Report of Examination of Radian Insurance Inc ......RDN’s principal activity is providing credit...

Examination Warrant Number 13-00766-20720-R1

Report of Examination of

Radian Insurance Inc. Philadelphia, Pennsylvania

As of December 31, 2013

Radian Insurance Inc.

TABLE OF CONTENTS Subject Page Salutation .........................................................................................................................................1 Scope of Examination ......................................................................................................................1 History..............................................................................................................................................2 Management and Control: Capitalization .............................................................................................................................2 Stockholder ................................................................................................................................2 Insurance Holding Company System.........................................................................................3 Board of Directors......................................................................................................................8 Committees ................................................................................................................................8 Officers ......................................................................................................................................9 Corporate Records Minutes ......................................................................................................................................9 Articles of Incorporation ..........................................................................................................10 By-Laws ...................................................................................................................................10 Service and Operating Agreements ...............................................................................................10 Reinsurance: Ceded .......................................................................................................................................11 Assumed ...................................................................................................................................11 Territory and Plan of Operation .....................................................................................................12 Significant Operating Ratios and Trends .......................................................................................12 Accounts and Records....................................................................................................................13 Pending Litigation ..........................................................................................................................13 Financial Statements: Comparative Statement of Assets, Liabilities, Surplus and Other Funds ................................14 Comparative Statement of Income ...........................................................................................15 Comparative Statement of Capital and Surplus .......................................................................16 Comparative Statement of Cash Flow .....................................................................................17 Summary of Examination Changes ...............................................................................................18 Notes to Financial Statements: Assets: Investments ..............................................................................................................................18 Liabilities: Losses and Loss Adjustment Expense Reserves ......................................................................19 Aggregate Write-ins for Liabilities ..........................................................................................20 Subsequent Events .........................................................................................................................20 Recommendations: Prior Examination ....................................................................................................................20 Current Examination ................................................................................................................21 Conclusion .....................................................................................................................................21

Harrisburg, Pennsylvania February 27, 2015

Honorable Stephen J. Johnson, CPA Deputy Insurance Commissioner Commonwealth of Pennsylvania Insurance Department Harrisburg, Pennsylvania

Dear Sir:

In accordance with instructions contained in Examination Warrant Number 13-00766-20720-R1 dated March 1, 2013, an examination was made of

Radian Insurance Inc., NAIC Code: 20720 a Pennsylvania domiciled mortgage guaranty insurance company, hereinafter referred to as “RII”, or “Company”. The examination was conducted at RII’s home office, located at 1601 Market Street, Philadelphia, PA 19103.

A report of this examination is hereby respectfully submitted.

SCOPE OF EXAMINATION RII was last examined as of December 31, 2008.

This examination covered the five year period from January 1, 2009 through December 31, 2013, and consisted of a general survey of the Company’s business practices, management, and operations, and an evaluation of the Company’s financial condition as of the latter date. Material subsequent events were also reviewed.

Work programs employed in the performance of this examination were designed to comply with the standards promulgated by the Pennsylvania Insurance Department (“Department”) and the National Association of Insurance Commissioners (“NAIC”).

The format of this report is consistent with the current practices of the Department and the examination format prescribed by the NAIC. It is limited to a description of RII, a discussion of financial items that are of specific regulatory concern, and a disclosure of other significant regulatory information.

For each year during the period under examination, the Certified Public Accounting firm of PricewaterhouseCoopers LLP (“PwC”) of Philadelphia, Pennsylvania, provided an unmodified audit opinion on the Company’s year-end financial statements, based on statutory accounting principles. Relevant work performed by the CPA firm during its annual audit of RII was reviewed during the examination and incorporated into the examination workpapers were possible.

The following companies were examined concurrently as part of the multi-state examination:


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Company NAIC Code

State of Domicile

Radian Guaranty Inc. 33790 PA Radian Mortgage Assurance Inc. 30872 PA Radian Guaranty Reinsurance Inc.* 15909 PA Radian Mortgage Insurance Inc.** 33944 PA Radian Asset Assurance Inc. 36250 NY

* Formerly Commonwealth Mortgage Assurance Company of Texas (re-domesticated from Texas in 2013) ** Re-domesticated from Arizona in 2012

HISTORY The Company was incorporated in 1993 as CMAC Mortgage Insurance Company. It is a

stock corporation and is 100% owned by Radian Guaranty Inc. (“RGI”). The Company was licensed by the Department on December 17, 1993 and commenced business on that date.

The Company name was changed to Radian Insurance Inc. on March 21, 2000. It was reorganized in September 2000 to write mortgage insurance on nontraditional, mortgage-related assets, such as second-lien mortgages, international mortgage insurance and reinsurance, and manufactured housing, as well as to provide credit enhancement to mortgage-related capital market transactions.

RII is currently authorized to transact those classes of insurance described in 40 P.S. § 382 (c) (7) Credit.

MANAGEMENT AND CONTROL

CAPITALIZATION As of the examination date, December 31, 2013, the Company’s total capital and surplus

was $230,833,364, consisting of 100,000 shares of issued and outstanding common stock with a par value of $25 per share, totaling $2,500,000; $533,364,404 in paid-in and contributed surplus; and ($305,031,040) in unassigned funds (surplus).

RII’s minimum capital and surplus requirements for the types of business for which it is licensed, pursuant to 40 P. S. § 386(c), is $750,000 in capital and $375,000 in surplus. The Company met this requirement throughout the examination period.

STOCKHOLDER RII is a wholly owned subsidiary of RGI, which is a wholly owned subsidiary of Radian

Group Inc., (“RDN”). During the examination period, RII paid no dividends to its stockholder.


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INSURANCE HOLDING COMPANY SYSTEM During the examination period, the Company met the requirements for filing an insurance

holding company system registration statement. RDN is named as the ultimate controlling person in the system. During the period under examination, the Company met the requirements for filing an Insurance Holding Company System Registration Statement, in accordance with 40 P.S.§§ 991.1404(a)(1) and 991.1404(a)(2), to register with the Department by March 31, of each year during the examination period. The following organizational chart presents the members of that holding company system as of December 31, 2014:


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Radian Guaranty Inc. (“RGI”)(Pennsylvania)

100% owned by RDNNAIC #33790

Radian Clayton Holdings Inc. ("RCH")

(Delaware) 100% owned by RDN

EIN #46-5745522

Radian Insurance Inc. ("RIINC")

(Pennsylvania Ins.) 100% owned by RGI

NAIC #20720

Radian Mortgage Assurance Inc.

(“RMAI”) (Pennsylvania) 100% owned by RGI

NAIC #30872

Radian Mortgage Insurance Inc. (“RMII”)

(Pennsylvania)100% owned by RGI

NAIC #33944

Radian Mortgage Services (Hong Kong) Ltd.

(Hong Kong Corporation)100% owned by RGI

Radian Services LLC(Delaware)

100% owned by RGIEIN #23-1936987

Radian Asset Assurance Inc. (“RAA”) (New York)

100% owned by RGI NAIC #36250

Van American Insurance Agency, Inc.

(South Carolina)100% owned by RAA

EIN #20-3759337

Clayton Holdings LLC ("CHL")

(Delaware)100% owned by RCH

EIN #20-2660764

Clayton Fixed Income Services LLC(Delaware)

100% owned by CHLEIN #84-1399420

Clayton Holdings UK, Ltd. ("CHUK")

(United Kingdom)100% owned by CHL

Clayton Services LLC ("CS")

(Delaware)100% owned by CHL

EIN #75-3161447

Clayton Euro Risk, Ltd.(United Kingdom)

100% owned by CHUK

Clayton Support Services LLC(Delaware)

100% owned by CSEIN #45-3560069

First Madison Services LLC ("FMS")

(Delaware)100% owned by CSEIN #75-3161450

Green River Capital, LLC ("GRC")(Delaware)

100% owned by FMSEIN #45-3933740

GR Financial, LLC(Utah)

100% owned by GRC

EIN #20-5639099

Enhance Financial Services Group Inc. ("EFSG") (New York)

100% owned by RDNEIN #13-3333448

AE Global Holdings, LLC

(Delaware)50% owned by EFSGEIN #: 36-4746928

EFS – AGIC Master Business Trust

(Delaware )EFSG 100% beneficiary

EIN # 13-3333448

Lottery Receivables(Delaware)

100% owned by EFSG

EIN # 13-4080669

Radian Guaranty Reinsurance Inc.

("RGRI") (Pennsylvania)

100% Owned by EFSG

NAIC #15909

Residual Interest Investments LP

(Delaware)99.2% owned by RGRI0.8% owned by ERFC

EIN # 75-2511700

Radian MI Services Inc. (“RMIS”)

(Pennsylvania)100% owned by RDN

EIN#27-3727012

Radian Advisors LLC(Pennsylvania)

100% owned by RMIS

EIN #46-4212549

Radian Insurance Services LLC

(Pennsylvania)100% owned by

RMISEIN #27-3727116

Radian Investor Surety Inc. (“RISI”)

(Pennsylvania)100% owned by

RMISNAIC #15546

Radian Mortgage Reinsurance Co. (Vermont)

100% owned by RDNNAIC #11472

RDN Investments, Inc. (Delaware)

100% owned by RDNEIN #46-2447576

Radian Group Inc. (“RDN”)(Delaware)

EIN #23-2691170 NAIC Group #00766

Enhance C-BASS Residual Finance

Corporation (“ERFC”)(Delaware)

100% owned by RGRIEIN # 13-4053333


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Key members of the holding company system include the following entities that are briefly described below:

RADIAN GROUP INC. Radian Group Inc. is publicly held and listed on the New York Stock Exchange. RDN

began in 1992 when CMAC Investment Corporation was spun off through an initial public offering by Reliance Group Holdings. A principal subsidiary was Commonwealth Mortgage Assurance Company (see below). In 1999, CMAC Investment Corporation merged with Amerin Corporation, both holding companies of mortgage insurance companies, with Amerin Guaranty Corporation the principal insurance subsidiary of Amerin Corporation. The surviving holding company was CMAC Investment Corporation, which subsequently changed its name to Radian Group Inc. and is the ultimate parent of the holding company system.

RDN’s principal activity is providing credit enhancement, primarily through first-lien residential mortgage insurance. Although RDN’s subsidiary, Radian Asset Assurance Inc., discontinued writing new financial guaranty business in 2008, it continues to provide financial guaranty insurance on the existing portfolio consisting primarily of public finance and structured finance insured transactions.

RADIAN GUARANTY INC. (formerly Commonwealth Mortgage Assurance Company)

RGI has provided mortgage insurance on both a flow and a structured basis and has offered pool insurance on a limited basis. RGI wrote the pool insurance in the form of credit enhancement on residential mortgage loans underlying residential mortgage-backed securities, whole loan sales, and other structured transactions. It also wrote modified pool insurance, which differs from standard pool insurance in that it included an exposure limit on each individual loan, as well as a stop-loss feature for the entire pool of loans. RGI’s current business focus is traditional first-lien primary mortgage insurance written on a flow basis.

A mortgage insurance policy is issued to a lender to protect against losses arising from a borrower’s monetary default. RGI’s principal customers are mortgage originators such as mortgage bankers, mortgage brokers, commercial banks and savings institutions. .

The residential real estate market boomed at the beginning of the 21st century, due to available credit promoted by the Federal government, and strong demand for “dependable” and “safe” investment income products. The mortgage insurance industry grew and profited substantially until 2007. At that point, a real estate market correction occurred, apparently because real estate prices had escalated to unsustainable levels. As a result, poorly qualified borrowers began to default and many lenders reduced the capital traditionally available for home mortgages. Home sales and prices declined, especially for purchases requiring private mortgage insurance. This resulted in sharply decreasing revenues for RGI, while the defaults increased required loss reserves and settlement payouts.

http://www.answers.com/topic/reliance-group-holdings-inc


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ENHANCE FINANCIAL SERVICES GROUP INC. Enhance Financial Services Group Inc. (“EFSG”) was founded in 1985. On February 28,

2001, RDN purchased 100% of Enhance Financial Services Group Inc. for $540 million of its stock. On April 4, 2003, RGI purchased a 10.5% interest for $100 million cash. In December of 2011, RGI sold its 10.5% ownership interest of EFSG back to RDN for $5,692,610 which represented the fair value of RGI’s ownership in EFSG. EFSG has provided insurance services through its subsidiaries. Its insurance business previously included issuance of direct financial guaranties of smaller municipal debt obligations, trade credit reinsurance, and other structured transactions.

RADIAN INSURANCE INC. Radian Insurance Inc. (“RII”), domiciled in Pennsylvania and 100% owned by RGI,

wrote mortgage and financial guaranty insurance on both a direct and an assumed basis offering non-traditional mortgage insurance and credit enhancements on mortgage assets. Currently, RII is not writing new business and is effectively in a runoff mode.

RII also insured a portion of RGI’s business under a reinsurance agreement dated December 30, 1993, and RGI assumed certain Australian reinsurance treaties from RII in 2008.

RADIAN SERVICES LLC Radian Services LLC (“Radian Services”) is 100% owned by RGI. Pursuant to a March

3, 1983 Property Disposal Agreement with RGI, Radian Services purchases, maintains, and disposes of real estate and certain other assets acquired in the settlement of claims. It also purchases, services and settles loans acquired in the loss mitigation process. Financing of each acquisition is provided by RGI and is repaid at the time of disposal or settlement.

RADIAN ASSET ASSURANCE INC. Radian Asset Assurance Inc. (“RAA”), domiciled in New York and 100% owned by

RGI, was in the financial guaranty business, insuring and reinsuring state and municipal bonds and providing direct financial guarantees of smaller debt obligations. RAA operated in the U.S. and Puerto Rico; its UK-based subsidiaries, Radian Asset Assurance Limited and Radian Financial Products Limited, provided financial guaranty products in Europe. Since RAA was heavily involved in insuring collateralized debt obligations and asset-backed securities, its ratings were downgraded in 2008 and it ceased writing new financial guaranty business. It has no current plans to recommence writing new business and is engaged solely in reducing its existing exposures through commutations, in order to maximize capital for the mortgage insurance business.

RADIAN MORTGAGE INSURANCE INC. Radian Mortgage Insurance Inc. (“RMII”) is a Pennsylvania-domiciled insurance

company which is 100% owned by RGI and licensed to write business in Pennsylvania and Arizona.


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RMII was originally organized and incorporated as State Mortgage Insurance Company (“SMIC”) under the laws of the State of Arizona on June 4, 1987. It received its initial Certificate of Authority to transact business as a property and casualty insurance company on December 1, 1987. Since then the following key changes occurred:

• On May 22, 1990, SMIC changed its name to Commonwealth Mortgage Assurance Company of Arizona, and subsequently changed its name to Radian Mortgage Insurance Inc. in July 2003.

• On December 3, 1992, the common shares of the Company’s ultimate parent Radian Group Inc. (formerly known as CMAC Investment Corporation) were sold to the public in an initial public offering. The Arizona Department of Insurance ("ADOI") approved the acquisition on May 12, 1993.

• On July 22, 2003, the Company adopted its present name, Radian Mortgage Insurance Inc.

• On November 5, 2012, the Redomestication Application filed by Radian Mortgage, seeking approval to redomesticate from the State of Arizona to the Commonwealth of Pennsylvania was approved by the Department.

RADIAN GUARANTY REINSURANCE INC. Radian Guaranty Reinsurance Inc. (“RGRI”) was incorporated on October 29, 1993, in

the State of Texas, as a capital stock mortgage guaranty company. Effective August 15, 2013, RGRI became a Pennsylvania domiciled insurance company. The Department issued a new Certificate of Authority to RGRI indicating its line of authority and the fact that it is a domestic stock insurance company. RGRI’s name was changed from Commonwealth Mortgage Assurance Company of Texas to Radian Guaranty Reinsurance Inc. effective November 19, 2013.

RGRI’s business is concentrated on the assumption of mortgage guaranty policies from its affiliate, Radian Guaranty Inc., and RGRI does not produce any direct written business.

RADIAN MORTGAGE ASSURANCE INC. Radian Mortgage Assurance Inc. (“RMAI”) is domiciled and licensed in Pennsylvania as

a stock casualty insurance company authorized to carry on the business of credit insurance, which includes the authority to write mortgage guaranty insurance. It is a monoline insurer restricted to writing only residential mortgage guaranty insurance. In addition to Pennsylvania, RMAI is authorized to write mortgage guaranty insurance (or in states where there is no specific authorization for mortgage guaranty insurance, the applicable line of insurance under which mortgage guaranty insurance is regulated), in each of the other 49 states and the District of Columbia, other than Rhode Island where it operates under an industrial insured exemption. RMAI is not currently writing mortgage guaranty insurance. RMAI is a direct subsidiary of RGI.


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BOARD OF DIRECTORS Management of RII is vested in its Board of Directors (“Board”), which was comprised

of the following members as of the examination date, December 31, 2013: Name and Address Principal Occupation Richard Ian Altman Chief Operating Officer Bala Cynwyd, PA Radian Guaranty Inc. Teresa Bryce Bazemore President Penn Valley, PA Radian Guaranty Inc. Zoe Liakopoulos Devaney SVP Operations Titusville, NJ Radian Guaranty Inc.

Timothy White Hunter General Counsel Philadelphia, PA Radian Guaranty Inc. Brien Joseph McMahon Chief Franchise Officer Randolph, NJ Radian Group Inc. Sanford Alexander Ibrahim Chief Executive Officer Philadelphia, PA Radian Group Inc. Carl Robert Quint Chief Financial Officer, Rydal, PA Radian Group Inc. The composition of the Board meets the independence requirements of 40 P.S. §

991.1405(c)(3)(i) and the Board meets the minimum number of members requirement (i.e. 7 members) of 15 Pa. C.S. § 3131 throughout the period under examination. All directors are elected at the annual meeting of the shareholder. Each director holds office for one year or until his successor is elected and qualified.

RII has in place a conflict of interest policy. The policy covers directors, officers and employees. A copy of the policy is provided to each director, officer, and management employee. Disclosure questionnaires are signed annually by officers, directors and key employees.

COMMITTEES RII’s Board did not appoint any committees. RII achieves compliance with the Board

committee membership requirements of 40 P.S. § 991.1405(c)(3)(ii), (4) and (4.1) through 40 P.S. § 991.1405(c)(5), which states: “The provisions of paragraphs (3), (4) and (4.1) shall not apply to a domestic insurer if the person controlling such insurer is an insurer, an attorney in fact for a reciprocal exchange, a mutual insurance holding company or a publicly held corporation having a board of directors and committees thereof which already meet the requirements of paragraphs (3), (4) and (4.1)”. The RDN Board appointed an Audit Committee, Finance & Investment Committee, Compensation & Human Resources (“HR”) Committee, Governance Committee, and Credit Committee which perform the functions delineated in 40 P.S. § 991.1405(c)(4) and (4.1) on behalf of RII.


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The Directors and/or Officers are assigned to serve on the following RDN standing committees as listed below as of December 31, 2013:

Audit Committee Finance & Investment Committee David C. Carney (Chairperson) Lisa W. Hess (Chairperson) Lisa W. Hess Stephan T. Hopkins Gregory V. Serio Gaetano J. Muzio Noel J. Spielgel Noel J. Spielgel Compensation & HR Committee Governance Committee Howard B. Culang David C. Carney Stephan T. Hopkins (Chairperson) Howard B. Culang Brian D. Montgomery Stephan T. Hopkins Gaetano J. Muzio Jan Nicholson (Chairperson) Credit Committee David C. Carney Howard B. Culang (Chairperson) Jan Nicholson Gregory V. Serio Noel J. Spielgel

OFFICERS As of the examination date, December 31, 2013, the following officers were appointed

and serving in accordance with RII’s By-laws:

Name Title Sanford Alexander Ibrahim Chief Executive Officer Teresa Bryce Bazemore President Richard Ian Altman Executive Vice President and Chief Operating Officer Derrick Brummer Executive Vice President and Chief Risk Officer Lawrence Delgatto Executive Vice President and Chief Information Officer Brien Joseph McMahon Executive Vice President and Chief Franchise Officer Carl Robert Quint Executive Vice President and Chief Financial Officer H. Scott Theobald Executive Vice President, Lender and Structured Products

CORPORATE RECORDS

MINUTES A compliance review of corporate minutes revealed the following:


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• The Annual Meetings of the RII’s stockholder were held in compliance with its By-laws.

• The stockholder elects directors at such meetings in compliance with the By-laws.

• The stockholder ratified the prior year’s actions of the officers and directors.

• Quorums were present at all directors’ meetings.

• RII’s investment and reinsurance transactions are approved quarterly by the Board.

• All directors attend Board meetings regularly.

ARTICLES OF INCORPORATION No amendments were made to RII’s Articles of Incorporation during the examination

period.

BY-LAWS No amendments were made to RII’s By-laws during this examination period.

SERVICE AND OPERATING AGREEMENTS RII is party to the following material service and operating agreements listed below. All

of these agreements meet the requirements contained in 40 P.S. § 991.1405(a).

EXPENSE ALLOCATION AND SERVICES AGREEMENT RII entered into an Expense Allocation and Services Agreement with RDN in the first

quarter of 2003. This agreement provides for the use of facilities and service by the Company and RDN’s costs are allocated on the basis of RII’s percentage of total consolidated GAAP capital. On March 13, 2009, the Company revised this agreement so that expenses, which benefit multiple parties, are allocated on the basis of time studies or “another fair and equitable basis”. Direct expenses are charged to the benefitting parties and interest expense is allocated on the basis of the various companies’ relative capital.

MANAGEMENT AGREEMENT RGI has individual management services agreements with some of its subsidiaries:

Radian Mortgage Services (Hong Kong) Ltd., RII, Radian Services LLC, RMAI, RMII, and RGRI, whereby RGI provides a variety of accounting, finance, data processing, legal services, claims-handling services, and in some cases, office space. These agreements are billed by calendar quarters, and the billings are based on costs incurred or an allocation based on usage.


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NET WORTH AND LIQUIDITY SUPPORT AGREEMENT In October 2000, RGI and RII entered into a Net Worth and Liquidity Maintenance

Agreement. The agreement provides that RGI will cause RII at all times to have Tangible Net Worth of at least $30 million. Additionally, RGI will cause RII at all time to have sufficient liquidity to meet its current obligations. Under the terms of agreement, it may be terminated at any time by either party giving written notice of such termination.

TAX ALLOCATION AGREEMENT RII has a written Tax Allocation Agreement with RDN approved by RII’s Board. The

agreement sets forth the manner in which the total combined federal income tax is allocated to each entity that is a party to the consolidation. The method of allocation is based upon separate return calculation with current credit for losses that were utilized by the consolidated group.

INTERCOMPANY TRANSFER AGREEMENT RII entered into an agreement with RDN, RGI, RMII, RMAI and RGRI on September 20,

2010. The purpose of the agreement was to help facilitate sales of investment grade securities among the group of companies noted above.

REINSURANCE

CEDED RII entered into a facultative reinsurance agreement with RAA on January 23, 2002,

whereby selected risks will be individually ceded by RII to RAA, subject to acceptance by RAA.

The above contract transfers risk in accordance with SSAP No. 62R and includes the required insolvency clause.

RII did not engage any reinsurance intermediary.

ASSUMED RII has several arrangements with RGI which are designed to cap RII’s risk to 25% of

each insured party’s indebtedness or limit the total loss for all claims during the year (Excess of Loss). Under those various agreements, in 2013 the Company assumed premiums written and earned of $27.6 million and $27.8, respectively, as compared to $37.6 million and $37.8 million in 2012. In 2013, paid losses and loss adjustment expenses, assumed premiums receivable, and Uunearned premiums assumed from the Company amounted to $1.3 million, $2 million, and $104,000, respectively. In 2012, the comparable cessions were $1 million, $2.7 million, and $249,000.

The above contracts transfers risk in accordance with SSAP No. 62R and include the required insolvency clause. There was no reinsurance intermediary involved in the transactions.


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TERRITORY AND PLAN OF OPERATION The Company is licensed in the Commonwealth of Pennsylvania and writes mortgage

and financial guaranty insurance. RII and RGI’s sales and marketing efforts were supported by field sales staff, operating in three divisions and supervised by area sales managers. In addition, RII had dedicated staff for national accounts.

Total 2013 direct premium writings by state and company are as follows:

SIGNIFICANT OPERATING RATIOS AND TRENDS The underwriting ratios summarized below are on an earned/incurred basis, and

encompass the five-year period covered by this examination.

Amount Percentage

Premiums earned 29,836,348$ 100.0 %Losses incurred (3,352,470)$ (11.2)%Loss expenses incurred 28,421 0.1 %Other underwriting expenses incurred 17,897,596 60.0 %Aggregate write-ins for underwriting deductions (1,900,400) (6.4)%Net underwriting gain or (loss) 17,163,201 57.5 %Totals 29,836,348$ 100.0 %

The Company reported the following net underwriting, investment and other gains or

losses during the period under examination:

Radian Guaranty Inc.

Radian Guaranty

Reinsurance Inc

Radian Insurance

Inc.

Radian Mortgage

Assurance inc.

Radian Mortgage

Insurance Inc. TotalsCalifornia 146,368,647$ $ 0 $ 0 $ 0 $ 0 146,368,647$ Texas 67,456,312 0 0 0 0 67,456,312 Florida 66,970,593 0 0 0 0 66,970,593 Illinois 55,894,515 0 0 0 0 55,894,515 Georgia 43,717,225 0 0 0 0 43,717,225 New Jersey 42,089,547 0 0 0 0 42,089,547 New York 37,830,635 0 0 0 0 37,830,635 Pennsylvania 35,278,383 0 2,490,003 0 0 37,768,386 Virginia 35,746,187 0 0 0 0 35,746,187 Ohio 31,308,381 0 0 0 0 31,308,381 All other states & alien OT 468,123,870 0 48,784 0 0 468,172,654 Totals 1,030,784,295$ $ 0 2,538,787$ $ 0 $ 0 1,033,323,082$

2013 2012 2011 2010 2009Admitted assets 314,117,047$ 323,291,339$ 268,981,177$ 432,136,873$ 618,824,498$ Liabilities 83,283,683$ 104,730,635$ 106,588,357$ 280,411,208$ 509,927,391$ Surplus as regards policyholder 230,833,364$ 218,560,704$ 162,392,821$ 151,725,665$ 108,897,107$ Gross premium written 30,223,937$ 40,559,515$ 17,247,651$ 11,248,361$ 2,603,962$ Net premium written 29,227,691$ 39,491,968$ 16,076,835$ 9,976,752$ 12,643,815$ Underwriting gain/(loss) 17,163,201$ 13,198,096$ (2,472,215)$ (7,018,638)$ (6,013,957)$ Investment gain/(loss) 10,699,600$ 31,954,162$ 13,560,802$ 19,477,864$ 27,493,582$ Other gain/(loss) 1,034$ 11,825$ (21,223)$ 2,729$ 224,955$ Net income 26,457,474$ 57,982,438$ 9,855,108$ 43,886,347$ 19,909,994$


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ACCOUNTS AND RECORDS All of the Company’s accounting, investment, policy and claim records are automated

and maintained at RII’s Home Office and at its data center in Dayton, Ohio. The examination team performed a review of the Company’s information systems controls. This review was based on the NAIC’s Exhibit C, Information Systems Questionnaire. It was concluded that the Department could reasonably rely on data obtained from the Company’s automated systems for the year ended December 31, 2008.

PENDING LITIGATION A legal representation letter was obtained from the Company’s General Counsel. No

material legal issues affecting the Company were presented in the letter.

FINANCIAL STATEMENTS The financial condition of the Company, as of December 31, 2013, and the results of its

operations for the five-year period under examination, is reflected in the following statements:

Comparative Statement of Assets, Liabilities, Surplus and Other Funds; Comparative Statement of Income; Comparative Statement of Capital and Surplus; and Comparative Statement of Cash Flow


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Comparative Statement of Assets, Liabilities, Surplus and Other Funds As of December 31,

2013 2012 2011 2010 2009Bonds 193,710,274$ 207,455,009$ 153,082,676$ 158,089,634$ 408,466,060$ Preferred stocks 10,480,739 7,191,697 6,290,830 7,031,710 0 Common stocks 0 0 0 0 1,636,478 Cash, cash equivalents, and short term investments 86,315,665 82,937,510 101,315,370 262,166,062 187,398,562 Other invested assets 0 1,584,588 1,601,922 1,340,879 1,120,709 Receivables for securities 0 0 0 0 2,836,272 Subtotals, cash and invested assets 290,506,678 299,168,804 262,290,798 428,628,285 601,458,081 Investment income due and accrued 2,689,103 3,028,957 2,094,281 1,864,388 3,725,879 Premiums and agents' balances due 2,149,299 2,905,255 3,752,897 1,087,531 337,494 Amounts recoverable from reinsurers 0 0 0 0 621,643 Current federal and foreign income tax recoverable and interest thereon 96,360 355,059 830,279 550,469 383,239 Net deferred tax asset 18,550,000 17,828,650 0 0 0 Receivables from parent, subsidiaries and affiliates 122,871 4,612 5,473 6,109 12,294,232 Aggregate write-ins for other than invested assets 2,735 0 7,448 91 3,930 Total 314,117,047$ 323,291,339$ 268,981,177$ 432,136,873$ 618,824,498$

Losses 42,958,316$ 75,403,503$ 88,290,822$ 256,566,112$ 460,582,196$ Reinsurance payable on paid loss and loss adjustment expenses 1,350,133 1,043,761 10,604,666 1,398,506 808,049 Loss adjustment expenses 116,402 141,913 226,165 453,373 537,087 Commissions payable, contingent commissions and other similar charges 101 1,324 3,127 5,528 3,755 Other expenses 126,993 93,385 112,653 144,622 397,019 Taxes, licenses and fees 78,929 198,000 156,000 120,197 183,183 Unearned premiums 289,782 898,439 2,572,519 8,395,651 20,255,074 Ceded reinsurance premiums payable (net of ceding commissions) 148,190 156,186 178,414 189,728 208,415 Amounts withheld or retained by company for account of others 0 0 42 0 59 Payable to parent, subsidiaries and affiliates 929,519 2,183,649 800,089 885,825 1,595,725 Payable for securities 0 342,068 0 0 0 Aggregate write-ins for liabilities 37,285,318 24,268,409 3,643,860 12,251,666 25,356,829 Total liabilities 83,283,683 104,730,635 106,588,357 280,411,208 509,927,391 Common capital stock 2,500,000 2,500,000 2,500,000 2,500,000 2,500,000 Gross paid in and contributed surplus 533,364,404 533,364,404 533,364,404 533,364,404 533,364,403 Unassigned funds (surplus) (305,031,040) (317,303,700) (373,471,583) (384,138,739) (426,967,296) Surplus as regards policyholders 230,833,364 218,560,704 162,392,821 151,725,665 108,897,107

Totals 314,117,047$ 323,291,339$ 268,981,177$ 432,136,873$ 618,824,498$


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Comparative Statement of Income For the Year Ended December 31,

2013 2012 2011 2010 2009Underwriting Income

Premiums earned 29,836,348$ 41,166,048$ 21,899,967$ 21,836,175$ 38,488,195$ Deductions: Losses incurred (3,352,470) 11,583,326 21,457,605 34,402,118 108,296,353 Loss expenses incurred 28,421 932,937 1,284,253 3,760,216 2,195,317 Other underwriting expenses incurred 17,897,596 15,410,278 8,722,614 5,313,160 10,387,133 Aggregate write-ins for underwriting deductions (1,900,400) 41,411 (7,092,289) (14,620,681) (76,376,651) Total underwriting deductions 12,673,148 27,967,952 24,372,182 28,854,813 44,502,152 Net underwriting gain or (loss) 17,163,201 13,198,096 (2,472,215) (7,018,638) (6,013,957)

Investment IncomeNet investment income earned 8,463,017 8,342,260 12,160,598 12,848,631 19,414,877 Net realized capital gains or (losses) 2,236,583 23,611,902 1,400,204 6,629,233 8,078,705 Net investment gain or (loss) 10,699,600 31,954,162 13,560,802 19,477,864 27,493,582

Other IncomeAggregate write-ins for miscellaneous income 1,034 11,825 (21,223) 2,729 224,955 Total other income 1,034 11,825 (21,223) 2,729 224,955 Net income before dividends to policyholders and before federal and foreign income taxes 27,863,834 45,164,083 11,067,364 12,461,955 21,704,580 Federal and foreign income taxes incurred 1,406,360 (12,818,355) 1,212,256 (31,424,392) 1,794,586 Net income 26,457,474$ 57,982,438$ 9,855,108$ 43,886,347$ 19,909,994$


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Comparative Statement of Capital and Surplus For the Year Ended December 31,

2013 2012 2011 2010 2009Surplus as regards policyholders, December 31, previous year 218,560,704$ 162,392,821$ 151,725,665$ 108,897,107$ 80,634,003$ Net income 26,457,474 57,982,438 9,855,108 43,886,347 19,909,994 Net unrealized capital gains or (losses) (23,421) 591,380 (493,783) 298,384 4,651,191 Change in net unrealized foreign exchange capital gain or (loss (424) (11,229) 31,622 (6,039) (211,719) Change in net deferred income tax (4,168,830) 154,996,992 (779,554) 710,711 (204,998,486) Change in nonadmitted assets 4,925,170 (136,808,558) 538,245 (545,329) 208,932,182 Aggregate write-ins for gains and losses in surplus (14,917,309) (20,583,138) 1,515,517 (1,515,516) (20,058) Change in surplus as regards policyholder for the year 12,272,660 56,167,885 10,667,156 42,828,558 28,263,104 Surplus as regards policyholders, December 31, current year 230,833,364$ 218,560,704$ 162,392,821$ 151,725,665$ 108,897,107$


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Comparative Statement of Cash Flow For the Year Ended December 31,

2013 2012 2011 2010 2009Cash from Operations

Premiums collected net of reinsurance 29,975,651$ 40,317,381$ 13,400,155$ 9,208,028$ 14,503,993$ Net investment income 10,748,929 8,418,311 11,752,490 15,039,218 23,892,189 Miscellaneous income 1,034 11,826 (21,223) 2,728 224,955 Total income 40,725,615 48,747,519 25,131,422 24,249,974 38,621,137 Benefit and loss related payments 28,840,278 35,048,739 182,038,196 241,050,032 213,317,886 Commissions, expenses paid and aggregate write-ins for deductions 18,009,282 15,389,349 8,721,180 5,626,711 13,177,711 Federal and foreign income taxes paid (recovered) (259,231) (429,030) 864,033 (27,652,107) 3,716,541 Total deductions 46,590,330 50,009,058 191,623,409 219,024,696 230,212,138 Net cash from operations (5,864,715) (1,261,539) (166,491,987) (194,774,722) (191,591,001)

Cash from InvestmentsProceeds from investments sold, matured or repaid: Bonds 36,077,231 223,089,601 50,086,473 484,744,409 687,756,757 Stocks 0 0 0 8,264,244 30,880,081 Other invested assets 2,226,483 1,380 8,202 163,220 224,903 Net gain or (loss) on cash and short-term investments 98 3,216 (32) 66 13,087 Miscellaneous proceeds 0 344,554 158,292 4,079,648 0 Total investment proceeds 38,303,812 223,438,751 50,252,935 497,251,587 718,874,828 Cost of investments acquired (long-term only): Bonds 24,136,888 241,717,611 44,275,073 223,732,425 413,595,045 Stocks 3,325,000 0 0 14,498,270 31,606,182 Other invested assets 6,040 265,650 268,250 1,044,592 256,801 Miscellaneous applications 265,290 0 0 0 3,047,985 Total investments acquired 27,733,218 241,983,261 44,543,323 239,275,287 448,506,013 Net cash from investments 10,570,594 (18,544,510) 5,709,612 257,976,300 270,368,815

Cash from Financing and Miscellaneous ServicesOther cash provided (applied): Other cash provided or (applied) (1,327,724) 1,428,189 (68,317) 11,565,922 (16,634,179) Net cash from financing and miscellaneous sources (1,327,724) 1,428,189 (68,317) 11,565,922 (16,634,179)

Reconciliation of cash and short-term investments:Net change in cash and short-term investments 3,378,155 (18,377,860) (160,850,692) 74,767,500 62,143,635 Cash and short-term investments: Beginning of the year 82,937,510 101,315,370 262,166,062 187,398,562 125,254,927 End of the year 86,315,665$ 82,937,510$ 101,315,370$ 262,166,062$ 187,398,562$


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SUMMARY OF EXAMINATION CHANGES There were no examination changes to the preceding financial statements as filed with

regulatory authorities over the review period.

NOTES TO FINANCIAL STATEMENTS

ASSETS

INVESTMENTS As of December 31, 2013, RII’s invested assets were distributed as follows:

Amount Percentage Bonds 193,710,274$ 66.7%Preferred stocks 10,480,739 3.6%Cash 35,662,216 12.3%Short-term investments 50,653,449 17.4%Totals 290,506,678$ 100.0%

The Company’s bond and short-term investment portfolio had the following quality and

maturity profiles:

NAIC Designation Amount Percentage 1 - highest quality 204,019,253$ 83.5%2 - high quality 40,344,470 16.5%Totals 244,363,723$ 100.0%

Years to Maturity Amount Percentage 1 year or less 52,252,322$ 21.4%2 to 5 years 30,380,246 12.4%6 to 10 years 64,211,282 26.3%11 to 20 years 32,843,173 13.4%over 20 years 64,676,700 26.5%Totals 244,363,723$ 100.0%

The approximately $194 million of bond investments were high (16.5%) or highest

(83.5%) quality issues. The total bonds consisted of approximately $1.2 million in U.S. Government bonds, approximately $50 million in state and municipal bonds – Direct and Guaranteed, approximately $45.6 million in state and municipal bonds – Non-guaranteed


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obligations, approximately $89.4 million in corporate bonds, and approximately $7.4 million in U.S. Government – Residential Mortgage-Backed Securities.

The cash and short term investments amounted to approximately $36 million of cash balances and approximately $51 million in four mutual funds.

The approximately $10.5 million of preferred stock consisted of two financial issues.

RII has a written investment policy as required by the Pennsylvania Insurance Company Law 40 P.S. § 653 (b). The investment policy is reviewed and approved on an annual basis by the Board of Directors. The Company, at December 31, 2013, was following its investment policy.

The Company had a custodial agreement with Northern Trust Company, effective July 1, 2005. However, the custodial agreement did not include certain language as required by 31 Pa. Code § 148a.3. Before the end of fieldwork, the Company revised its custodial agreement with Northern Trust Company effective February 13, 2014 and the agreement is now in compliance with 31 Pa. § 148a.3.

LIABILITIES

LOSSES AND LOSS ADJUSTMENT EXPENSE RESERVES The Company reported reserves of $42,958,316 for loss and $116,402 for loss adjustment

expense (“LAE”), respectively, on the December 31, 2013 Annual Statement. The Company’s reserving methodology has been consistently followed since the prior examination.

For the years under examination, the Board appointed two different independent qualified actuaries to provide the Statement of Actuarial Opinion (“Opinion”) on the Company’s loss and LAE reserve amounts carried on the balance sheet at each respective year-end date as follows:

December 31, Actuary Firm

2009 Marc Oberholtzer, FCAS, MAAA PwC 2010-2013 Michael Schmitz, FCAS, MAAA Milliman, Inc.

The Group change in actuary was made during 2010 in response to Pennsylvania’s Model Audit Rule, which does not permit actuarial and auditing services to be provided by the same firm. There were no disagreements, either resolved, or unresolved, related to the content of the Opinion on matters of required disclosures, scope, date, procedure or data quality with the change in actuary. For each year in the examination period, the appointed actuary concluded that reserves make a reasonable provision for all unpaid loss and LAE obligations of the Company.

In order for the examination team to gain an adequate comfort level with the reserve estimates, the Department engaged the actuarial examination services of Risk and Regulatory Consulting, LLC (“RRC”) of Farmington, Connecticut to perform a risk-focused review of the Company’s loss and LAE reserves, the forecasting and reserving models, and pricing and underwriting activities in conjunction with this examination. In the course of their work, RRC actuarial examiners relied upon the underlying financial and risk-focused procedures performed


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by the financial examiners, the Company’s Internal Audit Department, and the work of the Company’s CPA firm.

Based upon the procedures performed, the exam team determined that the Company’s loss and LAE reserves fall within a reasonable range. The Department has accepted the appointed actuary’s statement that reserves “Make a reasonable provision for all unpaid loss and loss adjustment expense obligations of the Company under the terms of its contracts and agreements” such that the carried reserves are acceptable for the purposes of this examination.

AGGREGATE WRITE-INS FOR LIABILITIES RII reported $37,285,318 in its December 31, 2013 Annual Statement under the above

caption with $35,500,448 representing a Contingency Reserve and $1,784,870 representing a Premium Deficiency Reserve (“PDR”). These amounts are accepted as reported. SSAP No. 58, paragraph 22 requires mortgage guaranty providers to put up a reserve to protect policyholders against loss during periods of extreme economic contraction. The annual addition to the liability shall equal 50% of the earned premium from mortgage guaranty insurance contracts and shall be maintained for ten years regardless of coverage period for which premiums were paid. The reserve can be released in any year in which actual incurred losses exceed 35% of the corresponding earned premium. The examination team also noted that paragraph 23 of SSAP No. 58 requires mortgage guaranty providers to recognize a PDR when anticipated losses and unrecognized expenses exceed the unearned premium reserve, contingency reserve, and estimated future renewal premiums on existing policies.

SUBSEQUENT EVENTS

CARL ROBERT QUINT RETIREMENT On December 15, 2014, RDN announced that Carl Robert Quint, Executive Vice

President and Chief Financial Officer, will retire at the end of 2014 after nearly 25 years with the Company. On January 1, 2015, J. Franklin Hall assumed the role of Executive Vice President and Chief Financial Officer of RDN. In order to ensure a smooth transition, Mr. Quint will serve as Executive Vice President of Finance through March 31, 2015, and then assume a consulting role through the end of 2015.

RECOMMENDATIONS

PRIOR EXAMINATION The prior examination report contained the following recommendations:

1. It is recommended that the Company comply with the requirements of Pennsylvania Insurance Company Law 40 P.S. § 991.1405(a)(2) and report all required transactions on a timely basis.


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The Company complied with this recommendation.

2. It is recommended that the Company comply with the requirements of its own investment policy and either refrain from purchasing securities related to residential real estate and/or the residential housing industries, or change its policy to permit such purchases for risk mitigation purposes.

The Company complied with this recommendation.

CURRENT EXAMINATION As a result of the current examination, no recommendations are being made.

CONCLUSION As a result of this examination, the financial condition of Radian Insurance Inc., as of

December 31, 2013, was determined to be as follows:

Amount Percentage Admitted assets 314,117,047$ 100.0%Liabilities 83,283,683$ 26.5%Surplus as regards policyholders 230,833,364 73.5%Total liabilities and surplus 314,117,047$ 100.0%

Since the previous examination, made as of December 31, 2008, RII’s assets decreased by $488,407,656, its liabilities decreased by $638,607,017, and its surplus increased by $150,199,361.


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This examination was conducted by Dean Cross, CFE, CPA, Amber Kinney, CFE, CPA, Glenn LeGault, CFE, CPA and William Michael, CFE, CIA, CPCU, Are, with the latter in char~e.

· e B. Szady, <g;fd5;;f Mtions

awt:~~u) ·William Michael, CFE, CIA, CPCU, ARe Examiner-in-Charge

111e CFE designation has been conferred by an organization not affiliated with the federal or any state government. However the CFE

designation is the only designation recognized by the N AIC for the putposes of directing statutory Association examinations of insurance

companies.

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