1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________________to_____________________
Commission file number 1-11356
RADIAN GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2691170
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1601 MARKET STREET, PHILADELPHIA, PA 19103
(Address of principal executive offices) (zip code)
(215) 564-6600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or if such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 36,976,690 shares of
Common Stock, $0.001 par value, outstanding on August 11, 1999.
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RADIAN GROUP INC. AND SUBSIDIARIES
INDEX
PAGE NUMBER
Part I - Financial Information
Consolidated Balance Sheets - June 30, 1999 and
December 31, 1998..................................................... 3
Consolidated Statements of Income - For the quarters and six month periods
ended June 30, 1999 and 1998.......................................... 4
Consolidated Statement of Changes in Common Stockholders'
Equity and Comprehensive Income - For the six month
period ended June 30, 1999............................................ 5
Consolidated Statements of Cash Flows - For the six month periods ended
June 30, 1999 and 1998................................................ 6
Notes to Consolidated Financial Statements..................................... 7-8
Management's Discussion and Analysis of Results of
Operations and Financial Condition.................................... 9-15
Quantitative and Qualitative Disclosures about Market Risk..................... 15
Part II - Other Information, as applicable.............................................. 16-17
Signature............................................................................... 18
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RADIAN GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30 December 31
1999 1998
----------- -----------
(Unaudited)
(In thousands, except share amounts)
Assets
Investments
Fixed maturities held to maturity - at amortized cost (fair value
$492,048 and $512,368) ............................................ $ 474,140 $ 477,518
Fixed maturities available for sale - at fair value
(amortized cost $724,012 and $621,581) ............................ 717,366 646,148
Equity securities available for sale - at fair value (cost $35,328
and $25,109) ................................................... 41,377 27,425
Short-term investments .................................................. 23,361 24,361
Cash .................................................................... 6,968 9,377
Deferred policy acquisition costs ....................................... 57,579 48,983
Prepaid federal income taxes ............................................ 176,366 152,864
Provisional losses recoverable .......................................... 36,915 32,718
Other assets ............................................................ 84,794 94,011
----------- -----------
$ 1,618,866 $ 1,513,405
=========== ===========
Liabilities and Stockholders' Equity
Unearned premiums ....................................................... $ 74,504 $ 75,538
Reserve for losses ...................................................... 290,427 245,125
Deferred federal income taxes ........................................... 182,906 166,276
Accounts payable and accrued expenses ................................... 54,386 54,267
----------- -----------
602,223 541,206
----------- -----------
Preferred stockholder's equity
Redeemable preferred stock, par value $.001 per share;
800,000 shares issued and outstanding - at
redemption value .................................................... 40,000 40,000
----------- -----------
Common stockholders' equity
Common stock, par value $.001 per share; 80,000,000 shares authorized;
36,937,550 shares and 36,842,550 shares issued
and outstanding ..................................................... 37 37
Additional paid-in capital .............................................. 510,155 507,282
Retained earnings ....................................................... 466,839 407,406
Accumulated other comprehensive (loss) income ........................... (388) 17,474
----------- -----------
976,643 932,199
----------- -----------
$ 1,618,866 $ 1,513,405
=========== ===========
See notes to consolidated financial statements.
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RADIAN GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
--------- --------- --------- ---------
(In thousands, except per-share amounts)
Revenues:
Premiums written:
Direct ......................... $ 126,643 $ 112,363 $ 249,390 $ 210,346
Assumed ........................ 79 98 83 108
Ceded .......................... (10,815) (11,576) (22,211) (20,162)
--------- --------- --------- ---------
Net premiums written ................ 115,907 100,885 227,262 190,292
Decrease (increase) in unearned
premiums .......................... 412 (1,839) 1,550 3,543
--------- --------- --------- ---------
Premiums earned ..................... 116,319 99,046 228,812 193,835
Net investment income ............... 16,814 14,796 32,727 29,188
Gain on sales of investments ........ 443 133 828 913
Other income ........................ 3,302 3,310 7,711 6,243
--------- --------- --------- ---------
136,878 117,285 270,078 230,179
--------- --------- --------- ---------
Expenses:
Provision for losses ................ 43,312 40,059 87,554 82,430
Policy acquisition costs ............ 17,067 14,552 33,253 27,096
Other operating expenses ............ 15,188 14,359 32,132 26,650
Merger expenses ..................... 22,697 -- 25,530 --
--------- --------- --------- ---------
98,264 68,970 178,469 136,176
--------- --------- --------- ---------
Pretax income ................................ 38,614 48,315 91,609 94,003
Provision for income taxes ................... 13,520 13,563 29,162 26,249
--------- --------- --------- ---------
Net income ................................... 25,094 34,752 62,447 67,754
Dividends to preferred stockholder ........... 825 825 1,650 1,650
--------- --------- --------- ---------
Net income available to common stockholders .. $ 24,269 $ 33,927 $ 60,797 $ 66,104
========= ========= ========= =========
Basic net income per share ................... $ 0.66 $ 0.93 $ 1.65 $ 1.80
========= ========= ========= =========
Diluted net income per share ................. $ 0.64 $ 0.90 $ 1.61 $ 1.75
========= ========= ========= =========
Average number of common shares outstanding -
basic ....................................... 36,905 36,673 36,883 36,663
========= ========= ========= =========
Average number of common and common equivalent
shares outstanding - diluted ................. 37,891 37,903 37,807 37,880
========= ========= ========= =========
See notes to consolidated financial statements.
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RADIAN GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income Total
--------- ---------- --------- ------------- ---------
(In thousands)
Balance, December 31, 1998 ............................ $ 37 $ 507,282 $ 407,406 $ 17,474 $ 932,199
Comprehensive income:
Net income (unaudited) ......................... -- -- 62,447 -- 62,447
Unrealized holding losses arising during period,
net of tax of $(9,374) (unaudited) ........ -- -- -- (17,409)
Less: Reclassification adjustment for net gains
included in net income, net of tax of
$244 (unaudited) ........................... -- -- -- (453)
---------
Net unrealized loss on investments - net of tax
of $(9,618) (unaudited) ................... -- -- -- (17,862) (17,862)
---------
Comprehensive income (unaudited) ............... 44,585
Issuance of common stock (unaudited) ............. -- 2,873 -- -- 2,873
Dividends (unaudited) ............................ -- -- (3,014) -- (3,014)
--------- --------- --------- --------- ---------
Balance, June 30, 1999 (unaudited) .................... $ 37 $ 510,155 $ 466,839 $ (388) $ 976,643
========= ========= ========= ========= =========
See notes to consolidated financial statements.
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RADIAN GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30
1999 1998
--------- ---------
(In thousands)
Cash flows from operating activities ................................... $ 104,016 $ 82,154
--------- ---------
Cash flows from investing activities:
Proceeds from sales of investments available for sale ........... 37,653 64,361
Proceeds from sales of investments held to maturity ............. 10 1,031
Proceeds from sales of equity securities available for sale ..... 136 --
Proceeds from redemptions of investments available for sale ..... 13,064 14,512
Proceeds from redemptions of investments held to maturity ....... 11,173 3,225
Proceeds from redemptions of equity securities available for sale 1,160 --
Purchases of investments available for sale ..................... (155,819) (157,782)
Purchases of equity securities available for sale ............... (11,490) --
Sales (purchases) of short-term investments - net ............... 1,000 (9,707)
Other ........................................................... (3,171) (3,105)
--------- ---------
Net cash used in investing activities ........................... (106,284) (87,465)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock .......................... 2,873 9,100
Dividends paid .................................................. (3,014) (3,007)
--------- ---------
Net cash (used in) from financing activities ........................... (141) 6,093
--------- ---------
(Decrease) increase in cash ............................................ (2,409) 782
Cash, beginning of period .............................................. 9,377 6,820
--------- ---------
Cash, end of period .................................................... $ 6,968 $ 7,602
========= =========
Supplemental disclosures of cash flow information:
Income taxes paid ...................................................... $ 25,800 $ 25,200
========= =========
Interest paid .......................................................... $ 87 $ 12
========= =========
See notes to consolidated financial statements.
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RADIAN GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of Radian
Group Inc. (the "Company") and its subsidiaries including its principal
operating subsidiary, Radian Guaranty Inc. ("Radian"), and are presented on the
basis of generally accepted accounting principles.
The financial information for the interim periods included herein is
unaudited; however, such information reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position, results of operations, and cash flows for the interim periods. All
such adjustments are of a normal, recurring nature. The results of operations
for interim periods are not necessarily indicative of results to be expected for
the full year.
Basic net income per share is based on the weighted average number of
common shares outstanding, while diluted net income per share is based on the
weighted average number of common shares outstanding and common share
equivalents that would arise from the exercise of stock options. Preferred stock
dividends are deducted from net income in the net income per share computation.
For a summary of significant accounting policies and additional
financial information, see both the CMAC Investment Corporation Annual Report on
Form 10-K/A for the year ended December 31, 1998 and the Amerin Corporation
Annual Report on Form 10-K/A for the year ended December 31, 1998.
2 - MERGER
On November 22, 1998, the board of directors of CMAC Investment
Corporation ("CMAC") and the board of directors of Amerin Corporation ("Amerin")
each approved an Agreement and Plan of Merger pursuant to which CMAC and Amerin
have merged. The merger closed on June 9, 1999 after approval by the
stockholders of both companies, at which time, the name of the merged company
was changed to Radian Group Inc. The merger called for Amerin stockholders to
receive 0.5333 shares of CMAC common stock in a tax-free exchange for each share
of Amerin common stock that they owned. CMAC's stockholders continued to own
their existing shares after the merger. The transaction has been accounted for
on a pooling of interests basis and, therefore, all financial statements
presented reflect the combined entity.
3 - ACCOUNTING PRINCIPLES ISSUED AND NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The statement, originally
effective for fiscal years beginning after June 15, 1999, was deferred for one
year when the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133." The statement establishes accounting and reporting standards for
derivative instruments and hedging activity and requires that all derivatives be
measured at fair value and recognized as either assets or liabilities in the
financial statements. The impact of the statement will depend on the extent of
derivatives and embedded derivatives at the date the statement is adopted. The
Company is currently evaluating the effect this statement might have on the
consolidated financial position or results of operations.
In October 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public
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RADIAN GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Accountants issued Statement of Position 98-7, "Deposit Accounting; Accounting
for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk."
This statement provides guidance on how to apply the deposit method of
accounting when it is required for insurance and reinsurance contracts that do
not transfer insurance risk. This statement is effective for financial
statements for fiscal years beginning after June 15, 1999. Management does not
believe that the impact of applying this statement will be material to the
consolidated financial position or results of operations of the Company when
adopted.
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RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The following is a "Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995:
The statements contained in this Form 10-Q that are not historical facts
are forward-looking statements. Actual results may differ materially from those
projected in the forward-looking statements. These forward-looking statements
involve risks and uncertainties including, but not limited to, the risk that
housing demand may decrease as a result of higher-than-expected interest rates,
adverse economic conditions, or other reasons; that seasonality may be different
than the historical pattern; that the market share of the segment of the
mortgage market served by the mortgage insurance industry may decline as a
result of competition from government programs or other substitute products; and
that the Company's share of originations having private mortgage insurance may
decline as a result of competition or other factors. Investors are also directed
to other risks discussed in documents filed by the Company with the Securities
and Exchange Commission.
RESULTS OF OPERATIONS
Net income for the first six months of 1999 was $62.4 million, a 7.8%
decrease compared to $67.8 million for the first six months of 1998 and net
income for the quarter ended June 30, 1999 was $25.1 million, a 27.8% decrease
compared to $34.8 million for the same period in 1998. However, net income for
the first six months of 1999 included merger expenses net of tax of $21.4
million and without these merger expenses, net income was $83.9 million, a 23.8%
increase compared to $67.8 million for the first six months of 1999. For the
second quarter of 1999, net income included merger expenses net of tax of $18.9
million and without these merger expenses, net income was $44.0 million, a 26.6%
increase compared to $34.8 million for the same period of 1998. These
improvements in net income excluding merger expenses were the result of
significant growth in premiums earned and net investment income, partially
offset by a higher provision for losses, policy acquisition costs and other
operating expenses.
New primary insurance written during the first six months of 1999 was
$18.4 billion, a 12.1% increase compared to $16.4 billion for the first six
months of 1998 and for the second quarter of 1999, new primary insurance written
of $9.2 billion was 2.7% lower than the $9.5 billion written in the second
quarter of 1998. However, new primary insurance written in the second quarter of
1998 included a large bulk seasoned loan transaction, under which Radian insured
approximately $700 million of California loans with a risk profile similar to
the Company's regular business. Without the effect of this transaction, new
primary insurance written during the first six months and the second quarter of
1998 was $15.7 billion and $8.8 billion, respectively, and 1999 primary new
insurance written volume increased by 17.1% and 5.0% for the first six months
and the second quarter of 1999, respectively, when compared to these adjusted
figures. Contributing to the increase in Radian"s primary new insurance written
for the first six months of 1999 was a 20.6% increase in new insurance written
volume in the private mortgage insurance industry compared to the same period of
1998. This increase was offset by a decline in Radian's market share of the
industry, which fell to 18.5% for the six months ended June 30, 1999, compared
to 19.9% for the same period of 1998. However, when eliminating the effect of
the bulk seasoned loan transaction from the second quarter of 1998, Radian's
market share for the six months ended June 30, 1998 was 18.6% as compared to
18.5% for the same period in 1999. This slight decrease in market share,
combined with the 20.6% growth in industry new insurance written volume,
resulted in the 17.1% increase in Radian's new insurance written for the first
six months of 1999 without the effect of the seasoned loan transaction. Although
the private mortgage insurance industry increased new insurance written volume
by 6.0% for the second quarter of 1999 as compared to the same period of 1998,
Radian's decline in market share from 20.1% for the quarter ended June 30, 1998
to 18.6% for same period in 1999 offset this increase and resulted in the 2.7%
decline in Radian's primary new insurance written volume for the period.
However, after eliminating the effect of the seasoned loan transaction from the
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RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
second quarter of 1998, Radian's market share for the quarter ended June 30,
1998 was 18.6% as compared to 18.6% for the same period in 1999. This constant
market share, combined with the 6.0% growth in the mortgage insurance industry's
new insurance written volume, resulted in the 5.0% growth in Radian's new
insurance written volume for the quarter ended June 30, 1999 without the effect
of the seasoned loan transaction. Additionally, in the first six months of 1999,
Radian wrote an increased amount of pool insurance which represented an addition
to risk of $270.0 million as compared to $191.0 million in the same period of
1998 and for the quarter ended June 30, 1999, Radian wrote pool insurance
representing an addition to risk of $114.0 million as compared to $105.0 for the
same period in 1998. Most of this pool insurance volume related to a group of
structured transactions composed primarily of Fannie Mae- and Freddie
Mac-eligible conforming mortgage loans that are geographically dispersed
throughout the United States and that have lower average loan-to-value ratios
than Radian's primary business. This business contains loans with loan-to-value
ratios above 80% which have primary insurance that places the pool insurance in
a secondary loss position and loans with loan-to-value ratios of 80% and below
for which the pool coverage is in a first loss position. Under a pool insurance
transaction, the exposure to Radian on each individual loan is uncapped;
however, the aggregate stop-loss percentage (typically 1.0% to 1.5% in the
Fannie Mae/Freddie Mac transactions) is the most that can be paid out in losses
before the insurer's exposure terminates. The Company expects its pool insurance
activity to decline toward the end of 1999 and into 2000 as certain outstanding
commitments expire and are not renewed. Premium rates on such pool insurance are
significantly lower than on primary insurance loans due to the low stop-loss
levels, which limit the overall risk exposure to Radian, and the focus of such
product on high quality primary insurance customers. Both Standard & Poor's and
Moody's Investors Service have recently determined that the capital requirements
to support such pool insurance will be significantly more stringent than on
primary insurance due to the low premium rates and small stop loss levels.
Radian's volume in the first six months of 1999 was positively impacted
by relatively lower interest rates which affected the entire mortgage industry.
The trend toward lower interest rates, which began in the third quarter of 1997,
caused refinancing activity during the first half of 1999 to continue at a
higher rate than normal and strong housing prices have caused a large percentage
of the refinanced loans to be done without private mortgage insurance at an LTV
of 80% or below. Therefore, the rate of growth in the private mortgage industry
has not been as high as that of the entire mortgage market. Radian's refinancing
activity as a percentage of primary new insurance written was 34% for the six
month period ended June 30, 1999 as compared to 33% for the same period in 1998;
however, for the second quarter of 1999, that rate had declined to 29% from 39%
in the first quarter of 1999. The persistency rate, which is defined as the
percentage of insurance in force that is renewed in any given year, was 68.3%
for the twelve months ended June 30, 1999 as compared to 74.7% for the twelve
months ended June 30, 1998. This decrease was consistent with the continued high
level of refinancing activity during the first half of 1999, which caused the
cancellation rate to increase. The persistency rate for 1999 should continue at
a rate lower than normal (i.e., 80% to 85%), although if the current refinance
boom continues to slow, the persistency rate should improve.
Net premiums earned in the first six months of 1999 were $228.8
million, an 18.0% increase compared to $193.8 million for the first six months
of 1998 and premiums earned for the quarter ended June 30, 1999 were $116.3
million, a 17.4% increase compared to $99.0 million for the same period of 1998.
This increase reflected the insurance in force growth resulting from strong new
insurance volume and the increase in pool insurance written during the first
half of 1999, and was offset by the decline in persistency levels. The strong
volume led to an increase in direct primary insurance in force for the six
months of 9.6%, from $81.9 billion at December 31, 1998 to $89.7 billion at June
30, 1999. Direct pool risk in force also grew to $1.2 billion at June 30, 1999
from $993.0 million at the end of 1998, an increase of 25.4% for the six month
period.
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RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
Net investment income for the first half of 1999 was $32.7 million, a
12.1% increase compared to $29.2 million for the same period of 1998 and for the
second quarter of 1999, net investment income was $16.8 million as compared to
$14.8 million for the second quarter of 1998, a 13.6% increase. These increases
were a result of continued growth in invested assets primarily due to positive
operating cash flows of $104.0 million for the first half of 1999. The Company
has continued to invest new operating cash flow in tax-advantaged securities,
primarily municipal bonds, although the Company did modify its investment policy
to allow the purchase of various other asset classes, including common stock and
convertible securities, beginning in the second quarter of 1998. The Company's
intent is to target the common equity exposure at a maximum of 5% of the
investment portfolio's market value while the convertible securities and
mortgage-backed securities exposures are targeted not to exceed 10% each. The
Company expects no material long-term impact on total investment returns as a
result of this investment asset diversification. The Company's investment yield
declined from 5.70% at June 30, 1998 to 5.51% at June 30, 1999, primarily as a
result of the relative decline in the prevailing interest rates combined with
the modification of the Company's investment policy which now allows the
purchase of equities and convertible securities that have relatively lower
yields.
The provision for losses was $87.6 million for the first six months of
1999, an increase of 6.2% compared to $82.4 million for the first six months of
1998, and for the second quarter of 1999, the provision was $43.3 million as
compared to $40.1 million for the second quarter of 1998, an increase of 16.7%.
These increases reflected the significant growth and maturation of Radian's book
of business over the past several years, the continued adverse experience of
California loans (despite an improving trend in California), and the continued
poor experience of certain "affordable housing" program loans insured in 1994
and 1995, especially in Florida. Although the ultimate performance of the books
of business that originated since 1994 cannot yet be determined, it appears that
the ultimate loss levels will be higher than average, partially due to the
presence of these "affordable housing" loans. Claim activity is not evenly
spread 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 75% of Radian's
primary risk in force and almost all of Radian's pool risk in force has not yet
reached its anticipated highest claim frequency years. Radian's overall default
rate at June 30, 1999 was 1.34% as compared to 1.57% at December 31, 1998 and
1.48% at March 31, 1999, while the default rate on the primary business was
1.97% at June 30, 1999 as compared to 2.12% at December 31, 1998 and 2.15% at
March 31, 1999. The decrease in Radian's overall default rate is a result of the
continued strong economy and the relatively lower interest rates that have been
experienced over the past few years. A strong economy generally results in
better loss experience and a decrease in the overall level of delinquencies. A
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 number
of defaults rose from 18,775 at December 31, 1998 to only 18,794 at June 30,
1999 and the average loss reserve per default rose from $13,056 at the end of
1998 to $15,453 at June 30, 1999. The average loss reserve per default on
primary business rose from $14,959 at March 31, 1999 to $16,886 at June 30,
1999. The increase in average loss reserve per default reflected the Company's
continued implementation of a more conservative reserve calculation for certain
loans in default perceived as having a higher risk of claim incidence. In
addition, an increase in the average loan balance and the coverage percentage on
loans originated beginning in 1995 has necessitated a higher reserve balance on
loans in a default status due to the increased ultimate exposure on these loans.
The default rate in California was 1.85% (including pool) at June 30, 1999 as
compared to 2.37% at December 31, 1998 and claims paid in California during the
first half of 1999 were $19.4 million, representing approximately 31.5% of total
claims as compared to 49.2% for the same period of 1998. California represented
approximately 18.1% of primary risk in force at June 30, 1999 as compared to
18.7% at December 31, 1998. The default rate in Florida was 2.81% (including
pool) at June 30,
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RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
1999 as compared to 3.28% at December 31, 1998 and claims paid in Florida during
the first half of 1999 were $7.4 million, representing approximately 12.1% of
total claims as compared to 10.4% for the same period of 1998. Florida
represented approximately 7.1% of primary risk in force at June 30, 1999 as
compared to 7.2% at December 31, 1998. The "affordable housing" early default
experience is a result of insuring certain loans in which the borrowers'
principal and interest reserves and other credit factors were not as strong as
on prior years' books of business. Certain underwriting changes were implemented
near the end of 1996 to compensate for the factors that contributed to the early
default experience on these "affordable housing" loans; however, it is too early
to determine the impact of such changes. In addition, the Company has reported
an increased number of defaults on the Alternative A and A minus business
insured beginning in 1997. Although the default rate for this business is higher
than on Radian's normal books, it is not currently higher than was expected for
this type of business and the higher premium rates charged are expected to
compensate for the increased level of risk. Direct losses paid in the first six
months of 1999 were $45.9 million as compared to $53.9 million in the same
period of 1998, a decrease of 14.7% and direct losses paid during the second
quarter of 1999 were $22.5 million, a 16.7% decrease compared to $27.0 for the
same period in 1998.
Underwriting and other operating expenses were $65.4 million for the
first six months of 1999, an increase of 21.7% compared to $53.7 million for the
same period of 1998 and for the second quarter of 1999, these expenses were
$32.3 million as compared to $28.9 million for the second quarter of 1998, an
increase of 11.6%. These expenses consisted of policy acquisition expenses,
which relate directly to the acquisition of new business, and other operating
expenses, which primarily represent contract underwriting expenses, overhead and
administrative costs.
Policy acquisition costs in the first six months of 1999 were $33.3
million, an increase of 22.7% compared to $27.1 million for the first half of
1998 and these expenses were $17.1 million in the second quarter of 1999, an
increase of 17.3% compared to $14.6 million for the same period in 1998. This
reflects the increase in variable sales- and underwriting-related expenses
relating to the Company's continued growth in new insurance written. The Company
has continued development of its marketing infrastructure needed to support a
focus on larger, national mortgage lenders in order to take advantage of the
widespread consolidation occurring in the mortgage lending industry. Other
operating expenses for the six months ended June 30, 1999 were $32.1 million, an
increase of $5.5 million or 20.6% as compared to $26.7 million for the same
period in 1998 and these expenses were $15.2 million for the second quarter of
1999, an increase of 5.8% compared to $14.4 million for the second quarter of
1998. Most of the increase continued to result from an increase in expenses
associated with the Company's ancillary services, specifically contract
underwriting. Contract underwriting expenses for the six month period ended June
30, 1999 included in other operating expenses were $20.0 million as compared to
$13.6 million for the same period of 1998, an increase of 46.9% and these
expenses were $9.3 million for the second quarter of 1999 as compared to $8.1
million for the second quarter of 1998, an increase of 14.9%. The increase in
contract underwriting expenses during the first half of 1999 of $6.4 million
represented over 100% of the $5.5 million increase in other operating expenses
for the first six months of 1998 and was offset by decreases in other operating
and overhead expenses realized as a result of the merger and the $1.2 million
increase in contract underwriting expenses in the second quarter of 1999 also
represented more than 100% of the $0.8 million increase in other operating
expenses for the second quarter of 1999. Merger related synergies resulted in a
decline in other operating expenses unrelated to contract underwriting of
$917,000, or 7.0%, from $13.0 million for the first six months of 1998 to $12.1
million for the same period of 1999 while for the second quarter of 1999, other
operating expenses unrelated to contract underwriting declined from $6.3 million
for the quarter ended June 30, 1998 to $5.9 million for the quarter ended June
30, 1999, a decrease of 6.1% or $381,000. In addition, some of the additional
contract underwriting expenses were correspondingly offset by increases to other
income, which rose 23.5% from $6.2 million in the first six months of
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13
RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
1998 to $7.7 million for the same period in 1999, while for the second quarter,
other income remained constant at $3.3 million for both 1998 and 1999. During
the first six months of 1999, loans underwritten via contract underwriting
accounted for 36.7% of applications issued by Radian as compared to 30.6% of in
the first six months of 1998. In 1999, this percentage is expected to continue
increasing if there is a continued decrease in the level of refinancing as
refinanced loans tend to have lower loan-to-value ratios and therefore, do not
require mortgage insurance. Changing market conditions caused the cost of
contract underwriting to increase during 1997 and 1998 due to the high demand
for available resources. However, as further efficiencies are realized in the
contract underwriting process due to the integration with Freddie Mac's Loan
Prospector and Fannie Mae's Desktop Underwriter origination systems, the cost
per loan underwritten could decrease. In addition, as the level of refinancing
has decreased, the demand for available resources has also decreased, resulting
in a decline in contract underwriting costs.
During the six months and quarter ended June 30, 1999, the Company
incurred merger-related expenses of $25.5 million and $22.7 million,
respectively. Merger-related expenses should total approximately $37.5 million
and will consist of the following types of expenses:
- Professional services of $11.0 million;
- Compensation arrangements of $10.0 million;
- Write-offs of fixed and intangible assets of $14.5 million;
and
- Miscellaneous merger-related costs of $2.0 million.
The Company expects to incur most of the remaining expenses relating to the
merger during the third quarter of 1999, although there could be some
incremental expenses incurred during the fourth quarter of 1999 and beyond as
CMAC and Amerin integrate their operations.
The effective tax rate for the six months ended June 30, 1999,
excluding merger costs net of tax of $21.4 million, was 28.4% as compared to
27.9% for the same period in 1998 and the tax rate for the second quarter of
1999, excluding merger costs net of tax of $18.9 million, was 28.2% as compared
to 28.1% for the second quarter of 1998. Eliminating the merger expenses of
$25.5 million and $22.7 million, respectively, for the six months and quarter
ended June 30, 1999, operating income accounted for 71.4% and 71.9%,
respectively, of net income for the six months and quarter ended June 30, 1999,
as compared to 68.0% and 69.1%, respectively, for the same periods in 1998, thus
resulting in the increase in effective tax rates for 1999.
LIQUIDITY AND CAPITAL RESOURCES
Radian's sources of funds consist primarily of premiums and investment
income. Funds are applied primarily to the payment of Radian's claims and
operating expenses.
Cash flows from operating activities for the six months ended June 30,
1999 were $104.0 million as compared to $82.2 million for the same period of
1998. This increase consisted of an increase in net premiums written and
investment income received and a decrease in claims paid and was partially
offset by an increase in operating expenses and the payment of merger-related
expenses. Positive cash flows are invested pending future payments of claims and
other expenses; cash flow shortfalls, if any, are funded through sales of
short-term investments and certain other investment portfolio securities.
Stockholders' equity plus redeemable preferred stock of $40.0 million,
increased from $972.2 million at December 31, 1998 to $1.0 billion at June 30,
1999, primarily as a result of net income of $62.4 million and the exercise of
stock options of $2.9 million, partially offset by dividends of $3.0 million and
a net unrealized loss on the investment portfolio of $17.9 million.
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14
RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
As of June 30, 1999, the Company and its subsidiaries had no material
commitments for capital expenditures.
The Company believes that Radian will have sufficient funds to satisfy
its claims payments and operating expenses and to pay dividends to the Company
for at least the next 12 months. The Company also believes that it will be able
to satisfy its long-term (more than 12 months) liquidity needs with cash flow
from Radian. As a holding company, the Company conducts its principal operations
through Radian. The Company's ability to pay dividends on the $4.125 Preferred
Stock is dependent upon Radian's ability to pay dividends or make other
distributions to the Company. Based on the Company's current intention to pay
quarterly common stock dividends of approximately $0.03 per share, the Company
will require distributions from Radian of $7.7 million annually to pay the
dividends on the outstanding shares of $4.125 Preferred Stock and common stock.
There are regulatory and contractual limitations on the payment of dividends or
other distributions; however, the Company does not believe that these
restrictions will prevent the payment by Radian or the Company of these
anticipated dividends or distributions in the foreseeable future.
YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or at the
year 2000. The Company has conducted an analysis of its systems and has
completed its Year 2000 project with the result that all of its systems were
Year 2000 compliant by the end of 1998. "Year 2000 compliant" means fault-free
performance in the processing of data and date related data (including, but not
limited to, calculating, comparing and sequencing) by all hardware and software
products, individually and in combination. Fault-free performance must include
the manipulation of data when dates are in the 20th or 21st century and must be
transparent to the user.
The Company has completed the necessary program modifications to make
them Year 2000 compliant and all date sensitive fields have been appropriately
modified and updated. The Company has built a stand-alone testing environment
that allowed simulation of different year-end scenarios and testing of the Year
2000 programming changes and file modifications was completed in October 1998.
In addition, the Company has undertaken a review of all of its hardware systems
to assess Year 2000 compliance. The Company's servers are currently Year 2000
compliant and any desktop or laptop systems not currently Year 2000 compliant
are scheduled for replacement in 1999. The replacement of these non-Year 2000
compliant systems has begun in the first quarter of 1999 and should be completed
by the end of the third quarter of 1999. Although the Company will be Year 2000
compliant, in the event that third parties with whom the Company transacts
business are not Year 2000 compliant, potential for an adverse effect on the
Company's operations may remain. The Company has taken precautions to minimize
this risk by contacting each of its mission critical business partners to
ascertain their Year 2000 compliance status. Currently, the Company believes its
most reasonably likely Year 2000 worst case scenario would involve the failure
of its business partners' loan origination, renewal processing or default
reporting systems. The Company is an active participant in the mortgage
industry's Year 2000 testing project and has developed contingency plans to
minimize the risks of business disruptions resulting from its business partners'
Year 2000 issues. These contingency plans include:
- accepting non-Year 2000 compliant data and using "windowing"
logic to process dates correctly;
- encouraging customers to order mortgage insurance via the
internet using the company's MI Online system;
- accepting paper or fax submissions of mortgage insurance
applications;
- encouraging customers to effect servicing transactions via the
internet using the Company's ServiceLink system;
- deferring or delaying renewal billing of policyholders to a
mutually agreed upon date; and
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15
RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
- suspending automatic cancellation for non-payment.
With respect to the Company's non-information technology systems, the
Company has made reasonable efforts to contact providers of products and
services concerning their Year 2000 readiness. Discussions with suppliers of
electronic and electro-mechanical devices deemed critical to the Company's
business operations are ongoing. Based on this contact and discussions, the
Company believes that it does not have material exposure to the Year 2000 issue
with respect to its non-information systems.
The Company did not incur any significant incremental expense related
to Year 2000 issues during the first six months of 1999 and does not expect that
its Year 2000 compliance program will result in any material costs or have a
material impact on its financial condition. The Company has not used any
independent verification and/or validation processes to assure the reliability
of its risk and cost estimates.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the second quarter of 1999, the Company experienced a decline in
the fair market value of the available for sale portfolio, which resulted in a
decline in the net unrealized gain on the investment portfolio of $17.8 million,
from a net unrealized gain of $17.5 million at December 31, 1998 to a net
unrealized loss of $388,000 at June 30, 1999. This decline in value was a result
of changes in market interest rates and not as a result of changes in the
composition of the Company's investment portfolio. For a more complete
discussion about the potential impact of interest rate changes upon the fair
value of the financial instruments in the Company's investment portfolio, see
"Quantitative and Qualitative Disclosures about Market Risk" in both the CMAC
Investment Corporation 1998 Form 10-K/A and the Amerin Corporation 1998 Form
10-K/A.
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16
RADIAN GROUP INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - None
ITEM 3. Defaults upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders
On June 9, 1999, the Special Meetings of stockholders
of CMAC and Amerin were held. The stockholders of both CMAC
and Amerin agreed to adopt the Agreement and Plan of Merger
dated as of November 22, 1998, as amended, whereby CMAC and
Amerin merged to become Radian Group Inc. The stockholders of
CMAC also voted to adopt the amendment to the CMAC Investment
Corporation Equity Compensation Plan.
The number of votes cast by the stockholders of CMAC
for, against and abstensions relating to the adoption of the
Agreement and Plan of Merger dated as of November 22, 1998, as
amended, is set forth below. There were 1,493,521 broker
non-votes in the approval of the Agreement and Plan of Merger.
For Against Abstain
--- ------- -------
Approval of the Agreement and Plan of Merger between
CMAC Investment Corporation and Amerin Corporation
dated as of November 22, 1998, as amended: 18,888,508 36,866 20,410
The number of votes cast by the stockholders of CMAC
for, against and abstentions relating to adoption of the
amendment to the CMAC Investment Corporation Equity
Compensation Plan is set forth below. There were no broker
non-votes in the approval of the Equity Compensation Plan
amendment.
For Against Abstain
Approval of the amendment to the CMAC Investment
Corporation Equity Compensation Plan: 17,779,463 2,642,655 17,187
The number of votes cast by the stockholders of
Amerin for, against and abstensions relating to the adoption
of the Agreement and Plan of Merger dated as of November 22,
1998, as amended, is set forth below. There were no broker
non-votes in the approval of the Agreement and Plan of Merger.
For Against Abstain
Approval of the Agreement and Plan of Merger between
CMAC Investment Corporation and Amerin Corporation
dated as of November 22, 1998, as amended: 17,188,850 39,023 7,620
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17
RADIAN GROUP INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
(CONTINUED)
ITEM 5. Other Information - None
ITEM 6. a. Exhibits
*Exhibit 11.1 - Statement Re: Computation of Per
Share Earnings
*Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
On June 11, 1999, the Registrant filed one report on
Form 8-K with respect to the adoption of the
Agreement and Plan of Merger dated as of November 22,
1998, as amended, between CMAC Investment Corporation
and Amerin Corporation.
* Filed Herewith
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18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RADIAN GROUP INC.
Date: August 13, 1999 /s/ C. Robert Quint
-------------------------------------------------
C. Robert Quint
Executive Vice President, Chief Financial Officer
(Principal Accounting Officer)
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