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 SEPTEMBER 30, 2002
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 for 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 by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes X No
---- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date 93,471,420 shares of
Common Stock, $0.001 par value, outstanding on November 8, 2002.
RADIAN GROUP INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statement of Changes in Common Stockholders' Equity 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
Item 4. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
CERTIFICATIONS 27
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RADIAN GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30 December 31
-----------------------------
(In thousands, except share amounts)
Assets
Investments
Fixed maturities held to maturity - at amortized cost (fair value $417,412
and $461,962) $ 390,089 $ 442,198
Fixed maturities available for sale - at fair value (amortized cost
$3,255,187 and $2,552,930) 3,403,421 2,567,200
Trading securities - at fair value (cost $43,585 and $22,599) 36,911 21,659
Equity securities - at fair value (cost $195,226 and $116,978) 156,114 120,320
Short-term investments 122,852 210,788
Other invested assets 6,479 7,310
----------- -----------
Total Investments $ 4,115,866 $ 3,369,475
----------- -----------
Cash 9,448 60,159
Investment in affiliates 235,324 177,465
Deferred policy acquisition costs 179,837 151,037
Prepaid federal income taxes 287,900 326,514
Provisional losses recoverable 47,490 47,229
Other assets 355,024 306,747
----------- -----------
$ 5,230,889 $ 4,438,626
----------- -----------
Liabilities and Stockholders' Equity
Unearned premiums $ 576,851 $ 513,932
Reserve for losses 612,437 588,643
Short -term and long-term debt 544,127 324,076
Deferred federal income taxes 554,300 432,098
Accounts payable and accrued expenses 274,628 233,549
----------- -----------
$ 2,562,343 $ 2,092,298
----------- -----------
Redeemable preferred stock, par value $.001 per share; 0 shares and 800,000
shares issued and outstanding in 2002 and 2001, respectively - at
redemption value 0 40,000
----------- -----------
Common stockholders' equity
Common stock, par value $.001 per share; 200,000,000 shares authorized;
95,028,010 and 94,170,300 shares issued in 2002 and 2001, respectively 95 94
Treasury stock; 1,188,092 and 188,092 shares in 2002 and 2001, respectively (39,991) (7,874)
Additional paid-in capital 1,234,926 1,210,088
Retained earnings 1,402,180 1,093,580
Accumulated other comprehensive income 71,336 10,440
----------- -----------
2,668,546 2,306,328
----------- -----------
$ 5,230,889 $ 4,438,626
=========== ===========
See notes to unaudited condensed consolidated financial statements
3
RADIAN GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
---------------------------------------------------------
(In thousands, except per-share amounts)
Revenues:
Premiums written:
Direct $ 216,594 $ 177,769 $ 640,533 $ 524,924
Assumed 35,217 21,836 104,711 63,143
Ceded (17,197) (15,667) (48,382) (44,677)
---------------------------------------------------------
Net premiums written 234,614 183,938 696,862 543,390
Increase in unearned premiums (25,102) (3,448) (67,130) (27,896)
---------------------------------------------------------
Premiums earned 209,512 180,490 629,732 515,494
Net investment income 45,503 39,956 132,741 107,431
Equity in net income of affiliates 12,994 7,389 58,387 32,193
Other income 8,200 13,188 30,448 28,763
---------------------------------------------------------
276,209 241,023 851,308 683,881
---------------------------------------------------------
Expenses:
Provision for losses 57,923 50,968 172,926 152,550
Policy acquisition costs 24,716 20,327 73,765 59,364
Other operating expenses 39,043 34,149 128,288 91,048
Interest expense 7,177 6,003 21,571 11,852
---------------------------------------------------------
128,859 111,447 396,550 314,814
---------------------------------------------------------
Gains and losses:
Net gains on sales of investments 5,685 2,968 8,768 5,730
Change in fair value of derivative instruments (5,090) (4,267) (14,096) (4,458)
---------------------------------------------------------
595 (1,299) (5,328) 1,272
---------------------------------------------------------
Pretax income 147,945 128,277 449,430 370,339
Provision for income taxes 41,384 36,745 130,014 105,973
---------------------------------------------------------
Net income 106,561 91,532 319,416 264,366
---------------------------------------------------------
Dividends to preferred stockholder 3,828 825 5,478 2,475
---------------------------------------------------------
Net income available to common stockholders $ 102,733 $ 90,707 $ 313,938 $ 261,891
=========================================================
Basic net income per share $ 1.08 $ 0.97 $ 3.32 $ 2.93
=========================================================
Diluted net income per share $ 1.07 $ 0.96 $ 3.27 $ 2.88
=========================================================
Average number of common shares outstanding - basic 94,761 93,281 94,564 89,360
=========================================================
Average number of common and common equivalent shares
outstanding - diluted 96,035 94,784 96,101 90,892
=========================================================
See notes to unaudited condensed consolidated financial statements.
4
RADIAN GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(UNAUDITED)
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, 2002 $ 94 $ (7,874) $1,210,088 $1,093,580 $ (586) $ 11,026 $2,306,328
Comprehensive income:
Net income -- -- -- 319,416 -- -- 319,416
Unrealized foreign currency
translation adjustment, net of tax
of $493 -- -- -- -- 915 -- 915
Unrealized holding gains arising
during period, net of tax
of $35,366 -- -- -- -- -- 65,680 --
Less: Reclassification adjustment
for net gains included in net
income, net of tax of $3,069 -- -- -- -- -- (5,699) --
-----------
Net unrealized gain on investments,
net of tax of $32,297 -- -- -- -- -- 59,981 59,981
----------
Comprehensive income 380,312
Issuance of common stock under
incentive plans 1 -- 24,838 -- -- -- 24,839
Redemption of preferred stock -- -- -- (3,003) -- -- (3,003)
Purchase of treasury stock -- (32,117) -- -- -- -- (32,117)
Dividends -- -- -- (7,813) -- -- (7,813)
------- -------- ---------- ---------- ----------- ----------- ----------
Balance, September 30, 2002 $ 95 $(39,991) $1,234,926 $1,402,180 $ 329 $ 71,007 $2,668,546
======= ======== ========== ========== =========== =========== ==========
See notes to unaudited condensed consolidated financial statements.
5
RADIAN GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30
2002 2001
---------------------------
(in thousands)
Cash flows from operating activities $ 429,589 $ 323,079
---------- --------
Cash flows from investing activities:
Proceeds from sales of fixed maturity investments available
for sale 1,376,780 535,579
Proceeds from sales of equity securities available for sale 12,753 3,515
Proceeds from redemptions of fixed maturity investments
available for sale 61,068 173,776
Proceeds from redemptions of fixed maturity investments
held to maturity 55,492 15,826
Purchases of fixed maturity investments available for sale (2,086,093) (980,790)
Purchases of equity securities available for sale (108,601) (41,439)
Sales (purchases) of short-term investments, net 87,987 (66,197)
Purchases of property and equipment, net (36,125) (6,490)
Sales of other invested assets 3,432 --
Acquisitions, net of cash acquired -- 6,788
Investment in affiliates (20,000) (15,020)
Distributions from affiliates 20,095 5,261
Other (4,931) (3,278)
---------- --------
Net cash used in investing activities (638,143) (372,469)
---------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock under incentive plans 24,839 30,047
Acquisition costs -- (7,394)
Issuance of long-term debt 215,937 247,058
Repayment of short-term debt -- (173,724)
Redemption of preferred stock (43,003) --
Purchase of treasury stock (32,117) (5,715)
Dividends paid (7,813) (7,349)
---------- --------
Net cash provided by financing activities 157,843 82,923
---------- --------
(Decrease)/increase in cash (50,711) 33,533
Cash, beginning of period 60,159 2,424
---------- --------
Cash, end of period $ 9,448 $ 35,957
========== ========
Supplemental disclosures of cash flow information:
Income taxes (received) paid $ (2,881) $ 96,880
========== ========
Interest paid $ 17,691 $ 9,127
========== ========
See notes to unaudited condensed consolidated financial statements
6
RADIAN GROUP INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1 - CONSOLIDATED FINANCIAL STATEMENTS - BASIS OF PRESENTATION
The consolidated financial statements included herein, include the
accounts of Radian Group Inc. (the "Company" or "Radian") and its subsidiaries,
including its principal mortgage guaranty subsidiaries, Radian Guaranty Inc.
("Radian Guaranty"), Amerin Guaranty Corporation ("Amerin Guaranty") and Radian
Insurance Inc. ("Radian Insurance") (together referred to as "Mortgage
Insurance") and its principal financial guaranty operating subsidiaries, Radian
Reinsurance Inc. ("Radian Re") and Radian Asset Assurance Inc. ("Radian Asset
Assurance"). The Company also has an equity interest in two active credit-based
asset businesses, Credit-Based Asset Servicing and Securitization LLC ("C-BASS")
and Sherman Financial Group LLC ("Sherman"). The Company has a 46.0% interest in
C-BASS and a 45.5% interest in Sherman. These statements are presented on the
basis of accounting principles generally accepted in the United States of
America ("GAAP"). The Company has condensed or omitted certain information and
footnote disclosures normally included in consolidated financial statements
prepared in accordance with GAAP pursuant to such rules and regulations.
The financial information for the interim periods 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. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 2001. 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.
The preparation of financial statements in accordance with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results may differ
from these estimates.
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.
Certain prior period balances have been reclassified to conform to the
current period presentation.
2 - ACQUISITION OF ENHANCE FINANCIAL
On February 28, 2001, the Company acquired the financial guaranty and
other businesses of Enhance Financial Services Group Inc. ("Financial
Guaranty"), a New York based insurance holding company that primarily insures
and reinsures credit-based risks, at a purchase price of approximately $581.5
million. The 2001 results include the results of Financial Guaranty's operations
for the period from the date of the acquisition.
The following unaudited pro forma information presents a summary of the
consolidated operating results of the Company for the nine month period ended
September 30, 2001, as if the acquisition of Financial Guaranty had occurred on
January 1, 2001 (in thousands, except per-share information):
Nine Months Ended
September 30, 2001
------------------
Total revenues $ 687,886
Net income $ 169,094
Net income per share-basic $ 1.86
Net income per share-diluted $ 1.83
7
3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended, on January 1, 2001.
Transactions that the Company has entered into that are accounted for under SFAS
No. 133, as amended, include investments in convertible securities, and selling
credit protection in the form of credit default swaps and certain financial
guaranty contracts that are considered credit default swaps. Credit default
swaps and certain financial guaranty contracts that are accounted for under SFAS
No. 133 are part of the Company's overall business strategy of offering
financial guaranty protection to its customers. Currently, none of the
derivatives qualify as hedges under SFAS No. 133. Therefore, changes in fair
value are included in the periods presented.
At September 30, 2002, the fair value of the Company's derivative
instruments, classified as trading securities, was $36.9 million, as compared to
an amortized value of $43.6 million, and the Company recognized $4.9 million,
net of tax, of loss on changes in the fair value of trading securities in the
consolidated statements of income for the nine months ended September 30, 2002.
The notional value of the Company's credit default swaps and certain other
financial guaranty contracts accounted for under SFAS No. 133 was $5.5 billion
at September 30, 2002 and the Company recognized $4.3 million, net of tax, of
losses on these instruments. Net unrealized losses on credit default swaps and
certain other financial guaranty contracts of $9.3 million at September 30, 2002
was comprised of gross unrealized gains of $53.7 million and gross unrealized
losses of $63.0 million.
The application of SFAS 133, as amended, could result in volatility
from period to period in gains and losses as reported on the Company's
consolidated statements of income. The Company is unable to predict the effect
this volatility may have on its financial position or results of operations.
4 - SEGMENT REPORTING
The Company has three reportable segments: mortgage insurance,
financial guaranty and mortgage services. The mortgage insurance segment
provides private mortgage insurance and risk management services to mortgage
lending institutions located throughout the United States. Private mortgage
insurance primarily 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 segment provides credit-related
insurance coverage, credit default swaps and certain other financial guaranty
contracts to meet the needs of customers in a wide variety of domestic and
international markets. For the periods presented in this report, revenues
attributable to foreign countries were not material. In addition, long-lived
assets located in foreign countries were not material for the periods presented.
The Company's insurance businesses within the Financial Guaranty segment include
the assumption of reinsurance from monoline financial guaranty insurers for both
municipal bonds and structured finance obligations. The Company also provides
direct financial guaranty insurance for municipal bonds and structured
transactions, trade credit reinsurance and excess Securities Investor Protection
Corporation ("SIPC") insurance. The mortgage services segment deals primarily
with credit-based servicing and securitization of assets in underserved markets,
in particular, the purchase and servicing of and securitization of special
assets, including sub-performing/non-performing mortgages, seller financed
residential mortgages and delinquent consumer assets. In addition, mortgage
services includes the results of RadianExpress.com ("RadianExpress"), an
internet-based settlement company that provides real estate information products
and services to the first and second lien mortgage industry. As a result of the
acquisition of Financial Guaranty in February 2001, the results for 2001 for the
Financial Guaranty and most of the Mortgage Services segments include the
results from the date of acquisition. The Company's reportable segments are
strategic business units, which are managed separately, as each business
requires different marketing and sales expertise. Certain corporate income and
expenses have been allocated to the segments. Prior period information has been
restated to conform with current year segment definitions.
In the mortgage insurance segment, the highest state concentration of
risk is California at 16.5%. At September 30, 2002, California also accounted
for 16.4% of Mortgage Insurance's total direct primary insurance in force and
11.8% of Mortgage Insurance's total direct pool insurance in force. California
also accounted for 18.7% of Mortgage Insurance's direct primary new insurance
written in the first nine months of 2002. The largest single customer of
Mortgage Insurance (including branches and affiliates of such customer) measured
by new insurance written, accounted for 11.7% of new insurance written during
the first nine months of 2002 compared to 12.6% for full year 2001 and 11.2% for
full year 2000. The new insurance written amount reported in 2002 consists of a
large structured transaction, for $3.9 billion, for one customer comprised of
prime mortgage loans originated throughout the United States.
8
In the financial guaranty segment, the Company derives a substantial
portion of its premiums written from a small number of primary insurers. In the
first nine months of 2002, 22% of gross written premiums in the financial
guaranty segment were derived from two primary insurers. Four primary insurers
were responsible for 27% of gross written premiums. This customer concentration
results from the small number of primary insurance companies who participate in
writing financial guaranty insurance.
The Company evaluates segment performance based on net income and
return on investment. Summarized financial information concerning the Company's
operating segments as of and for the year-to-date periods indicated, is
presented in the following tables:
Quarter Ended Nine Months Ended
MORTGAGE INSURANCE September 30 September 30
(in thousands) 2002 2001 2002 2001
--------------------------------------------------------
Net premiums written $ 162,484 $ 148,229 $ 488,874 $ 458,279
--------- --------- --------- --------
Net premiums earned $ 162,139 $ 152,098 $ 499,051 $ 445,181
Net investment income 27,068 24,546 79,882 72,038
Equity in net income of -- -- -- --
affiliates
Other income 5,570 4,666 13,980 14,446
--------- --------- --------- --------
Total revenues 194,777 181,310 592,913 531,665
--------- --------- --------- --------
Provision for losses 47,081 43,707 139,497 133,657
Policy acquisition costs 17,103 15,470 50,001 46,316
Other operating expenses 25,182 21,843 81,236 63,069
Interest expense 4,121 3,475 12,796 6,821
--------- --------- --------- --------
Total expenses 93,487 84,495 283,530 249,863
--------- --------- --------- --------
Net gains (losses) (1,374) (836) (2,305) 2,375
--------- --------- --------- --------
Pretax income 99,916 95,979 307,078 284,177
Income tax provision 27,045 26,703 84,432 78,250
--------- --------- --------- --------
Net income $ 72,871 $ 69,276 $ 222,646 $ 205,927
========= ========= ========= ========
Total assets $3,163,479 $2,611,222
Deferred policy acquisition costs 78,287 74,260
Reserve for losses 479,157 452,864
Unearned premiums 94,624 89,160
Equity 1,583,019 1,373,771
9
Quarter Ended Nine Months Ended
FINANCIAL GUARANTY September 30 September 30
(in thousands) 2002 2001 2002 2001
-----------------------------------------------------
Net premiums written $ 72,130 $ 35,709 $ 207,988 $ 85,111
========= ========= ======== ========
Net premiums earned $ 47,373 $ 28,392 $ 130,681 $ 70,313
Net investment income 18,388 15,364 52,758 35,269
Equity in net income (loss) of (510) 392 (529) (930)
affiliates
Other income 251 1,443 1,082 2,248
--------- --------- -------- --------
Total revenues 65,502 45,591 183,992 106,900
--------- --------- -------- --------
Provision for losses 10,842 7,261 33,429 18,893
Policy acquisition costs 7,612 4,857 23,764 13,048
Other operating expenses 6,569 7,414 23,061 15,629
Interest expense 2,532 2,053 7,265 4,108
--------- --------- -------- --------
Total expenses 27,555 21,585 87,519 51,678
--------- --------- -------- --------
Net gains (losses) 156 (572) (5,625) (1,138)
--------- --------- -------- --------
Pretax income 38,103 23,435 90,848 54,085
Income tax provision 10,368 6,497 24,979 14,892
--------- --------- ------- -------
Net income $ 27,735 $ 16,938 $ 65,869 $ 39,193
========= ========= ======== ========
Total assets $1,838,600 $1,419,912
Deferred policy acquisition costs 101,550 69,115
Reserve for losses 133,280 122,939
Unearned premiums 482,228 388,467
Equity 898,787 693,898
Quarter Ended Nine Months Ended
MORTGAGE SERVICES September 30 September 30
------------------------------------------------
(in thousands) 2002 2001 2002 2001
Net premiums written ======== ======== ======= =======
Net premiums earned -- -- -- --
Net investment income $ 47 $ 46 $ 101 $ 124
Equity in net income of affiliates 13,503 6,997 58,916 33,123
Other income 2,380 7,079 15,386 12,069
------- ------- ------- -------
Total revenues 15,930 14,122 74,403 45,316
------- ------- ------- -------
Provision for losses
Policy acquisition costs
Other operating expenses 7,292 4,892 23,991 12,351
Interest expense 525 475 1,510 922
------- ------- ------- -------
Total expenses 7,817 5,367 25,501 13,273
------- ------- ------- -------
Net gains (losses) 1,813 109 2,602 35
------- ------- ------- -------
Pretax income 9,926 8,864 51,504 32,078
Income tax provision 3,971 3,546 20,603 12,832
------- ------- ------- -------
Net income $ 5,955 $ 5,318 $ 30,901 $ 19,246
======= ======= ======= =======
Total assets $228,810 $199,573
Deferred policy acquisition costs
Reserve for losses
Unearned premiums
Equity 186,740 154,963
10
The reconciliation of segment net income to consolidated net income is as
follows:
Quarter Ended Nine Months Ended
CONSOLIDATED September 30 September 30
(in thousands) 2002 2001 2002 2001
-------------------------------------------------
Net income:
Mortgage Insurance $ 72,871 $69,276 $222,646 $205,927
Financial Guaranty 27,735 16,938 65,869 39,193
Mortgage Services 5,955 5,318 30,901 19,246
-------- ------- -------- --------
Total $106,561 $91,532 $319,416 $264,366
======== ======= ======== ========
5 - SHORT-TERM AND LONG-TERM DEBT
In January 2002, the Company sold $220 million of Senior Convertible
Debentures. The debentures bear interest at the rate of 2.25% per year and
interest is payable semi-annually on January 1 and July 1. The Company will also
pay contingent interest on specified semi-annual periods, if the sale price of
its common stock for a specified period of time is less than 60% of the
conversion price. The debentures are convertible, at the purchaser's option,
into shares of common stock at prices and on dates specified in the offering. At
that time, the shares would become common shares for the purposes of calculating
earnings per share.
The composition of short-term and long-term debt was as follows:
September 30 December 31
($ in thousands) 2002 2001
---------------------------
2.25% Senior Convertible Debentures due 2022 $220,000 $ --
7.75% debentures due 2011 249,127 249,076
6.75% debentures due 2003 75,000 75,000
-------- --------
$544,127 $324,076
======== ========
6 - REDEEMABLE PREFERRED STOCK
On August 15, 2002, the Company redeemed its $4.125 Preferred Stock,
par value $.001 per share. Pursuant to the Company's sinking fund redemption
obligation, 72,000 shares were redeemed at $50.00 per share, and the remaining
728,000 shares were redeemed at $54.125 per share. Accrued and unpaid dividends
on the shares to the date of redemption were also paid as part of the redemption
price. The excess of the amount paid over the carrying value of the preferred
stock of $3.0 million, is accounted for as a charge to equity and resulted in an
approximate $.03 reduction in earnings per share for the third quarter and
year-to-date periods of 2002.
7 - RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." The provisions of this statement related to the
rescission of SFAS No. 4 are effective for fiscal years beginning after May 15,
2002. Certain provisions of the statement relating to SFAS No. 13 are effective
for transactions occurring after May 15, 2002. All other provisions of the
statement are effective for financial statements issued on or after May 15,
2002. Management has determined that the provisions of this statement will have
no impact on the Company's financial statements.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with restructuring,
discontinued operations, plant closing, or other exit or disposal activity.
Statement No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002.
11
8 - OTHER INFORMATION
On September 24, 2002, the Company announced that its Board of
Directors had authorized the repurchase of up to 2.5 million shares of its
common stock on the open market. Shares will be purchased from time to time
depending on the market conditions, share price, and other factors. These
purchases will be funded from available working capital. At September 30, 2002,
1,000,000 shares had been repurchased at a total price of approximately $32
million.
9 - SUBSEQUENT EVENTS
On October 4, 2002, Standard & Poor's Rating Service, a division of The
McGraw-Hill Companies, Inc. ("S&P") announced that it had downgraded the
financial strength, the financial enhancement and counterparty credit ratings of
Radian Re from "AAA" to "AA" (on the same date, Fitch placed the "AAA" rating of
Radian Re on Negative Watch for possible downgrade). Concurrently with the
downgrade, S&P improved Radian Re's outlook from negative to stable. The October
4, 2002 S&P decision follows S&P's issuance of a negative outlook for monoline
financial guaranty reinsurance companies in March 2002, stating concerns
regarding the business positions of Radian Re and three of its competitors in
the industry. S&P explained this downgrade was based on worsening credit and
economic characteristics for assumed financial guaranty business, combined with
a perceived absence of timely development and implementation of strategies to
effectively meet the challenges that S&P believes are facing the financial
guaranty reinsurance industry. In addition, reduced business volume and business
prospects due to management imposed limitations - referring to the Company's
strategy of active management of its reinsurance business to reject ceded
business that does not meet its standards for risk and profitability -- and the
primary insurers' changing reinsurance strategies were also stated as factors
leading to the downgrade.
Radian Re is party to several agreements with primary insurers that grant
them the right to "recapture" business ceded to Radian Re under these agreements
if the financial strength rating is downgraded below minimum rates established
in the agreements. S&P's October 4 downgrade has resulted in those primary
insurers having such a right to recapture business, including unearned premium
reserves. Although the Company does not believe, for the reasons explained
below, that the primary insurers will exercise such right in connection with the
October 4, 2002 downgrade, the recapture of business by a primary insurer could
have a material adverse effect on earned premiums, deferred premium revenue and
recognition of future income from such agreements.
The primary insurers have indicated to Radian Re that they do not intend
at this time to recapture all of the business they have ceded to Radian Re, and
generally the primary insurers do not have the right to recapture less than all
of the business they have ceded to Radian Re in any given year. Moreover, the
Company believes that the recapture of business by the primary insurers would
otherwise be inconsistent with their long-standing risk-management practices.
However, the primary insurers have indicated that they are considering changes
to their treaty agreements with Radian Re, in respect of possible adjustments to
pricing terms that may be necessary in order to preserve their economic benefit
for the reinsurance ceded to Radian Re as a result of the downgrade, which could
also result in Radian Re agreeing to permit some of the primary insurers to
recapture a portion of the business ceded to Radian Re. Any such modifications
to existing treaty terms and/or agreements to recapture less than all the
previously ceded business would have to be consensual, as a matter of contract,
and the Company would agree to them only if, and to the extent, that the Company
determined them to be consistent with its business interests and strategies.
Nevertheless, the Company believes that it is possible that this downgrade could
have a material adverse effect on Radian Re's competitive position in the
monoline financial guaranty reinsurance industry. The ultimate effect of the
downgrade will depend on many factors, including the credit for capital relief
given by the rating agencies to the primary insurers for Radian Re's
reinsurance, the ratings of Radian Re's competitors, the relative costs and
benefits of alternative means for Radian Re's reinsurance customers to manage
their capital requirements, the Company's ability to replace any premium
recaptured by the primary insurers with new premium and the Company's ability to
effectively utilize capital made available by the recapture of business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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
possibility that interest rates may increase rather than remain stable or
decrease; the possibility that housing demand may decrease for any number of
reasons, some of which may be out of the control of the Company, including
changes in interest rates, adverse economic conditions, or other reasons; the
Company's market share may decrease as a result of changes in underwriting
criteria by the Company or its competitors, or other reasons; performance of the
financial markets generally; changes in the demand for and market acceptance of
the Company's products; increased competition from government programs and the
use of substitutes for mortgage insurance; changes in government regulation or
tax laws that may affect one or more of the Company's businesses; changes in
investor perceptions regarding the strength of financial guaranty providers and
the guaranty offered by such providers; changes in investor concern regarding
the credit quality of municipalities and corporations, including the need or
desirability for financial guaranty insurance at all or as an alternative for
other credit enhancement; and changes in general financial 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
Net income for the third quarter of 2002 was $106.6 million or $1.07
per share compared to $91.5 million or $0.96 per share for the third quarter of
2001. Net income for the first nine months of 2002 was $319.4 million or $3.27
per share, compared to $264.4 million or $2.88 per share for the nine months
ended September 30, 2001. The 16.5% increase in net income for the third quarter
was primarily a result of growth in the Company's business volumes. Insurance in
force for Mortgage Insurance increased from $106.8 billion at September 30, 2001
to $109.4 billion at September 30, 2002. Total net debt service outstanding on
transactions insured by Financial Guaranty increased from $96.3 billion at
September 30, 2001 to $103.0 billion at September 30, 2002. These increases in
business volumes produced increases in written and earned premiums and
investment income. In addition, equity in net income of affiliates increased by
$5.6 million in the third quarter of 2002 to $13.0 million from the $7.4 million
recorded in the third quarter of 2001 primarily due to strong results at
Credit-Based Asset Servicing and Securitization LLC ("C-BASS") and Sherman
Financial Services Group LLC ("Sherman"). Partially offsetting these increases
was a decrease in other income and increases in the provision for losses, policy
acquisition costs, operating expenses and interest expense to support the
business growth. The 20.8% increase in net income for the nine months ended
September 30, 2002 was primarily due to the reasons stated above, as well as the
inclusion of Financial Guaranty and much of Mortgage Services for nine months in
2002, compared to seven months in 2001, as a result of the acquisition of
Financial Guaranty on February 28, 2001.
Consolidated earned premiums for the third quarter of 2002 of $209.5
million increased $29.0 million or 16.1% from $180.5 million in the third
quarter of 2001. Mortgage Insurance contributed $10.0 million of this increase
and Financial Guaranty contributed $19.0 million of this increase. Net
investment income for the third
12
quarter of 2002 increased to $45.5 million from $40.0 million in the third
quarter of 2001. The $5.5 million or 13.7% increase was primarily due to a large
increase in the investment portfolio balance as a result of continued positive
operating cash flows and the proceeds from the issuance of $220 million of
convertible debt. Other income decreased to $8.2 million in the third quarter of
2002 from $13.2 million in the same period of 2001, primarily related to the
lower level of activity at RadianExpress, our internet-based settlement company
(discussed below under "Mortgage Services - Results of Operations").
Consolidated earned premiums for the first nine months of 2002 were $629.7
million, up 22.2% from $515.5 million for the same period of 2001. Financial
Guaranty contributed $60.4 million of this increase, partially due to the
inclusion of that segment for nine months during 2002 compared to seven months
in 2001, as described in Note 4. The remaining increase came from Mortgage
Insurance. Net investment income of $132.7 million for the nine months ended
September 30, 2002 increased $25.3 million or 23.6% from $107.4 million reported
in the comparable period of 2001. Equity in net income of affiliates increased
81.4% from $32.2 million for the first nine months of 2001 to $58.4 million for
the same period of 2002. Other income increased 5.9% to $30.4 million for the
first nine months of 2002 compared to $28.8 million in the comparable period of
2001 primarily due to an increase in revenues at RadianExpress.
The provision for losses was $57.9 million for the third quarter of
2002, an increase of $6.9 million or 13.6% from the $51.0 million reported for
the third quarter of 2001. Approximately $3.4 million of this was related to
Mortgage Insurance to support an increase in delinquencies and claims payments,
and $3.6 million was due to loss reserve increases at Financial Guaranty to
support business growth. Policy acquisition costs for the third quarter of 2002
were $24.7 million, up from $20.3 million in the third quarter of 2001. Other
operating expenses of $39.0 million increased $4.9 million or 14.3% from the
$34.1 million reported in the third quarter of 2001. This was primarily due to
increases in salaries and benefits related to an increase in headcount to
support higher volumes, increased professional fees, fees for outside services,
and increased depreciation and software costs due to increased capital
expenditures in the information technology and infrastructure areas, which began
in late 2001 and will continue through 2003. Interest expense of $7.2 million
for the third quarter of 2002 increased from $6.0 million for the third quarter
of 2001, as a result of the issuance of $220 million of convertible debt in
January 2002. The provision for losses of $172.9 million for the first nine
months of 2002 increased $20.4 million or 13.4% from the same period of 2001.
The increase in the provision for losses for the nine month period of 2002 was
primarily related to increased claims in Mortgage Insurance and loss reserve
increases at Financial Guaranty to support higher growth levels. Policy
acquisition costs were $73.8 million for the nine months ended September 30,
2002 compared to $59.4 million for the first nine months of 2001. Other
operating expenses were $128.3 million for the first nine months of 2002, a
$37.2 million or 40.9% increase from the same period of 2001. Interest expense
of $21.6 million for the first nine months of 2002 increased from $11.9 million
for the first nine months of 2001, as a result of the issuance of $250 million
of long-term debt in May 2001 and $220 million of convertible debt in January
2002, combined with the $75 million of debt acquired as a result of the
Financial Guaranty acquisition in February 2001. The consolidated effective tax
rate for the three and nine months ended September 30, 2002 was 28.0% and 28.9%,
respectively, compared to 28.6% for both the three and nine month periods of
2001.
MORTGAGE INSURANCE - RESULTS OF OPERATIONS
Net income for the third quarter was $72.9 million, up from $69.3
million in the third quarter of 2001. This increase was due to an increase in
earned premiums, investment income and other income partially offset by an
increase in the provision for losses, policy acquisition costs, other operating
expenses and interest expense.
Primary new insurance written during the third quarter of 2002 was $9.5
billion, a 22.7% decrease compared to $12.3 billion for the third quarter of
2001. This decrease in Mortgage Insurance's primary new insurance written volume
for the third quarter of 2002 was primarily due to a decrease in insurance
written through structured transactions. The industry experienced a 2% increase
in new insurance written volume for the third quarter of 2002 as compared to the
third quarter of 2001. The Company's market share of the industry based on new
insurance written was 12% in the third quarter and second quarter of 2002,
compared to 16% in the third quarter of 2001. The Company's market share of the
industry based on new insurance written for the first nine months of 2002 was
13.8%. During the first nine months of 2002, Mortgage Insurance wrote $6.8
billion or 20.4% of new insurance written in structured transactions as compared
to $5.2 billion or 16.4% of new insurance written in structured transactions in
the same period of 2001. Of this amount in 2002, $4.8 billion was written in the
first quarter of the year. The amount originated in the first quarter of 2002
includes a large structured transaction for $3.9 billion for one customer
comprised of prime mortgage loans originated throughout the United States. The
Company's participation in the structured transactions market is likely to vary
significantly from quarter to quarter as the Company competes with other
mortgage insurers as well as capital market executions for these transactions.
In the
13
third quarter of 2002, the Company wrote $400 million in structured transactions
compared to $2.6 billion in the third quarter of 2001. In the third quarter and
year-to-date periods of 2002, Mortgage Insurance wrote $28.1 million and $148.9
million of pool insurance risk as compared to $22.4 million and $110.3 million
in the same periods of 2001.
Mortgage Insurance's volume in the third quarter and year-to-date
period of 2002 continued to be impacted by relatively lower interest rates that
affected the entire mortgage industry. The continued low interest rate
environment caused refinancing activity at the beginning of 2002 to continue to
remain high and contributed to relatively strong new insurance volume through
the third quarter of 2002. Mortgage Insurance's refinancing activity as a
percentage of primary new insurance written was 33% for the third quarter of
2002 as compared to 37% for the same period in 2001. The refinancing percentages
for the nine months ended September 30, 2002 and 2001, were 36% and 38%,
respectively. The persistency rate, which is defined as the percentage of
insurance in force that is renewed in any given year, was 58.8% for the twelve
months ended September 30, 2002 as compared to 68.6% for the twelve months ended
September 30, 2001. This decrease was consistent with the increasing level of
refinancing activity, which caused the cancellation rate to increase. The
expectation for the balance of 2002 is a continuation of strong industry volume
and continued low persistency rates, influenced by a back log of refinances and
a leveling off of mortgage interest rates.
The Company insures non-traditional loans, predominantly Alternative A
and A minus loans (collectively, referred to as "non-prime" business).
Alternative A borrowers have a similar credit profile to the Company's prime
borrowers, but these loans are underwritten with reduced documentation and
verification of information. The Company 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 that are less
stringent than standard credit guidelines. To compensate for this additional
risk, the Company receives a higher premium for insuring this product, which the
Company believes is commensurate with the additional default risk. During the
third quarter and year-to-date period of 2002, non-prime business accounted for
$2.9 billion and $10.7 billion or 30.4% and 31.9%, respectively of Mortgage
Insurance's primary new insurance written. This compared to $4.0 billion and
$9.3 billion or 32.4% and 29.4% for the same periods in 2001. Of the $2.9
billion of non-prime business for the third quarter of 2002 and $10.7 billion
year-to-date 2002, $2.2 billion or 75.9% and $8.0 billion or 74.8%,
respectively, was Alternative A.
The Company insures 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 Fitch Ratings 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%. Beginning in October 2001, Radian Insurance
entered into a reinsurance agreement with one of its affiliates, Radian Asset
Assurance, whereby Radian Insurance ceded substantially all of the insurance
business and premium associated with certain obligations secured by
mortgage-backed securities and manufactured housing loans. Because most
Financial Guaranty business on mortgage related assets will be written in Radian
Asset Assurance and Amerin will be the primary writer of second mortgage
insurance in the future, the business written by Radian Insurance has been
substantially reduced in 2002 and this reduction is expected to continue in the
future. The second mortgage new insurance written by Amerin in the third quarter
and first nine months of 2002 was $35.5 million and $204.1 million,
respectively. The comparable amounts of second mortgage new insurance written in
2001 were $426.0 million and $2.3 billion, respectively. This reduction was a
result of the tightening of underwriting guidelines. Radian Insurance originated
$10 million par amount of financial guaranty insurance in the first nine months
of 2002. The business originated by Radian Insurance related to certain
structured financial guaranty insurance on mortgage related assets.
Net premiums earned in the third quarter and first nine months of 2002
were $162.1 million and $499.1 million, respectively. These amounts represent
increases of 6.6% and 12.1% respectively, compared to the comparable periods of
2001. This increase included a slightly 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 third quarter of 2002
was offset by the decrease in persistency levels. These lower persistency
levels, as well as our lower level of participation in the structured
transactions market, will impact premiums earned in future periods. There was an
increase in direct primary insurance in force for the first nine months of 1.3%,
from $107.9 billion at December 31, 2001 to $109.4 billion at September 30,
2002. Total pool risk in force was $1.7 billion at September 30, 2002 compared
to $1.6 billion at December 31, 2001.
14
Mortgage Insurance and other companies in 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 third
quarter of 2002, premiums ceded under captive reinsurance arrangements were
$14.0 million, or 8.6% of total premiums earned during the period, as compared
to $12.6 million, or 8.3% of total premiums earned for the same period of 2001.
For the year-to-date period of 2002, premiums ceded under captive reinsurance
arrangements were $38.9 million, or 7.8% of total premiums earned during the
period, as compared to $38.0 million, or 8.3% of total premiums earned for the
same period of 2001. Primary new insurance written under captive reinsurance
arrangements for the three and nine months ended September 30, 2002 was $2.9
billion and $11.0 billion, respectively, or 30.1% and 32.9%, respectively, of
total primary new insurance written for the third quarter and year to date
period of 2002 as compared to $5.2 billion and $11.0 billion, respectively, for
the three and nine months ended September 30, 2001, or 42.6% and 34.7%,
respectively, of total primary new insurance written.
Net investment income for the third quarter of 2002 was $27.1 million,
a 10.6% increase compared to $24.5 million for the same period of 2001. This
increase was a result of continued growth in invested assets primarily due to
positive operating cash flows during the third quarter of 2002 and the
allocation of interest income from net financing activities. The Company has
continued to invest some of its net operating cash flow in tax-advantaged
securities, primarily municipal bonds, although the Company's investment policy
allows the purchase of various other asset classes, including common stock and
convertible securities. The Company's common equity exposure is targeted at a
maximum of 5% of the investment portfolio's market value, while the
investment-grade convertible securities and investment-grade asset-backed
securities exposures are each targeted not to exceed 10%. Net investment income
was $79.9 million for the nine months ended September 30, 2002 compared to $72.0
million for the same period of 2001, also due to the reasons stated above.
The provision for losses was $47.1 million for the three months ended
September 30, 2002, an increase of 7.8% compared to $43.7 million for the
comparable three months of 2001. 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 68.4% of the primary risk in force
and approximately 37.0% of the pool risk in force at September 30, 2002 had not
yet reached its anticipated highest claim frequency years. The overall default
rate for both primary and pool insurance at September 30, 2002 was 2.5%,
compared to 2.2% at December 31, 2001, while the default rate on the primary
business was 3.8% at September 30, 2002 slightly higher than the 3.5% at
December 31, 2001. The change in the primary business default rate resulted from
a 28 basis point decline in the delinquency rate on our prime loans, more than
offset by a 286 basis point increase in the non-prime delinquency rate. 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 the Company's overall default rates, which would result in an increase in
the provision for losses. The total number of defaults increased slightly from
41,147 at December 31, 2001 to 41,941 at September 30, 2002 and the average loss
reserve per default increased from $11,291 at the end of 2001 to $11,425 at
September 30, 2002. The reserve as a percentage of risk in force was 1.7% at
September 30, 2002 and 1.6% at December 31, 2001. Mortgage Insurance 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 the prime
book 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 September 30, 2002
was 13,315, which represented 39.5% of the total number of primary loans in
default as compared to 7,704 at December 31, 2001, which represented 24.8% of
the primary loans in default. The default rate on this business rose from 5.5%
at December 31, 2001 to 8.4% at September 30, 2002 as compared to the primary
default rate on the prime business of 2.8% at September 30, 2002 and 3.1% at
December 31, 2001. Direct claims paid in the third quarter of 2002 increased to
$41.2 million as compared to $39.3 million in the second quarter of 2002 and
$24.4 million for the third quarter of 2001. Direct claims paid for the first
nine months of 2002 were $117.5 million as compared to $66.0 million for the
same period of 2001, an increase of 78.0%. Claims paid for the second mortgage
business for the third quarter and first nine months of 2002 were $4.2 million
and $12.8 million, respectively. The severity of loss payments has increased due
to deeper coverage amounts and larger loan balances, and any negative impact on
future property values would most likely increase the loss severity. In
addition, the claims in the nine months of 2002 have been impacted by the rise
in delinquencies from 2001 that have proceeded to foreclosure. The Company
anticipates that claim payments will increase in the fourth quarter of 2002 and
throughout 2003.
15
The following table provides selected information as of and for the
periods indicated for the Mortgage Insurance segment:
Three Months Ended Nine Months Ended
September 30 June 30 September 30 September 30 September 30
($ thousands, unless specified otherwise) 2002 2002 2001 2002 2001
-----------------------------------------------------------------------------------
Provision for losses $ 47,081 $ 47,318 $ 43,707 $139,497 $133,657
Reserve for losses $479,157 $475,288 $452,864
PRIMARY INSURANCE
Prime:
Number of insured loans 723,322 749,065 784,233
Number of loans in default 20,427 20,012 21,606
Percentage of total loans in default 2.82% 2.67% 2.76%
Alt A:
Number of insured loans 86,576 85,018 48,564
Number of loans in default 4,767 3,790 1,637
Percentage of total loans in default 5.51% 4.46% 3.37%
A Minus and below:
Number of insured loans 71,929 71,503 62,521
Number of loans in default 8,548 7,853 4,025
Percentage of loans in default 11.88% 10.98% 6.44%
Total:
Number of insured loans 881,827 905,586 895,318
Number of loans in default 33,742 31,655 27,268
Percentage of loans in default 3.83% 3.50% 3.05%
Claims Paid:
Georgia $ 3,051 $ 2,774 $ 1,182 $ 9,511 $ 2,554
California 1,715 2,879 1,898 7,296 5,513
Utah 2,627 2,010 1,262 7,142 3,263
Texas 2,229 2,668 926 6,508 2,702
Florida 2,578 1,926 1,986 6,178 6,309
Total Claims Paid $ 41,242 $ 37,892 $ 24,411 $117,462 $ 66,035
Percentage of total claims paid:
Georgia 7.4% 7.3% 4.8% 8.1% 3.9%
California 4.2 7.6 7.8 6.2 8.3
Utah 6.4 5.3 5.2 6.1 4.9
Texas 5.4 7.0 3.8 5.5 4.1
Florida 6.3 5.1 8.1 5.3 9.6
Risk in Force: ($ millions)
California $ 4,323 $ 4,459 $ 4,143
Florida 2,020 2,037 1,890
New York 1,613 1,629 1,579
Texas 1,384 1,401 1,343
Georgia 1,171 1,196 1,134
Total Risk in Force: $ 26,181 $ 26,716 $ 25,756
16
Three Months Ended Nine Months Ended
September 30 June 30 September 30 September 30 September 30
2002 2002 2001 2002 2001
----------------------------------------------------------------------------------
Percentage of total risk in force:
California 16.5% 16.7% 16.1%
Florida 7.7 7.6 7.3
New York 6.2 6.1 6.1
Texas 5.3 5.2 5.2
Georgia 4.5 4.5 4.4
Reserve for Losses as a % of Risk in 1.7% 1.7% 1.6%
Force
New insurance written: ($ millions)
Prime $ 6,602 $ 6,838 $ 8,302 $22,818 $22,369
Alt A 2,184 2,274 2,548 7,968 5,434
A minus and below 702 1,035 1,431 2,711 3,892
------- ------- -------- -------- --------
Total $ 9,488 $10,147 $ 12,281 $33,497 $31,695
Primary risk written ($ millions) $ 2,243 $ 2,501 $ 3,037 $ 8,335 $ 7,778
Direct primary insurance in force $109,363 $111,424 $106,805
POOL INSURANCE: ($ millions)
Pool risk written $ 28 $ 35 $ 27 $ 149 $ 115
GSE pool risk in force $ 1,220 $ 1,222 $ 1,218
Total pool risk in force $ 1,720 $ 1,745 $ 1,562
Underwriting and other operating expenses were $42.3 million for the third
quarter of 2002, an increase of 13.4% compared to $37.3 million for the same
period of 2001. For the nine months ended September 30, 2002, these expenses
were $131.2 million, an increase of 19.9% compared to $109.4 million for the
comparable period of 2001. These expenses consist 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 $17.1 million
in the third quarter of 2002, an increase of 10.3% compared to $15.5 million in
the third quarter of 2001. While new insurance written volume has not increased,
the amortization of expenses is related to the premium recognition over the life
of an account. Much of the amortization in the current year represents costs
that were expended in 2001. Other operating expenses for the third quarter of
2002 were $25.2 million, an increase of 15.6% compared to $21.8 million for the
third quarter of 2001. This reflects an increase in expenses associated with the
Company's technological, administrative and support functions. Contract
underwriting expenses for the third quarter of 2002 included in other operating
expenses were $11.2 million as compared to $10.7 million for the same period in
2001, an increase of 4.7%. This $.5 million increase in contract underwriting
expenses during the third quarter of 2002 reflected the slightly higher demand
for contract underwriting services. Other income related to contract
underwriting services was $4.6 million for the third quarter of 2002 as compared
to $3.9 million for the same period in 2001. During the first nine months of
2002, loans underwritten via contract underwriting accounted for 32.0% of
applications, 30.0% of insurance commitments, and 23.7% of certificates issued
by the Company as compared to 30.5% of applications, 28.0% of commitments and
23.1% of certificates in the first nine months of 2001.
The effective tax rate for the quarter and year-to-date period ended
September 30, 2002 was 27.1% and 27.5%, respectively, as compared to 27.8% and
27.5%, respectively, for the third quarter and year-to-date period of 2001.
The U.S. Department of Housing and Urban Development ("HUD") has proposed
a rule under the Real Estate Settlement Procedures Act ("RESPA") to create a
safe harbor from the provisions of RESPA that prohibit the giving of any fee,
kickback or thing of value pursuant to any agreement or understanding that real
estate settlement
17
services will be referred. The proposed rule would make the safe harbor
available to lenders that, at the time a borrower submits a loan application,
give the borrower a firm, guaranteed price for all the settlement services
associated with the loan. Mortgage insurance could be included as one of these
settlement services. HUD is currently considering comments to the proposed rule,
and is not expected to finalize the rule until summer of 2003. The rule would
not be effective until a year after it is finalized. If the rule is implemented,
the premiums charged for mortgage insurance could be affected. As the final rule
has not been issued, management is unable to determine what impact, if any, it
will have on the Company.
FINANCIAL GUARANTY INSURANCE - RESULTS OF OPERATIONS
The financial guaranty insurance operations are conducted through
Financial Guaranty and primarily involve the direct insurance and reinsurance of
municipal bonds and structured finance obligations, including credit default
swaps and certain other financial guaranty contracts. Reinsurance is assumed
primarily from the four primary monoline financial guaranty insurers. Radian
Reinsurance Inc., a subsidiary of Financial Guaranty ("Radian Re"), currently
derives substantially all of its reinsurance premium revenues from those four
monolines. Approximately 27% of total gross written premiums for Financial
Guaranty were derived from those four monolines in 2002. A substantial reduction
in the amount of insurance ceded by one or more of those four principal clients
could have a material adverse effect on Financial Guaranty's gross written
premiums and, consequently, its results of operations. Financial Guaranty is
also dependent on reinsurance for trade credit insurance written.
On October 4, 2002, Standard & Poor's Ratings Services lowered the
financial strength, financial enhancement, and counterparty credit ratings of
Radian Re, the registrant's financial guaranty reinsurance subsidiary to "AA"
from "AAA". See Note 9 of Notes to Unaudited Condensed Consolidated Financial
Statements. Radian Re's outlook was also improved to stable from negative.
18
The results of operations for the Financial Guaranty insurance operations
for the year-to-date period of 2001 include the results of Financial Guaranty
from the date of acquisition, February 28, 2001. Since the acquisition, business
volumes in Financial Guaranty have increased significantly, leading to large
increases in premiums written and more gradual increases in premiums earned
since premiums are often earned over many years.
Net income for the third quarter of 2002 was $27.7 million compared to
$16.9 million in the same period of 2001. Net premiums written and earned for
the third quarter of 2002 were $72.1 million and $47.4 million, respectively,
compared to $35.7 million and $28.4 million, respectively, for the same periods
of 2001. Net income for the nine months ended September 30, 2002 was $65.9
million compared to $39.2 million for the same period of 2001. Net premiums
written and earned for the nine month period of 2002 were $208.0 million and
$130.7 million, respectively, compared to $85.1 million and $70.3 million,
respectively, for the comparable period in 2001. For the third quarter of 2002,
there was $578 million of par insured originated in the municipal bond insurance
area including $132 million in the healthcare sector, $65 million in the higher
education sector, $75 million of government obligations and $77 million in
Water, Sewer, Electric and Gas ("WSEG"). In the non-municipal or global
structured products area, Financial Guaranty wrote $1.4 billion of par,
primarily in the form of credit protection on synthetic, static pools of
investment-grade collateralized debt obligations. For the first nine months of
2002, Financial Guaranty originated $1.6 billion of par in the municipal bond
insurance area, including almost $700 million in the healthcare sector and $300
million in the higher education sector. In the global structured products area,
Financial Guaranty wrote $4.4 billion of par for the first nine months of 2002,
primarily in the form of collateralized debt obligations. The following table
shows the breakdown of premiums written and earned for each period.
Quarter Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
Net premiums written: (in thousands) (in thousands)
Muni direct $ 12,907 $ 9,227 $ 43,447 $ 15,905
Muni reinsurance 11,035 6,434 34,229 22,685
Non-muni direct 21,907 3,999 51,591 6,814
Non-muni reinsurance 13,188 10,499 44,158 23,365
Trade credit 13,094 5,550 34,564 16,342
-------- ------- --------- --------
Total net premiums written $ 72,131 $35,709 $ 207,989 $ 85,111
======== ======= ========= ========
Net premiums earned:
Muni direct $ 3,947 $ 3,223 $ 10,780 $ 8,633
Muni reinsurance 9,894 7,913 28,399 16,927
Non-muni direct 12,020 3,410 27,519 7,932
Non-muni reinsurance 13,639 7,389 41,244 20,632
Trade credit 7,873 6,457 22,739 16,189
-------- ------- --------- --------
Total net premiums earned $ 47,373 $28,392 $ 130,681 $ 70,313
======== ======= ========= ========
Included in net premiums earned for the third quarter and year-to-date
periods of 2002 were refundings of $941,000 and $4,844,000 respectively,
compared to $2,019,000 and $4,824,000 for the same periods of 2001.
Net investment income was $18.4 million and $52.8 million for the third
quarter and year-to-date periods of 2002, compared to $15.4 million and $35.3
million for the similar periods of 2001. The provision for losses was $10.8
million for the third quarter of 2002 compared to $7.3 million for the third
quarter of 2001 and the year-to-date 2002 provision was $33.4 million compared
to $18.9 million in 2001. The provision represented 22.9% and 25.6% of earned
premiums for the third quarter and year-to-date periods of 2002, respectively,
compared to 25.7% and 26.9% in the same periods of 2001. Financial Guaranty paid
one large claim for approximately $9.0 million in the year-to-date period of
2002. The remaining claims of $14.8 million relate primarily to trade credit
insurance. Policy acquisition and other operating expenses were $14.2 million
and $46.8 million for the three and nine month periods of 2002, respectively,
compared to $12.3 million and $28.7 million for the three and nine month periods
of 2001, respectively. This resulted in an expense ratio of 29.9% and 35.8% for
the third quarter and year-to-date period of 2002, respectively, compared to
43.2% and 40.8% for the 2001 periods, respectively. Other operating
19
expenses for the third quarter of 2002 were $6.6 million, a decrease of 10.8%
from $7.4 million for the third quarter of 2001. Interest expense for the third
quarter of 2002 was $2.5 million compared to $2.1 million in the third quarter
of 2001. For the year-to-date periods of 2002 and 2001, interest expense was
$7.3 million and $4.1 million, respectively. All periods include interest
allocated on the Company's debt financing. Net gains of $0.2 million and net
losses of $5.6 million for the third quarter and year-to-date periods of 2002
related primarily to the change in the fair value of derivative instruments,
primarily convertible debt securities and financial guaranty contracts that are
considered to be derivative instruments.
The effective tax rate was 27.2% and 27.5% for the three and nine months
ended September 30, 2002 compared to 27.7% and 27.5%, respectively, for the
three and nine month periods of 2001.
MORTGAGE SERVICES - RESULTS OF OPERATIONS
The mortgage services results include the operations of RadianExpress.com
Inc. ("RadianExpress") and the asset-based businesses conducted through
Financial Guaranty's minority owned subsidiaries, C-BASS and Sherman. The
Company owns a 46% interest in C-BASS and a 45.5% interest in Sherman. C-BASS is
engaged in the purchasing, servicing and/or securitizing 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,
primarily unsecured consumer assets.
Net income for the third quarter and year-to-date periods of 2002 was $6.0
million and $30.9 million compared to $5.3 million and $19.2 million for the
same periods in 2001. Equity in net income of affiliates (pre-tax) was $13.5
million for the third quarter of 2002 compared to $7.0 million for the
comparable period in 2001. For the year-to-date periods of 2002 and 2001, equity
in net income of affiliates was $58.9 million and $33.1 million, respectively.
C-BASS accounted for $9.2 million (pre-tax) of the total income from affiliates
in the third quarter of 2002 and $46.8 million (pre-tax) of the year-to-date
2002 amount. These results could vary significantly from period to period due to
a substantial portion of C-BASS's income being generated from sales of
mortgage-backed securities in the capital markets. These markets can be
volatile, subject to change in interest rates, the credit environment and
liquidity.
RadianExpress contributed $1.7 million of other income and $4.6 million of
operating expenses for the third quarter of 2002 compared to $4.7 million and
$4.8 million, respectively, for the third quarter of 2001. Year-to-date 2002,
RadianExpress had revenues of $13.2 million and expenses of $17.2 million,
compared to $9.7 million and $11.2 million, respectively in the year-to-date
period of 2001. RadianExpress processed approximately 49,000 applications during
the third quarter of 2002 and almost 275,000 applications year-to-date 2002. In
the third quarter and year to date periods of 2001, RadianExpress processed
100,000 and 264,000 applications, respectively. In June 2002, the Company
received a cease and desist order from the State of California in connection
with the offering of its Radian Lien Protection product, which it vigorously
appealed and on which a decision could be rendered as early as late December or
January. This cease and desist order has not had a material impact on the
Company's overall operations, but it has significantly reduced the potential for
any future revenues of RadianExpress, the Radian entity that would offer Radian
Lien Protection. The Company successfully reduced expenses in RadianExpress as a
result of the cease and desist order, but has the infrastructure ready to
support the Radian Lien Protection product.
OTHER
Two wholly-owned subsidiaries of Financial Guaranty, Singer Asset Finance
Company, L.L.C. ("Singer") and Enhance Consumer Services LLC ("ECS"), which had
been engaged in the purchase, servicing, and securitization of assets including
state lottery awards, structured settlement payments and viatical settlements,
are currently operating on a run-off basis. Their operations consist of
servicing the prior originations of non-consolidated special purpose vehicles
and the results of these subsidiaries are not material to the financial results
of the Company. At September 30, 2002, the Company has approximately $522
million and $495 million of non-consolidated assets and liabilities,
respectively, associated with the Singer special purpose vehicles. The Company's
investment in these special purpose vehicles is $27 million at September 30,
2002.
Another insurance subsidiary, Van-American Insurance Company, Inc., is
operating 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 material to the financial results of the
Company.
20
At September 30, 2002, the Company, through its ownership of Financial
Guaranty, owned an indirect 36.5% equity interest in Exporters Insurance Company
Ltd., an insurer of primarily foreign trade receivables for multinational
companies. Financial Guaranty provides significant reinsurance capacity to this
joint venture on a quota-share, surplus share and excess-of-loss basis.
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 nine months ended September
30, 2002 were $429.6 million as compared to $323.1 million for the same period
of 2001. This increase consisted of a reduction in income tax payments, an
increase in net premiums written and investment income received partially offset
by increases in losses paid and operating expenses. Positive cash flows are
invested pending future payments of claims and other expenses; excess cash flow
needs, if any, are funded through sales of short-term investments and other
investment portfolio securities.
Stockholders' equity, increased to $2.7 billion at September 30, 2002 from
$2.3 billion at December 31, 2001. The 2001 amount includes $40.0 million of
redeemable preferred stock which we redeemed in August 2002. This increase in
stockholders' equity resulted from net income of $319.4 million, proceeds from
the issuance of common stock of $24.8 million and an increase in the market
value of securities available for sale of $71.3 million, net of tax, offset by
dividends of $7.8 million, the redemption of $40 million of redeemable preferred
stock at a $3.0 million premium (described in the next paragraph) and the
purchase of approximately 1.0 million shares of the Company's stock for
approximately $32 million pursuant to the Company's repurchase described below.
In August 2002, the Company redeemed its $4.125 Preferred Stock, par value
$.001 per share. Pursuant to the Company's sinking fund redemption obligation,
72,000 shares were redeemed at $50.00 per share, and the remaining 728,000
shares were redeemed at $54.125 per share. Accrued and unpaid dividends on the
shares to the date of redemption were also paid as part of the redemption price.
On September 24, 2002, the Company announced that its Board of Directors
had authorized the repurchase of up to 2.5 million shares of its common stock on
the open market. Shares will be purchased from time to time depending on the
market conditions, share price, and other factors. These purchases will be
funded from available working capital. At September 30, 2002, approximately 1.0
million shares had been repurchased at a cost of approximately $32 million.
Subsequent to September 30, 2002, the Company purchased approximately 400,000
additional shares at a cost of approximately $13 million.
On October 4, 2002, Standard & Poor's Ratings Services lowered the
financial strength, financial enhancement, and counterparty credit ratings of
Radian Re to "AA" from "AAA," as further described in Note 9 of Notes to
Unaudited Condensed Consolidated Financial Statements. Radian Re's outlook was
also improved to stable from negative.
As of September 30, 2002, the Company and its subsidiaries had plans to
continue investing in significant information technology and infrastructure
upgrades over the next two years at an estimated total cost of $25 million to
$30 million. The Company plans to move the majority of its Data Center to
Dayton, Ohio in the coming months and expects to be in full service by early
2003. Cash flows from operations are being used to fund these expenditures.
Financial Guaranty was party to a credit agreement (as amended, the
"Credit Agreement") with major commercial banks providing Financial Guaranty
with a borrowing facility aggregating up to $175.0 million, the proceeds of
which were used for general corporate purposes. The outstanding principal
balance under the Credit Agreement of $173.7 million was retired on May 29,
2001.
The Company owns a 46% interest in C-BASS. The Company did not make any
capital contributions to C-BASS since the Company acquired its interest in
C-BASS in connection with the acquisition of Financial Guaranty. C-BASS paid
$20.1 million of dividends to the Company during the first nine months of 2002
and $12.8 million during all of 2001.
The Company owns a 45.5% interest in Sherman as a result of the
acquisition of Financial Guaranty. The
21
Company did not make any capital contributions to Sherman in the first nine
months of 2002, but made $15.0 million of contributions during full year 2001.
In conjunction with the acquisition of its interest in Sherman, the Company
guaranteed payment of up to $25.0 million of a revolving credit facility issued
to Sherman. There were no outstanding drawdowns on the line of credit as of
September 30, 2002.
In January 2002, the Company sold $220 million of Senior Convertible
Debentures. Approximately $125 million of the proceeds from the offering was
used to increase capital at Radian Asset Assurance. The remainder is being used
for general corporate purposes. The debentures bear interest at the rate of
2.25% per year and interest is payable semi-annually on January 1 and July 1.
The Company will also pay contingent interest on specified semi-annual periods,
if the sale price of its common stock for a specified period of time is less
than 60% of the conversion price. The debentures are convertible, at the
purchaser's option, into shares of common stock at prices and on dates specified
in the offering memorandum. At that time, the shares would become common shares
for the purposes of calculating earnings per share. The Company may redeem all
or some of the debentures on or after January 1, 2005.
In February 2002, the Company closed on a $50 million Senior Revolving
Credit Facility. The facility is unsecured and expires in one year. The facility
will be used for working capital and general corporate purposes. The facility
bears interest on any amounts drawn at either the Borrower's Base rate as
defined in the agreement, or at a rate above LIBOR based on certain
debt-to-capital ratios. There have been no drawdowns on this facility.
In March 2002, the Company made a $20 million investment in Primus
Guaranty, Ltd, a Bermuda holding company and parent company to Primus Financial
Products, LLC. ("Primus"), a Triple A rated company that provides credit risk
protection to derivatives dealers and credit portfolio managers on individual
investment-grade entities. In connection with the capitalization and Triple A
rating of Primus, Radian Re has provided Primus with an excess of loss insurance
policy. The Company accounts for the Primus investment under the equity method
of accounting. The results of Primus for the third quarter and year to date
periods of 2002 were immaterial to the Company's consolidated financial
statements.
The Company believes that Radian Guaranty 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 Mortgage Insurance and Financial Guaranty. As a holding company, the
Company conducts its principal operations through Mortgage Insurance and
Financial Guaranty. In connection with obtaining approval from the New York
Insurance Department for the change of control of Financial Guaranty when the
Company acquired Financial Guaranty, Financial Guaranty 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 Financial Guaranty. Based on the Company's current
intention to pay quarterly common stock dividends of approximately $0.02 per
share, the Company will require approximately $7.6 million annually to pay the
dividends on the outstanding shares of common stock. The Company will also
require $29.4 million annually to pay the debt service on its long-term and
short-term debt financing and $75 million to redeem the debentures due in March
2003. The Company utilized approximately $43.0 million to redeem its preferred
stock. The Company believes that it has the resources to meet these cash
requirements for the next twelve months. There are regulatory and contractual
limitations on the payment of dividends or other distributions from its
insurance subsidiaries. The Company does not believe that any of these
restrictions will prevent the payment by its subsidiaries or the Company of
these anticipated dividends or distributions in the foreseeable future.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies comprise those policies that require the
Company's most difficult, subjective, and complex judgments. These policies
require estimates of matters that are inherently uncertain. The accounting
policies that the Company believes meet the criteria of critical accounting
policies are described below.
Reserve for Losses
The Company establishes reserves to provide for the estimated costs of
settling claims in both the mortgage insurance and financial guaranty
businesses. Setting those loss reserves in both businesses involves the
significant use of estimates with regard to the likelihood, magnitude and timing
of a loss.
In the mortgage insurance business, the incurred loss process is initiated
by a borrower's missed payment.
22
The Company uses historical models based on a variety of loan characteristics,
including the status of the loan as reported by the servicer of the loan, the
economic conditions, and the estimated foreclosure period in the area where the
default exists to help determine the appropriate loss reserve at any point in
time. As the delinquency proceeds toward foreclosure, there is more certainty
around these estimates, and adjustments are made to loss reserves to reflect
this updated information.
The financial guaranty loss reserve is similar, however, the remote
probability of losses and the dearth of historical losses in this business makes
it more difficult to estimate the appropriate loss reserve. Financial Guaranty
has a regular case reserve committee meeting where experts in the risk
management and surveillance area provide input to the finance area before any
case reserves are determined, and the surveillance team actively monitors any
problem deals and notifies the committee if a change in the loss reserve is
necessary. Financial Guaranty establishes a reserve based on the estimated loss,
including expenses associated with the settlement of the loss.
Derivative Instruments and Hedging Activity
The Company adopted SFAS No. 133 on January 1, 2001. The two areas where
gains and losses on derivative contracts are recognized are in the convertible
debt securities contained in the Company's investment portfolio and in certain
financial guaranty contracts. The value of the derivative position of
convertible debt securities is calculated by our outside convertible debt
portfolio manager by determining the value of the readily ascertainable
comparable debt securities and assigning a value to the equity (derivative)
portion by subtracting the value of the comparable debt security from the total
value of the convertible instrument. Changes in such values from period to
period represent the gains and losses recorded. The gains and losses on
derivative financial guaranty contracts are derived from internally generated
models. The estimated fair value amounts have been determined by the Company
using available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required to interpret market data
to develop the estimates of fair value. Accordingly, the estimates are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have an effect on the estimated fair value.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the first nine months of 2002, the Company experienced an increase
in the fair market value of the available for sale portfolio, which resulted in
an increase in the net unrealized gain on the investment portfolio of $60.9
million. The accumulated net unrealized gain at September 30, 2002 was $71.3
million compared to $10.4 million at December 31, 2001. This increase in value
was a result of changes in market interest rates and not a result of changes in
the composition of the Company's investment portfolio. The market value of the
Company's long-term and short-term debt at September 30, 2002 was $580.8
million. 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 2001 Form 10-K.
At September 30, 2002, the fair value of the Company's derivative
instruments, classified as trading securities, was $36.9 million, as compared to
an amortized value of $43.6 million, and the Company recognized $4.9 million,
net of tax, of loss on changes in the fair value of trading securities in the
consolidated statements of income for the nine months ended September 30, 2002.
The notional value of the Company's credit default swaps and certain other
financial guaranty contracts accounted for under SFAS No. 133 was $5.5 billion
at September 30, 2002 and the Company recognized $4.3 million, net of tax, of
losses on these instruments. Net unrealized losses on credit default swaps and
certain other financial guaranty contracts of $9.3 million at September 30, 2002
was comprised of gross unrealized gains of $53.7 million and gross unrealized
losses of $63.0 million.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of Radian's disclosure controls and procedures as of a date within
90 days of the filing of this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that Radian's
disclosure controls and procedures are effective in ensuring that the
information required to be disclosed by Radian in its reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported on a timely basis.
There have been no significant changes in Radian's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation referred to above.
23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has had two class action lawsuits filed against each of Radian
Guaranty Inc. and Amerin Guaranty Corporation, its wholly-owned subsidiaries
(together "Radian"), based on alleged violations of Section 8 of the Real Estate
Settlement Procedures Act pending, one in the United States District Court for
the Eastern District of Texas and one in the United States District Court for
the Middle District of North Carolina, as described in our annual report on Form
10-K for the year ended December 31, 2001. On September 10, 2002, Radian's
motion to dismiss the Texas lawsuit was granted; the plaintiffs are appealing
that decision.
The plaintiffs in the North Carolina lawsuit are represented by the same
group of plaintiff's lawyers who filed six similar lawsuits in federal court in
Georgia against the other providers of primary mortgage insurance. Four of the
Georgia lawsuits were settled; two are currently in discovery and, contrary to
Radian's success in Texas described above, the Georgia court recently ruled
against one of the defendants on certain preliminary motions substantially
similar to those on which Radian prevailed in Texas. Radian's North Carolina
case is in the motions and early discovery phase, and Radian has filed a motion
to dismiss. Because this case is still developing, it is not possible to
evaluate the likelihood of an unfavorable outcome, to determine the effect, if
any, that the Texas or Georgia court ruling could have on this case, or to
estimate the amount or range of potential loss.
There have been no other material developments in legal proceedings
involving the Company or its subsidiaries since those reported in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
The Company is involved in certain litigation arising in the normal course
of its business. The Company is contesting the allegations in each such pending
action and believes, based on current knowledge and after consultation with
counsel, that the outcome of such litigation will not have a material adverse
effect on the Company's consolidated financial position and results of
operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit No. Exhibit Name
3 Certificate of Designations
11 Statement Re: Computation of Per Share Earnings
(B) REPORTS ON FORM 8-K
Current Report on Form 8-K filed with the Securities and Exchange
Commission ("SEC") on July 16, 2002 reporting the Company's call for
redemption on August 15, 2002 of all of the outstanding shares of
its $4.125 Preferred Stock.
Current Report on Form 8-K filed with the SEC on September 24, 2002
reporting the Company's establishment of a stock repurchase program
for the purchase of up to 2.5 million shares of its common stock on
the open market.
Current Report on Form 8-K filed with the SEC on October 1, 2002
pursuant to Regulation FD containing the text of slide presentations
made by management to shareholders of the Company as part of an
"investor day" conference hosted by the Company.
Current Report on Form 8-K filed with the SEC on October 4, 2002
pursuant to Regulation FD containing the Company's press release
announcing a ratings downgrade of Radian Reinsurance Inc. by
Standard & Poor's Ratings Services.
24
SIGNATURES
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: November 13, 2002 /s/ C. Robert Quint
-------------------------
C. Robert Quint
Executive Vice President and Chief Financial Officer
/s/ John J. Calamari
-------------------------
John J. Calamari
Senior Vice President and Corporate Controller
25
CERTIFICATIONS
I, Frank P. Filipps, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Radian Group Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 13, 2002 /s/Frank P. Filipps
-------------------------
Frank P. Filipps
Chief Executive Officer
26
I, C. Robert Quint, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Radian Group Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
d) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 13, 2002 /s/ C. Robert Quint
-------------------------
C. Robert Quint
Chief Financial Officer
27
EXHIBIT INDEX
Exhibit No. Exhibit Name
3 Certificate of Designations
11 Statement Re: Computation of Per Share Earnings
28