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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

(Mark One)

For the fiscal year ended December 31, 2004

OR

For the transition period from                      to                     

Commission file number 1-11356

RADIAN GROUP INC.

(Exact name of registrant as specified in its charter)

(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. ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES x NO ¨

State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $4,477,392,000, which amount excludes the value of all shares beneficially owned (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) by executive officers and directors of the registrant (however, this does not constitute a representation or acknowledgment that any such individual 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: 88,446,515 shares of Common Stock, $.001 par value, outstanding on March 3, 2005.

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

All statements in this report that address operating performance, events or developments that we expect or anticipate may occur in the future are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the U.S. Private Securities Litigation Reform Act of 1995. These statements are made on the basis of management’s current views and assumptions with respect to future events. The forward-looking statements, as well as our prospects as a whole, are subject to risks and uncertainties including those described below. You also should refer to the risks discussed in other documents we file with the SEC. We do not intend to and disclaim any duty or obligation to update or revise any forward-looking statements made in this report to reflect new information or future events or for any other reason.

Risks Affecting Our Company

Deterioration in general economic factors may increase our loss experience and decrease demand for mortgage insurance and financial guaranties.

Our business tends to be cyclical and tends to track general economic and market conditions. Our loss experience on the mortgage and financial guaranty insurance we write is subject to general economic factors that are beyond our control and that we cannot anticipate, including extended national economic recessions, interest rate changes or volatility, business failures, the impact of terrorist attacks or acts of war, or changes in investor perceptions regarding the strength of private mortgage insurers or financial guaranty providers and the policies or guaranties they offer. Deterioration of general economic conditions, such as increasing unemployment rates, negatively affects our mortgage insurance business by increasing the likelihood that borrowers will not pay their mortgages. Factors affecting individual borrowers, such as divorce or illness, also impact the ability of borrowers to continue to pay their mortgages. Our financial guaranty business also is impacted by adverse economic conditions due to the impact or perceived impact these conditions may have on the credit quality of municipalities and corporations. The same events that increase our loss experience in each business also generally lead to decreased activity in the market for mortgages and financial obligations, leading to decreased demand for our mortgage insurance or financial guaranties. An increase in our loss experience or a decrease in demand for our products due to adverse economic factors could have a material adverse effect on our business, financial condition and operating results.

Because our business is geographically concentrated, deterioration in regional economic factors could increase our losses or reduce demand for our insurance.

Much of our business is concentrated in relatively few states, which increases our vulnerability to economic downturns in those states. A majority of our primary mortgage insurance in force is concentrated in ten states, with the highest percentage being in California, Florida, New York and Texas. A large percentage of our second mortgage insurance in force is concentrated in California. The recent low mortgage interest rate environment has generated increased refinancing of mortgage loans. Refinancing activity could cause increased concentration of our mortgage insurance in force in economically weaker areas because mortgage loans in areas experiencing low property value appreciation are more likely to require mortgage insurance upon refinancing than are loans in areas experiencing high property value appreciation. Our financial guaranty business also has a significant portion of its insurance in force concentrated in a small number of states, principally including New York, California, Texas and Florida, and is vulnerable to weakening economic conditions, catastrophic events, or acts of terrorism in those states.

A downgrade or potential downgrade of the insurance financial strength ratings assigned to any of our operating subsidiaries could weaken its competitive position.

The insurance financial strength ratings assigned to our subsidiaries may be downgraded by one or more of S&P, Moody’s or Fitch if they believe that we or the applicable subsidiary has experienced adverse

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developments in our business, financial condition or operating results. These ratings are important to our ability to market our products and to maintain our competitive position and customer confidence in our products. A downgrade in these ratings could have a material adverse effect on our business, financial condition and operating results. Our subsidiaries had been assigned the following ratings as of the date of this report:

If the financial strength ratings assigned to any of our mortgage insurance subsidiaries were to fall below “Aa3” from Moody’s or the “AA-” level from S&P and Fitch, then national mortgage lenders and a large segment of the mortgage securitization market, including Fannie Mae and Freddie Mac, generally would not purchase mortgages or mortgage-backed securities insured by that subsidiary. A downgrade of the ratings assigned to our financial guaranty subsidiaries would limit the desirability of their respective direct insurance products and would reduce the value of Radian Asset Assurance’s reinsurance, even to the point where primary insurers may be unwilling to continue to cede insurance to Radian Asset Assurance. In addition, many of Radian Asset Assurance’s reinsurance agreements give the primary insurers the right to recapture business ceded to Radian Asset Assurance under these agreements, and in some cases the right to increase commissions charged to Radian Asset Assurance, if Radian Asset Assurance’s insurance financial strength rating is downgraded below specified levels. Accordingly, Radian Asset Assurance’s competitive position and prospects for future financial guaranty reinsurance opportunities would be damaged by a downgrade in its ratings. For example, downgrades that occurred in October 2002 and in May 2004 triggered these recapture rights. As a result of the May 2004 downgrade, two of the primary insurer customers of the financial guaranty reinsurance business had the right to recapture previously written business ceded to our financial guaranty business. One of these customers has agreed, without cost to or concessions by us, to waive its recapture rights. On November 8, 2004, the remaining primary insurer customer with recapture rights notified us of its intent to recapture, effective February 28, 2005, $6.4 billion of par in force that it had ceded to our financial guaranty business through December 31, 2004. In March of 2005, without cost to or concessions by us, this customer waived its remaining right to recapture $5.2 billion of additional par in force that it had ceded to our financial guaranty business through December 31, 2004.

An increase in our subsidiaries’ risk-to-capital or leverage ratios may prevent them from writing new insurance.

Rating agencies and state insurance regulators impose capital requirements on our subsidiaries. These capital requirements include risk-to-capital ratios, leverage ratios and surplus requirements that limit the amount of insurance that these subsidiaries may write. For example, Moody’s and S&P have entered into an agreement with Radian Guaranty that obligates Radian Guaranty to maintain specified levels of capital in Radian Insurance as a condition of the issuance and maintenance of Radian Insurance’s ratings. A material reduction in the statutory capital and surplus of a subsidiary, whether resulting from underwriting or investment losses or otherwise, or a disproportionate increase in risk in force, could increase a subsidiary’s risk-to-capital ratio or leverage ratio. This in turn could limit that subsidiary’s ability to write new business or require that subsidiary to lower its ratios by obtaining capital contributions from us, reinsuring existing business or reducing the amount of new business it writes, which could have a material adverse effect on our business, financial condition and operating results.

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If the estimates we use in establishing loss reserves for our mortgage insurance or financial guaranty business are incorrect, we may be required to take unexpected charges to income and our ratings may be lowered.

We establish loss reserves in both our mortgage insurance and financial guaranty businesses to provide for the estimated cost of claims. However, our loss reserves may be inadequate to protect us from the full amount of claims we may have to pay. Setting our loss reserves involves significant reliance on estimates of the likelihood, magnitude and timing of anticipated losses. The models and estimates we use to establish loss reserves may prove to be inaccurate, especially during an extended economic downturn. Further, if our estimates are inadequate, we may be forced by insurance and other regulators or rating agencies to increase our reserves, which could result in a downgrade of our insurance financial strength ratings. Failure to establish adequate reserves or a requirement that we increase our reserves could have a material adverse effect on our business, financial condition and operating results.

In our mortgage insurance business, we generally do not establish reserves until we are notified that a borrower has failed to make at least two payments when due. Once two payments have been missed, we establish a loss reserve by using historical models based on a variety of loan characteristics, including the status of the loan as reported by the servicer of the loan, economic conditions, the estimated amount recoverable by foreclosure and the estimated foreclosure period in the area where a default exists. These reserves are therefore based on a number of assumptions and estimates that may prove to be inaccurate.

It is even more difficult to estimate the appropriate loss reserves for our financial guaranty business because of the nature of potential losses in that business. We establish both case and non-specific reserves for losses. We increase case reserves when we determine that a default has occurred. We also establish non-specific reserves to reflect deterioration of our insured credits for which we have not provided specific reserves.

In January and February of 2005, we discussed with the SEC staff, both separately and together with other members of the financial guaranty industry, the differences in loss reserve practices followed by different financial guaranty industry participants. We understand from those discussions that the Financial Accounting Standards Board staff is considering whether additional accounting guidance is necessary to address the financial guaranty industry. When and if the FASB or the SEC reaches a conclusion on this issue, we and the rest of the financial guaranty industry may be required to change some aspects of our accounting policies. If the FASB or the SEC were to determine that we should account for our financial guaranty contracts differently, for example by requiring them to be treated solely as one or the other of short-duration or long-duration contracts under SFAS No. 60, this determination could impact our accounting for loss reserves, premium revenue and deferred acquisition costs, all of which are covered by SFAS No. 60. Management is unable to estimate what impact, if any, the ultimate resolution of this issue will have on our financial condition or operating results.

Our success depends on our ability to assess and manage our underwriting risks.

Our mortgage insurance and financial guaranty premium rates may not adequately cover future losses. Our mortgage insurance premiums are based upon our expected risk of claims on insured loans, and take into account, among other factors, each loan’s loan-to-value ratio (or “LTV”), type, term, occupancy status and coverage percentage. Similarly, our financial guaranty premiums are based upon our expected risk of claim on the insured obligation, and take into account, among other factors, the rating and creditworthiness of the issuer of the insured obligations, the type of insured obligation, the policy term and the structure of the transaction being insured. In addition, our premium rates take into account expected cancellation rates, operating expenses and reinsurance costs, as well as profit and capital needs and the prices that we expect our competitors to offer. We generally cannot cancel the mortgage insurance or financial guaranty insurance coverage we provide and, because we generally fix premium rates for the life of a policy when issued, we cannot adjust renewal premiums or otherwise

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adjust premiums over the life of a policy. If the risk underlying a particular mortgage insurance or financial guaranty coverage develops more adversely than we anticipate, or if national and regional economies undergo unanticipated stress, we generally cannot increase premium rates on in-force business or cancel coverage to mitigate the effects of these adverse developments. Despite the analytical methods we employ, our premiums earned and the associated investment income on those premiums may ultimately prove to be inadequate to compensate for losses we may incur. This could have a material adverse effect on our business, financial condition and operating results.

Our success depends on our ability to manage our investment risks.

Our income from our investment portfolio is one of our primary sources of cash flow to support our operations and claim payments. If we incorrectly calculate our policy liabilities, or if we improperly structure our investments to meet those liabilities, we could have unexpected losses, including losses resulting from forced liquidation of investments before their maturity. Our investments and investment policies and those of our subsidiaries are subject to state insurance laws, and may change depending upon regulatory, economic and market conditions and the existing or anticipated financial condition and operating requirements, including the tax position, of our business segments.

We cannot assure you that our investment objectives will be achieved. Although our portfolio consists primarily of highly rated investments that comply with applicable regulatory requirements, the success of our investment activity is affected by general economic conditions, which may adversely affect the markets for interest-rate-sensitive securities, including the extent and timing of investor participation in these markets, the level and volatility of interest rates and, consequently, the value of our fixed-income securities. Volatility or illiquidity in the markets in which we directly or indirectly hold positions could have a material adverse effect on our business, financial condition and operating results.

As a holding company, we depend on our subsidiaries’ ability to transfer funds to us to pay dividends and to meet our obligations.

We act primarily as a holding company for our insurance subsidiaries and do not have any significant operations of our own. Dividends from our subsidiaries and permitted payments to us under our tax sharing arrangements with our subsidiaries, along with income from our investment portfolio and dividends from our affiliates (C-BASS and Sherman), are our principal sources of cash to pay stockholder dividends and to meet our obligations. These obligations include our operating expenses and interest and principal payments on debt. The payment of dividends and other distributions to us by our insurance subsidiaries is regulated by insurance laws and regulations. In general, dividends in excess of prescribed limits are deemed “extraordinary” and require insurance regulatory approval. In addition, our insurance subsidiaries’ ability to pay dividends to us, and our ability to pay dividends to our stockholders, is subject to various conditions imposed by the rating agencies for us to maintain our ratings. If the cash we receive from our subsidiaries pursuant to dividend payment and tax-sharing arrangements is insufficient for us to fund our obligations, we may be required to seek capital by incurring additional debt, by issuing additional equity or by selling assets, which we may be unable to do on favorable terms, if at all. The need to raise additional capital or the failure to make timely payments on our obligations could have a material adverse effect on our business, financial condition and operating results.

Our reported earnings are subject to fluctuations based on quarterly changes in our credit derivatives that require us to adjust their fair market value as reflected on our income statement.

Our financial guaranty business includes the provision of credit enhancement in the form of derivative financial guaranty contracts. The gains and losses on these derivative financial guaranty contracts are derived from internally generated models, which may differ from other models. We estimate fair value amounts using market information, to the extent available, and valuation methodologies that we deem appropriate. The gains and losses on assumed derivative financial guaranty contracts are provided by the primary insurance companies. Considerable judgment is required to interpret available market data to develop the estimates of fair value.

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Accordingly, our estimates are not necessarily indicative of amounts we could realize in a current market exchange, due to, among other factors, the lack of a liquid market. Temporary market changes as well as actual credit improvement or deterioration in these contracts are reflected in the mark-to-market gains and losses. Because these adjustments are reflected on our income statement, they affect our reported earnings and create earnings volatility even though they might not have a cash flow effect.

The performance of our strategic investments could harm our financial results.

Part of our business involves strategic investments in other companies, and we generally do not have control over the way that these companies run their day-to-day operations. At December 31, 2004, we had investments in affiliates of $393.0 million. The performance of our strategic investments could be harmed by:

In addition, our ability to engage in additional strategic investments is subject to the availability of capital and maintenance of our insurance financial strength ratings.

We may not be able to effectively manage our growth.

We seek to expand our business internationally and into new markets. International expansion often requires the receipt of foreign regulatory approval that may be difficult to obtain. Our expansion into new markets presents us with different risks and management challenges. We may not be able to effectively manage new operations or successfully integrate them into our existing operations, which could have a material adverse effect on our business, financial condition and operating results.

Our business could be harmed if members of our senior management team or other key personnel terminate their employment with us.

Our future success depends, to a significant extent, upon the continued services of our senior management team and other key employees. In particular, our Chairman and Chief Executive Officer, Frank P. Filipps, is scheduled to retire on or before June 30, 2005. We cannot assure you that we will be able to identify and retain a suitable replacement for Mr. Filipps in a timely manner. The loss of Mr. Filipps’ services or those of one or more of the other members of our senior management team or other key personnel could have a material adverse effect on our business and our prospects.

Our business may suffer if we are unable to meet our customers’ technological demands.

Participants in the mortgage insurance and financial guaranty industries rely on e-commerce and other technologies to provide and expand their products and services. Our customers generally require that we provide aspects of our products and services electronically, and the percentage of our new insurance written and claims processing that we deliver electronically has increased. We expect this trend to continue and, accordingly, we may be unable to satisfy our customers if we fail to invest sufficient resources or otherwise are unable to maintain and upgrade our technological capabilities.

Our information technology systems may not be configured to process information regarding new and emerging products.

Many of our information technology systems have been in place for a number of years, and many of them originally were designed to process information regarding traditional products. As products such as reduced

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documentation or interest only mortgages with new features emerge, or when we insure structured transactions with unique features, our systems may require modification in order to recognize these features to allow us to price or bill for our insurance of these products appropriately. Our systems also may not be capable of recording, or may incorrectly record, information about these products that may be important to our risk management and other functions. In addition, our customers may encounter similar technological issues that prevent them from sending us complete information about the products or transactions that we insure. Making appropriate modifications to our systems involves inherent time lags and may require us to incur significant expenses. An inability to make necessary modifications to our systems in a timely and cost-effective manner may have adverse effects on our business, financial condition and operating results.

Risks Particular to Our Mortgage Insurance Business

Because our mortgage insurance business is concentrated among relatively few major customers, our revenues could decline if we lose any significant customer.

Our mortgage insurance business depends on a small number of customers. Our top ten mortgage insurance customers are generally responsible for approximately half of both our primary new insurance written in a given year and our direct primary risk in force, based on the aggregate principal amount of the mortgage loans we insure multiplied by the coverage percentage. This concentration of business may increase as a result of mergers of those customers or other factors. Our master policies and related lender agreements do not, and by law cannot, require our mortgage insurance customers to do business with us. The loss of business from even one of our major customers could have a material adverse effect on our business, financial condition and operating results.

A large portion of our mortgage insurance risk in force consists of loans with high loan-to-value ratios and loans that are non-prime, or both, which generally result in more and larger claims than loans with lower loan-to-value ratios and prime loans.

We generally provide private mortgage insurance on mortgage products that have more risk than conforming mortgage products. A large portion of our mortgage insurance in force consists of insurance on mortgage loans with LTVs at origination of more than 90%. LTV is the ratio of the original loan amount to the value of the property. Mortgage loans with LTVs greater than 90% are expected to default substantially more often than those with lower LTVs. In addition, when we are required to pay a claim on a higher LTV loan, it is generally more difficult to recover our costs from the underlying property, especially in areas with declining property values. Also, a large portion of our mortgage insurance in force is on adjustable-rate mortgage loans, which generally have higher default rates than fixed-rate loans.

We insure non-prime loans, which are more likely to go into default and require us to pay claims. The majority of the non-prime loans we insure are loans, known as “Alt-A” loans, which have credit scores commensurate with prime loans but are processed with reduced or no documentation. Alt-A loans also tend to have larger loan balances relative to our other loans. Our other non-prime loans are “A minus” or “B/C” loans, which enable borrowers with substandard credit histories to obtain mortgages and mortgage insurance. Due to competition for prime loan business from lenders offering alternative arrangements, such as simultaneous second mortgages, which sometimes are referred to as “80-10-10 loans,” a large percentage of our mortgage insurance in force is written on non-prime loans, which we believe to be the largest area for growth in the private mortgage insurance industry. In 2004, non-prime business accounted for $16.4 billion or 36.6% of our new primary mortgage insurance written (61.9% of which was Alt-A), compared to $27.4 billion or 40.1% in 2003 (73.0% of which was Alt-A). At December 31, 2004, non-prime insurance in force was $35.7 billion or 31.0% of total primary insurance in force, compared to $37.8 billion or 31.5% of primary insurance in force at December 31, 2003. Although we historically have limited the insurance of these non-prime loans to those made by lenders with good results and servicing experience in this area, because of the lack of data regarding the performance of non-prime loans, and our relative inexperience in insuring these loans, we may fail to estimate default rates properly and may incur larger losses than we anticipate, which could have a material adverse effect on our

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business, financial condition and operating results. Further, we cannot assure you that the increased premiums that we charge for mortgage insurance on non-prime loans will be adequate to compensate us for the losses we incur on these products.

Some of our mortgage insurance products are riskier than traditional mortgage insurance.

We offer pool mortgage insurance, which exposes us to different risks than the risks applicable to primary mortgage insurance. Our pool mortgage insurance products generally cover all losses in a pool of loans up to our aggregate exposure limit, which generally is between 1% and 10% of the initial aggregate loan balance of the entire pool of loans. Under pool insurance, we could be required to pay the full amount of every loan in the pool within our exposure limits that is in default and upon which a claim is made until the aggregate limit is reached, rather than a percentage of the loan amount as is the case with traditional primary mortgage insurance. At December 31, 2004, $2.4 billion of our mortgage insurance risk in force was attributable to pool insurance.

In addition, we insure interest-only mortgages, where the borrower pays only the interest charge on a mortgage for a specified period of time, usually five to ten years, after which the loan payment increases to include principal payments. These loans may have a heightened propensity to default because of possible “payment shocks” after the initial low-payment period expires and because the borrower does not automatically build equity as payments are made.

We also write credit insurance on non-traditional, mortgage-related assets such as second mortgages, home equity loans and mortgages with LTVs above 100%, provide credit enhancement to mortgage-related capital market transactions such as net interest margin securities, and have in the past and may again write credit insurance on manufactured housing loans. These types of insurance generally have higher claim payouts than traditional mortgage insurance products. We have less experience writing these types of insurance and less performance data on this business, which could lead to greater losses than we anticipate. Greater than anticipated losses could have a material adverse effect on our business, financial condition and operating results.

An increasing concentration of servicers in the mortgage lending industry could lead to disruptions in the servicing of mortgage loans that we insure, resulting in increased delinquencies.

We depend on reliable, consistent third-party servicing of the loans that we insure. A recent trend in the mortgage lending and mortgage loan servicing industry has been toward consolidation of loan servicers, particularly with respect to “specialized” servicing such as for manufactured housing loans. This reduction in the number of servicers could lead to disruptions in the servicing of mortgage loans covered by our insurance policies, which in turn could contribute to a rise in delinquencies among those loans and could have a material adverse effect on our business, financial condition and operating results.

We face the possibility of higher claims as our mortgage insurance policies age.

Historically, most claims under private mortgage insurance policies on prime loans occur during the third through fifth year after issuance of the policies, and under policies on non-prime loans during the second through fourth year after issuance of the policies. Low mortgage interest rate environments tend to lead to increased refinancing of mortgage loans and to lower the average age of our mortgage insurance policies. On the other hand, increased interest rates tend to reduce mortgage refinancings and cause a greater percentage of our mortgage insurance risk in force to reach its anticipated highest claim frequency years. In addition, periods of growth tend to reduce the average age of our policies, and the relatively recent growth of our non-prime mortgage insurance business means that a significant percentage of our insurance in force on non-prime loans has not yet reached its anticipated highest claim frequency years. If the growth of our new business were to slow or decline, a greater percentage of our total mortgage insurance in force could reach its anticipated highest claim frequency years. A resulting increase in claims could have a material adverse effect on our business, financial condition and operating results.

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Our revenues from mortgage insurance depend on the renewals of policies that policyholders instead may terminate or fail to renew.

Most of our mortgage insurance premiums each month have been derived from the monthly renewal of policies that we previously have written. Recently, the rate of nonrenewal has been very high. Factors that could cause an increase in nonrenewals of our mortgage insurance policies include falling mortgage interest rates (which tends to lead to increased refinancings and associated cancellations of mortgage insurance), appreciating home values, and changes in the mortgage insurance cancellation requirements applicable to mortgage lenders and homeowners. A decrease in the length of time that our mortgage insurance policies remain in force reduces our revenues and could have a material adverse effect on our business, financial condition and operating results.

Our delegated underwriting program may subject our mortgage insurance business to unanticipated claims.

In our mortgage insurance business, we permit many of our mortgage lender customers to commit us to insure loans using pre-established underwriting guidelines. Once we accept a lender into our delegated underwriting program, we generally insure a loan originated by that lender even if the lender has not followed our specified underwriting guidelines. Under this program, a lender could commit us to insure a material number of loans with unacceptable risk profiles before we discover the problem and terminate that lender’s delegated underwriting authority. Even if we terminate a lender’s underwriting authority, we remain at risk for any loans previously insured on our behalf by the lender before that termination. The performance of loans insured through programs of delegated underwriting has not been tested over a period of extended adverse economic conditions, meaning that the program could lead to greater losses than we anticipate. Greater than anticipated losses could have a material adverse effect on our business, financial condition and operating results.

We face risks associated with our contract underwriting business.

As part of our mortgage insurance business, we provide contract underwriting services to some of our mortgage lender customers, even with respect to loans for which we are not providing mortgage insurance. If we make mistakes in connection with these underwriting services, in some cases the mortgage lender may require us to purchase the loans or issue mortgage insurance on the loans, or to indemnify it against future loss associated with the loans. Accordingly, we assume some credit risk and interest rate risk if we make an error. In a rising interest rate environment, the value of loans that we are required to repurchase could decrease, and consequently, our costs of those repurchases could increase. In 2004, we underwrote $6.7 billion in principal amount of loans through contract underwriting. If the independent contractors who we rely on to perform contract underwriting for us make more mistakes than we anticipate, the resulting need to provide greater than anticipated recourse to mortgage lenders could have a material adverse effect on our business, financial condition and operating results.

If housing values fail to appreciate, we may be less able to recover amounts paid on defaulted mortgages.

If a borrower defaults under our standard mortgage insurance policy, generally we have the option of paying the entire loss amount and taking title to a mortgaged property or paying our coverage percentage in full satisfaction of our obligations under the policy. In the strong housing market of recent years, we have been able to take title to the properties underlying many defaulted loans and to sell the properties quickly at prices that have allowed us to recover most or all of our losses. If housing values fail to appreciate or begin to decline, our ability to mitigate our losses on defaulted mortgages may be reduced, which could have a material adverse effect on our business, financial condition and operating results.

Our mortgage insurance business faces intense competition from other mortgage insurance providers and from alternative products.

The United States mortgage insurance industry is highly dynamic and intensely competitive. Our competitors include:

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In addition, there are an increasing number of alternatives to traditional private mortgage insurance, and new alternatives may develop, which could reduce the demand for our mortgage insurance. Existing alternatives include:

Much of the competition described above is directed at prime loans, which has led us to shift more of our business to insuring riskier, non-prime loans. The inability to compete with other providers and alternatives, or increased losses that may result from insuring more non-prime loans, could have a material adverse effect on our business, financial condition and operating results.

Because many of the mortgage loans that we insure are sold to Fannie Mae and Freddie Mac, changes in their business practices could significantly impact our mortgage insurance business.

Fannie Mae and Freddie Mac are the beneficiaries of the majority of our mortgage insurance policies, so their business practices have a significant influence on us. Changes in their practices could reduce the number of policies they purchase that are insured by us and consequently reduce our revenues. Some of Fannie Mae and Freddie Mac’s more recent programs require less insurance coverage than they historically have required, and they have the ability to further reduce coverage requirements, which could reduce demand for mortgage insurance and have a material adverse effect on our business, financial condition and operating results.

Fannie Mae and Freddie Mac also have the ability to implement new eligibility requirements for mortgage insurers and to alter or liberalize underwriting standards on low-down-payment mortgages they purchase. We cannot predict the extent to which any new requirements may be enacted or how they may affect the operations of our mortgage insurance business, our capital requirements and our products.

Additionally, Fannie Mae and Freddie Mac could decide to differentiate between mortgage insurance companies rated “AAA” rather than “AA” based on risk-based capital regulations issued by the Office of Federal Housing Enterprise Oversight that took effect in 2002. Such a decision could impair our “AA”-rated subsidiaries’ ability to compete with “AAA”-rated companies (of which there currently is one) and could have a material adverse effect on our business, financial condition and operating results.

Legislation and regulatory changes and interpretations could harm our mortgage insurance business.

Our business and legal liabilities may be affected by the application of existing federal or state consumer lending and insurance laws and regulations, or by unfavorable changes in these laws and regulations. For

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example, recent regulatory changes have reduced demand for private mortgage insurance by increasing the maximum loan amount that the Federal Housing Administration can insure and reducing the premiums it charges. Also, we have been subject to consumer lawsuits alleging violations of the provisions of the Real Estate Settlement Procedures Act (“RESPA”) that prohibit the giving of any fee, kickback or thing of value under any agreement or understanding that real estate settlement services will be referred. In addition, proposed changes to the application of RESPA could harm our competitive position. The U.S. Department of Housing and Urban Development (“HUD”) proposed an exemption under RESPA for lenders that, at the time a borrower submits a loan application, give the borrower a firm, guaranteed price for all the settlement services associated with the loan, commonly referred to as “bundling.” In 2003, HUD withdrew the proposed rule and submitted another rule to the Office of Management and Budget, the contents of which have not yet been made public. If bundling is exempted from RESPA, mortgage lenders may have increased leverage over us and the premiums we are able to charge for mortgage insurance could be negatively affected.

Our international mortgage insurance operations subject us to numerous risks.

We have committed and may in the future commit additional significant resources to expand our international operations, particularly in the United Kingdom. We also are in the process of applying to commence operations in Hong Kong. Accordingly, we are subject to a number of risks associated with our international business activities, including:

Any one or more of the risks listed above could render us unable to develop our international operations profitably.

Risks Particular to Our Financial Guaranty Business

Our financial guaranty business may subject us to significant risks from the failure of a single company, municipality or other entity whose obligations we have insured.

The breadth of our financial guaranty business exposes us to potential losses in a variety of our products as a result of a credit problem at one counterparty. For example, we could be exposed to an individual corporate credit risk in multiple transactions if the credit is contained in multiple portfolios of collateralized debt obligations that we have insured, or if one counterparty (or its affiliates) acts as the originator or servicer of the underlying assets or loans backing any of the structured securities that we have insured. Although we track our

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aggregate exposure to single counterparties in our various lines of business and have established underwriting criteria to manage aggregate risk from a single counterparty, we cannot assure you that our ultimate exposure to a single counterparty will not exceed our underwriting guidelines, due to merger or otherwise, or that an event with respect to a single counterparty will not cause a significant loss in one or more of the transactions in which we face risk to such counterparty. In addition, because we insure and reinsure municipal obligations, we can have significant exposures to individual municipal entities, directly or indirectly through explicit or implicit support of related entities. Even though we believe that the risk of a complete loss on some municipal obligations generally is lower than for corporate credits because some municipal bonds are backed by taxes or other pledged revenues, a single default by a municipality could cause a significant lack of liquidity or could result in a large or even complete loss that could have a material adverse effect on our business, financial condition and operating results.

Our financial guaranty business is concentrated among relatively few major customers, meaning that our revenues could decline if we lose any significant customer.

Our financial guaranty business derives a significant percentage of its annual gross premiums from a small number of customers. A loss of business from even one of our major customers could have a material adverse effect on our business, financial condition and operating results. As a result of a downgrade by S&P in October 2002, one of the few primary insurer customers of our financial guaranty reinsurance business exercised its right, effective in the first quarter of 2004, to recapture substantially all of the financial guaranty insurance ceded to us. After excluding the effect of this recapture, one single customer of our financial guaranty business accounted for over 15.2% of the premiums by our financial guaranty business in 2004. In November of 2004, as a result of a ratings downgrade in May 2004 associated with the merger of our principal financial guaranty operating subsidiaries, another customer of our financial guaranty reinsurance business exercised its right, effective February 28, 2005, to recapture significant reinsurance ceded to us. Further downgrades could trigger similar recapture rights in our other primary insurer customers, or we may lose a customer for other reasons, which could have a material adverse effect on our business, financial condition and operating results.

Some of our financial guaranty products are riskier than traditional guaranties of public finance obligations.

In addition to the traditional guaranties of public finance bonds, we write guaranties involving structured finance transactions that expose us to a variety of complex credit risks, and indirectly to market, political and other risks beyond those that generally apply to financial guaranties of public finance obligations. We issue financial guaranties connected with certain asset-backed transactions and securitizations secured by one or a few classes of assets, such as residential mortgages, auto loans and leases, credit card receivables and other consumer assets, obligations under credit default swaps, both funded and synthetic, and in the past have issued financial guaranties covering utility mortgage bonds and multi-family housing bonds. We also provide trade credit reinsurance, which protects sellers of goods under certain circumstances against non-payment of their accounts receivable. These guaranties expose us to the risk of buyer nonpayment, which could be triggered by many factors, including the failure of a buyer’s business. These guaranties may cover receivables where the buyer and seller are in the same country as well as cross-border receivables. In the case of cross-border transactions, we sometimes grant coverage that effectively provides coverage to losses that could result from political risks, such as foreign currency controls and expropriation, which could interfere with the payment from the buyer. Losses associated with these non-public finance financial guaranty products are extremely difficult to predict accurately, and a failure to properly anticipate those losses could have a material adverse effect on our business, financial condition and operating results.

We may be forced to reinsure greater risks than we desire due to adverse selection by ceding companies.

A portion of our financial guaranty reinsurance business is written under treaties that generally give the ceding company some ability to select the risks that they cede to us within the terms of the treaty. There is a risk

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under these treaties that the ceding companies will decide to cede to us exposures that have higher rating agency capital charges or that the ceding companies expect to be less profitable, which could have a material adverse effect on our business, financial condition and operating results. We attempt to mitigate this risk in a number of ways, including requiring ceding companies to retain a specified minimum percentage on a pro-rata basis of the ceded business, but we cannot assure you that our mitigation attempts will succeed.

Our financial guaranty business faces intense competition.

The financial guaranty industry is highly competitive. The principal sources of direct and indirect competition are:

Competition in the financial guaranty reinsurance business is based on many factors, including overall financial strength, financial strength ratings, pricing and service. The rating agencies allow credit to a ceding company’s capital requirements and single risk limits for reinsurance ceded in an amount that is in part determined by the financial strength rating of the reinsurer. Some of our competitors have greater financial resources than we have and are better capitalized than we are and/or have been assigned higher ratings by one or more of the major rating agencies. In addition, the rating agency could change the level of credit they will allow a ceding company to take for our and/or similarly rated reinsurers. An inability to compete for desirable financial guaranty business could have a material adverse effect on our business, financial condition and operating results.

Legislation and regulatory changes and interpretations could harm our financial guaranty business.

The laws and regulations affecting the municipal, asset-backed and trade credit debt markets, as well as other governmental regulations, could be changed in ways that subject us to additional legal liability or affect the demand for the primary financial guaranty insurance and reinsurance that we provide. Any such change could have a material adverse effect on our business, financial condition and operating results.

Changes in tax laws could reduce the demand for or profitability of financial guaranty insurance, which could harm our business.

Any material change in the U.S. tax treatment of municipal securities, or the imposition of a “flat tax” or a national sales tax in lieu of the current federal income tax structure in the United States, could adversely affect the market for municipal obligations and, consequently, reduce the demand for related financial guaranty insurance and reinsurance. For example, the Jobs and Growth Tax Relief Reconciliation Act of 2003, enacted in

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May 2003, significantly reduced the federal income tax rate for individuals on dividends and long-term capital gains. This tax change may reduce demand for municipal obligations and, in turn, may reduce the demand for financial guaranty insurance and reinsurance of these obligations by increasing the comparative yield on dividend-paying equity securities. Future potential changes in U.S. tax laws, including current efforts to eliminate the federal income tax on dividends, might also affect demand for municipal obligations and for financial guaranty insurance and reinsurance of those obligations.

We may be unable to develop or sustain our financial guaranty business if it cannot obtain reinsurance or other forms of capital.

In order to comply with regulatory, rating agency and internal capital and single risk retention limits as our financial guaranty business grows, we need access to sufficient reinsurance or other capital capacity to underwrite transactions. The market for reinsurance recently has become more concentrated because several participants have exited the industry. If we are unable to obtain sufficient reinsurance or other forms of capital, we may be unable to issue new policies and grow our business.

The merger of Radian Reinsurance with and into Radian Asset Assurance exposes us to risks.

In June 2004, we merged Radian Reinsurance, which primarily had conducted our financial guaranty reinsurance business, with and into Radian Asset Assurance, which primarily conducted our financial guaranty direct insurance business. The merger combined the assets and liabilities of the two companies, creating one larger company. Our reinsurance customers may view the combined entity as more of a competitor and a threat to their business and prospects because Radian Asset Assurance not only reinsures their obligations, but also could directly insure larger obligations in competition with them. As a result, any of our reinsurance customers could:

Consequently, we may experience a reduction in the number of transactions entered into, the premiums received and/or the premium rate relative to the insurance exposure on future transactions or in future reinsurance premiums written and earned.

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Part I

General

Radian Group Inc. is a credit enhancement provider to the global financial and capital markets. Our subsidiaries provide products and services through three primary business lines: mortgage insurance, financial guaranty and other financial services. Our mortgage insurance business provides private mortgage insurance and risk management services to mortgage lending institutions. Our financial guaranty business provides guaranties for full and timely payment of principal and interest when due, to the holders of public and structured finance obligations and provides credit protection in the form of credit default swaps, and reinsures public finance, structured finance and trade credit obligations. Our financial services business consists primarily of our 46% ownership interest in Credit-Based Asset Servicing and Securitization LLC – a mortgage investment and servicing firm specializing in credit-sensitive, single-family residential mortgage assets and residential mortgage-backed securities – and our 41.5% interest in Sherman Financial Services Group LLC – a consumer asset and servicing firm specializing in charged-off and bankruptcy plan consumer assets. The following table shows the percentage contributions to net income attributable to each of these businesses in 2004:

Our strategic objective is to be a diversified global credit enhancement and financial services company focused on returns on risk-adjusted equity. The key components of this strategy are to:

We began conducting business as CMAC Investment Corporation, a Delaware corporation, following our spin-off from Commonwealth Land Title Insurance Company through an initial public offering on November 6, 1992. On June 9, 1999, we merged with Amerin Corporation and were renamed Radian Group Inc. As further described below, on February 28, 2001, we acquired Enhance Financial Services Group Inc., principally a provider of financial guaranty insurance and reinsurance. Our principal executive offices are located at 1601 Market Street, Philadelphia, Pennsylvania 19103, and our telephone number is (215) 564-6600.

We maintain a website with the address www.radian.biz. We are not including or incorporating by reference the information contained on our website into this report. We make available on our website, free of charge and as soon as reasonably practicable after filing with the SEC, copies of our most recently filed Annual Report on Form 10-K and all Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed during each year, including all amendments to those reports. In addition, copies of our guidelines of corporate governance, code of business conduct and ethics (which includes the code of ethics applicable to our chief executive officer, principal financial officer and principal accounting officer) and the governing charters for the audit, compensation, executive, governance and investment committees of our board of directors are available free of charge on our website, as well as in print to any stockholder upon request.

Mortgage Insurance Business

We provide private mortgage insurance and risk management services to mortgage lending institutions located throughout the United States and select countries overseas through our wholly owned subsidiaries, Radian Guaranty Inc. (“Radian Guaranty”), Radian Insurance Inc. (“Radian Insurance”) and Amerin Guaranty

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Corporation (“Amerin Guaranty”). Private mortgage insurance protects mortgage lenders from all or a portion of 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 these mortgage loans in the secondary mortgage market, principally to Freddie Mac and Fannie Mae (which we sometimes refer to as Government Sponsored Enterprises or “GSEs”). Our mortgage insurance business, through Radian Guaranty, offers primary and pool private mortgage insurance coverage on residential, first-lien mortgages. At December 31, 2004, primary insurance on first-lien mortgages made up 88.3% of our total mortgage insurance risk in force and pool insurance on first-lien mortgages made up 7.8% of our total mortgage insurance risk in force. We use Radian Insurance to provide credit enhancement for mortgage-related capital market transactions and to write credit insurance on mortgage-related assets that monoline mortgage guaranty insurers are not permitted to insure, including second mortgages, home equity loans, net interest margin securities (“NIMs”), international insurance transactions and mortgages with loan-to-value ratios above 100%. We also insure second-lien mortgages through Amerin Guaranty. At December 31, 2004, the risk in force of Radian Insurance and Amerin Guaranty represented 3.9% of our total mortgage insurance risk in force.

Premium Rates

We cannot change our premium rates after we issue coverage. Accordingly, we determine premium rates in our mortgage insurance business on a risk-adjusted basis that includes borrower, loan and property characteristics. We use proprietary default and prepayment models to project the premiums we should charge, the losses and expenses we should expect to incur and the capital we need to hold in support of our risk. We establish pricing in an amount that we expect will allow a reasonable return on allocated capital. We insure mortgages either on an individual basis, which we refer to as “flow business,” or on a group basis, which we refer to as “structured business.” We generally price our borrower-paid flow business based on rates that we have filed with the various state insurance departments. We generally price our structured business and some lender-paid insurance based on the specific characteristics of the insured portfolio, which can vary significantly from portfolio to portfolio depending on a variety of factors including the quality of the underlying loans, the credit history of the borrowers, the amount of coverage required and the amount, if any, of credit protection in front of our risk exposure.

Primary Mortgage Insurance

We provide primary mortgage insurance on both a flow basis and a structured basis. Primary mortgage insurance provides mortgage default protection on prime and non-prime mortgages at a specified coverage percentage. When there is a claim, the coverage percentage is applied to the claim amount – which consists of the unpaid loan principal, plus past due interest and certain expenses associated with the default – to determine our maximum liability. Upon a claim or foreclosure, we have three basic settlement options as described in “Defaults and Claims – Claims.” In 2004, we wrote $44.8 billion of primary mortgage insurance of which 81.1% was originated on a flow basis and 18.9% was originated on a structured basis, compared to $68.4 billion of primary mortgage insurance written in 2003 of which 72.4% was originated on a flow basis and 27.6% was originated on a structured basis.

Persistency rates, defined as the percentage of insurance in force that remains on a company’s books after any 12-month period, are a key indicator for the primary mortgage insurance industry. Because most of our insurance premiums are earned over time, higher persistency rates enable us to recover our policy acquisition costs and then start earning a profit on the business. Therefore, higher persistency rates tend to increase the profitability for a mortgage insurer. On the other hand, high persistency rates also can indicate that mortgage insurance risk in force is concentrated in borrowers who are less able to eliminate their private mortgage insurance through refinancing or home value appreciation. These borrowers may be riskier because they may have relatively low credit scores or reside in geographic areas experiencing relatively poor economic conditions or stagnant home values. At December 31, 2004, the persistency rate of our primary mortgage insurance was 58.8%, compared to 46.7% at December 31, 2003. Both of these figures are low relative to historical levels and reflect the high levels of refinancing in the mortgage market.

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Pool Insurance

We offer pool insurance on a selective basis. Pool insurance differs from primary insurance in that our maximum liability is not limited to a specific coverage percentage on each individual prime or non-prime mortgage in an insured pool of mortgages. Instead, an aggregate exposure limit, or “stop loss,” generally between 1% and 10%, is applied to the pool’s initial aggregate loan balance. We also write modified pool insurance, which has a stop loss feature as well as an exposure limit on each individual loan. An insured pool of mortgages may contain mortgages with and without primary mortgage insurance, and the pool insurance is secondary to any primary mortgage insurance that exists on mortgages within the pool.

We write the majority of our pool insurance in the form of credit enhancement on mortgage loans included in mortgage-backed securities, whole loan sales and other structured transactions. This form of pool insurance has a very low stop loss, generally 1.0% to 1.5% of the pool’s initial aggregate loan balance. We include both our pool insurance on mortgages as well as our pool insurance on other mortgage-related assets in our financial results and other statistics related to our pool insurance.

Premium rates on pool insurance business are generally lower than primary mortgage insurance rates. Because of the generally lower premium rates and lack of exposure limits on individual loans associated with much of our pool insurance, the rating agency capital requirements for this product are more restrictive than for primary insurance. In 2004, we wrote $304 million of pool insurance risk, compared to $933 million of pool insurance risk written in 2003.

Structured Transactions

Structured transactions generally involve insuring a large group of existing loans or issuing a commitment to insure new loans that are to be originated under negotiated terms. In structured mortgage insurance transactions, we insure the individual mortgages included in the structured portfolio up to specified levels of coverage. Most structured mortgage insurance transactions that we insure involve non-traditional mortgages, such as non-prime mortgages or mortgages with higher than average balances. A single structured mortgage insurance transaction may include primary insurance or pool insurance, and an increasing number of structured transactions have both primary and pool components. We also insure mortgage-related assets, such as mortgage-backed securities, in structured transactions. Some structured transactions include 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 depend on a number of macroeconomic factors and thus the volume of structured transactions we close can vary significantly from year to year, and we expect this to continue. In 2004, we wrote $8.5 billion of primary mortgage insurance in structured transactions, consisting of approximately 42.9% prime loans and 57.1% non-prime loans, compared to $18.9 billion of primary new insurance written in structured transactions in 2003. Also in 2004, we wrote $6.3 billion of pool mortgage insurance in structured transactions compared to $5.4 billion in 2003. Including both primary and pool insurance, we wrote $14.8 billion of mortgage insurance in structured transactions in 2004, compared to $24.3 billion written in 2003.

Second-Lien Mortgages

In addition to insuring first-lien mortgages, to a lesser extent we also provide traditional or modified pool insurance on second-lien mortgages. Beginning in 2004, we began limiting most of our participation in these transactions to situations where there is a loss deductible or other first-loss protection that precedes our loss exposure. We wrote $154 million of second-lien mortgage insurance risk in 2004. At December 31, 2004, we had $673 million of risk in force on second-lien mortgages, compared to $725 million of risk at December 31, 2003. We present certain of our financial results and other statistics related to second-lien mortgages separately from our presentation of financial results and other statistics related to primary insurance.

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Credit Enhancement on Net Interest Margin Securities

We provide credit enhancement on NIMs. A NIM represents the securitization of the excess cash flow from a mortgage-backed transaction. The majority of this excess cash flow consists of the spread between the interest rate on the mortgage-backed security and the interest rate on the underlying mortgages. Historically, mortgage issuers would have earned this excess interest over time as mortgages age, but recent market efficiencies have enabled mortgage issuers to sell their residual interests to investors in the form of NIM bonds. We provide credit enhancement on these bonds. In 2004, we wrote $273 million of insurance risk on NIMs. At December 31, 2004, we had $312 million of risk in force on NIMs, compared to $299 million at December 31, 2003.

Non-Prime Loans

We believe that non-prime lending programs represent the largest area for future growth in the mortgage insurance industry, and we have increased and expect to continue to increase our insurance written in this area. During 2004, non-prime business accounted for $16.4 billion or 36.6% of our primary new insurance written in our mortgage insurance business (61.9% of which was Alt-A), compared to $27.4 billion or 40.1% in 2003 (73.0% of which was Alt-A). At December 31, 2004, non-prime insurance in force was $35.7 billion or 31.0% of total primary insurance in force, compared to $37.8 billion or 31.5% of total primary insurance in force at December 31, 2003.

Within our non-prime lending program, we have defined three categories of loans that we insure: Alt-A, A minus and B/C loans. We use credit-scoring mechanisms to assist us in predicting loan performance and in categorizing loans as Alt-A, A minus or B/C loans. The Fair Isaac and Company (“FICO”) model calculates a credit score based on a borrower’s credit history among other factors. This credit score is used to estimate 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. We have continued to limit our participation in these non-prime markets to mostly Alt-A and A minus loans rather than B/C loans and we have targeted the business insured to specific lenders with proven good results and servicing experience in this area.

Alt-A Loans.    We define Alt-A loans as loans where the borrower’s FICO score is 620 or higher and where the loan documentation has been reduced or eliminated. Alt-A borrowers generally have a similar credit profile to prime borrowers, but these loans are underwritten with reduced or no documentation and verification of information. We typically charge a higher premium rate for this business due to the reduced documentation. Alt-A loans tend to have higher balances than other loans that we insure. We consider Alt-A business to be more risky than prime business, particularly Alt-A loans to borrowers with FICO scores below 660. We insure Alt-A loans with FICO scores ranging from 620 to 660, but we have measures in place to limit this exposure and we charge a significantly higher premium for the level of increased risk on these loans. Alt-A loans represented 19.1% of total primary mortgage risk in force at the end of 2004 and made up 22.7% of our primary new insurance written in 2004, compared to 29.3% of primary new insurance written in 2003. The delinquency rate on Alt-A loans was 6.5% at December 31, 2004, compared to 5.3% at December 31, 2003. Claims paid on Alt-A loans were $85.1 million in 2004, compared to $56.2 million in 2003.

A Minus Loans.    We define A minus loans as loans where the borrower’s FICO score ranges from 570 to 619. This product comes to us through structured transactions where the insurance typically is lender-paid and through flow business where the borrower pays the insurance premium. We also receive a significantly higher premium for insuring this product that is commensurate with the increased default risk. We also classify certain Fannie Mae Desktop Underwriter and Freddie Mac Loan Prospector automated underwriting system loan-level responses as A minus, regardless of the FICO score. Our pricing of A minus loans is tiered into four levels based on the FICO score, with increased premiums at each descending tier of FICO score. A minus loans represented 10.4% of our total primary mortgage risk in force at the end of 2004 and made up 11.2% of our primary new insurance written in 2004, compared to 9.7% of primary new insurance written in 2003. The delinquency rate on A minus loans was 11.2% at December 31, 2004, compared to 9.6% at December 31, 2003. Claims paid on A minus loans were $69.6 million in 2004, compared to $47.3 million in 2003.

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B/C Loans.    We define B/C loans as loans where the borrower’s FICO score is below 570, and we have no approved programs to insure B/C loans. However, some pools of loans submitted for insurance as structured transactions contain B/C loans. We price these structured transactions to reflect a higher premium on B/C loans due to the increased default risk associated with these types of loans. B/C loans represented 2.4% of total primary mortgage risk in force at the end of 2004 and made up approximately 2.8% of total primary new insurance written during 2004, compared to 1.1% of total primary new insurance written in 2003. The delinquency rate on B/C loans was 15.7% at December 31, 2004, compared to 17.2% at December 31, 2003. Claims paid on B/C loans were $25.8 million in 2004, compared to $24.4 million in 2003.

Reinsurance of Non-Prime Risk

In 2004, we developed an innovative way to manage our internal credit limits through unaffiliated reinsurance companies funded by the issuance of credit-linked notes in the capital markets. On August 3, 2004, we entered into a reinsurance agreement under which we ceded a significant portion of the risk associated with an $882 million portfolio of first-lien, non-prime residential mortgage loans that we insure. Our counterparty under the reinsurance agreement is SMART HOME Reinsurance 2004-1 Limited (“Smart Home”), a Bermuda reinsurance company that is not affiliated with us and was formed solely to enter into the reinsurance arrangement. Smart Home was funded in the capital markets by the issuance of credit-linked notes rated between AA and BB by S&P, and between Aa2 and Ba1 by Moody’s, that were issued in separate classes related to loss coverage levels on the reinsured portfolio. We anticipate retaining the risk associated with the first loss coverage levels and may retain or sell, in a separate risk transfer agreement, the risk associated with the AAA-rated coverage level.

Holders of the Smart Home credit-linked notes bear the risk of loss from losses paid to us under the reinsurance agreement. Smart Home will invest the proceeds of the notes in high-quality short-term investments approved by S&P and Moody’s. Income earned on those investments and a portion of the reinsurance premiums we pay will be applied to pay interest on the notes as well as certain of Smart Home’s expenses. The liquidation proceeds from the investments will be used to pay reinsured loss amounts to us, and any remaining proceeds will be applied to pay principal on the notes.

In February of 2005, we completed a second reinsurance agreement under which we ceded a portion of the risk associated with a $1.68 billion portfolio of first-lien, non-prime mortgages that we insured.

Captive Reinsurance

In captive reinsurance, a mortgage lender sets up a reinsurance company that assumes part of the risk associated with the mortgage lender’s mortgages insured on a flow basis. In return for the reinsurance company’s assumption of risk, the mortgage insurer cedes a portion of its mortgage insurance premiums to the reinsurance company. 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, in effect providing the mortgage insurer with a form of stressed loss coverage. Captive reinsurance arrangements continue to grow in popularity, and a larger percentage of our business participates in these arrangements at increasing percentage levels. We believe that these arrangements provide an incentive for lenders to funnel relatively high-quality loans into captives. They also provide risk sharing and capital relief for us. Given the complexity of these arrangements and their impact on our profitability, we evaluate the level of revenue sharing against the risk sharing on a customer-by-customer basis.

We had approximately 52 active captive reinsurance agreements in place at December 31, 2004, compared to 45 that were in place at December 31, 2003. We may enter into several new agreements or modify existing agreements in 2005, some with large national lenders. Premiums ceded to captive reinsurance companies in 2004 were $87.3 million, representing 11.3% of total direct mortgage insurance premiums earned, as compared to

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$73.6 million, or 10% in 2003. Primary new insurance written in 2004 that had captive reinsurance associated with it was $17.8 billion, or 39.7% of our total primary new insurance written, as compared to $21.9 billion, or 32.1% in 2003.

We have entered into risk/revenue sharing arrangements with the GSEs whereby the primary insurance coverage amount on certain loans is recast and our overall risk is reduced in return for a payment made to the GSEs. Premiums ceded under these programs in 2004 were not significant.

Delegated Underwriting

We have a delegated underwriting program with a significant number of our customers. Our delegated underwriting program currently involves only lenders that are approved by our risk management area. The delegated underwriting program allows the lender to commit us to insure loans that meet agreed-upon underwriting guidelines. Delegated loans are submitted to us in various ways—fax, electronic data interchange and through the Internet. We routinely audit loans submitted under this program. As of December 31, 2004, approximately 30% of the risk in force on our books was originated on a delegated basis, compared to 27% as of December 31, 2003.

Contract Underwriting

We utilize our underwriting skills to provide an outsourced underwriting service to our customers, known as contract underwriting. For a fee, we underwrite fully documented loan files for secondary market compliance, while concurrently assessing the file for mortgage insurance if applicable. Contract underwriting continues to be a popular service to mortgage insurance customers. During 2004, loans underwritten via contract underwriting accounted for 20.6% of applications, 19.6% of commitments for insurance and 17.9% of insurance certificates issued. We provide recourse to our customers on loans we underwrite for compliance. If we make a material error in underwriting a loan, we agree to provide a remedy of either placing mortgage insurance coverage on the loan or purchasing the loan. During 2004, we processed requests for remedies on less than 1% of the loans underwritten and sold a number of loans previously acquired as part of the remedy process. We had total losses from sales and remedies in 2004 of approximately $3.5 million. Providing these remedies means we assume some credit risk and interest rate risk if an error is found during the limited remedy period in the agreements governing our provision of contract underwriting services. Rising mortgage interest rates or an economic downturn may expose the mortgage insurance business to higher losses. In 2003, we had provisions for contract underwriting remedies of $2.9 million. In 2004, our provisions were approximately $12.0 million and our reserve at December 31, 2004 was $7.3 million. We closely monitor this risk and negotiate our underwriting fee structure and recourse agreements on a client-by-client basis.

International Mortgage Insurance Operations

We carefully review and assess international markets for opportunities to expand our mortgage insurance operations. On several occasions, through our domestic subsidiaries, we have provided credit protection on pools of mortgages in the United Kingdom and in the Netherlands, and we are in the process of applying for authorization to conduct operations in the United Kingdom. In 2004 and early 2005, we entered into two mortgage reinsurance transactions in Australia. In early 2005, we entered into a relationship with Standard Charter Bank (Hong Kong) Limited, one of the largest mortgage lenders in Hong Kong, to serve as its exclusive provider of mortgage insurance. We are in the process of applying for branch authorization in Hong Kong, which will enable us to expand our international business in the Asian markets.

Financial Guaranty Business

We entered the financial guaranty business through our 2001 acquisition of Enhance Financial Services Group Inc. (“EFSG”), a New York-based insurance holding company that primarily insures and reinsures credit-based risks. Financial guaranty insurance provides an unconditional and irrevocable guaranty to the holder of a

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financial obligation of full and timely payment of principal and interest when due. Financial guaranty reinsurance provides for reimbursement to the primary insurer when that insurer is obligated to pay principal and interest on an insured obligation. In the event of default, payments under the insurance policy generally may not be accelerated without the insurer’s approval, and the holder continues to receive payments of principal and interest as if no default had occurred. Also, the insurer often has recourse against the issuer and/or any related collateral for amounts the insurer pays under the terms of the policy. Premiums almost always are non-refundable and are invested upon receipt. Premiums paid in full at inception are recorded as revenue (“earned”) over the life of the obligation (or the coverage period if shorter). Premiums paid in installments generally are recorded as revenue in the accounting period in which coverage is provided. This long and relatively predictable premium earnings pattern is characteristic of the financial guaranty insurance industry and provides a relatively predictable source of future revenues.

The issuer of an obligation generally pays the premiums for financial guaranty insurance either in full at the inception of the policy or, in the case of most structured finance transactions, in monthly, quarterly, semi-annual or annual installments from the cash flow of the related collateral. For public finance transactions, premium rates typically are stated as a percentage of debt service, which includes total principal and interest. For structured finance transactions, premium rates typically are stated as a percentage of the total principal. The establishment of a premium rate for a transaction reflects some or all of the following factors:

The majority of insured public finance and structured finance transactions are guaranteed by AAA-rated monoline financial guaranty insurers. As a AA-rated company, our financial guaranty business targets distinct markets. There generally is a higher interest cost to the issuer by using AA credit enhancement as compared to AAA, but in some cases the additional overall cost to the issuer of AAA credit enhancement exceeds the higher interest costs an issuer may incur with AA enhancement. AA insurance also can provide significant value over uninsured executions in select markets. Finally, in some markets, issuers and other counterparties receive no additional rating agency credit for purposes of capital requirements and single risk limits from a AAA enhancement level as compared to a AA enhancement level.

Our financial guaranty business offers the following products:

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The following table summarizes the net premiums written and earned for the indicated financial guaranty lines of business for 2004, 2003 and 2002:

Credit derivatives are classified as derivatives under Statement of Financial Accounting Standards No. 133. The mark-to-market position on derivatives must be accounted for as either assets or liabilities on the Consolidated Balance Sheets, and measured at fair value. Although there is no cash flow from “marking-to-market,” net changes in the fair value of the derivatives are reported in the Consolidated Statements of Income. Structured direct net premiums written and earned for 2004 included $66.1 million and $50.3 million, respectively, of credit enhancement fees on derivative financial guaranty contracts, compared to $54.1 million and $42.0 million in 2003 and $40.4 million and $19.8 million in 2002.

Merger of Radian Asset Assurance and Radian Reinsurance

In June 2004, we merged our two main financial guaranty operating subsidiaries, Radian Asset Assurance Inc. (“Radian Asset Assurance”) and Radian Reinsurance Inc. (“Radian Reinsurance Inc.”) with Radian Asset Assurance as the surviving company. Through this merger, the financial guaranty reinsurance business formerly conducted by Radian Reinsurance was combined with the direct financial guaranty business conducted by Radian Asset Assurance. The merger combined the assets, liabilities and shareholder’s equity of the two companies and the combined company is rated Aa3 (stable outlook) by Moody’s Investor Service (“Moody’s”), AA (negative outlook) by Standard & Poor’s Insurance Rating Service (“S&P”) and AA (stable outlook) by Fitch Ratings (“Fitch”), which correspond to the ratings assigned to Radian Asset Assurance immediately before the merger. In May 2004, Moody’s provided Radian Asset Assurance with an initial insurance financial strength rating of Aa3. Concurrently, and in anticipation of the merger, Moody’s downgraded the insurance financial strength rating of Radian Reinsurance from Aa2 to Aa3. As a result of this downgrade, two of the primary insurer customers of our financial guaranty reinsurance business had the right to recapture previously written business ceded to our

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financial guaranty business. One of these customers has agreed, without cost to or concessions by us, to waive its recapture rights. On November 8, 2004, the remaining primary insurer customer with recapture rights notified us of its intent to recapture, effective February 28, 2005, $6.4 billion of par in force that it had ceded to our financial guaranty business through December 31, 2004. Despite the recapture, the primary insurer customer also informally advised us that, going forward, the customer intends to continue its reinsurance relationship with us on the same terms as before the May 2004 downgrade. In March of 2005, without cost to or concessions by us, this customer waived its remaining right to recapture $5.2 billion of additional par in force that it had ceded to our financial guaranty business through December 31, 2004.

Public Finance

Financial guaranty of public finance obligations 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 and private non-profit universities and hospitals, public housing and transportation authorities, and other public and quasi-public entities. Municipal bonds are supported by the issuer’s taxing power in the case of general obligation bonds, dedicated taxes, 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 public finance market has been and continues to be a major source of revenue for our financial guaranty business. Public Finance direct represented 16.7% of Financial Guaranty net premiums written in 2004 (excluding the impact of the recapture that occurred in the first quarter of 2004), down from 23.1% in 2003.

The drop in premiums was primarily attributable to three factors: a decrease in new issue volume, competition from other financial guaranty companies and a tightening credit-spread environment. Municipal issuance declined 6% to $360.2 billion from a record $383.7 billion in 2003, but was up slightly compared to $358.8 billion issued in 2002. Insured penetration by the AAA-rated insurers reached a record high of 53.5% in 2004, resulting in fewer opportunities for us to add value while maintaining adequate returns on capital. We were faced with increased competition from relatively new entrants to the financial guaranty market. In addition, existing financial guaranty companies began insuring credits that we may have insured in recent years. Finally, due to compression in spreads between insured and uninsured execution, premium rates dropped to an average of 153 basis points, down from 192 basis points, and insured par decreased by 20% year-over-year.

Structured Finance

The structured finance market includes the market for both synthetic and funded asset-backed obligations, as well as the market for collateralized debt obligations. At December 31, 2004, we had $10.7 billion of notional exposure related to the direct insurance of 71 structured transactions, compared to $7.2 billion related to 46 transactions at December 31, 2003.

Funded asset-backed obligations usually take the form of a secured interest in a pool of assets, such as residential or commercial mortgages or credit card or auto loan receivables. Funded asset-backed securities also may be secured by a few specific assets, such as utility mortgage bonds and multi-family housing bonds. In low interest rate environments and when credit spreads are tight, as was the case in 2004, our ability to participate in the funded asset-backed market is severely limited.

Synthetic transactions are tied to the performance of a pool of assets, but are not secured by those assets. Most of the synthetic transactions we insure are collateralized debt obligations, where we assume credit risk on defined portfolios of corporate credits, some of which consist of synthetic mortgage-backed securities or other synthetic consumer asset-backed securities. The transfer of this type of credit risk is referred to as a synthetic credit default swap. Credit default swaps may require settlement of a credit event without financial loss actually being incurred by the counterparty and are accounted for as derivatives in accordance with Statement of Financial Accounting Standards No. 133.

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With respect to collateralized debt obligations, we generally are required to make payments to our counterparty upon the occurrence of specified credit-related events related to the senior unsubordinated debt obligations or the bankruptcy of the issuer contained within investment-grade pools. These investment-grade pools can range in size from 50 to 500 or more obligors. Typically, we provide protection up to a specified exposure amount that tends to range from $10.0 million to $15.0 million per obligor, with an aggregate exposure of $20.0 million to $450.0 million per transaction, though the exposure amounts vary on a transaction-by-transaction basis. To manage the amount of risk we incur on these transactions, we have set internal limits as to the aggregate risk per obligor, industry sector and tranche size that we are willing to insure, and we comply with applicable insurance regulations limiting the size and composition of the pools we insure. We also have developed a methodology for aggregating risk across insured pools. See “Risk Management –Financial Guaranty” for additional information regarding our risk management.

The same obligor may exist in a number of our structured finance transactions. The 10 largest corporate obligors, measured by gross nominal exposures, in our direct written book as of December 31, 2004 ranged from $487.0 million to $640.0 million, compared to a range of $313.0 million to $390.5 million as of December 31, 2003. However, because each transaction has a distinct subordination requirement, prior credit events would have to occur with respect to other obligors in the pool before we would have an obligation to pay in respect of any particular obligor, meaning that our actual exposure to each corporate obligor is significantly less than our nominal exposure. We monitor not only the nominal exposure for each obligor for which we provide protection, but also risk-adjusted measures, taking into account, among other factors, our assessments of the relative risk that would be represented by direct exposure to the particular obligor and the remaining subordination in the transactions in which we are exposed to a particular obligor. Initial subordination before we are obligated to pay ranges from 2.0% to 30.7% of the initial total pool size. As of December 31, 2004, the initial subordination for our directly written protection ranged from $13.0 million to $460.0 million, and the subordination remaining for these transactions ranged from $4.0 million to $460.0 million.

The following table shows the gross par amounts of structured finance transactions we originated in each of the years presented:

The following table shows the gross par outstanding on structured finance transactions for each of the years presented:

The net par outstanding is not materially different from the gross par outstanding.

Financial Guaranty Reinsurance

We provide reinsurance on direct financial guarantees written by other primary insurers. 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

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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 relieve the reinsurer’s obligations to the ceding company under the reinsurance contract.

We have reinsurance agreements with each of the monoline financial guaranty primary insurers. These reinsurance agreements generally are subject to termination (i) upon written notice (ranging from 90 to 120 days) before the specified deadline for renewal, (ii) at the option of the ceding company if we fail to maintain certain financial, regulatory and rating agency criteria that are equivalent to or more stringent than those that our financial guaranty operating subsidiaries are otherwise required to maintain for their own compliance with the New York insurance law and to maintain a specified financial strength rating for the particular insurance subsidiary or (iii) upon certain changes of control. Upon termination under the conditions set forth in (ii) and (iii) above, we may be required (under some of the reinsurance agreements) to return to the ceding company all unearned premiums, less ceding commissions, attributable to reinsurance ceded pursuant to these agreements. Upon the occurrence of the conditions set forth in (ii) above, whether or not an agreement is terminated, we may be required to obtain a letter of credit or alternative form of security to collateralize our obligation to perform under that agreement or we may be obligated to increase the level of ceding commissions paid. These and other matters associated with a downgrade in our subsidiaries’ ratings are discussed in further detail in the section entitled “Ratings” below.

Reinsurance allows a ceding company to write greater single risks and greater aggregate risks while remaining in compliance with the risk limits and capital requirements of applicable state insurance laws and rating agency guidelines. State insurance regulators allow ceding companies 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 a reduction in both exposures and liabilities ceded under reinsurance agreements, with the amount of credit permitted dependent on the 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 obligated to assume, a specified portion of all risks, within ranges, of transactions deemed eligible for cession by the terms of the treaty. Limitations on transactions deemed eligible for cession typically focus on size, security and ratings of the insured obligation. Each treaty is entered into for a defined term, generally one year, with renewals upon mutual consent and rights to early termination under certain circumstances (although the reinsurance risk thereafter extends for the life of the respective underlying obligations). In treaty reinsurance, there is a risk that the ceding company may select weaker credits or proportionally larger amounts to cede to reinsurers. However, we mitigate this risk by requiring the ceding company to retain a sizable minimum portion of each ceded risk and include limitations on individual transactions and on aggregate amounts within each type of transaction. Under a facultative agreement, the ceding company has the option to offer, and the reinsurer has the option to accept, a portion of specific risks, usually in connection with particular obligations. Unlike under a treaty agreement, where the reinsurer generally relies on the ceding company’s credit analysis, under a facultative agreement, the reinsurer often performs its own underwriting and credit analysis to determine whether to accept the particular risk. The majority of our financial guaranty reinsurance is provided under treaty arrangements.

Reinsurance typically is written on either a proportional or non-proportional basis. Proportional relationships are those in which the ceding company and the reinsurer share a proportionate amount of the premiums and the losses of the risk group subject to reinsurance. In addition, the reinsurer generally pays the ceding company a commission, which typically is related to the ceding company’s underwriting and other expenses in connection with obtaining the business being reinsured. Non-proportional reinsurance can be done on an excess-of-loss or first-loss basis. An excess-of-loss reinsurance agreement provides coverage to a ceding

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company up to a specified dollar limit for losses, if any, incurred by the ceding company in excess of a specified threshold amount. A first-loss reinsurance agreement is a form of structural credit enhancement that provides coverage to the ceding company on the first dollar of loss. The majority of our financial guaranty business is originated on a proportional basis.

European Operations

Our financial guaranty segment includes Radian Asset Assurance Limited (“RAAL”), a subsidiary of Radian Asset Assurance that is authorized to enter into insurance transactions in the United Kingdom. We believe that, through RAAL, we will have additional opportunities to write financial guaranty insurance in the United Kingdom and, subject to compliance with the European passporting rules, in seven other countries in the European Union. In July of 2004, RAAL received initial ratings of AA (negative outlook) from S&P and AA from Fitch. We expect that these ratings will better position RAAL to continue to build its structured products business in the United Kingdom and throughout the European Union through the European passport system. In September 2004, the Financial Services Authority granted a license to Radian Financial Products Limited, another subsidiary of Radian Asset Assurance, to trade as a Category A Securities and Futures Firm, allowing us to develop a range of derivatives-based credit-risk solutions for clients in the United Kingdom and throughout the European Union.

Other Financial Guaranty Businesses

Our financial guaranty business provides reinsurance to many of the major primary insurers of trade credit exposures. Trade credit insurance protects sellers of goods under certain circumstances against non-payment of their receivables, and covers receivables where the buyer and seller are in the same country, as well as cross-border receivables. In the latter instance, the coverage sometimes extends to certain political risks (foreign currency controls, expropriation, etc.) that potentially could interfere with the payment from the buyer.

We owned a 36.0% interest in EIC Corporation Ltd. (“Exporters”), an insurance holding company that, through its wholly owned insurance subsidiary licensed in Bermuda, insures primarily foreign trade receivables for multinational companies. In December 2004, we sold our interest in Exporters for $4.0 million, recording a loss of $1.2 million on the sale. We have provided significant reinsurance capacity to Exporters on a quota-share, surplus-share and excess-of-loss basis, through Radian Reinsurance (Bermuda) Limited. The amount of this reinsurance exposure at December 31, 2004 was $137.2 million and will run off over a period of approximately seven years. We currently have reserves of $11.9 million for this exposure.

Financial Services

Our financial services business consists primarily of our 46% ownership interest in Credit-Based Asset Servicing and Securitization LLC (“C-BASS”) and our 41.5% interest in Sherman Financial Services Group LLC (“Sherman”). Effective January 1, 2003, Sherman’s management exercised its right to acquire additional ownership of Sherman, reducing our ownership interest from 45.5% to 41.5%. C-BASS is 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 and 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, C-BASS’s residential mortgage servicing company, Litton Loan Servicing LP (“Litton”), 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’s subsidiaries service, 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. We also engage C-BASS in the management of the acquisition and sale of certain residential mortgage-backed securities, for which we pay them a fee. These securities are included in other invested assets on our consolidated balance sheets.

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Sherman is 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 that it purchases at deep discounts from national financial institutions and major retail corporations. We have provided to Sherman a $150 million financial guaranty policy in connection with a structured financing of a pool of receivables previously acquired by Sherman.

In December 2003, we announced that we would cease operations at RadianExpress.com Inc. (“RadianExpress”). Our decision followed our receipt in July 2003 of a decision by the California Commissioner of Insurance sustaining a California cease and desist order applicable to our offering of our Radian Lien Protection product. The California Superior Court’s denial is on appeal, but the decision significantly reduced the potential for increased revenues at RadianExpress, which was the entity through which Radian Lien Protection sales would have been processed. During the first quarter of 2004, RadianExpress ceased processing new orders and is completing the final processing of remaining transactions.

We are seeking to sell or otherwise dispose of the remaining assets and operations of Singer Asset Finance Company L.L.C. (“Singer”), an entity acquired in connection with our acquisition of EFSG. We have sold portions of the business to the extent possible. The remainder of the business is operating on a run-off basis. Singer had been engaged in the purchase, servicing and securitization of assets including state lottery awards and structured settlement payments. Its operations consist of servicing and/or disposing of Singer’s previously originated assets and servicing of Singer’s non-consolidated special-purpose vehicles.

Defaults and Claims

Defaults

The default and claim cycle in the mortgage insurance business begins with the mortgage insurer’s receipt of a default notice from the insured. Generally, our master policy of insurance requires the insured to notify us of a default within 15 days after the loan has become 60 days past due. The insured must notify us within 45 days if the borrower fails to remit his or her first payment. Defaults occur due to a variety of factors, including death or illness, unemployment or other events reducing the borrower’s income, such as divorce or other marital problems.

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

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 our defined regions as of the dates indicated, including prime and non-prime loans:

As of December 31, 2004, primary mortgage insurance default rates for our two largest states measured by risk in force, California and Florida, were 2.1% and 4.1% respectively, compared to 2.4% and 4.5% respectively, at December 31, 2003.

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Claims

Depending on applicable state foreclosure law, a claim generally is not paid until 12 to 18 months following default on a mortgage. In our mortgage insurance business, the insured lender is required to obtain title to the property before submitting a claim. Upon receipt of a valid claim, we generally have the following three settlement options:

In general, we base our selection of a settlement option on the value of the property. In 2004, we settled 73% of claims by paying the maximum liability, 26% by paying the deficiency amount following approved sale and less than 1% by paying the full claim amount and acquiring title to the property. Strong property values over the past few years have presented us with increased loss mitigation opportunities, thereby allowing us to avoid paying the maximum liability in a significant percentage of cases.

Mortgage insurance claim volume is influenced by the circumstances surrounding the default. Claim volume also is affected by local housing prices and housing supply, interest rates and unemployment levels. Claim volume in our mortgage insurance business is not evenly spread through the coverage period of our book of business. Historically, most claims under mortgage insurance policies on prime loans occur during the third through fifth year after issuance of the policies, and on non-prime loans during the second through fourth year after issuance of the policies. After those peak years, the number of claims received historically has declined at a gradual rate, although the rate of decline can be affected by macroeconomic factors. Approximately 80.4% of the primary risk in force, including most of our risk in force on alternative products, and approximately 30.4% of the pool risk in force at December 31, 2004 had not yet reached its anticipated highest claim frequency years. Because it is difficult to predict both the timing of originating new business and the run-off rate of existing business, it also is difficult to predict, at any given time, the percentage of risk in force that will reach its highest claim frequency years on any future date.

The following table shows claims paid information for primary mortgage insurance for the periods indicated:

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The disproportionately higher incidence of claims in Georgia is directly related to a significant amount of defaulted loans with reported property values that our risk management department believed to be questionable. Our risk management department identified this issue several years ago and has implemented several property valuation checks and balances, such as the use of fraud detection software intended to prevent it from recurring. We are applying these same techniques to all of our mortgage insurance transactions. We expect the higher incidence of claims in Georgia to continue until loans originated in Georgia before we implemented these preventive measures become sufficiently seasoned. The higher incidence of claims in Texas resulted in part from unemployment levels that were higher than the national average and lower home price appreciation. We believe that claims in the Midwest and Southeast have been rising and will continue to rise due to the weak industrial sector of the economy.

In our direct financial guaranty business and with respect to some of the mortgage-backed securities insured by our mortgage insurance business, we typically are obligated to pay claims in an amount equal to defaulted payments on insured obligations on their respective due dates. In certain transactions insuring mortgage-backed securities, we also are obligated to pay principal when and if, but only to the extent, the outstanding principal balance of the insured obligations exceeds the value of the collateral insuring the bonds at the end of a reporting period (either monthly or quarterly). In our financial guaranty reinsurance business, net claim payments due to the ceding companies are typically deducted from premium amounts due us. For public finance, asset-backed and other structured products insured by our financial guaranty business, we underwrite to a remote-expected loss standard, which means that in a normal economic and operating environment, the assets underlying the financial guaranty perform within the range anticipated at origination and the transaction matures with no loss paid. However, in a stressed or unexpectedly negative economic or operating environment exceeding conditions that were reasonably anticipated at origination of the risk, losses may occur. Accordingly, the patterns of claim payments tend to fluctuate and may be low in frequency and high in severity. For trade credit protection reinsurance, we underwrite and price to encompass historical loss patterns experienced by us and by ceding companies in similar businesses. The claim payments in trade credit tend to follow the historical loss pattern of overall global economic conditions.

Loss Mitigation

Our mortgage insurance claims department consists of over 20 full-time employees dedicated to avoiding or minimizing losses. These experienced specialists pursue opportunities to mitigate loss before and after claims are received.

For pre-claim default situations, specialists focus on the following activities to reduce losses:

For post-claim default situations, specialists focus on:

In our financial guaranty business, our risk management surveillance group is responsible for detecting any deterioration in credit quality or changes in the economic or political environment that could affect the timely

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payment of debt service on an insured transaction. Our surveillance procedures include periodic review of all exposures, focusing on those exposures with which we may have concerns. The specific procedures vary depending on whether the risk is public finance or structured finance, direct or reinsurance, but the general procedures we follow for surveillance of risks include:

Our financial guaranty business conducts periodic reviews of direct insured transactions, at least annually, to determine their credit quality and performance. These reviews include an examination of the financial results, compliance and other factors that may be useful or necessary to consider. However, in our financial guaranty reinsurance business, the primary obligation for the determination and mitigation of claims rests with the primary insurer that ceded the risk to us. As a result, we rely on the primary insurers for loss determination and mitigation. We and the rating agencies conduct extensive reviews of the ceding companies and their procedures for determining and mitigating losses. Moreover, to help align the ceding company’s interests with our interests, the ceding company typically is required to retain at least 25% of the exposure on any single risk that we reinsure. As a part of its surveillance for reinsurance transactions, our financial guaranty business periodically re-evaluates the risk underwriting and management of treaty customers and monitors the reinsured portfolio’s performance.

As soon as our risk management department detects a problem, it works with the appropriate parties in an attempt to avoid a default. Claims generally can be 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 and, if appropriate, exercising applicable rights to replace problem parties. Issuers typically are under no obligation to restructure insured transactions to prevent losses, but oftentimes do not want to be associated with an obligation that experiences losses. We believe that early detection and continued involvement by our risk management group has reduced claims.

Loss Reserves – General

We have determined that the establishment of loss reserves in our businesses constitutes a critical accounting policy. Accordingly, more detailed descriptions of our policies are contained in “Management’s Discussion and Analysis of Results of Operations and Financial Condition” included in Part II, Item 7 of this report and in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this report.

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Loss Reserves – Mortgage Insurance

In our mortgage insurance business, we establish reserves for losses and loss adjustment expenses (“LAE”) on defaults that have been reported and on an estimated number of defaults that we believe have occurred but have not been reported. LAE consists of the estimated cost of settling claims, including legal and other fees and expenses associated with administering the claims process. Statement of Financial Accounting Standards (“SFAS”) No. 60 specifically excludes mortgage guaranty insurance from its guidance relating to the reserve for losses. Consistent with accounting principles generally accepted in the United States of America (“GAAP”) and industry accounting practices, we do not establish loss reserves for future claims on insured loans that are not in default or believed to be in default. In determining the liability for unpaid losses related to reported outstanding defaults, we establish loss reserves on a case-by-case basis after we are notified that a borrower has failed to make at least two consecutive payments when due. The amount reserved for any particular loan depends on the loan’s characteristics, its status as reported by its servicer, and the economic conditions and estimated foreclosure period in the geographical area in which the default exists. We do not record reserves for mortgages that are in default if we believe it to be doubtful that we will be liable for the payment of a claim with respect to that default. With respect to delinquent loans that are in the early stage of delinquency, considerable judgment is exercised as to the adequacy of reserve levels. We rely on our historical models and make adjustments to our estimates based on current economic conditions and recent trend information. These adjustments in estimates for delinquent loans in the early stage of delinquency are more judgmental in nature than for loans that are in the later stage of delinquency. As the default progresses closer to foreclosure, the amount of loss reserve for that particular loan is increased, in stages, to approximately 100% of our exposure. If a default is cured, the reserve for that loan is removed from the reserve for losses and LAE. The curing process could cause an appearance of a reduction in reserves from prior years. We also reserve for defaults that have occurred but have not been reported using historical information on defaults not reported on a timely basis by lending institutions. We review these estimates on an ongoing basis and adjust the related liabilities as necessary.

The following table presents information relating to our liability for unpaid mortgage insurance claims and related expenses:

The following table shows our mortgage insurance reserves by category:

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Loss Reserves – Financial Guaranty

We establish reserves for losses and LAE in our financial guaranty business based on our estimate of case and non-specific losses, including expenses associated with settling losses on our insured and reinsured obligations. We record case reserves and related LAE when we determine that a default has occurred. The non-specific reserves represent our estimate of total expected losses, less provisions for case reserves. Generally, when a case reserve is established or adjusted, an offsetting adjustment is made to the non-specific reserve.

In January and February of 2005, we discussed with the SEC staff, both separately and together with other members of the financial guaranty industry, the differences in loss reserve practices followed by different financial guaranty industry participants. We understand from those discussions that the Financial Accounting Standards Board (the “FASB”) staff is considering whether additional accounting guidance is necessary to address the financial guaranty industry. When and if the FASB or the SEC reaches a conclusion on this issue, we and the rest of the financial guaranty industry may be required to change some aspects of our accounting policies. If the FASB or the SEC were to determine that we should account for our financial guaranty contracts differently, for example by requiring them to be treated solely as one or the other of short-duration or long-duration contracts under Statement of Financial Accounting Standards No. 60 (“SFAS No. 60”), this determination could impact our accounting for loss reserves, premium revenue and deferred acquisition costs, all of which are covered by SFAS No. 60. Management is unable to estimate what impact, if any, the ultimate resolution of this issue will have on our financial condition or operating results.

Our financial guaranty business generally experiences relatively higher loss levels in certain of its other insurance businesses, such as trade credit reinsurance, than in its financial guaranty business. We believe that the higher premiums we receive in these businesses, as well as the lower relative capital charges, adequately compensate us for the risks involved. Reserves for losses and LAE for trade credit reinsurance are based on reports and individual loss estimates received from ceding companies, net of anticipated estimated recoveries under salvage and subrogation rights. In addition, a reserve is included for losses and LAE incurred but not reported on trade credit reinsurance.

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The following table shows information regarding the loss experience of our financial guaranty business for the years indicated:

The provision for losses in 2004, 2003 and 2002 included $34.3 million, $38.7 million and $36.3 million, respectively, in connection with our trade credit and surety businesses. In addition, the provision for losses in 2003 includes $111.0 million related to a single manufactured housing transaction originated and serviced by Conseco Finance Corp.

The following table shows our financial guaranty reserves by category:

Risk Management – General

We consider effective risk management to be critical to our long-term financial stability. Market analysis, prudent underwriting, the use of automated risk evaluation models and quality control are all important elements of our risk management process. We also evaluate our risk by reviewing our credit risk, market or funding risk, currency risk, interest rate risk, operational risk, and legal risk across all of our businesses, and developing risk-adjusted return on capital (“RAROC”) models where the measure of capital is based on economic stress capital.

During 2003, we implemented a redesigned credit committee structure applicable to both our mortgage insurance and financial guaranty businesses. Under this structure, an enterprise credit committee, consisting primarily of members of company-wide senior management, oversees individual credit committees organized by product line that include representatives of the product line, along with members of our credit policy, finance and legal departments. We believe that this redesigned credit committee structure enables us to more fully utilize the intelligence, knowledge, experience and skills available throughout our company to evaluate the risk in each subsidiary’s insurance in force and in proposed transactions.

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Risk Management – Mortgage Insurance

Risk Management Personnel

Our mortgage insurance business has a comprehensive credit policy department responsible for overall portfolio monitoring/management, policy setting, policy/guidelines communication and comprehensive analytics. In addition to the centralized risk staff, our mortgage insurance business maintains a staff of operations risk managers throughout its geographic territories who partner both with its lenders and its field service center offices. The operations risk managers work with individual customers in evaluating loan programs, processes particular to risk and specific lender book of business performance. This effort is conducted along with our quality assurance department to ensure that guidelines, policies and procedures are adhered to on a regular basis. The mortgage insurance business employs an underwriting and support staff of approximately 98 persons who are located in our mortgage insurance business’s nine service centers. There also is a specific risk manager who has direct contact and oversight for the risk taken by its agency operations in the states of Alaska and Hawaii.

Underwriting Process

We generally accept 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.

Mortgage Scoring Models

As discussed in “Mortgage Insurance Business – Non-Prime Loans,” we use FICO scores to assist us in predicting loan performance. Our proprietary Prophet Score^® model 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. We believe that this additional mortgage data expands the integrity of our Prophet Score^® model over the entire life of the loan.

Reinsurance of Non-Prime Risk

As discussed in “Mortgage Insurance – Reinsurance of Non-Prime Risk” we developed an innovative way to manage our internal credit limits through unaffiliated reinsurance companies funded by the issuance of credit-linked notes.

Portfolio Quality Assurance

As part of our system of internal control, our risk credit policy department maintains a Portfolio Quality Assurance (“PQA”) function. Among its other activities, the PQA function is responsible for ensuring that operational risks that impact the quality of our portfolio of insured products and the quality of loans underwritten by us or our delegated lenders are identified, investigated and communicated to minimize our exposure to controllable risk. The PQA function accomplishes this objective primarily by performing contract underwriting audits, delegated lender audits, third-party originator audits and mortgage fraud investigations.

The PQA function routinely audits the performance of our contract underwriters to ensure that customers receive quality underwriting services. To ensure the most effective use and allocation of audit resources, we have developed a risk assessment model that identifies high-, medium- and low-risk contract underwriters by applying five weighted risk factors to each underwriter. We frequently update these models 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 influence whether additional targeted training is necessary or whether termination of the underwriter’s services is appropriate.

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Through our PQA function, we conduct a periodic, on-site review of selected delegated lenders’ insured delegated underwriting business. Loans originated through our delegated lender program are selected for review on a random sample basis, and this sample may be augmented by a targeted sample based on specific risk factors or trends identified through the monitoring process described above. The size of the random sample is determined using statistical techniques. Delegated lenders that pose significant risk concerns, as identified in past reviews and through our regular risk reporting and analysis, or lenders with a relatively high volume of business with us, may be reviewed more frequently. The objectives of the loan review are to identify errors in the loan data transmitted to us, to determine lender compliance with our 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. We have developed a proprietary data collection and risk analysis application to facilitate these reviews. Audits are graded based on 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 our management. The audit results are used as a means to improve the quality of the business the lender submits to us for insurance. Issues that are raised in the reports and that are not resolved in a manner and within a time period acceptable to us may result in restriction or termination of the lender’s delegated underwriting authority.

Our PQA function also coordinates and conducts third-party originator audits, also known as broker audits. Loan-level audits of broker-originated files help minimize our exposure to brokers who originate poor quality loans, or loans containing some form of misrepresentation.

The PQA function also includes a separate group of investigators known as the Special Investigations Unit (“SIU”). The SIU is responsible for identification and investigation of insured loans involving non-compliance with the terms of our master policy of insurance (or commitment letter for structured transactions) to ensure that claims are ultimately paid for agreed-upon, valid and insurable risks. Much of the SIU’s efforts involve the identification, investigation and reporting of mortgage fraud schemes that impact us. The SIU often coordinates its activities with legal counsel, law enforcement and fraud prevention organizations, and works to promote mortgage fraud awareness, detection and prevention among our personnel and client lenders.

Due Diligence on Structured Transactions

Our credit desk function, in conjunction with other members of our risk management department, performs due diligence on 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.

We believe that understanding our business partners is a key component of managing the risks posed by potential business deals. Our objective in business-level due diligence is to understand the lender’s business model in sufficient depth to determine whether we should have confidence in the lender 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 we have had no recent business experience. Business-level due diligence includes a review of the lender’s organizational structure, management, business philosophy, financial health, credit management processes, quality control processes, and servicing relations.

Loan-level due diligence is conducted on pending structured transactions to determine whether appropriate underwriting guidelines have been adhered to and whether loans conform to our 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 our management. The results of loan-level due diligence assist management in determining whether the pending deal should be consummated and, if it should be consummated, provide data that can be used to determine appropriate pricing. The results also provide 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 management. Letter grades are assigned to each section of the business- and loan-level reviews. Weights are then assigned to each section of the

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review (e.g., corporate, credit, quality control, servicing) that vary based on 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 management our risk management department’s opinion as to a lender’s overall risk profile and the relative appeal of a potential relationship with that lender.

Risk Management – Financial Guaranty

We believe our financial guaranty underwriting discipline is critical to the profitability and growth of our financial guaranty business. We have a structured underwriting process to determine the characteristics and creditworthiness of risks that we directly insure or reinsure. Our financial guaranty business conducts periodic reviews of its insured transactions to determine their credit quality and performance. This review includes an examination of an issuer’s financial results, compliance and other factors. The underwriting process is performed at a transaction level for direct insurance transactions, and all transactions are subject to formal approval by credit committees. To ensure quality control, emphasis is placed on extensive credit analysis and stringent legal structuring. Insurability is determined both on an individual and portfolio basis. As a result, we analyze the credit characteristics of specific transactions as well as how the credit fits into our portfolio, including sector and geographic concentrations. Each transaction is supported by our legal department (or by outside counsel supervised by our legal department) from the underwriting phase through the closing phase.

The size of the direct insurance transactions underwritten and insured by our financial guaranty business is subject to single risk exposure limitations. These limitations are derived from state insurance regulations, rating agency guidelines and internally established criteria. The primary factor in determining single risk capacity is the class or sector of business being underwritten. Our policy is to use the lowest of the internally derived, regulatory or rating agency limit. We also manage our risk through subordination and other protections such that our risk attachment point and risk layer are set no lower than our internally determined minimum tranche rating, which we generally set at a AA or AAA attachment point as defined by at least one of the major rating agencies. To estimate this level, we use several internal and publicly available tools to model the risk associated with the transaction, including rating agency models such as S&P’s CDO Evaluator Model. We also seek a rating from the relevant rating agency on each transaction. We further evaluate each deal by analyzing the individual obligors in the pool, including the concentration of industries in which they operate, the number of the obligors on credit watch for downgrade, if any, and a comparison of spreads on the debt obligations of these obligors to the market norm for similar companies.

On individual underwritings, our credit committees may limit insurance or reinsurance participation to an amount below that allowed by the single risk guidelines noted above. Moreover, we rely on ongoing oversight by our credit committees with input from our risk management department to avoid undue exposure concentration in any given sector or geographic area, or to any obligor or type of obligation.

Notwithstanding our reviews of our insured parties in our financial guaranty reinsurance transactions, the entire underwriting responsibility rests with the primary insurer. As a result, primary insurers participate more actively than we participate in the structuring of the transaction and conduct more detailed reviews of the parties to the transaction. We conduct periodic reviews of our financial guaranty primary insurer customers and other carriers with which we conduct treaty or facultative business. Those reviews entail an examination of the ceding company’s operating, underwriting and surveillance procedures, personnel, organization and existing book of business, as well as the ceding company’s underwriting of a sample of business assumed under the treaty. We review facultative transactions individually under procedures adopted by our credit committees. Any underwriting issues are discussed internally by the credit committee and with the ceding company’s personnel. Our surveillance procedures include reviews of reinsured exposures that we have identified as posing concerns. We also maintain regular communication with the surveillance departments of the ceding companies. Moreover, the ceding company typically is required to retain at least 25% of the exposure on any single risk that we assume. We evaluate carefully the risk underwriting and management of treaty customers, monitor the insured portfolio

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performance and conduct an underwriting review of the facultative reinsurance we write. Facultative reinsurance underwriting, like direct underwriting, is performed at a transaction level. In addition, we rely on the reviews performed by the primary insurers for loss determination and mitigation.

Risk in Force

Mortgage Insurance Business

In recent years, we have faced increasing competition for traditional prime mortgages. As a result, we have been required to offer mortgage insurance on increasing levels of non-prime mortgages, as well as new and emerging products such as interest-only loans and non-traditional arrangements such as structured transactions, second mortgages and NIMs. Because we have limited historical data regarding these products and transactions, we attempt to limit our exposure to these transactions until we can perform rigorous risk analytics and generate enough data to assist us in predicting the attendant risks and adjusting our pricing accordingly. We analyze our portfolio in a number of ways to identify any concentrations or imbalances in risk dispersion. We believe the performance of our mortgage insurance portfolio is affected significantly by:

Primary Risk in Force by Policy Year

The following table shows the percentage of our primary mortgage insurance risk in force by policy origination year as of December 31, 2004:

Geographic Dispersion

The following tables show the percentage of direct primary mortgage insurance risk in force by location of property for the top 10 states and top 15 metropolitan statistical areas (“MSAs”) as of December 31, 2004 and 2003:

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Lender and Product Characteristics

Although geographic dispersion is an important component of overall risk dispersion and our strategy has been to limit our exposure in the top 10 states and top 15 MSAs, we believe 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 our risk management and underwriting practices.

One of the most important determinants of claim incidence is the relative amount of borrower’s equity, or down payment, in a home securing the insured mortgage. The expectation of claim incidence on mortgages with LTVs between 90.01% and 95% (“95s”) is approximately two times the expected claim incidence on mortgages with LTVs between 85.01% and 90% (“90s”). We believe that the higher premium rates we charge on 95s adequately reflect the additional risk on these loans. We, along with the rest of our industry, have been insuring loans with LTVs between 95.01% and 97% (“97s”) since 1995 and loans with an LTV of between 97.01% and 100% (“100s”) since 2000. These loans are expected to have a higher claim incidence than 95s. Premium rates on 100s and 97s are higher than on 95s in an amount that we believe is commensurate with the additional risk and the higher expected frequency and severity of claims. We insure an insignificant amount of loans having an LTV over 100%.

We believe that the risk of claim on non-prime loans is significantly higher than that on prime loans. Non-prime loans generally include Alt-A and A minus products and, although higher premium rates and surcharges are charged to compensate for the additional risk, these products are relatively new and have not been fully tested in adverse economic situations, so we cannot assure you that the premium rates we charge are adequate or that the loss performance will be at, or close to, expected levels.

Our claim frequency on insured ARMs has been higher than on fixed-rate loans due to monthly payment increases that occur when interest rates rise.

We believe that 15-year mortgages present a lower 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.

We believe that the risk of claim also is affected by the type of property securing the insured loan. Loans on single-family detached housing are subject to less risk of claim incidence than loans on other types of properties.

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Conversely, we generally consider loans on attached housing types, particularly condominiums and cooperatives, to be a higher risk, due to the higher density of these properties and because a detached unit is the preferred housing type in most areas. Our more stringent underwriting guidelines on condominiums and cooperatives reflect this higher expected risk.

We believe that the risk of claim on loans to borrowers who are relocating and loans originated by credit unions is low and we offer lower premium rates on these loans commensurate with the lower risk.

We believe 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. Accordingly, we underwrite loans on non-owner-occupied homes more stringently and we charge a significantly higher premium rate than the rate charged for insuring loans on owner-occupied homes.

We believe that higher-priced properties experience wider fluctuations in value than moderately priced residences and that the high incomes of many people who buy higher-priced homes are less stable than that of people with moderate incomes. Underwriting guidelines for these higher-priced properties reflect this concern.

In addition, we insure interest-only mortgages, where the borrower pays only the interest charge on a mortgage for a specified period of time, usually five to ten years, after which the loan payment increases to include principal payments. These loans may have a heightened propensity to default because of possible “payment shocks” after the initial low-payment period expires and because the borrower does not automatically build equity as payments are made.

The following table shows the percentage of our direct mortgage insurance 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, 2004 and 2003: