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
SEPTEMBER 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: 37,153,403 shares of
Common Stock, $0.001 par value, outstanding on November 11, 1999.
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RADIAN GROUP INC. AND SUBSIDIARIES
INDEX
PAGE NUMBER
Part I - Financial Information
Consolidated Balance Sheets - September 30, 1999 (Unaudited) and
December 31, 1998..................................................... 3
Consolidated Statements of Income - For the quarters and nine month periods
ended September 30, 1999 (Unaudited) and 1998 (Unaudited)............. 4
Consolidated Statement of Changes in Common Stockholders'
Equity - For the nine month period ended
September 30, 1999 (Unaudited)........................................ 5
Consolidated Statements of Cash Flows - For the nine month periods ended
September 30, 1999 (Unaudited) and 1998 (Unaudited)................... 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
Signature............................................................................... 17
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RADIAN GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30 December 31
1999 1998
------------ -----------
(Unaudited)
(In thousands, except share amounts)
Assets
Investments
Fixed maturities held to maturity - at amortized cost (fair value
$484,615 and $512,368) $ 471,394 $ 477,518
Fixed maturities available for sale - at fair value
(amortized cost $774,952 and $621,581) 752,837 646,148
Equity securities available for sale - at fair value (cost $40,503
and $25,109) 43,697 27,425
Short-term investments 31,691 24,361
Cash 4,087 9,377
Deferred policy acquisition costs 57,729 48,983
Prepaid federal income taxes 190,242 152,864
Provisional losses recoverable 38,402 32,718
Other assets 73,408 94,011
----------- -----------
$ 1,663,487 $ 1,513,405
=========== ===========
Liabilities and Stockholders' Equity
Unearned premiums $ 49,238 $ 75,538
Reserve for losses 312,158 245,125
Deferred federal income taxes 195,169 166,276
Accounts payable and accrued expenses 65,068 54,267
----------- -----------
621,633 541,206
----------- -----------
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;
36,982,628 shares and 36,842,550 shares issued
and outstanding 37 37
Additional paid-in capital 511,709 507,282
Retained earnings 502,407 407,406
Accumulated other comprehensive (loss) income (12,299) 17,474
----------- -----------
1,001,854 932,199
----------- -----------
$ 1,663,487 $ 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 Nine Months Ended
September 30 September 30
1999 1998 1999 1998
(In thousands, except per-share amounts)
Revenues:
Premiums written:
Direct................................. $102,571 $112,435 $351,961 $322,781
Assumed ............................... 3 8 86 116
Ceded.................................. (7,037) (11,515) (29,248) (31,677)
--------- -------- --------- --------
Net premiums written........................ 95,537 100,928 322,799 291,220
Decrease in unearned premiums............... 24,494 2,017 26,044 5,560
--------- -------- --------- --------
Premiums earned............................. 120,031 102,945 348,843 296,780
Net investment income....................... 16,439 14,984 49,166 44,172
Gain on sales of investments................ 378 2,083 1,206 2,996
Other income .............................. 2,190 3,773 9,901 10,016
--------- -------- --------- --------
139,038 123,785 409,116 353,964
--------- -------- --------- --------
Expenses:
Provision for losses........................ 42,519 42,037 130,073 124,467
Policy acquisition costs.................... 15,660 14,780 48,913 41,876
Other operating expenses.................... 15,462 14,835 47,594 41,485
Merger expenses............................. 11,353 -- 36,883 --
--------- -------- --------- --------
84,994 71,652 263,463 207,828
--------- -------- --------- --------
Pretax income ....................................... 54,044 52,133 145,653 146,136
Provision for income taxes........................... 16,556 14,726 45,718 40,975
--------- -------- --------- --------
Net income ....................................... 37,488 37,407 99,935 105,161
Dividends to preferred stockholder................... 825 825 2,475 2,475
--------- -------- --------- --------
Net income available to common stockholders.......... $ 36,663 $ 36,582 $ 97,460 $102,686
========= ======== ========= ========
Basic net income per share........................... $ 0.99 $ 0.99 $ 2.64 $ 2.80
========= ======== ========= ========
Diluted net income per share......................... $ 0.97 $ 0.97 $ 2.58 $ 2.71
========= ======== ========= ========
Average number of common shares outstanding -
basic .............................................. 36,974 36,799 36,914 36,686
========= ======== ========= ========
Average number of common and common equivalent
shares outstanding - diluted......................... 37,765 37,816 37,793 37,859
========= ======== ========= ========
See notes to consolidated financial statements.
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RADIAN GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income (Loss) Total
----- ------- -------- ------------- -----
(In thousands)
Balance, December 31, 1998................................ $ 37 $507,282 $407,406 $17,474 $ 932,199
Comprehensive income:
Net income (unaudited)............................. -- -- 99,935 -- 99,935
Unrealized holding losses arising during period,
net of tax of $(15,633) (unaudited)........... -- -- -- (29,033)
Less: Reclassification adjustment for net gains
included in net income, net of tax of
$398 (unaudited)............................... -- -- -- (740)
--------
Net unrealized loss on investments - net of tax
of $(16,031) (unaudited)...................... -- -- -- (29,773) (29,773)
--------
Comprehensive income (unaudited)................... 70,162
Issuance of common stock (unaudited)................. -- 4,427 -- -- 4,427
Dividends (unaudited)................................ -- -- (4,934) -- (4,934)
---------- -------- -------- -------- ---------
Balance, September 30, 1999 (unaudited)................... $ 37 $511,709 $502,407 $(12,299) $1,001,854
========== ======== ======== ======== ==========
See notes to consolidated financial statements.
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RADIAN GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30
1999 1998
---- ----
(In thousands)
Cash flows from operating activities......................................... $ 162,806 $ 130,467
--------- ----------
Cash flows from investing activities:
Proceeds from sales of investments available for sale................. 79,728 169,301
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........... 19,623 19,006
Proceeds from redemptions of investments held to maturity............. 14,182 8,505
Proceeds from redemptions of equity securities available for sale..... 1,920 --
Purchases of investments available for sale........................... (260,562) (327,227)
Purchases of equity securities available for sale..................... (17,330) --
Purchases of short-term investments - net............................. (7,278) (151)
Other ............................................................... 1,982 (4,097)
--------- ----------
Net cash used in investing activities........................................ (167,589) (133,632)
--------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock................................ 4,427 9,864
Dividends paid........................................................ (4,934) (4,513)
--------- ----------
Net cash (used in) from financing activities................................. (507) 5,351
--------- ----------
(Decrease) increase in cash.................................................. (5,290) 2,186
Cash, beginning of period.................................................... 9,377 6,820
--------- ----------
Cash, end of period.......................................................... $ 4,087 $ 9,006
========= ==========
Supplemental disclosures of cash flow information:
Income taxes paid............................................................ $ 37,050 $ 35,950
========= ==========
Interest paid ............................................................... $ 144 $ 36
========= ==========
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 nine months of 1999 was $99.9 million, a 5.0%
decrease compared to $105.2 million for the first nine months of 1998 and net
income for the quarter ended September 30, 1999 was $37.5 million, a 0.2%
increase compared to $37.4 million for the same period in 1998. However, net
income for the first nine months of 1999 included merger expenses net of tax of
$29.8 million and without these merger expenses, net income was $129.7 million,
a 23.4% increase compared to $105.2 million for the first nine months of 1998.
For the third quarter of 1999, net income included merger expenses net of tax of
$8.4 million and without these merger expenses, net income was $45.9 million, a
22.6% increase compared to $37.4 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 nine months of 1999 was
$26.7 billion, a 3.4% increase compared to $25.9 billion for the first nine
months of 1998 and for the third quarter of 1999, new primary insurance written
of $8.7 billion was 8.2% lower than the $9.5 billion written in the third
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 nine months of 1998 was $25.2 billion
and 1999 primary new insurance written volume increased by 6.3% for the first
nine months when compared to these adjusted figures. Contributing to the
increase in Radian"s primary new insurance written volume for the first nine
months of 1999 was a 12.1% 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 17.8% for the nine months ended September 30, 1999, compared to 19.3%
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 nine months ended September 30, 1998 was 18.9% compared to 17.8% for the
same period in 1999. The private mortgage insurance industry decreased new
insurance written volume by 1.5% for the third quarter of 1999 as compared to
the same period of 1998, which, combined with Radian's decline in market share
from 18.6% for the quarter ended September 30, 1998 to 17.2% for same period in
1999, resulted in the 2.7% decline in Radian's primary new insurance written
volume for the period. Additionally, in the first nine months of 1999, Radian
wrote an increased amount of pool insurance which represented an addition to
risk of $343.0 million as compared to $279.0 million in the same period of 1998
and for the quarter ended September 30, 1999, Radian wrote pool insurance
representing an addition to risk of $73.0 million as compared to $88.0 for the
same period in 1998. Most of this pool insurance volume related to a group of
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RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
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 nine 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. However, an increase in interest rates during the third quarter of 1999
resulted in a decline in refinancing activity for Radian and contributed to the
1.5% decrease in the mortgage insurance industry new insurance written volume
for the third quarter of 1999 as compared to the same period in 1998. Radian's
refinancing activity as a percentage of primary new insurance written was 30%
for the nine month period ended September 30, 1999 as compared to 32% for the
same period in 1998; however, for the third quarter of 1999, that rate had
declined to 20% from 29% in the second quarter of 1999 and 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 69.7% for the twelve
months ended September 30, 1999 as compared to 71.5% for the twelve months ended
September 30, 1998 and 68.3% for the twelve months ended June 30, 1999. This
increase from June 30, 1999 levels was consistent with the declining level of
refinancing activity during the third quarter of 1999, which caused the
cancellation rate to decrease. The persistency rate for 1999 should continue at
a rate lower than normal (i.e., 80% to 85%), although if the current decline in
refinancing activity continues, the persistency rate should improve.
Net premiums earned in the first nine months of 1999 were $348.8
million, a 17.5% increase compared to $296.8 million for the first nine months
of 1998 and premiums earned for the quarter ended September 30, 1999 were $120.0
million, a 16.6% increase compared to $102.9 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 nine months 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 nine months of 13.0%, from $81.9 billion at December 31, 1998 to
$92.6 billion at September 30, 1999. Direct pool risk in force also grew to $1.2
billion at September 30, 1999 from $993.0 million at the end of 1998, an
increase of 21.6% for the nine month period.
Net investment income for the first nine months of 1999 was $49.2
million, an 11.3% increase compared to $44.2 million for the same period of 1998
and for the third quarter of 1999, net investment income was $16.4
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RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
continued growth in invested assets primarily due to positive operating cash
flows of $162.8 million for the first nine months 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 5.68% at September 30, 1998 to 5.33% at September 30, 1999,
primarily as a result of 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 $130.1 million for the first nine months
of 1999, an increase of 4.5% compared to $124.5 million for the first nine
months of 1998, and for the third quarter of 1999, the provision was $42.5
million as compared to $42.0 million for the third quarter of 1998, an increase
of 1.1%. These increases reflected increases in the number of delinquent loans
as a result of the significant growth and maturation of Radian"s book of
business over the past several years, 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 70% 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. Due to the increased
level of refinancing activity in 1998 and 1999, this percentage of risk in force
is significantly higher than normal levels. Radian's overall default rate at
September 30, 1999 was 1.42% 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 2.07% at
September 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 20,356 at September 30,
1999 and the average loss reserve per default rose from $13,056 at the end of
1998 to $15,335 at September 30, 1999. The average loss reserve per default on
primary business rose from $14,959 at March 31, 1999 to $16,610 at September 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 1.87% (including pool) at September 30, 1999
as compared to 2.37% at December 31, 1998 and claims paid in California during
the first nine months of 1999 were $17.9 million, representing approximately
27.8% of total claims as compared to 44.9% for the same period of 1998.
California represented approximately 18.0% of primary risk in force at September
30, 1999 as compared to 18.7% at December 31, 1998. The default rate in Florida
was 3.05% (including pool) at September 30, 1999 as compared to 3.28% at
December 31, 1998 and claims paid in Florida during the first nine months of
1999 were $8.8 million, representing approximately 13.7% of total claims as
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12
RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
compared to 12.3% for the same period of 1998. Florida represented approximately
6.9% of primary risk in force at September 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 nine months of 1999
were $67.6 million as compared to $79.7 million in the same period of 1998, a
decrease of 17.8% and direct losses paid during the third quarter of 1999 were
$15.4 million, a 58.6% decrease compared to $37.2 for the same period in 1998.
The severity of loss payments has declined due to property value appreciation
but any negative impact on future property values would most likely increase the
loss severity.
Underwriting and other operating expenses were $96.5 million for the
first nine months of 1999, an increase of 15.8% compared to $83.4 million for
the same period of 1998 and for the third quarter of 1999, these expenses were
$31.1 million as compared to $29.6 million for the third quarter of 1998, an
increase of 5.1%. 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 nine months of 1999 were $48.9
million, an increase of 16.8% compared to $41.9 million for the first nine
months of 1998 and these expenses were $15.7 million in the third quarter of
1999, an increase of 6.0% compared to $14.8 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 and centralized decision making occurring in the
mortgage lending industry. Other operating expenses for the nine months ended
September 30, 1999 were $47.6 million, an increase of $6.1 million or 14.7% as
compared to $41.5 million for the same period in 1998 and these expenses were
$15.5 million for the third quarter of 1999, an increase of 4.2% compared to
$14.8 million for the third quarter of 1998. Some of the increase was a result
of an increase in expenses associated with the Company"s ancillary services,
specifically contract underwriting; however, most of the increase resulted from
an increase in the expenses associated with the Company's administrative and
support functions. Contract underwriting expenses for the nine month period
ended September 30, 1999 included in other operating expenses were $25.4 million
as compared to $23.1 million for the same period of 1998, an increase of 10.0%;
however, these expenses were $5.4 million for the third quarter of 1999 as
compared to $9.5 million for the third quarter of 1998, a decrease of 43.3%.
This reflected the decreasing demand for contract underwriting services as
mortgage origination volume has declined. The increase in contract underwriting
expenses during the nine months of 1999 of $2.3 million represented
approximately 37.4% of the $6.1 million increase in other operating expenses as
compared to the first nine months of 1998. The additional costs related to
running duplicate systems and other administrative operations during the
integration process resulted in an increase in other operating expenses
unrelated to contract underwriting of $3.8 million, or 20.8%, from $18.3 million
for the first nine months of 1998 to $22.2 million for the same period of 1999
while for the third quarter of 1999, other operating expenses unrelated to
contract underwriting increased from $5.3 million for the quarter ended
September 30, 1998 to $10.1 million for the quarter ended September 30, 1999, an
increase of 89.0% or $4.7 million. During the first nine
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13
RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
months of 1999, loans underwritten via contract underwriting accounted for 24.0%
of applications issued by Radian as compared to 22.4% in the first nine 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, contain a relatively low
percentage of loans that require mortgage insurance. In addition to the increase
in contract underwriting volume, 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 nine months and quarter ended September 30, 1999, the
Company incurred merger-related expenses of $36.9 million and $11.4 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 the remaining expenses relating to the merger
during the fourth quarter of 1999.
The effective tax rate for the nine months ended September 30, 1999,
excluding merger costs net of tax of $29.8 million, was 28.9% as compared to
28.0% for the same period in 1998 and the tax rate for the third quarter of
1999, excluding merger costs net of tax of $8.4 million, was 29.9% as compared
to 28.2% for the third quarter of 1998. Eliminating the merger expenses of $36.9
million and $11.4 million, respectively, for the nine months and quarter ended
September 30, 1999, operating income accounted for 72.4% and 70.1%,
respectively, of net income for the nine months and quarter ended September 30,
1999, as compared to 67.7% and 67.3%, 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 nine months ended
September 30, 1999 were $162.8 million as compared to $130.5 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 September
30, 1999, primarily as a result of net income of $99.9 million and the exercise
of stock options of $4.4 million, partially offset by dividends of $4.9 million
and a net unrealized loss on the investment portfolio of $29.8 million.
As of September 30, 1999, the Company and its subsidiaries had no
material commitments for capital expenditures.
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14
RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
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
- 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.
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15
RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
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 nine 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 first nine months 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 $29.8
million, from a net unrealized gain of $17.5 million at December 31, 1998 to a
net unrealized loss of $12.3 million at September 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 August 31, 1999, the Annual Meeting of Stockholders of
Radian Group Inc. was held. The stockholders re-elected three
nominees from the existing Board of Directors to three year terms
expiring in 2002. The stockholders also approved the designation
of Deloitte & Touche as independent auditors.
The number of votes cast for and withheld from the election
of each director nominee is set forth below. There were no
votes against, abstentions or broker non-votes in the
election of directors.
Election of Directors:
For Withheld
--- --------
David C. Carney 32,141,056 204,836
Claire M. Fagin 32,136,547 209,345
Ronald W. Moore 32,143,885 202,007
The number of votes cast for, against and abstentions
relating to the designation of Deloitte & Touche as
independent auditors is set forth below. There were no
broker non-votes in the approval of Deloitte & Touche.
For Against Abstain
Approval of the designation
of Deloitte & Touche as
independent auditors: 32,331,131 4,167 10,061
ITEM 5. Other Information - None
ITEM 6. a. Exhibits
*Exhibit 11.1 - Statement Re: Computation of Per Share
Earnings
*Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K - None
* Filed Herewith
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17
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: November 12, 1999 /s/ C. Robert Quint
---------------------------------------------
C. Robert Quint
Executive Vice President, Chief Financial Officer
(Principal Accounting Officer)
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