Discontinued Operations

On December 22, 2014, Radian Guaranty entered into the Radian Asset Assurance Stock Purchase Agreement to sell 100% of the issued and outstanding shares of Radian Asset Assurance, Radian’s financial guaranty insurance subsidiary, to Assured, for a purchase price of approximately $810 million, subject to certain adjustments. The purchase price is payable in cash on the closing date. Radian expects to complete the sale of Radian Asset Assurance to Assured in the first half of 2015, subject to satisfaction of customary closing conditions including regulatory approvals.

The divestiture is part of Radian’s strategy to focus its business toward the mortgage and real estate markets and to accelerate its ability to comply with the proposed PMIERs. The consummation of the transaction is expected to increase Radian Guaranty’s Available Assets, as required under the PMIERs, by the net proceeds of approximately $790 million. See Note 1 for additional information regarding the PMIERs.

Based upon the applicable terms of the Radian Asset Assurance Stock Purchase Agreement, we determined that Radian Asset Assurance met the criteria for held for sale and discontinued operations accounting at December 31, 2014. As a result, we recognized an approximate $468 million pre-tax impairment charge for the year ended December 31, 2014, which is reported in loss from discontinued operations in the Consolidated Statements of Operations and in other liabilities in the table below summarizing the major components of assets and liabilities held for sale on the Consolidated Balance Sheets. We have reclassified the related operating results as discontinued operations for all periods presented in our consolidated statements of operations. No general corporate overhead or interest expense was allocated to discontinued operations.

Previously, Radian Asset Assurance comprised substantially all of the financial guaranty segment. Radian Asset Assurance provides direct insurance and reinsurance on credit-based risks. As a result, the assets and liabilities associated with the discontinued operations have historically been a source of significant volatility to Radian’s results of operations, due to various factors including fluctuations in fair value and credit risk.

Although closing under the Radian Asset Stock Purchase Agreement is subject to conditions, the purchase price is not subject to adjustment based on Radian Asset Assurance’s results of operations, changes in valuation or market conditions occurring after December 31, 2014 through the closing date. Therefore, assuming satisfaction of the closing conditions, which we expect will be satisfied, the financial results of Radian Asset Assurance are not expected to have an impact on Radian’s financial condition or results of operations after December 31, 2014 and therefore, significant estimates associated with Radian Asset Assurance’s assets and liabilities are not subject to risks and uncertainties that could materially affect amounts reported in our financial statements in future periods.

Summarized financial information regarding discontinued operations is provided in the tables below.

The loss from discontinued operations consisted of the following components for the periods indicated:



	Year Ended December 31,
(In thousands)	2014			2013			2012
Net premiums earned	$	37,194		$	49,474		$	36,598
Net investment income	35,633			39,966			41,657
Net gains (losses) on investments	51,409			(50,775		)	70,606
Impairment losses on investments	—			(3		)	(3		)
Change in fair value of derivative instruments	130,617			(32,406		)	(143,834		)
Net gains (losses) on other financial instruments	3,903			2,845			(90,071		)
Gain on sale of affiliate	—			—			7,708
Other income	88			(20		)	2
Total revenues	258,844			9,081			(77,337		)

Provision for losses	2,853			2,486			37,664
Policy acquisition costs	6,340			13,178			27,745
Other operating expense	23,726			27,127			29,010
Total expenses	32,919			42,791			94,419

Equity in net (loss) income of affiliates	(13		)	1			(13		)
Income (loss) from operations of businesses held for sale	225,912			(33,709		)	(171,769		)
Loss on classification as held for sale	(467,527		)	—			—
Income tax provision	58,442			21,425			55,594
Loss from discontinued operations, net of tax	$	(300,057	)	$	(55,134	)	$	(227,363	)

The assets and liabilities associated with the discontinued operations have been segregated in the consolidated balance sheets. The following table summarizes the major components of Radian Asset Assurance’s assets and liabilities held for sale on the Consolidated Balance Sheets as of December 31, 2014 and 2013:



	December 31,
(In thousands)	2014		2013
Fixed-maturity investments	$	224,552	$	85,408
Equity securities	3,749		—
Trading securities	689,887		884,696
Short-term investments	435,413		493,376
Other invested assets	108,206		106,000
Other assets	274,637		198,581
Total assets held for sale	$	1,736,444	$	1,768,061

Unearned premiums	$	158,921	$	201,798
Reserve for losses and LAE	31,558		21,069
VIE debt	85,016		91,800
Derivative liabilities	183,370		307,185
Other liabilities	488,143		20,767
Total liabilities held for sale	$	947,008	$	642,619

The following table provides highlights of financial guaranty derivative contracts as of the dates indicated:



	December 31,
($ in thousands)	2014		2013
Number of contracts	74		93
Par/notional amount	$	8,755,457	$	12,269,421
Total net liability	$	159,335	$	290,543

The following table provides financial guaranty gross and net claim liability details by internal surveillance category as of December 31, 2014:



($ in thousands)	Number of Policies	Remaining weighted-average contract period (years)	Gross Claim Liability		Gross Potential Recoveries		Net Claim Liability (Asset) (1)
Performing	5	21	$	1	$	—	$	—
Special Mention	166	15	14,803		1,733		4,540
Intensified Surveillance	85	18	219,594		269,442		37,328
Case Reserves	91	19	35,467		47,000		(12,302		)
Total	347	17	$	269,865	$	318,175	$	29,566

________________

(1) Net of discount and unearned premium reserves.

The following is a brief description of each of the surveillance categories listed above:

Performing-Performing credits generally have investment grade internal ratings, denoting nominal to moderate credit risk.

Special mention-This category includes insured transactions that are rated no more than two rating levels below investment grade. Although these insured transactions typically are not performing as expected, we have determined that such transactions are not expected to have severe, prolonged stress and we do not believe that claim payments are imminent.

Intensified Surveillance-This category includes transactions in financial guaranty’s insured portfolio that are rated below investment grade and indicate a severe and often permanent adverse change in the transaction’s credit profile. Transactions in this category are still performing, meaning they have not yet defaulted on a payment, but our risk management department has determined that there is a substantial likelihood of default.

Case Reserves-This category consists of insured transactions where a payment default on the insured obligation has occurred.