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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2005

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) 231-1000

(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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES x NO ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x

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. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer x                    Accelerated filer ¨                    Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

State the aggregate market value of the voting and non-voting common equity held by non-affiliates, 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. As of June 30, 2005, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $4,012,075,963 based on the closing sale price as reported on the New York Stock Exchange. Excluded from this amount is the value of all shares beneficially owned by executive officers and directors of the registrant. These exclusions should not be deemed to constitute a representation or acknowledgement that any such individual is, in fact, an affiliate of the registrant or that there are not other persons or entities who may be deemed to be affiliates 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: 83,159,404 shares of common stock, $.001 par value per share, outstanding on February 28, 2006.

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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Forward Looking Statements — Safe Harbor Provisions

All statements in this report that address events, developments or results 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. In most cases, forward-looking statements may be identified by words such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “goal,” “contemplate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue” or the negative or other variations on these words and other similar expressions. 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 the following:

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For more information regarding these risks and uncertainties as well as certain additional risks that we face, you should refer to the risk factors detailed in Part I, Item 1A of this report. We caution you not to place undue reliance on these forward-looking statements, which are current only as of the date on which we filed this report. We do not intend to, and we 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.

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Part I

General

We are a global credit risk management company. Our strategic objective is to prudently grow our core mortgage credit enhancement business while providing value to our clients in the acquisition, management and distribution of credit risk, both in domestic and international markets. We develop and deliver innovative financial solutions by applying our credit risk expertise and structured finance capabilities to the credit enhancement needs of the capital markets worldwide.

Based on this foundation of credit risk evaluation and expertise, we offer products and services through three primary business lines: mortgage insurance, financial guaranty and financial services:

The following shows the contribution to net income and equity created by our three business lines in 2005:

A summary of financial information for each of our operating segments and a discussion of net premiums earned attributable to our domestic and international operations for each of the last three fiscal years is included in “Segment Reporting” in Note 2 to our Consolidated Financial Statements.

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. (“EFSG”), a New York-based insurance holding company that principally provides financial guaranty insurance and reinsurance. Our principal executive offices are located at 1601 Market Street, Philadelphia, Pennsylvania 19103, and our telephone number is (215) 231-1000.

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 we file with, or furnish to, the Securities and Exchange Commission (“SEC”), copies of our most recently filed Annual Report on Form 10-K, all Quarterly Reports on Form 10-Q and all Current Reports on Form 8-K, 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 each committee of our board of directors are available free of charge on our website, as well as in print to any stockholder upon request.

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Mortgage Insurance Business

Our mortgage insurance business provides credit-related insurance coverage, principally via private mortgage insurance, and risk management services to mortgage lending institutions located throughout the United States and select countries overseas. We provide these products and services through our wholly-owned subsidiaries, Radian Guaranty Inc. (“Radian Guaranty”), Radian Insurance Inc. (“Radian Insurance”) and Amerin Guaranty Corporation (“Amerin Guaranty”). Private mortgage insurance protects mortgage lenders from all or a portion of default-related losses on residential first mortgage loans made mostly 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, some of which are sold to the Federal Home Loan Mortgage Corp. (“Freddie Mac”) and the Federal National Mortgage Association (“Fannie Mae”). We sometimes refer to Freddie Mac and Fannie Mae collectively 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, 2005, primary insurance on first-lien mortgages made up 90% of our total first-lien mortgage insurance risk in force and pool insurance on first-lien mortgages made up 10% of our total first-lien 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 net interest margin securities (“NIMs”), international insurance transactions, second-lien mortgages and credit default swaps (collectively, we refer to the risk associated with these transactions as “other risk in force”). We also insure second-lien mortgages through Amerin Guaranty. At December 31, 2005, other risk in force was 25.5% of our total mortgage insurance risk in force.

Premiums written and earned by our mortgage insurance business for the periods indicated were as follows:

Traditional Types of Coverage

Primary Mortgage Insurance

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—

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which consists of the unpaid loan principal, plus past due interest and certain expenses associated with the default—to determine our maximum liability. We provide primary mortgage insurance on both a flow basis (which is loan by loan) and a structured basis (in which we insure a group of individual loans). See “Types of Transactions” in this Item 1 below. In 2005, we wrote $42.6 billion of primary mortgage insurance, of which 60.1% was originated on a flow basis and 39.9% was originated on a structured basis, compared to $44.8 billion of primary mortgage insurance written in 2004 of which 81.1% was originated on a flow basis and 18.9% was originated on a structured basis.

Persistency rates, defined as the percentage of insurance in force that remains on our 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. Therefore, higher persistency rates tend to increase the profitability of a mortgage insurer. At December 31, 2005, the persistency rate of our primary mortgage insurance was 58.2%, compared to 58.8% at December 31, 2004. Both of these figures are low relative to historical levels and reflect the high levels of refinancing that have occurred recently in the mortgage market.

Pool Insurance

We offer pool insurance on a selective basis. Generally, pool insured mortgages are similar to primary insured mortgages. Pool insurance differs from primary insurance in that our maximum liability is not limited to a specific coverage percentage on each individual mortgage. Instead, an aggregate exposure limit, or “stop loss,” generally between 1% and 10%, is applied to the initial aggregate loan balance on a group or “pool” of mortgages. In addition to a stop loss, many pool policies are “second to pay” or “second-loss” meaning that the insured must incur losses on the pool above a specified amount or deductible before any claim payments under the policy will be made. The deductible and stop loss features are effective in limiting our exposure on a specified pool. An insured pool of mortgages may contain mortgages that are already covered by 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 residential mortgage loans underlying residential mortgage-backed securities, whole loan sales and other structured transactions. We include our pool insurance on mortgages and on other mortgage-related assets in our financial results as well as other statistics related to our pool insurance.

Premium rates for our pool insurance business are generally lower than primary mortgage insurance rates due to the aggregate stop loss. 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 generally more restrictive than for primary insurance. In 2005, we wrote $569 million of pool insurance risk, compared to $304 million of pool insurance risk written in 2004.

Modified Pool Insurance

We also write modified pool insurance, which differs from standard pool insurance in that it includes a stop loss feature for the entire pool as well as an exposure limit on each individual loan. Prior to 2005, modified pool insurance was classified as pool or primary insurance depending on the characteristics of the underlying loan. Beginning in 2005, all new insurance written as modified pool insurance was classified as primary insurance due to the nature of the loan.

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Non-Traditional Credit Enhancement

Second-Lien Mortgages

In addition to insuring first-lien mortgages, to a lesser extent, we also provide primary or modified pool insurance on second-lien mortgages. Beginning in 2004, we began focusing 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 $668 million of second-lien mortgage insurance risk in 2005. Most of this represents business in which we are in a second-loss or shared-loss position. At December 31, 2005, we had $591 million of risk in force on second-lien mortgages in a first-loss position and $638 million of risk in force where we are in a second-loss position, compared to $598 million of risk in force in a first-loss position and $75 million of risk in force in a second- or shared-loss position at December 31, 2004. 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.

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 security. 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, issuers of mortgage-backed securities would have earned this excess interest over time as mortgages age, but recent market efficiencies have enabled these issuers to sell their residual interests to investors in the form of NIM bonds. We provide credit enhancement on these bonds. In 2005, we wrote $99 million of insurance risk on NIMs. At December 31, 2005, we had $261 million of risk in force on NIMs, compared to $318 million at December 31, 2004. These transactions are typically rated BBB and are all rated between A- and BB by Standard and Poor’s Insurance Rating Service (“S&P”) and Fitch Ratings Service (“Fitch”).

Domestic Credit Default Swaps

In our mortgage insurance business, we sell protection on residential mortgage-backed securities via credit default swaps, which we classify as credit derivatives. A credit default swap is an agreement to pay our counterparty should an underlying security or the issuer of such security suffer a specified credit event, such as nonpayment, downgrade or a reduction of the principal of the security as a result of defaults in the underlying collateral. A credit default swap operates much like a financial guaranty insurance policy in that our obligation to pay is absolute. Unlike with most of our mortgage insurance and financial guaranty products, however, our ability to engage in loss mitigation is generally limited. Further, in a credit default swap structure, there is no requirement that our counterparty hold the security for which credit protection is provided. This has the effect of greatly increasing the volume and liquidity in the market. In 2005, our mortgage insurance business wrote $180 million in notional value of credit protection on residential mortgage-backed securities in credit default swap form.

International Mortgage Insurance Operations

We carefully review and assess international markets for opportunities to expand our mortgage insurance operations in areas where we believe our business would produce acceptable risk adjusted returns. Our primary geographical focus includes locations in Europe, Asia and Australia. International mortgage insurance transactions can take the form of primary or pool mortgage insurance or credit default swaps.

During 2005, we increased the level of mortgage insurance business that we have been writing internationally. On several occasions, we have provided credit protection on pools of mortgages (including mortgage-backed securities in credit default swap form) in the United Kingdom (“U.K.”) and in the Netherlands, and we have applied for authorization to conduct insurance operations in the U.K. In 2004 and early in 2005, we

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entered into two mortgage reinsurance transactions in Australia, and in the fourth quarter of 2005, we wrote $7.3 billion in notional value of credit protection in credit default swap form on two large AAA tranches of mortgage-backed securities, one in Germany and one in Denmark. We’ve also recently entered into a relationship with 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.

Types of Transactions

Our mortgage insurance business provides credit enhancement mainly through two forms of transactions. We write mortgage insurance on an individual loan basis, which is commonly referred to as “flow” business, and we also insure multiple mortgages in a single transaction, which is commonly referred to as “structured” business. In flow transactions, mortgages typically are insured as they are originated, while in structured deals, we typically provide insurance on mortgages after they have been originated and closed.

We also may issue a commitment to a customer to insure new loans as they are originated under negotiated terms and for a limited period of time. For 2005, our mortgage insurance business wrote $25.6 billion in flow business and $17.0 billion in structured transactions, compared to $36.3 billion in flow business and $8.5 billion in structured transactions for 2004.

In structured mortgage insurance transactions, we typically 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. In our residential mortgage-backed securities transactions, similar to our financial guaranty insurance business, we insure the availability of funds sufficient for the timely payment of interest and ultimate payment of principal to the holders of debt securities, the payment for which is backed by a pool of residential mortgages. Unlike our traditional flow and structured transactions, in our residential mortgage-backed securities transactions, we do not insure the payment of the individual loans in the pool, but only that there will be aggregate payments on the pool of loans sufficient to meet the interest and principal payment obligations to the holders of the debt securities. 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. We expect these fluctuations to continue. In 2005, we wrote $17.0 billion of primary mortgage insurance in structured transactions, consisting of approximately 33.3% prime loans and 66.7% non-prime loans, compared to $8.5 billion of primary new insurance written in structured transactions in 2004. Also in 2005, we wrote $20.8 billion of pool mortgage insurance in structured transactions, compared to $6.3 billion in 2004. Including both primary and pool insurance, we wrote $37.8 billion of mortgage insurance in structured transactions in 2005, compared to $14.8 billion written in 2004.

Types of Mortgage Risk

Prime Loans

We define prime loans as loans where the borrower’s Fair Isaac and Company (“FICO”) score is 620 or higher and the loan file meets “fully documented” standards of our credit guidelines and/or the GSE’s guidelines for fully documented loans. Prime loans represented 69.3% of our total primary mortgage risk in force at the end of 2005 and made up 58.3% of our primary new insurance written in 2005, compared to 63.4% of primary new insurance written in 2004. The default rate on prime loans was 3.6% at December 31, 2005, compared to 3.2% at December 31, 2004. Claims paid on prime loans were $121.3 million in 2005, compared to $140.8 million in 2004.

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Non-Prime Loans

We believe that non-prime lending programs represent an area of future growth in the mortgage insurance industry, and we have increased, and expect to continue to increase, our insurance written in this area. During 2005, non-prime business accounted for $17.8 billion or 41.7% of our primary new insurance written in our mortgage insurance business (63.3% of which was Alternative-A or “Alt-A”), compared to $16.4 billion or 36.6% in 2004 (61.9% of which was Alt-A). At December 31, 2005, non-prime insurance in force was $34.7 billion or 31.7% of total primary insurance in force (61.1% of which was Alt-A), compared to $35.7 billion or 31.0% of total primary insurance in force at December 31, 2004 (61.9% of which was Alt-A).

Within our non-prime mortgage insurance program, we have defined three categories of loans that we insure: Alt-A, A minus and B/C loans. We use our own proprietary statistical models to price our mortgage insurance business to produce appropriate risk-adjusted rates of return. We continue 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 we insure to specific lenders that we believe have proven 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. Because of the reduced documentation, 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 tend to have higher balances than other loans that we insure because they are often more heavily concentrated in high-cost areas. Alt-A loans represented 17.5% of total primary mortgage risk in force at the end of 2005 and made up 26.4% of our primary new insurance written in 2005, compared to 22.7% of primary new insurance written in 2004. The default rate on Alt-A loans was 6.4% at December 31, 2005, compared to 6.5% at December 31, 2004. Claims paid on Alt-A loans were $79.4 million in 2005, compared to $85.1 million in 2004.

A Minus Loans.    We define A minus loans as loans where the borrower’s FICO score ranges from 575 to 619. This product comes to us both through structured transactions in which the insurance typically is lender-paid and through flow business in which the borrower pays the insurance premium. We also classify loans with certain characteristics originated within the GSE’s automated underwriting system 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. We receive a significantly higher premium for insuring this product that we believe is commensurate with the increased default risk. A minus loans represented 10.5% of our total primary mortgage risk in force at the end of 2005, compared to 10.4% at the end of 2004, and made up 11.7% of our primary new insurance written in 2005, compared to 11.2% of primary new insurance written in 2004. The default rate on A minus loans was 14.2% at December 31, 2005, compared to 11.2% at December 31, 2004. Claims paid on A minus loans were $67.5 million in 2005, compared to $69.6 million in 2004.

B/C Loans.    We define B/C loans as loans where the borrower’s FICO score is below 575. We have no approved programs to insure B/C loans. However, some pools of loans submitted for insurance as structured transactions contain a small percentage of 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 2.7% of total primary mortgage risk in force at the end of 2005, compared to 2.4% at the end of 2004, and made up approximately 3.6% of total primary new insurance written during 2005, compared to 2.8% of total primary new insurance written in 2004. The default rate on B/C loans was 21.8% at December 31, 2005, compared to 15.7% at December 31, 2004. Claims paid on B/C loans were $18.5 million in 2005, compared to $25.8 million in 2004.

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

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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. 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 the losses that we may incur. An increase in the amount or frequency of claims beyond the levels contemplated by our pricing assumptions could have a material adverse effect on our business, financial condition and operating results.

Premiums for our mortgage insurance may be paid by the lender, which will in turn charge a higher interest-rate to the borrower, or directly by the borrower. We 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 business 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.

Captive Reinsurance

We and other companies in the mortgage insurance industry participate in reinsurance arrangements with mortgage lenders commonly referred to as “captive reinsurance arrangements.” Under captive reinsurance arrangements, a mortgage lender typically establishes a reinsurance company that assumes part of the risk associated with the portfolio of that lender’s mortgages insured by us on a flow basis (as compared to mortgages insured in structured transactions, which typically are not eligible for captive reinsurance arrangements). In return for the reinsurance company’s assumption of a portion of the risk, we cede a portion of its mortgage insurance premiums to the reinsurance company. In most cases, the risk assumed by the reinsurance company is an excess layer of aggregate losses that would be penetrated only in a situation of adverse loss development, such as losses brought on by significant national or regional downturns in the real estate market.

Because of many factors, including the incentives for mortgage lenders to funnel relatively higher-quality loans through their captive reinsurers due to the risk-sharing feature, we continue to evaluate the level of revenue sharing against risk sharing on a customer-by-customer basis as part of our customer profitability analysis. We believe that all of our captive reinsurance arrangements transfer risk to the captive reinsurer at a premium level that is commensurate with the risk. We and other mortgage insurers have faced private lawsuits alleging, among other things, that our captive reinsurance arrangements constitute unlawful payments to mortgage lenders under the anti-referral fee provisions of the Real Estate Settlement Practices Act of 1974 (“RESPA”). We also have been subject to inquiries from the New York insurance department relating to our captive reinsurance arrangements. For more information, see “Regulation—Federal Regulation—RESPA” in this Item 1.

We had approximately 50 active captive reinsurance agreements in place at December 31, 2005, compared to 52 that were in place at December 31, 2004. We may enter into new agreements or modify existing agreements in 2006, which may include agreements with large national lenders. Premiums ceded to captive reinsurance companies in 2005 were $92.9 million, representing 11.5% of total direct mortgage insurance premiums earned, as compared to $87.3 million, or 11.3% in 2004. Primary new insurance written in 2005 that had captive reinsurance associated with it was $12.2 billion, or 28.7% of our total primary new insurance written, as compared to $17.8 billion, or 39.7% in 2004. These percentages can be volatile as a result of increases or decreases in the volume of structured transactions, which are not typically eligible for captive reinsurance arrangements, such as has occurred over the last several years.

We also have entered into risk/revenue-sharing arrangements with the GSEs whereby the primary insurance coverage amount on certain loans is recast into primary and pool insurance and our overall exposure is reduced in return for a payment made to the GSEs. Premiums ceded under these programs in 2005 and 2004 were not significant.

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Delegated Underwriting

We have a delegated underwriting program with a significant number of our customers. Our delegated underwriting program allows lenders 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. Our delegated underwriting program currently involves only lenders that are approved by our risk management area, and we routinely audit loans submitted under this program. Once we accept a lender into our delegated underwriting program, however, we generally insure all loans submitted to us by that lender even if the lender has not followed our specified underwriting guidelines. A lender could commit us to insure a number of loans with unacceptable risk profiles before we discover the problem and terminate that lender’s delegated underwriting authority. We mitigate this risk through periodic, on-site reviews of selected delegated lenders by our Portfolio Quality Assurance department. See “Risk Management—Mortgage Insurance—Portfolio Quality Assurance” in this Item 1. As of December 31, 2005, approximately 28% of the insurance in force on our books was originated on a delegated basis, compared to 30% as of December 31, 2004.

Contract Underwriting

Our mortgage insurance business also utilizes its underwriting skills to provide an outsourced underwriting service to its customers known as contract underwriting. For a fee, we underwrite fully documented loan files for secondary market compliance (i.e., for sale to GSEs), while concurrently assessing the file for mortgage insurance, if applicable. Contract underwriting continues to be a popular service to our mortgage insurance customers. During 2005, loans underwritten via contract underwriting accounted for 11.7% of applications, 11.4% of commitments for insurance and 10.1% of insurance certificates issued.

We give recourse to our customers on loans that we underwrite for compliance. Typically, we agree that if we make a material error in underwriting a loan, we will provide a remedy to the customer by repurchasing or placing additional mortgage insurance on the loan, or by indemnifying the customer against loss. Providing these remedies means we assume some credit risk and interest-rate risk if an error is found during the limited remedy period, which may be up to 7 years, but typically is only two years. Rising mortgage interest rates or an economic downturn may expose the mortgage insurance business to an increase in such costs. During 2005, 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 paid losses for sales and remedies from reserves in 2005 of approximately $11.7 million. In 2004, we had provisions for contract underwriting remedies of $11.9 million. In 2005, our provisions were approximately $8.0 million, and our reserve for such expenses at December 31, 2005 was $3.6 million. We closely monitor this risk and negotiate our underwriting fee structure and recourse agreements on a client-by-client basis. We also routinely audit the performance of our contract underwriters to ensure that customers receive quality underwriting services. This audit function is performed by our Portfolio Quality Assurance department. See “Risk Management—Mortgage Insurance—Portfolio Quality Assurance” in this Item 1 below.

Financial Guaranty Business

We entered the financial guaranty business through our acquisition in 2001 of EFSG. Financial guaranty insurance generally provides an unconditional and irrevocable guaranty to the holder of a financial obligation of full and timely payment of scheduled principal and interest when due.

Our financial guaranty business offers the following products:

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In October 2005, we announced that we would be exiting the trade credit reinsurance line of business. Accordingly, this line of business has been placed into run-off and we have ceased initiating new trade credit reinsurance contracts going forward. We expect that our existing trade credit reinsurance business, including claims paid, will take several years to run off, although we expect that the bulk of the remaining premiums will be earned and losses incurred over the next two years. Management does not consider the trade credit line of business to be a core part of our financial guaranty business, and we do not expect that our move to exit the trade credit reinsurance line of business will materially impact the overall profitability or business position of our financial guaranty business in the long term. However, in the short term, our decision to exit the trade credit reinsurance line of business will likely have a negative impact on certain financial measures for our financial guaranty business as this business line continues to run off. 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. In 2005, trade credit reinsurance accounted for 15.7% of financial guaranty’s net premiums written, down from 27.4% of financial guaranty’s net premiums written in 2004.

The following table summarizes the net premiums written and earned by our financial guaranty segment’s various products for 2005, 2004 and 2003:

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In our financial guaranty business, the issuer of an insured obligation generally pays the premiums for our 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. Premiums for synthetic credit protection are generally paid in monthly, quarterly, semi-annual or annual installments, but occasionally all or a portion of the premium is paid upfront at the inception of the protection. In synthetic credit protection transactions, payment is due directly from our counterparty and is generally not restricted to the cash flows from the underlying obligation or collateral supporting the obligation. Since we depend on the corporate creditworthiness of our counterparty rather than the cash flows from the insured collateral for payment, we generally have a right to terminate synthetic credit protection without penalty to us if our counterparty fails to make timely payments to us under the terms of the synthetic credit transaction.

For public finance transactions, premiums are typically paid upfront and premium rates typically are stated as a percentage of debt service, which includes total principal and interest. For structured finance transactions, premiums are paid in installments over time and premium rates are typically stated as a percentage of the total principal. Premiums are generally non-refundable. Premiums paid in full at inception are recorded as revenue “earned” over the life of the insured obligation (or the coverage period for such obligation if shorter). Premiums paid in installments are generally recorded as revenue in the accounting period in which coverage is provided. The long and relatively predictable premium earnings pattern from our public finance transactions provides us with a relatively predictable source of future “earned” revenues. 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 triple-A rated financial guaranty insurers. As a AA/Aa3-rated company, our financial guaranty business mainly targets distinct niches in the capital markets. There is generally a greater interest cost savings to an issuer by using triple-A rated credit enhancement as compared to our AA/Aa3 rated credit enhancement. However, financial guaranty insurance provided by a lower-rated provider also can provide significant value over uninsured executions in markets where the triple-A rated financial guaranty insurance is unavailable or uneconomical. In some markets, issuers and other counterparties receive no additional rating agency credit or regulatory relief from triple-A rated enhancement than they do with our AA/Aa3 enhancement, so our enhancement in these markets may be more economical.

Public Finance

Financial guaranty of municipal 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), school districts, utility districts, public and private non-profit universities and hospitals, public housing and transportation authorities and other public and quasi-public entities. Municipal bonds can be categorized generally into tax-backed bonds and revenue bonds. Tax-backed bonds, which include general obligation bonds, are backed by the taxing power of the governmental agency that issues them, while revenue bonds are backed by the revenue generated by a specific project such as bridge or highway tolls, or by rents or hospital fees. Insurance

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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 business represented 32.8% of financial guaranty net premiums written in 2005 (26.3% excluding the impact of the recapture in the first quarter of 2005), up from 24.2% in 2004 (16.7% excluding the impact of the recapture in the first quarter of 2004). See “Ratings” in this Item 1 for information regarding these recaptures.

Structured Finance

The structured finance market includes the market for both synthetic and funded asset-backed or mortgage-backed obligations as well as collateralized debt obligations (“CDOs”), which generally consist of multiple pools of assets, each of which is typically of a different credit quality or possesses different characteristics with respect to interest rates, amortization, and level of subordination. At December 31, 2005, we had $20.7 billion of notional exposure related to the direct insurance of 114 credit default swaps in structured transactions, compared to $10.7 billion related to 71 transactions at December 31, 2004. Structured finance direct business represented 31.9% of financial guaranty net premiums written in 2005 (25.6% excluding the impact of the recapture in the first quarter of 2005), down from 43.6% in 2004 (30.2% excluding the impact of the recapture in the first quarter of 2004). Structured direct net premiums written and earned for 2005 included $50.5 million and $59.1 million, respectively, of credit enhancement fees on derivative financial guaranty contracts, compared to $66.1 million and $50.3 million, respectively, in 2004 and $54.1 million and $42.0 million, respectively, in 2003.

Funded asset-backed obligations usually take the form of a secured interest in a pool of assets, often of uniform credit quality, such as commercial mortgages, 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 2005, our ability to participate in the funded asset-backed market is 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 CDOs, where we typically assume credit risk on defined portfolios of corporate credits. A portion of these CDOs consist of synthetic mortgage-backed securities or other synthetic consumer asset-backed securities. The transfer of this type of credit risk is typically performed through synthetic credit default swaps. 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, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted (“SFAS No. 133”). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Derivative Instruments and Hedging Activity” in Item 7 below.

With respect to CDOs for which we provide credit protection, we generally are required to make payments to our counterparty upon the occurrence of a failure to pay interest or principal over a specified amount or other specified credit-related events related to the unsecured debt obligations or the bankruptcy of obligors contained within pools of investment grade corporate or asset-backed obligations. 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 $20.0 million per obligor (but may be up to $40.0 million per obligor in specific transactions), 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” in this Item 1 for additional information regarding our risk management.

With respect to synthetic credit default swaps covering a specific obligation rather than a pool of debt obligations or reference entities (as in the case of the synthetic CDO’s we insure as described above), our payment obligations to our counterparties are generally the same as those we have when insuring the underlying obligations. We agree to pay our counterparty should an underlying security or the issuer of such security suffer a

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specified credit event, such as nonpayment, bankruptcy or a reduction of the principal of the security as a result of defaults in the underlying collateral. For example, when providing synthetic credit protection for one or more specified obligations in derivative form, if an event occurred resulting in the acceleration of principal and interest on an underlying obligation, we generally would be responsible for paying these amounts to our counterparty on their regularly scheduled dates, despite the counterparty’s not holding the obligation or directly suffering a loss for such amount.

In addition, under corporate CDO’s and some other secondary market transactions for which we provide synthetic credit protection, we generally do not have recourse or other rights and remedies against the issuer and/or any related collateral for amounts we may be obligated to pay under the synthetic credit protection. Even when we have recourse or rights and remedies in a synthetic credit protection transaction, they are generally much more limited than the recourse, rights and remedies we generally have in our more traditional financial guaranty transactions.

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, 2005 ranged from $865 million to $1.5 billion, compared to a range of $487.0 million to $640.0 million as of December 31, 2004. However, because each transaction has a distinct subordination requirement, prior credit events would have to occur with respect to several obligors in the pool before we would have an obligation to pay in respect of any particular obligor, meaning that our risk adjusted exposure to each corporate obligor in a CDO pool 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 assessment 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 a claim ranges from 2.0% to 30.7% of the initial total pool size.

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 originated and outstanding on our structured finance transactions was not materially different from the gross par originated and outstanding at each period because we do not cede a material amount of business to reinsurers.

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Reinsurance

We provide reinsurance on direct financial guaranties written by other primary insurers or “ceding companies.” We have reinsurance agreements with several of the triple-A rated financial guaranty primary insurers. These reinsurance agreements generally are subject to termination: (i) upon written notice by either party (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, regardless of 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 “Ratings” in this Item 1.

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. Some of our competitors have greater financial resources than we have, are better capitalized than we are and/or have been assigned higher ratings by one or more of the major rating agencies. In 2004, the laws applicable to New York-domiciled monoline financial guarantors were amended to permit them to use certain default swaps meeting applicable requirements as statutory collateral (i.e., to offset their statutory single-risk limits, aggregate risk limits, aggregate net liability calculations and contingency reserve requirements). This regulatory change, which makes credit default swaps a more attractive alternative to traditional financial guaranty reinsurance, may result in a reduced demand for traditional monoline financial guaranty reinsurance in the future. If we are unable to compete for desirable financial guaranty business, our business, financial condition and operating results could be adversely affected.

Merger of Radian Asset Assurance and Radian Reinsurance

Effective June 1, 2004, EFSG’s two main operating subsidiaries, Radian Asset Assurance Inc. (“Radian Asset Assurance”) and Radian Reinsurance Inc. (“Radian Reinsurance”) were merged, 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 also combined the assets, liabilities and stockholders’ equity of the two companies. Prior to the merger, Moody’s Investor Service (“Moody’s”) downgraded the insurance financial strength rating of Radian Reinsurance from Aa2 to Aa3. See “Ratings” in this Item 1 for a discussion of the financial impact of this downgrade. The combined company is now rated Aa3 (with a stable outlook) by Moody’s, AA (with a negative outlook) by S&P and AA (with a negative outlook) by Fitch.

Treaty and Facultative Arrangements

The principal forms of reinsurance agreements are treaty and facultative. Under a treaty arrangement, the ceding company is obligated to cede to us, and we are obligated to assume, a specified portion of all risks, within ranges, of transactions deemed eligible for reinsurance by the terms of the treaty. Limitations on transactions deemed eligible for reinsurance 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 (subject to reinsurance risk extending thereafter for the life of the respective underlying obligations)

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under certain circumstances. The termination rights described above under “Reinsurance” are typical provisions for the termination of treaty reinsurance arrangements. In treaty reinsurance, there is a risk that the ceding company may select weaker credits or proportionally larger amounts to cede to us. We mitigate this risk by requiring the ceding company to retain a sizable minimum portion of each ceded risk and we 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 to us, and we have the option to accept, a portion of specific risks, usually in connection with particular obligations. Unlike under a treaty agreement, where we generally rely on the ceding company’s credit analysis, under a facultative agreement, we often perform our 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, although facultative reinsurance is growing as a percentage of the total.

Proportional or Non-Proportional Reinsurance

We typically accept reinsurance risk on either a proportional or non-proportional basis. Proportional relationships are those in which we and the ceding company share a proportionate amount of the premiums and the losses of the risk group subject to reinsurance. In addition, we generally pay 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 relationships are those in which the losses, and consequently, the premiums paid are not shared by the ceding company and us on a proportional basis. Non-proportional reinsurance can be based on an excess-of-loss or first-loss basis. Under excess-of-loss reinsurance agreements, we provide coverage to a ceding company up to a specified dollar limit for losses, if any, incurred by the ceding company in excess of a specified threshold amount. A first-loss reinsurance agreement is a form of structural credit enhancement that provides coverage to the ceding company on a first dollar of loss up to a specified dollar limit for losses. Generally, we do not pay a commission for non-proportional reinsurance (although the factors affecting the payment of a ceding commission in proportional arrangements may be taken into account to determine the proportion of the aggregate premium paid to us). The majority of our financial guaranty reinsurance business is originated on a proportional basis.

European Operations

Through Radian Asset Assurance Limited (“RAAL”), we have additional opportunities to write financial guaranty insurance in the U.K. and, subject to compliance with the European passporting rules, in other countries in the European Union. In particular, we expect that RAAL will continue to build its structured products business in the U.K. and throughout the European Union. RAAL accounted for $3.5 million of direct premiums written in 2005 (or 2.4% of financial guaranty’s 2005 direct premiums written), which is a $3.3 million increase from the $0.2 million of direct premiums written in 2004. In September 2004, the Financial Services Authority (the “FSA”) authorized Radian Financial Products Limited (“RFPL”), another subsidiary of Radian Asset Assurance, to transact as a Category A Securities and Futures Firm permitting it to act as a principal on credit default swap risk. Following receipt of this authorization, management decided that RFPL should focus its core business on arranging credit default swap risk for RAAL and Radian Asset Assurance. Accordingly, we expect to use RFPL solely for negotiating and arranging credit default swaps with counterparties located in the U.K. or other European countries with portions of the risk being assumed by RAAL and Radian Asset Assurance. As a result, we are in the process of lowering the category of authorization for RFPL commensurate with this more limited purpose.

Other Financial Guaranty Business

Through our ownership of EFSG, 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 mostly 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. Our financial guaranty business has provided significant reinsurance capacity to Exporters on a quota-share, surplus-share and excess-of-loss basis. We expect this business to run off over a period of approximately six years.

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Financial Services Business

The financial services segment includes the credit-based businesses conducted through our affiliates, C-BASS and Sherman. We own a 46% interest in C-BASS and a 34.58% interest in Sherman. C-BASS is a mortgage investment and servicing firm specializing in credit-sensitive, single-family residential mortgage assets and residential mortgage-backed securities. By using sophisticated analytics, C-BASS essentially seeks to take advantage of what it believes to be the mispricing of credit risk for certain assets in the marketplace. Sherman is a consumer asset and servicing firm specializing in charged-off and bankruptcy plan consumer assets and charged-off high Loan-to-Value (“LTV”) mortgage receivables that it generally purchases at deep discounts from national financial institutions and major retail corporations and subsequently collects upon these receivables. In March 2005, Sherman acquired CreditOne, a credit card bank that provides Sherman with the ability to originate subprime credit card receivables. On June 24, 2005, we entered into agreements to restructure our ownership interest in Sherman. Before the restructuring, Sherman was owned 41.5% by us, 41.5% by Mortgage Guaranty Insurance Corporation (“MGIC”) and 17% by an entity controlled by Sherman’s management team.

As part of the restructuring, we and MGIC each agreed to sell a 6.92% interest in Sherman to a new entity controlled by Sherman’s management team, thereby reducing our ownership interest and MGIC’s ownership interest to 34.58% for each of us. In return, the new entity controlled by Sherman’s management team paid approximately $15.65 million (which resulted in a $3.3 million loss) to us and the same amount to MGIC. Regulatory approval for this transaction was received in August 2005, and our ownership interest was reduced to 34.58%, retroactive to May 1, 2005. Effective June 15, 2005, Sherman’s employees were transferred to the new entity controlled by Sherman’s management team, and this entity agreed to provide management services to Sherman. Sherman’s management team also agreed to reduce significantly its maximum incentive payout under its annual incentive plan for periods beginning on or after May 1, 2005. This has resulted in Sherman’s net income now being greater than it would have been without a reduction in the maximum incentive payout. We expect that our and MGIC’s share of Sherman’s net income will be similar to our respective shares before the restructuring because, although our percentage interest in Sherman is smaller than it was before the restructuring, Sherman’s net income is now greater than it would have been if the restructuring had not occurred.

In connection with the restructuring, we and MGIC each also paid $1 million for each of us to have the right to purchase, on July 7, 2006, a 6.92% interest in Sherman from the new entity controlled by Sherman’s management team for a price intended to approximate current fair market value. If either we or MGIC exercise our purchase right but the other fails to exercise its purchase right, the exercising party also may exercise the purchase right of the non-exercising party. Our and MGIC’s representation on Sherman’s board of managers will not change regardless of which party or parties exercise the purchase right.

The financial services segment formerly included the operations of RadianExpress.com Inc. (“RadianExpress”). In December 2003, we announced that we would cease operations at 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 the offering of our Radian Lien Protection product. During the first quarter of 2004, RadianExpress, which was the entity through which Radian Lien Protection sales would have been processed, ceased processing new orders. RadianExpress completed the final processing of all remaining transactions in the first quarter of 2005 and was dissolved in the last quarter of 2005.

Other

We are seeking to sell or otherwise dispose of the remaining assets and operations of Singer Asset Finance Company L.L.C. (“Singer”), a wholly-owned subsidiary of EFSG. Singer had been engaged in the purchase, servicing and securitization of assets, including state lottery awards and structured settlement payments, and currently is operating on a run-off basis. Singer’s run-off operations consist of servicing and/or disposing of Singer’s previously originated assets and servicing its non-consolidated special purpose vehicles. The results of this subsidiary are not material to our financial results.

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Radian Asset Assurance is engaged on a run-off basis in reclamation bonds for the coal mining industry and surety bonds covering closure and post-closure obligations of landfill operations that were previously conducted through its subsidiary, Van-Am Insurance Company, Inc. (“Van-Am”). Van-Am was dissolved effective December 2005, and the business previously conducted by it has been novated to Radian Asset Assurance (most of which business had been previously reinsured by Radian Asset Assurance). This business is not material to our financial results.

Defaults and Claims

Mortgage Insurance

The default and claim cycle in our mortgage insurance business begins with our receipt of a default notice from the insured lender. 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. In addition, the insured must notify us within 45 days if the borrower fails to remit his or her first payment. Defaults can 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.

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

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The default rate in our mortgage insurance business is subject to seasonality. Historically, our mortgage insurance business experiences a fourth quarter seasonal increase in defaults as a result of higher defaults reported during the winter months. 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, 2005, the two states with the highest primary mortgage insurance default rates were Louisiana and Mississippi, at 19.6% and 11.7%, respectively. During the fourth quarter of 2005, we experienced a significant increase in defaults in areas affected by Hurricanes Katrina, Rita and Wilma. For more information, see the discussion below in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview.” As of December 31, 2005, our two largest states, measured by risk in force, were Florida and California, with default rates of 4.1% and 2.1%, respectively.

In our mortgage insurance business, the insured lender is required to complete foreclosure proceedings and obtain title to the property before submitting a claim. It can take anywhere from three months to five years for a lender to acquire title to a property via foreclosure, depending on the state. Therefore, on average, we are not required to pay a claim until 12 to 18 months following a default on a mortgage.

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 throughout 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 that we receive historically has declined at a gradual rate, although the rate of decline can be affected by macroeconomic factors. Approximately 76.5% of the primary risk in force, including most of our risk in force on non-traditional products, and approximately 38.6% of the pool risk in force at December 31, 2005 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.

Our Investigative Services Department is responsible for identifying and investigating 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, as agreed upon, valid and insurable risks. Much of our efforts involve the identification, investigation and reporting of mortgage fraud schemes that impact us. We coordinate our activities with legal counsel, law enforcement and fraud prevention organizations, and work to promote mortgage fraud awareness, detection and prevention among our personnel and client lenders.

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

A higher incidence of claims in Georgia is directly related to what our risk management department believes to be questionable property values. Several years ago, our risk management department implemented several property valuation checks and balances to mitigate the risk of this issue recurring, and now applies these same techniques to all mortgage insurance transactions. We expect this higher incidence of claims in Georgia to continue until loans originated in Georgia before the implementation of these preventive measures become sufficiently seasoned. A higher level 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. We also believe that increased claims in Michigan and North Carolina are a result of declining economic conditions in those areas and that in Colorado, increased claims are a result of a significant decline in property values in that area.

Financial Guaranty

In the event of default, payments under a typical financial guaranty insurance policy that we provide or reinsure may not be accelerated without our or the primary insurer’s approval, and without such approval, the policyholder is entitled to receive payments of principal and interest on their regularly scheduled dates as if no default had occurred. The insurer often has remedies against other parties to the transaction, which may be exercised both before and after making payment, if any payment is necessary.

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 in which we insure mortgage-backed securities, we also are obligated to pay principal when and if due, but only to the extent the outstanding principal balance of the insured obligation 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 line of business,

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net claim payments due to the ceding companies are typically deducted from premium amounts due to 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 under historical economic and operating environments, the assets providing the cash flow to pay the obligations insured by us should perform within the range anticipated at origination and should mature without our having to pay any claims. However, in a stressed or unexpectedly negative economic and operating environment, losses may occur. Accordingly, the patterns of claim payments tend to fluctuate and may be low in frequency and high in severity. For our trade credit reinsurance line of business, which is currently in run-off, we underwrote and priced this business 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

Mortgage Insurance

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

Upon receipt of a valid claim in our traditional mortgage insurance business, 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 2005, we settled 77% of claims by paying the maximum liability, 22% by paying the deficiency amount following an 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 over one out of five cases. If housing values fail to appreciate or begin to decline, the frequency of loans going to claim may increase and 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.

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

For post-claim default situations, our specialists focus on:

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Financial Guaranty

In our financial guaranty business, our surveillance risk management department is responsible for monitoring credit quality or changes in the economic or political environment that could affect the timely payment of debt service on an insured transaction and mitigating losses should they occur. Our surveillance procedures include periodic review of all exposures, focusing principally on those exposures with which we have concerns. The specific procedures vary depending on whether the risk is public finance or structured finance, funded or synthetic, or direct or reinsurance, but the general procedures we follow for surveillance of risks include:

In our financial guaranty reinsurance business, the primary obligation for the determination and mitigation of claims rests with the primary insurer. 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. Loss mitigation can consist of restructuring the obligation, enforcing available security arrangements, 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. When appropriate, we discuss potential settlement options, either at our behest or that of our counterparties, regarding particular obligations with appropriate parties. On occasion, loss mitigation may include an early termination of our obligations, which could result in payments to or from us. To determine the

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appropriate loss mitigation approach, we generally consider various factors relevant to such insured transaction, which may include the current and projected performance of the underlying obligation (both on an expected case basis and stressed for more adverse performance and/or market circumstances that we expect), the likelihood that we will pay a claim in light of credit deterioration and reductions in available payment reserves and existing subordination, our total exposure to the obligation, expected future premium payments and the cost to us of pursuing such remedies.

Included on our list of intensified surveillance credits at December 31, 2005 is a derivative financial guaranty contract, representing $247.5 million in exposure or approximately 38% of our total exposure to intensified surveillance credits at December 31, 2005. While Radian Asset Assurance had not been required to pay a claim with respect to this credit, given the deterioration of the credit quality of the portfolio of high-yield debt obligations underlying this transaction, the significant amount of time before the expiration of this risk in 2013 and our large notional exposure to this credit, Radian Asset Assurance recently engaged its counterparty in negotiations aimed at limiting our exposure arising from this credit. On March 2, 2006, Radian Asset Assurance entered into a settlement agreement with respect to this transaction and the one other derivative financial guaranty contract insured by Radian Asset Assurance with this same counterparty. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Financial Guaranty—Year Ended December 31, 2005 Compared to Year Ended December 31, 2004—Provision for Losses” in Item 7 below for more information regarding the settlement of this transaction.

We believe that early detection and continued involvement by our surveillance risk management department has reduced claims.

Reserve for Losses

We establish reserves to provide for losses and the estimated costs of settling claims in both our mortgage insurance and financial guaranty businesses. Setting loss reserves in both businesses involves significant use of estimates with regard to the likelihood, magnitude and timing of a loss. We have determined that the establishment of loss reserves in our businesses constitutes a critical accounting policy. Accordingly, a more detailed description of our policies is contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Reserve for Losses” included in Item 7 below and in Notes 2 and 6 to our Consolidated Financial Statements.

Mortgage Insurance

In our mortgage insurance business, reserves for losses generally are not established until we are notified that a borrower has missed two payments. We also establish reserves for associated loss adjustment expenses (“LAE”), consisting of the estimated cost of the claims administration process, including legal and other fees and expenses associated with administering the claims process. Statement of Financial Accounting No. 60, “Accounting and Reporting by Insurance Enterprises, Standards (“SFAS No. 60”) specifically excludes mortgage guaranty insurance from its guidance relating to the reserve for losses. We maintain a database of claim payment history and use models, based on loan characteristics, including the status of the loan as reported by its servicer, as well as more static factors, such as the estimated foreclosure period in the area where a default exists, to help determine the appropriate loss reserve at any point in time. As a delinquency proceeds toward foreclosure, there is more certainty around these estimates as a result of the aging of the delinquent loan. If a default cures, the reserve for that loan is removed from the reserve for losses and LAE. This curing process causes an appearance of a reduction in reserves from prior years if the reduction in reserves from cures is greater than the additional reserves for those loans that are nearing foreclosure or have become claims. All estimates are continually reviewed and adjustments are made as they become necessary. We generally do not establish reserves for mortgages that are in default if we believe that we will not be liable for the payment of a claim with respect to that default. For example, for those defaults in which we are in a second-loss position, we calculate what the reserve would have been if there had been no deductible. If the existing deductible is greater than the reserve amount for any given default, we do not establish a reserve for the default. Consistent with accounting principles generally accepted in the United States of America (“GAAP”) and industry accounting practices, we do not establish loss reserves for expected future claims on insured mortgages that are not in default or believed to be in default.

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In January 2005, we implemented a revised modeling process to assist us in establishing reserves in the mortgage insurance business. In recent years, with the growth in the Alt-A and other non-prime business, the change in the portfolio mix required us to segment the portfolio and evaluate the reserves required for each product differently. The previous model had been designed for a prime product only and needed to be updated with years of additional data. The revised model differentiates between prime and non-prime products and takes into account the different loss development patterns and borrower behavior that is inherent in these products. The model calculates a range of reserves by product and a midpoint for each product based on historical factors. We then evaluate other conditions, such as current economic conditions, regional housing conditions and the reliability of historical data for new products, to determine if an adjustment to the midpoint calculated by the model is necessary. At December 31, 2005, we made a judgment to reserve at a level within this range, but slightly above the midpoint, given the uncertainty around the ultimate performance of our non–prime products and the potential overpricing in certain housing markets. The new model did not result in an adjustment to the overall reserve for losses that we recorded.

We do not establish reserves for losses on mortgage insurance derivatives. Mortgage insurance derivatives are recorded at fair value in accordance with SFAS No. 133. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Derivative Instruments and Hedging Activity” in Item 7 below.

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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Financial Guaranty

We establish loss reserves on our non-derivative financial guaranty contracts. We establish case reserves for specifically identified impaired credits that have defaulted and allocated non-specific reserves for specific credits that we expect to default. In addition, we establish unallocated non-specific reserves for our entire portfolio based on estimated statistical loss probabilities. Generally, when a case reserve is established or adjusted, an offsetting adjustment is made to the non-specific reserves (allocated or unallocated, as applicable). We do not establish reserves on our derivative financial guaranty contracts. Instead, gains and losses on direct derivative financial guaranty contracts are derived from internally generated models that take into account both credit and market spreads and are recorded on our Consolidated Financial Statements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Derivative Instruments and Hedging Activity” in Item 7 below for a discussion of how we account for derivatives under SFAS No. 133.

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. On June 8, 2005, the Financial Accounting Standards Board (the “FASB”) added a project to its agenda to consider the accounting by insurers for financial guaranty insurance. The FASB will consider several aspects of the insurance accounting model, including claims liability recognition, premium recognition and the related amortization of deferred policy acquisition costs. In addition, we also understand that the FASB may expand the scope of this project to include income recognition and loss reserving methodology in the mortgage insurance industry. Proposed and final guidance from the FASB regarding accounting for financial guaranty insurance is expected to be issued in 2006. When and if the FASB or the SEC reaches a conclusion on these issues, we and the rest of the financial guaranty and mortgage insurance industries 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 financial guaranty business generally experiences relatively higher loss levels in certain of its other insurance businesses, such as trade credit reinsurance, than in its public finance or structured products businesses. 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 established 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 2005, 2004 and 2003 included $17.2 million, $34.3 million and $38.7 million, respectively, in connection with our trade credit reinsurance 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

We consider effective risk management to be critical to our long-term financial stability. As such, we are looking to continuously enhance and integrate the risk management function across our business lines. Since the acquisition of EFSG, we have sought to take the best practices existing in each business line and integrate them into a company-wide risk management process. In 2005, we hired a Chief Risk Officer to enhance our corporate-wide

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credit processes, to further integrate our credit culture and to establish a single credit risk platform for analysis and valuation. The Chief Risk Officer is responsible for formulating corporate-wide credit policy, maintaining the economic capital methodology, assessing model integrity, establishing and monitoring risk limits, and insuring adequate supporting technological and human resources are in place. The respective heads of risk management in the mortgage insurance and financial guaranty businesses report directly to the Chief Risk Officer, with reporting responsibility to their business heads as well.

We have implemented a credit committee structure applicable to both our mortgage insurance and financial guaranty businesses. Overseeing this credit committee structure is the Enterprise Risk Credit Committee (the “ERC”), consisting mainly of members of company-wide senior management. The ERC oversees individual credit committees organized by product line. These product-line committees include representatives of the product line, along with members of our credit policy, finance and legal departments. We believe that this 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 of our subsidiary’s insurance in force and in proposed transactions. In 2005, our board of directors formed a committee of independent directors to assist the board in its responsibilities related to the oversight of our credit and risk management policies and procedures, including, heightening board-level awareness of the impact of developing risk trends on our portfolio and plans. The Chief Risk Officer provides the committee with a quarterly review of all aspects of our credit risk, including notable transactions and a periodic assessment of the state of our risk management function.

In order to evaluate and review credit risk across the company, we have developed an internal economic capital methodology which allows us to attribute economic capital to each individual credit within our portfolio. As such, economic capital provides us with a uniform risk measure for analyzing and valuing risk that is consistent across the mortgage insurance and financial guaranty businesses. The ability to measure risk in the same units allows us to set company-wide position limits for our portfolio that account for both differences in loss probabilities for each credit and also for the correlation in loss probabilities across a portfolio of credits. Economic capital is also the basis for calculating risk-adjusted returns on our capital (“RAROC”) which allows us to establish criteria for weighing the credit risk borne relative to the premium received.

Our economic capital methodology is heavily reliant on our models’ ability to quantify the underlying risks of default and prepayment. We have established a Model Review and Advisory Committee to address the issue of how well our models perform their respective risk assessments. This company-wide committee is made up of representatives of our quantitative modeling groups in each business line with the chairperson reporting directly to the Chief Risk Officer. The results of the committee’s model reviews are reported to and approved by the ERC.

In addition to credit risk, we evaluate our risk by reviewing market risk, currency risk, interest-rate risk, operational risk and legal risk across all of our businesses on a regular basis.

Mortgage Insurance

In 2005, in order to align the business to meet the needs of a changing business environment and to enhance credit risk awareness throughout the company, the mortgage insurance business moved to a business channel approach with four channels—Capital Markets, Strategic Accounts, Business Direct and International (see “Sales and Marketing—Mortgage Insurance” in this Item 1).

Our mortgage insurance business has a comprehensive risk management function that is imbedded in the channels as well as a separate department, Credit Policy & Compliance, with three distinct functions – Credit Policy, Portfolio Management and Risk Analytics and Portfolio Quality Assurance. The Credit Policy & Compliance group is focused on mortgage collateral and is responsible for overall credit policy creation and monitoring of compliance, portfolio management, limit setting and reporting, quantitative model creation and maintenance, comprehensive analytics and communication of credit related issues to management and our board of directors. This group reports directly to the Chief Risk Officer.

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Risk tolerance policies are established by our Credit Policy & Compliance group to allow each of the mortgage business channels to operate within a predetermined set of acceptable risk parameters. Compliance with these policies is enforced in two ways: first, all risk functions in each of the mortgage business channels indirectly report to our Credit Policy and Compliance group; and second, by direct monitoring and enforcement by our Portfolio Quality Assurance department and our Credit Policy department. Our Portfolio Management and Risk Analytics department provides further surveillance at the portfolio level and coordinates with the business channels, which provide surveillance at the lender and loan level.

Additionally, the Credit Policy & Compliance group chairs two of our credit committees—the Mortgage Credit Committee and the Mortgage Insurance Credit Committee. The Mortgage Credit Committee is responsible for approving all domestic and international financial guaranty and structured transactions that are conducted through Radian Insurance. The Mortgage Insurance Credit Committee is responsible for approving all mortgage insurance risks that are outside our published guidelines and for approving changes to our proprietary scoring models.

Credit Policy

The Credit Policy function is responsible for establishing and maintaining all mortgage insurance and financial guaranty credit risk policy around counterparty, portfolio, operational and structured risks secured by or involving mortgage collateral. Credit Policy is also responsible for approving policy exception requests from the business channels. Additional responsibilities include establishing and monitoring portfolio limits for product types, loan attributes, and geographic concentrations, maintaining the flow rate card pricing return policy, economic capital policy review, developing standard commitment contract provisions and administration of the credit committees.

Portfolio Management and Risk Analytics

Our Portfolio Management and Risk Analytics department is responsible for three major functions: Risk Analytics, Quantitative Models and Surveillance.

Risk Analytics is responsible for analyzing risk in the overall market and portfolio, building reserving models for the mortgage insurance business, and performing a data and systems management function for the mortgage insurance business. Risk analysis involves analyzing risks to the portfolio from the market (for example, analyzing the effects of changes in housing prices and interest rate movements) and analyzing risks from particular lenders, products, and geographic locales.

Quantitative Models estimates, implements and controls our proprietary Prophet Models^® used to price any of our flow rate cards or structured transactions. Our proprietary Prophet Models^® jointly estimate default and prepayment risk on all of our major product lines. These models and any changes to them are discussed in a Model Review Forum and ultimately are approved by the Mortgage Insurance Credit Committee. Quantitative Models also reviews and approves all third party models used to approve loans for delegated mortgage insurance.

Surveillance is responsible for providing an independent view of risks assumed in all structured transactions in our mortgage insurance business, among major lenders and on select deals. For all structured transactions in our mortgage insurance business, Surveillance rates the performance of each transaction by modeling cash flows and providing detailed analysis. Results are then shared with management in a quarterly committee review meeting.

Further responsibilities of Portfolio Management and Risk Analytics include economic research, presentations to our board of directors and assisting in financial reporting.

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Portfolio Quality Assurance

Our Portfolio Quality Assurance (“PQA”) department is responsible for ensuring that credit and related risks that impact the quality of our portfolio of insured loans, the quality of loans underwritten by us or our delegated lenders and the quality of critical data used within our business are assessed, investigated and communicated to management so that informed decisions can be made about loss prevention, mitigation, corrective action, pricing and/or other appropriate remedies.

The PQA group is responsible for ensuring that our underwriting procedures and guidelines (as well as those of lenders and the GSEs) are followed by service center, contract underwriting, and corporate operational support personnel through a loan re-underwriting and auditing program.

The PQA group also conducts risk-based reviews of our delegated underwriting business. The results of our reviews are used to improve the quality of the business the lender submits to us for insurance. Issues that are raised in our reports and not resolved within a time period acceptable to us will result in restriction or termination of the lender’s delegated underwriting authority.

The PQA group also identifies and recommends solutions for significant credit-related data integrity issues that do not meet our expectations for accuracy, consistency, ease of use, or availability. Under a continuous improvement program, the PQA group works with the technology area to resolve these data issues.

The PQA group also is responsible for executing a program of risk-based monitoring to evaluate the level of business channel and risk operations compliance with critical credit policies established by Credit Policy & Compliance, ensuring enforcement of credit policy and accountability on the part of the business channels and providing feedback to our Credit Policy department for continual review and improvement of existing policies.

Due Diligence on Structured Transactions

We believe that understanding our business partners is a key component of managing the risks posed by potential business transactions. Due diligence is performed by the business channels under policies issued by our Credit Policy & Compliance group. These due diligence reviews are 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.

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.

Loan-level due diligence is conducted on structured transactions (i) to determine whether appropriate underwriting guidelines have been adhered to and whether loans conform to our guidelines, (ii) to evaluate data integrity and (iii) to detect any fraudulent loans. The results of loan-level due diligence assist our mortgage insurance business in determining whether the pending transaction should be consummated and, in the event it is consummated, to provide data that can be used to determine appropriate pricing. The results also provide the mortgage insurance business with a database of information on the quality of a particular lender’s underwriting practices for future reference.

Reinsurance—Ceded

Radian Guaranty entered into variable quota-share treaties in each of the years 1994 through 1997 to reinsure its primary risk originated in each of these years and a portion of its pool risk written in 1997. Under these treaties, quota-share loss relief is provided to Radian Guaranty at varying levels ranging from 7.5% to

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15.0% based on the loss ratio on the reinsured book for a ten-year term on each origination year. The higher the loss ratio, the greater the potential reinsurance relief, which protects Radian Guaranty in adverse loss situations. A commission is paid by the reinsurer to Radian Guaranty, and the agreements are noncancelable during their ten-year terms by either party. As of December 31, 2005, the risk in force covered by the variable quota-share treaties was approximately $2.1 billion, or approximately 7.4% of our mortgage insurance business’s total primary and pool risk in force, and $52.8 million, or approximately 1.9% of our mortgage insurance business’s total pool risk in force on the remaining terms of the 1996 and 1997 origination years. We have not reinsured any additional business pursuant to variable quota-share treaties since 1998.

In addition, Radian Guaranty currently uses reinsurance from affiliated companies to remain in compliance with the insurance regulations of states that require that a mortgage insurer limit its coverage percentage of any single risk to 25%. These transactions have no impact on our Consolidated Financial Statements.

Radian Guaranty and Amerin Guaranty are parties to a cross guaranty agreement. This agreement provides that if either party fails to make a payment to any of its policyholders, then the other party will step in and make the payment. The obligations of both parties under the agreement are unconditional and irrevocable; however, no payments will be made without prior approval by the insurance department of the payor’s state of domicile.

In 2004, we developed an approach for reinsuring our non-prime risk. The arrangement, which we refer to as “Smart Home,” effectively transfers risk from our portfolio to investors in the capital markets. Each transaction begins with the formation of an unaffiliated, offshore reinsurance company. We then enter into an agreement with the Smart Home reinsurer pursuant to which we agree to cede to the reinsurer a portion of the risk (and premium) associated with a portfolio of non-prime residential mortgage loans insured by us. The Smart Home reinsurer is funded in the capital markets through the issuance to investors of a series of separate classes of credit-linked notes. Each class relates to the loss coverage levels on the reinsured portfolio and is assigned a rating by one or more of the three major rating agencies. We typically retain the risk associated with the first-loss coverage levels, and we may retain or sell, in a separate risk transfer agreement, the risk associated with the AAA rated or most remote coverage level. Holders of the Smart Home credit-linked notes bear the risk of loss from losses paid to us under the reinsurance agreement. The Smart Home reinsurer invests the proceeds of the notes in high-quality short-term investments approved by the rating agencies. Income earned on those investments and a portion of the reinsurance premiums that we pay are applied to pay interest on the notes as well as certain of the Smart Home reinsurer’s expenses. The rate of principal amortization of the credit-linked notes approximates the rate of principal amortization of the underlying mortgages.

Since August 2004, we have completed three Smart Home arrangements. Details of these transactions are as follows:

Smart Home allows us to continue to take on more non-prime risk and the higher premiums associated with insuring these types of products. As a result, we consider Smart Home arrangements to be important to our ability to effectively manage our risk profile and to remain competitive in the non-prime market. Approximately 13% of our non-prime risk in force is currently reinsured through Smart Home arrangements. Because the Smart Home arrangement ultimately depends on the willingness of investors to invest in Smart Home securities, we cannot be certain that Smart Home will always be available to us or will be available on terms that are acceptable

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to us. If we are unable to continue to use Smart Home arrangements, our ability to participate in the non-prime mortgage market could be limited, which could have a material adverse effect on our business, financial condition and operating results.

Premiums written (ceded) in 2005 and 2004 include $3.5 million and $1.0 million, respectively, related to the Smart Home transactions. There were no ceded losses in 2005 or 2004 as a result of the Smart Home transactions.

We and other companies in the mortgage insurance industry also participate in reinsurance arrangements with mortgage lenders commonly referred to as “Captive reinsurance arrangements.” See “Mortgage Insurance Business—Captive Reinsurance” in this Item 1.

Financial Guaranty

We consider effective risk management to be critical to our long-term financial stability and employ a comprehensive risk system. This incorporates the integration of company-wide risk management policies and processes as well as best practices of the financial guaranty industry. All transactions are subject to a thorough underwriting analysis, a comprehensive risk committee decision process, and if a transaction is booked, surveillance by an independent department.

Transaction underwriting includes the analysis of all credit and legal aspects as well as any specific risks that may be inherent in the transaction. Further, the financial guaranty business utilizes our proprietary internal economic capital model for risk analysis, valuation and as the basis for calculating RAROC. All transactions are subject to a credit committee decision process embedded in the business and governed by the ERC. Following documented protocols and voting rules, a transaction must be approved in order to qualify for financial guaranty insurance. For transactions that are approved and booked, responsibility transfers to the surveillance department for monitoring, review, feed back to underwriting and risk mitigation.

Underwriting

Our financial guaranty underwriting discipline incorporates a multi-discipline underwriting process for both direct transactions and reinsurance transactions.

Direct Transactions.    Direct transactions are sourced and screened by the financial guaranty business based upon established criteria and profitability requirements. Transactions that qualify for further analysis are subject to an underwriting process to determine the creditworthiness of the obligor. The underwriting analysis is performed at a transaction level, examining the fundamental ability and willingness of the obligor and/or issuer to meet the specified obligation. This analysis includes all aspects of the obligation ranging from the fundamental financial strength of the obligor to the structure of the transaction, which may dictate the payment structure. All transaction analysis is also subject to legal requirements.

Reinsurance Transactions.    The same disciplined approach and risk requirements are applied to our reinsurance transactions. As part of our ongoing business, the financial guaranty business assumes transactions from approved reinsurance companies on a treaty or facultative basis. The primary insurance company is subject to a review by us that involves an examination of its operating, underwriting and surveillance procedures, personnel, organization and existing book of business. Additionally, our long-standing relationships with these select companies provide for experience-based analysis and information. The treaty book of assumed business is governed by treaties, which specify the parameters of risk acceptance as well as other components. The facultative business is governed by agreements between the primary insurer and us, and each transaction is subject to individual underwriting, as outlined above. Moreover, the ceding company typically is required to retain at least 25% of the exposure on any single risk that we assume.

Surveillance

Financial guaranty also has a surveillance risk management department that is dedicated to the surveillance of our book of business. See “Loss Mitigation—Financial Guaranty” in this Item 1 for information regarding this department.

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Risk in Force

Mortgage Insurance

In recent years, we have faced increasing competition for traditional prime mortgages. As a result, we began offering mortgage insurance on increasing levels of non-prime mortgages, as well as new and emerging products such as interest-only loans and non-traditional products such as second mortgages, credit default swaps, NIMs and insurance of international mortgage transactions. 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 adjust 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, 2005:

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”) in the United States as of December 31, 2005 and 2004:

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During 2005, we increased the level of mortgage insurance business that we have been writing internationally. We are now writing a product mix that varies according to location and includes mortgage insurance and reinsurance as well as credit enhancement for structured mortgage-backed transactions and credit default swaps. Our primary geographical focus includes locations in Europe, Asia and Australia. We have provided credit protection on pools of mortgages (including mortgage-backed securities in credit default swap form) in the U.K., the Netherlands, Germany and Denmark. In addition, we entered into two mortgage reinsurance transactions in Australia in 2004 and early in 2005. We’ve also recently entered into a relationship with 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.

Lender and Product Characteristics

Although geographic dispersion is an important component of overall risk diversification—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 diversification such as product distribution and our risk management and underwriting practices.

One of the most important indicators of claim incidence is the relative amount of borrower’s equity or down payment that exists in a home. 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 also insure loans having an LTV over 100%, although the amount that we insure is insignificant.

We believe that the risk of claim on non-prime loans is significantly higher than that on prime loans. Although higher premium rates and surcharges are charged to compensate for the additional risk, non-prime products are relatively new and have not been fully tested in adverse economic situations, so we cannot be certain 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 Adjustable-Rate Mortgages (“ARMs”) has been higher than on fixed-rate loans due to monthly payment increases that occur when interest rates rise.

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We believe that 15-year mortgages are less risky than 30-year mortgages, mainly 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.

The risk of claim also is affected by the type of property securing the insured loan. Loans on single-family detached housing are less likely to result in a claim than loans on other types of properties. 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. 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 also believe that loans on non-owner-occupied homes purchased for investment purposes are more likely to result in a claim and are subject to greater value declines than loans on either primary or second homes. Accordingly, we underwrite loans on non-owner-occupied investment homes more stringently, and we charge a significantly higher premium rate than the rate charged for insuring loans on owner-occupied homes.

It has been our experience 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 those 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.

We also insure Option ARMs, a product that has recently become very popular in the market. Option ARMs offer a number of different monthly payment options to the borrower. One of these options is a minimum payment that is below the fully amortizing payment, which results in principal being added back to the loan balance and the loan balance continually increasing. This process is referred to as negative amortization. Additional premiums are charged against these Option ARMs as a result.

The following table shows the percentage of our direct primary 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, 2005 and 2004:

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