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 JUNE 30, 2000
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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
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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
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(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: 37,710,804 shares
of Common Stock, $0.001 par value, outstanding on August 10, 2000.
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RADIAN GROUP INC. AND SUBSIDIARIES
INDEX
PAGE NUMBER
-----------
Part I - Financial Information
Consolidated Balance Sheets - June 30, 2000 and
December 31, 1999..................................................... 3
Consolidated Statements of Income - For the quarters and six month periods
ended June 30, 2000 and 1999.......................................... 4
Consolidated Statement of Changes in Common Stockholders'
Equity - For the six month period ended June 30, 2000................. 5
Consolidated Statements of Cash Flows - For the six month periods ended
June 30, 2000 and 1999................................................ 6
Notes to Consolidated Financial Statements..................................... 7
Management's Discussion and Analysis of Results of
Operations and Financial Condition.................................... 8-13
Quantitative and Qualitative Disclosures about Market Risk..................... 13
Part II - Other Information, as applicable.............................................. 14
Signature............................................................................... 15
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RADIAN GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30 December 31
2000 1999
----------- -----------
(Unaudited)
(In thousands, except share amounts)
Assets
Investments
Fixed maturities held to maturity - at amortized cost (fair value
$477,685 and $475,257)............................................... $ 467,570 $ 468,549
Fixed maturities available for sale - at fair value
(amortized cost $1,011,488 and $839,845)............................. 987,509 804,776
Equity securities - at fair value (cost $57,743 and $47,719)........... 67,915 58,378
Short-term investments................................................. 48,463 56,974
Cash....................................................................... 5,713 7,507
Deferred policy acquisition costs.......................................... 64,678 61,680
Prepaid federal income taxes............................................... 242,105 204,701
Provisional losses recoverable............................................. 41,629 40,065
Other assets............................................................... 77,493 74,082
---------- ----------
$2,003,075 $1,776,712
========== ==========
Liabilities and Stockholders' Equity
Unearned premiums.......................................................... $ 62,664 $ 54,925
Reserve for losses......................................................... 360,467 335,584
Deferred federal income taxes.............................................. 252,686 206,168
Accounts payable and accrued expenses...................................... 94,374 82,779
---------- ----------
770,191 679,456
---------- ----------
Preferred stockholder's equity
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;
37,679,973 shares and 37,307,504 shares issued
and outstanding........................................................ 38 37
Additional paid-in capital................................................. 536,555 524,408
Retained earnings.......................................................... 665,266 548,684
Accumulated other comprehensive loss....................................... (8,975) (15,873)
---------- ----------
1,192,884 1,057,256
---------- ----------
$2,003,075 $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 Six Months Ended
June 30 June 30
2000 1999 2000 1999
-------- -------- -------- --------
(In thousands, except per-share amounts)
Revenues:
Premiums written:
Direct................................. $138,529 $126,643 $285,537 $249,390
Assumed................................ 69 79 73 83
Ceded.................................. (9,662) (10,815) (21,068) (22,211)
-------- -------- -------- --------
Net premiums written........................ 128,936 115,907 264,542 227,262
Decrease (increase) in unearned premiums.... 603 412 (7,706) 1,550
-------- -------- -------- --------
Premiums earned............................. 129,539 116,319 256,836 228,812
Net investment income....................... 20,304 16,814 39,131 32,727
Gain on sales of investments................ 246 443 1,097 828
Other income................................ 1,289 3,302 2,639 7,711
-------- -------- -------- --------
151,378 136,878 299,703 270,078
-------- -------- -------- --------
Expenses:
Provision for losses........................ 38,005 43,312 76,787 87,554
Policy acquisition costs.................... 13,132 17,067 26,394 33,253
Other operating expenses.................... 12,360 15,188 25,811 32,132
Merger expenses............................. -- 22,697 -- 25,530
-------- -------- -------- --------
63,497 98,264 128,992 178,469
-------- -------- -------- --------
Pretax income........................................ 87,881 38,614 170,711 91,609
Provision for income taxes........................... 26,023 13,520 50,253 29,162
-------- -------- -------- --------
Net income........................................... 61,858 25,094 120,458 62,447
Dividends to preferred stockholder................... 825 825 1,650 1,650
-------- -------- -------- --------
Net income available to common stockholders.......... $ 61,033 $ 24,269 $118,808 $ 60,797
======== ======== ======== ========
Basic net income per share........................... $ 1.62 $ 0.66 $ 3.17 $ 1.65
======== ======== ======== ========
Diluted net income per share......................... $ 1.60 $ 0.64 $ 3.13 $ 1.61
======== ======== ======== ========
Average number of common shares outstanding -
basic .............................................. 37,591 36,905 37,505 36,883
======== ======== ======== ========
Average number of common and common equivalent
shares outstanding - diluted........................ 38,138 37,891 38,001 37,807
======== ======== ======== ========
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)............................. -- -- 120,458 -- 120,458
Unrealized holding gains arising during period,
net of tax of $4,100 (unaudited)............... -- -- -- 7,615
Less: Reclassification adjustment for net gains
included in net income, net of tax of
$386 (unaudited)............................... -- -- -- (717)
--------
Net unrealized gain on investments - net of tax
of $3,714 (unaudited).......................... -- -- -- 6,898 6,898
----------
Comprehensive income (unaudited)................... 127,356
Issuance of common stock (unaudited)................. 1 12,147 -- -- 12,148
Dividends (unaudited)................................ -- -- (3,876) -- (3,876)
--- -------- -------- -------- ----------
Balance, June 30, 2000 (unaudited)........................ $38 $536,555 $665,266 $ (8,975) $1,192,884
=== ======== ======== ======== ==========
See notes to consolidated financial statements.
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RADIAN GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30
2000 1999
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(In thousands)
Cash flows from operating activities......................................... $ 145,909 $ 109,354
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Cash flows from investing activities:
Proceeds from sales of investments available for sale................. 212,652 37,653
Proceeds from sales of investments held to maturity................... -- 10
Proceeds from sales of equity securities available for sale........... 13,127 1,296
Proceeds from redemptions of investments available for sale........... 11,205 13,064
Proceeds from redemptions of investments held to maturity............. 3,693 11,173
Purchases of investments available for sale........................... (381,312) (155,819)
Purchases of equity securities available for sale..................... (23,345) (11,490)
Sales of short-term investments - net................................. 8,511 1,000
Sales (purchases) of property and equipment - net..................... 637 (7,516)
Other ............................................................... (1,143) (993)
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Net cash used in investing activities........................................ (155,975) (111,622)
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Cash flows from financing activities:
Proceeds from issuance of common stock................................ 12,148 2,873
Dividends paid........................................................ (3,876) (3,014)
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Net cash from (used in) financing activities................................. 8,272 (141)
--------- ---------
Decrease in cash............................................................. (1,794) (2,409)
Cash, beginning of period.................................................... 7,507 9,377
--------- ---------
Cash, end of period.......................................................... $ 5,713 $ 6,968
========= =========
Supplemental disclosures of cash flow information:
Income taxes paid............................................................ $ 42,168 $ 25,800
========= =========
Interest paid ............................................................... $ 513 $ 87
========= =========
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. All
such adjustments are of a normal, recurring nature. 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 ("SFAS") 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. The adoption of SOP 98-7 did not have a
material impact on the financial position or results of operations of the
Company.
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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 six months of 2000 was $120.5 million, a 92.9%
increase compared to $62.4 million for the first six months of 1999 and net
income for the quarter ended June 30, 2000 was $61.9 million, a 146.5% increase
compared to $25.1 million for the same period in 1999. However, net income for
the first six months and second quarter of 1999 included merger expenses net of
tax of $21.5 million and $18.9 million, respectively, and without these merger
expenses, net income for the first six months and second quarter of 1999 was
$83.9 million and $44.0 million, respectively. Excluding merger expenses, net
income for the first six months of 2000 increased by 43.6% or $36.6 million as
compared to the same period of 1999 and net income for the second quarter of
2000 increased by 40.6% or $17.9 million as compared to the same quarter of
1999. These improvements in net income excluding merger expenses were the result
of 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 six months of 2000 was
$10.6 billion, a 42.4% decrease compared to $18.4 billion for the first six
months of 1999 and for the second quarter of 2000, new primary insurance written
of $5.5 billion was 40.3% lower than the $9.2 billion written in the second
quarter of 1999. This decrease in Radian's primary new insurance written volume
for the first six months and second quarter of 2000 was partially due to a 25.3%
and 15.7%, respectively, decrease in new insurance written volume in the private
mortgage insurance industry compared to the same periods of 1999. In addition,
Radian's market share of the industry decreased to 14.2% and 13.2%,
respectively, for the six months and quarter ended June 30, 2000 as compared to
18.5% and 18.6%, respectively, for the same periods of 1999. Radian believes the
market share decline was due in part 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 six months of
2000, Radian reduced the volume of pool insurance it wrote to $104.3 million of
risk written as compared to $270.0 million in the first six months of 1999 and
for the quarter ended June 30, 2000, Radian's pool risk written was $14.0
million as compared to $114.0 million for the same period 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
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RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
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 continue at the current reduced levels 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 six months of 2000 was negatively impacted
by relatively higher interest rates which affected the entire mortgage industry.
The trend toward higher interest rates, which began in the third quarter of
1999, caused refinancing activity during the first half 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 half of 2000. Radian's
refinancing activity as a percentage of primary new insurance written was 12.0%
and 11.0%, respectively, for the six months and quarter ended June 30, 2000 as
compared to 34.0% and 29.0%, respectively, for the same periods in 1999. The
persistency rate, which is defined as the percentage of insurance in force that
is renewed in any given year, was 78.4% for the twelve months ended June 30,
2000 as compared to 68.3% for the twelve months ended June 30, 1999. This
increase was consistent with the declining level of refinancing activity during
the second half of 1999 which has continued into the first half of 2000, which
has caused the cancellation rate to decrease. The expectation for the remainder
of 2000 is a continuation of smaller industry volume compared to 1999 and
modestly higher persistency rates, influenced by higher interest rates.
Radian insures 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 six months and quarter ending June 30, 2000,
Alternative A and A-minus business accounted for $1.7 billion and $848.4
million, respectively, or 16.0% and 15.4%, respectively, of Radian's new primary
insurance written as compared to $1.1 billion and $1.0 billion, respectively,
for the same periods of 1999, which accounted for 5.9% and 10.9%, respectively,
of Radian's new primary insurance written during 1999.
Net premiums earned in the first six months of 2000 were $256.8
million, a 12.2% increase compared to $228.8 million for the first six months of
1999 and premiums earned for the quarter ended June 30, 2000 were $129.5
million, an 11.4% increase compared to $116.3 million for the same period of
1999. This increase reflected the change in the mix of new insurance written
volume originated by Radian during the second half of 1999 and the first six
months of 2000, which has become more heavily weighted toward Adjustable Rate
Mortgage ("ARM") business, loans with loan-to-value ratios of 95% or higher and
Alternative A or A-minus business. These types of business have higher premium
rates, which are commensurate with the increased level of risk associated with
the insurance. Radian's ARM activity as a percentage of primary new insurance
written was 18.0% and 17.0%, respectively, for the six months and quarter ended
June 30, 2000 as compared to 5.0% and 6.0% for the same
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RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
periods in 1999 while Radian's higher loan-to-value activity was 45.0% and
47.0%, respectively, for the six months and quarter ended June 30, 2000 as
compared to 39.0% and 41.0% for the same periods in 1999. Radian's direct
primary insurance in force remained constant for the six month period ending
June 30, 2000 at $97.1 billion. GSE Pool risk in force grew to $1.2 billion at
June 30, 2000 from $1.1 billion at the end of 1999, an increase of 11.2% for the
six month period. 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 six
months and second quarter of 2000, premiums ceded under captive reinsurance
arrangements were $16.0 million and $7.9 million, respectively, or 5.7% and
5.7%, of total premiums earned during the period and for the same periods of
1999, premiums ceded were $11.6 million and $6.3 million, respectively, or 4.5%
and 4.6%, of total premiums earned during the period. New primary insurance
written under captive reinsurance arrangements for the six months and quarter
ended June 30, 2000 were $3.1 billion and $1.4 billion, respectively, accounting
for 29.2% and 25.4%, of total new primary insurance written during the periods.
For the same periods of 1999, new primary insurance written under captive
reinsurance arrangements was $5.2 billion and $2.5 billion, respectively,
representing 28.7% and 27.9%, of total new primary insurance written during
those periods in 1999. Radian expects to enter into some new captive reinsurance
agreements in 2000.
Net investment income for the first half of 2000 was $39.1 million, a
19.6% increase compared to $32.7 million for the same period of 1999 and for the
second quarter of 2000, net investment income was $20.3 million as compared to
$16.8 million for the second quarter of 1999, a 20.8% increase. These increases
were a result of continued growth in invested assets primarily due to positive
operating cash flows of $145.9 million for the first half 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 other 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 and must be 100% investment grade assets. The Company expects
no material long-term impact on total investment returns as a result of this
investment asset diversification.
The provision for losses was $76.8 million for the first six months of
2000, a decrease of 12.3% compared to $87.6 million for the first six months of
1999, and for the second quarter of 2000, the provision was $38.0 million as
compared to $43.3 million for the second quarter of 1999, a decrease of 12.3%.
These decreases were due to a decline in Radian's delinquency rate, offset by a
slight increase in the amount of paid claims and the number of delinquent loans
as a result of the 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 75% of Radian's
primary risk in force and most of Radian's pool risk in force at June 30, 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 June 30, 2000 was 1.41% as compared to 1.49% at December
31, 1999 and 1.45% at March 31, 2000, while the default rate on the primary
business was
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RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
2.08% at June 30, 2000 as compared to 2.20% at December 31, 1999 and 2.16% at
March 31, 2000. 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 22,227 at June 30, 2000 and
the average loss reserve per default rose from $15,071 at the end of 1999 to
$16,217 at June 30, 2000. The increase in 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 1.55%
(including pool) at June 30, 2000 as compared to 1.80% at December 31, 1999 and
claims paid in California during the first half of 2000 were $9.6 million,
representing approximately 19.1% of total claims as compared to 31.5% for the
same period of 1999. California represented approximately 16.9% of primary risk
in force at June 30, 2000 as compared to 17.2% at December 31, 1999. The default
rate in Florida was 2.69% (including pool) at June 30, 2000 as compared to 3.08%
at December 31, 1999 and claims paid in Florida during the first half of 2000
were $7.6 million, representing approximately 15.1% of total claims as compared
to 12.1% for the same period of 1999. Florida represented approximately 7.3% of
primary risk in force at June 30, 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 range for this type of business, and the higher
premium rates charged are expected to compensate for the increased level of
risk. The number of Alternative A and A minus loans in default at June 30, 2000
was 1,936 which represented 11.2% of the total number of primary loans in
default and the default rate on this business was 4.01% at the end of the
quarter as compared to the primary default rate on Radian's A business of 1.96%
at June 30, 2000. Direct losses paid in the first six months of 2000 were $48.5
million as compared to $46.0 million in the same period of 1999, an increase of
5.6% and direct losses paid during the second quarter of 2000 were $25.2
million, an 11.8% increase compared to $22.5 for the same period in 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 $52.2 million for the
first six months of 2000, a decrease of 20.2% compared to $65.4 million for the
same period of 1999 and for the second quarter of 2000, these expenses were
$25.5 million as compared to $32.3 million for the second quarter of 1999, a
decrease of 21.0%. 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 in the first six months of 2000 were $26.4
million, a decrease of 20.6% compared to $33.3 million for the first half of
1999 and these expenses were $13.1 million in the second quarter of 2000, a
decrease of 23.1% compared to $17.1 million for the same period in 1999. This
reflects the synergies achieved as a result of the merger and the decrease in
the level of new insurance written for the first half of 2000. Other operating
expenses for the six months ended June 30, 2000 were $25.8 million, a decrease
of $6.3 million or 19.7% as compared to $32.1 million for the same period in
1999 and these expenses were $12.4 million for the second quarter
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12
RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
of 2000, a decrease of 18.6% compared to $15.2 million for the second quarter of
1999. This 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 six months of 2000 included in other operating expenses were $7.2 million
as compared to $20.0 million for the same period of 1999, a decrease of 63.9%,
and for the second quarter of 2000, these expenses were $3.8 million, a decrease
of 55.3% as compared to $8.6 million for the same period of 1999. This $12.8
million decrease in contract underwriting expenses during the first half 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 65.8% to $2.6 million for the
first half of 2000 as compared to $7.7 million for the same period in 1999. For
the second quarter of 2000, other income decreased 61.0% to $1.3 million as
compared to $3.3 million for the second quarter of 1999. During the first six
months of 2000, loans underwritten via contract underwriting accounted for 28.7%
of applications, 25.4% of commitments, and 18.5% of certificates issued by
Radian as compared to 23.5% of applications, 20.0% of commitments, and 17.6% of
certificates issued in the first six months of 1999. In 2000, these percentages
are expected to continue to increase 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 originations
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 six months and quarter ended June 30, 1999, the Company
incurred merger-related expenses of $25.5 million and $22.7 million,
respectively. The Company expects to incur no additional merger-related expenses
in 2000 or beyond related to the CMAC/Amerin merger.
The effective tax rate for the six months ended June 30, 2000 was 29.4%
and, excluding merger costs net of tax of $21.4 million, the effective tax rate
for the same period in 1999 was 28.4%. The tax rate for the second quarter of
2000 was 29.6% as compared to 28.2% for the second quarter of 1999, excluding
merger costs net of tax of $18.9 million incurred in the second quarter of 1999.
Eliminating the merger expenses of $25.5 million and $22.7 million,
respectively, for the six months and quarter ended June 30, 1999, operating
income accounted for 71.4% and 71.9%, respectively, of net income for the six
months and quarter ended June 30, 1999, as compared to 76.4% and 76.6%,
respectively, for the same periods in 2000, thus resulting in the increase in
effective tax rates for 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 six months ended June 30,
2000 were $145.9 million as compared to $109.4 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 and
merger-related 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 June 30,
2000, primarily as a result of net income of $120.5 million, an increase in the
market value of securities available for sale of $6.9 million, net of tax, and
proceeds from the issuance of common stock of $12.1 million, partially offset by
dividends of $3.9 million.
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13
RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
As of June 30, 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 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 second quarter 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 $6.9 million,
from a net unrealized loss of $15.9 million at December 31, 1999 to a net
unrealized loss of $9.0 million at June 30, 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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14
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
On May 9, 2000, the Annual Meeting of Stockholders of Radian
Group Inc. was held. The stockholders re-elected three nominees from
the existing Board of Directors to three-year terms expiring in 2003,
one nominee from the existing Board of Directors to a two-year term
expiring in 2003 and one nominee from the existing Board of Directors
to a one-year term expiring in 2001. The stockholders also approved the
designation of Deloitte & Touche as independent auditors.
The number of votes cast for and withheld from the election of
each director nominee is set forth below. There were no votes
against, abstentions or broker non-votes in the election of
directors.
Election of Directors:
For Withheld
--- --------
Frank P. Filipps 32,573,789 92,404
Stephen T. Hopkins 32,572,853 93,340
Robert W. Richards 32,573,289 93,060
Anthony W. Schweiger 32,573,289 92,904
James C. Miller 32,571,829 94,364
The number of votes cast for, against and abstentions relating
to the designation of Deloitte & Touche as independent
auditors is set forth below. There were no broker non-votes in
the approval of Deloitte & Touche.
For Against Abstain
--- ------- -------
Approval of the designation
of Deloitte & Touche as
independent auditors: 32,653,693 3,568 8,932
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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15
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: August 14, 2000 /s/ C. Robert Quint
-------------------------------------------------
C. Robert Quint
Executive Vice President, Chief Financial Officer
(Principal Accounting Officer)
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