Statutory Information

We prepare our statutory financial statements in accordance with the accounting practices required or permitted, if applicable, by the insurance departments of the respective states of domicile of our insurance subsidiaries. Required statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (“NAIC”) as well as state laws, regulations and general administrative rules. In addition, insurance departments have the right to permit other specific practices that may deviate from prescribed practices. As of September 30, 2013, our use of any prescribed or permitted statutory accounting practices did not result in reported statutory surplus or risk-based capital being significantly different from what would have been reported had NAIC statutory accounting practices been followed.

Under state insurance regulations, Radian Guaranty is required to maintain minimum surplus levels and, in certain states, a minimum amount of statutory capital relative to the level of net RIF, or “risk-to-capital” as described below. Sixteen states (the “RBC States”) currently impose a statutory or regulatory risk-based capital requirement (the “Statutory RBC Requirement”). The most common Statutory RBC Requirement is that a mortgage insurer’s risk-to-capital ratio not exceed 25 to 1. In some of the RBC States, the Statutory RBC Requirement is that a mortgage insurer must maintain a minimum policyholder position, which is based on both risk and surplus levels (the “MPP Requirement”). Unless an RBC State grants a waiver or other form of relief, if a mortgage insurer is not in compliance with the Statutory RBC Requirement of such RBC State, it may be prohibited from writing new mortgage insurance business in that state. Radian Guaranty’s domiciliary state, Pennsylvania, is not one of the RBC States. During the nine months ended September 30, 2013, the RBC States accounted for approximately 55.4% of Radian Guaranty’s total primary NIW.

We actively manage Radian Guaranty’s statutory capital position in various ways, including: (1) through internal and external reinsurance arrangements; (2) by seeking opportunities to reduce our risk exposure through commutations or other negotiated transactions; (3) by contributing additional capital from Radian Group to our mortgage insurance subsidiaries; and (4) by realizing gains in our investment portfolio through open market sales of securities. At September 30, 2013, Radian Group had unrestricted cash and liquid investments of $822.1 million. Approximately $119.5 million (approximately $75.5 million of which relates to payments we expect to make in the next 12 months) of future expected corporate expenses and interest payments have been accrued for and paid by certain subsidiaries to Radian Group as of September 30, 2013, and therefore, the total unrestricted cash and liquid investments held by Radian Group as of September 30, 2013 include these amounts. Net of these advances, our available holding company liquidity is $702.6 million. We expect to use a portion of our remaining available liquidity to further support Radian Guaranty’s capital position, including to continue to maintain Radian Guaranty’s risk-to-capital ratio at 20 to 1 or below. In addition, while our other mortgage insurance subsidiaries are not subject to Statutory RBC Requirements, these subsidiaries, which provide reinsurance to Radian Guaranty but do not write direct business of their own, are subject to certain minimum capital and statutory surplus requirements. All of these subsidiaries were in compliance with their respective capital and statutory surplus requirements as of September 30, 2013. In order for Radian Guaranty to continue to receive appropriate statutory credit for the reinsurance arrangements with these subsidiaries and therefore to continue to utilize these arrangements, some of these subsidiaries may require additional capital contributions in the future to maintain minimum capital levels.

Radian Guaranty’s statutory net income (loss) and statutory policyholders’ surplus as of or for the periods indicated were as follows:



(In millions)	As of and for the Nine Months Ended September 30, 2013		As of and for the Year Ended December 31, 2012
Statutory net income (loss)	$	10.7	$	(175.9	)
Statutory surplus	1,239.1		926.0
Contingency reserve	17.2		—

The components of Radian Guaranty’s risk-to-capital calculation appear in the table below. For purposes of the risk-to-capital requirements imposed by certain states, statutory capital is defined as the sum of statutory policyholders’ surplus (i.e., statutory-basis capital and surplus) plus statutory contingency reserves.



	September 30, 2013			December 31, 2012
($ in millions)
RIF, net (1)	$	24,899.4		$	19,226.7

Statutory surplus	$	1,239.1		$	926.0
Statutory contingency reserve	17.2			—
Statutory capital	$	1,256.3		$	926.0

Risk-to-capital	19.8		:1	20.8		:1

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(1)	RIF, net excludes risk ceded through reinsurance contracts and RIF on defaulted loans.

We expect to continue to maintain Radian Guaranty’s risk-to-capital ratio at 20 to 1 or below, including, as necessary, by making contributions to Radian Guaranty from Radian Group’s available liquidity. Radian Guaranty was in compliance with the Statutory RBC Requirements or MPP Requirements, as applicable, in each of the RBC States as of September 30, 2013.

The improvement in Radian Guaranty’s risk-to-capital ratio in the first nine months of 2013 was primarily due to capital contributions from Radian Group to Radian Guaranty totaling $230 million, the release of contingency reserves at Radian Asset Assurance, and the impact of the QSR transactions entered into in 2012. This benefit was partially offset by an increase in net RIF at Radian Guaranty.

Radian Asset Assurance is a wholly-owned subsidiary of Radian Guaranty. If our financial guaranty portfolio performs worse than anticipated, including if we are required to establish (or increase) one or more statutory reserves on defaulted obligations that we insure, or if we make net commutation payments to terminate insured financial guaranty obligations in excess of the then established statutory reserves for such obligations, the statutory capital of Radian Guaranty would also be negatively impacted. We establish statutory financial guaranty reserves at the time of default, whereas for GAAP reporting purposes, loss reserves are established when estimated losses exceed unearned premiums, regardless of whether a default has occurred. Any decrease in the statutory policyholders’ surplus in our financial guaranty business would have a direct negative impact on Radian Guaranty’s capital position and may affect its ability to remain in compliance with the Statutory RBC Requirements. In addition, any decrease in the amount of capital credit that Radian Guaranty otherwise receives for capital attributable to Radian Asset Assurance could have a negative impact on Radian Guaranty’s capital adequacy for purposes of GSE eligibility, as further discussed below.

As of September 30, 2013, Radian Asset Assurance maintained claims paying resources of $1.6 billion (which included statutory policyholders’ surplus, contingency reserves, unearned premium reserves, the present value of installment premiums and loss and LAE reserves). As of September 30, 2013, the statutory policyholders’ surplus of Radian Asset Assurance was approximately $1.2 billion. In July 2013, Radian Asset Assurance paid an ordinary dividend of $36 million to Radian Guaranty.

We and our insurance subsidiaries are subject to comprehensive, detailed regulation that is 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 on our insurance subsidiaries. The state insurance regulatory requirements include risk-to-capital ratios, risk-based capital measures, and surplus requirements that potentially limit the amount of insurance that each of our insurance subsidiaries may write. The GSEs’ current eligibility requirements for Radian Guaranty to maintain its status as an eligible mortgage insurer include financial strength ratings requirements (with respect to which we are currently operating under remediation plans) and also impose limitations on the type of risk insured, standards for the geographic and customer diversification of risk, procedures for claims handling, standards for acceptable underwriting practices, standards for certain reinsurance cessions and financial and capital requirements that generally have mirrored state insurance regulatory requirements. The GSEs currently are considering revisions to their standard mortgage insurer eligibility requirements. Among other changes, the new GSE eligibility requirements may include new capital standards for private mortgage insurers that could impose more onerous capital requirements than are currently in effect, including potentially: (i) a risk-to-capital ratio below (a) the current 25 to 1 requirement that is statutorily imposed in most of the RBC states and (b) the 20 to 1 risk-to-capital ratio that we currently expect to maintain for Radian Guaranty; (ii) higher capital requirements for loans insured prior to 2009; and (iii) a limitation on the amount of capital credit available for subsidiary capital (including Radian Guaranty’s capital that is attributable to Radian Asset Assurance). While it remains unclear what form the new eligibility requirements may take or the potential implementation period that may be allowed, we expect the GSEs to release the new eligibility requirements by the end of 2013 and for them to become effective following an implementation period.

The GSEs and our state insurance regulators possess significant discretion with respect to our insurance subsidiaries. If Radian Guaranty’s regulatory risk-based capital position fails to comply with applicable state statutory or regulatory risk-based capital requirements, or if Radian Guaranty is unable to satisfy the GSEs’ eligibility requirements: (i) insurance regulators or the GSEs may limit or cause Radian Guaranty to cease writing new mortgage insurance; (ii) the GSEs may terminate or otherwise restrict Radian Guaranty’s eligibility to insure loans purchased by the GSEs; (iii) 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; and (iv) state or federal regulators could pursue regulatory actions or proceedings, including possible supervision or receivership actions against us in the future. Our failure to maintain adequate levels of capital could also lead to intervention by the various insurance regulatory authorities, which could materially and adversely affect our business, business prospects and financial condition.

As of September 30, 2013, the amount of restricted net assets held by our consolidated subsidiaries (which represents our equity investment in those insurance subsidiaries) totaled $1.3 billion of our consolidated net assets.