Fair Value of Financial Instruments

Certain assets and liabilities are recorded at fair value. These include: available for sale securities, trading securities, VIE debt, derivative instruments, and certain other assets. All derivative instruments are recognized in our condensed consolidated balance sheets as either derivative assets or derivative liabilities. All changes in 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).

Our estimated 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. Changes in economic conditions and capital market conditions, including but not limited to, credit spread changes, benchmark interest rate changes, market volatility and changes in the value of underlying collateral or of any third-party guaranty or insurance, could cause actual results to differ materially from our estimated fair value measurements. We define fair value as the current amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In the event that our investments or derivative contracts were sold, commuted, terminated or settled with a counterparty or transferred in a forced liquidation, the amounts received or paid may be materially different from those determined in accordance with the accounting standard regarding fair value measurements. Differences may also arise between our recorded fair value and the settlement or termination value with a counterparty based upon consideration of information that may not be available to another market participant. Those differences, which may be material, are recorded as realized gains/(losses) in our condensed consolidated statements of operations in the period in which the transaction occurs. There were no significant changes to our fair value methodologies during the three months ended March 31, 2014.

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. Our five-year CDS spread is an observable quantitative measure of our non-performance risk and is used by typical market participants to determine the likelihood of our default; the CDS spread actually used in the valuation of specific fair value liabilities is typically based on the remaining term of the insured obligation. Assuming all other factors are held constant, as our CDS spread tightens or widens, it has the effect of increasing or decreasing, respectively, the fair value of our liabilities with a corresponding impact on our results of operations.

In accordance with GAAP, we established a three-level valuation hierarchy for disclosure of fair value measurements based on the transparency of inputs to the valuation of an asset or liability as of the measurement date. 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 level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the measurement in its entirety. The three levels of the fair value hierarchy are described below:


Level I	— Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;


Level II	— Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities; and


Level III	— Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. Level III inputs are used to measure fair value only to the extent that observable inputs are not available.

The level of market activity used to determine 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. We provide a qualitative description of the valuation techniques and inputs used for Level II recurring and non-recurring fair value measurements in our audited annual financial statements as of December 31, 2013. For a complete understanding of those valuation techniques and inputs used as of March 31, 2014, these unaudited condensed consolidated financial statements should be read in conjunction with the audited annual financial statements and notes thereto included in our 2013 Form 10-K.

The following is a list of those assets and liabilities that are measured at fair value by hierarchy level as of March 31, 2014:



(In millions)	Level I		Level II		Level III		Total
Assets and Liabilities at Fair Value
Investment Portfolio:
U.S. government and agency securities	$	980.0	$	370.9	$	—	$	1,350.9
State and municipal obligations	—		619.0		19.1		638.1
Money market instruments	639.5		—		—		639.5
Corporate bonds and notes	—		1,026.0		—		1,026.0
Residential mortgage-backed securities (“RMBS”)	—		282.4		—		282.4
CMBS	—		282.6		—		282.6
Other ABS	—		234.4		—		234.4
Foreign government and agency securities	—		46.7		—		46.7
Equity securities (1)	130.0		96.4		0.4		226.8
Other investments (2)	—		2.2		82.1		84.3
Total Investments at Fair Value (3)	1,749.5		2,960.6		101.6		4,811.7
Derivative assets	—		8.8		5.6		14.4
Other assets (4)	—		—		92.5		92.5
Total Assets at Fair Value	$	1,749.5	$	2,969.4	$	199.7	$	4,918.6

Derivative liabilities	$	—	$	—	$	257.7	$	257.7
VIE debt (5)	—		—		95.6		95.6
Total Liabilities at Fair Value	$	—	$	—	$	353.3	$	353.3

______________________


(1)	Comprising 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)	Comprising TruPs ($0.6 million) and short-term certificates of deposit (“CDs”) ($1.6 million) included within Level II and lottery annuities ($0.3 million), TruPs ($0.2 million), and a guaranteed investment contract held by a consolidated VIE ($81.6 million) within Level III.


(3)	Does not include fixed-maturities held to maturity ($0.1 million) and certain other invested assets ($46.8 million), primarily invested in limited partnerships, accounted for as cost-method investments and not measured at fair value.


(4)	Primarily comprising manufactured housing loan collateral related to two consolidated financial guaranty VIEs.


(5)	Comprising consolidated debt related to NIMS VIEs ($3.1 million) and financial guaranty VIEs ($92.5 million).

At March 31, 2014, our total Level III assets were approximately 4.1% of total assets measured at fair value and total Level III liabilities accounted for 100% of total liabilities measured at fair value. Realized and unrealized gains and losses on Level III assets and liabilities in the rollforward represent gains and losses for the periods in which they were classified as Level III.

The following is a list of those assets and liabilities that are measured at fair value by hierarchy level as of December 31, 2013:



(In millions)	Level I		Level II		Level III		Total
Assets and Liabilities at Fair Value
Investment Portfolio:
U.S. government and agency securities	$	755.0	$	402.9	$	—	$	1,157.9
State and municipal obligations	—		602.3		18.7		621.0
Money market instruments	672.6		—		—		672.6
Corporate bonds and notes	—		1,036.6		—		1,036.6
RMBS	—		560.4		—		560.4
CMBS	—		288.9		—		288.9
Other ABS	—		194.9		0.9		195.8
Foreign government and agency securities	—		40.7		—		40.7
Equity securities (1)	128.3		97.1		0.4		225.8
Other investments (2)	—		2.2		81.5		83.7
Total Investments at Fair Value (3)	1,555.9		3,226.0		101.5		4,883.4
Derivative assets	—		10.3		6.3		16.6
Other assets (4)	—		—		91.9		91.9
Total Assets at Fair Value	$	1,555.9	$	3,236.3	$	199.7	$	4,991.9

Derivative liabilities	$	—	$	—	$	307.2	$	307.2
VIE debt (5)	—		—		94.6		94.6
Total Liabilities at Fair Value	$	—	$	—	$	401.8	$	401.8

______________________


(1)	Comprising 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)	Comprising TruPs ($0.6 million) and short-term CDs ($1.6 million ) included within Level II and lottery annuities ($0.3 million), TruPs ($0.2 million), and a guaranteed investment contract held by a consolidated VIE ($81.0 million) within Level III.


(3)	Does not include fixed-maturities held to maturity ($0.4 million) and certain other invested assets ($47.4 million), primarily invested in limited partnerships, accounted for as cost-method investments and not measured at fair value.


(4)	Primarily comprising manufactured housing loan collateral related to two consolidated financial guaranty VIEs.


(5)	Comprising consolidated debt related to NIMS VIEs ($2.8 million) and financial guaranty VIEs ($91.8 million).

At December 31, 2013, our total Level III assets approximated 4.0% of total assets measured at fair value and our total Level III liabilities accounted for 100% of total liabilities measured at fair value. Realized and unrealized gains and losses on Level III assets and liabilities in the rollforward represent gains and losses for the periods in which they were classified as Level III.

The following tables quantify the estimated impact of our non-performance risk on our derivative assets, derivative liabilities and net VIE liabilities (in aggregate by type) presented in our condensed consolidated balance sheets as of the dates indicated:



(In basis points)	March 31, 2014	December 31, 2013	March 31, 2013	December 31, 2012
Radian Group’s five-year CDS spread	288	323	513	913



(In millions)	Fair Value Liability before Consideration of Radian Non-Performance Risk March 31, 2014		Impact of Radian Non-Performance Risk March 31, 2014		Fair Value Liability Recorded March 31, 2014
Product
Corporate CDOs	$	26.0	$	23.5	$	2.5
Non-Corporate CDO-related (1)	357.6		155.7		201.9
NIMS-related (2)	5.2		2.1		3.1
Total	$	388.8	$	181.3	$	207.5



(In millions)	Fair Value Liability before Consideration of Radian Non-Performance Risk December 31, 2013		Impact of Radian Non-Performance Risk December 31, 2013		Fair Value Liability Recorded December 31, 2013
Product
Corporate CDOs	$	30.4	$	29.0	$	1.4
Non-Corporate CDO-related (1)	409.7		178.7		231.0
NIMS-related (2)	5.0		2.2		2.8
Total	$	445.1	$	209.9	$	235.2

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(1)	Includes the net fair value liability recorded within derivative assets and derivative liabilities and the net fair value liabilities included in our consolidated VIEs.


(2)	Includes NIMS VIE debt.

Non-performance risk is commonly measured by default probability, with a credit spread tightening indicating a lesser probability of default. Radian Group’s five-year CDS spread at March 31, 2014 implies a market view that there is a 21.1% probability that Radian Group will default in the next five years as compared to a 22.9% implied probability of default at December 31, 2013. The cumulative impact on our derivative assets, derivative liabilities and VIE liabilities attributable to the market’s perception of our non-performance risk decreased by $28.6 million during the first three months of 2014, as presented in the tables above. This decrease was in part due to the decrease in net derivative liabilities outstanding, as well as the market’s perception of the lower probability that Radian Group may default.

The following is a rollforward of Level III assets and liabilities measured at fair value for the quarter ended March 31, 2014:



(In millions)	Beginning Balance at January 1, 2014		Realized and Unrealized Gains (Losses) Recorded in Earnings (1)			Purchases		Sales		Issuances		Settlements			Transfers Into (Out of) Level III (2)			Ending Balance at March 31, 2014
Investments:
State and municipal obligations	$	18.7	$	0.4		$	—	$	—	$	—	$	—		$	—		$	19.1
Other ABS	0.9		—			—		—		—		0.4			(0.5		)	—
Equity securities	0.4		—			—		—		—		—			—			0.4
Other investments	81.5		0.6			—		—		—		—			—			82.1
Total Level III Investments	101.5		1.0			—		—		—		0.4			(0.5		)	101.6
Other assets	91.9		5.8			—		—		—		5.2			—			92.5
Total Level III Assets	$	193.4	$	6.8		$	—	$	—	$	—	$	5.6		$	(0.5	)	$	194.1

Derivative liabilities, net	$	300.9	$	52.2		$	—	$	—	$	—	$	(3.4	)	$	—		$	252.1
VIE debt	94.6		(5.1		)	—		—		—		4.1			—			95.6
Total Level III Liabilities, net	$	395.5	$	47.1		$	—	$	—	$	—	$	0.7		$	—		$	347.7

______________________


(1)	Includes unrealized gains (losses) relating to assets and liabilities still held as of March 31, 2014 as follows: $0.2 million for other investments, $3.6 million for other assets, $48.6 million for derivative liabilities and $(4.4) 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.

The following is a rollforward of Level III assets and liabilities measured at fair value for the quarter ended March 31, 2013:



(In millions)	Beginning Balance at January 1, 2013		Realized and Unrealized Gains (Losses) Recorded in Earnings (1)			Purchases		Sales		Issuances		Settlements			Transfers Into (Out of) Level III (2)		Ending Balance at March 31, 2013
Investments:
State and municipal obligations	$	19.0	$	0.2		$	—	$	—	$	—	$	—		$	—	$	19.2
Corporate bonds and notes	—		—			2.7		—		—		—			—		2.7
CMBS	—		—			3.1		—		—		—			—		3.1
Other ABS	1.7		—			—		—		—		0.2			—		1.5
Equity securities	1.0		—			—		0.6		—		—			—		0.4
Other investments	79.0		(1.6		)	0.4		0.1		—		0.4			—		77.3
Total Level III Investments	100.7		(1.4		)	6.2		0.7		—		0.6			—		104.2
NIMS derivative assets	1.6		—			—		—		—		—			—		1.6
Other assets	99.2		3.3			—		—		—		6.0			—		96.5
Total Level III Assets	$	201.5	$	1.9		$	6.2	$	0.7	$	—	$	6.6		$	—	$	202.3

Derivative liabilities, net	$	254.9	$	(167.7	)	$	—	$	—	$	—	$	(3.5	)	$	—	$	426.1
VIE debt	108.9		(3.3		)	—		—		—		4.8			—		107.4
Total Level III Liabilities, net	$	363.8	$	(171.0	)	$	—	$	—	$	—	$	1.3		$	—	$	533.5

______________


(1)	Includes unrealized gains (losses) relating to assets and liabilities still held as of March 31, 2013 as follows: $(1.5) million for investments, $0.8 million for other assets, $(172.6) million for derivative liabilities and $(2.5) 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.

There were no transfers between Level I and Level II for the quarters ended March 31, 2014 or 2013.

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. Given the level of judgment necessary, another market participant may derive a materially different estimate of fair value. These assets and liabilities are classified in Level III of our fair value hierarchy. For fair value measurements categorized within Level III of the fair value hierarchy, we use certain significant unobservable inputs in estimating fair value. Those inputs primarily relate to the probability of default, the expected loss upon default and our own non-performance risk as it relates to our liabilities.

The following table summarizes the significant unobservable inputs used in our recurring Level III fair value measurements as of March 31, 2014:



(In millions)	Fair Value Net Asset (Liability) March 31, 2014 (1)			Valuation Technique	Unobservable Input	Range/ Weighted Average
Level III Assets/Liabilities:
State and municipal obligations	$	19.1		Discounted cash flow	Discount rate				12.3	%
					Expected loss				11.1	%
Other investments	81.6			Discounted cash flow	Discount rate				1.0	%
Corporate CDOs	(2.5		)	Base correlation model	Radian correlation to corporate index				85.0	%
					Average credit spread	0.1	%	-	0.9	%
					Own credit spread (2)	0.9	%	-	3.8	%
CDOs of CMBS	(56.3		)	Discounted cash flow	Radian correlation to CMBS transaction index	72.0	%	-	85.0	%
					Own credit spread (2)	0.9	%	-	3.8	%
TruPs CDOs	(30.2		)	Discounted cash flow	Principal recovery				75.0	%
					Principal recovery (stressed)				65.0	%
					Probability of conditional liquidity payment	0.2	%	-	10.0	%
					Own credit spread (2)	0.9	%	-	3.8	%
TruPs - related VIE	(47.8		)	Discounted cash flow	Discount rate				8.8	%
Other non-corporate CDOs and derivative transactions	(115.3		)	Risk-based model	Average life (in years)	<1		-	20
					Own credit spread (2)	0.9	%	-	3.8	%
NIMS VIE	(3.1		)	Discounted cash flow	NIMS credit spread				43.2	%
					Own credit spread (2)				7.2	%

________________


(1)	Excludes certain assets and liabilities for which we do not develop quantitative unobservable inputs. The fair value estimates for these assets and liabilities are developed using third-party pricing information, generally without adjustment.


(2)	Represents the range of our CDS spread that a typical market participant might use in the valuation analysis based on the remaining term of the investment.

The following table summarizes the significant unobservable inputs used in our recurring Level III fair value measurements as of December 31, 2013:



(In millions)	Fair Value Net Asset (Liability) December 31, 2013 (1)			Valuation Technique	Unobservable Input	Range/ Weighted Average
Level III Assets/Liabilities:
State and municipal obligations	$	18.7		Discounted cash flow	Discount rate				12.3	%
					Expected loss				11.1	%
Other investments	81.0			Discounted cash flow	Discount rate				1.2	%
Corporate CDOs	(1.4		)	Base correlation model	Radian correlation to corporate index				85.0	%
					Average credit spread	0.1	%	-	0.9	%
					Own credit spread (2)	0.8	%	-	4.3	%
CDOs of CMBS	(67.8		)	Discounted cash flow	Radian correlation to CMBS transaction index	72.0	%	-	85.0	%
					Own credit spread (2)	0.8	%	-	4.3	%
TruPs CDOs	(43.9		)	Discounted cash flow	Principal recovery				75.0	%
					Principal recovery (stressed)				65.0	%
					Probability of conditional liquidity payment	1.1	%	-	12.4	%
					Own credit spread (2)	0.8	%	-	4.3	%
TruPs - related VIE	(68.4		)	Discounted cash flow	Discount rate				13.1	%
Other non-corporate CDOs and derivative transactions	(119.4		)	Risk-based model	Average life (in years)	<1		-	20
					Own credit spread (2)	0.8	%	-	4.3	%
NIMS VIE	(2.8		)	Discounted cash flow	NIMS credit spread				43.8	%
					Own credit spread (2)				7.9	%

________________


(1)	Excludes certain assets and liabilities for which we do not develop quantitative unobservable inputs. The fair value estimates for these assets and liabilities are developed using third-party pricing information, generally without adjustment.


(2)	Represents the range of our CDS spread that a typical market participant might use in the valuation analysis based on the remaining term of the investment.

The significant unobservable inputs in the fair value measurement of our investment securities noted in the tables above include an interest rate used to discount the projected cash flows and an expected loss assumption. This expected loss assumption generally represents the principal shortfall we believe that a typical market participant would expect on our security as a result of the obligor’s failure to pay. In addition, our other investments include a guaranteed investment contract for which the counterparty’s non-performance risk is considered in the discount rate. Significant increases (decreases) in either the discount rates or loss estimates in isolation would result in a lower (higher) fair value measurement. Changes in these assumptions are independent and may move in either similar or opposite directions.

The significant unobservable inputs used in the fair value measurement of our derivative assets, derivative liabilities and VIE debt relate to average credit spreads, average life, discount rates, correlation to indices and projected losses. In addition, 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, if applicable, as discussed below.

For our corporate CDOs, we estimate the correlation of the default probability between the corporate entities and Radian—the higher the correlation percentage, the higher the probability that both the corporate entities and Radian will default together. In addition, a widening of the average credit spread increases the expected loss for our transactions, and therefore, increases the related liability.

For our CDO of CMBS transactions, we use the CMBX index that most directly correlates to our transaction with respect to vintage and credit rating and then we estimate losses by applying a correlation factor. Because we have more exposure to senior tranches, an increase in this factor generally increases the expected loss for our transactions and therefore, increases our related liability.

For our TruPs CDOs, the performance of each underlying reference obligation is measured by a standard and distressed pricing, which indicates the expected principal recovery. An increase in the standard and stressed principal recovery decreases the loss severity of the transaction, and therefore, in isolation, decreases the related liability. For those transactions where we may be required to pay a “liquidity claim,” we also assign these transactions a probability that we will be required to pay such claim, which generally would increase our related liability.

For our TruPs-related VIE liabilities, the fair value is estimated using similar inputs as in the estimated fair value of our TruPs CDOs, except there is no non-performance risk adjustment, as the derivative liability is limited to the segregated assets already held by the VIE.

For our other non-corporate CDOs, we utilize the internal credit rating, average remaining life, and current par outstanding for each transaction to project both expected losses and an internally developed risk-based capital amount. An increase in the average remaining life typically increases the expected loss of the transactions, and therefore, increases our related liability. An upgrade (downgrade) in the internal credit rating typically decreases (increases) the expected loss of the transactions, and therefore, decreases (increases) our related liability.

For all fair value measurements where we project our non-performance risk, including VIE debt, we utilize a market observed credit spread for Radian, which we believe is the best available indicator of the market’s perception of our non-performance risk. In isolation, a widening (tightening) of this credit spread typically decreases (increases) our related liability. The assumption used to project our own non-performance risk is independent from the other unobservable inputs used in our fair value measurements. The net impact on our reported assets and liabilities from increases or decreases in our own credit spread and from increases or decreases in other unobservable inputs depends upon the magnitude and direction of the changes in each input; such changes may result in offsetting effects to our recorded fair value measurements or they may result in directionally similar impacts, which may be material.

Other Fair Value Disclosure

The carrying value and estimated fair value of other selected assets and liabilities not carried at fair value on our condensed consolidated balance sheets were as follows as of the dates indicated:



	March 31, 2014					December 31, 2013
(In millions)	Carrying Amount		Estimated Fair Value			Carrying Amount		Estimated Fair Value
Assets:
Fixed-maturities held to maturity	$	0.1	$	0.1	(1)	$	0.4	$	0.4	(1)
Other invested assets	46.8		55.4		(1)	47.4		54.3		(1)
Liabilities:
Long-term debt (3)	938.4		1,559.8		(1)	930.1		1,502.7		(1)
Non-derivative financial guaranty liabilities	148.6		215.2		(2)	144.7		189.1		(2)

______________________


(1)	These estimated fair values would be classified in Level II of the fair value hierarchy.


(2)	These estimated fair values would be classified in Level III of the fair value hierarchy.


(3)	The carrying amount of long-term debt is net of the equity component, which is accounted for under the accounting standard for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). The fair value is estimated based on the quoted market prices for the same or similar issues. See Note 10 for further information.