1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________________to_____________________
Commission file number 1-11356
RADIAN GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2691170
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1601 MARKET STREET, PHILADELPHIA, PA 19103
(Address of principal executive offices) (zip code)
(215) 564-6600
(Registrant's telephone number, including area code)
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 if 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 37,576,823 shares of Common
Stock, $0.001 par value, outstanding on May 10, 2000.
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RADIAN GROUP INC. AND SUBSIDIARIES
INDEX
PAGE NUMBER
Part I - Financial Information
Consolidated Balance Sheets - March 31, 2000 (Unaudited) and
December 31, 1999.................................................... 3
Consolidated Statements of Income - For the quarters ended
March 31, 2000 (Unaudited) and 1999 (Unaudited)....................... 4
Consolidated Statement of Changes in Common Stockholders'
Equity - For the quarter ended March 31, 2000 (Unaudited)............. 5
Consolidated Statements of Cash Flows - For the quarters ended
March 31, 2000 (Unaudited) and 1999 (Unaudited)....................... 6
Notes to Consolidated Financial Statements..................................... 7
Management's Discussion and Analysis of Results of
Operations and Financial Condition.................................... 8 - 12
Quantitative and Qualitative Disclosures about Market Risk..................... 12
Part II - Other Information, as applicable.............................................. 13
Signature............................................................................... 14
2
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RADIAN GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31 December 31
2000 1999
---- ----
(Unaudited)
(In thousands, except share amounts)
Assets
Investments
Fixed maturities held to maturity - at amortized cost (fair value
$476,847 and $475,257) ......................................... $ 467,564 $ 468,549
Fixed maturities available for sale - at fair value
(amortized cost $941,819 and $839,845) ......................... 920,977 804,776
Equity securities - at fair value (cost $47,795 and $47,719) ..... 59,674 58,378
Short-term investments ........................................... 64,581 56,974
Cash ................................................................. 3,104 7,507
Deferred policy acquisition costs .................................... 62,952 61,680
Prepaid federal income taxes ......................................... 202,750 204,701
Provisional losses recoverable ....................................... 41,856 40,065
Other assets ......................................................... 73,940 74,082
----------- -----------
$ 1,897,398 $ 1,776,712
=========== ===========
Liabilities and Stockholders' Equity
Unearned premiums .................................................... $ 63,232 $ 54,925
Reserve for losses ................................................... 349,966 335,584
Federal income taxes, principally deferred ........................... 232,908 206,168
Accounts payable and accrued expenses ................................ 82,679 82,779
----------- -----------
728,785 679,456
----------- -----------
Redeemable preferred stock, par value $.001 per share;
800,000 shares issued and outstanding - at
redemption value ................................................. 40,000 40,000
----------- -----------
Common stockholders' equity
Common stock, par value $.001 per share; 80,000,000 shares authorized;
37,453,141 shares and 37,307,504 shares issued
and outstanding .................................................. 37 37
Additional paid-in capital ........................................... 529,061 524,408
Retained earnings .................................................... 605,348 548,684
Accumulated other comprehensive loss ................................. (5,833) (15,873)
----------- -----------
1,128,613 1,057,256
----------- -----------
$ 1,897,398 $ 1,776,712
=========== ===========
See notes to consolidated financial statements.
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RADIAN GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter Ended
March 31
2000 1999
---- ----
(In thousands, except per-share amounts)
Revenues:
Premiums written:
Direct ....................................... $ 147,008 $ 122,747
Assumed ...................................... 4 4
Ceded ........................................ (11,406) (11,396)
--------- ---------
Net premiums written ............................. 135,606 111,355
(Increase) decrease in unearned premiums ......... (8,309) 1,138
--------- ---------
Premiums earned .................................. 127,297 112,493
Net investment income ............................ 18,827 15,913
Gain on sales of investments ..................... 851 385
Other income ..................................... 1,350 4,409
--------- ---------
148,325 133,200
Expenses:
Provision for losses ............................. 38,782 44,242
Policy acquisition costs ......................... 13,262 16,186
Other operating expenses ......................... 13,451 16,944
Merger expenses .................................. -- 2,833
--------- ---------
65,495 80,205
--------- ---------
Pretax income ....................................... 82,830 52,995
Provision for income taxes .......................... (24,230) (15,642)
--------- ---------
Net income .......................................... 58,600 37,353
Dividends to preferred stockholder .................. 825 825
--------- ---------
Net income available to common stockholders ......... $ 57,775 $ 36,528
========= =========
Basic net income per share .......................... $ 1.54 $ 0.99
========= =========
Diluted net income per share ........................ $ 1.53 $ 0.97
========= =========
Average number of common shares outstanding - basic . 37,419 36,862
========= =========
Average number of common and common equivalent shares
outstanding - diluted ............................... 37,864 37,723
========= =========
See notes to consolidated financial statements.
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RADIAN GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income (Loss) Total
----- ------- -------- ------------- -----
(In thousands)
Balance, December 31, 1999 ............ $ 37 $ 524,408 $ 548,684 $ (15,873) $ 1,057,256
Comprehensive income:
Net income (unaudited) ................ -- -- 58,600 -- 58,600
Unrealized holding gains arising
during period, net of tax of
$5,706 (unaudited) .................. -- -- -- 10,598
Less: Reclassification adjustment
for net gains included in net income,
net of tax of $300 (unaudited) ...... -- -- -- (558)
-----------
Net unrealized gain on investments,
net of tax of $5,406 (unaudited) . -- -- -- 10,040 10,040
-----------
Comprehensive income (unaudited) ..... 68,640
Issuance of common stock (unaudited) .. -- 4,653 -- -- 4,653
Dividends (unaudited) ................. -- -- (1,936) -- (1,936)
----------- ----------- ---------- ---------- -----------
Balance, March 31, 2000 (unaudited) ... $ 37 $ 529,061 $ 605,348 $ (5,833) $ 1,128,613
=========== =========== =========== =========== ===========
See notes to consolidated financial statements.
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RADIAN GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Quarter Ended
March 31
2000 1999
---- ----
(In thousands)
Cash flows from operating activities ........................ $ 96,080 $ 71,457
--------- ---------
Cash flows from investing activities:
Proceeds from sales of investments available for sale ..... 84,059 20,801
Proceeds from sales of equity securities available for sale 4,349 528
Proceeds from redemptions of investments available for sale 5,713 2,350
Proceeds from redemptions of investments held to maturity . 3,398 4,834
Purchases of investments available for sale ............... (186,863) (80,381)
Purchases of equity securities available for sale ......... (4,451) (5,573)
Purchases of short-term investments, net .................. (7,607) (4,668)
Purchases of property and equipment, net .................. (1,282) (5,643)
Other ..................................................... (516) (738)
--------- ---------
Net cash used in investing activities ....................... (103,200) (68,490)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock .................... 4,653 714
Dividends paid ............................................ (1,936) (1,506)
--------- ---------
Net cash from (used in) financing activities ................ 2,717 (792)
--------- ---------
(Decrease) increase in cash ................................. (4,403) 2,175
Cash, beginning of period ................................... 7,507 9,377
--------- ---------
Cash, end of period ......................................... $ 3,104 $ 11,552
========= =========
Supplemental disclosures of cash flow information:
Income taxes paid ........................................... $ -- $ 500
========= =========
Interest paid ............................................... $ 62 $ 33
========= =========
See notes to consolidated financial statements.
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RADIAN GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of Radian
Group Inc. (the "Company") and its subsidiaries including its principal
operating subsidiaries, Radian Guaranty Inc. and Amerin Guaranty
Corporation, (collectively referred to as "Radian"), and are presented on
the basis of generally accepted accounting principles.
The financial information for the interim periods included herein is
unaudited; however, such information reflects all adjustments which are, in
the opinion of management, necessary for a fair presentation of the
financial position, results of operations, and cash flows for the interim
periods. The results of operations for interim periods are not necessarily
indicative of results to be expected for the full year.
Basic net income per share is based on the weighted average number of
common shares outstanding, while diluted net income per share is based on
the weighted average number of common shares outstanding and common share
equivalents that would arise from the exercise of stock options. Preferred
stock dividends are deducted from net income in the net income per share
computation.
For a summary of significant accounting policies and additional
financial information, see the Radian Group Inc. Annual Report on Form 10-K
for the year ended December 31, 1999.
2 - MERGER
On November 22, 1998, the board of directors of CMAC Investment
Corporation ("CMAC") and the board of directors of Amerin Corporation
("Amerin") each approved an Agreement and Plan of Merger pursuant to which
CMAC and Amerin have merged. The merger closed on June 9, 1999 after
approval by the stockholders of both companies, at which time the name of
the merged company was changed to Radian Group Inc. The merger called for
Amerin stockholders to receive 0.5333 shares of CMAC common stock in a
tax-free exchange for each share of Amerin common stock that they owned.
CMAC's stockholders continued to own their existing shares after the
merger. The merger transaction has been accounted for on a pooling of
interests basis and, therefore, all financial statements presented reflect
the combined entity.
3 - ACCOUNTING PRINCIPLES ISSUED AND NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The statement, originally
effective for fiscal years beginning after June 15, 1999, was deferred for
one year when the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133." The statement establishes accounting and reporting
standards for derivative instruments and hedging activity and requires that
all derivatives be measured at fair value and recognized as either assets
or liabilities in the financial statements. The impact of the statement
will depend on the extent of derivatives and embedded derivatives at the
date the statement is adopted. The Company is currently evaluating the
effect this statement might have on the consolidated financial position or
results of operations.
In October 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 98-7, "Deposit Accounting: Accounting for Insurance and
Reinsurance Contracts That Do Not Transfer Insurance Risk" ("SOP 98-7").
This statement provides guidance on how to apply the deposit method of
accounting when it is required for insurance and reinsurance contracts that
do not transfer insurance risk. The Company adopted SOP 98-7 in 2000.
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RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT"S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
The following is a "Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995:
The statements contained in this Form 10-Q that are not historical facts
are forward-looking statements. Actual results may differ materially from those
projected in the forward-looking statements. These forward-looking statements
involve risks and uncertainties including, but not limited to, the following
risks: that interest rates may increase rather than remain stable or decrease;
that housing demand may decrease for any number of reasons, including changes in
interest rates, adverse economic conditions, or other reasons; that Radian's
market share may decrease as a result of changes in underwriting criteria by
Radian or its competitors, or other reasons; and changes in the performance of
the financial markets, in the demand for and market acceptance of Radian
products, increased competition from government programs and the use of
substitutes for mortgage insurance, and in general conditions. Investors are
also directed to other risks discussed in documents filed by the Company with
the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Net income for the first quarter of 2000 was $58.6 million, a 56.9%
increase compared to $37.4 million for the first quarter of 1999. However, net
income for the first quarter of 1999 included merger expenses net of tax of $2.5
million. Without these merger expenses, net income was $39.9 million for the
first quarter of 1999 and net income for the first quarter of 2000 increased by
47.0%. This improvement was a result of significant growth in premiums earned
and net investment income combined with a lower provision for losses and a
reduction in policy acquisition costs and other operating expenses.
New primary insurance written during the first quarter of 2000 was $5.1
billion, a 44.5% decrease compared to $9.2 billion for the first quarter of
1999. This decrease in Radian's primary new insurance written volume for the
first quarter of 2000 was primarily due to a 34.8% decrease in new insurance
written volume in the private mortgage insurance industry for the first quarter
of 2000 as compared to the first quarter of 1999. In addition, Radian"s market
share of the industry decreased to 15.5% in the first quarter of 2000, compared
to 18.3% for the same period of 1999. Radian believes the market share decline
was primarily due to the reduction in business provided by a few of the largest
national accounts, which rebalanced their mortgage insurance allocation after
the merger. In addition, the Company believes that certain large bulk
transactions written by other companies within the industry are included in
industry new insurance written figures. In the first quarter of 2000, Radian
reduced the amount of pool insurance it wrote to $90.3 million of risk written
as compared to $158.6 million in the first quarter of 1999. Most of this pool
insurance volume relates to a group of structured transactions composed
primarily of Fannie Mae- and Freddie Mac-eligible conforming mortgage loans
("GSE Pool") that are geographically well dispersed throughout the United States
and have lower average loan-to-value ratios than Radian"s primary business. This
business contains loans with loan-to-value ratios above 80% which have primary
insurance that places the pool insurance in a secondary loss position and loans
with loan-to-value ratios of 80% and below for which the pool coverage is in a
first loss position. The performance of this business written in prior years has
been better than anticipated although the business is relatively young and the
historical performance might not be an indication of future performance. Under a
pool insurance transaction, the exposure to Radian on each individual loan is
uncapped; however, the aggregate stop-loss percentage (typically 1.0% to 1.5% of
the aggregate original loan balance in the Fannie Mae/Freddie Mac transactions)
is the maximum that can be paid out in losses before the insurer"s exposure
terminates. The Company expects its pool insurance activity to decline during
the remainder of 2000. Premium rates on such pool insurance are significantly
lower than on primary insurance loans due to the low stop-loss levels, which
limit the overall risk exposure to Radian, and the focus of such product on
high-quality primary insurance customers. Standard & Poor"s Corporation, Moody's
Investors Service and Fitch Investors Service, Inc. have determined that the
capital requirements to support such pool insurance will be significantly more
stringent than on primary insurance due to the low premium rates and low
stop-loss levels which increase expected losses as a percentage of risk
outstanding.
Radian"s volume in the first three months of 2000 was negatively
impacted by relatively higher interest rates
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RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
which affected the entire mortgage industry. The trend toward higher interest
rates, which began in the third quarter of 1999, caused refinancing activity at
the beginning of 2000 to decline to a more normal rate and contributed to the
decrease in the mortgage insurance industry new insurance written volume for the
first quarter of 2000. Radian's refinancing activity as a percentage of primary
new insurance written was 13.0% for the first quarter of 2000 as compared to
39.0% for the same period in 1999. The persistency rate, which is defined as the
percentage of insurance in force that is renewed in any given year, was 78.2%
for the twelve months ended March 31, 2000 as compared to 66.1% for the twelve
months ended March 31, 1999. This increase was consistent with the declining
level of refinancing activity during the second half of 1999, which caused the
cancellation rate to decrease. The expectation for the remainder of 2000 is a
smaller industry volume and higher persistency rates, influenced by higher
interest rates.
Radian also has become more involved in insuring non-traditional loans,
specifically Alternative A and A minus loans. Alternative A borrowers have an
equal or better credit profile than Radian's typical insured borrowers, but
these loans are underwritten with reduced documentation and verification of
information. Radian typically charges a higher premium rate for this business
due to the reduced documentation, but does not consider this business to be
significantly more risky than its normal primary business. The A minus loan
programs typically have non-traditional credit standards which are less
stringent than standard credit guidelines. To compensate for this additional
risk, Radian receives a higher premium for insuring this product that Radian
believes is commensurate with the additional default risk. During the first
quarter of 2000, Alternative A and A minus business accounted for $852.2 million
or 16.8% of Radian's new primary insurance written as compared to $75.4 million
or 0.8% for the same period in 1999.
Net premiums earned in the first quarter of 2000 were $127.3 million, a
13.2% increase compared to $112.5 million for the first quarter of 1999. This
increase reflected the insurance in force growth resulting from strong new
insurance volume in 1999, aided by the increase in persistency levels, and was
offset slightly by the decrease in pool insurance written during the first
quarter of 2000. There was an increase in direct primary insurance in force for
the quarter of 1.8%, from $97.1 billion at December 31, 1999 to $98.9 billion at
March 31, 2000. GSE Pool risk in force also grew to $1.2 billion at March 31,
2000 from $1.1 billion at the end of 1999, an increase of 12.7% for the quarter.
Radian and the industry have entered into risk-sharing arrangements with various
customers that are designed to allow the customer to participate in the risks
and rewards of the mortgage insurance business. One such product is captive
reinsurance, in which a mortgage lender sets up a mortgage reinsurance company
that assumes part of the risk associated with that lender's insured book of
business. In most cases, the risk assumed by the reinsurance company is an
excess layer of aggregate losses that would be penetrated only in a situation of
adverse loss development. For the first quarter of 2000, premiums ceded under
captive reinsurance arrangements were $8.1 million, or 5.8% of total premiums
earned during the period, as compared to $5.3 million, or 4.5% of total premiums
earned for the same period of 1999. New primary insurance written under captive
reinsurance arrangements was $1.7 billion, or 33.3% of total new primary
insurance written for the first quarter of 2000 as compared to $2.7 billion, or
29.5% for the same period in 1999. Radian expects to enter into several new
agreements in 2000.
Net investment income for the first quarter of 2000 was $18.8 million, an
18.3% increase compared to $15.9 million for the same period of 1999. This
increase was a result of continued growth in invested assets primarily due to
positive operating cash flows of $96.1 million during the first quarter of 2000.
The Company has continued to invest some of its new operating cash flow in
tax-advantaged securities, primarily municipal bonds, although the Company did
modify its investment policy to allow the purchase of various of asset classes,
including common stock and convertible securities, beginning in the second
quarter of 1998 and some of the Company's cash flows have been used to purchase
these classes of securities. The Company's intent is to target the common equity
exposure at a maximum of 5% of the investment portfolio's market value while the
convertible securities and mortgage-backed securities exposures are targeted not
to exceed 10% each. The Company expects no material long-term impact on total
investment returns as a result of this investment asset diversification.
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RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
The provision for losses was $38.8 million for the first three months of
2000, a decrease of 12.3% compared to $44.2 million for the first three months
of 1999. This decrease was due to a decline in Radian's delinquency rate
combined with the relatively lower amount of paid claims, offset by an increase
in the number of delinquent loans as a result of the significant growth and
maturation of Radian's book of business over the past several years and the
continued poor experience of certain "affordable housing" program loans insured
in 1994 and 1995, especially in Florida. Historically, claim activity has
reached its highest level in the third through fifth years after the year of
loan origination. Approximately 61% of Radian's primary risk in force and most
of Radian's pool risk in force at March 31, 2000 had not yet reached its
anticipated highest claim frequency years. Due to the high cancellation rates
and strong new insurance volume in 1998 and 1999, this percentage of risk in
force is significantly higher than normal levels. Radian's overall default rate
at March 31, 2000 was 1.45% as compared to 1.49% at December 31, 1999, while the
default rate on the primary business was 2.16% at March 31, 2000 as compared to
2.15% at December 31, 1999. The decrease in Radian's overall default rate is a
result of the continued strong economy and the relatively lower interest rates
that have been experienced over the past few years. A strong economy generally
results in better loss experience and a decrease in the overall level of losses.
A weakening of the economy could negatively impact Radian's overall default
rates, which would result in an increase in the provision for losses. The number
of defaults rose from 22,151 at December 31, 1999 to 22,746 at March 31, 2000
and the average loss reserve per default rose from $15,071 at the end of 1999 to
$15,385 at March 31, 2000. The slight increase in the average loss reserve per
default was primarily the result of an increase in the average loan balance and
the coverage percentage on loans originated beginning in 1995, which has
necessitated a higher reserve balance on loans in a default status due to the
increased ultimate exposure on these loans. The default rate in California was
1.66% (including pool) at March 31, 2000 as compared to 1.80% at December 31,
1999 and claims paid in California during the first quarter of 2000 were $5.0
million, representing approximately 20.8% of total claims as compared to 32.4%
in 1999. California represented approximately 17.1% of primary risk in force at
March 31, 2000 as compared to 17.2% at December 31, 1999. The default rate in
Florida was 2.77% (including pool) at March 31, 2000 as compared to 3.08% at
December 31, 1999 and claims paid in Florida during the first quarter of 2000
were $4.0 million, representing approximately 16.5% of total claims as compared
to 11.5% in 1999. Florida represented approximately 7.3% of primary risk in
force at March 31, 2000 as compared to 7.4% at December 31, 1999. The
"affordable housing" early default experience is a result of insuring certain
loans in which the borrowers" principal and interest reserves and other credit
factors were not as strong as on prior years" books of business. Certain
underwriting changes were implemented near the end of 1996 to compensate for the
factors that contributed to the early default experience on these "affordable
housing" loans; however, it is too early to determine the impact of such
changes. In addition, Radian has reported an increased number of defaults on the
Alternative A and A minus business insured beginning in 1997 through 1999.
Although the default rate for this business is higher than on Radian's normal
books, it is within the expected rage for this type of business, and the higher
premium rates charged are expected to compensate for the increased level of
risk. Direct losses paid in the first quarter of 2000 remained constant at $23.3
million as compared to $23.4 million for the same quarter of 1999. The severity
of loss payments has declined due to property value appreciation, but any
negative impact on future property values would likely increase the loss
severity.
Underwriting and other operating expenses were $26.7 million for the
first three months of 2000, a decrease of 19.4% compared to $33.1 million for
the same period of 1998. These expenses consisted of policy acquisition
expenses, which relate directly to the acquisition of new business, and other
operating expenses, which primarily represent contract underwriting expenses,
overhead and administrative costs.
Policy acquisition costs were $13.3 million in the first quarter of 2000,
a decrease of 18.1% compared to $16.2 million in the first quarter of 1999. This
reflects the synergies achieved as a result of the merger combined with a
decrease in the level of new insurance written for the first quarter of 1999.
The Company has continued development of its marketing infrastructure needed to
support a focus on larger, national mortgage lenders in order to take advantage
of the widespread consolidation and centralized decision making occurring in the
mortgage lending industry. Other
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RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (CONTINUED)
operating expenses for the first quarter of 2000 were $13.5 million, a decrease
of 20.6% compared to $16.9 million for the first quarter of 1999. This also
reflects a decrease in expenses associated with contract underwriting services
offset by an increase in expenses associated with the Company's administrative
and support functions. Contract underwriting expenses for the first quarter of
2000 included in other operating expenses were $3.4 million as compared to $10.7
million for the same period in 1999, a decrease of 68.3%. This $7.3 million
decrease in contract underwriting expenses during the first quarter of 2000
reflected the decreasing demand for contract underwriting services as mortgage
origination volume has declined. Consistent with the decline in contract
underwriting expenses, other income decreased 69.4% to $1.4 million for the
first quarter of 2000 as compared to $4.4 million for the same period in 1999.
During the first three months of 2000, loans underwritten via contract
underwriting accounted for 27.5% of applications, 23.6% of insurance
commitments, and 16.8% of certificates issued by Radian as compared to 24.2% of
applications, 20.7% of commitments and 17.7% of certificates in the first three
months of 1999. In 2000, these percentages are expected to continue increasing
if the level of refinancing activity remains relatively low as refinanced loans
tend to have lower loan-to-value ratios and therefore contain a relatively low
percentage of loans that require mortgage insurance. In addition to the
decreasing demand for contract underwriting services, integration of the
contract underwriting process with Freddie Mac's Loan Prospector and Fannie
Mae's Desktop Underwriter origination systems has resulted in a decrease in the
cost per contract underwriting loan underwritten thus contributing to the
overall decrease in contract underwriting expenses.
During the first quarter of 1999, the Company incurred merger-related
expenses of $2.8 million. The Company expects to incur no additional
merger-related expenses in 2000.
The effective tax rate for the quarter ended March 31, 2000 was 29.3% as
compared to 28.6% for the first quarter of 1999, excluding merger costs net of
tax of $2.5 million. Eliminating the merger expenses of $2.8 million for the
first quarter of 1999, operating income accounted for 76.2% of pretax net income
in the first quarter of 2000 as compared to 70.8% in the first quarter of 1999,
thus resulting in the increase in effective tax rate for the first quarter of
2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of funds consist primarily of premiums and
investment income. Funds are applied primarily to the payment of Radian's claims
and operating expenses.
Cash flows from operating activities for the quarter ended March 31, 2000
were $96.1 million as compared to $71.5 million for the same period of 1999.
This increase consisted of an increase in net premiums written and investment
income received combined with a decrease in operating expenses. Positive cash
flows are invested pending future payments of claims and other expenses; cash
flow shortfalls, if any, are funded through sales of short-term investments and
other investment portfolio securities.
Stockholders' equity plus redeemable preferred stock of $40.0 million,
increased from $1.1 billion at December 31, 1999 to $1.2 billion at March 31,
2000, primarily as a result of net income of $58.6 million, an increase in the
market value of securities available for sale of $10.0 million, net of tax, and
proceeds from the issuance of common stock of $4.7 million, partially offset by
dividends of $1.9 million.
As of March 31, 2000, the Company and its subsidiaries had no material
commitments for capital expenditures.
The Company believes that Radian will have sufficient funds to satisfy
its claims payments and operating expenses and to pay dividends to the Company
for at least the next 12 months. The Company also believes that it will be able
to satisfy its long-term (more than 12 months) liquidity needs with cash flow
from Radian. As a holding company, the Company conducts its principal operations
through Radian. The Company's ability to pay dividends on
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RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION (CONTINUED)
the $4.125 Preferred Stock is dependent upon Radian's ability to pay dividends
or make other distributions to the Company. Based on the Company's current
intention to pay quarterly common stock dividends of approximately $0.03 per
share, the Company will require distributions from Radian of $7.8 million
annually to pay the dividends on the outstanding shares of $4.125 Preferred
Stock and common stock. There are regulatory and contractual limitations on the
payment of dividends or other distributions; however, the Company does not
believe that these restrictions will prevent the payment by Radian or the
Company of these anticipated dividends or distributions in the foreseeable
future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the first three months of 2000, the Company experienced an
increase in the fair market value of the available for sale portfolio, which
resulted in a decrease in the net unrealized loss on the investment portfolio of
$10.0 million, from a net unrealized loss of $15.9 million at December 31, 1999
to a net unrealized loss of $5.8 million at March 31, 2000. This increase in
value was a result of changes in market interest rates and not as a result of
changes in the composition of the Company's investment portfolio. For a more
complete discussion about the potential impact of interest rate changes upon the
fair value of the financial instruments in the Company's investment portfolio,
see "Quantitative and Qualitative Disclosures about Market Risk" in the
Company's 1999 Form 10-K.
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13
RADIAN GROUP INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - None
ITEM 3. Defaults upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. a. Exhibits -
*Exhibit 11.1 - Statement Re: Computation of Per Share Earnings
*Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K - None
* Filed Herewith
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RADIAN GROUP INC.
Date: May 15, 2000 /s/ C. Robert Quint
-------------------------------------------------
C. Robert Quint
Executive Vice President, Chief Financial Officer
(Principal Accounting Officer)