all awards under the Equity Plans is 10 years.

The 2008 Equity Plan authorizes the issuance of up to 6,417,000 shares of our common stock, of which there were 1,329,689 shares remaining available for grant as of December 31, 2012 (the “share reserve”). Each grant of restricted stock, RSUs, phantom stock or performance share awards under the 2008 Equity Plan (other than those settled in cash) reduces the reserve available for grant under the 2008 Equity Plan by 1.19 shares for every share subject to such grant (1.33 shares for grants made prior to May 13, 2009 and 1.14 shares for grants made on and after May 13, 2009 and prior to May 11, 2011). Awards under the 2008 Equity Plan that provide for settlement solely in cash (and not common shares) do not count against the share reserve. Absent this reserve adjustment for restricted stock, RSUs, phantom stock or performance share awards, our shares remaining available for grant under the 2008 Equity Plan would have been 1,768,249 shares as of December 31, 2012.

Unless otherwise described below, awards under the Equity Plans:


•	Generally vest 50% on the third and fourth anniversaries of the grant date and require the grantee to remain in service with us through the vesting period, except in the event of the grantee’s death, disability, retirement or upon a change of control.


•	Generally vest upon a grantee’s death, disability or retirement.

•

For awards granted prior to May 13, 2009, awards vest upon a change of control, defined as: (i) the acquisition by any third party of the beneficial ownership of 40% or more of our outstanding common stock (20% or more of our outstanding common stock for awards under the 1995 Equity Plan); (ii) the purchase by any third party of substantially all of our assets; or (iii) during any 24-month period, a change in 75% of the members of the board of directors with 75% of the prior members of the board of directors not approving such change.

•

Beginning in May 2009, awards granted under the 2008 Equity Plan provide for “double trigger” vesting in the event of a change of control, meaning that awards will vest in connection with a change of control only in the event the grantee’s employment is terminated by us without cause or the grantee terminates employment for “good reason,” in each case within 90 days before or one year after the change of control.

We estimate that the vesting of awards as a result of a change in control, including “double trigger” vesting in connection with a change in control as of December 31, 2012, would result in a pre-tax accounting charge to us of approximately $22.4 million, representing an acceleration of compensation expense.

In addition to the 2008 Equity Plan, we have granted long-term incentive awards pursuant to a long-term performance-based incentive cash program. This program is conducted pursuant to two plans, the Radian Group Inc. 2008 Long-Term Performance Cash Plan (the “Officer LTI Plan”) and the 2008 Executive Long-Term Incentive Cash Plan (the “Executive LTI Plan” and together with the Officer LTI Plan, the “Cash Based LTI Plans”). Participants in the Cash Based LTI Plans include certain officers of Radian Group and its subsidiaries. In 2008, we granted an award under the Officer LTI Plan for which performance was based on our stock price growth (above a minimum threshold price), with a range of possible payouts corresponding to ranges of stock prices achieved. See “Officer LTI Plan (Cash Settled)” below. In addition to the 2008 award under the Officer LTI Plan, the Compensation and Human Resources Committee of our board of directors (the “Compensation Committee”) has granted cash incentive awards under the Cash Based LTI Plans that are not directly correlated with our stock price, but contain discretionary payments based on various fundamental business metrics. See “Other Compensation Programs” below.

We use the Monte Carlo valuation model to determine the fair value of all cash settled awards where stock price is a factor in determining the vesting, as well as for cash or stock settled performance awards where there exists a similar stock price based market condition (we refer to these awards as “Market Condition Awards”). The Monte Carlo valuation model incorporates multiple input variables, including expected life, volatility, risk-free rate of return and dividend yield for each award to estimate the probability that a vesting condition will be achieved. In determining these assumptions for the Monte Carlo valuations, we consider historic and observable market data.

Depending on certain characteristics of the awards granted under the various compensation programs noted above, they are accounted for as either liabilities or equity instruments. The following table summarizes awards outstanding and compensation expense recognized for each type of market condition award as of and for the periods indicated:



	December 31,
($ in thousands)	2012				2011					2010
Market Condition Compensation Programs	Liability Recorded/ Equity Instruments Outstanding		Compensation Cost Recognized (1)		Liability Recorded/ Equity Instruments Outstanding		Compensation Cost Recognized (1)			Liability Recorded/ Equity Instruments Outstanding		Compensation Cost Recognized (1)
Liabilities:
RSUs—Cash Settled	$	26,164	$	21,301	$	5,229	$	480		$	4,788	$	1,774
SARs—Cash Settled	4,602		3,498		1,156		(5,229		)	6,430		3,951
Officer LTI Plan	—		—		—		32			8,397		5,618
Liabilities	$	30,766	24,799		$	6,385	(4,717		)	$	19,615	11,343
Equity:
Stock Options	4,402,344		1,787		3,472,762		1,558			3,227,411		2,214
Phantom Stock	343,094		4		518,441		5			518,441		3,183
RSUs—Equity Settled	990,881		1,466		505,183		1,717			216,300		1,272
Restricted Stock	131,374		57		324,778		120			399,575		2,036
Employee Stock Purchase Plan (“ESPP”)			253				348					321
Equity			3,567				3,748					9,026
Total all share-based plans			$	28,366			$	(969	)			$	20,369

______________

(1)

For purposes of calculating compensation cost recognized, we consider awards effectively vested (and we recognize the full compensation costs) when grantees become retirement eligible. Under the terms of our awards, legal vesting upon retirement occurs when the grantee actually separates from service, except for awards granted to certain senior executives in which case vesting remains dependent on performance for the full term of the awards notwithstanding an executive’s early retirement.

The following table reflects additional information regarding all market condition awards for the years indicated:



	Year Ended December 31,
($ in thousands except per-share amounts)	2012		2011			2010
Total compensation cost recognized	$	28,366	$	(969	)	$	20,369
Less: Costs deferred as acquisition costs	465		171			551
Stock-based compensation expense impact on net (loss) income before income taxes—increase (decrease)	$	27,901	$	(1,140	)	$	19,818
Stock-based compensation expense impact on net (loss) income—decrease (increase)	$	18,136	$	(741	)	$	12,882
Excess tax benefits from stock-based payment arrangements	$	—	$	4		$	—
Stock-based compensation expense impact on diluted (loss) income per share—increase (decrease)	$	0.14	$	(0.01	)	$	0.11

RSUs (Cash Settled)

Performance-Based RSUs—In 2012 and 2011, the Compensation Committee granted a total of 2,211,640 and 3,004,730, respectively, of performance-based RSUs (to be settled in cash) to eligible officers under the 2008 Equity Plan. These performance-based RSUs entitle grantees to a cash amount equal to the fair market value of RSUs that have vested at the end of a three-year performance period.

Vesting of awards granted to executive officers in 2012 is dependent upon Radian Group’s absolute “total stockholder return” (“TSR”) and Radian Group’s relative TSR compared to the relative TSR of the companies listed on the NASDAQ 100 Financial Index and our most directly comparable mortgage insurance peers (the “2011 and 2012 TSR Peer Groups”), with a maximum payout at the end of the three-year performance period of 200% of a grantee’s target number of RSUs. If Radian Group’s absolute TSR during the performance period is negative, the payout of the performance-based RSUs awarded will be at 0% and none of the performance-based RSUs will vest. If Radian Group’s absolute TSR is positive, the payout will be determined based on an analysis of both Radian Group’s relative TSR and absolute TSR, beginning with an assessment of Radian Group’s relative TSR.

Vesting of awards granted to non-executives in 2012 and to both non-executives and executives in 2011 is dependent upon the performance of Radian Group’s TSR compared to TSRs of the 2011 and 2012 TSR Peer Groups, with a maximum payout at the end of the three-year performance period of 200% of a grantee’s target number of RSUs.

Vesting of the performance-based RSUs awarded to executives and non-executives in 2010 is based on two factors, both equally weighted at 50% of the total performance target: (1) the performance of Radian Group’s relative TSR compared to the TSRs of an industry peer group, with a maximum payout of 100% of the peer target (i.e., 50% of the total performance target); and (2) the performance of Radian Group’s relative TSR compared to the TSRs of companies included in the S&P MidCap 400® index, with a maximum payout of 150% of the index target (i.e., 50% of the total performance target). Upon the occurrence of certain corporate events involving one or more companies included in the industry peer group, the performance goals for the entire award (between 0% and 150% of the total target award) would then be based on Radian Group’s relative TSR compared to the TSRs of companies included in the S&P MidCap 400® index.

In general, pursuant to the terms of the 2012 and 2011 award agreements, in the event of a grantee’s retirement, the award will continue to vest and be paid in accordance with the achievement of the performance goals as of the stated vesting date. Each RSU was granted at full value with no exercise price. The RSUs do not entitle the grantees to voting or dividend rights.

Timed-Vested RSUs—In 2012, the Compensation Committee awarded to certain non-executives 151,154 time-vested RSUs (to be settled in cash) under the 2008 Equity Plan. In 2010, the Compensation Committee awarded to our non-employee directors 108,921 time-vested RSUs (to be settled in cash) under the 2008 Equity Plan. The estimated fair value of the time-vested RSUs is based on the closing price of our common stock on the measurement date. These RSU awards entitle award recipients to a cash amount equal to the closing price of our common stock on the New York Stock Exchange (“NYSE”) on the vesting date for employees or the conversion date for non-employee directors (generally defined as a director’s termination of service with us). These RSU awards vest in their entirety three years from the date of grant, or earlier, upon retirement, death or disability.

SARs (Cash Settled)

In 2010 and 2009, the Compensation Committee awarded 192,100 and 1,623,500, respectively, of cash-settled SARs under the 2008 Equity Plan. The award of SARs entitles grantees to receive a cash amount equal to the excess of the closing share price of our common stock on the date of exercise over the grant price (the closing share price of our common stock on the date of grant). The exercise prices of the SARs awarded in 2010 and 2009 were $10.42 and $2.68 per share, respectively. As of December 31, 2012, the estimated fair value of the SARs granted in 2010 and 2009 was $2.27 and $3.43 per share, respectively. The SARs have a five-year term and vest 50% on the third and fourth anniversaries of the date of grant.

Officer LTI Plan (Cash Settled)

The Officer LTI Plan is structured as a performance-based, long-term cash incentive plan that consists of grants of cash settled performance awards. The Compensation Committee administers the Officer LTI Plan and is responsible for, among other things, establishing the target values of awards to participants and selecting the specific performance factors. At the end of each performance period, the Compensation Committee determines, at its discretion, the specific cash payout to each participant, which may range from 0% to 200% of the amount of the target award, based on the Compensation Committee’s evaluation of our overall corporate performance and the degree to which each of the performance measures have been satisfied. At December 31, 2012, there were no awards outstanding under the Officer LTI Plan.

Non-Qualified Stock Options

Information with regard to stock options for the periods indicated is as follows:



	Number of Shares		Weighted Average Exercise Price Per Share
Outstanding, December 31, 2011	3,472,762		$	23.97
Granted	1,312,590		2.45
Exercised	—		—
Forfeited	(18,342	)	6.43
Expired	(364,666	)	45.73
Outstanding, December 31, 2012	4,402,344		15.82
Exercisable, December 31, 2012	2,267,857		27.24
Available for grant, December 31, 2012	1,329,689

The weighted average fair value per share of the stock options granted during 2012, 2011 and 2010 was $1.92, $3.33 and $8.70, respectively. There were no stock options exercised in 2012, 2011 or 2010. The intrinsic value for the stock options outstanding at December 31, 2012 was $7.8 million, based on the closing price of our common stock as of December 31, 2012, relative to the exercise prices for such stock options. There was no intrinsic value for the stock options outstanding at December 31, 2011 due to the exercise prices for such stock options exceeding the closing price of our common stock. The total intrinsic value of options outstanding at December 31, 2010 was $2.5 million.

Upon the exercise of stock options, we generally issue shares from the authorized, unissued share reserves when the exercise price is less than the treasury stock repurchase price and from treasury stock when the exercise price is greater than the treasury stock repurchase price.

The table below summarizes information regarding fully vested stock options as of December 31, 2012:



($ in millions, except per-share amounts)	Outstanding and Exercisable
Number of options vested	2,267,857
Fair value of options vested during the year	$	0.3
Weighted-average exercise price per share	$	27.24
Aggregate intrinsic value (excess market price over exercise price)	$	—
Weighted-average remaining contractual term of options (in years)	1.4 years

The following table summarizes information concerning outstanding and exercisable options at December 31, 2012:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$2.45 - $3.58	2,288,360	5.45	$	2.72	444,800	$	2.48
$5.76 - $7.06	76,827	5.18	6.89		—	—
$10.42	214,100	4.36	10.42		—	—
$20.34	946,400	1.70	20.34		946,400	20.34
$35.79 - $53.17	494,580	0.04	40.48		494,580	40.48
$56.03	382,077	0.10	56.03		382,077	56.03
	4,402,344	3.51			2,267,857

In 2012, we used the Monte Carlo valuation model in determining the grant date fair value of stock options issued to executives and non-executives. Prior to 2012, we used the Black-Scholes valuation model in determining the grant date fair value of stock options issued to executives, non-executives and non-employee directors. Each of these was determined using the assumptions noted in the following table:



	Year Ended December 31,
	2012		2011		2010
Expected life (years) (1)	(2)		6 years		6 years
Risk-free interest rate (3)	1.66	%	1.88	%	2.85	%
Volatility (4)	96.97	%	114.51	%	110.83	%
Dividend yield	0.41	%	0.28	%	0.10	%

______________


(1)	In 2011 and 2010, the expected life of stock options granted was estimated to be less than the full term of the options awarded. The expected life is estimated using historical data.


(2)	In 2012, we began using a Monte Carlo valuation, which assumes a derived service period of between 3.14 years and 4 years instead of an expected life assumption.


(3)	The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.


(4)	Volatility is determined at the date of grant using historical share price volatility and expected life of each award.

For stock option awards granted in 2012 and 2011, in addition to the time-based vesting requirements, the options contain a performance hurdle whereby the options will vest if the closing price of our common stock on the NYSE exceeds $4.90 (200% of the option exercise price) and $4.48 (125% of the option exercise price), respectively, for ten consecutive trading days ending on or after the third anniversary of the date of grant.

We elected to apply the short-cut method in accounting for the windfall tax benefits under the accounting standard regarding share-based payment. Should future offsets to the windfall resulting from cancellations, expirations or exercise shortfalls exceed the balance of $18.3 million at December 31, 2012, the excess would be reflected in the consolidated statements of operations.

Phantom Stock

In the past, the Compensation Committee has granted phantom stock awards under the Equity Plans, which entitle grantees to receive shares of our common stock on the conversion date (generally defined as a grantee’s termination of service with us). The estimated fair value of phantom stock is based on the closing share price of our common stock as reported by the NYSE on the date of grant. All outstanding shares of phantom stock were fully vested as of December 31, 2010. Each share of phantom stock was granted at full value with no exercise price and accrues dividend equivalents until the conversion (as defined above). Upon conversion, all phantom stock will be paid in whole shares of our common stock, with fractional shares paid in cash. At December 31, 2012, there were approximately 4,899 dividend-equivalent phantom shares accrued that were not included in the total number of our outstanding shares. The cost recognized for these awards was recognized on a straight-line basis over the vesting period.

RSUs (Equity Settled)

Performance-Based RSUs—In 2010, the Compensation Committee granted to executive officers a total of 203,300 performance-based RSUs to be settled in common stock. No performance-based RSUs (equity settled) were awarded in 2012 or 2011. The performance, vesting conditions and potential payouts relative to target for the 2010 performance-based RSUs are the same as those described above under “RSUs (Cash Settled)—Performance-Based RSUs” for awards granted in 2010.

The grant date fair value of performance-based RSUs is determined using the Monte Carlo valuation model. The following are assumptions used in our calculation of the 2010 grant date fair value of performance-based RSUs to be settled in common stock:



	2010
Expected life	3 years
Risk-free interest rate	1.4	%
Volatility	154.5	%
Dividend yield	0.12	%

Time-Vested RSUs—In 2012, the Compensation Committee granted a total of 558,216 shares of time-vested RSUs to be settled in common stock, including 7,812 shares awarded to non-executives and 550,404 shares awarded to non-employee directors. In 2011 and 2010, the Compensation Committee granted a total of 323,866 and 13,000 shares of time-vested RSUs, respectively, to be settled in common stock. The grant date fair value of the time-vested RSUs was calculated based on the fair market value of our common stock on the NYSE on the date of grant and is recognized over the vesting period. The 2012 awards to non-executives vest at the end of four years, while the awards to non-employee directors vest at the end of three years.

Information with regard to RSUs to be settled in stock for the periods indicated is as follows:



	Number of Shares		Weighted Average Grant Date Fair Value
Unvested, December 31, 2011	505,183		$	8.08
Granted	558,216		2.51
Vested	(62,388	)	5.53
Forfeited	(10,130	)	9.26
Unvested, December 31, 2012	990,881		$	5.09

Restricted Stock

In 2009, the Compensation Committee granted 375,500 shares of restricted stock. No shares of restricted stock were granted during 2012, 2011 or 2010. The estimated fair value of restricted stock is based on the closing share price of our common stock on the NYSE on the date of grant. All restrictions imposed under a restricted stock grant lapse after the applicable restriction period. The holders of restricted stock are entitled to vote their restricted shares and to receive cash dividends. Each share of restricted stock is granted at full value with no exercise price. The restricted stock vests 50% after three years and 50% after four years. The cost recognized for these awards is based on the fair value at date of grant and is recognized over the applicable vesting period.

Information with regard to restricted stock for the periods indicated is as follows:



	Number of Shares		Weighted Average Grant Date Fair Value Per Share
Unvested, December 31, 2011	324,778		$	2.67
Granted	—		—
Vested	(189,404	)	2.62
Forfeited	(4,000	)	2.68
Unvested, December 31, 2012	131,374		$	2.72

Employee Stock Purchase Plan

We have an ESPP, the Radian Group Inc. 2008 Employee Stock Purchase Plan (the “2008 ESPP”) under which 2,000,000 shares of our authorized but unissued common stock have been reserved for issuance. Under the 2008 ESPP, we sold 204,834, 158,676 and 99,781 shares to employees during the years ended December 31, 2012, 2011 and 2010, respectively.

The 2008 ESPP is designed to allow eligible employees to purchase shares of our common stock at a discount of 15% off the lower of the fair market value of our common stock at the beginning-of-period or end-of-period (each period being the first and second six calendar months in a calendar year).

The following are assumptions used in our calculation of ESPP compensation expense during 2012:



	January 1, 2012		July 1, 2012
Expected life	6 months		6 months
Risk-free interest rate	0.79	%	0.73	%
Volatility	121.02	%	95.70	%
Dividend yield	0.21	%	0.15	%

Unrecognized Compensation Expense

As of December 31, 2012, 2011 and 2010, unrecognized compensation expense related to the unvested portion of all of our market condition awards was approximately $22.4 million, $7.4 million and $7.8 million, respectively. Absent a change of control under the Equity Plans, this expense is expected to be recognized over a weighted average period of approximately two years.

Other Compensation Programs

In 2009 and 2010, the Compensation Committee granted awards under the Cash Based LTI Plans with performance for 50% of the award measured over a three-year performance period and 50% of the award measured over a four-year performance period based on the following performance measures: (1) mortgage insurance market share; (2) capital management; (3) mortgage insurance credit quality; (4) expense management; and (5) operating profitability. No awards were granted in 2012 or 2011 under the Cash Based LTI Plans. Compensation costs recognized related to non-share-based awards under the Officer LTI Plan were $0.7 million, $0.5 million and $1.1 million for the years ended December 31, 2012, 2011 and 2010, respectively. Compensation costs recognized related to non-share-based awards under the Executive LTI Plan were $0.7 million, $5.5 million and $3.1 million for the years ended December 31, 2012, 2011 and 2010, respectively.