Mortgage insurer Radian Group (RDN) narrowed its fourth-quarter loss, as the company battled a challenging home lending market and troubled legacy loans in its portfolio.

The Philadelphia-based insurer posted a loss of $121.5 million, or 92 cents a share, for the fourth quarter. That is significantly improved from the year earlier, when the company posted a loss of $1.1 billion, or $8.55 a share. 

The recent fourth quarter was impacted by gains from changes in the fair value of derivatives and a tax provision of $65.4 million.

Income for 2011 hit $302.2 million, or $2.26 a share, compared to a loss of $1.8 billion, or $15.74 a share, a year earlier.

The company said the credit quality on insured loans improved in the fourth quarter. Still, the number of primary delinquent loans edged up slightly during the period, while falling 12% from a year earlier.

Mortgage insurance claims paid on defaulted loans hit $291.6 million in the fourth quarter, down from $392 million a year earlier.

For all of 2011, Radian paid $1.5 billion in mortgage insurance claims, up from $1.3 billion in 2010.

The company had $3.2 billion in mortgage insurance loss reserves in December, which is flat from the third quarter and down from $3.5 billion a year earlier.

Radian remains in a challenging environment from a capital standpoint. The firm’s current risk-to-capital ratio is 21.5-to-1. Analysts suggest a mortgage insurer is at the high-end of the risk scale when their ratio is 15-to-1 or higher.

Radian spent the past several months trying to obtain waivers from state regulators to keep writing new business if it ends up exceeded statutory minimums on capital ratio requirements.

“In the event Radian is no longer in compliance with the risk-based capital requirements of certain states, the company is preparing to continue writing new business in those states through state-specific waivers or similar relief, or by using Radian Mortgage Assurance Inc.,” the company said.

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