RADIAN GROUP INC – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this report and our audited financial statements, notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Form 10-K for the fiscal year ended December 31, 2011, for a more complete understanding of our financial position and results of operations. In addition, investors should review the "Forward Looking Statements-Safe Harbor Provisions" above and the "Risk Factors" detailed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2011, and in Item 1A of Part II of this Quarterly Report on Form 10-Q for a discussion of those risks and uncertainties that have the potential to affect our business, financial condition, results of operations, cash flows or prospects in a material and adverse manner. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year or for any other period.

  Business Summary We are a credit enhancement company with a primary strategic focus on domestic, first-lien residential mortgage insurance. Our business segments are mortgage insurance and financial guaranty. Mortgage Insurance Our mortgage insurance segment provides credit-related insurance coverage, principally through private mortgage insurance, and risk management services to mortgage lending institutions. We provide these products and services mainly through our wholly-owned subsidiary, Radian Guaranty Inc. ("Radian Guaranty"). Private mortgage insurance protects the holders of our insurance from all or a portion of default-related losses on residential mortgage loans made generally to home buyers who make downpayments of less than 20% of the home's purchase price. Private mortgage insurance also facilitates the sale of these mortgage loans in the secondary mortgage market, most of which are sold to Freddie Mac and Federal National Mortgage Association ("Fannie Mae"). We refer to Freddie Mac and Fannie Mae together as "Government Sponsored Enterprises" or "GSEs." Traditional Mortgage Insurance. Our mortgage insurance segment offers primary mortgage insurance coverage on residential first-lien mortgages ("first-liens"). At June 30, 2012, primary insurance on first-liens made up approximately 93.8% of our total risk in force ("RIF"). Prior to 2009, we also wrote pool insurance, which comprised approximately 5.7% of our total RIF at June 30, 2012. Non-Traditional Mortgage Credit Enhancement. In addition to traditional mortgage insurance, in the past, we provided other forms of credit enhancement on residential mortgage assets. These products included mortgage insurance on second-lien mortgages ("second-liens"), credit enhancement on net interest margin securities ("NIMS"), and primary mortgage insurance on international mortgages (collectively, we refer to the risk associated with these transactions as "non-traditional"). We stopped writing non-traditional business in 2007, other than a small amount of international mortgage insurance, which we discontinued writing in 2008. Our non-traditional RIF was $179 million as of June 30, 2012, representing 0.5% of our total RIF. In the second quarter of 2012, Radian Guaranty entered into a quota share reinsurance agreement with a third-party reinsurance provider (the "2012 Quota Share Reinsurance Transaction"). Through the 2012 Quota Share Reinsurance Transaction, Radian Guaranty agreed to cede 20% of its new insurance written ("NIW") beginning with the business written in the fourth quarter of 2011. As of June 30, 2012, the amount ceded pursuant to this transaction was $922.5 million of Radian Guaranty's RIF. The amount of risk that ultimately may be ceded is expected to be between $1.25 billion and $1.6 billion. At a 25 to 1 risk-to-capital ratio, the equivalent initial capital benefit associated with ceding this amount of risk will be between $50 million and $62.5 million. Radian Guaranty has the ability, at its option, to commute two-thirds of the reinsurance ceded as part of this transaction on December 31, 2014. Financial Guaranty Our financial guaranty segment has provided direct insurance and reinsurance on credit-based risks through Radian Asset Assurance Inc. ("Radian Asset Assurance"), a wholly-owned subsidiary of Radian Guaranty. Financial guaranty insurance typically provides an unconditional and irrevocable guaranty to the holder of a financial obligation of full and timely payment of principal and interest when due. Financial guaranty insurance may be issued at the inception of an insured obligation or may be issued for the benefit of a holder of an obligation in the secondary market.                                         61 

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  We have provided financial guaranty credit protection through the issuance of a financial guaranty insurance policy, by insuring the obligations under a credit default swap ("CDS"), or through the reinsurance of such obligations. Both a financial guaranty insurance policy and a CDS provide the purchaser of such credit protection with a guaranty of the timely payment of interest and scheduled principal when due on a covered financial obligation, and in the case of most of our financial guaranty CDSs, credit protection for amounts in excess of specified levels of losses. These forms of credit enhancement each require similar underwriting and surveillance. We historically have offered the following financial guaranty products: •      Public Finance-Insurance of public finance obligations, including        tax-exempt and taxable indebtedness of states, counties, cities, special        service districts, other political subdivisions, enterprises such as        public and private higher education institutions and healthcare facilities        and infrastructure, project finance and private finance initiative assets        in sectors such as airports, education, healthcare and other        infrastructure projects;   •      Structured Finance-Insurance of structured finance obligations, including        collateralized debt obligations ("CDOs") and asset-backed securities        ("ABS"), consisting of funded and non-funded (referred to herein as        "synthetic") executions that are payable from or tied to the performance        of a specific pool of assets or covered reference entities. Examples of        the pools of assets that collateralize or underlie structured finance        obligations include corporate loans, bonds or other borrowed money,        residential and commercial mortgage loans, trust preferred securities        ("TruPs"), diversified payment rights ("DPRs"), a variety of consumer        loans, equipment receivables, real and personal property leases, or a        combination of asset classes or securities backed by one or more of these        pools of assets;   •      Reinsurance-Reinsurance of domestic and international public finance        obligations, including those issued by sovereign and sub-sovereign        entities, and structured finance obligations.  

In 2008, in light of difficult market conditions and the downgrade of the financial strength ratings of our financial guaranty insurance subsidiaries, we discontinued writing new financial guaranty business, other than as necessary to commute, restructure, hedge or otherwise mitigate losses or reduce exposure in our existing portfolio. Since 2008, we have significantly reduced our financial guaranty operations and have reduced our financial guaranty exposures through commutations in order to mitigate uncertainty, maximize the ultimate capital available for our mortgage insurance business and accelerate our access to that capital.

  In January 2012, Radian Asset Assurance entered into a three-part transaction (the "Assured Transaction") with subsidiaries of Assured Guaranty Ltd. (collectively "Assured") that included the following: •      the commutation of $13.8 billion of financial guaranty net par outstanding        that was reinsured by Radian Asset Assurance (the "Assured Commutation");   •      the cession of $1.8 billion of public finance business to Assured (the        "Assured Cession"); and   •      the sale of Municipal and Infrastructure Assurance Corporation (the "FG        Insurance Shell"), a New York domiciled financial guaranty insurance        company with licenses to conduct business in 37 states and the District of        Columbia. The sale of the FG Insurance Shell was completed in the second        quarter of 2012.  

This three-part transaction with Assured reduced our financial guaranty net par outstanding by 22.5% and provided a statutory capital benefit to Radian Asset Assurance and Radian Guaranty of $100.7 million as of June 30, 2012. This transaction is consistent with our strategic objective of accelerating the reduction of our financial guaranty net par outstanding and strengthening the statutory capital positions of Radian Asset Assurance and Radian Guaranty.

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The following table shows the impact of the Assured Transaction on our condensed consolidated financial statements in the first six months of 2012. While Radian Asset Assurance and Radian Guaranty received a statutory capital benefit as a result of this transaction as discussed above, under accounting principles generally accepted in the United States of America ("GAAP") this transaction resulted in a realized loss, and therefore, a reduction in our retained earnings.

  Statement of Operations (In millions) Decrease in premiums written                                    $ (119.8 ) Decrease in net premiums earned                                 $  (22.2 ) 

Increase in change in fair value of derivative instruments-gain 1.4 Gain on sale of affiliate

                                            7.7 Increase in amortization of policy acquisition costs               (15.7 ) Decrease in pre-tax income                                      $  (28.8 )  Balance Sheet (In millions) Decrease in: Cash                                                            $   93.6 Deferred policy acquisition costs                                   26.2 Accounts and notes receivable                                        1.1 Derivative assets                                                    0.6 Unearned premiums                                                   71.6 Derivative liabilities                                               2.1 Increase in other assets                                            19.1  

In the second quarter of 2012, Radian Asset Assurance entered into a commutation with one of its derivative counterparties (the "Counterparty") to commute Radian Asset Assurance's: (1) only CDO of ABS exposure related to a directly insured tranche of an extremely distressed CDO of ABS transaction (the "CDO of ABS Transaction"), for which we expected to pay claims on substantially all of the $450.2 million in net par outstanding; and (2) credit protection through CDS on six directly insured TruPs CDO transactions, representing $699.0 million of net par outstanding at the time of the commutation (the "Terminated TruPs CDOs"). In consideration for these commutations, Radian Asset Assurance paid $210.0 million (the "Commutation Amount"), a significant portion of which (the "LPV Initial Capital") has been deposited with a limited purpose vehicle (an "LPV") to cover the Counterparty's potential future losses on the TruPs bonds underlying the Terminated TruPs CDOs (the "Terminated TruPs Bonds"). The commutations described in this paragraph are referred to herein as the "Commutation Transactions." Also as part of the Commutation Transactions, the LPV entered into a credit default swap (the "Residual CDS") with the Counterparty to provide for payments to the Counterparty for future losses relating to the Terminated TruPs Bonds. The LPV Initial Capital, together with investment earnings (collectively, the "LPV Capital") represent the only funds available to pay the Counterparty for amounts due under the Residual CDS. The Residual CDS terminates concurrently with the Terminated TruPs Bonds for which we had provided credit protection and provides for payment to the Counterparty substantially in accordance with the terms of our original CDS protection for the Terminated TruPs Bonds. In addition, pursuant to an agreement with the Counterparty, if any LPV Capital amount is remaining following the maturity of the Residual CDS, Radian Asset Assurance is entitled to these remaining funds.

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  Due to current expectations regarding future credit losses on the Terminated TruPs Bonds, we established an associated salvage recovery for statutory accounting purposes of approximately $75 million related to the LPV funds we expect to ultimately receive. Although Radian Asset Assurance has no further obligation for claims related to the Terminated TruPs CDOs, the amount of salvage recovery remains at risk, and the actual amount of salvage that we ultimately recover will depend on the future performance of the Terminated TruPs Bonds. If the LPV is required to make payments to the Counterparty pursuant to the terms of the Residual CDS, Radian Asset Assurance's projected and actual recovery from the LPV may be materially reduced or eliminated. Because we had already established a statutory reserve for the CDO of ABS Transaction and we do not expect ultimate losses on the Terminated TruPs CDOs, the Commutation Transactions did not have a significant impact on the statutory capital of Radian Asset Assurance or Radian Guaranty in the second quarter of 2012. Prior to the Commutation Transactions, the terminated transactions were required to be accounted for at fair value for GAAP purposes. The Commutation Amount exceeded the aggregate fair value liability that we had recorded for such transactions. As a result, we recorded a loss for GAAP purposes of $108 million on the Commutation Transactions in the quarter ended June 30, 2012. This loss resulted primarily from the fact that the aggregate fair value liability for the commuted transactions incorporated a significant discount to the derivative liability for these transactions related to the market's perception of our non-performance risk. See "Critical Accounting Policies-Fair Value of Financial Instruments-Corporate CDOs" for additional information regarding our fair value methodology. All of the transactions commuted pursuant to the Commutation Transactions were rated below investment grade ("BIG") internally with $1.0 billion net par outstanding of the commuted transactions rated B or below internally. In the aggregate, the transactions commuted pursuant to the Commutation Transactions represented approximately 51% of our financial guaranty segment's aggregate net par outstanding rated B or below internally. Financial Guaranty Exposure Subject to Recapture or Termination.  Approximately $28.3 billion of our total net par outstanding as of June 30, 2012 (representing 65.8% of our financial guaranty segment's total net par outstanding), was subject to recapture or termination at the option of our primary reinsurance customers and financial guaranty credit derivative counterparties. Of such amount, $21.9 billion was subject to termination at the option of our financial guaranty credit derivative counterparties, while the remaining $6.4 billion was subject to recapture at the option of our primary reinsurance customers. In the first half of 2012, four CDS counterparties in our financial guaranty business exercised their termination rights with respect to 22 corporate CDOs and one CDS of an investor-owned utility bond that we insured (the "2012 CDO Terminations"), which reduced our net par outstanding by an aggregate of $9.4 billion, 94.2% of which was rated AAA internally. On June 28, 2012, one of our primary reinsurance customers, Financial Guaranty Insurance Company ("FGIC") was placed into rehabilitation by the New York Department of Financial Services ("NYDFS"). As of June 30, 2012, we had reinsured an aggregate of $863.3 million in net par outstanding from FGIC. In addition, as of June 30, 2012, we had $88.1 million of second-to-pay exposure to FGIC (or 3.9% of our aggregate second-to-pay exposure), pursuant to which we are obligated to pay claims to the extent that both the underlying obligation defaults and FGIC (or its rehabilitator) fails to pay all or a portion of such claims. While we continue to monitor the situation, we currently do not anticipate that the placement of FGIC into rehabilitation will have a material adverse effect on us.                                         64 

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  Overview of Business Results As a seller of credit protection, our results are subject to macroeconomic conditions and specific events that impact the origination environment and credit performance of our underlying insured assets. The ongoing weakness in the United States ("U.S.") housing and related credit markets, characterized by a decrease in mortgage originations, further declines in home prices in certain markets, mortgage servicing and foreclosure delays, and ongoing deterioration in the credit performance of mortgage and other assets originated prior to 2009, together with current macroeconomic factors such as limited economic growth, the lack of meaningful liquidity in some sectors of the capital markets, and continued high unemployment, have had, and we believe will continue to have, a significant negative impact on the operating environment and results of operations for each of our businesses. Because of these factors, there is uncertainty regarding our ultimate loss performance. See Note 1 of Notes to Condensed Consolidated Financial Statements. Mortgage Insurance •      Defaults. Our first-lien primary default rate at June 30, 2012 was 13.3%,        compared to 15.2% at December 31, 2011. Our primary default inventory        comprised 98,450 loans at June 30, 2012, compared to 103,027 loans and        110,861 loans at March 31, 2012 and December 31, 2011, respectively. Our        primary default inventory declined slightly in July 2012. The reduction in        our default inventory is the result of the total number of defaulted loans        that have cured ("cures"), defaulted loans for which claim payments have        been made, and defaulted loans that have resulted in insurance rescissions        and claim denials collectively exceeding the total number of new defaults        on insured loans. Despite this positive trend, our overall primary default        rates continue to remain elevated compared to historical levels due to        continued high unemployment and weakness in the U.S. housing and mortgage        credit markets. We believe that a return to sustained profitability in our        mortgage insurance business is dependent upon both a further reduction in        the number of new defaults and an increase in the number of cures,        particularly with respect to our older delinquent loans. Based on our        projections, which are subject to significant risks and uncertainties, we        expect improved operating results in our mortgage insurance business in        2012 compared to 2011, and while we expect an operating loss for our        mortgage insurance business in 2012, we continue to expect to achieve        marginal operating profitability in our mortgage insurance business in        2013. We are projecting a 15%-20% decrease in new defaults in 2012        compared to 2011, which compares to an 18% decrease in new defaults in        2011 compared to 2010. During the second quarter and first half of 2012,        new defaults decreased 20% compared to the same periods of 2011.  

Notwithstanding these decreases, defaults have remained at elevated levels across all of our mortgage insurance product lines, including our insured portfolio of prime, first-lien mortgages. Overall, the underlying trend of high defaults continues to be driven primarily by the poor performance of our 2005 through 2008 books of business. In addition, a slowdown in mortgage foreclosures, driven by foreclosure moratoriums, servicing delays and the effect of prolonged modification programs for delinquent loans, has contributed to the sustained high level of our default inventory. This slowdown has resulted in more defaults remaining unresolved for a longer period of time than has historically been the case.

 •      Provision for Losses. Our mortgage insurance provision for losses for the        second quarter and first half of 2012 was $208.1 million and $442.8        million, respectively, and consisted primarily of reserves established on        new defaults. In addition, our provision for losses has been impacted by        an increase in the weighted average rate at which defaulted loans are        expected to move to claim (the "default to claim rate"), due to a greater        than anticipated impact from the aging of underlying defaulted loans. With        continuing declines in home values in certain markets, persistently high        unemployment and delays by servicers in either modifying loans or        foreclosing on properties, the time it has taken to cure or otherwise        resolve a delinquent loan has been prolonged. Consequently, in recent        years, our default inventory has experienced an increase in its weighted        average age, and because we apply higher estimated default to claim rates        on our older delinquent loans, this has resulted in higher reserves. Our        assumed aggregate weighted average default to claim rate (which        incorporates the expected impact of rescissions and denials) was        approximately 46% and 43% as of June 30, 2012 and December 31, 2011,        respectively.                                           65

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Our mortgage insurance reserve for losses continues to be favorably affected by our loss management efforts. Our loss reserve estimate incorporates our recent experience with respect to the elevated number of claims that we are denying due to the policyholder's failure to submit sufficient documentation to perfect a claim submission and to the number of insurance certificates that we are rescinding due to fraud, underwriter negligence or other factors, including the impact of our recent experience regarding reinstatements of previously rescinded policies and denied claims. Our current level of rescissions and denials remains elevated compared to historical levels, which we believe reflects the larger concentration of poorly underwritten loans (primarily originated during 2005 through 2008) that are in our default inventory, as well as our extensive efforts to examine all claims for potential rescissions or denials. We expect the level of rescissions and denials to continue to remain elevated compared to historical levels as long as our 2005 through 2008 insurance policies comprise a significant percentage of our default inventory. In addition, as part of our claims review process, we assess whether defaulted loans were serviced appropriately in accordance with our insurance policies and servicing guidelines. To the extent a servicer has failed to satisfy its servicing obligations, our policies provide that we may curtail the claim payment for such default, and in some circumstances deny the claim. In 2012, claim curtailments due to servicer noncompliance with our insurance policies and servicing guidelines have increased both in frequency and amount, which has contributed to a reduction in the severity of our claim payments during this period. While we cannot give assurance regarding the extent or level at which such claim curtailments will continue, we expect this trend to continue throughout 2012 in light of well publicized issues in the servicing industry and our existing portfolio of aged defaults.

 •      Claims Paid.  Total mortgage insurance claims paid in the second quarter        and first half of 2012 were $263.4 million and $481.6 million,        respectively. Foreclosure backlogs, servicer delays and loan modification        programs have reduced the number of defaults going to claim. Our extensive        review of all claims has slowed our internal claims payment process and        has resulted in a significant increase in the number of denials in recent        periods as a result of servicers failing to produce the documents        necessary to perfect a claim submission. While this increasing trend has        the effect of reducing claims paid in current periods, we expect a        significant portion of denials to be resubmitted and ultimately paid, and        our incurred loss and claims paid estimates reflect this expectation. We        currently expect total claims paid in 2012 to increase throughout the        year, and to total approximately $1.1 billion for 2012.    •      New Insurance Written. We wrote $8.3 billion and $14.8 billion of new        mortgage insurance in the second quarter and first half of 2012,        respectively, compared to $2.3 billion and $4.9 billion of insurance        written in the corresponding periods of 2011, respectively. The        significant increase in NIW in the three and six months ended June 30,        2012, compared to the corresponding periods of 2011, is mainly        attributable to an increase in the penetration rate of private mortgage        insurance in the overall insured mortgage market, as well as an increase        in our share of the insured private mortgage market. While the private        mortgage insurance industry has made progress in recapturing business from        the Federal Housing Administration ("FHA"), the FHA's market share remains        at historically high levels. We have been more aggressively marketing our        product offerings that favorably compete with the FHA in order to regain        market share from the FHA. In the second quarter of 2011, we implemented a        series of changes to our underwriting guidelines and premium rates,        including a more efficient underwriting process for loans conforming to        the GSEs' guidelines and lower premium rates for monthly mortgage        insurance paid directly by borrowers, which also has had a positive impact        on our 2012 NIW.  

Starting in 2008, we implemented a series of changes to our underwriting guidelines aimed at improving the long-term risk profile and profitability of our business. As a result of these changes, the credit profile of our mortgage insurance portfolio has improved. Since 2009, almost all of our new business production has been prime business. In addition, Fair Isaac and Company ("FICO") scores for the borrowers of these insured mortgages have generally increased, while the loan-to-value ("LTV") on these mortgages has decreased, meaning that borrowers generally are making larger downpayments in connection with the more recent mortgages that we are insuring.

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 •      Statutory Capital. 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 RIF, or        "risk-to-capital." Sixteen states (the risk-based capital or "RBC States")        currently have a statutory or regulatory risk-based capital requirement (a        "Statutory RBC Requirement"), the most common of which (imposed by 11 of        the RBC States) is a requirement that a mortgage insurer's risk-to-capital        ratio may not exceed 25 to 1. Radian Guaranty's risk-to-capital ratio        improved to 21.0 to 1 as of June 30, 2012, compared to 21.5 to 1 at        December 31, 2011, primarily as a result of: (1) an increase in Radian        Guaranty's statutory surplus resulting from the release of contingency        reserves at Radian Asset Assurance due to the Assured Transaction; (2)        gains from the sale of securities in our investment portfolio; and (3) the        reduction in net risk in force due to the 2012 Quota Share Reinsurance        Transaction discussed above.  

We currently project, based on various assumptions that are subject to inherent uncertainty and require significant judgment by management, that Radian Guaranty's risk-to-capital ratio will increase. Absent any further risk-to-capital support, we expect Radian Guaranty to exceed the 25 to 1 risk-to-capital ratio requirement and other Statutory RBC Requirements during the second half of 2012. Risk-to-capital support includes: (1) internal and external reinsurance arrangements; (2) reduction of our risk exposure through commutations or other negotiated transactions; (3) contributions of additional capital from Radian Group Inc. ("Radian Group") to our mortgage insurance subsidiaries; and (4) the realization of gains in our investment portfolio through open market sales of securities. See "Risk Factors-Losses in our mortgage insurance and financial guaranty businesses have reduced Radian Guaranty's statutory surplus and increased Radian Guaranty's risk-to-capital ratio; additional losses in these businesses, without a corresponding increase in new capital or capital relief, would further negatively impact this ratio, which could limit Radian Guaranty's ability to write new insurance and increase restrictions and requirements placed on Radian Guaranty" in Part II, Item 1A of this Quarterly Report. In the event that Radian Guaranty exceeds the risk-based capital requirements imposed by the RBC States, we have the ability to continue writing new mortgage insurance business in those states through a combination of state-specific waivers or similar relief and by writing business in Radian Mortgage Assurance Inc. ("RMAI"), which has been approved by Fannie Mae and Freddie Mac as an eligible mortgage insurer subject to certain requirements.

  Financial Guaranty •      Net Par Outstanding. Our financial guaranty segment's net par outstanding        was $41.5 billion as of June 30, 2012, compared to $69.2 billion at        December 31, 2011. This reduction in net par outstanding was primarily due        to the Assured Transaction, the 2012 CDO Terminations and the Commutation        Transactions, as well as the amortization or scheduled maturity of our        insured portfolio and prepayments of public finance transactions. We        expect our net par outstanding will continue to decrease over time as our        financial guaranty portfolio matures and as we proactively seek to reduce        our financial guaranty net par outstanding.   •      Credit Performance. The percentage of internally rated AAA credits in our        insured portfolio increased to 50.6% of our net par outstanding at        June 30, 2012, from 44.9% at December 31, 2011. In addition, the        percentage of internally rated BBB credits increased to 27.5% of our net        par outstanding at June 30, 2012, from 22.0% at December 31, 2011. The BIG        exposure increased to 7.0% of our total portfolio as of June 30, 2012,        from 5.9% as of December 31, 2011. These changes in the ratings mix of our        financial guaranty segment's insured portfolio were primarily due to the        Assured Transaction, the Commutation Transactions and the 2012 CDO        Terminations.   •            Public Finance. Our public finance insured portfolio continues to              experience some stress from the general economic downturn and slow              economic recovery. As of June 30, 2012, approximately 10.1% of our              total financial guaranty segment's public finance net par              outstanding consisted of credits rated BIG, compared to 4.5% as of              December 31, 2011. The percentage of AA or A rated public finance              credits declined from 47.5% to 21.1% between December 31, 2011 and              June 30, 2012. The ratings mix shift in our public finance portfolio              was primarily caused by the Assured Transaction, which reduced the              public finance portfolio by $15.0 billion and removed 45% of public              finance net par outstanding from our insured portfolio. The              percentage of our total net par outstanding from public finance              obligations decreased from 47.6% to 39.5% of our total net par              outstanding between December 31, 2011 and June 30, 2012.                                           67

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  As of June 30, 2012, we had an aggregate of $3.7 billion net par exposure to healthcare and long-term care credits and our net claim liability for our healthcare and long-term care exposure was $15.3 million. More hospitals have been experiencing a decrease in patient revenues as a result of a significant decline in patient volumes, increased charity care and limited increases in commercial and government reimbursements. Many healthcare institutions are reporting that further expense reduction efforts are unrealistic and that operating losses are expected as healthcare inflation out-paces weak revenue growth. Further, long-term care facilities generally have been experiencing gradually declining occupancies, reduced debt service coverage margins and slowly eroding cash positions. If these trends continue, it could result in further credit deterioration and require increases in our net claim liability and loss reserves related to our healthcare and long-term care credits. As of June 30, 2012, we had an aggregate of $6.6 billion net par exposure to general obligations and other tax supported credits. Our net claim liability for our general obligations and other tax supported exposure was $28.9 million as of June 30, 2012. Although states and municipalities generally have been able to withstand stresses caused by the difficult economic environment and challenges facing the municipal sector to date, the lagging impact on municipal governments from the most recent economic downturn is becoming more evident. We expect the negative trend in this sector to continue through at least the end of 2013, due to the tepid economic recovery, federal funding reductions (including the end of federal stimulus revenues), expected Medicare cuts, and continued stress on tax-based revenue receipts (in particular where tax revenues are derived from the value of real estate, as discussed below). We expect this negative trend to continue to strain the ability of government entities to maintain balanced budgets and adequate liquidity to meet near-term financial obligations. We may continue to experience further credit deterioration and municipal defaults in our government-related insured credits, which could require increases in our net claim liability with respect to these credits. We have seen some credit deterioration in our insured portfolio of other-tax-supported bond transactions, in particular those that are payable from real estate tax revenues derived from the value of real estate in narrowly defined special districts or from special assessments for improvements on certain properties. Declining property values have reduced the assessed value of the tax base in these jurisdictions, resulting in reduced tax revenues being available to pay interest and principal on these insured bonds. We may experience further credit deterioration in these transactions, which would increase the likelihood that ultimately we would be required to make claim payments with respect to these bonds, especially those from special districts. Our net par exposure to this portfolio was approximately $2.4 billion as of June 30, 2012, a reduction from $4.1 billion as of December 31, 2011, primarily due to the Assured Transaction. Our international sovereign and sub-sovereign (collectively, "Sovereign") net par exposure declined 60% from $495.4 million at December 31, 2011, to $196.4 million at June 30, 2012, primarily due to the Assured Transaction, partially offset by a reclassification of certain international indebtedness as Sovereign. As of June 30, 2012, 51.0% of our Sovereign net par exposure is rated at least investment grade, while 49.0% is rated BIG. All of our BIG exposure relates to Portugal, Ireland, Greece, Spain and Hungary (collectively with Italy, the "Stressed European Countries") whose Sovereign obligations have been under particular stress due to economic uncertainty, potential restructuring and ratings downgrades. Our Sovereign net par exposure to the Stressed European Countries was $116.3 million as of June 30, 2012, of which $45.5 million is related to Spain, $27.8 million is related to Greece, $22.1 million is related to Hungary, $20.0 million is related to Italy, and $0.9 million is related to Portugal, with no such exposure to Ireland. Our net claim liability to Sovereign exposures as of June 30, 2012 is $23.1 million, all of which is related to Greece. Substantially all of our Sovereign exposure to Spain is to an infrastructure project backed by the province of Valencia, which has requested financial assistance from the Spanish government under a recently created program from the Spanish government to assist cash-strapped regions. In addition, we anticipate that our Sovereign exposure to Greece will be settled in full in the second half of 2012. Due to volatile economic conditions and uncertainty, particularly in the Stressed European Countries, we believe that there is significant risk of negative ratings and net claim liability developments in our Sovereign insured credits in the Stressed European Countries over the next few quarters. In addition to our Sovereign net par exposure, Sovereign obligations represent approximately 0.6% of the collateral in our insured portfolio of corporate CDOs, including less than 0.1% to each of Spain and Hungary, the only Stressed European Countries included within the collateral in our insured portfolio of corporate CDOs.                                         68 

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 •            Structured Finance. The percentage of internally rated AAA credits              in our structured finance portfolio declined to 77.3% at June 30,              2012, from 79.5% at December 31, 2011, mainly due to the Commutation              Transactions and the 2012 CDO Terminations. The Commutation              Transactions, which removed $1.1 billion of BIG structured finance              credits from our portfolio, improved the ratings mix of our              structured finance portfolio by reducing the percentage of our BIG              structured finance net par outstanding from 9.3% as of December 31,              2011, to 5.0% as of June 30, 2012. The 2012 CDO Terminations also              reduced the net par outstanding of the corporate CDOs scheduled to              mature in 2012, 2013 and 2014 by 63%, 29% and 31%, respectively.  

We have seen stabilization and improved performance across many of the transactions in our directly insured TruPs CDO portfolio. Banks within these insured transactions continue to show improved performance, while insurance companies in these transactions remain generally stable. As of June 30, 2012, our weighted average internal rating for our directly insured TruPs bonds improved from BB at December 31, 2011, to BBB- as of June 30, 2012, primarily due to the Commutation Transactions. See "Results of Operations-Financial Guaranty-Financial Guaranty Exposure Information" below for additional information regarding changes in the credit performance of our insured TruPs CDO portfolio. Our insured CDO of commercial mortgage-backed securities ("CMBS") transactions experienced mixed performance during the first six months of 2012. While the average total delinquencies in the collateral supporting our CDOs of CMBS declined with respect to one CDO of CMBS, and increased with respect to one CDO of CMBS during the first half of 2012, the aggregate average total delinquencies in the collateral supporting all of our CDOs of CMBS did not change materially during this period. Moreover, loss severities have improved within many of the CMBS backing these CDOs during the first six months of 2012. Our maximum total exposure to interest shortfalls on all of our CDO of CMBS transactions is limited to the aggregate of $6.1 million of contractual premium payable over the remaining life of the contracts. We have again seen interest shortfalls across some of the CMBS tranches that back our CDOs as a result of reductions in the appraised value of properties that allowed servicers to stop making advances for interest, as well as due to expenses related to the liquidation of certain properties. During the second quarter of 2012, two of the CMBS tranches that back one of our CDOs experienced interest shortfalls that exhausted the interest subordination available to us. We project that these shortfalls will be eventually repaid to us. Despite the occurrence of an interest shortfall, the overall credit quality of the affected CDO of CMBS transaction did not change materially during the first six months of 2012 and, as a result, its internal rating of AA was unchanged. Due to deterioration in the performance of one of our CMBS transactions, it was downgraded from BBB to BBB- during the first quarter of 2012. Our internal ratings for our other three CMBS transactions remained unchanged (two are internally rated AAA and one AA) as of June 30, 2012. We do not expect to pay net claims on our CDO of CMBS transactions.

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  Results of Operations Our results for the first half of 2012 were negatively impacted by the change in fair value of derivative and other financial instruments, including the impact of the Commutation Transactions. Radian Group's CDS spread tightened during this time period, which resulted in a corresponding increase in the fair value liability of our insured obligations. See "Item 3.-Quantitative and Qualitative Disclosures About Market Risk" for additional information about the impact of changes in Radian Group's five-year CDS spread on the fair value of certain of our financial instruments. Because we have the ability to hold our financial guaranty contracts to maturity, changes in market spreads are not necessarily indicative of our ultimate net credit loss payments with respect to these obligations. Our estimated credit loss payments presented in the table below represent our current estimate of the present value (net of estimated recoveries) of claims that we expect to pay or recoveries that we expect to receive on our insured credit derivatives and net variable interest entity ("VIE") liabilities. As illustrated in the table below, expected recoveries for our insured credit derivatives and VIEs exceeded estimated credit loss payments for these transactions as of June 30, 2012. This change from prior periods is primarily the result of the Commutation Transactions, including our expected salvage recovery on the Terminated TruPs CDOs. The estimated fair value of our insured credit derivatives and VIEs is measured as of a specific point in time and may be influenced by changes in interest rates, credit spreads, credit ratings and other market, asset-class and transaction-specific conditions, as well as factors that may be unrelated to our obligation to pay future claims. Other factors that may cause a difference between the fair value of these obligations and our estimated credit loss payments include the effects of our non-performance risk and differing assumptions regarding discount rate and future performance, as well as the expected impact of our loss mitigation activities, including commutations. In the absence of credit losses, unrealized losses related to changes in fair value will reverse before or at the maturity of these obligations. In addition, we may agree to settle some or all of these obligations prior to maturity at amounts that are greater or less than their fair values at the time of settlement, which could result in the realization of additional gains or losses. The following table summarizes the fair value amounts related to these instruments reflected on our condensed consolidated balance sheet at June 30, 2012, and the present value of our estimated credit loss payments (recoveries) on these instruments. Because the present value of our estimated credit loss payments currently is less than the net fair value liability, we expect the fair value liability ultimately to reverse before or at the maturity of these transactions.