RDN.10Q.09.30.2011 NEW

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
 FORM 10-Q
 _______________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 1-11356
_______________________________
 Radian Group Inc.
(Exact name of registrant as specified in its charter)
_______________________________
 
Delaware
 
23-2691170
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1601 Market Street, Philadelphia, PA
 
19103
(Address of principal executive offices)
 
(Zip Code)
(215) 231-1000
(Registrant’s telephone number, including area code)
_____________________________________________
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
 
Accelerated filer  o
  
Non-accelerated filer  o
 
Smaller reporting company  o
 
 
 
  
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 133,199,159 shares of common stock, $0.001 par value per share, outstanding on November 4, 2011.


Radian Group Inc.
INDEX
 
 
 
 
Page
Number
 
 
 
 
 
Item 1.
  
 
  
 
  
 
  
 
  
 
  
Item 2.
  
Item 3.
  
Item 4.
  
 
 
 
 
 
Item 1.
  
Item 1A.
  
Item 6.
  
 
 
 
 
 
 
 




Forward Looking Statements—Safe Harbor Provisions
All statements in this report that address events, developments or results that we expect or anticipate may occur in the future are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the United States ("U.S.") Private Securities Litigation Reform Act of 1995. In most cases, forward-looking statements may be identified by words such as "anticipate," "may," "will," "could," "should," "would," "expect," "intend," "plan," "goal," "contemplate," "believe," "estimate," "predict," "project," "potential," "continue," or the negative or other variations on these words and other similar expressions. These statements, which may include, without limitation, projections regarding our future performance and financial condition, are made on the basis of management's current views and assumptions with respect to future events. Any forward-looking statement is not a guarantee of future performance and actual results could differ materially from those contained in the forward-looking statement. The forward-looking statements, as well as our prospects as a whole, are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including the following:

changes in general economic and political conditions, including high unemployment rates and continued weakness in the U.S. housing and mortgage credit markets, the U.S. economy reentering a recessionary period, a lack of meaningful liquidity in the capital markets or in the credit markets, changes or volatility in interest rates or consumer confidence and changes in credit spreads, each of which may be accelerated or intensified by, among other things, further actual or threatened downgrades of U.S. credit ratings;

changes in the way customers, investors, regulators or legislators perceive the strength of private mortgage insurers or financial guaranty providers, in particular in light of recent developments in the private mortgage insurance industry in which certain of our former competitors have ceased writing new mortgage insurance business and, in one case, has been placed under supervision or receivership by its insurance regulator;

catastrophic events or further economic changes in geographic regions, including governments and municipalities, where our mortgage insurance or financial guaranty insurance exposure is more concentrated;

our ability to successfully execute upon our capital plan for our mortgage insurance business (which depends, in part, on the performance of our financial guaranty portfolio), and if necessary, to obtain additional capital to support our mortgage insurance business and the long-term liquidity needs of our holding company;

a further reduction in, or prolonged period of depressed levels of, home mortgage originations due to reduced liquidity in the lending market, tighter underwriting standards, general reduced housing demand in the U.S., and the risk retention requirements established under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act");

our ability to maintain an adequate risk-to-capital position and surplus requirements in our mortgage insurance business in light of ongoing losses in this business and potential further deterioration and losses in our financial guaranty portfolio which, in the absence of new capital, could depend on our ability to execute strategies for which regulatory and other approvals are required and may not be obtained (see Item 1A of Part II of this Quarterly Report on Form 10-Q);

our ability to continue to effectively mitigate our mortgage insurance and financial guaranty losses;

the ability of our primary insurance customers in our financial guaranty reinsurance business to provide appropriate surveillance and to mitigate losses adequately with respect to our assumed insurance portfolio;

a more rapid than expected decrease in the level of insurance rescissions and claim denials from the current elevated levels (including as a result of successful challenges to previously rescinded policies or claim denials), which rescissions and denials have reduced our paid losses and resulted in a significant reduction in our loss reserves;

the negative impact our insurance rescissions and claim denials may have on our relationships with customers and potential customers, including the potential loss of business and the heightened risk of disputes and litigation;

the need, in the event that we are unsuccessful in defending our rescissions or denials, to increase our loss reserves for, and reassume risk on, rescinded or denied loans, and to pay additional claims;


1




the concentration of our mortgage insurance business among a relatively small number of large customers;

any disruption in the servicing of mortgages covered by our insurance policies and poor servicer performance;

adverse changes in severity or frequency of losses associated with certain products that we formerly offered that are riskier than traditional mortgage insurance or financial guaranty insurance policies;

the performance of our insured portfolio of higher risk loans, such as Alternative-A and subprime loans, and of adjustable rate products, such as adjustable rate mortgages and interest-only mortgages;

a decrease in persistency rates of our mortgage insurance policies, which would reduce our premium income;

an increase in the risk profile of our existing mortgage insurance portfolio as refinancing of existing mortgage loans generally is available to only the most qualified borrowers in the current mortgage and housing market;

changes in the criteria for assigning credit or similar ratings, further downgrades or threatened downgrades of, or other ratings actions with respect to, our credit ratings or the ratings assigned by the major rating agencies to any of our rated insurance subsidiaries at any time, including in particular, the credit ratings of Radian Group Inc. ("Radian Group") and the financial strength ratings assigned to Radian Guaranty Inc. ("Radian Guaranty");

heightened competition for our mortgage insurance business from others such as the Federal Housing Administration (the "FHA"), the Veteran's Administration and other private mortgage insurers (in particular, the FHA and those private mortgage insurers that have been assigned higher ratings from the major rating agencies that may have access to greater amounts of capital than we do, or new entrants to the industry that are not burdened by legacy obligations);

changes in the charters or business practices of, or rules or regulations applicable to, Federal National Mortgage Association ("Fannie Mae") and Freddie Mac, the largest purchasers of mortgage loans that we insure, and our ability to remain an eligible provider to both Fannie Mae and Freddie Mac;

changes to the current system or regulatory structure of housing finance, including the possibility of a new system in which private mortgage insurers are not required or their products are significantly limited in scope;

the effect of the Dodd-Frank Act on the financial services industry in general, and on our mortgage insurance and financial guaranty businesses in particular, including whether and to what extent loans with mortgage insurance are considered "qualified residential mortgages" for purposes of the Dodd-Frank Act securitization provisions or "qualified mortgages" for purposes of the ability to repay provisions of the Dodd-Frank Act and potential obligations to post collateral on our existing insured derivatives portfolio (see Item 1A of Part II of this Quarterly Report on Form 10-Q);

the application of existing federal or state consumer, lending, insurance, tax, securities and other applicable laws and regulations, or changes in these laws and regulations or the way they are interpreted, including, without limitation: (i) the outcome of existing, or the possibility of additional, lawsuits or investigations; and (ii) legislative and regulatory changes (a) affecting demand for private mortgage insurance, including the possibility that the current federal tax deduction for mortgage insurance will not be extended beyond the expiration of the program on December 31, 2011, (b) limiting or restricting our use of (or increasing requirements for) additional capital and the products we may offer, or (c) affecting the form in which we execute credit protection or affecting our existing financial guaranty portfolio;

the possibility that we may fail to estimate accurately the likelihood, magnitude and timing of losses in connection with establishing loss reserves for our mortgage insurance or financial guaranty businesses or premium deficiencies for our mortgage insurance business, or to estimate accurately the fair value amounts of derivative instruments in determining gains and losses on these instruments;

volatility in our earnings caused by changes in the fair value of our assets and liabilities carried at fair value, including our derivative instruments, and our need to reevaluate the possibility of a premium deficiency in our mortgage insurance business on a quarterly basis;



2




our ability to realize the tax benefits associated with our gross deferred tax assets, which will depend on our ability to generate sufficient sustainable taxable income in future periods;

our ability to successfully develop and implement a strategy to utilize the recently acquired Municipal and Infrastructure Assurance Corporation (the "FG Insurance Shell") in the public finance financial guaranty market, which strategy may depend on, among other items, our ability to obtain further necessary regulatory or other approvals, to attract third-party capital and to obtain ratings sufficient to support such a strategy;

changes in accounting guidance from the Securities and Exchange Commission or the Financial Accounting Standards Board; and

legal and other limitations on amounts we may receive from our subsidiaries as dividends or through our tax- and expense-sharing arrangements with our subsidiaries.

For more information regarding these risks and uncertainties as well as certain additional risks that we face, you should refer to the Risk Factors detailed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2010, and in Item 1A of Part II of our Quarterly Reports on Form 10-Q filed in 2011. We caution you not to place undue reliance on these forward-looking statements, which are current only as of the date on which we filed this report. We do not intend to, and we disclaim any duty or obligation to, update or revise any forward-looking statements made in this report to reflect new information or future events or for any other reason.



3



PART I—FINANCIAL INFORMATION
Item 1.     Financial Statements. (Unaudited)
Radian Group Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
September 30,
2011
 
December 31,
2010
(In thousands, except share and per share amounts)
 
 
 
ASSETS
 
 
 
Investments
 
 
 
Fixed-maturities held to maturity—at amortized cost (fair value $4,248 and $11,416)
$
4,083

 
$
10,773

Fixed-maturities available for sale—at fair value (amortized cost $123,249 and $340,795)
118,895

 
273,799

Equity securities available for sale—at fair value (cost $159,959 and $160,242)
163,673

 
184,365

Trading securities—at fair value (including variable interest entity (“VIE”) securities of $99,435 and $83,184)
4,482,161

 
4,562,821

Short-term investments—at fair value (including VIE investments of $149,979 and $149,981)
1,055,818

 
1,537,498

Other invested assets—at cost
62,444

 
59,627

Total investments
5,887,074

 
6,628,883

Cash
21,863

 
20,334

Restricted cash
27,649

 
31,413

Deferred policy acquisition costs
138,962

 
148,326

Accrued investment income
38,193

 
40,498

Accounts and notes receivable (less allowance of $0 and $50,000)
105,382

 
116,452

Property and equipment, at cost (less accumulated depreciation of $96,314 and $92,451)
11,936

 
13,024

Derivative assets (including VIE derivative assets of $4,931 and $10,855)
20,315

 
26,212

Deferred income taxes, net
19,244

 
27,531

Reinsurance recoverables
166,483

 
244,894

Receivable for securities sold
504,584

 
160

Other assets (including VIE other assets of $98,328 and $112,426)
304,600

 
323,160

Total assets
$
7,246,285

 
$
7,620,887

LIABILITIES AND STOCKHOLDERS’ EQUITY

 
 
Unearned premiums
$
628,400

 
$
686,364

Reserve for losses and loss adjustment expenses (“LAE”)
3,260,556

 
3,596,735

Reserve for premium deficiency
4,309

 
10,736

Long-term debt
814,901

 
964,788

VIE debt—at fair value (including $3,401 and $9,514 of non-recourse debt)
273,379

 
520,114

Derivative liabilities (including VIE derivative liabilities of $20,781 and $19,226)
188,921

 
723,579

Payable for securities purchased
532,451

 
9,112

Accounts payable and accrued expenses (including VIE accounts payable of $573 and $837)
254,932

 
249,679

Total liabilities
5,957,849

 
6,761,107

Commitments and Contingencies (Note 15)

 

Stockholders’ equity
 
 
 
Common stock: par value $.001 per share; 325,000,000 shares authorized; 150,661,461 and 150,507,853 shares issued at September 30, 2011 and December 31, 2010, respectively; 133,194,174 and 133,049,213 shares outstanding at September 30, 2011 and December 31, 2010, respectively
151

 
150

Treasury stock, at cost: 17,467,287 and 17,458,640 shares at September 30, 2011 and December 31, 2010, respectively
(892,052
)
 
(892,012
)
Additional paid-in capital
1,966,253

 
1,963,092

Retained earnings (deficit)
218,095

 
(204,926
)
Accumulated other comprehensive loss
(4,011
)
 
(6,524
)
Total stockholders’ equity
1,288,436

 
859,780

Total liabilities and stockholders’ equity
$
7,246,285

 
$
7,620,887

See notes to unaudited condensed consolidated financial statements.

4


Radian Group Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In thousands, except per share amounts)
2011

2010
 
2011
 
2010
Revenues:
 
 
 
 
 
 
 
Premiums written—insurance:
 
 
 
 
 
 
 
Direct
$
187,726

 
$
200,820

 
$
552,575

 
$
579,855

Assumed
(251
)
 
575

 
(10,415
)
 
(8,596
)
Ceded
(9,188
)
 
(26,588
)
 
(28,346
)
 
(81,050
)
Net premiums written
178,287

 
174,807

 
513,814

 
490,209

Decrease in unearned premiums
1,368

 
29,130

 
57,798

 
115,442

Net premiums earned—insurance
179,655

 
203,937

 
571,612

 
605,651

Net investment income
38,763

 
46,554

 
124,826

 
140,531

Net gains on investments
81,640

 
94,258

 
163,311

 
209,468

Total other-than-temporary impairment ("OTTI") losses
(20
)
 
(34
)
 
(31
)
 
(90
)
Losses recognized in other comprehensive income (loss)

 

 

 

Net impairment losses recognized in earnings
(20
)
 
(34
)
 
(31
)
 
(90
)
Change in fair value of derivative instruments
126,008

 
229,783

 
558,626

 
(372,777
)
Net gains (losses) on other financial instruments
80,602

 
4,882

 
160,900

 
(159,882
)
Gain on sale of affiliate

 

 

 
34,815

Other income
1,404

 
1,951

 
4,048

 
5,654

Total revenues
508,052

 
581,331

 
1,583,292

 
463,370

Expenses:
 
 
 
 
 
 
 
Provision for losses
249,598

 
344,389

 
940,537

 
1,323,435

Change in reserve for premium deficiency
(1,942
)
 
8,628

 
(6,427
)
 
43

Policy acquisition costs
11,449

 
11,054

 
39,967

 
42,719

Other operating expenses
45,240

 
43,052

 
137,413

 
143,273

Interest expense
14,094

 
9,502

 
47,197

 
28,551

Total expenses
318,439

 
416,625

 
1,158,687

 
1,538,021

Equity in net income of affiliates

 

 
65

 
14,668

Pretax income (loss)
189,613

 
164,706

 
424,670

 
(1,059,983
)
Income tax provision (benefit)
6,045

 
52,521

 
981

 
(386,733
)
Net income (loss)
$
183,568

 
$
112,185

 
$
423,689

 
$
(673,250
)
Basic net income (loss) per share
$
1.39

 
$
0.85

 
$
3.20

 
$
(6.20
)
Diluted net income (loss) per share
$
1.37

 
$
0.84

 
$
3.16

 
$
(6.20
)
Weighted-average number of common shares outstanding—basic
132,364

 
132,324

 
132,366

 
108,608

Weighted-average number of common and common equivalent shares outstanding—diluted
133,513

 
133,520

 
133,867

 
108,608

Dividends per share
$
0.0025

 
$
0.0025

 
$
0.0075

 
$
0.0075


See notes to unaudited condensed consolidated financial statements.


5

Radian Group Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY (UNAUDITED)
(In thousands)
Common
Stock

Treasury
Stock

Additional Paid-in Capital

Retained
Earnings/(Deficit)

Foreign Currency Translation Adjustment

Unrealized Holding Gains (Losses)

Other

Total

BALANCE, JANUARY 1, 2010
$
100

$
(889,496
)
$
1,363,255

$
1,602,143

$
18,285

$
(72,802
)
$
(16,491
)
$
2,004,994

Comprehensive loss:
















Net loss



(673,250
)



(673,250
)
Unrealized foreign currency translation adjustment, net of tax of $1,171




2,280





Less: Reclassification adjustment for liquidation of foreign subsidiary, net of tax of benefit of $240




(447
)




Net foreign currency translation adjustment, net of tax of $931




1,833



1,833

Unrealized holding gains arising during the period, net of tax of $26,214





48,681




Less: Reclassification adjustment for net losses included in net loss, net of tax benefit of $1,668





3,099




Net unrealized gain on investments, net of tax of $27,882





51,780


51,780

Comprehensive loss







(619,637
)
Sherman unrealized loss included in net loss






16,761

16,761

Repurchases of common stock under incentive plans

(2,493
)
108





(2,385
)
Issuance of common stock - stock offering
50


525,837





525,887

Issuance of common stock under benefit plans


3,035





3,035

Amortization of restricted stock


3,084





3,084

Stock-based compensation expense


749





749

Dividends declared



(868
)



(868
)
BALANCE, SEPTEMBER 30, 2010
$
150

$
(891,989
)
$
1,896,068

$
928,025

$
20,118

$
(21,022
)
$
270

$
1,931,620

BALANCE, JANUARY 1, 2011
$
150

$
(892,012
)
$
1,963,092

$
(204,926
)
$
21,094

$
(27,857
)
$
239

$
859,780

Comprehensive income:
















Net income



423,689




423,689

Unrealized foreign currency translation adjustment, net of tax of $0




6,519





Less: Reclassification adjustment for liquidation of foreign subsidiary and other adjustments included in net income, net of tax of $11,367




27,599





Net foreign currency translation adjustment, net of tax of $11,367




(21,080
)


(21,080
)
Unrealized holding losses arising during the period, net of tax of $0





(9,856
)

 
Less: Reclassification adjustment for net losses included in net income, net of tax of $18,640 (See Note 6)





(33,449
)

 
Net unrealized gain on investments, net of tax of $18,640





23,593


23,593

Comprehensive income







426,202

Repurchases of common stock under incentive plans

(40
)






(40
)
Issuance of common stock under benefit plans
1


707





708

Amortization of restricted stock


1,665





1,665

Additional convertible debt issuance costs, net


(22
)




(22
)
Stock-based compensation expense


1,144





1,144

Dividends declared


(333
)
(668
)



(1,001
)
BALANCE, SEPTEMBER 30, 2011
$
151

$
(892,052
)
$
1,966,253

$
218,095

$
14

$
(4,264
)
$
239

$
1,288,436

See notes to unaudited condensed consolidated financial statements.

6

Radian Group Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
(In thousands)
Nine Months Ended
September 30,
2011
 
2010
Cash flows used in operating activities
$
(766,120
)
 
$
(947,468
)
Cash flows from investing activities:
 
 
 
Proceeds from sales of fixed-maturity investments available for sale
136,123

 
1,216,270

Proceeds from sales of equity securities available for sale
644

 
6,329

Proceeds from sales of trading securities
4,462,041

 
4,070,396

Proceeds from redemptions of fixed-maturity investments available for sale
30,746

 
44,939

Proceeds from redemptions of fixed-maturity investments held to maturity
7,250

 
6,810

Purchases of trading securities
(4,184,608
)
 
(5,128,531
)
Sales and redemptions of short-term investments, net
481,969

 
70,019

Purchases of other invested assets, net
(2,817
)
 
(28,197
)
Proceeds from the sale of investment in affiliate

 
172,017

Purchases of property and equipment, net
(2,776
)
 
(1,864
)
Net cash provided by investing activities
928,572

 
428,188

Cash flows from financing activities:
 
 
 
Dividends paid
(1,001
)
 
(868
)
Redemption of long-term debt
(160,000
)
 
(29,348
)
Issuance of common stock

 
525,887

Net cash (used in) provided by financing activities
(161,001
)
 
495,671

Effect of exchange rate changes on cash
78

 
1,594

Increase (decrease) in cash
1,529

 
(22,015
)
Cash, beginning of period
20,334

 
41,574

Cash, end of period
$
21,863

 
$
19,559

Supplemental disclosures of cash flow information:
 
 
 
Income taxes (received) paid
$
(69
)
 
$
3,375

Interest paid
$
34,660

 
$
27,726

See notes to unaudited condensed consolidated financial statements.


7

Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

1. Condensed Consolidated Financial Statements—Basis of Presentation
Our condensed consolidated financial statements include the accounts of Radian Group Inc. and its subsidiaries. We refer to Radian Group Inc. together with its consolidated subsidiaries as "Radian," "we," "us" or "our," unless the context requires otherwise. We generally refer to Radian Group Inc. alone, without its consolidated subsidiaries, as "Radian Group."
Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and include the accounts of all wholly-owned subsidiaries. Companies in which we, or one of our subsidiaries, own interests ranging from 20% to 50%, are accounted for in accordance with the equity method of accounting. VIEs where we are the primary beneficiary are consolidated. See Note 5 for further information. All intercompany accounts and transactions, and intercompany profits and losses, have been eliminated. We have condensed or omitted certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP pursuant to the instructions for Article 10 of Regulation S-X of the Securities and Exchange Commission ("SEC").
The financial information presented for interim periods is unaudited; however, such information reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the financial position, results of operations, and cash flows for the interim periods. These interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010. The total assets for our mortgage insurance segment as of September 30, 2010, reflected in Note 2, have been revised to conform to the presentation in the audited financial statement—s for the year ended December 31, 2010. We have reflected in Note 4 the additional disclosures required by the update to the accounting standard regarding fair value measurements, including the disclosures that were effective January 1, 2011, as described in Note 14. The 2010 information has been updated to be consistent with the 2011 disclosure. The year-end condensed balance sheet data was derived from our audited financial statements, but does not include all disclosures required by GAAP.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. While the amounts included in our condensed consolidated financial statements include our best estimates and assumptions, actual results may vary materially.
Basic net income (loss) per share is based on the weighted-average number of common shares outstanding, while diluted net income (loss) per share is based on the weighted-average number of common shares outstanding and common stock equivalents that would be issuable upon the exercise of stock options and other stock-based compensation. For the three and nine months ended September 30, 2011, 3,152,395 shares of our common stock equivalents issued under our stock-based compensation plans were not included in the calculation of diluted net income per share as of such date because they were anti-dilutive. For the three months ended September 30, 2010, 2,790,978 shares of our common stock equivalents issued under our stock-based compensation plans were not included in the calculation of diluted net income per share as of such date because they were anti-dilutive. As a result of our net loss for the nine months ended September 30, 2010, 4,386,697 shares of our common stock equivalents issued under our stock-based compensations plans were not included in the calculation of diluted net loss per share as of such date because they were anti-dilutive.

Overview and Business Conditions
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. While the strong credit quality of our new mortgage insurance business has continued in 2011, the ongoing downturn in the housing and related credit markets, characterized by a decrease in mortgage originations, decline in home prices, mortgage servicing and foreclosure delays, ongoing deterioration in the credit performance of mortgage and other assets originated prior to 2009 and reduced liquidity for many participants in the mortgage and financial services industries, has 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. The possibility that the United States ("U.S.") economy may not fully recover from the most recent recession, may experience limited economic growth for a prolonged period of time or may reenter a recessionary period, the lack of meaningful liquidity in some sectors of the capital and credit markets, the potential for continued high unemployment, and limited home price appreciation or further depreciation may add further stress on the performance of our insured assets. Because of these factors, there is a great deal of uncertainty regarding our ultimate loss performance.

8


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)




Our businesses have been significantly affected by, and our future success may depend upon, legislative and regulatory developments impacting the housing finance industry. The Government Sponsored Enterprises (“GSEs”) are the primary beneficiaries of the majority of our mortgage insurance policies, and the Federal Housing Authority ("FHA") remains our primary competitor outside of the private mortgage insurance industry. The GSEs federal charters generally prohibit them from purchasing any mortgage with a loan amount that exceeds 80% of a home's value, unless that mortgage is insured by a qualified insurer or the mortgage seller retains at least a 10% participation in the loan or agrees to repurchase the loan in the event of a default. As a result, high-loan-to-value ("LTV") mortgages purchased by the GSEs generally are insured with private mortgage insurance. Changes in the charters or business practices of the GSEs, including pursuing new products for purchasing high-LTV loans that are not insured by private mortgage insurance, could reduce the number of mortgages they purchase that are insured by us and consequently diminish our franchise value. In September 2008, the Federal Housing Finance Agency ("FHFA") was appointed as the conservator of the GSEs to control and direct the operations of the GSEs. The continued role of the conservator may increase the likelihood that the business practices of the GSEs will be changed in ways that may have a material adverse effect on us. In particular, if the private mortgage insurance industry does not have the ability, due to capital constraints, to continue to write sufficient business to meet the needs of the GSEs, the GSEs may seek alternatives other than private mortgage insurance to conduct their business.
Various regulatory agencies are now in the process of developing new rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") that are expected to have a significant impact on the housing finance industry, and the U.S. Congress is planning for the reform of the housing finance market, including the future roles of the GSEs. We cannot predict the requirements of the rules ultimately adopted under the Dodd-Frank Act or the effect such rules will have on financial markets generally, or on our mortgage insurance and financial guaranty businesses specifically, the additional costs associated with compliance with such regulations, and any changes to our operations that may be necessary to comply with the Dodd-Frank Act, any of which could have a material adverse effect on our businesses, business prospects, financial condition and results of operations.
Our future performance and financial condition is subject to significant risks and uncertainties that could cause actual results to be materially different from our estimates and forward-looking statements, including but not limited to, the following:
Potential adverse effects of the failure or significant delay of the U.S. economy to fully recover from the most recent recession and prolonged economic downturn, including ongoing uncertainty in the housing and related credit markets and high unemployment, which could increase our mortgage insurance or financial guaranty losses beyond existing expectations. (See Notes 7, 8 and 9).
Our ability to estimate accurately the likelihood, magnitude and timing of losses in connection with establishing loss reserves or premium deficiency reserves for our mortgage insurance or financial guaranty businesses. (See Notes 7, 8 and 9).
Our ability to effectively manage our capital and liquidity, including:
Potential adverse effects on us if the capital and liquidity levels of Radian Group or our regulated subsidiaries' statutory capital levels are deemed inadequate to support current business operations and strategies. Radian Group had immediately available, directly or through an unregulated direct subsidiary, unrestricted cash and liquid investments of $726.4 million at September 30, 2011, which includes $150 million of investments contained in our committed preferred custodial trust securities ("CPS"). (See Note 5 for additional information regarding CPS).
Potential adverse effects if Radian Guaranty's regulatory risk-based capital position fails to comply with applicable state statutory or regulatory risk-based capital requirements, including if its risk-to-capital ratio were to increase above 25 to 1, without obtaining waivers or similar relief from the states that impose such statutory or regulatory risk-based capital requirements. These risks include the possibility that: (i) insurance regulators or the GSEs may limit or cause Radian Guaranty to cease writing new mortgage insurance; (ii) the GSEs may terminate or otherwise restrict Radian Guaranty's eligibility to insure loans purchased by the GSEs; and (iii) Radian Guaranty's customers may decide not to insure loans with Radian Guaranty or may otherwise limit the type or amount of business done with Radian Guaranty. (See Note 13 for additional information regarding our statutory capital and Note 17 regarding a subsequent event).

9


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)




Factors adversely affecting Radian Group's capital and liquidity that could cause Radian Group to have insufficient sources of capital and liquidity to meet all of its expected obligations, including our failure to estimate accurately the likelihood and potential effects of the various risks and uncertainties described in this report, as well as potential regulatory, legal or other changes to our tax or expense allocation agreements among Radian Group and its subsidiaries. During October 2011, Radian Group paid approximately $84 million to Radian Guaranty and other subsidiaries within its consolidated group under its tax-sharing agreements.
Potential adverse effects from legislative efforts to reform the housing finance market, including the possibility that new federal legislation could reduce or eliminate the requirement for private mortgage insurance or place additional significant obligations or restrictions on mortgage insurers.
Potential impact on our businesses as a result of the implementation of regulations under the Dodd-Frank Act, including whether and to what extent loans with mortgage insurance are considered "qualified residential mortgages" for purposes of the Dodd-Frank Act securitization provisions or "qualified mortgages" for purposes of the ability to repay provisions of the Dodd-Frank Act, and potential obligations to post collateral on our existing insured derivatives portfolio.
If actual results differ materially from one or more of our estimates or forward-looking statements, or if one or more possible adverse outcomes were realized, our actual results could prove to be materially different than our estimates and it could have a material adverse effect on our financial position, statutory capital, results of operations and cash flows.

2. Segment Reporting
Our mortgage insurance and financial guaranty segments are strategic business units that are managed separately on an operating basis. We allocate corporate income and expenses to our mortgage insurance and financial guaranty segments based on either an allocated percentage of time spent or internally allocated capital. We allocate corporate cash and investments to our segments based on internally allocated capital. The results for each segment for each reporting period can cause significant volatility in allocated capital.
Prior to January 1, 2011, we also had a third reportable segmentfinancial services. Our financial services segment had consisted mainly of our ownership interest in Credit-Based Asset Servicing and Securitization LLC ("C-BASS"), which was a credit-based consumer asset business. We wrote off our entire investment in C-BASS in 2007. C-BASS filed for Chapter 11 bankruptcy protection on November 12, 2010, and was subsequently liquidated. Our equity interest in C-BASS, and a related note receivable from C-BASS that had also been previously written off, were extinguished pursuant to the Plan of Liquidation that was confirmed on April 25, 2011. In addition, until May 3, 2010, when we sold our remaining interest therein, our financial services segment included our interest in Sherman Financial Group LLC, a consumer asset and servicing firm specializing in credit card and bankruptcy-plan consumer assets. Consequently, as of January 1, 2011, we no longer had any on-going activity in this reporting segment.
Summarized financial information concerning our current and previous operating segments, as of and for the periods indicated, are as follows:

10


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)




 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In thousands)
2011
 
2010
 
2011
 
2010
Mortgage Insurance
 
 
 
 
 
 
 
Net premiums written—insurance
$
178,215

 
$
174,419

 
$
523,255

 
$
499,360

Net premiums earned—insurance
$
163,436

 
$
181,731

 
$
513,895

 
$
539,062

Net investment income
21,642

 
26,658

 
73,328

 
81,561

Net gains on investments
53,263

 
62,326

 
98,450

 
125,548

Net impairment losses recognized in earnings
(20
)
 
(34
)
 
(31
)
 
(90
)
Change in fair value of derivative instruments
200

 
6,772

 
64

 
5,739

Net gains (losses) on other financial instruments
2,486

 
(6,591
)
 
4,321

 
(44,764
)
Other income
1,357

 
1,870

 
3,881

 
5,292

Total revenues
242,364

 
272,732

 
693,908

 
712,348

Provision for losses
276,599

 
347,800

 
960,564

 
1,304,513

Change in reserve for premium deficiency
(1,942
)
 
8,628

 
(6,427
)
 
43

Policy acquisition costs
7,834

 
6,444

 
26,651

 
29,061

Other operating expenses
36,082

 
31,690

 
104,132

 
103,562

Interest expense
2,015

 
3,251

 
11,950

 
6,920

Total expenses
320,588

 
397,813

 
1,096,870

 
1,444,099

Equity in net income of affiliates

 

 

 

Pretax loss
(78,224
)
 
(125,081
)
 
(402,962
)
 
(731,751
)
Income tax benefit
(36,033
)
 
(50,090
)
 
(27,158
)
 
(267,700
)
Net loss
$
(42,191
)
 
$
(74,991
)
 
$
(375,804
)
 
$
(464,051
)
Cash and investments
$
3,176,860

 
$
3,722,189

 
 
 
 
Deferred policy acquisition costs
47,863

 
37,144

 
 
 
 
Total assets
3,731,978

 
5,293,768

 
 
 
 
Unearned premiums
206,477

 
199,764

 
 
 
 
Reserve for losses and LAE
3,214,854

 
3,504,181

 
 
 
 
VIE debt
31,164

 
156,811

 
 
 
 
Derivative liabilities

 
178

 
 
 
 

11


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)





 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In thousands)
2011
 
2010
 
2011
 
2010
Financial Guaranty
 
 
 
 
 
 
 
Net premiums written—insurance
$
72

 
$
388

 
$
(9,441
)
 
$
(9,151
)
Net premiums earned—insurance
$
16,219

 
$
22,206

 
$
57,717

 
$
66,589

Net investment income
17,121

 
19,896

 
51,498

 
58,970

Net gains on investments
28,377

 
31,932

 
64,861

 
83,920

Net impairment losses recognized in earnings

 

 

 

Change in fair value of derivative instruments
125,808

 
223,011

 
558,562

 
(378,516
)
Net gains (losses) on other financial instruments
78,116

 
11,473

 
156,579

 
(115,118
)
Other income
47

 
81

 
167

 
299

Total revenues
265,688

 
308,599

 
889,384

 
(283,856
)
Provision for losses
(27,001
)
 
(3,411
)
 
(20,027
)
 
18,922

Change in reserve for premium deficiency

 

 

 

Policy acquisition costs
3,615

 
4,610

 
13,316

 
13,658

Other operating expenses
9,158

 
11,362

 
33,281

 
39,511

Interest expense
12,079

 
6,251

 
35,247

 
21,631

Total expenses
(2,149
)
 
18,812

 
61,817

 
93,722

Equity in net income of affiliates

 

 
65

 
78

Pretax income (loss)
267,837

 
289,787

 
827,632

 
(377,500
)
Income tax provision (benefit)
42,078

 
102,611

 
28,139

 
(136,278
)
Net income (loss)
$
225,759

 
$
187,176

 
$
799,493

 
$
(241,222
)
Cash and investments
$
2,759,726

 
$
2,716,715

 
 
 
 
Deferred policy acquisition costs
91,099

 
109,331

 
 
 
 
Total assets
3,514,307

 
3,257,829

 
 
 
 
Unearned premiums
421,923

 
507,501

 
 
 
 
Reserve for losses and LAE
45,702

 
88,792

 
 
 
 
VIE debt
242,215

 
339,482

 
 
 
 
Derivative liabilities
188,921

 
530,510

 
 
 
 

12


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)





(In thousands)
Nine Months Ended
September 30, 2010
Financial Services
 
Net premiums written—insurance
$

Net premiums earned—insurance
$

Net investment income

Net gains on investments

Net impairment losses recognized in earnings

Change in fair value of derivative instruments

Net gains (losses) on other financial instruments

Gain on sale of affiliate
34,815

Other income
63

Total revenues
34,878

Provision for losses

Change in reserve for premium deficiency

Policy acquisition costs

Other operating expenses
200

Interest expense

Total expenses
200

Equity in net income of affiliates
14,590

Pretax income
49,268

Income tax provision
17,245

Net income
$
32,023

Cash and investments
 
Deferred policy acquisition costs
 
Total assets
 
Unearned premiums
 
Reserve for losses and LAE
 
VIE debt
 
Derivative liabilities
 
A reconciliation of segment net income (loss) to consolidated net income (loss) is as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In thousands)
2011
 
2010
 
2011
 
2010
Consolidated
 
 
 
 
 
 
 
Net income (loss):
 
 
 
 
 
 
 
Mortgage Insurance
$
(42,191
)
 
$
(74,991
)
 
$
(375,804
)
 
$
(464,051
)
Financial Guaranty
225,759

 
187,176

 
799,493

 
(241,222
)
Financial Services

 

 

 
32,023

Total
$
183,568

 
$
112,185

 
$
423,689

 
$
(673,250
)



13


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)





3. Derivative Instruments
The following table sets forth our gross unrealized gains and gross unrealized losses on derivative assets and liabilities as of the dates indicated. Certain contracts are in an asset position because the net present value of the contractual premium we receive exceeds the net present value of our estimate of the expected future premiums that a financial guarantor of similar credit quality to us would charge to provide the same credit protection, assuming a transfer of our obligation to such financial guarantor as of the measurement date.
 
(In millions)
September 30,
2011
 
December 31,
2010
Balance Sheets
 
 
 
Derivative assets:
 
 
 
Financial Guaranty credit derivative assets
$
15.1

 
$
14.5

Net interest margin securities ("NIMS") assets
4.9

 
10.9

Other
0.3

 
0.8

Total derivative assets
20.3

 
26.2

Derivative liabilities:
 
 
 
Financial Guaranty credit derivative liabilities
168.1

 
704.4

Financial Guaranty VIE derivative liabilities
20.8

 
19.2

Total derivative liabilities
188.9

 
723.6

Total derivative liabilities, net
$
168.6

 
$
697.4

The notional value of our derivative contracts at September 30, 2011, and December 31, 2010, was $37.9 billion and $41.6 billion, respectively.
The components of the gains (losses) included in change in fair value of derivative instruments are as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In millions)
2011
 
2010
 
2011
 
2010
Statements of Operations
 
 
 
 
 
 
 
Net premiums earned—derivatives
$
10.3

 
$
11.5

 
$
31.7

 
$
35.6

Financial Guaranty credit derivatives
120.1

 
223.7

 
536.6

 
(384.6
)
Financial Guaranty VIE derivatives
(4.5
)
 
(5.2
)
 
(9.4
)
 
(15.9
)
NIMS
0.2

 
(0.9
)
 
(1.3
)
 
(1.4
)
Put options on CPS

 

 

 
(6.3
)
Other
(0.1
)
 
0.7

 
1.0

 
(0.2
)
Change in fair value of derivative instruments
$
126.0

 
$
229.8

 
$
558.6

 
$
(372.8
)
The valuation of derivative instruments may result in significant volatility from period to period in gains and losses as reported on our consolidated statements of operations. Generally, these gains and losses result, in part, from changes in corporate credit or asset-backed spreads and changes in the creditworthiness of underlying corporate entities or the credit performance of the assets underlying asset-backed securities ("ABS"). Additionally, 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 and consequently, changes in the market's perception of our non-performance risk also result in gains and losses on our derivative instruments. Any incurred gains or losses (which include any claim payments) on our financial guaranty contracts that are accounted for as derivatives are recognized as a change in fair value of derivative instruments. Because our fair value determinations for derivative and other financial instruments in our mortgage insurance and financial guaranty businesses are based on assumptions and estimates that are inherently subject to risk and uncertainty, our fair value amounts could vary significantly from period to period. See Note 4 for information on our fair value of financial instruments.
 



14


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)





The following table shows selected information about our derivative contracts:
 
($ in millions)
September 30, 2011
Number of
Contracts
 
Par/
Notional
Exposure
 
Total Net Asset/
(Liability)
Product
 
 
 
 
 
NIMS related and other (1)

 
$

 
$
5.2

Corporate collateralized debt obligations ("CDOs")
76

 
30,554.3

 
(9.1
)
Non-Corporate CDOs and other derivative transactions:
 
 
 
 
 
Trust Preferred Securities ("TruPs")
19

 
1,932.0

 
(32.4
)
CDOs of commercial mortgage-backed securities ("CMBS")
4

 
1,831.0

 
(50.9
)
Other:
 
 
 
 
 
Structured finance
9

 
777.3

 
(32.3
)
Public finance
27

 
1,695.5

 
(13.2
)
Total Non-Corporate CDOs and other derivative transactions
59

 
6,235.8

 
(128.8
)
Assumed financial guaranty credit derivatives:
 
 
 
 
 
Structured finance
245

 
988.5

 
(13.5
)
Public finance
10

 
168.1

 
(1.6
)
Total Assumed
255

 
1,156.6

 
(15.1
)
Financial Guaranty VIE derivative liabilities (2)

 

 
(20.8
)
Grand Total
390

 
$
37,946.7

 
$
(168.6
)
 ________________
(1)
Represents NIMS derivative assets related to consolidated NIMS VIEs. Also includes common stock warrants. Because none of these investments represent financial guaranty contracts that we issued, they cannot become liabilities, and therefore, do not represent additional par exposure.
(2)
Represents the fair value of an interest rate swap included in the consolidation of one of our financial guaranty transactions. The notional amount of the interest rate swap does not represent additional par exposure, and therefore, is excluded from this table. See Note 5 for information on our maximum exposure to loss from our consolidated financial guaranty transactions.

4. Fair Value of Financial Instruments
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 declines in the value of underlying collateral could cause actual results to differ materially from our estimated fair value measurements. We define fair value as the current amount that would be exchanged 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 arise between the Company's recorded fair value and the settlement or termination value with a counterparty. Those differences, which may be material, are recorded as transaction realized gains/(losses) in our consolidated statements of operations in the period in which the transaction occurs. There have been no significant changes to our fair value methodologies during the nine months ended September 30, 2011.

15


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)




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. Radian Group's credit default swap ("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. As Radian Group's CDS spread tightens or widens, it has the effect of increasing or decreasing, respectively, the fair value of our liabilities.
The following table quantifies the impact of our non-performance risk on our derivative assets and liabilities (in aggregate by type, excluding assumed financial guaranty derivatives) and VIE liabilities presented in our condensed consolidated balance sheets. Radian Group's five-year CDS spread is presented as an illustration of the market's view of our non-performance risk; the CDS spread actually used in the valuation of specific fair value liabilities is typically based on the remaining term of the instrument.
(In basis points)
September 30,
2011
 
December 31,
2010
 
September 30,
2010
 
December 31,
2009
Radian Group's five-year CDS spread
2,238

 
465

 
625
 
1,530

 
(In millions)
Fair Value Liability
before Consideration
of Radian Non-Performance Risk
September 30, 2011

 
Impact of Radian
Non-Performance Risk September 30, 2011

 
Fair Value Liability
Recorded
September 30, 2011

Product
 
 
 
 
 
Corporate CDOs
$
678.8

 
$
669.7

 
$
9.1

Non-Corporate CDO-related (1)
1,632.6

 
1,437.9

 
194.7

NIMS-related (2)
37.0

 
10.7

 
26.3

Total
$
2,348.4

 
$
2,118.3

 
$
230.1

 
(In millions)
Fair Value Liability
before Consideration
of Radian Non-Performance Risk
December 31, 2010

 
Impact of Radian
Non-Performance Risk
December 31, 2010

 
Fair Value Liability
Recorded
December 31, 2010

Product
 
 
 
 
 
Corporate CDOs
$
387.1

 
$
281.5

 
$
105.6

Non-Corporate CDO-related (1)
1,696.2

 
934.1

 
762.1

NIMS-related (2)
134.1

 
4.8

 
129.3

Total
$
2,217.4

 
$
1,220.4

 
$
997.0

 ________________
(1)
Includes the net liability recorded within derivative assets and derivative liabilities, and the net liability recorded within VIE debt and other financial statement line items for consolidated VIEs.
(2)
Includes NIMS VIE debt and NIMS derivative assets.

Radian Group's five-year CDS spread at September 30, 2011, implies a market view that there is a 79% probability that Radian Group will default in the next five years as compared to a 32% implied probability of default at December 31, 2010. The cumulative impact attributable to the market's perception of our non-performance risk increased by $897.9 million during the first nine months of 2011, as presented in the table above. This increase was primarily the result of the widening of Radian Group's CDS spreads during this period.
We established a fair value hierarchy by prioritizing the inputs to valuation techniques used to measure fair value. 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 three levels of the fair value hierarchy under this standard 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.

16


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)




The level of market activity used in determining 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. 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, 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.
A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At September 30, 2011, our total Level III assets were approximately 4.8% of total assets measured at fair value and total Level III liabilities accounted for 100% of total liabilities measured at fair value.
Available for sale securities, trading securities, VIE debt, derivative instruments, and certain other assets are recorded at fair value. All derivative instruments and contracts are recognized in our consolidated balance sheets as either derivative assets or derivative liabilities. All changes in the fair value of trading securities, VIE debt, derivative instruments and certain other assets are included in our consolidated statements of operations. All changes in the fair value of available for sale securities are recorded in accumulated other comprehensive income (loss).
The following is a list of those assets and liabilities that are measured at fair value by hierarchy level as of September 30, 2011:
(In millions)
 
Level I
 
Level II
 
Level III
 
Total
Assets and Liabilities at Fair Value
 
 
 
 
 
 
 
 
Investment Portfolio:
 
 
 
 
 
 
 
 
U.S. government and agency securities
 
$
405.1

 
$
737.2

 
$

 
$
1,142.3

State and municipal obligations
 

 
1,066.7

 
62.6

 
1,129.3

Money market instruments
 
499.0

 

 

 
499.0

Corporate bonds and notes
 

 
766.7

 

 
766.7

Residential mortgage-backed securities ("RMBS")
 

 
983.0

 
48.8

 
1,031.8

CMBS
 

 
189.0

 
38.0

 
227.0

CDO
 

 

 
5.4

 
5.4

Other ABS
 

 
112.4

 
2.7

 
115.1

Foreign government securities
 

 
100.4

 

 
100.4

Hybrid securities
 

 
324.6

 

 
324.6

Equity securities (1)
 
149.1

 
169.2

 
2.8

 
321.1

Other investments (2)
 

 
151.6

 
6.2

 
157.8

Total Investments at Fair Value (3)
 
1,053.2

 
4,600.8

 
166.5

 
5,820.5

Derivative Assets
 

 
0.3

 
20.0

 
20.3

Other Assets (4)
 

 

 
96.8

 
96.8

Total Assets at Fair Value
 
$
1,053.2

 
$
4,601.1

 
$
283.3

 
$
5,937.6

Derivative Liabilities
 
$

 
$

 
$
188.9

 
$
188.9

VIE debt (5)
 

 

 
273.4

 
273.4

Total Liabilities at Fair Value
 
$

 
$

 
$
462.3

 
$
462.3

 ______________________
(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 short-term commercial paper within CPS trusts ($150.0 million) and short-term CDs ($1.6 million) included within Level II, and lottery annuities ($1.7 million) and TruPs held by consolidated VIEs ($4.5 million) included within Level III.
(3)
Does not include fixed-maturities held to maturity ($4.1 million) and other invested assets ($62.4 million), primarily invested in limited partnerships, accounted for as cost-method investments and not measured at fair value.
(4)
Comprising manufactured housing loan collateral related to two consolidated financial guaranty VIEs.
(5)
Comprising consolidated debt related to NIMS VIEs ($31.2 million) and amounts related to financial guaranty VIEs ($242.2 million).
 

17


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)





The following is a list of those assets and liabilities that are measured at fair value by hierarchy level as of December 31, 2010:
 
(In millions)
 
Level I
 
Level II
 
Level III
 
Total
Assets and Liabilities at Fair Value
 
 
 
 
 
 
 
 
Investment Portfolio:
 
 
 
 
 
 
 
 
U.S. government and agency securities
 
$
1,075.0

 
$
731.4

 
$

 
$
1,806.4

State and municipal obligations
 

 
1,159.7

 
23.2

 
1,182.9

Money market instruments
 
310.9

 

 

 
310.9

Corporate bonds and notes
 

 
1,060.4

 

 
1,060.4

RMBS
 

 
913.5

 
52.5

 
966.0

CMBS
 

 
173.6

 
23.0

 
196.6

CDO
 

 

 
2.4

 
2.4

Other ABS
 

 
131.1

 
3.3

 
134.4

Foreign government securities
 

 
83.5

 

 
83.5

Hybrid securities
 

 
318.9

 

 
318.9

Equity securities (1)
 
168.4

 
168.6

 
2.9

 
339.9

Other investments (2)
 

 
150.0

 
4.6

 
154.6

Total Investments at Fair Value (3)
 
1,554.3

 
4,890.7

 
111.9

 
6,556.9

Derivative Assets
 

 

 
26.2

 
26.2

Other Assets (4)
 

 

 
109.7

 
109.7

Total Assets at Fair Value
 
$
1,554.3

 
$
4,890.7

 
$
247.8

 
$
6,692.8

Derivative Liabilities
 
$

 
$

 
$
723.6

 
$
723.6

VIE debt (5)
 

 

 
520.1

 
520.1

Total Liabilities at Fair Value
 
$

 
$

 
$
1,243.7

 
$
1,243.7

______________________
(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 short-term commercial paper within CPS trusts included within Level II, and lottery annuities ($2.6 million) and TruPs held by consolidated VIEs ($2.0 million) included within Level III.
(3)
Does not include fixed-maturities held to maturity ($10.8 million), certain short-term investments ($1.6 million), primarily invested in CDs and time deposits, and other invested assets ($59.6 million), primarily invested in limited partnerships, accounted for as cost-method investments and not measured at fair value.
(4)
Comprising manufactured housing loan collateral related to two consolidated financial guaranty VIEs.
(5)
Comprising consolidated debt related to NIMS VIEs ($141.0 million) and amounts related to financial guaranty VIEs ($379.1 million) that required consolidation as of January 1, 2010, under the accounting standard update regarding improvements to financial reporting by enterprises involving VIEs.














18


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)





The following is a rollforward of Level III assets and liabilities measured at fair value for the quarter ended September 30, 2011:
 
(In millions)
Beginning
Balance at
July 1, 2011

 
Realized and
Unrealized
Gains (Losses)
Recorded
in Earnings  (1)
 
Purchases
 
Sales
 

Issuances
 
Settlements
 
Transfers Into
(Out of)
Level III (2)
 
Ending
Balance at
September 30, 2011

Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and municipal obligations
$
23.6

 
$
0.2

 
$
39.1

 
$

 
$

 
$
0.3

 
$

 
$
62.6

RMBS
61.4

 
(12.0
)
 

 
(1.6
)
 

 
2.2

 

 
48.8

CMBS
29.4

 
8.6

 

 

 

 

 

 
38.0

CDO
3.9

 
1.4

 

 
0.1

 

 
(0.2
)
 

 
5.4

Other ABS
2.0

 
0.7

 

 

 

 

 

 
2.7

Equity securities
5.6

 
(0.9
)
 
0.5

 
0.4

 

 

 
(2.0
)
 
2.8

Other investments
5.8

 
0.6

 

 
0.1

 

 
0.1

 

 
6.2

Total Level III Investments
131.7

 
(1.4
)
 
39.6

 
(1.0
)
 

 
2.4

 
(2.0
)
 
166.5

NIMS derivative assets
4.7

 
0.1

 
0.1

 

 

 

 

 
4.9

Other assets
113.7

 
(10.3
)
 

 

 

 
6.6

 

 
96.8

Total Level III Assets
$
250.1

 
$
(11.6
)
 
$
39.7

 
$
(1.0
)
 
$

 
$
9.0

 
$
(2.0
)
 
$
268.2

Derivative liabilities, net
$
291.5

 
$
125.8

 
$

 
$

 
$

 
$
(8.1
)
 
$

 
$
173.8

VIE debt
393.7

 
92.2

 

 

 

 
28.1

 

 
273.4

Total Level III Liabilities, net
$
685.2

 
$
218.0

 
$

 
$

 
$

 
$
20.0

 
$

 
$
447.2

_______________________
(1)
Includes unrealized gains (losses) relating to assets and liabilities still held as of September 30, 2011, as follows: $(1.5) million for investments, $0.2 million for NIMS derivative assets, $(13.3) million for other assets, $117.1 million for derivative liabilities, and $92.3 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.

 

19


Radian Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements - (Continued)





The following is a rollforward of Level III assets and liabilities measured at fair value for the nine months ended September 30, 2011:
 
(In millions)
Beginning
Balance at
January 1, 2011

 
Realized and
Unrealized
Gains (Losses)
Recorded
in Earnings  (1)
 
Purchases
 
Sales
 

Issuances
 
Settlements
 
Transfers Into
(Out of)
Level III (2)
 
Ending
Balance at
September 30, 2011

Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
State and municipal obligations
$
23.2

 
$
0.6

 
$
39.1

 
$

 
$

 
$
0.3

 
$

 
$
62.6

RMBS
52.5

 
(0.4
)
 

 

 

 
3.3

 

 
48.8

CMBS
23.0

 
15.0

 

 

 

 

 

 
38.0

CDO
2.4

 
2.7

 

 

 

 
(0.3
)
 

 
5.4

Other ABS
3.3

 
(0.6
)