RDN

Business Context and Reporting Period

Company: Radian Group Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2010
Business Overview: Radian is a credit enhancement company focused on domestic first-lien residential mortgage insurance, financial guaranty insurance, and financial services. The company operates in a challenging environment characterized by a prolonged downturn in housing and credit markets, high unemployment, and elevated default rates, particularly in loans originated between 2005 and 2008.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Loss vs. Net Income: The company reported a net loss of $475.1 million for the quarter ended June 30, 2010, compared to net income of $231.9 million in the same period of 2009. For the six months, the loss was $785.4 million versus income of $14.4 million in 2009.
• Derivative Valuation Impact: A significant driver of the loss was a $524.6 million unrealized loss on the change in fair value of derivative instruments for the quarter. This was primarily caused by the tightening of Radian Group's Credit Default Swap (CDS) spread (improving market perception of non-performance risk) and widening spreads on insured corporate CDO transactions.
• Provision for Losses: The provision for losses increased significantly to $435.2 million (quarter) and $979.0 million (six months) compared to $132.7 million and $459.5 million in 2009. This increase was driven by higher loss reserve estimates due to an increased "default to claim rate," aging of the defaulted loan portfolio, and increased severity.
• Capital Actions: In May 2010, the company completed a public offering of 50 million shares, raising approximately $526 million in net proceeds. Additionally, the company sold its remaining 28.7% equity interest in Sherman Financial Group LLC for approximately $172 million, recording a pre-tax gain of $34.8 million.

Guidance, Outlook, and Risks

• Outlook: Management expects claims paid to increase during the remainder of 2010, projecting total claims paid for the year to be approximately $1.5 billion. The company anticipates that persistency rates will remain elevated due to market disruption.
• Rescissions and Denials: The company has experienced elevated levels of insurance rescissions and claim denials, which reduced loss reserves by approximately $1.3 billion as of June 30, 2010. However, there is a heightened risk of litigation from lenders challenging these actions. If unsuccessful in defending these rescissions, the company may need to reestablish reserves.
• Liquidity and Capital: Radian Group holds approximately $597 million in unrestricted cash and marketable securities. The company expects to need additional capital support for its mortgage insurance subsidiaries in the near and long term. Radian Guaranty's statutory surplus declined to $1.2 billion from $1.5 billion at year-end 2009.
• Regulatory Risks: The company faces risks related to the Dodd-Frank Act, which may impact mortgage insurance demand and impose new capital/collateral requirements on financial guaranty businesses. There is also ongoing uncertainty regarding the Texas Department of Insurance's examination of a subsidiary (CMAC of Texas), which could restrict the ability to write new reinsurance.
• Financial Guaranty Portfolio: The portfolio continues to face stress, particularly in Trust Preferred Securities (TruPs) and Commercial Mortgage-Backed Securities (CMBS). The company expects to begin paying claims on a specific CDO of ABS transaction in early 2012.

Key Facts for Investor Verification

• Derivative Liability Sensitivity: Verify the impact of the company's own CDS spread on the fair value of liabilities. A tightening of the spread increases the recorded liability, creating non-cash losses that may reverse if spreads widen again.
• Rescission Litigation Exposure: Monitor ongoing legal challenges from lenders regarding rescinded policies. The potential reversal of $1.3 billion in reserve reductions is a critical risk factor.
• Capital Adequacy: Track the statutory surplus of Radian Guaranty and its subsidiaries (CMAC of Texas, Radian Mortgage Insurance Inc.) to ensure they meet regulatory minimums and GSE requirements.
• Default to Claim Rate: Verify the assumptions used for the "default to claim rate" (38% as of June 30, 2010), as small changes in this assumption significantly impact loss reserves (estimated $90 million change per 1% shift).
• Debt Maturities: Note the $160.3 million principal amount of 7.75% Debentures due in June 2011 and the $250 million senior notes due in 2013 and 2015.