report of examination of radian mortgage insurance inc ... · radian mortgage insurance inc. -3-...

Examination Warrant Number 13-00766-33944-R1

Report of Examination of

Radian Mortgage Insurance Inc. Philadelphia, Pennsylvania

As of December 31, 2013

Radian Mortgage Insurance Inc.

TABLE OF CONTENTS Subject Page Salutation .........................................................................................................................................1 Scope of Examination ......................................................................................................................1 History..............................................................................................................................................2 Management and Control: Capitalization .............................................................................................................................2 Stockholder ................................................................................................................................3 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 .....................................................................................................11 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: Loss and Loss Adjustment Expense Reserves .........................................................................19 Contingency Reserve ...............................................................................................................20 Subsequent Events .........................................................................................................................20 Recommendations: Prior Examination ....................................................................................................................20 Current Examination ................................................................................................................20 Conclusion .....................................................................................................................................20

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 13-00766-33944-R1 dated March 1, 2013, an examination was made of

Radian Mortgage Insurance Inc., NAIC Code: 33944 a Pennsylvania domiciled mortgage guaranty insurance company, hereinafter referred to as “RMII”, or “Company”. The examination was conducted at RMII’s home office, located at 1601 Market Street, Philadelphia, PA 19103.

A report of this examination is hereby respectfully submitted.

SCOPE OF EXAMINATION RMII was last examined as of December 31, 2008 by the Arizona Department of

Insurance.

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 RMII, 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 (“CPA”) firm of PricewaterhouseCoopers LLP 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 RMII, was reviewed during the examination and incorporated into the examination work papers where possible.


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

Company NAIC Code

State of Domicile

Radian Insurance Inc. 20720 PA Radian Mortgage Assurance Inc. 30872 PA Radian Guaranty Reinsurance Inc.* 15909 PA Radian Guaranty Inc. 33790 PA Radian Asset Assurance Inc. 36250 NY

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

HISTORY

RMII is a Pennsylvania-domiciled property and casualty insurance company licensed only in Arizona and Pennsylvania to write mortgage guaranty insurance and reinsurance.

RMII was originally organized and incorporated as State Mortgage Insurance Company 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.

On May 22, 1990, RMII’s name was changed to Commonwealth Mortgage Assurance Company of Arizona. On June 18, 1991, RMII’s Certificate of Authority was amended to authorize transacting only mortgage guaranty insurance, which the Company has exclusively assumed since inception.

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

RMII 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, RMII’s total capital and surplus was

$98,032,032, consisting of 100,000 capital shares of issued and outstanding common stock with a par value of $10 per share, amounting to $1,000,000; $166,149,471 in paid-in and contributed surplus; and $(69,117,439) in unassigned funds (surplus).


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The Company’s minimum capital and minimum 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. RMII met this requirement throughout the examination period.

STOCKHOLDER RMII is a wholly owned subsidiary of Radian Guaranty Inc. (“RGI”), who is a wholly

subsidiary of Radian Group, Inc. (“RDN”). During the years under examination, RMII paid no dividends to its stockholder.

The following additional surplus was provided by RGI:

2009 $ 0

2010 $74,066,046

2011 $10,500,000

2012 $60,000,000

2013 $ 0

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 the 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. 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 RMII, 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 RMII 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. 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.

RMII has a conflict of interest policy in place. 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 RMII’s Board did not appoint any committees. RMII 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, Credit Committee, and Governance Committee, which perform the functions delineated in 40 P.S. § 991.1405(c)(4) and (4.1) on behalf of RMII.

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


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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 RMII’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:

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


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• 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.

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

• All directors attend Board meetings regularly.

ARTICLES OF INCORPORATION The Articles of Incorporation were amended in 2012 when the Company re-domesticated

to Pennsylvania from Arizona.

BY-LAWS During the examination period, the By-Laws were amended twice. In November 2012 the

By-Laws were amended due to the redomestication to Pennsylvania and again in December 2012 to incorporate Pennsylvania regulations.

SERVICE AND OPERATING AGREEMENTS RMII 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 AGREEMENTS On December 2, 2013, RMII and RDN entered into an Expense Allocation and Services

Agreement covering all of RDN’s expenses effective as of 2013. Under this agreement, all of RDN’s interest expense costs were allocated on the basis of RMII’s percentage of total relative consolidated GAAP capital and RDN’s remaining costs were allocated based on RMII’s pro rata share of the expense as calculated based on time spent or other fair and equitable methods.

FACILITIES AND SERVICES AGREEMENT Effective May 10, 1997, the Company entered into a facilities and services agreement with RGI, under which RGI agrees to provide all operational and administrative support services as may be necessary to conduct the business and operations of the Company in exchange for reimbursement of allocated costs incurred.

CAPITAL MAINTENANCE AGREEMENT Effective November 1, 2002, RDN executed a capital maintenance agreement, which sets forth a guaranty that, in the event that the Company is unable to satisfy any of its financial obligations and as a result, fails to pay all liabilities on a timely basis to its creditors, RDN will


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make funds available in cash to cover the full and complete payment of all financial obligations of the Company that are due and unpaid.

TAX ALLOCATION AGREEMENT RMII has a written Tax Allocation Agreement with RDN, approved by RMII’s Board of

Directors. 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 RMII entered into an agreement with RDN, RGI, RII, 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 The Company did not have any ceded business during the examination period.

ASSUMED Effective December 31, 1987, the Company entered into a reinsurance agreement with

RGI. Under the agreement, RGI agrees to cede 16.67% of losses on primary mortgage guaranty insurance policies with coverage of 30% of the insured amount and 25% of the loss on primary and pooled mortgage guaranty insurance policies with coverage of 100% of the insured amount.

TERRITORY AND PLAN OF OPERATION Since inception, the Company has confined its operations to the assumption of mortgage

guaranty insurance on residential first mortgage loans. The Company has no plans to change its ongoing operations.

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


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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.

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$

Amount Percentage Premiums earned 13,851,910$ 100.0 %Losses incurred (4,903,501)$ -35.4 %Other underwriting expenses incurred 2,217,041 16.0 %Net underwriting gain or (loss) 16,538,370 119.4%Totals 13,851,910$ 100.0 %

2013 2012 2011 2010 2009Admitted assets 137,233,303$ 134,386,000$ 92,710,868$ 102,689,896$ 57,516,291$ Liabilities 39,201,271$ 52,611,214$ 72,665,842$ 92,593,292$ 50,569,935$ Surplus as regards policyholders 98,032,032$ 81,774,786$ 20,045,026$ 10,096,604$ 6,946,356$ Gross premium written 13,706,854$ 1,427,069$ 20,074$ 242,957$ 289,626$ Net premium written 13,706,854$ 1,427,069$ 20,074$ 242,957$ 289,626$ Underwriting gain/(loss) 16,538,370$ (570,719)$ (15,569,395)$ (63,177,332)$ (37,943,733)$ Investment gain/(loss) 1,590,355$ 1,765,981$ 3,761,101$ 1,884,795$ 3,104,903$ Other gain/(loss) 0$ 0$ 0$ 0$ 2$ Net income 18,128,955$ 1,729,760$ (11,117,610)$ (60,576,222)$ (34,176,050)$


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ACCOUNTS AND RECORDS All of RMII’s accounting, investments, policies and claim records are automated and

maintained at its Home Office and at its data center in Dayton, Ohio. The examination team reviewed the Company’s information technology (“IT”) controls based on the NAIC’s Exhibit C, Evaluation of Controls in IT. It was concluded that the Company’s IT controls were operating effectively for the year ended December 31, 2013.

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 101,013,153$ 48,272,352$ 15,207,087$ 28,516,716$ 47,343,906$ Cash, cash equivalents, and short term investments 29,614,815 84,539,538 66,891,950 53,254,298 8,990,167 Subtotals, cash and invested assets 130,627,968 132,811,890 82,099,037 81,771,014 56,334,073 Investment income due and accrued 497,340 290,295 92,897 327,890 746,424 Premiums and agents' balances due 1,050,240 1,283,815 21,888 24,946 29,827 Current federal and foreign income tax recoverable and interest thereon 0 0 0 0 361,313 Net deferred tax asset 5,057,755 0 0 0 0 Receivable from parent, subsidiaries and affiliates 0 0 10,497,046 20,566,046 44,654 Total 137,233,303$ 134,386,000$ 92,710,868$ 102,689,896$ 57,516,291$

Losses 28,757,830$ 51,240,001$ 55,897,749$ 89,658,544$ 46,711,942$ Reinsurance payable on paid loss and loss adjustment expenses 1,350,133 1,043,761 10,604,666 1,398,506 808,049 Other expenses 40,085 20,064 20,063 20,144 207 Taxes, licenses and fees 31,412 20,610 17,220 13,830 19,182 Unearned premiums 104,348 249,404 551,322 1,487,019 3,030,347 Payable to parent, subsidiaries and affiliates 1,991,508 37,374 64 15,249 208 Aggregate write-ins for liabilities 6,925,955 0 5,574,758 0 0 Total liabilities 39,201,271 52,611,214 72,665,842 92,593,292 50,569,935 Common capital stock 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 Gross paid in and contributed surplus 166,149,471 166,149,471 106,149,471 95,649,471 21,583,425 Unassigned funds (surplus) (69,117,439) (85,374,685) (87,104,445) (86,552,867) (15,637,069) Surplus as regards policyholders 98,032,032 81,774,786 20,045,026 10,096,604 6,946,356 Totals 137,233,303$ 134,386,000$ 92,710,868$ 102,689,896$ 57,516,291$


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Comparative Statement of Income For the Year Ended December 31,

2013 2012 2011 2010 2009Underwriting Income

Premiums earned 13,851,910$ 1,728,987$ 955,771$ 1,786,285$ 3,252,907$ Deductions: Losses incurred (4,903,501) 7,718,754 10,818,298 64,835,462 41,076,824 Other underwriting expenses incurred 2,217,041 155,710 132,110 128,155 119,816 Aggregate write-ins for underwriting deductions 0 (5,574,758) 5,574,758 0 0 Total underwriting deductions (2,686,460) 2,299,706 16,525,166 64,963,617 41,196,640 Net underwriting gain or (loss) 16,538,370 (570,719) (15,569,395) (63,177,332) (37,943,733)

Investment IncomeNet investment income earned 1,589,927 775,766 1,549,987 1,556,439 2,353,055 Net realized capital gains or (losses) 428 990,215 2,211,114 328,356 751,848 Net investment gain or (loss) 1,590,355 1,765,981 3,761,101 1,884,795 3,104,903

Other IncomeAggregate write-ins for miscellaneous income 0 0 0 0 2 Total other Income 0 0 0 0 2 Net income before dividends to policyholders and before federal and foreign income taxes 18,128,725 1,195,262 (11,808,294) (61,292,537) (34,838,828) Federal and foreign income taxes incurred (230) (534,498) (690,684) (716,315) (662,778) Net income 18,128,955$ 1,729,760$ (11,117,610)$ (60,576,222)$ (34,176,050)$


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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 81,774,786$ 20,045,026$ 10,096,604$ 6,946,356$ 26,664,197$ Net income 18,128,955 1,729,760 (11,117,610) (60,576,222) (34,176,050) Net unrealized capital gains or (losses) 0 0 0 147,089 (147,089) Change in net deferred income tax 33,965,971 0 (3,698,112) 3,777,256 (6,113,158) Change in nonadmitted assets (28,911,725) 0 14,264,144 (14,263,921) 5,741,932 Surplus adjustments: Paid in 0 60,000,000 10,500,000 74,066,046 0 Aggregate write-ins for gains and losses in surplus (6,925,955) 0 0 0 14,976,524 Change in surplus as regards policyholder for the year 16,257,246 61,729,760 9,948,422 3,150,248 (19,717,841) Surplus as regards policyholders, December 31, current year 98,032,032$ 81,774,786$ 20,045,026$ 10,096,604$ 6,946,356$


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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 13,940,429$ 165,142$ 23,132$ 247,838$ 292,451$ Net investment income 2,234,636 1,068,280 1,732,059 2,012,348 2,798,225 Miscellaneous income 0 0 0 0 209 Total income 16,175,065 1,233,422 1,755,191 2,260,186 3,090,915 Benefit and loss related payments 17,272,298 21,937,407 35,372,934 21,298,403 10,685,409 Commissions, expenses paid and aggregate write-ins for deductions 2,206,217 152,320 128,799 113,571 117,416 Federal and foreign income taxes paid (recovered) 0 0 0 (684,262) (1,817,837) Total deductions 19,478,515 22,089,727 35,501,733 20,727,712 8,984,988 Net cash from operations (3,303,450) (20,856,305) (33,746,542) (18,467,526) (5,894,073)

Cash from InvestmentsProceeds from investments sold, matured or repaid: Bonds 5,492,867 49,555,223 24,070,100 50,054,332 48,967,859 Net gain or (loss) on cash and short-term investments 658 (37) (32) (51) 0 Total investment proceeds 5,493,525 49,555,186 24,070,068 50,054,281 48,967,859 Cost of investments acquired (long-term only): Bonds 59,065,421 81,585,650 615,586 37,506,585 38,685,734 Total investments acquired 59,065,421 81,585,650 615,586 37,506,585 38,685,734 Net cash from investments (53,571,896) (32,030,464) 23,454,482 12,547,696 10,282,125

Cash from Financing and Miscellaneous ServicesOther cash provided (applied): Capital and paid in surplus, less treasury stock 0 70,500,000 20,566,046 53,500,000 0 Other cash provided or (applied) 1,950,623 34,357 (12,246) 59,873 (46,097) Net cash from financing and miscellaneous sources 1,950,623 70,534,357 20,553,800 53,559,873 (46,097)

Reconciliation of cash and short-term investments:Net change in cash and short-term investments (54,924,723) 17,647,588 10,261,740 47,640,043 4,341,955 Cash and short-term investments: Beginning of the year 84,539,538 66,891,950 56,630,210 8,990,167 4,648,212 End of the year 29,614,815$ 84,539,538$ 66,891,950$ 56,630,210$ 8,990,167$


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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, RMII’s invested assets were distributed as follows:

Amount Percentage Bonds 101,013,153$ 77.3%Cash 199,000 0.2%Cash equivalents 3,999,999 3.1%Short-term investments 25,415,816 19.4%Totals 130,627,968$ 100.0%

RMII’s bond and short-term investment portfolio had the following quality and maturity

profiles:

NAIC Designation Amount Percentage 1 - highest quality 115,402,608$ 88.5%2 - high quality 15,026,360 11.5%Totals 130,428,968$ 100.0%

Years to Maturity Amount Percentage 1 year or less 38,831,368$ 29.8%2 to 5 years 34,325,978 26.3%6 to 10 years 21,747,085 16.7%11 to 20 years 1,995,626 1.5%over 20 years 33,528,911 25.7%Totals 130,428,968$ 100.0%

The Company’s approximately $130 million cash and invested assets portfolio consists of

77.3% in bonds and 22.7% in cash and short term investments. Investment management is provided under a written agreement with various external advisors.

RMII has a written investment policy as required by the 40 P.S. § 653b(b). The investment policy is reviewed and approved on an annual basis by the Board. As of December 31, 2013, the Company was found to be following its investment policy.


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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. Code § 148a.3.

LIABILITIES

LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES The Company reported reserves of $28,757,830 for loss and $0 for loss adjustment

expense (“LAE”) 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’s 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 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.


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CONTINGENCY RESERVE RMII reported $6,925,955 in its December 31, 2013 Annual Statement under the above

caption. The amount is 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.

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 all disclosure requirements concerning affiliated transactions.

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 Mortgage Insurance

Inc., as of December 31, 2013, was determined to be as follows:


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Amount PercentageAdmitted assets 137,233,303$ 100.0 %Liabilities 39,201,271$ 28.6 %Surplus as regards policyholders 98,032,032 71.4 %Total liabilities and surplus 137,233,303$ 100.0 %

Since the previous examination, made as of December 31, 2008, RMII’s assets increased by $72,436,282, its liabilities increased by $1,068,447, and its surplus increased by $71,367,835.


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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 charge.

Respectfully,

Annette B. Szady, CP Director, Bureau of Financial Examinations

Kelly A. Monaghan, C A Examination Manager

William Michael, CFE, CIA,'CPCU, ARe Examiner-in-Charge

The 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 NAIC for the puiposes of directing statutory Association examinations of insurance

companies.

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