RADIAN GROUP INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-11356
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RADIAN GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 23-2691170
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1601 MARKET STREET, PHILADELPHIA, PA 19103
(Address of principal executive offices) (zip code)

(215) 564-6600
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
(See definition of affiliate in Rule 405.)

$4,462,225,944 as of March 22, 2002 which amount excludes the value of all
shares beneficially owned (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934) by officers and directors of the registrant (however this
does not constitute a representation or acknowledgment that any such individuals
is an affiliate of the registrant).

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 94,578,761 shares of
Common Stock, $.001 par value, outstanding on March 22, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424 (b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).

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PART I

ITEM 1. BUSINESS

GENERAL

Radian Group Inc. (the "Company") provides through its subsidiaries and
affiliates, credit-based insurance and mortgage services to financial
institutions in the United States and globally. The principal business segments
of the Company are mortgage insurance, financial guaranty and mortgage services.
The following table shows the percentage contributions to total revenues and net
income of these businesses for 2001:

The Company was formed on June 9, 1999 by the merger of CMAC Investment
Corporation ("CMAC") and Amerin Corporation ("Amerin"). At that time the
Company's sole product was mortgage insurance. Since that time, the Company has
diversified its revenue and net income by expanding its mortgage service
business and expanding into other areas such as internet-based mortgage services
and financial guaranty insurance and reinsurance. This diversification has been
achieved primarily through the acquisition of other businesses, including
RadianExpress.com, ("RadianExpress", formerly ExpressClose.com, Inc.) and
Enhance Financial Services Group Inc. ("Financial Guaranty"). For selected
financial information about each segment, see note 1 of the Notes to
Consolidated Financial Statements under the caption "Segment Reporting". The
Notes to Consolidated Financial Statements are incorporated by reference into
this report from the 2001 Annual Report to Stockholders and included as an
exhibit to this report.

MORTGAGE INSURANCE BUSINESS

The Company provides, through its wholly owned subsidiaries, Radian
Guaranty Inc. and Amerin Guaranty Corporation (individually referred to as
"Radian Guaranty" and "Amerin Guaranty," and together referred to as "Mortgage
Insurance"), private mortgage insurance and risk management services to mortgage
lending institutions located throughout the United States and globally. Private
mortgage insurance protects mortgage lenders and investors from default related
losses on residential first mortgage loans made primarily to home buyers who
make down payments of less than 20% of the home's purchase price. Private
mortgage insurance also facilitates the sale of such mortgage loans in the
secondary mortgage market, principally to Freddie Mac and Fannie Mae (Government
Sponsored Entities, "GSEs"). Radian Guaranty is restricted to providing
insurance on residential first mortgage loans only. Beginning October 1, 2001,
Amerin Guaranty was licensed to conduct second mortgage insurance and most
likely, any second mortgage insurance issued by the Company will be written in
Amerin Guaranty. Mortgage Insurance offers two principal types of private
mortgage insurance coverage, primary and pool. At December 31, 2001, primary
insurance comprised 94.3% of total risk in force and pool insurance comprised
5.7% of total risk in force. During the third quarter of 2000, the Company
commenced operations in Radian Insurance Inc., a subsidiary of Radian Guaranty,
which writes credit insurance on non-traditional mortgage related assets, such
as second mortgages and manufactured housing, and provides credit enhancement to
mortgage related capital market transactions. The Company also recently began
offering an alternative to title insurance, Radian Lien Protection ("RLP"),
providing lien protection insurance on refinanced second mortgages and home
equity loans.

Primary Insurance

Primary insurance provides mortgage default protection on individual loans
at a specified coverage percentage, which is applied to the unpaid loan
principal, delinquent interest and certain expenses, associated with the default
and subsequent foreclosure (collectively, the "claim amount"). The Company's
obligation to an insured lender in respect of a claim is determined by applying
the appropriate coverage percentage to the claim amount. The Company's "risk" on
each insured loan is the unpaid loan principal multiplied by the coverage
percentage. Much of the Company's current business is written with 30% coverage
on loans with a loan-to-value ("LTV") ratio between 90.01% and 95% ("95s") and
25% coverage on loans with an LTV ratio

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between 85.01% and 90% ("90s"). As of December 31, 2001, approximately 57% of
the Company's primary insurance in force outstanding had such coverages. In
January 1999, Fannie Mae announced a program that allows for lower levels of
required mortgage insurance for certain low down payment loans approved through
its "Desktop Underwriter" automated underwriting system. In March 1999, Freddie
Mac announced a similar program for loans approved through its "Loan Prospector"
automated underwriting system. Through the end of 2001, a minimal amount of
insurance was written in these programs. For more information on these
developments, see "Other Direct Regulation -- Freddie Mac and Fannie Mae" on
page 33.

Under the Company's master policy, upon a default, the Company has the
option of paying the entire claim amount and taking title to the mortgage
property (at which time it is typically sold quickly), or paying the coverage
percentage in full satisfaction of its obligations under the insurance written.
In 2001, the entire claim amount was paid in approximately 4% of filed claims
because of the expected economic advantage associated with that choice. Similar
to 2000, this percentage is significantly higher than in past years and is due
to the good economic conditions experienced over the past few years in which
property values have remained generally strong. However, housing values may not
remain strong in the future.

Pool Insurance

Pool insurance differs from primary insurance in that the exposure on pool
insurance is not limited to a specific coverage percentage on each individual
loan. Because of this feature and the generally lower premium rates associated
with pool insurance, the rating agency capital requirements for the product are
more restrictive than primary insurance. There is an aggregate exposure limit
("stop loss") on a "pool" of loans that is generally between 1% and 10% of the
initial aggregate loan balance. Modified pool insurance has a stop loss like
pool insurance, but also has exposure limits on each individual loan.

The Company offers pool insurance on a selected basis to various state
housing finance agencies on the collateral for their bond issues, as a credit
enhancement to mortgage loans included in mortgage-backed securities or in whole
loan sales, and in certain other structured transactions. Since 1996, the
Company has offered pool insurance on mortgage product sold to Freddie Mac and
Fannie Mae by the Company's primary insurance customers ("GSE Pool"). This pool
insurance has a very low stop loss, generally 1.0% to 1.5%, and the insured
pools contain loans with and without primary insurance. Loans without primary
insurance have an LTV ratio of 80.0% or below. Premium rates on this business
are significantly lower than primary insurance rates and the expected
profitability on this business is lower than that of primary insurance. During
2001, the Company had pool risk written of $255 million or 2.3% of the Company's
total risk written, consisting primarily of GSE Pool business, compared to $188
million in 2000 and $421 million in 1999. The Company expects Mortgage Insurance
to continue to write a limited amount of GSE Pool insurance in 2002, and will
continue to write other forms of pool or modified pool insurance as market
opportunities arise.

Structured Transactions

The Company, from time to time, engages in structured transactions that may
include either primary insurance, pool insurance or some combination thereof. A
structured transaction generally involves insuring a large group of seasoned or
unseasoned loans or issuing a commitment to insure new loan originations under
negotiated terms. Some structured transactions contain a risk-sharing component
under which the insured or a third party assumes a first-loss position or shares
in losses in some other manner. Opportunities for structured transactions have
increased during the last three years and this trend is expected to continue,
however the Company competes with other mortgage insurers as well as capital
market executions such as senior/subordinated security structures to obtain such
business. Most structured transactions involve non-traditional mortgage or
mortgage related assets such as Alternative A or A- ("Non-Prime") mortgages.
Alternative A or A- mortgages are known as our nonprime business. Competition
for this business is generally based upon price and is also based on the
percentage of a given pool of loans that the Company is willing to insure. In
2001, the Company wrote $8.7 billion of primary insurance in structured
transactions, which represented 19.3% of primary new insurance written. All of
the pool risk written in 2001 and substantially all of the $3.4 billion of new
insurance written in Radian Insurance was written in structured transactions.

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Revenue Sharing Products

The Company, like other mortgage insurers, offers financial products to its
mortgage lending customers that are designed to allow the customer to
participate in the risks and rewards of the mortgage insurance business. The
most common product is captive reinsurance, in which a lender sets up a
reinsurance company that assumes part of the risk associated with that lender's
insured book of business. In most cases, the risk assumed by the reinsurer is an
excess layer of aggregate losses that would be penetrated only in a situation of
adverse loss development. The Company had approximately 30 active captive
reinsurance agreements in place at December 31, 2001 and could enter into
several new agreements or modify existing agreements in 2002, some with large
national lenders. Premiums ceded to captive reinsurance companies in 2001 were
$55.7 million, representing 9.1% of total mortgage insurance premiums earned, as
compared to $39.6 million, or 7.0% of total premiums earned in 2000. Primary
insurance written in 2001 that had captive reinsurance associated with it was
$14.7 billion, or 32.9% of the Company's total primary insurance written as
compared to $8.1 billion or 32.6% in 2000. During 2000, Freddie Mac issued
standards for captive reinsurance through its mortgage insurance eligibility
requirements. Additionally, a task force consisting of lenders, mortgage
insurers and accounting firms has been set up to study risk transfer and the
appropriate accounting treatment for captive reinsurance. In addition to captive
reinsurance, the Company has entered into revenue sharing arrangements with the
GSEs whereby the primary insurance coverage amount on certain loans is recast
and the overall risk to the Company is reduced in return for a payment made to
the GSE. Premiums ceded under such programs in 2001 were not significant.

Radian Insurance Inc.

Radian Insurance was reorganized and rated in September 2000 to write
credit insurance on non-traditional mortgage related assets such as second
mortgages and manufactured housing and to provide credit enhancement to mortgage
related capital market transactions. The Company feels that there are many
opportunities to take advantage of its expertise in credit underwriting and
evaluation of asset performance to write business that it is precluded from
writing in its monoline mortgage guaranty companies, Radian Guaranty and Amerin
Guaranty. Radian Insurance obtained a AA rating from Standard & Poor's Rating
Services ("S&P") and Fitch Ratings ("Fitch") and a Aa3 rating from Moody's
Investors Service, Inc. ("Moody's") based on a prudent business plan and a Net
Worth and Liquidity Maintenance Agreement from Radian Guaranty, which obligates
Radian Guaranty to maintain at least $30 million of capital in Radian Insurance.
The insurance structures typically used in Radian Insurance are pool insurance
or modified pool insurance that can have a reserve or first loss position in
front of Radian Insurance's layer of risk. In addition to the Net Worth and
Liquidity Maintenance Agreement, the Company intends to capitalize Radian
Insurance at all times in an amount that would support the existing risk in
force. As of October 1, 2001, much of the business written in Radian Insurance
was reinsured by Radian Asset Assurance, thereby leaving Radian Insurance with
most of its net risk in second mortgage insurance. Because the Company
anticipates that Radian Asset Assurance will be the primary writer of most of
the Company's future financial guaranty business and that Amerin Guaranty will
be the primary writer of second mortgage insurance in the future, the business
written by Radian Insurance will likely be substantially reduced in 2002.

FINANCIAL GUARANTY INSURANCE BUSINESS

On February 28, 2001, the Company acquired the financial guaranty and other
businesses of Financial Guaranty, a New York based insurance holding company
that primarily insures and reinsures credit-based risks at a purchase price of
approximately $581.5 million. The financial guaranty insurance business is
conducted primarily through two insurance subsidiaries, Radian Reinsurance Inc.
("Radian Re", formerly Enhance Reinsurance Company) and Radian Asset Assurance
Inc. ("Radian Asset Assurance", formerly Asset Guaranty Company) and also to a
limited extent through a Class III Bermuda domiciled insurance company, Enhance
Reinsurance (Bermuda) Limited. In addition, Financial Guaranty has a partial
equity interest in two active credit-based asset businesses: Credit-Based Asset
Servicing and Securitization LLC ("C-BASS") and Sherman Financial Services Group
LLC, ("Sherman"). Several smaller businesses are either in run-off or have been
terminated. The purchase price represented the value of the Company's common
stock and stock options issued in connection with the acquisition and other
consideration in

4

accordance with an Agreement and Plan of Merger, dated November 13, 2000, by and
among the Company, a wholly-owned subsidiary of the Company and Financial
Guaranty. The acquisition, which was structured as a merger of a wholly-owned
subsidiary of the Company with and into Financial Guaranty, entitled Financial
Guaranty stockholders to receive 0.22 shares of the Company's common stock in a
tax-free exchange for each share of Financial Guaranty's common stock that they
owned at the time of the merger. The acquisition was treated as a purchase for
accounting purposes, and accordingly, the assets and liabilities were recorded
based on their fair values at the date of acquisition. The fair value of assets
acquired was $1,357.9 million. The liabilities assumed were $833.1 million. The
excess of purchase price over fair value of net assets acquired of $56.7 million
represented the future value of insurance profits, which is being amortized over
a period that approximates the future life of the insurance book of business.
The results of Financial Guaranty's operations have been included in the
Company's financial statements for the period from the date of the acquisition
through December 31, 2001.

Financial guaranty insurance provides an unconditional and irrevocable
guaranty to the holder of a debt obligation of full and timely payment of
principal and interest. In the event of a default under the obligation, the
insurer has recourse against the issuer and/or any related collateral (which is
a component of many insured asset-backed obligations and other non-municipal
debt but is not typically a component of municipal obligations) for amounts paid
under the terms of the policy. Payments under the insurance policy may not be
accelerated by the holder of the debt obligation. Absent payment in full at the
option of the insurer, in the event of a default under an insured obligation,
the holder continues to receive payments of principal and interest on schedule,
as if no default had occurred. Each subsequent purchaser of the obligation
generally receives the benefit of such guaranty.

The issuer of the obligation pays the premium for financial guaranty
insurance either in full at the inception of the policy or in installments on an
annual basis. Premium rates are typically calculated as a percentage of either
the principal amount of the debt or total exposure (principal and interest).
Rate setting reflects such factors as the credit strength of the issuer, type of
issue, sources of income, collateral pledged, restrictive covenants, maturity
and competition from other insurers.

Premiums are generally non-refundable and are earned in proportion to the
level amortization of insured principal over the contract period. Premiums
written on a monthly basis are primarily earned as they are received. This long
and relatively predictable earnings pattern is characteristic of the financial
guaranty insurance industry and, along with a conservative investment policy,
provides a relatively stable source of future revenues and claims-paying ability
to financial guaranty insurers and reinsurers such as Financial Guaranty.

The primary financial guaranty insurance market currently consists of two
main sectors: municipal bond insurance and structured finance business including
insurance on collateralized debt obligations, credit default swaps and
asset-backed debt. The following table summarizes the net premiums for the
indicated Financial Guaranty lines of business written by Financial Guaranty for
2001 since the date of acquisition of Financial Guaranty by the Company:

Municipal Bond Market. Municipal bond insurance provides credit
enhancement of bonds, notes and other evidences of indebtedness issued by states
and their political subdivisions (for example, counties, cities, or towns),
utility districts, public universities and hospitals, public housing and
transportation authorities, and

5

other public and quasi-public entities. Municipal bonds are supported by the
issuer's taxing power in the case of general obligation or special tax-supported
bonds, or by its ability to impose and collect fees and charges for public
services or specific projects in the case of most revenue bonds. Insurance
provided to the municipal bond market has been and continues to be a major
source of revenue for the financial guaranty insurance industry.

Non-Municipal Bond Market. Asset-backed transactions or securitizations
constitute a form of structured financing that is distinguished from unsecured
debt issues by being secured by a specific pool of assets held by the issuing
entity, rather than relying on the general unsecured creditworthiness of the
issuer of the obligation. While most asset-backed debt obligations represent
interests in pools of assets, such as residential and commercial mortgages and
credit card and auto loan receivables, financial guarantors have also insured
asset-backed debt obligations secured by one or a few assets, such as utility
mortgage bonds and multi-family housing bonds and obligations under credit
default swaps, both funded and synthetic. A synthetic credit default swap
involves the transfer of credit risk without the removal of assets from the
issuer's balance sheet. The asset-backed securities market including both
synthetic and funded collateralized debt obligations has grown significantly in
recent years although consensus estimates are lacking as to the insured volume.
The Company anticipates Financial Guaranty's increased participation in this
market on a global basis in 2002.

Financial Guaranty Reinsurance

Reinsurance is the commitment by one insurance company, the "reinsurer", to
reimburse another insurance company, the "ceding company," for a specified
portion of the insurance risks underwritten by the ceding company. Because the
insured party contracts for coverage solely with the ceding company, the failure
of the reinsurer to perform does not relieve the ceding company of its
obligation to the insured party under the terms of the insurance contract.
Similarly, the failure of the ceding company to perform does not diminish the
reinsurer's obligations under the reinsurance contract to the ceding company.

While reinsurance provides various benefits to the ceding company, more
important is that it enables a primary insurer to write greater single risks and
greater aggregate risks without contravening the capital requirements of
applicable state insurance laws and rating agency guidelines. State insurance
regulators allow primary insurers to reduce the liabilities appearing on their
balance sheets to the extent of reinsurance coverage obtained from licensed
reinsurers or from unlicensed reinsurers meeting certain solvency and other
financial criteria. Similarly, the rating agencies permit such a reduction for
reinsurance in an amount that depends on the claims-paying ability or financial
strength rating of the reinsurer.

The principal forms of reinsurance are treaty and facultative. Under a
treaty arrangement the ceding company is obligated to cede, and the reinsurer is
correspondingly obligated to assume, a specified portion of a specified type of
risk or risks insured by the ceding company during the term of the treaty
(although the reinsurance risk thereafter extends for the life of the respective
underlying obligations). Under a facultative agreement, the ceding company from
time to time during the term of the agreement offers a portion of specific risks
to the reinsurer, usually in connection with particular debt obligations. A
facultative arrangement further differs from a treaty arrangement in that under
a facultative arrangement the reinsurer oftentimes performs its own underwriting
credit analysis to determine whether to accept a particular risk, while in a
treaty arrangement the reinsurer generally relies on the ceding company's credit
analysis. Both treaty and facultative agreements are typically entered into for
a term of one year, subject to a right of termination under certain
circumstances.

Treaty and facultative reinsurance are typically written on either a
proportional or non-proportional basis. Proportional relationships are those in
which the ceding company and the reinsurer share the premiums, as well as the
losses and expenses, of a single risk or group of risks in an agreed percentage.
In addition, the reinsurer generally pays the ceding company a ceding
commission, which is typically related to the ceding company's cost of obtaining
the business being reinsured. Non-proportional reinsurance relationships are
typically on an excess-of-loss basis. An excess-of-loss relationship provides
coverage to a ceding company up to a specified dollar limit for losses, if any,
incurred by the ceding company in excess of a specified threshold amount.

Reinsurers may also, in turn, purchase reinsurance under retrocessional
agreements to cover all or a portion of their own exposure for reasons similar
to those that cause primary insurers to purchase reinsurance.

6

Other Financial Guaranty Insurance Businesses

Radian Asset Assurance provides trade credit reinsurance, which protects
sellers of goods under certain circumstances against non-payment of the
receivables they hold from buyers of those goods. Financial Guaranty covers
receivables both where the buyer and seller are in the same country as well as
cross-border receivables. Sometimes in the latter instance, the coverage extends
to certain political risks (foreign currency controls, expropriation, etc.) that
interfere with the payment from the buyer. As of December 31, 2001, the Company
through its ownership of Financial Guaranty, owned an indirect 36.5% equity
interest in EIC Corporation Ltd. ("Exporters"), an insurance holding company
which through its wholly-owned insurance subsidiary licensed in Bermuda, insures
primarily foreign trade receivables for multinational companies. Financial
Guaranty provides significant reinsurance capacity to this joint venture on a
quota-share, surplus share and excess-of-loss basis.

Financial Guaranty also provides surety and credit insurance to securities
firms mostly in the United States and to exchanges throughout the world. A
primary example of such coverage is excess Securities Investor Protection
Corporation ("SIPC") insurance, whereby Financial Guaranty covers non-investment
related losses (as a result of securities and in some cases cash missing from a
customer's account) of a securities firm's customers covered by SIPC in excess
of the $500,000 covered currently provided by SIPC in the United States.
Premiums written on these types of insurance were $2.8 million during 2001.

MORTGAGE SERVICES

RadianExpress.com Acquisition

On November 9, 2000, the Company acquired RadianExpress, an Iowa
Corporation engaged in the business of Internet-based mortgage processing,
closing and settlement services for approximately $8.0 million, consisting of
cash, the Company's common stock, stock options and other consideration. This
transaction has allowed the Company to expand further into the mortgage service
business, which is considered an important adjunct to both the primary mortgage
insurance business and the second mortgage activities of the Company.
RadianExpress had $16.0 million of other income and $17.4 million of operating
expense, for 2001. RadianExpress processed approximately 402,000 applications
during 2001 with approximately 37,000 of the transactions related to net funding
services, whereby RadianExpress receives and disburses mortgages funded on
behalf of its customers.

Asset-Based Businesses

The Company is engaged in certain asset-based businesses, including the
purchase, servicing and/or securitization of special assets, including
sub-performing/non-performing and seller-financed residential mortgages and
delinquent unsecured consumer assets, which utilizes the Company's expertise in
performing sophisticated analysis of complex, credit-based risks.

The most significant of the asset-based businesses is the Company's 46%
interest in C-BASS, a mortgage investment and servicing firm specializing in
credit sensitive, single-family residential mortgage assets and residential
mortgage-backed securities. C-BASS invests in whole loans, single-family
residential properties that have been, or are being, foreclosed, subordinated
securities, known as "B pieces," collateralized by residential loans and
seller-financed notes. By using sophisticated analytics, C-BASS essentially
seeks to take advantage of what it believes to be the mispricing of credit risk
for certain of these assets in the marketplace. In addition, its residential
mortgage servicing company, Litton Loan Servicing LP, which specializes in loss
mitigation, default collection, collection of insurance claims and guaranty
collections under government-sponsored mortgage programs, services whole loans
and real estate. Litton Loan Servicing's subsidiaries service seller-financed
loans and buy and sell seller-financed loans. As part of its investment
strategy, C-BASS holds some assets on its books, securitizes certain assets and
sells other assets directly into the secondary market.

The Company also owns a 45.5% interest in Sherman, a consumer asset and
servicing firm specializing in purchases of and services related to charged off
and bankruptcy plan consumer assets and charged off high loan to value mortgage
receivables from national financial institutions and major retail corporations.
The consumer assets and mortgage receivables are purchased at deep discounts to
their original face value.

7

In 2000, Financial Guaranty decided to wind down, sell or otherwise dispose
of, its purchase, servicing and/or securitization of state lottery awards,
structured settlements and viatical (life insurance payment) businesses of
Singer Asset Finance Company, L.L.C. and a related subsidiary Enhance Consumer
Services LLC (collectively, "Singer", an entity acquired in connection with the
acquisition of Financed Guaranty. In connection therewith, in October 2000,
Financial Guaranty sold certain assets and intangibles of its viatical
settlements business and in December 2000 and July 2001 it sold to the prior
management thereof certain of its balance sheet and off-balance sheet assets,
including its pipeline of lottery and structured settlement transactions and
certain intangibles.

Singer is currently operating on a run-off basis. Its operations consist of
servicing and/or disposing of Singer's prior originations of non-consolidated
special purpose vehicles.

CUSTOMERS

Mortgage originators, such as mortgage bankers, mortgage brokers,
commercial banks and savings institutions, are the Company's principal
customers, although individual mortgage borrowers generally incur the cost of
primary insurance coverage. The Company does offer lender-paid mortgage
insurance whereby mortgage insurance premiums are charged to the mortgage lender
or loan servicer. On the lender-paid product, the interest rate to the borrower
is usually higher to compensate for the mortgage insurance premium that the
lender is paying. In 2001, approximately 43% of the Company's primary mortgage
insurance was originated on a lender-paid basis. This lender-paid business is
highly concentrated among a few large mortgage lender customers.

To obtain primary insurance from the Company, a mortgage lender must first
apply for and receive a master policy from the Company. The Company's approval
of a lender as a master policyholder is based, among other factors, upon an
evaluation of the lender's financial position and its management's demonstrated
adherence to sound loan origination practices. The Company's quality control
function then monitors the master policyholder based on a number of criteria.

The number of primary individual mortgage insurance policies the Company
had in force was 891,693 at December 31, 2001, 858,413 at December 31, 2000, and
807,286 at December 31, 1999.

The top 10 mortgage insurance customers were responsible for 45.0% of the
Company's primary new insurance written in 2001 compared to 43.4% in 2000 and
44.6% in 1999. The largest single mortgage insurance customer (including
branches and affiliates of such customer), measured by primary new insurance
written, accounted for 12.6% of primary new insurance written during 2001
compared to 11.2 % in 2000 and 12.2% in 1999.

Financial Guaranty's insurance customers consist of many of the major
global financial institutions that participate in municipal bond transactions,
asset-backed securities and other structured products such as collateralized
debt obligations. These institutions are typically large commercial banks or
investment banks. It is the Company's intention to establish a broad
relationship with a limited number of such institutions to help ensure
consistent, high quality deals in the structured product and municipal areas.

Financial Guaranty's reinsurance customers consist primarily of the Major
Monolines-MBIA Insurance Corporation; Ambac Assurance Corporation; Financial
Guaranty Insurance Company; and Financial Security Assurance Inc. In June 2000,
The Dexia Group acquired the corporate parent of Financial Security Assurance.

The Major Monolines were responsible for 42.0% of Financial Guaranty's
gross premiums written in 2001, compared to 43.0% in 2000 and 45.0% in 1999. The
largest single customer of Financial Guaranty, measured by gross premiums
written, accounted for 18.8% of gross premiums written during 2001 compared to
17% in 2000 and 20% in 1999. This customer concentration results from the small
number of primary insurance companies that are licensed to write financial
guaranty insurance.

Financial Guaranty has maintained close and long-standing relationships
with the Major Monolines, dating from either Financial Guaranty's or the given
primary insurer's inception. In the Company's opinion, these relationships
provide Financial Guaranty with a comprehensive understanding of their
procedures and

8

reinsurance requirements and allow the clients to utilize Financial Guaranty's
underwriting expertise effectively, thus improving the service they receive.

Financial Guaranty is a party to facultative and treaty agreements with all
the Major Monolines. Financial Guaranty's facultative and treaty agreements are
generally subject to termination (i) upon written notice (ranging from 90 to 120
days) prior to the specified deadline for renewal, (ii) at the option of the
primary insurer if Financial Guaranty fails to maintain certain financial,
regulatory and rating agency criteria that are equivalent to or more stringent
than those Financial Guaranty's operating subsidiaries are otherwise required to
maintain for their own compliance with the New York Insurance Law and to
maintain a specified claims-paying ability or financial strength rating for the
particular operating subsidiary or (iii) upon certain changes of control. The
Company obtained a waiver of these provisions for the merger transaction between
the Company and Financial Guaranty. Upon termination under the conditions set
forth in (ii) and (iii) above, the Company may be required (under some of their
reinsurance agreements) to return to the primary insurer all unearned premiums,
less ceding commissions, attributable to reinsurance ceded pursuant to such
agreements. Upon the occurrence of the conditions set forth in (ii) above,
unless the agreement is terminated, the Company may be required to obtain a
letter of credit or alternative form of security to collateralize its obligation
to perform under that agreement. In addition, a substantial portion of Radian
Asset Assurance's written business is subject to similar provisions with respect
to any downgrade of its financial strength rating.

SALES, MARKETING AND COMPETITION

Sales and Marketing

The Company employs a mortgage insurance field sales force of approximately
eighty-four (84) persons, organized into three regions, providing local sales
representation throughout the United States. Each of the three regions is
supervised by a regional business manager who is directly responsible for
several area sales managers and several service centers where underwriting and
application processing are performed. The regional business managers are
responsible for managing the profitability of business in their regions
including premiums, losses and expenses. The area sales managers are responsible
for managing a small sales force in different areas within the region. In
addition, a new position of key account manager ("KAM") was created in 2000.
KAMs are intended to manage specific accounts within a region that are not
national accounts but that need more targeted oversight and attention. Mortgage
insurance sales personnel are compensated by salary, commissions on new
insurance written and a production incentive based on the achievement of various
goals. During 2001, these goals were related to volume and market share and this
is generally expected to continue in 2002. In addition to securing business from
small and mid-size regional customers, the mortgage insurance business regions
provide support to the national account effort in the field.

National Accounts. In recognition of the increased consolidation in the
mortgage lending business and the large proportional amount of mortgage business
done by large national accounts, the Company has a focused national accounts
team consisting of five national account managers ("NAM") and a dedicated "A
Team" that is directly and solely responsible for supporting national accounts.
Each NAM is responsible for a select group of dedicated accounts and is
compensated on the results for those accounts as well as the results of the
Company. There has been a trend among national accounts to move to a more
centralized decision about mortgage insurance based on revenue sharing products
and other value added services provided by the mortgage insurance companies. The
Company also has a dedicated NAM who is primarily responsible for relations with
and programs implemented with Fannie Mae and Freddie Mac. National accounts
business represented approximately 52% of the Company's primary new insurance
written in 2001 and is expected to provide a similar percentage in 2002.

The financial guaranty insurance business is derived from relationships
Financial Guaranty has established and maintains with many global financial
institutions and primary insurance companies. These relationships provide
business for Financial Guaranty in the following major areas: (1) deal flow on
municipal bond trading transactions, asset-backed securities and other
structured products; (2) reinsurance for municipal bonds and asset-backed
securities (in which area one or both of Radian Re and Radian Asset Assurance
currently has either treaty or facultative agreements with all but one of the
highest rated monoline primary companies); (3) trade credit reinsurance; and (4)
reinsurance for affiliated-companies (including

9

Exporters). Financial Guaranty markets directly to the monoline insurers writing
credit enhancement business and has direct relationships with their affiliated
primary insurers. Specialist reinsurance intermediaries, most of whom are
located in London, usually present to Financial Guaranty reinsurance
opportunities in the credit insurance sector. These brokers work with Financial
Guaranty marketing personnel in introducing Financial Guaranty to the primary
credit insurance markets and in structuring reinsurance to meet the needs of the
primary insurers. Intermediaries are typically compensated by the reinsurer
based on a percentage of premium assumed, which varies from agreement to
agreement.

Competition

The Company competes directly with six other private mortgage insurers and
with various federal government agencies, principally the Federal Housing
Administration ("FHA"). In addition, the Company and other private mortgage
insurers face competition from state-supported mortgage insurance funds. The
private mortgage insurance industry consists of the Company and six other active
mortgage insurance companies. During 2001, the Company was the fourth largest
private mortgage insurer, measured by market share and had, according to
industry data, a market share of new primary mortgage insurance written of 15.6%
as compared to 15.2% in 2000. The Company believes that the market share
increase was due, in part, to an increase in its share of new insurance written
under structured transactions that are included in industry new insurance
written figures.

Financial Guaranty is subject to competition from companies that specialize
in financial guaranty reinsurance including ACE Limited, Axa Reassurance
Finance, S.A. and RAM Reinsurance Co. Ltd. In addition, several multiline
insurers have recently increased their participation in financial guaranty
reinsurance. Certain of these multiline insurers have formed strategic alliances
with some of the U.S. primary financial guaranty insurers. Competition in the
financial guaranty reinsurance business is based upon many factors, including
overall financial strength, pricing, service and evaluation by the rating
agencies of claims-paying ability or financial strength. The agencies allow
credit to a ceding primary insurer's capital requirements and single-risk limits
for reinsurance ceded in an amount that is a function of the claims-paying
ability or financial strength rating of the reinsurer. The Company believes that
competition from multiline reinsurers and new monoline financial guaranty
insurers will continue to be limited due to (a) the declining number of
multiline insurers with the required financial strength and (b) the barriers to
entry for new reinsurers posed by state insurance law and rating agency criteria
governing minimum capitalization. Financial guaranty insurance, including
municipal bond insurance and the structured business, also competes with other
forms of credit enhancement, including letters of credit, guaranties and credit
default swaps provided primarily by foreign banks and other financial
institutions, some of which are governmental entities or have been assigned the
highest credit ratings awarded by one or more of the major rating agencies.
However, these credit enhancements serve to provide primary insurers with
increased insurance capacity only for rating agency purposes. They do not
qualify as capital for state regulatory purposes, nor do they constitute credit
against specific liabilities that would allow the primary insurer greater
single-risk capacity.

The Company believes that Financial Guaranty has a number of direct
competitors in their other insurance businesses, some of which have greater
financial and other resources than Financial Guaranty. As a primary insurer, the
Company writes insurance on those types of municipal bonds with respect to which
such primary insurers have sometimes declined to participate because of the size
or complexity of such bond issuances relative to the anticipated premium flow
and returns. The Company also serves as a reinsurer for certain specialty
primary insurers that are not monoline financial guaranty insurers. These
specialty primary insurers are themselves subject to competition from other
primary insurers, many of which have greater financial and other resources.

RISK MANAGEMENT

The Company considers effective risk management to be critical to its
long-term financial stability. Market analysis, prudent underwriting, the use of
automated risk evaluation models and quality control are all important elements
of the Company's risk management process. The Company also utilizes Enterprise
Risk Management (ERM) in evaluating its risk. This involves reviewing its
consolidated and interdependent credit

10

risk, market or funding risk, interest rate risk, operational risk, and legal
risk across all of its businesses, and the development of risk adjusted return
on capital models.

Mortgage Insurance Business

Risk Management Personnel

In addition to a centralized Risk Management department in the home office,
each of the Company's mortgage insurance service regions has an assigned Risk
Manager responsible for evaluating risk and monitoring the risk profiles of
major lenders in the region. The Company employs an underwriting and support
staff of approximately ninety (90) persons who are located in Mortgage
Insurance's twelve (12) service centers. Additionally, the Company has two
agency operations in place for the states of Alaska and Hawaii.

Underwriting Process

The Company has generally accepted applications for primary mortgage
insurance (other than in connection with structured transactions) under three
basic programs: the traditional fully documented program, a limited
documentation program and the delegated underwriting program. Programs that
involve less than fully documented file submissions have become more prevalent
in recent years. In order to meet this demand, the Company introduced to the
marketplace the process referred to as Radian Steamlined Doc ("Streamlined
Doc"). A lender utilizing Streamlined Doc can submit loans to the Company for
insurance with abbreviated levels of documentation based on the type of loan
being submitted for insurance. During 2001, 46% of the commitments issued for
primary insurance were received by the Company under the Streamlined Doc
program. In the Streamlined Doc program, the Company has agreed to underwrite
certain loans with less documentation by relying upon a scoring model created by
the Company during 1996 known as the "Prophet Score(R)" System (described
below).

Delegated Underwriting

The Company has a delegated underwriting program with a majority of its
customers. The Company's delegated underwriting program, which was implemented
in 1989, currently involves only lenders that are approved by the Company's risk
management department. The delegated underwriting program allows the lender's
underwriters to commit the Company to insure loans based on agreed upon
underwriting guidelines. Delegated loans are submitted to the Company in various
ways -- fax, electronic data interchange ("EDI") and through the Internet. The
Company routinely audits loans submitted under this program. As of December 31,
2001, approximately 21% of the risk in force on the Company's books was
originated on a delegated basis and during 2001 and 2000, respectively, 37% and
63% of the primary loans insured by the Company during such years were
originated on a delegated basis. This decrease from 2000 is primarily the result
of the increase in insurance written on loans resulting from structured
transactions.

Mortgage Scoring Models

During the last few years, the use of scoring mechanisms to predict loan
performance has become prevalent in the marketplace, especially with the GSEs
advocacy of the use of credit scores in the mortgage loan underwriting process.
The use of credit scores was pioneered by Fair Isaac and Company ("FICO") and
became popular in the mid-1980s. The FICO model calculates a score based on a
borrower's credit history. This credit score based scorecard is used to predict
the future performance of a loan over a one or two year time horizon. The higher
the credit score the lower the likelihood that a borrower will default on a
loan. The Company's Prophet Score begins with a FICO score then adds specific
additional data regarding the borrower, the loan and the property such as LTV,
loan type, loan amount, property type, occupancy status and borrower employment.
The Company believes that it is this additional mortgage data that expands the
integrity of the Company's Prophet Score over the entire life of the loan. In
addition to the Prophet Score, the Company's housing analysts regularly review
major metropolitan areas to assess the impact that key indicators such as
housing permits, employment trends, and median home sale prices have on local
lending. The healthier the real estate market, the lower the risk. The Company
refers to this score as a GEOScore. Beginning in October 1996, the Prophet Score
and GEOScore have appeared on each insurance commitment that Mortgage Insurance
issued.

11

Automated Underwriting

Mortgage Insurance's frontline computer system for input and underwriting
loan file information is called MINACS. In utilizing MINACS, the Company
captures information from all segments of a loan file including the borrower's
employment and income history and appraisal information. This information is
then channeled through various edits and subfiles (including Prophet and
GEOScore) to assist the underwriter in determining the total risk profile on a
given file. This system also includes: a) tracking loans by borrowers who have
previously defaulted on a loan insured by the Company or loans where the Company
has paid a claim, b) identifying borrowers who have previously applied for the
Company insurance, and c) information about the lender involved including
volume, commitment rates and delinquency rates.

Alternative Products

An increasingly popular form of mortgage lending is in the area of
non-prime loans. Subsets of this category in which the Company has become
involved are Alternative A ("Alt A"), A minus and B/C loans. The Company has
continued to limit its participation in these non-prime markets to mostly Alt A
and A minus loans rather than "B or "C" loans and has targeted the business
insured to specific lenders with proven good results and servicing experience in
this area. The Company's corporate due diligence has identified such lenders as
"Tier 1" lenders.

Alternative A Loans

Alt A loans can now be segregated into two distinct credit profiles:
borrowers with a better credit profile than the Company's typical insured
borrowers, with a FICO score greater than 680 ("FICO >680"), and borrowers with
a credit profile equal to the Company's typical insured borrower, with a FICO
score from 660 to 679 ("FICO 660-679"). The Company charges a higher premium for
Alt A business due to the reduced income and/or asset documentation received at
origination. The premium rate is also risk adjusted to reflect the difference in
credit profile of the FICO >680 borrower and FICO 660-679 borrower. While the
Company believes the Alt A loans with a FICO of 660-679 category present a
slightly higher risk than its normal business, the premium surcharge compensates
the Company for this additional risk. Alt A loans represented 9.4% of total
primary risk in force at the end of 2001 and Alt A products made up 18.3% of the
Company's primary new insurance written in 2001 as compared to 13.4% in 2000.

A Minus Loans

The A minus program can also be segregated into two distinct credit
profiles. A "near-miss" prime A loan has a FICO score from 590-619 ("FICO
590-619"). These borrowers were forced into the A minus markets in 1996 when the
GSEs set a 620 FICO score as the base for a prime borrower. These were typically
borrowers the Company insured prior to 1996 and mortgage insurance on loans made
to this class of borrowers has resurfaced as the GSEs have entered the A minus
market. The Company receives a significantly higher premium for insuring this
product that is commensurate with the additional default risk. The second credit
profile contains borrowers with a FICO score from 570-589 ("FICO 570-589"). This
product comes to the Company primarily through primary structured transactions
and the insurance is typically lender-paid. The Company also receives a
significantly higher premium for insuring this product that is commensurate with
the increased default risk and which is normally a variable rate based on the
Prophet Score. A minus loans represented 7.8% of total primary risk in force at
the end of 2001 and A minus loans made up 10.0% of the Company's primary new
insurance written in 2001 as compared to 8.1% in 2000.

B/C Loans

The Company has no approved programs to insure loans that are defined as
B/C risk grades. However, some pools of loans submitted for insurance as primary
structured transactions might contain a limited number of these loans. The
Company receives significantly higher premium on these loans due to the
increased default risk associated with this type of loan. B/C loans represented
approximately 3.6% of total primary new insurance written during 2001 compared
to less than 1% of total primary new insurance written during 2000. This
increase is primarily the result of the increase in insurance written on loans
resulting from structured transactions.

12

Contract Underwriting

The Company utilizes its underwriting skills to provide an outsource
contract underwriting service to its customers. For a fee, the Company
underwrites fully documented underwriting files for secondary market compliance,
while concurrently assessing the file for mortgage insurance, if applicable. The
automated underwriting service introduced in the latter part of 1997 has become
a major part of the Company's contract underwriting service. This service offers
customers access to Fannie Mae's Desktop Underwriter and Freddie Mac's Loan
Prospector loan origination systems. Contract underwriting continues to be a
popular service to mortgage insurance customers. During 2001, loans underwritten
via contract underwriting accounted for 34.5% of applications, 32.0% of
commitments for insurance and 25.8% of insurance certificates issued. The
Company gives recourse to its customers on loans it underwrites for compliance.
If the loan does not meet agreed upon guidelines, the Company agrees to remedy
the situation either by placing mortgage insurance coverage on the loan or by
purchasing the loan. During 2001, the Company processed requests for remedies on
less than 1% of the contract loans underwritten and sold a number of loans
previously acquired as part of the remedy process. Providing these remedies
means the Company assumes some credit risk and interest rate risk if an error is
found during the limited remedy period in the agreements. Rising mortgage
interest rates or an economic downturn may expose the mortgage insurance
business to higher losses. During 2001, the financial impact of these remedies
was insignificant although there is no assurance that such results will continue
in 2002 and beyond.

Quality Control

As part of the Company's system of internal control, the Risk Management
function maintains a Quality Control ("QC") Department. The QC function is
responsible for ensuring that the Company's portfolio of insured loans meets
good underwriting standards and conforms to the Company's guidelines for
insurability, thus minimizing the Company's exposure to controllable risk. Among
its other activities, the QC function accomplishes this objective primarily by
performing contract underwriting audits, delegated lender audits, and due
diligence reviews of structured transactions.

Contract Underwriting Audits

The QC function routinely audits the performance of the Company's contract
underwriters. In order to ensure the most effective use and allocation of audit
resources, a risk assessment model has been developed which identifies high,
medium, and low risk contract underwriters based upon six weighted risk factors
applied to each underwriter. The models are continually updated with current
information. Audit rotation is more frequent for high risk underwriters and less
frequent for those classified as low risk. Audit results are communicated to
management and impact whether additional targeted training is necessary or
whether termination of the underwriter's services is appropriate.

Contract underwriting audits help to ensure that customers receive quality
underwriting services. The audits also protect the Company in that they
facilitate the Company's efforts to improve quality control.

Delegated Lender Audits

Through the use of borrower credit scoring and its own proprietary mortgage
scoring system, the Company is able to monitor the credit quality of loans
submitted for insurance. The Company also conducts a periodic, on-site review of
a delegated lender's insured delegated underwriting business. Lenders with
significant risk concerns, as identified in past reviews and through the
Company's regular risk reporting and analysis of the business, may be reviewed
more frequently.

Loans are selected for review on a random sample basis, and this sample may
be augmented by a targeted sample based upon specific risk factors or trends
identified through the monitoring process described above. The objective of the
loan review is to identify errors in the loan data transmitted to the Company,
to determine lender compliance with the Company's underwriting guidelines and
eligible loan criteria, to assess the quality of a lender's underwriting
decisions, and to rate the risk of the individual loans insured. The Company has
developed a proprietary data collection and risk analysis application to
facilitate these reviews. Audits are graded based upon the risk ratings of the
loans reviewed, lender compliance, and data integrity. The results of each audit
are summarized in a report to the lender and to Company management. The audit
results are used

13

as a means to improve the quality of the business the lender submits to the
Company for insurance. Issues raised in the reports that are not resolved in a
manner and within a time period acceptable to the Company may result in
restriction or termination of the lender's delegated underwriting authority.

Due Diligence of Structured Transactions

The QC function, in conjunction with other members of the Risk Management
group, also performs due diligence of structured transactions. These due
diligence reviews may be precipitated either by a desire to develop an ongoing
relationship with selected lenders, or by the submission of a proposed
transaction by a given lender. Due diligence can take two forms: business level
and loan level.

Business Level Due Diligence

The Company believes that a key component of understanding the risks posed
by a potential business deal is understanding the business partner. The
Company's objective is to understand the lender's business model in sufficient
depth to determine whether the Company should have confidence in the firm as a
potential long-term business partner and customer. Business level due diligence
may be performed on any prospective lender with whom a structured deal is
contemplated and with whom the Company has had no prior business experience.
Business level due diligence includes a review of: the lender's company
structure, management, business philosophy, and financial health, the company's
credit management processes, the quality control processes, and servicing
relations.

Loan Level Due Diligence

Loan level due diligence is conducted on pending structured transactions in
order to determine whether appropriate underwriting guidelines have been adhered
to, whether loans conform to Company guidelines, to evaluate data integrity, and
to detect any fraudulent loans. Loans are selected for audit on a sample basis,
and audit results are communicated to the Company's management. The results of
loan level due diligence assist management in determining whether the pending
deal should be consummated, and if so, provides data that can be used to
determine appropriate pricing. It also provides management with a database of
information on the quality of a particular lender's underwriting practices for
future reference.

The results of these due diligence reviews are summarized in reports to the
Company's management. Letter grades are assigned to each section of the business
and loan level reviews. Weights are then assigned to each section of the review
(e.g., corporate, credit, quality control, servicing) that vary based upon the
product under review, (e.g., prime first liens, A minus first liens, prime
second liens, etc.) which results in an overall letter grade assigned to the
lender. The grade conveys to the Company's management the opinion of Risk
Management as to the overall risk profile presented by a lender and therefore
the relative appeal of a potential relationship with that lender.

Financial Guaranty Business

The Company believes its financial guaranty underwriting discipline is
critical to the profitability and growth of the financial guaranty insurance
businesses. Financial Guaranty has a structured underwriting process to
determine the characteristics and creditworthiness of risks that Financial
Guaranty directly insures or reinsures, which process, in the case of
reinsurance transactions, supplements the underwriting procedures of the primary
insurers. Rather than relying entirely upon the underwriting performed by the
primary insurers, Radian Re and Radian Asset Assurance, as applicable, and the
rating agencies conduct extensive reviews of the primary insurers. Moreover, the
ceding insurer is typically required to retain at least 25% of the exposure on
any single risk assumed.

Financial Guaranty carefully evaluates the risk underwriting and management
of treaty customers, monitors the insured portfolio performance and conducts a
detailed underwriting review of the facultative insurance it writes. Financial
Guaranty believes that the reinsurance of municipal bond guaranties provides a
relatively stable source of premium income. In addition, most premiums received
are credited as deferred premium revenue and are earned as the related risks
amortize, thereby providing a relatively stable, predictable source of earned
premiums.

14

Financial Guaranty conducts periodic detailed reviews of each Major
Monoline and other carriers with which it does facultative business. That review
entails an examination of the primary insurer's operating, underwriting and
surveillance procedures, personnel, organization and existing book of business,
as well as the primary insurer's underwriting of a sample of business assumed
under the treaty. Facultative transactions are reviewed individually under
procedures adopted by Financial Guaranty's credit committees. Any underwriting
issues are discussed internally by the credit committee and with the primary
insurer's personnel. In connection with Financial Guaranty's direct insurance
business, it conducts periodic reviews of its insured parties, whether in
connection with policy renewal or otherwise. That review includes an examination
of the insured party's operations, internal control procedures, personnel and
organization.

Limitations on Financial Guaranty's single-risk exposure derive from state
insurance regulation, rating agency guidelines and internally established
criteria. The primary factor in determining single-risk capacity is the class or
sector of business being underwritten. For municipal credits, Financial Guaranty
has self-imposed single-risk guidelines which range widely, depending upon the
perceived risk of default of the municipal obligation insured or reinsured. For
asset-backed transactions, the single-risk guidelines generally follow state
insurance regulation limitations, as well as additional self-imposed single risk
and cumulative servicer-related risk. On individual underwritings, the credit
committee may limit its insurance or reinsurance participation to an amount
below that allowed by the single-risk guidelines noted above. Moreover,
Financial Guaranty relies on ongoing oversight by its credit committees with
input from risk management and surveillance to avoid undue exposure
concentration in any given type of obligation or geographic area.

Financial Guaranty's surveillance procedures include reviews of those
exposures assumed as a reinsurer as to which it may have concerns. Financial
Guaranty also maintains regular communication with the surveillance departments
of the ceding primary insurers.

The underwriting criteria applied in evaluating a given issue for primary
insurance coverage and the internal procedures (for example, credit committee
review) for approval of the issue are substantially the same as for the
underwriting of reinsurance. The entire underwriting responsibility rests with
Financial Guaranty as the primary insurer. As a result, Financial Guaranty
participates more actively in the structuring of the transaction and conducts
more detailed reviews of the parties it insures in which Financial Guaranty is a
primary insurer than it does as a reinsurer. Financial Guaranty conducts, in
most cases annually, in-depth surveillance of issues insured as a primary
insurer.

RATINGS

The Company has its claims-paying ability and/or financial strength rated
by S&P, Moody's and Fitch. The rating criteria used by the rating agencies focus
on the following factors: capital resources; financial strength; commitment of
management to, and alignment of shareholder interests with, the insurance
business; demonstrated management expertise in the insurance business conducted
by the company; credit analysis; systems development; marketing; capital markets
and investment operations, including the ability to raise additional capital;
and a minimum policyholders' surplus comparable to primary company requirements,
with initial capital sufficient to meet projected growth as well as access to
such additional capital as may be necessary to continue to meet standards for
capital adequacy. As part of their rating process, S&P, Moody's and Fitch test
the Company's insurance subsidiaries by subjecting them to a "worst-case
depression scenario." Expected losses over a depression period are established
by applying capital charges to the existing and projected insurance portfolio.

The claims-paying ability and financial strength ratings assigned by the
rating agencies to an insurance or reinsurance company are based upon factors
relevant to policyholders and are not directed toward the protection of the
insurer's or reinsurer's securityholders. Such a rating is neither a rating of
securities nor a recommendation to buy, hold or sell any security. Claims-paying
ability and financial strength ratings assigned to the insurance subsidiaries
should not be viewed as indicative of or relevant to any ratings which may be
assigned to the Company's outstanding debt securities by any rating agency and
should not be considered an evaluation of the likelihood of the timely payment
of principal or interest under such securities. However, these ratings are an
indication to an insurer's customers of the insurer's present financial strength
and its capacity to honor its future claims payment obligations. Therefore,
ratings are generally considered critical to

15

an insurer's ability to compete for new insurance business. Currently, Radian
Guaranty, Amerin Guaranty, and Radian Insurance are rated "AA" by S&P and Fitch
and "Aa3" by Moody's.

Radian Re is rated by S&P, Fitch and Moody's. S&P and Fitch have each
assigned Radian Re an "AAA" claims-paying ability rating, its highest rating,
and Moody's has assigned Radian Re an "Aa2" financial strength rating. Radian
Asset Assurance has been assigned "AA" claims-paying ability ratings by each of
S&P and Fitch.

Radian Group, Inc., has been assigned a senior debt rating of A+ by Fitch,
A by S&P, and A2 by Moody's.

Pursuant to the terms of Financial Guaranty's reinsurance agreements, a
downgrade in either Radian Re's or Radian Asset Assurance's financial strength
rating to (or below) "A" could have a material adverse effect on their
respective competitive position. A downgrade may so diminish the value of their
reinsurance to the Major Monolines that they could either materially increase
the costs to Radian Re or Radian Asset Assurance associated with cessions under
the Major Monolines' treaties with Radian Re or Radian Asset Assurance or
recapture business previously ceded to Radian Re or Radian Asset Assurance. In
either case, the effect of such changes could materially adversely affect
Financial Guaranty's ability to continue to engage in the reinsurance of
monoline financial guaranty insurers business. While Financial Guaranty believes
that the recapture of business by the primaries would otherwise be inconsistent
with their long-standing risk management practices, such action, if it occurs
and depending on its magnitude, could have a material adverse effect on
Financial Guaranty. In March 2002, S&P changed the outlook for the financial
guaranty reinsurance industry from "stable" to "negative". Although this change
does not represent a downgrade or a credit watch event with respect to Radian Re
specifically, the Company anticipates such change to prompt a more thorough
review of the financial guaranty reinsurance industry, generally, and Radian Re,
specifically. Financial Guaranty believes that the same consequences as set
forth above would occur were Radian Asset Assurance to experience any such
downgrade, which, in turn, could materially adversely affect its ability to
continue to engage in certain specialty businesses, principally insurance of
municipal bonds.

REINSURANCE CEDED

Amerin Guaranty and Radian Guaranty currently use reinsurance from
affiliated companies in order to remain in compliance with the insurance
regulations of certain states that require that a mortgage insurer limit its
coverage percentage of any single risk to 25%. Amerin Guaranty and Radian
Guaranty currently intend to use such reinsurance solely for purposes of such
compliance. Radian Re and Radian Asset Assurance also use reinsurance from
affiliated companies in order to remain in compliance with applicable insurance
regulations, including single risk limitations. Radian Re and Radian Asset
Assurance currently intend to use such reinsurance from affiliated companies
solely for the purpose of such compliance.

Radian Guaranty reinsures all direct insurance in force under an excess of
loss reinsurance program that it considers to be an effective catastrophic
reinsurance coverage. Under this program, the reinsurer is responsible for 100%
of covered losses in excess of Radian Guaranty's retention. The annual retention
is determined by a formula that contains variable components. The estimated 2002
retention is approximately $735 million of loss, which represents 120% of
expected premiums earned by Radian Guaranty. The reinsurer's aggregate annual
limit of liability is also determined by a formula with variable components and
is currently estimated to be $140 million. In addition, in 1999, a limit was set
on the amount of annual pool insurance losses that can be counted in the
reinsurance recoverable calculation. For 2002, this limit is $90 million. If the
reinsurer decides not to renew the reinsurance arrangement and is not replaced
by Radian Guaranty, the reinsurer must provide six years of runoff coverage.
There is an overall aggregate limit of liability applicable to any runoff period
equal to four times the annual limit in effect for the calendar year of such
nonrenewal. For 2002, this aggregate limit is estimated to be $560 million. The
excess of loss reinsurance program also provides restrictions and limitations on
the payment of dividends by Radian Guaranty, investments, mergers or
acquisitions involving other private mortgage insurance companies and
reinsurance of exposure retained by Radian Guaranty. The Company is currently
reviewing this reinsurance program and could replace the provider by 2003.

16

In addition, Radian Guaranty entered into a variable quota-share ("VQS")
treaty for primary risk in the 1994 to 1997 origination years and a portion of
the pool risk written in 1997. In this treaty, quota-share loss relief is
provided at varying levels ranging from 7.5% to 15.0% based upon the loss ratio
on the reinsured book. The higher the loss ratio, the greater the potential
reinsurance relief, which protects Radian Guaranty in adverse loss situations. A
ceding commission is paid by the reinsurer to Radian Guaranty and the agreement
is noncancelable for ten years by either party. As of December 31, 2001, the
risk in force covered by the VQS treaty was approximately $4.0 billion, or
approximately 14.3% of total primary risk in force and $51.4 million, or
approximately 4.1% of total pool risk in force. The Company did not reinsure any
additional business pursuant to the VQS treaty for the 2001 origination year.

Amerin Guaranty was party, until December 31, 2000, to a reinsurance
agreement pursuant to which the reinsurer was obligated to repay, up to an
aggregate amount of $100 million, all losses and allocated loss adjustment
expenses paid by Amerin Guaranty during periods in which (i) the ratio of Amerin
Guaranty's risk in force divided by the sum of policyholders' surplus plus the
contingency reserve calculated in accordance with statutory accounting practices
exceeded 24.9 to 1 and (ii) the sum of Amerin Guaranty's expense ratio and loss
ratio exceeded 100%. This reinsurance treaty was cancelled as of January 1,
2001.

Financial Guaranty is a party to certain facultative retrocession (the
ceding of reinsured business) agreements, pursuant to which it cedes to certain
retrocessionnaires a portion of its reinsurance exposure. Since it is required
to pay its obligations in full to the primary insurer regardless of whether it
is entitled to receive payments from its retrocessionnaire, the Company believes
that it is important that its retrocessionnaires be very creditworthy. The
Company also cedes to reinsurers a portion of its direct insurance exposure, and
the foregoing also describes in general the relationship between the Company and
its reinsurers. Financial Guaranty has historically retroceded relatively little
of its financial guaranty reinsurance exposure for risk management reasons. In
its specialty insurance businesses, Financial Guaranty in recent years has
reinsured a portion of its direct insurance exposure, particularly that incurred
in its excess-SIPC program, principally in order to comply with applicable
regulatory single-risk limitations. Most of the reinsurance capacity for its
excess-SIPC program is provided by certain of the Major Monolines.

Radian Re is party to an excess-of-loss reinsurance agreement with a
reinsurance company under which it is entitled, subject to certain conditions,
to draw from such reinsurer up to $25 million under certain circumstances. The
agreement has a term of one year and is cancelable annually at the option of
either party, except that Radian Re has the option to force a seven-year run-off
period.

In November 2001, Radian Re entered into a credit agreement with a group of
major foreign banks under which Radian Re is entitled, upon reaching a $200
million threshold of losses and subject to certain conditions, to draw from such
banks up to $90 million under certain circumstances. The agreement has an
initial term of seven years and may be extended annually for additional one-year
periods.

In February 2001, Radian Asset Assurance entered into a credit agreement
with a major foreign bank under which Radian Asset Assurance is entitled, upon
reaching a $100 million threshold of losses and subject to certain conditions,
to draw from such bank up to $25 million under certain circumstances. The
agreement has an initial term of seven years and may be extended annually for
additional one-year periods.

CROSS GUARANTY AGREEMENT

A Guaranty Agreement was entered into on August 11, 1999 by Radian Guaranty
and Amerin Guaranty. The agreement provides that in the event Radian Guaranty
fails to make a payment to any of its policyholders, Amerin Guaranty will make
the payment; in the event Amerin Guaranty fails to make a payment to any of its
policyholders, then Radian Guaranty will make the payment. Under the terms of
the agreement, the obligations of both parties are unconditional and
irrevocable; however, no payments will be made without prior approval by the
Pennsylvania Department of Insurance.

DEFAULTS AND CLAIMS

Defaults

The default and claim cycle on loans which have private mortgage insurance
begins with the insurer's receipt from the lender of notification of a default
on an insured loan. The master policy requires lenders to

17

notify the Company of an uncured default on a mortgage loan within 75 days (45
days for an uncured default in the first year of the loan), although many
lenders do so earlier. The incidence of default is affected by a variety of
factors, including change in borrower income, unemployment, divorce and illness,
the level of interest rates and general borrower creditworthiness. Defaults that
are not cured result in claims to the Company. Borrowers may cure defaults by
making all delinquent loan payments or by selling the property and satisfying
all amounts due under the mortgage.

The following table shows the number of primary and pool loans insured,
related loans in default and the percentage of loans in default (default rate)
as of the dates indicated:

DEFAULT STATISTICS

- ---------------
(1) Loans in default exclude those loans 45 days past due or less and loans in
default for which the Company feels it will not be liable for a claim
payment.

(2) Includes traditional and modified pool insurance of prime and non-prime
loans.

Regions of the United States may experience different default rates due to
varying economic conditions. The following table shows the primary mortgage
insurance default rates by the Company's defined regions as of the dates
indicated, including prime and non-prime loans.

DEFAULT RATES BY REGION

As of December 31, 2001, primary mortgage insurance default rates for the
Company's two largest states measured by risk in force, California and Florida,
were 2.9% and 4.6% respectively, compared to 2.3% and 3.9% respectively, at
December 31, 2000.

18

Claims

In the mortgage insurance business, the likelihood that a claim will result
from a default and the amount of such claim depend principally on the borrower's
equity at the time of default and the borrower's (or the lender's) ability to
sell the home for an amount sufficient to satisfy all amounts due under the
mortgage, as well as the effectiveness of loss mitigation efforts. Claims are
also affected by local housing prices, interest rates, unemployment levels and
the housing supply.

Claim activity is not evenly spread through the coverage period of a book
of business. Relatively few claims are received during the first two years
following issuance of the policy. This is followed by a period of rising claims
which, based on industry experience, has historically reached its highest level
in the third through fifth years after the year of loan origination. Thereafter,
the number of claims received has historically declined at a gradual rate,
although the rate of decline can be affected by conditions in the economy.
Approximately 66.9% of total primary risk, including most of the Company's risk
in force on alternative products, and approximately 59.3% of total pool risk in
force at December 31, 2001 had not yet reached its anticipated highest claim
frequency years.

In the financial guaranty business, the Company is typically obligated to
pay amounts equal to defaulted payments on insured obligations on their
respective due dates. In municipal, asset-backed, and other structured products,
the Company primarily underwrites with a zero-loss or remote loss underwriting
objective. As such, the patterns of claim payments tend to fluctuate and may be
low in frequency and high in severity. In trade credit protection, the Company
underwrites and prices to encompass historical loss patterns experienced by the
Company and by ceding companies in similar businesses. The claim payments in
trade credit tend to follow a more historical loss pattern that is reflective of
overall global economic conditions.

Loss Mitigation

The Mortgage Insurance loan workout staff consists of nineteen (19)
employees, including several full time loan workout specialists who proactively
intervene in the default process, working with borrowers to reduce the frequency
and severity of foreclosure losses. The size of the loan workout staff has
decreased over the past few years, primarily due to an enhancement in the
ability of loan servicers to perform this function adequately with less
assistance needed by the Company. Once a notice of default is received, the
Company scores the default using a proprietary model that predicts the
likelihood that the default will become a claim. Using this model the loan
workout specialists prioritize cases for proactive intervention to counsel and
assist borrowers. Loss mitigation techniques include pre-foreclosure sales,
extensions of credit to borrowers to reinstate insured loans, loan modifications
and deficiency settlements. The Company still considers its loss mitigation
efforts to be an effective way to reduce claim payments.

Subsequent to foreclosure, the Company uses post-foreclosure sales and the
exercise of the full claim payment option to further mitigate loss. This was
considered an extremely effective loss mitigation tool in 2001 due to relatively
strong property values, although there can be no assurance that such positive
results will continue.

Financial Guaranty's surveillance group is responsible for detecting any
deterioration in credit quality or changes in the economic or political
environment that could effect the timely payment of debt service on an insured
issue. Once a problem is detected, the group then works with the appropriate
parties in order to avoid a default. Claims are generally mitigated by
restructuring the obligation, enforcing in a timely fashion any security
arrangements, and working with the issuer to solve management or potential
political problems. Issuers are typically under no obligation to restructure
insured issues in order to prevent losses. Financial Guaranty believes that
early detection and continued involvement by the surveillance group has reduced
claims. There can be no assurance, however, that there will be no material
losses in the future regarding Financial Guaranty's business.

Homeownership Counseling

In 1995, Mortgage Insurance established a Homeownership Counseling Center
(the "Center") to work with borrowers receiving insured loans under Community
Homebuyer, 97% LTV ("97s") or other "affordable housing" programs. The Company
considers this counseling to be very important to the future success of those

19

particular borrowers with regard to sustaining their mortgage payments. In
addition, the Center counsels such borrowers early in the default process in an
attempt to help cure the loan and assist the borrower in meeting their mortgage
obligation.

Loss Reserves -- Mortgage Insurance

The Company establishes reserves to provide for the estimated costs of
settling claims in respect of loans reported to be in default and loans that are
in default which have not yet been reported to the Company. Consistent with
accounting principles generally accepted in the United States of America
("GAAP") and industry accounting practices, the Company does not establish loss
reserves for future claims on insured loans which are not currently in default.
In determining the liability for unpaid losses related to reported outstanding
defaults, the Company establishes loss reserves on a case-by-case basis. The
amount reserved for any particular loan is dependent upon the characteristics of
the loan, the status of the loan as reported by the servicer of the insured loan
as well as the economic condition and estimated foreclosure period in the area
in which the default exists. As the default progresses closer to foreclosure,
the amount of loss reserve for that particular loan will be increased, in
stages, to approximately 100% of the Company's exposure.

Loss Reserves -- Financial Guaranty Insurance Businesses

Financial Guaranty establishes a provision for losses and related loss
adjustment expenses as to a particular insured risk when the ceding companies
report a loss on the risk or when, in its opinion, the risk is in default or a
default is probable and the amount of the loss is reasonably estimable.
Financial Guaranty bases the provision for losses and loss adjustment expenses
on the estimated loss, including expenses associated with settlement of the
loss, through the full term of the insured obligation. In the case of
obligations with fixed periodic payments, the provision for losses and loss
adjustment expenses represents the present value of the ultimate expected
losses, adjusted for estimated recoveries under salvage or subrogation rights.
On any given municipal and asset-backed reinsurance transaction, Financial
Guaranty and its primary insurer customers underwrite with a zero-loss
underwriting objective. For the trade credit reinsurance business, loss reserves
are established based on historical loss development patterns experienced by
Financial Guaranty and by ceding companies in similar businesses. The estimate
of reserves for losses and loss adjustment expenses, which includes a
non-specific loss reserve, is periodically evaluated by Financial Guaranty, and
changes in estimate are reflected in income currently.

Financial Guaranty's total unallocated or non-specific loss and loss
adjustment expenses reserve for the financial guaranty business, as of December
31, 2001 is $51.5 million, having been increased from $16.1 million as of
December 31, 2000. Financial Guaranty believes that after giving effect to this
increase, their reserves for losses and loss adjustment expenses, including case
and unallocated or non-specific reserves, are adequate to cover the ultimate net
cost of claims. However, the reserves are necessarily based on estimates, and
there can be no assurance that the ultimate liability will not exceed such
estimates.

As anticipated, Financial Guaranty experienced relatively higher loss
levels in certain of its other insurance businesses than it experienced in its
financial guaranty reinsurance business. Financial Guaranty believes that the
higher premiums they receive in these businesses adequately compensates them for
the risks involved.

At December 31, 2001, Financial Guaranty had established $123.2 million in
net reserves for losses and loss adjustment expenses (of which $58.5 million
represented incurred but not reported and non-specific

20

reserves). The following table sets forth certain information regarding
Financial Guaranty's loss experience for the years indicated:

The provision for losses and paid loss information presented above is
classified as "current year" and "prior year" based upon the year in which the
related reinsurance contract or insurance policy was underwritten. Therefore,
amounts presented as "Occurring in prior years" are not indicative of
redundancies or deficiencies in total reserves held as of prior year ends.

In 2001, 2000 and 1999, Financial Guaranty recorded losses of $24.9
million, $21.9 million and $9.9 million, respectively, in connection with its
trade credit businesses.

Analysis of Primary Risk in Force

The Company's business strategy has been to disperse risk as widely as
possible. The Company analyzes its portfolio in a number of ways to identify any
concentrations or imbalances in risk dispersion. The Company believes the
quality of its insurance portfolio is affected significantly by:

- the geographic dispersion of the properties securing the insured loans;

- the quality of loan originations;

- the types of loans insured (including LTV ratio, purpose of the loan,
type of loan instrument and type of underlying property securing the
loan); and

- the age of the loans insured.

Financial Guaranty seeks to maintain a diversified insurance portfolio
designed to spread its risk based on insurer, type of debt obligation insured,
and geographic concentration.

Primary Risk In Force By Policy Year

The following table sets forth the percentage of the Company's primary
mortgage insurance risk in force by policy origination year as of December 31,
2001:

1996 and prior.............................................. 10.9%
1997........................................................ 5.8
1998........................................................ 16.4
1999........................................................ 17.7
2000........................................................ 13.0
2001........................................................ 36.2
-----
100.0%
=====

21

Geographic Dispersion

The following tables reflect the percentage of direct primary mortgage
insurance risk in force on the Company's book of business (by location of
property) for the top ten states and top 15 metropolitan statistical areas
("MSAs") as of December 31, 2001 and 2000:

The following table sets forth the distribution by state of Financial
Guaranty's insurance in force as a December 31, 2001 and 2000:

- ---------------
(1) Represents all remaining states, the District of Columbia and several
foreign countries, in which obligations insured and reinsured by Financial
Guaranty arise, none of which individually constitutes greater than 3.7% for
2001 and 4.0% for 2000 of Financial Guaranty's insurance in force.

22

Lender and Product Characteristics

While geographic dispersion is an important component of overall risk
dispersion and it has been a strategy of the Company to limit its exposure in
the top ten states and top 15 MSAs, the Company believes the quality of the risk
in force should be considered in conjunction with other elements of risk
dispersion, such as product distribution, as well as the Company's risk
management and underwriting practices.

The following table reflects the percentage of the Company's direct risk in
force (as determined on the basis of information available on the date of
mortgage origination) by the categories indicated as of December 31, 2001 and
2000:

DIRECT MORTGAGE INSURANCE RISK IN FORCE

DIRECT PRIMARY RISK IN FORCE

- ---------------
(1) Includes traditional and modified pool insurance.

(2) Refers to loans where payment adjustments are the same as mortgage interest
rate adjustments.

(3) Loans with potential negative amortization will not have increasing
principal balances unless interest rates increase as contrasted with
scheduled negative amortization where an increase in loan balance will occur
even if interest rates do not change.

One of the most important determinants of claim incidence is the relative
amount of borrower's equity, or down payment, in the home. The expectation of
claim incidence on 95% LTV loans ("95s") is approximately two times the expected
claim incidence on 90s. The Company believes that the higher premium rates it
charges on 95s adequately reflect the additional risk on these loans. The
industry and the Company have been insuring 97s since 1995 and 100% LTV Loans
("100s") since 2000. These loans are expected to have a higher claim incidence
than 95s; however, with proper counseling efforts and by limiting insurance on
these loans to sensible affordable housing programs, it is the Company's belief
that the claim incidence should not be materially (more than one and one-half
times) worse than on 95s, although there can be no assurance that claim
incidence will not be materially worse on 97s or 100s than on 95s. Premium rates
on 100s and 97s are higher than on 95s to compensate for the additional risk and
the higher expected frequency and severity of claims.

In recent years, the Company has increased its insurance on mortgages
identified by its customers as "affordable housing" loans. These loans are
typically made to low- and moderate-income borrowers in conjunction with special
programs developed by state or local housing agencies, Fannie Mae or Freddie
Mac. Such programs usually include 95s, 97s and 100s and may require the
liberalization of certain underwriting guidelines in order to achieve their
objectives. The Company's participation in these programs is dependent upon
acceptable borrower counseling. Default experience on these programs has been
worse than non-"affordable housing" loans; however, the Company does not believe
the ultimate claims will materially affect its financial results due to the
relatively small amount of such business in the Company's insured book combined
with higher premium rates and risk-sharing elements.

The Company believes that the risk of claim on non-prime loans is
significantly higher than that of prime loans. Non-prime loans generally include
Alternative A and A minus products and although higher premium rates and
surcharges are charged in order to compensate for the additional risk, these
products are relatively new and have never been insured in an adverse economic
situation so there is no assurance that the premium rates are adequate or the
loss performance will be at, or close to, expected levels.

The Company's claim frequency on insured ARMs has been higher than on all
other loan types. The Company believes that the risk on ARM loans is greater
than on fixed rate loans due to possible monthly payment increases if interest
rates rise.

The Company believes that 15-year mortgages present a lower level of risk
than 30-year mortgages, primarily as a result of the faster amortization and the
more rapid accumulation of borrower equity in the property. Premium rates for
15-year mortgages are lower to reflect the lower risk.

24

The Company believes that the risk of claim is also affected by the type of
property securing the insured loan. In the Company's opinion, loans on
single-family detached housing are subject to less risk of claim incidence than
loans on other types of properties. Conversely, loans on attached housing types,
particularly condominiums and cooperatives, are generally considered by the
Company to be a higher risk, due to the higher density of such properties and
because a detached unit is the preferred housing type in most areas. The
Company's more stringent underwriting guidelines on condominiums and
cooperatives reflect this higher expected risk.

The Company believes that the risk of claim on relocation loans and loans
originated by credit unions is extremely low and offers lower premium rates on
such loans to compensate for the lower risk.

The Company believes that loans on non-owner occupied homes purchased for
investment purposes represent a substantially higher risk of claim incidence,
and are subject to greater value declines than loans on either primary or second
homes. The Company underwrites loans on non-owner occupied homes more
stringently, and sometimes requires that the investor indemnify the Company
directly for any loss suffered by the Company. The Company also charges a
significantly higher premium rate than the rate charged for insuring loans on
owner occupied homes.

The Company believes that higher priced properties experience wider
fluctuations in value than moderately priced residences and that the income of
many people who buy higher priced homes is less stable than that of people with
moderate incomes. Underwriting guidelines for such higher priced properties
reflect this concern.

The following table sets forth the distribution of Financial Guaranty's
insurance in force by type of issue and as a percentage of total financial
guaranty insurance in force as of December 31, 2001 and 2000:

- ---------------
(1) Represents Financial Guaranty's proportionate share of the aggregate
outstanding principal and interest payable on such insured obligations.

(2) Represents other types of municipal obligations, none of which individually
constitutes a material amount of Financial Guaranty's insurance in force.

25

The following table identifies the issuers of Financial Guaranty's ten
largest single-risk insurance in force by par amounts outstanding as of December
31, 2001 and the credit rating assigned by S&P as of that date (in the absence
of financial guaranty insurance) to each such issuer:

The following table identifies the Financial Guaranty insurance in force
amount outstanding at December 31, 2001 by credit rating assigned by S&P to each
issuer:

INVESTMENT POLICY AND PORTFOLIO

The Company's income from its investment portfolio is one of the Company's
primary sources of cash flow to support its operations and claim payments.

The Company follows an investment policy that at a minimum requires:

- 95% of its investment portfolio to consist of cash equivalents and debt
securities (including redeemable preferred stocks) which, at the date of
purchase, were rated investment grade by a nationally recognized rating
agency (e.g., "BBB" or better by S&P); and

- at least 50% of its investment portfolio to consist of cash, cash
equivalents and debt securities (including redeemable preferred stocks)
which, at the date of purchase, were rated the highest investment grade
by a nationally recognized rating agency (e.g., "AAA" by S&P).

The Company is permitted to invest in equity securities (including
convertible debt and convertible preferred stock), provided its equity component
does not exceed 20% of the total investment portfolio.

At December 31, 2001, the Company's investment portfolio had a carrying
value of $3,369.5 million and a market value of $3,389.2 million, including
$210.8 million of short-term investments. The Company's investment portfolio did
not include any real estate or mortgage loans. The portfolio included 305
privately placed, investment-grade securities with an aggregate carrying value
of $101.1 million. At December 31, 2001,

26

99.4% of the Company's investment portfolio (which excludes cash) consisted of
cash equivalents and debt securities (including redeemable preferred stocks)
that were rated investment grade.

The Company's investment policies and strategies are subject to change
depending upon regulatory, economic and market conditions and the then existing
or anticipated financial condition and operating requirements, including the tax
position, of the Company.

The diversification of the Company's investment portfolio (other than
short-term investments) at December 31, 2001 is shown in the table below:

INVESTMENT PORTFOLIO DIVERSIFICATION

- ---------------
(1) Percentage of amortized cost.

(2) Substantially all of these securities are backed by the full faith and
credit of the U.S. government.

(3) Consists primarily of investment-grade securities.

The following table shows the scheduled maturities of the securities held
in the Company's investment portfolio at December 31, 2001:

INVESTMENT PORTFOLIO SCHEDULED MATURITY(1)

- ---------------
(1) Actual maturities may differ as a result of calls prior to scheduled
maturity.

(2) Substantially all of these securities are backed by the Government National
Mortgage Association ("GNMA") or the Federal National Mortgage Association
("Fannie Mae").

(3) No stated maturity date.

The following table shows the ratings by S&P of the Company's investment
portfolio (other than short-term investments) as of December 31, 2001:

INVESTMENT PORTFOLIO BY S&P RATING

- ---------------
(1) As assigned by S&P as of December 31, 2001.

(2) Securities in this category have been rated non-investment grade by S&P as
of December 31, 2001.

(3) Securities in this category have not been rated by S&P as of December 31,
2001 but have been rated investment grade as of December 31, 2001 by at
least one other nationally recognized securities rating agency.

REGULATION

Direct Regulation

State Regulation

The Company and its insurance subsidiaries are subject to comprehensive,
detailed regulation principally designed for the protection of policyholders,
rather than for the benefit of investors, by the insurance departments in the
various states where the Company and its insurance subsidiaries are licensed to
transact business. Insurance laws vary from state to state, but generally grant
broad supervisory powers to agencies or officials to examine insurance companies
and enforce rules or exercise discretion affecting almost every significant
aspect of the insurance business.

Insurance regulations relate, among other things, to the licensing of
companies to transact business, claims handling, reinsurance requirements,
premium rates and policy forms offered to customers, financial statements,
periodic reporting, permissible investments and adherence to financial standards
relating to

28

surplus, dividends and other criteria of solvency intended to assure the
satisfaction of obligations to policyholders.

Mortgage insurers are generally restricted to writing residential mortgage
guaranty insurance business and financial guaranty insurers are generally
restricted to writing financial guaranty insurance business. The non-insurance
businesses of the Company, which consist of mortgage insurance related services,
are not generally subject to regulation under state insurance laws.

Radian Re and Radian Asset Assurance are domiciled and licensed in the
State of New York as financial guaranty insurers. They are also subject to the
provisions of the New York Insurance Law and related rules and regulations
governing property-casualty insurers to the extent such provisions are not
inconsistent with the financial guaranty insurance statute. Both Radian Re and
Radian Asset Assurance are also licensed under the New York Insurance Law to
write surety insurance, credit insurance and residual value insurance, which are
the only other types of insurance that a financial guaranty insurer licensed
under the New York Insurance Law may be authorized to write.

Each insurance subsidiary is required by its state of domicile and each
other jurisdiction in which it is licensed to make various filings, including
quarterly and annual financial statements prepared in accordance with statutory
accounting practices, with those jurisdictions and with the National Association
of Insurance Commissioners.

Additionally, each insurance subsidiary is subject to detailed regulation
in each of those states, including risk limits, investment restrictions and
diversification requirements.

Each insurance subsidiary must maintain both a reserve for unearned
premiums and for incurred losses and a special, formulaically derived
contingency reserve to protect policyholders against the impact of excessive
losses occurring during adverse economic cycles. Each calculated reserve may be
drawn on with the approval of the New York Insurance Department under specified
but limited circumstances.

Insurance Holding Company Regulation. All states have enacted legislation
that requires each insurance company in an insurance holding company system to
register with the insurance regulatory authority of its state of domicile and to
furnish to such regulator financial and other information concerning the
operations of companies within the holding company system that may materially
affect the operations, management or financial condition of insurers within the
system.

Because the Company is an insurance holding company, Radian Guaranty and
Radian Insurance are Pennsylvania insurance companies, Amerin Guaranty is an
Illinois insurance company, and Radian Re and Radian Asset Assurance are New
York insurance companies, the Pennsylvania, Illinois and New York insurance laws
regulate, among other things, certain transactions in the Company's common stock
and certain transactions between Radian Guaranty, Radian Insurance, Amerin
Guaranty, Radian Re, Radian Asset Assurance, the Company's other insurance
subsidiaries, and their parent or affiliates. Specifically, no person may,
directly or indirectly, offer to acquire or acquire "control" of the Company, or
its insurance subsidiaries, unless such person files a statement and other
documents with the relevant state's Commissioner of Insurance and obtains such
Commissioner's prior approval. The Commissioner may hold a public hearing on the
matter. "Control" is presumed to exist if 10% or more of the Company or its
insurance subsidiaries' voting securities are owned or controlled, directly or
indirectly, by a person, although "control" may or may not be deemed to exist
where a person owns or controls a lesser amount of securities. In addition,
material transactions between the Company and its insurance subsidiaries and
their parent or affiliates are subject to certain conditions, including that
they be "fair and reasonable." These restrictions generally apply to all persons
controlling or under common control with the Company or its insurance
subsidiaries. Certain transactions between the Company's insurance subsidiaries
and their parent or affiliates may not be entered into unless the relevant
Commissioner of Insurance is given 30 days prior notification and does not
disapprove the transaction during such 30-day period.

Dividends. The ability of Radian Guaranty to pay dividends on its common
stock is restricted by certain provisions of the insurance laws of the
Commonwealth of Pennsylvania, its state of domicile. The insurance laws of
Pennsylvania establish a test limiting the maximum amount of dividends that may
be paid without prior approval by the Pennsylvania Insurance Commissioner. Under
such test, Radian Guaranty may pay

29

dividends during any 12-month period in an amount equal to the greater of (i)
10% of the preceding year-end statutory policyholders' surplus or (ii) the
preceding year's statutory net income. In accordance with such restrictions,
$252.8 million would be available for dividends in 2002. However, an amendment
to the Pennsylvania statute requires that dividends and other distributions be
paid out of an insurer's unassigned surplus. Because of the unique nature of the
method of accounting for contingency reserves, Radian Guaranty has negative
unassigned surplus. Thus, prior approval by the Pennsylvania Insurance
Commissioner is required for Radian Guaranty to pay dividends or make other
distributions so long as Radian Guaranty has negative unassigned surplus. The
Pennsylvania Insurance Commissioner has approved all distributions by Radian
Guaranty since the passage of this amendment and management has an expectation
that the Insurance Department will continue to approve such distributions in the
future, provided that the financial condition of Radian Guaranty does not
materially change.

The ability of Amerin Guaranty to pay dividends on its common stock is
restricted by certain provisions of the insurance laws of the State of Illinois,
its state of domicile. The insurance laws of Illinois establish a test limiting
the maximum amount of dividends that may be paid from unassigned surplus by an
insurer without prior approval by the Illinois Insurance Commissioner. Under
such test, Amerin Guaranty may pay dividends during any 12-month period in an
amount equal to the greater of (i) 10 percent of the preceding year-end
statutory policyholders' surplus or (ii) the preceding year's statutory net
income. In accordance with such restrictions, $53.2 million would be available
for dividends in 2002 without prior regulatory approval, which represents the
positive unassigned surplus of Amerin Guaranty at December 31, 2001.

Under the New York Insurance Law, the financial guaranty insurance
subsidiaries may declare or distribute dividends only out of earned surplus. The
maximum amount of dividends, which may be paid by the financial guaranty
insurance subsidiaries without prior approval of the Superintendent of
Insurance, is subject to restrictions relating to statutory surplus and net
investment income as defined by statute. At December 31, 2001, Radian Re would
not be able to pay any dividends in 2002 and Radian Asset Assurance had $13.3
million available for dividends in 2002 without prior approvals. In connection
with the approval of the acquisition of Financial Guaranty, Radian Re and Radian
Asset Assurance agreed to refrain and the Company agreed to refrain from causing
Radian Re and Radian Asset Assurance from paying any dividends for a period of
two years from the date of acquisition of control without the prior written
consent of the New York Insurance Department.

The Company and Radian Guaranty have entered into an agreement, pursuant to
which the Company has agreed to establish and, for as long as any shares of
$4.125 Preferred Stock remain outstanding, maintain a reserve account in an
amount equal to three years of dividend payments on the outstanding shares of
$4.125 Preferred Stock (currently $9.9 million), and not to pay dividends on the
common stock at any time when the amount in the reserve account is less than
three years of dividend payments on the shares of $4.125 Preferred Stock then
outstanding. This agreement between the Company and Radian Guaranty provides
that the holder of the $4.125 Preferred Stock is entitled to enforce the
agreement's provisions as if such holder was signatory to the agreement.

The Company may not pay any dividends on its shares of common stock unless
the Company has paid all accrued dividends on, and has complied with all sinking
fund and redemption obligations relating to, its outstanding shares of $4.125
Preferred Stock.

The Company's current excess of loss reinsurance agreement prohibits the
payment of any dividend that would have the effect of reducing the total of its
statutory policyholders' surplus plus its contingency reserve below $85.0
million. As of December 31, 2001, Radian Guaranty had statutory policyholders'
surplus of $185.3 million and a contingency reserve of $1,348.5 million, for a
total of $1,533.8 million.

Risk to Capital. A number of states limit a private mortgage insurer's
risk in force to 25 times the total of the insurer's policyholders' surplus plus
the statutory contingency reserve, commonly known as the "risk-to-capital"
requirement. As of December 31, 2001, the consolidated risk-to-capital ratio for
Mortgage Insurance was 14.1 to 1, compared to 15.4 to 1 in 2000. The Cross
Guaranty Agreement between Radian Guaranty and Amerin Guaranty makes it
appropriate to look at risk-to-capital on a consolidated basis.

30

Reserves. For statutory reporting, the mortgage insurance companies are
required annually to provide for additions to the contingency reserve in an
amount equal to 50% of earned premiums. Such amounts cannot be withdrawn for a
period of 10 years except under certain circumstances. The contingency reserve,
designed to be a reserve against catastrophic losses, essentially restricts
dividends and other distributions by the mortgage insurance companies. The
mortgage insurance companies classify the contingency reserve as a statutory
liability. At December 31, 2001, Radian Guaranty had policyholders' surplus of
$185.3 million and a contingency reserve of $1,348.5 million and Amerin Guaranty
had policyholders' surplus of $298.8 million. During 2001, Radian Guaranty and
Amerin Guaranty entered into an assumption agreement, whereby Radian Guaranty
assumed 100% of the rights, duties and obligations related to first lien
mortgage guaranty insurance written by Amerin Guaranty. The contingency reserve
of $310.9 million related to these was transferred as well.

In accordance with New York Insurance Law, Financial Guaranty must
establish a contingency reserve, equal to the greater of 50% of premiums written
or a stated percentage of the principal guaranteed, ratably over 15-20 years
dependent upon the category of obligation insured. Reinsurers are required to
establish a contingency reserve equal to their proportionate share of the
reserve established by the primary insurer. At December 31, 2001, Radian Re had
policyholders' surplus of $188.6 million and a contingency reserve of $309.0
million and Radian Asset Assurance had policyholders' surplus of $133.1 million
and a contingency reserve $37.0 million.

Premium Rates and Policy Forms. Mortgage Insurance and Financial
Guaranty's premium rates and policy forms are subject to regulation in every
state in which it is licensed to transact business in order to protect
policyholders against the adverse effects of excessive, inadequate or unfairly
discriminatory rates and to encourage competition in the insurance marketplace.
In most states, premium rates and policy forms must be filed prior to their use.
In some states, such rates and forms must also be approved prior to use. Changes
in premium rates are subject to justification, generally on the basis of the
insurer's loss experience, expenses and future trend analysis. The general
default experience in the mortgage insurance industry may also be considered.

Reinsurance. Certain restrictions apply under the laws of several states
to any licensed company ceding business to an unlicensed reinsurer. Under such
laws, if a reinsurer is not admitted or approved in such states, the company
ceding business to the reinsurer cannot take credit in its statutory financial
statements for the risk ceded to such reinsurer absent compliance with certain
reinsurance security requirements. In addition, several states also have special
restrictions on mortgage insurance and, several states limit the amount of risk
a mortgage insurer may retain with respect to coverage on an insured loan to 25%
of the insured's claim amount. Coverage in excess of 25% (i.e., deep coverage)
must be reinsured.

Examination. The Company's insurance subsidiaries are subject to
examination of their affairs by the insurance departments of each of the states
in which they are licensed to transact business.

New York Circular Letter. The New York Insurance Department (the
"Department") issued Circular Letter No. 2 dated February 1, 1999 (the "Letter")
that discusses their position concerning various transactions between mortgage
guaranty insurance companies licensed in New York and mortgage lenders. The
Letter confirms that captive reinsurance transactions are permissible if they
"constitute a legitimate transfer of risk" and "are fair and equitable to the
parties". The Letter also states that "supernotes/performance notes," "dollar
pool" insurance, and "un-captive captives" violate New York law.

Accreditation. The National Association of Insurance Commissioners has
instituted the Financial Regulatory Accreditation Standards Program, known as
"FRASP," in response to federal initiatives to regulate the business of
insurance. FRASP provides standards intended to establish effective state
regulation of the financial condition of insurance companies. FRASP requires
states to adopt certain laws and regulations, institute required regulatory
practices and procedures, and have adequate personnel to enforce such items in
order to become accredited. In accordance with the National Association of
Insurance Commissioners' Model Law on Examinations, accredited states are not
permitted to accept certain financial examination reports of insurers prepared
solely by the insurance regulatory agency in states not accredited by January 1,
1994. Although the State of New York is not accredited, no states where Radian
Re and Radian Asset Assurance are licensed have refused to accept the New York
Insurance Department's Reports on Examination for Radian Re and Radian Asset
Assurance. However, there can be no assurance that, should the

31

New York Insurance Department remain unaccredited, other states that are
accredited will continue to accept financial examination reports prepared solely
by New York. The Company does not believe that the refusal by an accredited
state to continue accepting financial examination reports prepared by New York,
should that occur, will have a material adverse impact on its insurance
businesses.

Federal Regulation

RESPA. The origination or refinance of a federally regulated mortgage loan
is a settlement service, and therefore subject to the Real Estate Settlement
Practices Act of 1974, and the regulations promulgated thereunder (collectively,
"RESPA"). In December 1992, regulations were issued which stated that mortgage
insurance is also a settlement service, and therefore, that mortgage insurers
are subject to the provisions of Section 8(a) of RESPA, which generally
prohibits persons from accepting anything of value for referring real estate
settlement services to any provider of such services. Although many states
prohibit mortgage insurers from giving rebates, RESPA has been interpreted to
cover many non-fee services as well. HUD's interest in pursuing violations of
RESPA has increased awareness of both mortgage insurers and their customers of
the possible sanctions of this law.

The Company and all of its competitors have been sued in similar actions
alleging violations of RESPA. The Company is contesting the action brought
against it and believes its products and services comply with RESPA, as well as
all other applicable laws and regulations. See "Item 3. Legal Proceedings" below
for further details.

HMDA. Most originators of mortgage loans are required to collect and
report data relating to a mortgage loan applicant's race, nationality, gender,
marital status and census tract to HUD or the Federal Reserve under the Home
Mortgage Disclosure Act of 1975 ("HMDA"). The purpose of HMDA is to detect
possible discrimination in home lending and, through disclosure, to discourage
such discrimination. Mortgage insurers are not required pursuant to any law or
regulation to report HMDA data, although under the laws of several states,
mortgage insurers are currently prohibited from discriminating on the basis of
certain classifications.

The active mortgage insurers, through their trade association, Mortgage
Insurance Companies of America ("MICA"), entered into an agreement with the
Federal Financial Institutions Examinations Council ("FFIEC") to report the same
data on loans submitted for insurance as is required for most mortgage lenders
under HMDA. Reports of HMDA-type data for the mortgage insurance industry have
been submitted by MICA to the FFIEC since 1993. Management is not aware of any
pending or expected actions by governmental agencies in response to the reports
submitted by MICA to the FFIEC.

Mortgage Insurance Cancellation. The Homeowners Protection Act of 1998
(the "Act") was signed into law on July 29, 1998. The Act imposes certain
cancellation and termination requirements for borrower-paid private mortgage
insurance and requires certain disclosures to borrowers regarding their rights
under the law. The Act also requires certain disclosures for loans covered by
lender-paid private mortgage insurance. Specifically, the Act provides that
private mortgage insurance on most loans originated on or after July 29, 1999
may be canceled at the request of the borrower once the LTV reaches 80%,
provided that certain conditions are satisfied. Private mortgage insurance must
be canceled automatically once the LTV reaches 78% (or, if the loan is not
current on that date, on the date that the loan becomes current). The Act
establishes special rules for the termination of private mortgage insurance in
connection with loans that are "high risk". The Act does not define "high risk"
loans but leaves that determination to Fannie Mae and Freddie Mac for loans up
to the conforming loan limit and to the mortgagee for any other loan. For "high
risk" loans above the conforming loan limit, private mortgage insurance must be
terminated on the date that the LTV is first scheduled to reach 77%. In no case,
however, may private mortgage insurance be required beyond the midpoint of the
amortization period of the loan if the mortgagor is current on the payments
required by the terms of the mortgage. The Company feels that the Act will have
an immaterial impact on the persistency of the Company's insured loans, on the
Company's insured book of business, and on the Company's financial results.

32

Other Direct Regulation

Freddie Mac and Fannie Mae

As the most significant purchasers and sellers of conventional mortgage
loans and beneficiaries of private mortgage insurance, Freddie Mac and Fannie
Mae impose requirements on private mortgage insurers so that they may be
eligible to insure loans sold to such agencies. Freddie Mac's current
eligibility requirements impose limitations on the type of risk insured,
standards for the geographic and customer diversification of risk, procedures
for claims handling, acceptable underwriting practices, standards for certain
reinsurance cessions and financial requirements which generally mirror state
insurance regulatory requirements. These requirements are subject to change from
time to time. Fannie Mae also has eligibility requirements, although such
requirements are not published. Radian Guaranty and Amerin Guaranty are approved
mortgage insurers for both Freddie Mac and Fannie Mae.

In January 1999, Fannie Mae announced a new program that allows for lower
levels of required mortgage insurance coverage for low down payment 30-year
fixed rate loans approved through its Desktop Underwriter automated underwriting
system. The insurance levels are similar to those required prior to 1995. Fannie
Mae will replace some of the coverage with a layer of investor mortgage
insurance coverage provided by at least two mortgage insurers, one of which will
be Mortgage Insurance. Fannie Mae also announced that it intends to purchase
additional insurance for certain eligible "Flex 97" and investor loans, and
Mortgage Insurance has been selected to provide this coverage on a pilot basis.
The Company does not believe that these developments will adversely affect the
demand for or the profitability of mortgage insurance in the near future.

The office of Federal Housing Enterprise Oversight issued new risk based
capital regulations for Fannie Mae and Freddie Mac, which take effect September
13, 2002. The most relevant provision to the Company is a distinction between
AAA rated insurers and AA rated insurers. The new regulations would impose a
credit haircut that the GSEs are given for exposure ceded to AAA insurers by
3.5% and to AA insurers by 8.75%. This would be phased in over a ten-year period
commencing on the effective date of the regulation. The Company believes that
this distinction will not have material effect on its business.

Indirect Regulation

The Company is also indirectly, but significantly, impacted by regulations
affecting originators and purchasers of mortgage loans, particularly Freddie Mac
and Fannie Mae, and regulations affecting governmental insurers such as the FHA
and VA. Private mortgage insurers, including Mortgage Insurance, are highly
dependent upon federal housing legislation and other laws and regulations which
affect the demand for private mortgage insurance and the housing market
generally. For example, legislation which increases the number of persons
eligible for FHA or VA mortgages could have a material adverse effect on the
Company's ability to compete with the FHA or VA.

The FHA single family loan limits were raised in the fall of 1998. These
increased loan limits vary by geographic region from $109,032 to $197,620. The
Company does not believe that demand for private mortgage insurance has been or
will be materially adversely affected by this change.

Proposals have been advanced which would allow Fannie Mae and Freddie Mac
additional flexibility in determining the amount and nature of alternative
recourse arrangements or other credit enhancements which they could utilize as
substitutes for private mortgage insurance. The Company cannot predict if or
when any of the foregoing legislation or proposals will be adopted, but if
adopted and depending upon the nature and extent of revisions made, demand for
private mortgage insurance may be adversely affected. There can be no assurance
that other federal laws affecting such institutions and entities will not
change, or that new legislation or regulations will not be adopted. In addition,
Fannie Mae and Freddie Mac have entered into, and may in the future seek to
enter into, alternative recourse arrangements or other enhancements based on
their existing legislative authority.

In the fall of 1998, Freddie Mac proposed to Congress an amendment to its
charter that would have permitted it to substitute other forms of loss
protection for private mortgage insurance. Although the proposed amendment was
defeated, it is not clear what, if any, changes or new products may emerge;
there is a possibility that any changes in this regard may materially affect the
mortgage insurance industry.

33

There can be no assurance that the above-mentioned federal laws and
regulations or other federal laws and regulations affecting lenders, private and
governmental mortgage insurers, or purchasers of insured mortgage loans, will
not be amended, or that new legislation or regulations will not be adopted, in
either case, in a manner which will adversely affect the demand for private
mortgage insurance.

Foreign Regulation

The Company is also subject to certain regulation in various foreign
countries primarily the United Kingdom and Bermuda as a result of its operation
in those jurisdictions.

EMPLOYEES

At December 31, 2001, the Company had 1,194 employees, of which
approximately one-third were located at its Philadelphia headquarters facility,
111 are employees of Financial Guaranty and 90 are employees of RadianExpress.
Approximately 600 employees are classified as contract underwriting employees
and their employment level is commensurate with the level of production activity
in the mortgage industry. The Company's employees are not unionized and
management considers employee relations to be good.

Safe Harbor Statement under the Private
Securities Litigation Reform Act of 1995

The statements contained herein that are not historical facts are
forward-looking statements. Actual results may differ materially from those
projected in the forward-looking statements. These forward-looking statements
involve certain risks and uncertainties including, but not limited to: the
possibility that interest rates may increase rather than remain stable or
decrease; the possibility that housing demand may decrease for any number of
reasons, some of which may be out of the control of the Company, including
changes in interest rates, adverse economic conditions, or other reasons; the
Company's market share may decrease as a result of changes in underwriting
criteria by the Company or its competitors, or other reasons; performance of the
financial markets generally, changes in the demand for and market acceptance of
the Company's products; increased competition from government programs and the
use of substitutes for mortgage insurance; changes in government regulation or
tax laws that may affect one or more of the Company's businesses, changes in
investor perceptions regarding the strength of financial guaranty providers and
the guaranty offered by such providers, changes in investor concern regarding
the credit quality of municipalities and corporations, including the need or
desirability for financial guaranty insurance at all or as an alternative for
other credit enhancement; and changes in general financial conditions. Investors
are also directed to other risks discussed in documents filed by the Company
with the Securities and Exchange Commission.

ITEM 2. PROPERTIES

The Company leases approximately 81,000 square feet for its corporate
headquarters in Philadelphia under leases that expire between 2003 and 2006. In
addition, it leases space for its Regional, Service Center and on-site offices
throughout the United States comprising approximately 36,000 square feet with
leases expiring between 2002 and 2004, and space for RadianExpress in Ohio
comprising approximately 25,000 square feet, with leases expiring in 2003.
Financial Guaranty leases 121,093 square feet of space for its operations in New
York with leases expiring in 2015. It also leases additional space for its
Florida and UK operations. With respect to all facilities, the Company believes
it will be able to obtain satisfactory lease renewal terms.

The Company believes its existing properties are well utilized and are
suitable and adequate for its present circumstances.

The Company currently maintains four data centers and two hotsites to
support its businesses. Over the next two years, the Company will be replacing
its legacy systems that currently support accounting, claims, risk management,
underwriting and other non-insurance operations. The Company's strategic
direction for all new system development is to deploy 100% web based custom or
off the shelf software on a Unix and Windows 2000 platform. PeopleSoft Financial
Systems are currently installed and operational for Financial Guaranty and will
be implemented through the Company during 2002 and 2003. In addition, the
Company will be building a new data center in Dayton, Ohio, which is expected to
be fully operational in 2002. Two

34

separate fiber optic feeds will serve this data center. The center is cabled for
two separate power grids and has sufficient diesel standby generator power to
power the data center and personal work areas for critical staff. The home
office in Philadelphia will become the hotsite for all operations. Over the next
two years, the Company will migrate its operations from the current New York
site to the data center in Ohio and the two existing hotsites to the
Philadelphia hotsite. This will ensure 24/7/365 availability at the Dayton site
and full business recovery capability at the Philadelphia data center.

ITEM 3. LEGAL PROCEEDINGS

In December 2000, a complaint seeking class action status on behalf of a
nationwide class of home mortgage borrowers was filed against the Company in the
United States District Court for the Middle District of North Carolina
(Greensboro Division). The complaint alleges that the Company violated Section 8
of the Real Estate Settlement Procedures Act ("RESPA") which generally prohibits
the giving of any fee, kickback or thing of value pursuant to any agreement or
understanding that real estate settlement services will be referred. The
complaint asserts that the pricing of pool insurance, captive reinsurance,
contract underwriting, performance notes and other, unidentified "structured
transactions," should be interpreted as imputed kickbacks made in exchange for
the referral of primary mortgage insurance business, which, according to the
complaint, is a settlement service under RESPA. The complaint seeks injunctive
relief and damages of three times the amount of any mortgage insurance premiums
paid by persons who were referred to the Company pursuant to the alleged
agreement or understanding. The plaintiffs in the lawsuit are represented by the
same group of plaintiffs' lawyers who filed similar lawsuits against other
providers of primary mortgage insurance in federal court in Georgia. The Georgia
court dismissed those lawsuits for failure to state a claim. Three of those
lawsuits were settled prior to appeal; two were appealed. The Court of Appeals
has reversed the dismissal of one of the two appealed cases and has yet to
decide the other. The Company responded to the complaint by filing a motion to
dismiss, which was granted in part, denied in part. The plaintiffs have since
filed an amended complaint to which the Company has again filed a motion to
dismiss. Because this case is at a very early stage, it is not possible to
evaluate the likelihood of an unfavorable outcome or to estimate the amount or
range of potential loss. A similar action focusing on pool insurance was filed
in February 2001 in the United States District Court for the Eastern District of
Texas. The Company's motion to dismiss that case is pending.

In addition to the above, the Company is involved in certain litigation
arising in the normal course of its business. The Company is contesting the
allegations in each other such pending action and believes, based on current
knowledge and after consultation with counsel, that the outcome of such
litigation will not have a material adverse effect on the Company's consolidated
financial position and results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted during the fourth quarter of 2001 to a vote of
holders of the Company's common stock.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Information with respect to this item is included on page 47 of the
Company's 2001 Annual Report to Stockholders under the caption "Common Stock"
and is hereby incorporated by reference.

ITEM 6. SELECTED FINANCIAL DATA

The information set forth in the table on page 15 of the Company's 2001
Annual Report to Stockholders under the caption "Selected Financial and
Statistical Data" is hereby incorporated by reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The information set forth on pages 39 through 46 in the Company's 2001
Annual Report to Stockholders under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition" is hereby
incorporated by reference.

35

ITEM 7A. QUANTITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

The information set forth on page 46 in the Company's 2001 Annual Report to
Stockholders under the caption "Management's Discussion and Analysis of Results
of Operations and Financial Condition -- Quantitative and Qualitative
Disclosures about Market Risk" is hereby incorporated by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated statements of income, of changes in common stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 2001, and the related consolidated balance sheets of the Company as
of December 31, 2001 and 2000, together with the related notes thereto, the
report on management's responsibility and the independent auditors' report, as
well as the unaudited quarterly financial data, all set forth on pages 16
through 38 of the Company's 2001 Annual Report to Stockholders, are hereby
incorporated by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information on the directors and executive officers of the Registrant
is included in the Company's Proxy Statement for the 2002 Annual Meeting of
Stockholders under the captions, "ELECTION OF DIRECTORS", "EXECUTIVE OFFICERS OF
THE COMPANY" and "Section 16(a) Beneficial Ownership Reporting Compliance", and
is hereby incorporated by reference.

ITEM 11. EXECUTIVE COMPENSATION

This information is included in the Company's Proxy Statement for the 2002
Annual Meeting of Stockholders under the caption "COMPENSATION OF DIRECTORS AND
EXECUTIVE OFFICERS", and is hereby incorporated by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

This information is included in the Company's Proxy Statement for the 2002
Annual Meeting of Stockholders under the caption "SECURITY OWNERSHIP OF
MANAGEMENT AND CERTAIN BENEFICIAL OWNERS", and is hereby incorporated by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

This information is included in the Company's Proxy Statement for the 2002
Annual Meeting of Stockholders under the caption "CERTAIN TRANSACTIONS", and is
hereby incorporated by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. Financial statements -- The financial statements listed in the
accompanying Index to Consolidated Financial Statements and
Financial Statement Schedules are incorporated by reference from the
Company's 2001 Annual Report to Stockholders into Item 8 of Part II
of this Form 10-K.

2. Financial statement schedules -- The financial statement schedules
listed in the accompanying Index to Consolidated Financial
Statements and Financial Statement Schedules are filed as part of
this Form 10-K.

3. Exhibits -- The exhibits listed in the accompanying Index to
Exhibits are filed as part of this Form 10-K.

(b) Reports on Form 8-K.

36

The Company has filed the following reports on Form 8-K since September 30,
2001:

(i) On November 8, 2001, the Company filed a Current Report on Form 8-K
reporting the Company's announcement on November 7, 2001 that it
extended the expiration of its exchange offering for $250 million of
its 7.75% Debentures due 2011, which were privately placed under Rule
144A, for $250 million of its 7.75% Debentures due 2011, that have
been registered under the Securities Act of 1933, to 5:00 p.m. eastern
standard time on November 26, 2001.

(ii) On November 27, 2001, the Company filed a Current Report on Form 8-K
reporting the Company's announcement on November 26, 2001, that its
exchange offering for $250,000,000 of its 7.75% Debentures due 2011,
which were privately placed under Rule 144A for $250,000,000 worth of
7.75% Debentures due 2011, that have been registered under the
Securities Act of 1933 expired at 5:00 p.m. eastern standard time on
November 26, 2001, $249,000,000 of its 7.75% Debentures due 2011,
which were privately placed under Rule 144A were exchanged for a like
amount of 7.75% Debentures due 2011, that have been registered under
the Securities Act of 1933.

(c) The response to Item 14(c) is contained in Item 14(a)(3) above.

(d) The response to Item 14(d) is contained in pages F-1 through F-6 of
this Form 10-K.

37

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(ITEMS 14(a) 1 AND 2)

All other schedules are omitted because the required information is not
present or is not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements and notes thereto.

38

INDEX TO EXHIBITS
(ITEM 14(a) 3)

- ---------------
* Filed herewith.

(1) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Registration Statement on Form S-1 filed
August 24, 1992 and amendments thereto (File No. 33-51188).

(2) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.

(3) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998.

(4) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999.

(5) Incorporated by reference filed in the Registrant's Registration Statement
on Form S-8 filed November 20, 1997 (File No. 333-40623).

(6) Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c) of Form 10-K.

(7) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in Amerin Corporation's Registration Statement on Form S-1
(File No. 33-97514).

(8) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Registration Statement on Form S-4 filed
May 6, 1999 (File No. 333-77957).

(9) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Registration Statement on Form S-4 filed
December 27, 2000 (File No. 333-52762).

(10) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Registration Statement on Form S-4 filed
July 19, 2001, and any amendment thereto (File No. 333-65440).

(11) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in Enhance Financial Services Group Inc.'s Registration
Statement on Form S-1 filed December 18, 1992, and any amendment thereto
(File no. 33-55958).

(12) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000.

(13) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Annual Report on Form 10-K for the year ended December
31, 1996 of Enhance Financial Services Group Inc.

(14) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Quarterly Report on Form 10-Q for the period ended
June 30, 1999, of Enhance Financial Services Group Inc.

(15) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit to Enhance Financial Services Group Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1999.

(16) Incorporated by reference to the annex identified in parentheses, filed as
an annex to Enhance Financial Services Group Inc.'s Schedule 14A filed with
the Securities and Exchange Commission on May 5, 1998.

41

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 29, 2002.

Radian Group Inc.

By: /s/ FRANK P. FILIPPS
------------------------------------
Frank P. Filipps
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 29, 2002 by the following persons on
behalf of the registrant and in the capacities indicated.

43

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Radian Group Inc.
Philadelphia, Pennsylvania

We have audited the consolidated financial statements of Radian Group Inc.,
(the "Company") as of December 31, 2001 and 2000, and for each of the three
years in the period ended December 31, 2001, and have issued our report thereon
dated March 15, 2002; such consolidated financial statements and reports are
included in your 2001 Annual Report to Stockholders and are incorporated herein
by reference. Our audits also included the financial statement schedules of
Radian Group Inc., listed in Item 14. These financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.

/s/ Deloitte & Touche LLP

Philadelphia, Pennsylvania
March 15, 2002

F-1

RADIAN GROUP INC.

SCHEDULE I
SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2001

F-2

RADIAN GROUP INC.

SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
PARENT COMPANY ONLY

F-3

RADIAN GROUP INC.

SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME
PARENT COMPANY ONLY

F-4

RADIAN GROUP INC.

SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
PARENT COMPANY ONLY

F-5

RADIAN GROUP INC.

SCHEDULE VI -- REINSURANCE
MORTGAGE INSURANCE PREMIUMS EARNED
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

F-6

This document has been printed entirely on recycled paper.