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, 2001
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: 46,378,897 shares of Common
Stock, $0.001 par value, outstanding on May 9, 2001.
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RADIAN GROUP INC. AND SUBSIDIARIES
INDEX
PAGE NUMBER
Part I - Financial Information
Consolidated Balance Sheets - March 31, 2001 (Unaudited) and
December 31, 2000.................................................... 3
Consolidated Statements of Income - For the quarters ended
March 31, 2001 (Unaudited) and 2000 (Unaudited)....................... 4
Consolidated Statement of Changes in Common Stockholders'
Equity - For the quarter ended March 31, 2001 (Unaudited)............. 5
Consolidated Statements of Cash Flows - For the quarters ended
March 31, 2001 (Unaudited) and 2000 (Unaudited)....................... 6
Notes to Unaudited Consolidated Financial Statements........................... 7 - 9
Management's Discussion and Analysis of Results of
Operations and Financial Condition.................................... 10 - 15
Quantitative and Qualitative Disclosures about Market Risk..................... 15
Part II - Other Information, as applicable.............................................. 16 - 17
Signature............................................................................... 18
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RADIAN GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31 December 31
2001 2000
----------- -----------
(Unaudited)
(In thousands, except share amounts)
Assets
Investments
Fixed maturities held to maturity - at amortized cost (fair value
$493,051 and $490,792) ......................................... $ 468,822 $ 469,591
Fixed maturities available for sale - at fair value
(amortized cost $2,209,939 and $1,087,191) ..................... 2,246,213 1,120,840
Trading securities - at fair value (cost $13,238) ................ 11,629 --
Equity securities - at fair value (cost $60,465 and $58,877) ..... 59,871 64,202
Short-term investments ........................................... 165,303 95,824
Cash ................................................................. 14,231 2,424
Investment in affiliates ............................................. 146,603 --
Deferred policy acquisition costs .................................... 126,320 70,049
Prepaid federal income taxes ......................................... 287,514 270,250
Provisional losses recoverable ....................................... 43,095 43,740
Other assets ......................................................... 250,762 135,891
----------- -----------
$ 3,820,363 $ 2,272,811
=========== ===========
Liabilities and Stockholders' Equity
Unearned premiums .................................................... $ 450,843 $ 77,241
Reserve for losses ................................................... 524,898 390,021
Short-term debt ...................................................... 173,724 --
Long-term debt ....................................................... 75,000 --
Federal income taxes, principally deferred ........................... 358,932 291,294
Accounts payable and accrued expenses ................................ 181,647 112,058
----------- -----------
1,765,044 870,614
----------- -----------
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;
46,306,704 shares and 37,907,777 shares issued
and outstanding .................................................. 46 38
Treasury stock; 37,706 shares redeemed ............................... (2,159) (2,159)
Additional paid-in capital ........................................... 1,126,490 549,154
Retained earnings .................................................... 868,025 789,831
Accumulated other comprehensive income ............................... 22,917 25,333
----------- -----------
2,015,319 1,362,197
----------- -----------
$ 3,820,363 $ 2,272,811
=========== ===========
See notes to unaudited consolidated financial statements.
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RADIAN GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter Ended
March 31
2001 2000
---- ----
(In thousands, except per-share amounts)
Revenues:
Premiums written:
Direct ....................................... $ 172,128 $ 147,008
Assumed ...................................... 1 4
Ceded ........................................ (11,880) (11,406)
--------- ---------
Net premiums written ............................. 160,249 135,606
Increase in unearned premiums .................... (4,486) (8,309)
--------- ---------
Premiums earned .................................. 155,763 127,297
Net investment income ............................ 28,020 18,827
Gain on sales of investments ..................... 1,823 851
Equity in net income of affiliates ............... 12,044 --
Other income ..................................... 6,292 1,350
--------- ---------
203,942 148,325
--------- ---------
Expenses:
Provision for losses ............................. 49,272 38,782
Policy acquisition costs ......................... 17,041 13,262
Other operating expenses ......................... 23,958 13,451
Interest expense ................................. 1,401 --
--------- ---------
91,672 65,495
--------- ---------
Pretax income ....................................... 112,270 82,830
Provision for income taxes .......................... (32,113) (24,230)
--------- ---------
Net income .......................................... 80,157 58,600
Dividends to preferred stockholder .................. 825 825
--------- ---------
Net income available to common stockholders ......... $ 79,332 $ 57,775
========= =========
Basic net income per share .......................... $ 1.94 $ 1.54
========= =========
Diluted net income per share ........................ $ 1.91 $ 1.53
========= =========
Average number of common shares outstanding - basic . 40,837 37,419
========= =========
Average number of common and common equivalent shares
outstanding - diluted ............................... 41,519 37,864
========= =========
See notes to unaudited consolidated financial statements.
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RADIAN GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
Accumulated Other
Comprehensive
Income (Loss)
------------------------
Foreign Unrealized
Additional Currency Holding
Common Treasury Paid-in Retained Translation Gains
Stock Stock Capital Earnings Adjustment Losses Total
----- ----- ------- -------- ---------- ------ -----
(In thousands)
Balance, January 1, 2001 .................... $38 $(2,159) $549,154 $789,831 $ -- $ 25,333 $ 1,362,197
Comprehensive income:
Net income (unaudited) .................... -- -- -- 80,157 -- -- 80,157
Unrealized foreign currency translation
adjustment, net of tax benefit of $46
(unaudited) ............................. -- -- -- -- (86) -- (86)
Unrealized holding gains arising
during period, net of tax of
$598 (unaudited) ........................ -- -- -- -- -- 1,112
Less: Reclassification adjustment
for net gains included in net income,
net of tax of $1,853 (unaudited) ........ -- -- -- -- -- (3,442)
--------
Net unrealized loss on investments,
net of tax benefit of $(1,255)
(unaudited) ........................ -- -- -- -- -- (2,330) (2,330)
-----------
Comprehensive income (unaudited) ............ -- 77,741
Issuance of common stock (unaudited) ........ 8 -- 577,336 -- -- -- 577,344
Dividends (unaudited) ....................... -- -- -- (1,963) -- -- (1,963)
--- ------- --------- -------- ------- -------- -----------
Balance, March 31, 2001 (unaudited) ......... $46 $(2,159) $1,126,490 $868,025 $ (86) $ 23,003 $ 2,015,319
=== ======= ========= ======== ======= ======== ===========
See notes to unaudited consolidated financial statements.
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RADIAN GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Quarter Ended
March 31
2001 2000
--------- ---------
(In thousands)
Cash flows from operating activities ........................ $ 120,346 $ 96,080
--------- ---------
Cash flows from investing activities:
Proceeds from sales of investments available for sale ..... 164,995 84,059
Proceeds from sales of equity securities available for sale 2,084 4,349
Proceeds from redemptions of investments available for sale 6,010 5,713
Proceeds from redemptions of investments held to maturity . 1,355 3,398
Purchases of investments available for sale ............... (291,332) (186,863)
Purchases of equity securities available for sale ......... (2,733) (4,451)
Sales (purchases) of short-term investments, net .......... 17,148 (7,607)
Sales (purchases) of property and equipment, net .......... 88 (1,282)
Other ..................................................... (513) (516)
--------- ---------
Net cash used in investing activities ....................... (102,898) (103,200)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock .................... 3,319 4,653
Acquisition costs ......................................... (6,997) --
Dividends paid ............................................ (1,963) (1,936)
--------- ---------
Net cash (used in ) from financing activities ............... (5,641) 2,717
--------- ---------
Increase (decrease) in cash ................................. 11,807 (4,403)
Cash, beginning of period ................................... 2,424 7,507
--------- ---------
Cash, end of period ......................................... $ 14,231 $ 3,104
========= =========
Supplemental disclosures of cash flow information:
Income taxes paid ........................................... $ 6,164 $ --
========= =========
Interest paid ............................................... $ 2,625 $ 62
========= =========
See notes to unaudited consolidated financial statements.
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RADIAN GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1 - CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of and for the three month
period ended March 31, 2001, include the accounts of Radian Group Inc. (the
"Company") and its subsidiaries, including its principal mortgage guaranty
subsidiaries, Radian Guaranty Inc. and Amerin Guaranty Corporation
(together referred to as "Radian"), its principal financial guaranty
operating subsidiaries, Enhance Reinsurance Company and Asset Guaranty
Insurance Company (together referred to as "Enhance"), and its principal
minority owned asset-based subsidiaries Credit-Based Asset Servicing and
Securitization LLC ("C-BASS") and Sherman Financial Group LLC ("Sherman").
For periods prior to this quarter, the financial statements do not include
any results from operations from Enhance Financial Services Group Inc.
("Enhance Financial"). These statements are presented on the basis of
accounting principles generally accepted in the United States of America.
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 or for any other
period.
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, 2000.
2 - ACQUISITION OF ENHANCE FINANCIAL
On February 28, 2001, the Company acquired Enhance Financial for
approximately $581.5 million representing the value of the Company's common
stock and stock options issued in connection with the acquisition and other
consideration in accordance with an Agreement and Plan of Merger, dated
November 13, 2000, by and between the Company, a wholly-owned subsidiary of
the Company and Enhance Financial. The acquisition, which was structured as
a merger of a wholly-owned subsidiary of the Company with and into Enhance
Financial, entitled Enhance Financial stockholders to receive 0.22 shares
of the Company's common stock in a tax-free exchange for each share of
Enhance Financial common stock that they owned at the time of the merger.
The Company's stockholders continued to own their existing shares after the
acquisition. The acquisition was treated as a purchase for accounting
purposes, and accordingly, the assets and liabilities were recorded based
on their fair values at the date of acquisition. The excess of purchase
price over fair value of net assets acquired of $52.8 million represents
the future value of insurance profits which will be amortized over a period
that approximates the future life of the insurance book of business. The
results of Enhance Financial's operations have been included in the
Company's financial statements for the period from March 1, 2001 through
March 31, 2001.
The purchase price of Enhance Financial reflects the issuance of
8,462,861 shares of the Company's common stock at $65.813 per share which
represents the average closing price of the Company's common stock for the
three days preceding and following the announcement of the acquisition, and
the issuance of 1,222,853 options to purchase shares of the Company's
common stock to holders of options to purchase shares of Enhance Financial
common stock. The value of the option grant was based on a Black-Scholes
valuation model assuming an average life of 2.8 years, a risk-free interest
rate of 4.75%, volatility of 43.4% and a dividend yield of 0.22%.
In conjunction with the acquisition, the Company guaranteed payment of
up to $12.5 million of a $25.0 million revolving credit facility issued to
Sherman, a 45.5% owned affiliate of Enhance Financial. There were no
drawdowns on the line of credit as of March 31, 2001.
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RADIAN GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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. Changes in the
fair value of derivative instruments will be recorded each period in
current earnings. This represents a change from the Company's prior
accounting practices whereby these changes were recorded as a component of
stockholders' equity. In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities - An Amendment of FASB Statement No. 133," which addressed
certain issues causing implementation difficulties for entities that apply
SFAS 133. The Company adopted SFAS 133, as amended, on January 1, 2001.
Transactions that the Company has entered into that will be accounted for
under SFAS 133, as amended, include convertible debt securities.
Upon adoption of SFAS 133, the balance of the Company's convertible
debt portfolio was approximately $104.6 million. SFAS 133 requires that the
Company split its convertible debt securities into the derivative and debt
host components. Over the term of the securities, increases in the debt
instrument will be recorded in the Company's consolidated statement of
changes in common stockholders' equity, through accumulated other
comprehensive income. Concurrently, a deferred tax liability will be
recognized as the recorded value of the debt host increases. Changes in the
fair value of the derivative will be recorded to investment income or
expense in the Company's consolidated statement of income. In connection
with the adoption of SFAS 133, the Company reclassified $13.8 million from
fixed maturities available for sale to trading securities on its
consolidated balance sheet as of January 1, 2001. During the first quarter
of 2001, the fair value of the Company's derivative instruments decreased
to $11.6 million and the Company recognized $1.0 million, net of tax, of
investment expense in the consolidated statement of income for the three
months ended March 31, 2001.
Adoption of SFAS 133, as amended, could result in volatility from
period to period in investment income or expense as reported on the
Company's consolidated statement of income. The Company is unable to
predict the effect this volatility may have on its financial position or
results of operations.
4 - SUBSEQUENT EVENTS
On May 1, 2001, the Company's board of directors authorized a stock
split, in the form of a dividend of one additional share of the Company's
common stock for each share owned by stockholders of record, subject to
stockholder approval of the additional authorized shares needed to effect
the split. The dividend will be accounted for as a two-for-one stock split
and the par value of the Company's common stock will remain at $.001 per
share. In addition, the Company's board of directors has voted to increase
the quarterly dividend to $.02 per share of common stock outstanding after
the split is effected.
5 - SEGMENT REPORTING
The Company has three reportable segments: mortgage insurance and
related businesses, financial guaranty and credit-related insurance
businesses and asset-based businesses. The mortgage insurance segment
provides private mortgage insurance and risk management services to
mortgage lending institutions located throughout the United States. Private
mortgage insurance protects lenders from default-related losses on
residential first mortgage loans made to homebuyers who make downpayments
of less than 20% of the purchase price and facilitates the sale of these
mortgages in the secondary market. The financial guaranty and
credit-related insurance segment provides credit-related insurance coverage
to meet the
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RADIAN GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
needs of customers in a wide variety of domestic and international markets.
The Company's largest insurance business within this segment is the
provision of reinsurance to the monoline primary financial guaranty
insurers for both municipal bonds and non-municipal obligations. The
Company also provides trade credit reinsurance, financial responsibility
bonds, excess-SIPC insurance and direct financial guaranty insurance. The
asset-based business segment deals primarily with credit-based servicing
and securitization of assets in underserved markets, in particular, the
origination, purchase, servicing and securitization of special assets,
including lottery awards, structured settlement payments,
sub-performing/non-performing and seller financed residential mortgages and
delinquent consumer assets. The Company's reportable segments are strategic
business units, which are managed separately as each business requires
different marketing and sales expertise.
The Company evaluates performance based on net income. Summarized
financial information concerning the Company's operating segments is
presented in the following tables:
March 31, 2001
-------------------------------------------------------
In thousands Mortgage Financial Asset-based Consolidated
Related Guaranty
Revenues from external customers..... $ 150,453 $ 11,425 $ 177 $ 162,055
Net investment income................ 23,130 4,890 -- 28,020
Net income before taxes.............. 92,224 8,723 11,323 112,270
Segment assets....................... 2,382,142 1,245,323 192,898 3,820,363
March 31, 2000
-------------------------------------------------------
In thousands Mortgage Financial Asset-based Consolidated
Related Guaranty
Revenues from external customers..... $ 128,647 $ -- $ -- $ 128,647
Net investment income................ 18,827 -- -- 18,827
Net income before taxes.............. 82,830 -- -- 82,830
Segment assets....................... 1,897,398 -- -- 1,897,398
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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 CONSOLIDATED OPERATIONS
Consolidated net income for the first quarter of 2001 was $80.2 million,
a 36.8% increase compared to $58.6 million for the same quarter of 2000. This
improvement was a result of growth in premiums earned and net investment income
and the inclusion of equity in net income of affiliates, offset by an increase
in provision for losses, policy acquisition costs and other operating expenses.
As a result of the acquisition of Enhance Financial by the Company on February
28, 2001, net income for the first quarter of 2001 included the results from
operations for March 2001 for Enhance Financial, which contributed $14.4 million
to net income. Consolidated earned premiums increased $28.5 million or 22.4%
from $127.3 million to $155.8 million with the inclusion of Enhance Financial
contributing $11.2 million of the increase. Net consolidated investment income
increased from $18.8 million for the first quarter of 2000 to $28.0 million in
the same period of 2001, a 48.8% increase with Enhance Financial contributing
$4.9 million of the increase. Equity in net income of affiliates for the quarter
was $12.0 million. Consolidated provision for losses increased $10.5 million for
the first quarter of 2001 from $38.8 million in the first quarter of 2000 to
$49.3 million for the same period of 2001, an increase of 27.0% with the
inclusion of Enhance Financial accounting for $2.8 million of the increase.
Policy acquisition and other operating expenses also increased from the first
quarter of 2000 by 53.5% from $26.7 million to $41.0 for the first quarter of
2001 and Enhance Financial accounted for $4.2 million of the increase. Diluted
net income per share increased 25.2% from $1.53 per share in the first quarter
of 2000 to $1.91 per share for the same period in 2001. The weighted average
shares for the quarter included one month of outstanding shares issued in
connection with the Enhance Financial acquisition.
MORTGAGE INSURANCE AND RELATED SERVICES - RESULTS OF OPERATIONS
Net income for the first quarter of 2001 was $65.7 million, a 12.2%
increase compared to $58.6 million for the first quarter of 2000. This
improvement was a result of significant growth in premiums earned, net
investment income and other income, offset by a higher provision for losses and
an increase in policy acquisition costs and other operating expenses.
New primary insurance written during the first quarter of 2001 was $8.6
billion, a 68.9% increase compared to $5.1 billion for the first quarter of
2000. This increase in Radian's primary new insurance written volume for the
first quarter of 2001 was primarily due to a 52.8% increase in new insurance
written volume in the private mortgage insurance industry for the first quarter
of 2001 as compared to the first quarter of 2000. In addition, Radian's market
share of the industry increased to 17.2% in the first quarter of 2001, compared
to 15.5% for the same period of 2000. Radian believes the market share increase
was due in part to an increase in the Company's share of new insurance written
under bulk transactions which are included in industry new insurance written
figures. During the first quarter of 2001, Radian wrote $1.3 billion of such
transactions as compared to none in the same quarter of 2000. Radian's
participation in the bulk transaction market is likely to vary significantly
from quarter to quarter. In the first quarter of 2001, Radian wrote $33.1
million of pool insurance risk as compared to $90.3 million in the first quarter
of 2000. Most of this pool insurance volume relates to a group of structured
transactions composed primarily of Fannie Mae- and Freddie Mac-eligible
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RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
conforming mortgage loans ("GSE Pool"). 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.
Radian's volume in the first three months of 2001 was positively impacted
by relatively lower interest rates that affected the entire mortgage industry.
The trend toward lower interest rates, which began in the fourth quarter of
2000, caused refinancing activity at the beginning of 2001 to increase
significantly and contributed to the increase in the industry new insurance
volume for the first quarter of 2001. Radian's refinancing activity as a
percentage of primary new insurance written was 36.0% for the first quarter of
2001 as compared to 13.0% for the same period in 2000. The persistency rate,
which is defined as the percentage of insurance in force that is renewed in any
given year, was 76.9% for the twelve months ended March 31, 2001 as compared to
78.2% for the twelve months ended March 31, 2000. This decrease was consistent
with the increasing level of refinancing activity during the last quarter of
2000, which caused the cancellation rate to increase. The expectation for the
second quarter of 2001 is strong industry volume and lower persistency rates,
influenced by low interest rates.
Radian insures non-traditional loans, specifically Alternative A and A
minus loans (collectively, referred to as "non-prime" business). 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 prime 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 2001, non-prime business accounted for $2.8 billion or 31.5% of
Radian's new primary insurance written as compared to $852.2 million or 16.8%
for the same period in 2000. Excluding bulk new insurance written, non-prime
business accounted for 19.8% of new primary insurance written in the first
quarter of 2001.
In the third quarter of 2000, the Company began to insure
mortgage-related assets in a Pennsylvania domiciled insurer, Radian Insurance
Inc. ("Radian Insurance"). Radian Insurance is rated AA by Standard & Poor's
Insurance Rating Service and Aa3 by Moody's Investors Service and was formed to
write credit insurance and financial guaranty insurance on mortgage-related
assets that are not permitted to be insured by monoline mortgage guaranty
insurers. Such assets include second mortgages, manufactured housing loans, home
equity loans and mortgages with loan-to-value ratios above 100%. During the
first quarter of 2001, Radian Insurance wrote $1.1 billion of insurance which
represented $187.0 million of risk. Such business is written under varying
structures and thus premium rates and commensurate risk levels will vary on a
deal by deal basis.
Net premiums earned in the first quarter of 2001 were $144.6 million, a
13.6% increase compared to $127.3 million for the first quarter of 2000. This
increase, which was greater than the increase in insurance in force, reflected
the premiums earned in Radian Insurance of $5.5 million and the change in the
mix of new insurance written volume originated by Radian during the second half
of 2000 and through the first quarter of 2001, combined with the increase in new
insurance volume. This change in mix included a higher percentage of non-prime
business. This type of business has higher premium rates, which are commensurate
with the increased level of risk associated with the insurance. The insurance in
force growth resulting from strong new insurance volume in the first quarter of
2001 was offset slightly by the decrease in persistency levels. There was an
increase in direct primary insurance in force for the quarter of 2.6%, from
$100.9 billion at December 31, 2000 to $103.4 billion at March 31, 2001. GSE
Pool risk in force also grew to $1.2 billion at March 31, 2001 from $1.1 billion
at the end of 2000, an increase of 2.8% for the quarter.
Radian and the industry have entered into risk-sharing arrangements
with various customers that are designed to
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RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
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 2001, premiums ceded under captive reinsurance arrangements
were $12.0 million, or 8.0% of total premiums earned during the period, as
compared to $8.1 million, or 5.8% of total premiums earned for the same period
of 2000. New primary insurance written under captive reinsurance arrangements
was $2.8 billion, or 33.1% of total new primary insurance written for the first
quarter of 2001 as compared to $1.7 billion, or 33.3% for the same period in
2000.
Net investment income for the first quarter of 2001 was $23.1 million, a
22.9% increase compared to $18.8 million for the same period of 2000. This
increase was a result of continued growth in invested assets primarily due to
positive operating cash flows of $115.8 million during the first quarter of
2001. Radian 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 Radian'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 provision for losses was $46.4 million for the first three months of
2001, an increase of 19.8% compared to $38.8 million for the first three months
of 2000. This increase reflected an increase in the number of delinquent loans
as a result of the maturation of Radian's book of business over the past several
years combined with an increase in defaults on the non-prime book of business.
Claim activity is not spread evenly throughout the coverage period of a book of
business. Relatively few claims are received during the first two years
following issuance of the policy. Historically, claim activity has reached its
highest level in the third through fifth years after the year of loan
origination. Approximately 69.1% of Radian's primary risk in force and almost
all of Radian's pool risk in force at March 31, 2001 had not yet reached its
anticipated highest claim frequency years. Radian's overall default rate at
March 31, 2001 was 1.7% as compared to 1.6% at December 31, 2000, while the
default rate on the primary business was 2.5% at March 31, 2001 as compared to
2.3% at December 31, 2000. The increase in Radian's overall default rate could
be a result of the slowing economy. A strong economy generally results in better
loss experience and a decrease in the overall level of losses. A continued
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 26,520 at December 31, 2000 to 28,572 at March 31, 2001 and
the average loss reserve per default declined from $14,707 at the end of 2000 to
$14,354 at March 31, 2001. The default rate in California was 1.7% (including
pool) at March 31, 2001 as compared to 1.5% at December 31, 2000 and claims paid
in California during the first quarter of 2001 were $1.9 million, representing
approximately 8.3% of total claims as compared to 20.8% in 2000. California
represented approximately 16.6% of primary risk in force at March 31, 2001 as
compared to 16.8% at December 31, 2000. The default rate in Florida was 3.3%
(including pool) at March 31, 2001 as compared to 2.7% at December 31, 2000 and
claims paid in Florida during the first quarter of 2001 were $2.4 million,
representing approximately 10.6% of total claims as compared to 16.5% in 2000.
Florida represented approximately 7.4% of primary risk in force at March 31,
2001 and December 31, 2000. Radian has reported an increased number of defaults
on non-prime business insured beginning in 1997. Although the default rate for
this business is higher than on Radian's normal books of business, 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 non-prime loans in default at March 31, 2001 was 3,609 which represented
16.3% of the total number of primary loans in default as compared to 2,690 at
December 31, 2000 which represented 13.1% of the primary loans in default. The
default rate on this business rose from 4.1% at December 31, 2000 to 4.4% at
March 31, 2001 as compared to the primary default rate on Radian's prime
business at March 31, 2001 and December 31, 2000 of 2.3%. Direct losses paid in
the first quarter of 2001 declined to $21.8 million as compared to $23.3 million
for the same quarter of 2000. The severity of loss payments has declined due to
property value appreciation, but any negative impact on future property
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RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
values would most likely increase the loss severity.
Underwriting and other operating expenses were $36.8 million for the
first three months of 2001, an increase of 37.6% compared to $26.7 million for
the same period of 2000. 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 $15.1 million in the first quarter of 2001,
an increase of 14.1% compared to $13.3 million in the first quarter of 2000.
This reflects an increase in expenses to support the higher new insurance
written volume during the first quarter of 2001 as compared to the same period
of 2000. In addition, 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 operating expenses for
the first quarter of 2001 were $21.6 million, an increase of 60.9% compared to
$13.5 million for the first quarter of 2000. This reflects an increase in
expenses associated with contract underwriting services combined with an
increase in expenses associated with the Company's administrative and support
functions. Contract underwriting expenses for the first quarter of 2001 included
in other operating expenses were $8.0 million as compared to $3.4 million for
the same period in 2000, an increase of 135.2%. This $4.6 million increase in
contract underwriting expenses during the first quarter of 2001 reflected the
increasing demand for contract underwriting services as mortgage origination
volume has increased. Consistent with the increase in contract underwriting
expenses, other income related to contract underwriting services increased
148.9% to $3.3 million for the first quarter of 2001 as compared to $1.3 million
for the same period in 2000. During the first three months of 2001, loans
underwritten via contract underwriting accounted for 33.1% of applications,
29.7% of insurance commitments, and 21.3% of certificates issued by Radian as
compared to 27.5% of applications, 23.6% of commitments and 16.8% of
certificates in the first three months of 2000.
The effective tax rate for the quarter ended March 31, 2001 was 28.7% as
compared to 29.3% for the first quarter of 2000. Operating income accounted for
72.9% of pretax net income in the first quarter of 2001 as compared to 76.2% in
the first quarter of 2000, thus resulting in the decrease in effective tax rate
for the first quarter of 2001 as the tax advantaged investment income
represented a larger share of pretax net income.
FINANCIAL GUARANTY INSURANCE - RESULTS OF OPERATIONS
The financial guaranty insurance operations are conducted through Enhance
and primarily involve the reinsurance and direct underwriting of financial
guaranties of municipal and asset-backed debt obligations. Reinsurance is
assumed primarily from four monoline financial guaranty insurers. In addition,
another insurance subsidiary, Van-American Insurance Company, is engaged on a
run-off basis in reclamation bonds for the coal mining industry and surety bonds
covering closure and post-closure obligations of landfill operators. Such
business is not expected to be material to the financial results of the Company.
The Company's consolidated results of operations include only one month of
operating results from Enhance Financial and prior periods include no Enhance
Financial results so prior period comparisons are not contained herein.
During the month of March 2001, net written premiums were $9.6 million
and net earned premiums were $11.2 million, of which refundings constituted $1.2
million. Net written premiums were composed of $4.4 million of assumed
reinsurance, $1.9 million in direct financial guaranty, and $3.3 million of
trade credit insurance and reinsurance. The breakdown of net earned premiums
included $5.2 million in assumed reinsurance, $3.3 million in direct financial
guaranty, and $2.7 million in trade credit. Net investment income was $4.9
million and other income of $0.4 million resulted from several relatively small
sources and is not anticipated to present a recurring or meaningful component on
an ongoing basis.
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14
RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
Incurred losses and loss adjustment expenses were $2.8 million or 25.3%
of earned premium. Policy acquisition costs were $1.9 million, other insurance
expenses totaled $1.7 million and profit commissions were $0.1 million. Together
these expenses resulted in an insurance expense ratio of 33.5% and, combined
with the loss ratio of 25.3%, the combined ratio was 58.8% for March 2001.
Interest expense of $1.4 million represented interest on the $75.0 million
long-term public debt of Enhance Financial and $173.7 million of short-term bank
debt. The effective tax rate for the quarter ended March 31, 2001 was 28.0%.
ASSET-BASED BUSINESSES - RESULTS OF OPERATIONS
Enhance Financial's asset-based businesses are conducted primarily
through its minority owned subsidiaries, Sherman and C-BASS. C-BASS is engaged
in the origination, servicing and/or securitization of special assets, including
sub-performing/non-performing and seller-financed residential mortgages, real
estate and subordinated residential mortgage-based securities. Sherman conducts
a business that focuses on purchasing and servicing delinquent unsecured
consumer assets. In addition, two wholly owned subsidiaries, Singer Asset
Finance Company, L.L.C. and Enhance Consumer Services LLC, which had been
engaged in the origination, purchase, servicing, and securitization of assets
including state lottery awards, structured settlement payments, and viatical
settlements, are currently operating on a run-off basis, primarily servicing
prior originations, and the results of these subsidiaries are not expected to be
material to the financial results of the Company. An unusually strong month from
C-BASS led to equity in net income from affiliates of $12.0 million for March
2001. This amount is expected to be lower in future periods, and is likely to
vary from period to period. C-BASS accounted for $11.6 million or 96.7% of the
total income from affiliates.
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 the Company's
claims and operating expenses.
Cash flows from operating activities for the quarter ended March 31, 2001
were $120.3 million as compared to $96.1 million for the same period of 2000.
This increase consisted of an increase in net premiums written and investment
income received combined with a decrease in operating expenses. In addition, the
March 31, 2001 operating cash flows included one month of cash flows from the
Enhance Financial operations of $4.5 million. 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 to at $2.1 billion at March 31, 2001 from $1.4 billion at December 31,
2000, primarily as a result of the issuance of stock associated with the
acquisition of Enhance Financial of $574.0 million, net income of $80.2 million
and proceeds from the issuance of common stock of $3.3 million, offset by a
decrease in the market value of securities available for sale of $2.4 million,
net of tax, and dividends of $2.0 million.
As of March 31, 2001, the Company and its subsidiaries had plans to
implement a new general ledger system at an anticipated cost of approximately
$2.0 million.
Enhance Financial is party to a credit agreement (as amended, the "Credit
Agreement") with major commercial banks providing Enhance Financial with a
borrowing facility aggregating up to $175.0 million, the proceeds of which are
to be used for general corporate purposes. The outstanding principal balance
under the Credit Agreement at March 31, 2001 is $173.7 million. The Credit
Agreement requires that the net proceeds from sales of any of the Company's
operating units or other assets be applied toward repayment of the outstanding
balance thereunder. The outstanding
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15
RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
principal balance under the Credit Agreement is due May 29, 2001.
A subsidiary of Enhance Financial and Mortgage Guaranty Insurance Company
("MGIC") each own 46% interests in C-BASS. The Company has not made any capital
contributions to C-BASS since the Company acquired its interest in C-BASS in
connection with the acquisition of Enhance Financial.
The Company and MGIC each own a 45.5% interest in Sherman. The Company
has not made any capital contributions to Sherman since the Company acquired its
interest in Sherman in connection with the acquisition of Enhance Financial. In
conjunction with the acquisition, the Company guaranteed payment of up to $12.5
million of a $25.0 million revolving credit facility issued to Sherman. There
were no drawdowns on the line of credit as of March 31, 2001.
Based on the cash flow of Enhance Financial in recent years and Enhance
Financials' current financial condition, the Company may not have funds
sufficient to repay the outstanding principal balance on the Credit Agreement
when it becomes due on May 29, 2001. To address this concern, the Company is
seeking alternate long term financing arrangements to replace the outstanding
indebtedness under the Credit Agreement. While the company anticipates being
successful in this effort on a timely basis, the success of this effort will
depend on numerous factors, many beyond the Company's control, including general
capital market conditions and the interest rate environment, and there can be no
assurance that the Company will be successful in resolving the situation in a
manner that will not involve substantial expense and/or dilution of the
Company's stockholders.
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. 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. In connection with obtaining
approval from the New York Insurance Department for the change of control of
Enhance when the Company acquired Enhance Financial, Enhance agreed not to
declare or pay dividends for a period of two years following consummation of the
acquisition. Consequently, the Company cannot rely upon or expect any dividends
or other distributions from Enhance. Based on the Company's current intention to
pay quarterly common stock dividends of approximately $0.02 per share, the
Company will require distributions from Radian of $10.7 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 2001, the Company experienced a decrease
in the fair market value of the available for sale portfolio, which resulted in
a decrease in the net unrealized gain on the investment portfolio of $2.3
million, from a net unrealized gain of $25.3 million at December 31, 2000 to a
net unrealized gain of $23.0 million at March 31, 2001. This decrease 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
2000 Form 10-K.
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RADIAN GROUP INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
Creditrust and its president filed a complaint against Enhance
Financial and its wholly owned subsidiary, Asset Guaranty
Insurance Company ("Asset Guaranty") on April 4, 2000 in the
United States District Court for the District of Maryland (the
"Court") alleging that a senior employee of Enhance Financial had
posted messages on an Internet message board containing
derogatory, false, misleading, and/or confidential information
regarding Creditrust, in violation of various state and federal
common law and statutory duties. This alleged misconduct would
have been unauthorized and contrary to Company policy. The
employee identified in the lawsuit is no longer employed by the
Company. Nonetheless, the complaint alleges that the message board
activity was undertaken on behalf of the Company to further its
competitive interests.
On February 26, 2001, as part of a global resolution of claims
between and among parties including Enhance Financial and Asset
Guaranty, on the one hand, and Creditrust and its president, on
the other hand, the Court entered a stipulation and consent order
dismissing all claims asserted in the aforementioned complaint
against Enhance Financial and Asset Guaranty, with prejudice. In
connection with the settlement and dismissal of the action,
neither Enhance Financial not Asset Guaranty paid any amount to,
or on behalf of, any plaintiff As a result of the resolution of
claims and the dismissal of the complaint, the Company believes
that the outcome of this litigation is not and will not be
material to the Company's financial position or results
operations.
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 February 27, 2001, the Special Meetings of stockholders of the
Company and Enhance Financial were held. The stockholders of both
the Company and Enhance Financial agreed to adopt the Agreement
and Plan of Merger dated as of November 13, 2000, whereby the
Company acquired Enhance Financial.
The number of votes cast by the stockholders of the Company for,
against and abstentions relating to the adoption of the Agreement
and Plan of Merger dated as of November 13, 2000 is set forth
below.
For Against Abstain
Approval of the Agreement and Plan
of Merger between the Company and
Enhance Financial dated as of
November 13, 2000: 30,747,132 84,837 117,476
ITEM 5. Other Information - None
ITEM 6. a. Exhibits -
*Exhibit 11.1 - Statement Re: Computation of Per Share
Earnings
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RADIAN GROUP INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
(CONTINUED)
ITEM 6. b. Reports on Form 8-K
On March 14, 2001, the Company filed a Current Report on Form
8-K (the "8-K") reporting, in accordance with Item 2 of Form
8-K, the Company's consummation of its acquisition of Enhance
Financial Services Group Inc. ("Enhance Financial") on
February 28, 2001. Pursuant to an Agreement and Plan of
Merger, dated as of November 13, 2000, between the company,
GOLD Acquisition Corporation, a wholly owned subsidiary of the
Company ("GOLD"), and Enhance Financial relating to such
acquisition, GOLD was merged with and into Enhance Financial,
with each outstanding share of common stock of Enhance
Financial being converted into 0.22 shares of the Common
Stock, par value $.001, of the Company. As set forth in the
8-K, the financial statements of Enhance Financial and Pro
Forma Financial Information meeting the requirements of Form
8-K with respect to such acquisition will be filed by
amendment to the 8-K.
* 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 14, 2001 /s/ C. Robert Quint
---------------------
C. Robert Quint
Executive Vice President, Chief Financial Officer
(Principal Accounting Officer)
18