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 December 31, 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.

Radian Group serves as the holding company for our insurance subsidiaries, through which we conduct the business of our mortgage insurance and financial guaranty business segments. These insurance subsidiaries are subject to comprehensive, detailed regulation by the insurance departments in the various states where our insurance subsidiaries are domiciled or licensed to transact business. These regulations include various capital requirements and dividend restrictions based on our insurance subsidiaries’ statutory financial position and results of operations, as described below. Our 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. As of December 31, 2013, the amount of restricted net assets held by our consolidated insurance subsidiaries (which represents our equity investment in those insurance subsidiaries) totaled $1.3 billion of our consolidated net assets.

The ability of Radian Guaranty, Radian Mortgage Assurance Inc. (“RMAI”), Radian Insurance Inc. (“Radian Insurance”), Radian Mortgage Insurance Inc. (“Radian Mortgage Insurance”) and Radian Guaranty Reinsurance Inc. (“RGRI”) (formerly known as Commonwealth Mortgage Assurance Company of Texas) to pay dividends on their common stock is restricted by certain provisions of the insurance laws of Pennsylvania, their state of domicile. Under Pennsylvania’s insurance laws, dividends and other distributions may only be paid out of an insurer’s positive unassigned surplus, measured as of the end of the prior fiscal year, unless the Pennsylvania Insurance Commissioner approves the payment of dividends or other distributions from another source. Radian Guaranty, RMAI, Radian Insurance, Radian Mortgage Insurance and RGRI had negative unassigned surplus at December 31, 2013 of $623.1 million, $161.0 million, $305.0 million, $69.1 million and $360.7 million, respectively, compared to negative unassigned surplus of $685.1 million, $160.5 million, $317.3 million, $85.4 million and $377.7 million, respectively, at December 31, 2012. If any of these insurers had positive unassigned surplus as of the end of the prior fiscal year, unless the prior approval of the Pennsylvania Insurance Commissioner is obtained, such insurer only may pay dividends or other distributions during any 12-month period in an aggregate amount less than or equal to the greater of: (i) 10% of the preceding year-end statutory policyholders’ surplus; or (ii) the preceding year’s statutory net income. Due to the negative unassigned surplus at the end of 2013, no dividends or other distributions can be paid from Radian Guaranty, RMAI, Radian Insurance, Radian Mortgage Insurance or RGRI in 2014, without approval from the Pennsylvania Insurance Commissioner. None of Radian Guaranty, RMAI, Radian Insurance, Radian Mortgage Insurance or RGRI paid any dividends in 2013 or 2012.

Radian Guaranty

Radian Guaranty is domiciled and licensed in Pennsylvania as a stock casualty insurance company authorized to carry on the business of credit insurance, which includes the authority to write mortgage guaranty insurance. It is a monoline insurer, restricted to writing only residential mortgage guaranty insurance.

Radian Guaranty’s statutory net loss, statutory surplus and contingency reserve as of and for the years ended December 31, 2013, 2012 and 2011 were as follows:



	December 31,
(In millions)	2013			2012			2011
Statutory net loss	$	(23.8	)	$	(175.9	)	$	(545.1	)
Statutory surplus	1,317.8			926.0			843.2
Contingency reserve	23.0			—			—

Radian Guaranty’s risk-to-capital calculation appears 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 capital and surplus) plus statutory contingency reserves.



	December 31,
	2013		2012
($ in millions)
RIF, net (1)	$	26,128.2	$	19,226.7

Statutory surplus	$	1,317.8	$	926.0
Statutory contingency reserve	23.0		—
Statutory position	$	1,340.8	$	926.0

Risk-to-capital	19.5:1		20.8:1

_______________________


(1)	Excludes risk ceded through reinsurance contracts (to third parties and affiliates) and RIF on defaulted loans.

Currently, we expect to maintain Radian Guaranty’s risk-to-capital ratio at or below 20 to 1. Radian Guaranty was in compliance with the Statutory RBC Requirements or MPP Requirements, as applicable, in each of the RBC States as of December 31, 2013. See Note 1 for information regarding new GSE eligibility requirements that we expect will be released in 2014.

The reduction in Radian Guaranty’s risk-to-capital ratio in 2013 was primarily due to capital contributions from Radian Group to Radian Guaranty totaling $230 million in 2013 and an additional $100 million in February 2014 (effective as of December 31, 2013), the release of contingency reserves at Radian Asset Assurance, and the impact of the Reinsurance Transactions entered into in 2012 (as described in Note 8). This benefit was partially offset by an increase in net RIF at Radian Guaranty.

Radian Insurance

Radian Insurance is domiciled and licensed in Pennsylvania as a stock casualty insurance company authorized to carry on the business of credit insurance, which includes the authority to write mortgage guaranty and financial guaranty insurance and the authority to reinsure policies of mortgage guaranty insurance. Radian Insurance is not licensed or authorized to write direct credit insurance in any locality other than Pennsylvania and Hong Kong.

Radian Insurance is required to maintain a minimum statutory surplus of $20 million to remain an authorized reinsurer in all states. The statutory net income and statutory policyholders’ surplus for Radian Insurance for the year ended December 31, 2011 have each been increased by $5.6 million from the amounts previously reported. This change was a result of the correction of an error associated with our statutory PDR. The correction of this error is not material with respect to the Company’s consolidated financial statements. Radian Insurance’s statutory net income, statutory policyholders’ surplus and contingency reserve as of and for the years ended December 31, 2013, 2012 and 2011 were as follows:



	December 31,
(In millions)	2013		2012		2011
Statutory net income	$	26.5	$	58.0	$	9.9
Statutory policyholders’ surplus	230.8		218.6		162.4
Contingency reserve	35.5		20.6		—

RMAI

RMAI is domiciled and licensed in Pennsylvania as a stock casualty insurance company authorized to carry on the business of credit insurance, which includes the authority to write mortgage guaranty insurance. It is a monoline insurer restricted to writing only residential mortgage guaranty insurance. RMAI is not currently writing mortgage guaranty insurance.

RMAI is required to maintain statutory-basis capital and surplus of $1.125 million. Radian Group and RMAI are parties to a guaranty agreement, which provides that Radian Group will make sufficient funds available to RMAI to ensure that RMAI has a minimum of $5 million of statutory policyholders’ surplus evaluated quarterly. RMAI’s statutory net income (loss) and statutory policyholders’ surplus as of and for the years ended December 31, 2013, 2012 and 2011 were as follows:



	December 31,
(In millions)	2013			2012		2011
Statutory net (loss) income	$	(0.5	)	$	2.0	$	(0.6	)
Statutory policyholders’ surplus	18.0			18.5		16.5

Radian Mortgage Insurance

Radian Mortgage Insurance is domiciled and licensed in Pennsylvania as a stock casualty insurance company authorized to carry on the business of credit insurance, which includes the authority to reinsure policies of mortgage guaranty insurance, and is only licensed or authorized to write direct mortgage guaranty insurance in Pennsylvania and Arizona.

Radian Mortgage Insurance is required to maintain a minimum statutory surplus of $20 million to remain an authorized reinsurer in all states. Radian Mortgage Insurance’s statutory net income (loss), statutory policyholders’ surplus and contingency reserve as of and for the years ended December 31, 2013, 2012 and 2011 were as follows:



	December 31,
(In millions)	2013		2012		2011
Statutory net income (loss)	$	18.1	$	1.7	$	(11.1	)
Statutory policyholders’ surplus	98.0		81.8		20.0
Contingency reserve	6.9		—		—

RGRI

RGRI is a monoline insurer restricted to writing only mortgage guaranty insurance or reinsurance. RGRI is not licensed or authorized to write direct mortgage guaranty insurance in any states other than Pennsylvania and Texas. RGRI is required to maintain a minimum statutory surplus of $20 million to remain an authorized reinsurer in all states.

RGRI’s statutory net income (loss), statutory policyholders’ surplus and contingency reserve as of and for the years ended December 31, 2013, 2012 and 2011 were as follows:



	December 31,
(In millions)	2013		2012		2011
Statutory net income (loss)	$	55.5	$	16.0	$	(37.6	)
Statutory policyholders’ surplus	59.3		42.3		26.2
Contingency reserve	38.5		—		—

Radian Group’s U.S. consolidated federal income tax returns, which include RGRI’s federal income tax returns, were under examination by the IRS for tax years 2000 through 2007. We are currently contesting proposed adjustments resulting from the IRS examination of these tax years. Effective December 31, 2011, Radian Group and RGRI entered into an Assumption and Indemnification Agreement with regard to these proposed adjustments. In this agreement, Radian Group agreed to indemnify RGRI for any tax payments ultimately due to the IRS for the proposed adjustments, which relate to the recognition of certain tax losses and deductions that were generated through our investment in a portfolio of non-economic REMIC residual interests currently held by RGRI. This indemnification was in lieu of an immediate capital contribution that otherwise would have been needed from Radian Group to RGRI, based on an estimate for this potential liability, in order for RGRI to maintain its minimum statutory surplus requirements. There remains significant uncertainty with regard to the amount and timing of any resolution with the IRS. See Note 13 for further information regarding the examination by the IRS for the 2000 through 2007 tax years.

The statutory net loss for RGRI for the year ended December 31, 2011 has been reduced by $9.0 million from the amount previously reported to reflect the correction of an error related to additional tax benefit associated with the recognition of certain tax losses and deductions that were generated through our investment in a portfolio of these non-economic REMIC residual interests. The correction of this error is not material with respect to the Company’s consolidated financial statements.

Radian Asset Assurance

Radian Asset Assurance is domiciled and licensed in New York as a monoline financial guaranty insurer. Radian Asset Assurance is also licensed under the New York insurance law to write some types of surety insurance and credit insurance.

Radian Asset Assurance’s ability to pay dividends to its parent, Radian Guaranty, is restricted by certain provisions of the insurance laws of New York, its state of domicile. Under the New York insurance laws, Radian Asset Assurance may only pay dividends from statutory earned surplus. Without the prior approval from the NYSDFS, Radian Asset Assurance can only pay a dividend, which when totaled with all other dividends declared or distributed by it during the preceding 12 months, is the lesser of 10% of its statutory surplus to policyholders, as shown by its last statement on file with the NYSDFS, or 100% of statutory adjusted net investment income during such period. In addition, the NYSDFS, in its discretion, may approve a dividend distribution greater than would be permitted as an ordinary dividend. In July 2013, July 2012 and June 2011, Radian Asset Assurance paid dividends of $36.0 million, $54.0 million and $53.4 million, respectively, to Radian Guaranty. We expect that Radian Asset Assurance will have the capacity to pay another ordinary dividend to Radian Guaranty in the third quarter of 2014 of approximately $32 million. As of December 31, 2013, Radian Asset Assurance maintained claims paying resources of $1.6 billion, which consists of statutory surplus of $1.2 billion, plus contingency reserves, unearned premium reserves, the present value of installment premiums and loss and LAE reserves.

New York insurance law establishes aggregate risk limits on the basis of aggregate net liability as compared with statutory capital. “Aggregate net liability” is a risk-based calculation based on outstanding principal and interest of guaranteed obligations insured, net of qualifying reinsurance and collateral. Under these limits, policyholders’ surplus and contingency reserves must not be less than a percentage of aggregate net liability equal to the sum of various percentages of aggregate net liability for various categories of specified obligations. The percentage varies from 0.33% for certain municipal obligations to 4% for certain non-investment grade obligations. As of December 31, 2013, the aggregate net liability of Radian Asset Assurance was significantly below the applicable limit.

New York insurance law requires financial guaranty insurers to maintain minimum policyholders’ surplus of $65 million. When added to the minimum policyholders’ surplus of $1.4 million separately required for the other lines of insurance that Radian Asset Assurance is licensed to write, Radian Asset Assurance is required to maintain an aggregate minimum policyholders’ surplus of $66.4 million. Radian Asset Assurance’s statutory net income, statutory surplus and contingency reserve as of and for the years ended December 31, 2013, 2012 and 2011 were as follows:



	December 31,
(In millions)	2013			2012		2011
Statutory net (loss) income	$	(24.9	)	$	103.3	$	69.1
Statutory surplus	1,198.0			1,144.1		973.9
Contingency reserve	264.0			300.1		421.4

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. 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. Our 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.

If, in the future, Radian Guaranty were unable to comply with the Statutory RBC Requirements of an RBC State and could not obtain a waiver or other similar relief from that state, we may request that RMAI once again be approved by the GSEs as a mortgage insurer with limited eligibility to write mortgage insurance in those states in which Radian Guaranty fails to receive a waiver or other similar relief from the Statutory RBC Requirements. RMAI previously held this limited eligibility status with the GSEs, which expired on December 31, 2013. RMAI is a wholly-owned subsidiary of Radian Guaranty and is licensed to write mortgage insurance in each of the fifty states and the District of Columbia.

The differences between the statutory financial statements and financial statements presented on a GAAP basis represent differences between GAAP and Statutory Accounting Principles (“STAT”) for the following reasons:

(a) Under STAT, mortgage guaranty insurance companies are required each year to establish a contingency reserve equal to 50% of premiums earned in such year. Such amount must be maintained in the contingency reserve for 10 years, after which time it is released to unassigned surplus. Prior to 10 years, the contingency reserve may be reduced with regulatory approval to the extent that losses in any calendar year exceed 35% of earned premiums for such year.

(b) In accordance with New York insurance law, financial guaranty insurance companies are required to establish a contingency reserve equal to the greater of 50% of premiums written or a stated percentage of the principal guaranteed, ratably over 15 to 20 years dependent upon the category of obligation insured. Contingency reserves may be discontinued if the total reserve established for all categories of obligations exceeds the sum of the stated percentages for such categories multiplied by the unpaid principal guaranteed. The contingency reserve may be released with regulatory approval to the extent that losses in any calendar year exceed a pre-determined percentage of earned premiums for such year, with the percentage threshold dependent upon the category of obligation insured. Such reserves may also be released, subject to regulatory approval in certain instances, upon demonstration that the reserve amount is excessive in relation to the outstanding obligations. Reinsurers are required to establish a contingency reserve equal to their proportionate share of the reserve established by the ceding company. Also under STAT, case reserves are required to be established in the year in which a default occurs based on the guarantor’s best estimate of ultimate loss payment, rather than when the probability weighted expected net cash out flows exceed unearned premium reserves.

(c) Under STAT, insurance policy acquisition costs are charged against operations in the year incurred. Under GAAP, such costs, other than those incurred in connection with the origination of derivative contracts, are deferred and amortized.

(d) Under STAT, income tax expense is calculated on the basis of amounts currently payable. Generally, DTAs are recorded under both STAT and GAAP when it is more likely than not that the DTA will be realized. However, STAT standards impose additional admissibility requirements whereby DTAs are only recorded to the extent they are expected to be recovered within a one-to three-year period subject to a capital and surplus limitation. Changes in DTAs and deferred tax liabilities (“DTLs”) are recognized as a direct benefit or charge to unassigned surplus, whereas under GAAP changes in DTAs and DTLs, except for changes in unrealized gains and losses on available-for-sale securities, are recorded as a component of income tax expense.

(e) Under STAT, investment grade fixed-maturity investments are valued at amortized cost and BIG securities are carried at the lower of amortized cost or market value. Under GAAP, those investments that the statutory insurance entities do not have the ability or intent to hold to maturity are considered to be either available for sale or trading securities and are recorded at fair value, with the unrealized gain or loss recognized, net of tax, as an increase or decrease to stockholders’ equity or current operations, as applicable.

(f) Under STAT, certain assets, designated as non-admitted assets, are charged directly against statutory surplus. Such assets are reflected on our GAAP financial statements.

(g) Prior to January 1, 2013, under STAT, the accounting standard regarding share-based payments was not applicable, with regard to the recognition and measurement of stock option issuances. However, effective January 1, 2013, the NAIC adopted Statement of Statutory Accounting Principles (“SSAP”) No. 104, Share-Based Payments (“SSAP 104”), on a prospective basis. Therefore, expenses related to stock options granted subsequent to the date of adoption of SSAP 104 are recognized under STAT but expenses related to stock options granted prior to the date of adoption continue to not be recognized under STAT. Expenses related to stock options, regardless of the date of grant, are reflected on our GAAP financial statements in accordance with this standard.

(h) Under STAT, the accounting standard regarding accounting for derivative instruments and hedging activities is not applicable, except for changes associated with known credit losses. Any derivative loss payments that are made are included in the provision for losses.

(i) Under STAT, the accounting standard regarding accounting for transfers and servicing of financial assets and extinguishment of liabilities and the accounting standard regarding consolidation of VIEs are not applicable.

(j) Under STAT, premiums written on a multi-year basis are initially deferred as unearned premiums. A portion of the premium written, which corresponds to the insurance policy acquisition costs, is earned immediately and the remaining premiums written are earned over the policy term. Under GAAP, these premiums written on a multi-year basis are initially deferred as unearned premiums and are earned over the policy term.

(k) Under STAT, capital contributions satisfied by receipt of cash or readily marketable securities subsequent to the balance sheet date but prior to the filing of the statutory financial statement are treated as a recognized subsequent event and, as such, are considered an admitted asst based on the evidence of collection and approval of the domiciliary commissioner. Under GAAP, such capital contributions are treated as a nonrecognized subsequent event.