RADIAN GROUP INC

Risk Philosophy, Vision and Appetite

As a financial services organization, risk management is a critical part of our business. The following goals guide our strategy and actions as a risk management organization:

■Embed and continually reinforce a disciplined, corporate-wide risk culture that utilizes an understanding of risk/return trade-offs to drive quality decisions and achieve long-term, through-the-cycle profitability;

■Maintain credit, underwriting, pricing and risk/return disciplines based on sound data and analytics and continuous feedback throughout the organization;

■Proactively monitor business, counterparty, economic, housing and regulatory trends to identify and mitigate emerging risks;

■Continually refine analytical and technological capabilities, processes and systems to effectively identify, assess and manage risks; and

■Develop and leverage tools and capabilities to inform and optimize capital allocation within our risk appetite in support of our corporate strategy.

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Risk Categories

Our risk appetite, or the amount of risk we are willing to take on in pursuit of value, is driven by our business strategy, which is established by executive management and overseen by our board of directors. We define our risk appetite qualitatively through the following key risk categories where strategic execution occurs: credit; financial; strategic; operational and regulatory and compliance. We do not treat reputational risk as a distinct category of risk; rather, we view reputational risk as pervasive throughout our entire risk portfolio, as each risk on its own can impact our reputation if not mitigated or managed properly.

Risk Governance

Board of Directors

Our board of directors is responsible for the general oversight of risks. Our board of directors seeks to understand and oversee the most critical risks relating to our business, allocates responsibilities for the oversight of risks among the full board and its committees, and reviews the systems and processes that management has in place to manage identified risks, as well as those that could arise in the future.

The board as a whole or through its Risk Committee and other standing committees, regularly meets with management to receive reports related to, among other risk-related items: (i) our Enterprise Risk Management (“ERM”) function regarding the most significant risks we are facing, and the steps being taken to assess, manage and mitigate those risks; (ii) our information security function regarding cybersecurity-related risks and our efforts to mitigate such risks; and (iii) our compliance programs and our efforts to embed a culture of compliance throughout the organization to encourage ethical behavior and mitigate risks of regulatory non-compliance. The full board further considers current and potential future strategic risks as part of its annual strategic planning session with management.

Executive Management

Our senior executive management team regularly monitors and discusses risks related to our businesses through various management committees. Our Pricing and Risk Committee, Capital and Liquidity Committee and Model Governance Committee (these committees collectively comprise our Asset Liability Committee) focus on identifying risks and decision making related to pricing, credit, capital, liquidity and model risk management, including risk/return analysis associated with different business opportunities. Other management committees focused on risk management include, but are not limited to, our ERM Council, Executive Information Security Committee, Enterprise Compliance Oversight Council, Resilience Executive Committee and Enterprise Information Governance Committee.

Integrated ERM Framework

We have adopted an integrated approach to risk management, which includes, among other things: (i) a centralized ERM function that is responsible for overseeing the process for risk identification, assessment, management and mitigation across the organization; (ii) an enterprise compliance function for overseeing regulatory compliance matters, policy governance and related risks; (iii) risk management functions embedded in our businesses; (iv) specialized risk committees with a focus on specific risks; and (v) an internal audit function that performs periodic, independent reviews and tests compliance with risk management policies, procedures and standards across the Company.

Our ERM framework is designed to provide executive management with the ability to identify and evaluate the most significant risks we face and to calibrate risk mitigation strategies to address challenges in the current business environment, as well as external factors that may create other risk exposures for our operations. In practice, our ERM function represents a cross-functional and enterprise-wide effort, consisting of subject matter experts and experienced managers, that utilizes a systematic method to identify, evaluate and monitor both known and emerging risks. Risk assessments and mitigation plans are developed to address these risks. Risk scoring and validation of the effectiveness of risk management plans through management reporting facilitate program sustainability and promote accountability for risk management activities throughout the Company.

As part of our ERM program, our businesses employ comprehensive risk management functions, which, in conjunction with oversight by the Risk Committee of our board of directors, are responsible for monitoring compliance with our risk-related policies, managing our insured portfolios and the mortgage loans we purchase through our mortgage conduit and communicating credit-related issues to management, our board of directors and our customers.

Information security is a significant operational risk for financial institutions such as Radian. To address this, our ERM program incorporates cybersecurity-related risks into our identification, evaluation and mitigation processes. In addition, we maintain an Information Security Program that is designed to protect our corporate data, including data we provide to others, as well as data entrusted to us by our customers and partners. For more information about our Information Security Program and other aspects of our cybersecurity governance and risk management, see “Item 1C. Cybersecurity.”

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Mortgage Insurance Risk Management

Risk Origination and Servicing. We believe that understanding our business partners and customers is a key component of managing risk. Accordingly, we have a counterparty risk management team that leverages our customer and servicer segmentation framework so that we can more effectively perform ongoing monitoring of loan performance, underwriting quality and the risk profile and mix of business of a customer’s mortgage insurance applications. The counterparty risk management team monitors trends at the customer level, identifies customers who may exceed certain risk tolerances and shares meaningful performance data with our customers to help them improve. The team is also responsible for taking lender corrective action in the event we discover credit performance issues, such as high early payment default levels.

Portfolio Management. We have developed risk and capital allocation models to support our mortgage insurance business. These models provide comprehensive analytics that help us establish portfolio limits for product type, loan attributes, geographic concentrations and counterparties. We proactively monitor market concentrations across these and other attributes. We also identify, evaluate and negotiate potential transactions for terminating insurance risk and for distributing risk to third parties, including through reinsurance arrangements. See “Risk Distribution” below for more information about the use of reinsurance as a risk management tool in our mortgage insurance business. As part of our portfolio management function, we monitor and analyze the performance of various risks in our mortgage insurance portfolio. We use this information to develop our mortgage credit risk and counterparty risk policies, and as a component of our default and prepayment analytics.

Credit Policy. We maintain mortgage-related credit risk policies that reflect our tolerance levels regarding counterparty, portfolio and operational risks. Based on our policies and risk tolerances, our credit policy function develops and updates our mortgage insurance eligibility requirements and guidelines through regular monitoring of competitor offerings, GSE programs and GSE guideline updates, customer input regarding lending needs, analysis of historical performance and portfolio trends, quality assurance results and underwriter experience and observations. The credit policy function works closely with our mortgage insurance underwriters to ensure that underwriting decisions align with risk tolerances and policies.

Quality Assurance. Our quality assurance function supports our credit analytics function by auditing individual loan files to examine underwriting decisions for compliance with agreed-upon underwriting guidelines. These audits are conducted across loans submitted through our delegated and non-delegated underwriting channels in order to monitor underwriting quality for insurance certificates underwritten by our customers or our underwriters. We conduct independent re-verification of key mortgage insurance application data to minimize the possibility of misrepresentation. Our quality assurance team also conducts audits of our key operational functions, including claims, premium processing and customer care to ensure that our operational transactions are in compliance with our policies and procedures.

Loss Mitigation. We have a dedicated loss mitigation group that works with servicers to identify and pursue loss mitigation opportunities for loans in both our performing and non-performing (defaulted) portfolios. This includes regular surveillance and benchmarking of servicer performance with respect to default and loss mitigation workout reporting, borrower home retention efforts, foreclosure alternatives and foreclosure proceedings. Through our risk management function, we seek to hold servicers accountable for their performance and communicate to servicers identified best practices for servicer performance. See “Mortgage Insurance—Defaults and Claims—Claims Management” for more information.

Risk Modeling. Our risk modeling team uses analytical techniques to develop and maintain economic scenario generation models and loan level default and prepayment models across a wide range of risk management applications, including portfolio analysis, credit decision making, forecasting and loss reserving.

Risk Distribution. In our mortgage insurance business, we use reinsurance as a capital and risk management tool, including to lower the risk profile and financial volatility of our mortgage insurance portfolio through economic cycles. We have distributed risk through third-party quota share and excess-of-loss reinsurance arrangements, including through the capital markets using mortgage insurance-linked notes transactions. In recent years, we have expanded our risk distribution strategy in an effort to optimize the amounts and types of capital and risk distribution deployed against insured risk. The objectives of our risk distribution strategy include: (i) supporting our overall capital plan by reducing our cost of capital, increasing capital efficiency and enhancing our projected returns on capital and (ii) reducing portfolio risk and financial volatility through economic cycles. For additional information regarding our reinsurance programs, see Note 8 of Notes to Consolidated Financial Statements.

Title Insurance Risk Management

We take a prudent approach to assessing and managing risk in our title insurance business through the use of well-trained underwriters, stringent underwriting guidelines and the imposition of per file risk limits and third-party reinsurance on a per policy basis, over certain policy limits.

Underwriting and Quality Assurance. Our agents, underwriters and title examiners receive training and feedback in the examining and underwriting of residential and commercial title insurance for both refinance and purchase transactions. Certain title commitments are selected for further review to ensure that underwriting decisions comply with agreed-upon underwriting guidelines and that the policies are within single risk limits.

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Credit Policy. We have developed and maintain policies for our title insurance business, which reflect our risk tolerance levels. Risk limits are imposed on selected loan types and reinsurance is currently required on all policies with loan amounts above a specified amount.

Ceded Reinsurance. In our title insurance business, we use reinsurance as part of our capital and risk management activities, including a loss portfolio transfer reinsurance agreement that transfers a portion of the risk associated with the legacy title insurance in our portfolio (insurance written prior to 2018 when we acquired our title insurance subsidiary) to a third party. We also currently maintain an excess-of-loss policy with a third-party reinsurer that covers losses on our entire title insurance legacy portfolio above a specified limit.

Mortgage Conduit Risk Management

Credit Policy. Our risk management team reviews and approves mortgage conduit loan programs, underwriting guideline changes and mortgage seller underwriting programs. Mortgage conduit loan programs are reviewed frequently and updated as needed to address changing market conditions and other factors.

Counterparty Risk. We maintain mortgage seller approval and recertification policies to evaluate and monitor, among other things, seller creditworthiness, capacity, and quality. Mortgage seller financial and other trends are also monitored, and appropriate mitigation actions are taken as warranted. Our counterparty risk management team has also developed risk thresholds for our mortgage conduit business that align with the Company’s overall risk and return tolerances.

Quality Assurance. Our quality assurance function audits a sample of individual loan files purchased by Radian Mortgage Capital to assess compliance with the applicable underwriting guidelines and regulatory compliance requirements. We conduct independent re-verification of key credit file data to protect against misrepresentation.

Secondary Marketing. We have a control framework with established standards, parameters and practices that apply to the purchase and sale of mortgage loan products by Radian Mortgage Capital. The controls are aligned with the Company’s risk and return tolerances through established authority levels, escalation triggers and governance over target pricing, margin limits, risk position limits and trade size limits. This framework governs Radian Mortgage Capital’s day-to-day management of market risk within profitability targets of its residential mortgage loan pipeline and ensures that Radian Mortgage Capital maintains a hedge coverage that is within the Company’s approved parameters.