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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
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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)
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(215) 564-6600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, $.001 PAR VALUE NEW YORK STOCK EXCHANGE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 37,415,587 shares of Common
Stock, $.001 par value, outstanding on March 20, 2000, and the aggregate market
value of the voting stock held by non-affiliates of the registrant is
$1,657,978,198.
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PART I
ITEM 1. BUSINESS
GENERAL
Radian Group Inc. (the "Company") provides, through its wholly owned
subsidiaries, Radian Guaranty Inc. and Amerin Guaranty Corporation (individually
referred to as "Radian Guaranty" and "Amerin Guaranty" and together referred to
as "Radian"), private mortgage insurance coverage in the United States on
residential mortgage loans. Private mortgage insurance protects mortgage lenders
and investors from default related losses on residential first mortgage loans
made primarily to home buyers who make down payments of less than 20% of the
home's purchase price. Private mortgage insurance also facilitates the sale of
such mortgage loans in the secondary mortgage market, principally to Freddie Mac
and Fannie Mae. Radian is restricted, both by state insurance laws and
regulations and the eligibility requirements of Freddie Mac and Fannie Mae, to
providing insurance on residential first mortgage loans only. Radian currently
offers two principal types of private mortgage insurance coverage, primary and
pool. At December 31, 1999, primary insurance comprised 94.3% of Radian's risk
in force and pool insurance comprised 5.7% of Radian's risk in force. The volume
of pool insurance written increased significantly in the past several years, but
is expected to decline in 2000 and beyond due primarily to stringent capital
requirements.
Merger
By Agreement and Plan of Merger dated as of November 22, 1998 and approved
by shareholders on June 6, 1999, the Company was formed on June 9, 1999 by the
merger of CMAC Investment Corporation ("CMAC") and Amerin Corporation
("Amerin"). The merger brought together the fifth and seventh largest private
mortgage insurers measured by market share of new primary insurance written and
created the second largest with a market share of 17.5% in 1999. In the merger,
Amerin stockholders received 0.5333 shares of CMAC common stock in a tax-free
exchange for each share of Amerin common stock. CMAC's stockholders continued to
own their existing shares in the Company after the merger. The transaction was
accounted for on a pooling of interests basis. Following the merger, Frank P.
Filipps, president and chief executive officer of CMAC, became chairman and
chief executive officer of the Company. Roy J. Kasmar, former president and
chief operating officer of Amerin, holds the same positions with the Company.
Gerald L. Friedman, the former chairman and chief executive officer of Amerin,
became chairman emeritus, and Herbert Wender, the former chairman of CMAC,
became lead director and chairman of the executive committee of the board of
directors of the Company. The new board is made up of CMAC's board, Roy J.
Kasmar and four individuals nominated by Amerin.
Primary Insurance
Primary insurance provides mortgage default protection on individual loans
at a specified coverage percentage which is applied to the unpaid loan
principal, delinquent interest and certain expenses associated with the default
and subsequent foreclosure (collectively, the "claim amount"). Radian's
obligation to an insured lender in respect of a claim is determined by applying
the appropriate coverage percentage to the claim amount. Radian's "risk" on each
insured loan is the unpaid loan principal multiplied by the coverage percentage.
Much of Radian's current business is written with 30% coverage on loans with a
loan-to-value ("LTV") ratio between 90.01% and 95% ("95s") and 25% coverage on
loans with an LTV ratio between 85.01% and 90% ("90s"). As of December 31, 1999,
approximately 60% of Radian's insurance in force had such "deeper coverage".
Deeper coverage refers to a higher percentage of insurance coverage on 90s and
95s than coverage levels prior to 1995. Beginning in 1995, both Fannie Mae and
Freddie Mac began to require such deeper coverage on 90s and 95s. Prior to 1995,
the coverage requirements were 22% on 95s and 17% on 90s. In January 1999,
Fannie Mae announced a new program which allows for lower levels of required
mortgage insurance for certain low down payment loans approved through its
"Desktop Underwriter" automated underwriting system. The insurance levels in
this program are similar to those required prior to 1995. In March 1999, Freddie
Mac announced a similar program for loans approved through its "Loan Prospector"
automated underwriting system. The Company does not believe that these
developments will
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adversely affect the demand for (or profitability of) mortgage insurance.
Through the end of 1999, an insignificant amount of insurance was written in
these programs. For more information on these developments, see "Freddie Mac and
Fannie Mae" on page 19.
Under its master policy, Radian has the option of paying the entire claim
amount and taking title to the mortgage property, or paying the coverage
percentage in full satisfaction of its obligations under the insurance written.
In 1999, the entire claim amount was paid in approximately 5% of filed claims
because of the expected economic advantage associated with that choice.
Pool Insurance
Pool insurance differs from primary insurance in that the exposure on pool
insurance is not limited to a specific coverage percentage on each individual
loan. Because of this feature and the generally lower premium rates associated
with pool insurance, the rating agency capital requirements for the product are
more restrictive than primary insurance. There is an aggregate exposure limit
("stop loss") on a "pool" of loans which is generally between 1% and 10% of the
initial aggregate loan balance. Modified pool insurance has a stop loss like
pool insurance, but also has exposure limits on each individual loan. The use of
modified pool insurance is much more limited than traditional pool insurance.
Radian offers pool insurance on a selected basis to various state housing
finance agencies on the collateral for their bond issues, as a credit
enhancement to mortgage loans included in mortgage-backed securities or in whole
loan sales, and in certain other specific situations. Since 1996, Radian has
offered significant amounts of pool insurance on mortgage product sold to
Freddie Mac and Fannie Mae by Radian's primary insurance customers ("GSE Pool").
This pool insurance has a very low stop loss, generally 1.0% to 1.5%, and the
insured pools contain loans with and without primary insurance. All loans
without primary insurance have an LTV ratio of 80.0% or below. Premium rates on
this business are significantly lower than primary insurance rates and the
expected profitability on this business is lower than that of primary insurance.
The volume of such business increased significantly from 1997 to 1998 due to the
strong demand for this product from Radian's customers and due to the increased
size of the mortgage market. During 1999, Radian had pool risk written of $421
million, consisting mostly of GSE Pool business, compared to $475 million in
1998. Radian expects to write less GSE Pool insurance in 2000. Radian also
intends to limit its GSE Pool risk in force to no more than 5% of its total risk
in force. GSE Pool risk in force at December 31, 1999 represented 4.9% of
Radian's total risk in force.
Structured Transactions
Radian, from time to time, engages in structured transactions which may
include either primary insurance, pool insurance or some form of combination
thereof. A structured transaction generally involves insuring a large group of
seasoned or unseasoned loans or issuing a commitment to insure new loan
originations under negotiated terms. Some structured transactions contain a
risk-sharing component under which the insured assumes a first-loss position or
shares in losses in some other manner. Opportunities for structured transactions
have increased during the last year, however Radian competes with other mortgage
insurers as well as capital market executions such as senior/subordinated
security structures to obtain such business.
Revenue Sharing Products
Radian, like other mortgage insurers, offers financial products to its
mortgage lender customers that are designed to allow the customer to participate
in the risks and rewards of the mortgage insurance business. One such product is
captive reinsurance, in which a lender sets up a reinsurance company that
assumes part of the risk associated with that lender's insured book of business.
In most cases, the risk assumed by the reinsurer is an excess layer of aggregate
losses that would be penetrated only in a situation of adverse loss development.
Radian had approximately 20 captive reinsurance agreements in place at December
31, 1999 and could enter into several new agreements in 2000, some with large
national lenders. Premiums ceded to captive reinsurance companies in 1999 were
$27.5 million, representing 5.8% of total premiums earned, as compared to $13.8
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million, or 3.4% of total premiums earned in 1998, and primary insurance written
in 1999 that had captive reinsurance associated with it was $13.7 billion, or
41.3% of Radian's total as compared to $9.7 billion or 26.1% in 1998.
Another revenue sharing product is a performance note ("SuperNote"), which
allows a mortgage lender to invest a portion of capital needed to support its
insured mortgage insurance book and to receive a return on investment that
approximates the return that Radian achieves on that same book of business. At
December 31, 1999, Radian had $2.8 million of outstanding SuperNotes. Effective
in 1999, Radian ceased offering new SuperNotes.
The New York Insurance Department issued Circular Letter No. 2 dated
February 1, 1999 (the "Letter") which discusses their position concerning
various transactions between mortgage guaranty insurance companies licensed in
New York and mortgage lenders. The Letter, which is described more fully on page
18 of this Form 10-K, could impact the terms and conditions of future pool
insurance, captive reinsurance, and other revenue sharing transactions.
Customers
Mortgage originators such as mortgage bankers, mortgage brokers, commercial
banks and savings institutions are Radian's principal customers, although
mortgage borrowers generally bear the cost of primary insurance coverage. Radian
does offer lender-paid mortgage insurance whereby mortgage insurance premiums
are charged to the mortgage lender or loan servicer. On the lender-paid product,
the interest rate to the borrower is usually higher to compensate for the
mortgage insurance premium that the lender is paying. In 1999, approximately 20%
of Radian's primary insurance was originated on a lender-paid basis; however,
this percentage could increase in 2000 and beyond if borrowers become less
sensitive to the stated interest rate and instead focus more on total monthly
costs, or if structured transactions become more prevalent.
To obtain primary insurance from Radian, a mortgage lender must first apply
for and receive a master policy from Radian. Radian's approval of a lender as a
master policyholder is based, among other factors, upon an evaluation of the
lender's financial position and its management's demonstrated adherence to sound
loan origination practices. Radian's quality control function then monitors the
master policyholder.
The number of primary individual policies Radian had in force was 807,286
at December 31, 1999, 718,789 at December 31, 1998, and 605,919 at December 31,
1997.
Radian's top 10 customers were responsible for 44.6% of Radian's primary
new insurance written in 1999 compared to 51.4% in 1998 and 46.8% in 1997. The
largest single customer of Radian (including branches and affiliates of such
customer), measured by primary new insurance written, accounted for 12.2% of
primary new insurance written during 1999 compared to 18.3% in 1998 and 15.8% in
1997.
SALES, MARKETING AND COMPETITION
Sales and Marketing
Radian employs a field sales force of approximately 85 persons, organized
into three regions, providing local sales representation throughout the United
States. Each of the three regions is supervised by a Regional Business Manager
who is directly responsible for several Area Sales Managers and several Service
Centers where underwriting and application processing are performed. The
Regional Business Managers are responsible for managing the profitability of
business in their regions including premiums, losses and expenses. The Area
Sales Managers are responsible for managing a small sales force in different
areas within the region. Radian sales personnel are compensated by salary,
commissions on new insurance written and a production incentive based on the
achievement of various goals. During 1999, these goals were related to volume,
market share and change in market share and this is generally expected to
continue in 2000. In addition to securing business from small and mid-size
regional customers, the Radian business regions provide support to the National
Account effort in the field.
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National Accounts
In recognition of the increased consolidation in the mortgage lending
business and the large proportional amount of mortgage business done by large
national accounts, Radian has a focused National Accounts Team consisting of six
national account managers ("NAM") and several support positions. Each NAM is
responsible for a select group of dedicated accounts and is compensated on the
results for those accounts as well as the results of the Company. There has been
a trend among National Accounts to move to a more centralized decision about
mortgage insurance based on structured transactions and other value added
services provided by the mortgage insurance companies. The Company also has a
dedicated NAM who is primarily responsible for relations with and programs
implemented with Fannie Mae and Freddie Mac. National Accounts business
represented 68% of Radian's primary new insurance written in 1999 and is
expected to provide a similar percentage in 2000.
Competition
Radian and other private mortgage insurers compete directly with various
federal government agencies, principally the Federal Housing Administration
("FHA"). In addition to competition from federal agencies, Radian and other
private mortgage insurers face competition from state-supported mortgage
insurance funds. The private mortgage insurance industry consists of Radian and
six other active mortgage insurance companies. During 1999, Radian was the
second largest private mortgage insurer, measured by market share and had,
according to industry data, a market share of new primary mortgage insurance
written of 17.5%.
RISK MANAGEMENT
Radian considers effective risk management to be critical to its long-term
financial stability. Market analysis, prudent underwriting, the use of automated
risk evaluation models, quality control and customer services are all important
elements of Radian's risk management process.
Underwriting Personnel
In addition to a centralized National Underwriting department in the home
office, each of Radian's service regions has a Regional Service Manager
responsible for evaluating risk and managing all underwriting field staff in the
region. Radian employs an underwriting and support staff of approximately 110
who are located in Radian's 25 service centers. Additionally, Radian has two
agency operations in place.
Underwriting Process
Radian has generally accepted applications for primary insurance (other
than in connection with structured transactions) under three basic programs: the
traditional fully documented program, a limited documentation program and the
delegated underwriting program. Programs that involve less than fully documented
file submissions have become more prevalent in recent years. In order to meet
this demand, in the fourth quarter of 1996, Radian introduced to the marketplace
the process referred to as "ExpressTracSM", now known as Radian Streamlined Doc
("Streamlined Doc"). A lender utilizing Streamlined Doc can submit loans to
Radian for insurance with abbreviated levels of documentation based on the type
of loan being submitted for insurance. During 1999, 65% of the commitments
issued for primary insurance were received by Radian under the Streamlined Doc
program. In the Streamlined Doc program, Radian has agreed to underwrite certain
loans with less documentation by relying upon a scoring model created by Radian
during 1996 and referred to as "Prophet ScoreSM" (described below).
Delegated Underwriting
Radian has a delegated underwriting program with certain customers.
Radian's delegated underwriting program, which was implemented in 1989,
currently involves only lenders that are approved by Radian's risk management
department. Delegated underwriting programs allow the lender's underwriters to
commit Radian to insure loans based on agreed upon underwriting guidelines.
Radian routinely audits loans submitted under these programs. As of December 31,
1999, approximately 74% of the primary loans on Radian's books were
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originated on a delegated basis and during 1999 and 1998, respectively, 74% and
76% of the primary loans insured by Radian were originated on a delegated basis.
Mortgage Scoring Models
During the last few years, the use of scoring mechanisms to predict loan
performance has become prevalent in the marketplace, especially with Fannie Mae
and Freddie Mac's advocacy of the use of credit scores in the mortgage loan
underwriting process. The use of credit scores was pioneered by Fair Isaac and
Company ("FICO") and became popular in the mid-1980s. The FICO model calculates
a score based on a borrower's credit history. This credit score based
"scorecard" is used to predict the future performance of a loan over a one or
two year time horizon. The higher the credit score the lower the likelihood that
a borrower will default on a loan. Radian's Prophet Score begins with a FICO
score then adds specific additional data regarding the borrower, the loan and
the property such as LTV, loan type, loan amount, property type, occupancy
status and borrower employment. Radian believes that it is this additional
mortgage data that expands the integrity of Radian's Prophet Score over the
entire life of the loan. In addition to the Prophet Score, Radian's housing
analysts regularly review major metropolitan areas to assess the impact that key
indicators such as housing permits, employment trends, and median home sale
prices have on local lending. The healthier the real estate market, the lower
the risk. Radian refers to this score as a GEOScore. Beginning in October 1996,
the Prophet Score and GEOScore appeared on each insurance commitment that Radian
issued. In 1998, the Prophet and GEOScores were combined into a more powerful
"Composite Prophet Score" that aggregates the credit and economic factors into
one decision tool.
Automated Underwriting
Radian's frontline computer system for input and underwriting loan file
information is called MINACS. In utilizing MINACS, Radian captures information
from all segments of a loan file including the borrower's employment and income
history and appraisal information. This information is then channeled through
various edits and subfiles (including Prophet and GEOScore) to assist the
underwriter in determining the total risk profile on a given file. This system
also includes: a) tracking loans by borrowers who have previously defaulted on
Radian insured loans or loans where Radian has paid a claim, b) identifying
borrowers who have previously applied for Radian insurance, and c) information
about the lender involved including volume, commitment rates and delinquency
rates.
Alternative Products
An increasingly popular form of mortgage lending is in the area of
non-conforming loans. Two subsets of this category in which Radian has become
involved are Alternative A loans and A minus loans. Alternative A borrowers have
an equal or better credit profile than Radian's typical insured borrowers, but
these loans are underwritten with reduced documentation and verification of
information. Radian typically charges a higher premium rate for this business
due to the reduced documentation, but does not consider this business to be
significantly more risky than its normal primary business. The A minus loan
programs typically have non-traditional credit standards which are less
stringent than standard credit guidelines. This market was created as an avenue
to homeownership for borrowers who had not properly maintained their credit
profile over time. Radian receives a significantly higher premium for insuring
this product that is commensurate with the additional default risk and is often
a variable rate based on the Prophet Score. Radian intends to limit its
participation in the non-conforming market to Alternative A and A minus loans
rather than "B" or "C" (lower credit) loans and to limit the business insured to
specific targeted lenders with proven good results and servicing experience in
this area. Alternative Products made up less than 10% of Radian's primary
insurance written during 1999 and 1998, and most of the Alternative Products
business written was categorized as Alternative A.
Lender Audits
Through the use of borrower credit scoring and its own proprietary mortgage
scoring system, Radian is able to monitor the credit quality of loans submitted
for insurance on a daily, real-time basis. The Company
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also conducts a periodic on-site review of a lender's Radian insured business.
Lenders with significant risk concerns as identified through the Company's daily
and weekly risk reporting and analysis of the business and related negative
trends may be reviewed more frequently. Due to the real-time picture of credit
quality obtained through the use of credit scoring and mortgage scoring, Radian
has been able to streamline the lender audit process to focus primarily on those
higher risk loans originated by the lender in the specified period. The sample
of loans to be re-underwritten during the audit may be augmented by loans with
certain risk factors or those insured under waivers to Radian's underwriting
guidelines granted to the lender, but is most frequently targeted toward
specific risk factors or trends identified through the daily, weekly, and
monthly reporting and analysis processes. The intent of the loan review is to
identify errors in the loan data transmitted to Radian, to determine lender
compliance with Radian's underwriting guidelines and eligible loan criteria, to
assess the quality of a lender's underwriting decisions and to rate the risk of
the individual loans insured. Audits are graded based on the risk ratings of the
loans reviewed, lender compliance and data integrity. The results of each audit
are set forth in a report to the lender that requires the lender to address any
deficiencies identified in the review. If issues raised by the report are not
resolved in a manner and within a time period acceptable to Radian, the lender's
delegated underwriting approval authority may be restricted or terminated.
Contract Underwriting
Radian utilizes its underwriting skills to provide an outsource contract
underwriting service to its customers. For a fee, Radian underwrites fully
documented underwriting files for secondary market compliance, while at the same
time assessing the file for mortgage insurance, if applicable. The automated
underwriting service introduced in the latter part of 1997 has become a major
part of Radian's contract underwriting service. This service offers customers
access to Fannie Mae's Desktop Underwriter and Freddie Mac's Loan Prospector
loan origination systems. Contract underwriting continues to be a popular
service to Radian's customers. During 1999, loans underwritten via contract
underwriting accounted for 22% of applications, 19% of commitments for insurance
and 16% of insurance certificates issued by Radian. Radian gives recourse to its
customers on loans it underwrites for compliance. If the loan does not meet
agreed upon guidelines and is not salable in the secondary market for that
reason, Radian agrees to remedy the situation either by placing mortgage
insurance coverage on the loan or by purchasing the loan. During 1999, Radian
processed requests for remedies on less than 1% of the contract loans
underwritten and sold a number of loans previously acquired as part of the
remedy process. Providing these remedies means Radian assumes some credit risk
and interest rate risk if an error is found during the limited remedy period in
the agreements. Rising mortgage interest rates or an economic downturn may
expose Radian to higher losses. During 1999, the financial impact of these
remedies was insignificant although there is no assurance that such results will
continue in 2000 and beyond.
Ratings
Radian has its claims-paying ability and financial strength rated by
Standard & Poor's Rating Services ("S&P"), Moody's Investors Service, Inc.
("Moody's") and Duff & Phelps Credit Rating Company ("DCR"). These ratings are
an indication to a mortgage insurer's customers of the insurer's present
financial strength and its capacity to honor its future claims payment
obligations. Ratings are generally considered critical to an insurer's ability
to compete for new insurance business. Currently, Radian is rated "AA" by S&P
and DCR, and "Aa3" by Moody's.
Reinsurance
Amerin Guaranty and Radian Guaranty currently use reinsurance from
affiliated companies in order to remain in compliance with the insurance
regulations of certain states which require that a mortgage insurer limit its
coverage percentage of any single risk to 25%. Amerin Guaranty and Radian
Guaranty currently intend to use such reinsurance solely for purposes of such
compliance.
Radian Guaranty reinsures all direct insurance in force under an excess of
loss reinsurance program which it considers to be an effective catastrophic
reinsurance coverage. Under this program, the reinsurer is responsible for 100%
of covered losses in excess of Radian Guaranty's retention. The annual retention
is
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determined by a formula which contains variable components. The estimated 2000
retention is approximately $630 million of loss which represents 150% of
expected premiums earned by Radian Guaranty. The reinsurer's aggregate annual
limit of liability is also determined by a formula with variable components and
is currently estimated to be $120 million. In addition, in 1999, a limit was set
on the amount of annual pool insurance losses that can be counted in the
reinsurance recoverable calculation. For 2000, this limit is $90 million. If the
reinsurer decides not to renew the reinsurance arrangement and is not replaced
by Radian Guaranty, the reinsurer must provide six years of runoff coverage.
There is an overall aggregate limit of liability applicable to any runoff period
equal to four times the annual limit in effect for the calendar year of such
nonrenewal. For 2000, this aggregate limit is estimated to be $480 million. The
excess of loss reinsurance program also provides restrictions and limitations on
the payment of dividends by Radian Guaranty, investments, mergers or
acquisitions involving other private mortgage insurance companies and
reinsurance of exposure retained by Radian Guaranty.
In addition, Radian Guaranty entered into a variable quota-share ("VQS")
treaty for primary risk in the 1994 to 1997 origination years and a portion of
the pool risk written in 1997. In this treaty, quota-share loss relief is
provided at varying levels ranging from 7.5% to 15.0% based upon the loss ratio
on the reinsured book. The higher the loss ratio, the greater the potential
reinsurance relief which protects Radian Guaranty in adverse loss situations. A
ceding commission is paid by the reinsurer to Radian Guaranty and the agreement
is noncancelable for ten years by either party. As of December 31, 1999, the
risk in force covered by the VQS treaty was approximately $6.3 billion, or
approximately 30% of Radian's primary risk in force and $82 million, or
approximately 8% of Radian's pool risk in force. It is Radian's present
intention not to reinsure any additional business pursuant to the VQS treaty for
the 2000 origination year, although the ultimate decision on reinsurance could
be impacted by business volume, capital adequacy and other factors.
Amerin Guaranty is party to a reinsurance agreement pursuant to which the
reinsurer is obligated to repay, up to an aggregate amount of $100 million, all
losses and allocated loss adjustment expenses paid by Amerin Guaranty during
periods in which (i) the ratio of Amerin Guaranty's risk in force divided by the
sum of policyholders' surplus plus the contingency reserve calculated in
accordance with statutory accounting practices exceeds 24.9 to 1 and (ii) the
sum of Amerin Guaranty's expense ratio and loss ratio exceeds 100%. The
claims-paying ability of the reinsurer is rated "AA" by S&P.
Guaranty Agreement
A Guaranty Agreement was entered into on August 11, 1999 by Radian Guaranty
and Amerin Guaranty. The agreement provides that in the event Radian Guaranty
fails to make a payment to any of its policyholders, Amerin Guaranty will make
the payment; in the event Amerin Guaranty fails to make a payment to any of its
policyholders, then Radian Guaranty will make the payment. Under the terms of
the agreement, the obligations of both parties are unconditional and
irrevocable; however, no payments will be made without prior approval by the
Pennsylvania Department of Insurance.
DEFAULTS AND CLAIMS
Defaults
The default and claim cycle on loans which have private mortgage insurance
begins with the insurer's receipt from the lender of notification of a default
on an insured loan. The master policy requires lenders to notify Radian of an
uncured default on a mortgage loan within 75 days (45 days for an uncured
default in the first year of the loan), although many lenders do so earlier. The
incidence of default is affected by a variety of factors, including change in
borrower income, unemployment, divorce and illness, the level of interest rates
and general borrower creditworthiness. Defaults that are not cured result in
claims to Radian. Borrowers may cure defaults by making all delinquent loan
payments or by selling the property and satisfying all amounts due under the
mortgage.
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The following table shows the number of primary and pool loans insured,
related loans in default and the percentage of loans in default (default rate)
as of the dates indicated:
DEFAULT STATISTICS
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DECEMBER 31
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1999 1998 1997
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PRIMARY INSURANCE:
Insured loans in force.............................. 807,286 718,789 605,919
Loans in default(1)................................. 17,798 15,228 12,597
Percentage of loans in default...................... 2.2% 2.1% 2.1%
POOL INSURANCE(2):
Insured loans in force.............................. 676,454 474,630 242,553
Loans in default(1)................................. 4,352 3,547 2,116
Percentage of loans in default...................... 0.6% 0.7% 0.9%
</TABLE>
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(1) Loans in default exclude those loans 45 days past due or less and loans in
default for which Radian feels it will not be liable for a claim payment.
(2) Includes traditional and modified pool insurance.
Regions of the United States may experience different default rates due to
varying economic conditions. The following table shows the default rates by
Radian's region as of the dates indicated, including both primary and pool
loans.
DEFAULT RATES BY RADIAN'S REGION
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DECEMBER 31
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1999 1998 1997
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North....................................................... 2.34% 1.97% 1.96%
South....................................................... 2.94 2.81 2.83
West........................................................ 2.34 2.31 2.62
Alaska...................................................... 0.88 0.64 0.88
Hawaii...................................................... 2.08 1.74 1.68
Guam........................................................ 0.64 -- --
</TABLE>
As of December 31, 1999, default rates for Radian's two largest states
measured by risk in force, California and Florida, were 2.5% and 3.9%,
respectively, compared to 2.8% and 3.8%, respectively, at December 31, 1998. The
relatively high default rate in Florida is due primarily to the increased
"affordable housing" business done in Florida since 1994 and the high default
development on such business.
Claims
The likelihood that a claim will result from a default and the amount of
such claim depend principally on the borrower's equity at the time of default
and the borrower's (or the lender's) ability to sell the home for an amount
sufficient to satisfy all amounts due under the mortgage, as well as the
effectiveness of loss mitigation efforts. Claims are also affected by local
housing prices, interest rates, unemployment levels and the housing supply.
Claim activity is not evenly spread through the coverage period of a book
of business. Relatively few claims are received during the first two years
following issuance of the policy. This is followed by a period of rising claims
which, based on industry experience, has historically reached its highest level
in the third through fifth years after the year of loan origination. Thereafter,
the number of claims received has historically declined at a gradual rate,
although the rate of decline can be affected by conditions in the economy.
8
<PAGE> 10
Approximately 65.3% of Radian's primary risk in force and almost all of Radian's
pool risk in force at December 31, 1999 had not yet reached its anticipated
highest claim frequency years. Certain "affordable housing" loans insured in
1994 and 1995 have experienced higher than normal early default and claim rates,
although these results are not anticipated to have a material effect on the
Company's financial statements due to the relatively small component of such
loans in Radian's book. Many of the reasons for these early defaults have been
addressed in the underwriting of such loans since 1996.
Loss Mitigation
Radian's loan workout staff consists of 16 employees, including several
full time loan workout specialists who proactively intervene in the default
process, working with borrowers to reduce the frequency and severity of
foreclosure losses. The size of the loan workout staff has decreased over the
past few years, primarily due to an enhancement in the ability of loan servicers
to perform this function adequately with less assistance needed by Radian. Once
a notice of default is received, Radian scores the default using a proprietary
model that predicts the likelihood that the default will become a claim. Using
this model the loan workout specialists prioritize cases for proactive
intervention to counsel and assist borrowers. Loss mitigation techniques include
pre-foreclosure sales, extensions of credit to borrowers to reinstate insured
loans, loan modifications and deficiency settlements. Radian still considers its
loss mitigation efforts to be an effective way to reduce claim payments.
Subsequent to foreclosure, Radian uses post-foreclosure sales and the
exercise of the full claim payment option to further mitigate loss. This was
considered an extremely effective loss mitigation tool in 1999 due to relatively
strong property values, although there can be no assurance that such positive
results will continue.
Homeownership Counseling
In 1995, Radian established a Homeownership Counseling Center (the
"Center") to work with borrowers receiving insured loans under Community
Homebuyer, 97% LTV ("97s") or other "affordable housing" programs. Radian
considers this counseling to be very important to the future success of those
particular borrowers with regard to sustaining their mortgage payments. In
addition, the Center counsels such borrowers early in the default process in an
attempt to help cure the loan and assist the borrower in meeting their mortgage
obligation.
Loss Reserves
Radian establishes reserves to provide for the estimated costs of settling
claims in respect of loans reported to be in default and loans that are in
default which have not yet been reported to Radian. Consistent with generally
accepted accounting principles and industry accounting practices, Radian does
not establish loss reserves for future claims on insured loans which are not
currently in default. In determining the liability for unpaid losses related to
reported outstanding defaults, Radian establishes loss reserves on a
case-by-case basis. The amount reserved for any particular loan is dependent
upon the characteristics of the loan, the status of the loan as reported by the
servicer of the insured loan as well as the economic condition and estimated
foreclosure period in the area in which the default exists. As the default
progresses closer to foreclosure, the amount of loss reserve for that particular
loan will be increased, in stages, to approximately 100% of Radian's exposure.
ANALYSIS OF PRIMARY RISK IN FORCE
Radian's business strategy has been to disperse risk as widely as possible.
Radian analyzes its portfolio in a number of ways to identify any concentrations
or imbalances in risk dispersion. Radian believes the quality of its insurance
portfolio is affected significantly by:
- the geographic dispersion of the properties securing the insured loans;
- the quality of loan originations;
9
<PAGE> 11
- the types of loans insured (including LTV ratio, purpose of the loan,
type of loan instrument and type of underlying property securing the
loan); and
- the age of the loans insured.
Primary Insurance In Force By Policy Year
The following table sets forth the percentage of Radian's primary risk in
force by policy origination year as of December 31, 1999:
<TABLE>
<S> <C>
1994 and prior....................................... 7.7%
1995................................................. 5.8
1996................................................. 8.8
1997................................................. 12.4
1998................................................. 31.4
1999................................................. 33.9
-----
100.0%
=====
</TABLE>
Geographic Dispersion
The following tables reflect the percentage of direct primary risk in force
on Radian's book of business (by location of property) for the top ten states
and top 15 metropolitan statistical areas ("MSAs") as of December 31, 1999 and
1998:
<TABLE>
<CAPTION>
TOP TEN STATES 1999 1998
- -------------- ---- ----
<S> <C> <C>
California.................................................. 17.2% 18.6%
Florida..................................................... 7.4 7.4
New York.................................................... 6.2 6.5
Texas....................................................... 5.4 5.7
New Jersey.................................................. 4.0 4.0
Georgia..................................................... 4.0 3.9
Illinois.................................................... 3.8 3.5
Pennsylvania................................................ 3.7 3.8
Arizona..................................................... 3.7 3.6
Colorado.................................................... 3.0 2.8
---- ----
Total............................................. 58.4% 59.8%
==== ====
</TABLE>
10
<PAGE> 12
<TABLE>
<CAPTION>
TOP FIFTEEN MSAS 1999 1998
- ---------------- ---- ----
<S> <C> <C>
Los Angeles-Long Beach, CA.................................. 4.4% 4.9%
Chicago, IL................................................. 3.3 3.0
Atlanta, GA................................................. 3.2 3.1
Phoenix/Mesa, AZ............................................ 3.0 2.9
Washington, DC-MD-VA........................................ 2.9 2.7
Philadelphia, PA-NJ......................................... 2.4 2.5
New York, NY................................................ 2.4 2.5
Riverside-San Bernadino, CA................................. 2.1 2.1
Nassau/Suffolk, NY.......................................... 1.9 2.0
Orange County, CA........................................... 1.8 2.0
Minneapolis/St. Paul, MN.................................... 1.6 1.5
Denver, CO.................................................. 1.6 1.4
Houston, TX................................................. 1.5 1.5
Detroit, MI................................................. 1.5 N/A
Dallas, TX.................................................. 1.4 1.6
San Diego, CA............................................... N/A 1.4
---- ----
Total............................................. 35.0% 35.1%
==== ====
</TABLE>
Lender and Product Characteristics
While geographic dispersion is an important component of overall risk
dispersion and it has been a strategy of the Company to reduce its exposure in
the top 10 states and top 15 MSAs, the Company believes the quality of the risk
in force should be considered in conjunction with other elements of risk
dispersion, such as product distribution, as well as Radian's risk management
and underwriting practices.
The following table reflects the percentage of direct risk in force (as
determined on the basis of information available on the date of mortgage
origination) by the categories indicated as of December 31, 1999 and 1998:
DIRECT RISK IN FORCE
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Product Type:
Primary................................................... 94.3% 95.0%
Pool(1)................................................... 5.7 5.0
----- -----
Total............................................. 100.0% 100.0%
===== =====
</TABLE>
- ---------------
(1) Includes traditional and modified pool insurance.
11
<PAGE> 13
DIRECT PRIMARY RISK IN FORCE
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Direct Primary Risk in Force (dollars in millions).......... $20,912 $18,627
Lender Concentration:
Top 10 lenders (by original applicant).................... 43.9% 48.9%
Top 20 lenders (by original applicant).................... 55.6% 58.8%
LTV:
95.01% to 97.00%.......................................... 4.8% 3.1%
90.01% to 95.00%.......................................... 44.3 42.6
85.01% to 90.00%.......................................... 43.9 45.1
85.00% and below.......................................... 7.0 9.2
------- -------
Total............................................. 100.0% 100.0%
======= =======
Loan Type:
Fixed..................................................... 88.9% 90.5%
Adjustable rate mortgage ("ARM") (fully indexed)(1)....... 10.1 8.6
ARM (potential negative amortization)(2).................. 1.0 0.9
------- -------
Total............................................. 100.0% 100.0%
======= =======
Mortgage Term:
15 years and under........................................ 4.0% 4.0%
Over 15 years............................................. 96.0 96.0
------- -------
Total............................................. 100.0% 100.0%
======= =======
Property Type:
Non-condominium (principally single-family detached)...... 96.2% 95.7%
Condominium or cooperative................................ 3.8 4.3
------- -------
Total............................................. 100.0% 100.0%
======= =======
Occupancy Status:
Primary residence......................................... 96.3% 97.3%
Second home............................................... 1.4 1.4
Non-owner occupied........................................ 2.3 1.3
------- -------
Total............................................. 100.0% 100.0%
======= =======
Mortgage Amount:
$200,000 or less.......................................... 82.1% 84.5%
Over $200,000............................................. 17.9 15.5
------- -------
Total............................................. 100.0% 100.0%
======= =======
Loan Purpose:
Purchase.................................................. 79.1% 79.7%
Refinance................................................. 20.9 20.3
------- -------
Total............................................. 100.0% 100.0%
======= =======
</TABLE>
- ---------------
(1) Refers to loans where payment adjustments are the same as mortgage interest
rate adjustments.
(2) Loans with potential negative amortization will not have increasing
principal balances unless interest rates increase as contrasted with
scheduled negative amortization where an increase in loan balance will occur
even if interest rates do not change.
12
<PAGE> 14
One of the most important determinants of claim incidence is the relative
amount of borrower's equity in the home, or down payment. The expectation of
claim incidence on 95s is approximately two times the expected claim incidence
on 90s. Radian believes that the higher premium rates it charges on 95s
adequately reflect the additional risk on these loans. The industry and Radian
have been insuring 97s since 1995. These loans are expected to have a higher
claim incidence than 95s; however, with proper counseling efforts and by
limiting insurance on these loans to sensible affordable housing programs, it is
Radian's belief that the claim incidence should not be materially (more than one
and one-half times) worse than on 95s, although this cannot be certain. Premium
rates on 97s are higher than on 95s to compensate for the additional risk and
the higher expected frequency and severity of claims.
In recent years, Radian has increased its insurance on mortgages identified
by its customers as "affordable housing" loans. These loans are typically made
to low- and moderate-income borrowers in conjunction with special programs
developed by state or local housing agencies, Fannie Mae or Freddie Mac. Such
programs usually include 95s and 97s and may require the liberalization of
certain underwriting guidelines in order to achieve their objectives. Radian's
participation in these programs is dependent upon acceptable borrower
counseling. Early default experience on these programs has been worse than non-
"affordable housing" loans; however, Radian does not believe the ultimate claims
will materially affect its financial results due to the relatively small amount
of such business in Radian's insured book combined with higher premium rates and
risk-sharing elements.
Radian's claim frequency on insured ARMs has been higher than on all other
loan types. Radian believes that the risk on ARM loans is greater than on fixed
rate loans due to possible monthly payment increases if interest rates rise.
Radian believes that 15-year mortgages present a lower level of risk than
30-year mortgages, primarily as a result of the faster amortization and the more
rapid accumulation of borrower equity in the property. Premium rates for 15-year
mortgages are lower to reflect the lower risk.
Radian believes that the risk of claim is also affected by the type of
property securing the insured loan. In Radian's opinion, loans on single-family
detached housing are subject to less risk of claim incidence than loans on other
types of properties. Conversely, loans on attached housing types, particularly
condominiums and cooperatives, are generally considered by Radian to be a higher
risk, due to the higher density of such properties and because a detached unit
is the preferred housing type in most areas. Radian's more stringent
underwriting guidelines on condominiums and cooperatives reflect this higher
expected risk.
Radian believes that the risk of claim on relocation loans and loans
originated by credit unions is extremely low and offers lower premium rates on
such loans to compensate for the lower risk.
Radian believes that loans on non-owner occupied homes purchased for
investment purposes represent a substantially higher risk of claim incidence,
and are subject to greater value declines than loans on either primary or second
homes. Radian underwrites loans on non-owner occupied homes more stringently,
and sometimes requires that the investor indemnify Radian directly for any loss
suffered by Radian. Radian also charges a significantly higher premium rate than
the rate charged for insuring loans on owner occupied homes.
Radian believes that higher priced properties experience wider fluctuations
in value than moderately priced residences and that the income of many people
who buy higher priced homes is less stable than that of people with moderate
incomes. Underwriting guidelines for such higher priced properties reflect this
concern.
INVESTMENT PORTFOLIO
The Company's income from its investment portfolio is one of the Company's
primary sources of cash flow to support its operations and claim payments.
The Company follows an investment policy which at a minimum requires:
- 95% of its investment portfolio to consist of cash equivalents and debt
securities (including redeemable preferred stocks) which, at the date of
purchase, were rated investment grade by a nationally recognized rating
agency (e.g., "BBB" or better by S&P); and
13
<PAGE> 15
- at least 50% of its investment portfolio to consist of cash, cash
equivalents and debt securities (including redeemable preferred stocks)
which, at the date of purchase, were rated the highest investment grade
by a nationally recognized rating agency (e.g., "AAA" by S&P).
The Company is permitted to invest in equity securities (including
convertible debt and convertible preferred stock), provided its equity component
does not exceed 20% of the total investment portfolio. The Company began
investing in equity securities in 1998. In addition, all investments purchased
in 1998 were classified as available for sale in contrast to primarily held to
maturity, as was typical during prior years.
At December 31, 1999, the Company's investment portfolio had a carrying
value of $1,388.7 million and a market value of $1,395.4 million, including
$57.0 million of short-term investments. The Company's investment portfolio did
not include any real estate or mortgage loans. The portfolio included 12
privately placed, investment-grade securities with an aggregate carrying value
of $11.2 million. At December 31, 1999, 99.7% of the Company's investment
portfolio (which excludes cash) consisted of cash equivalents and debt
securities (including redeemable preferred stocks) rated investment grade.
The Company's investment policies and strategies are subject to change
depending upon regulatory, economic and market conditions and the then existing
or anticipated financial condition and operating requirements, including the tax
position, of the Company.
The diversification of the Company's investment portfolio (other than
short-term investments) at December 31, 1999 is shown in the table below:
INVESTMENT PORTFOLIO DIVERSIFICATION
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------
AMORTIZED FAIR
COST VALUE PERCENT(1)
--------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities held to maturity:
U.S. government securities(2).................... $ 10,287 $ 10,266 2.2%
State and municipal obligations(3)............... 458,262 464,991 97.8
-------- -------- -----
Total.................................... $468,549 $475,257 100.0%
======== ======== =====
Fixed maturities available for sale:
U.S. government securities(2).................... $ 24,167 $ 22,201 2.9%
U.S. government agency securities(2)............. 69,553 66,964 8.3
State and municipal obligations(3)............... 623,700 590,318 74.2
Corporate obligations(3)......................... 82,167 83,741 9.8
Redeemable preferred stocks(3)................... 40,258 41,552 4.8
-------- -------- -----
Total.................................... $839,845 $804,776 100.0%
======== ======== =====
Equity securities available for sale:
Equity securities................................ $ 47,719 $ 58,378 100.0%
======== ======== =====
</TABLE>
- ---------------
(1) Percentage of amortized cost.
(2) Substantially all of these securities are backed by the full faith and
credit of the U.S. government.
(3) Consists primarily of investment-grade securities.
14
<PAGE> 16
The following table shows the scheduled maturities of the securities held
in the Company's investment portfolio at December 31, 1999:
INVESTMENT PORTFOLIO SCHEDULED MATURITY(1)
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------
CARRYING
VALUE PERCENT
-------------- -------
(IN THOUSANDS)
<S> <C> <C>
Short-term investments...................................... $ 56,974 4.1%
Less than one year.......................................... 6,085 0.4
One to five years........................................... 158,068 11.4
Five to ten years........................................... 363,552 26.2
Over ten years.............................................. 637,104 45.9
Mortgage-backed securities(2)............................... 66,964 4.8
Redeemable preferred stocks(3).............................. 41,552 3.0
Equity securities(3)........................................ 58,378 4.2
---------- -----
Total............................................. $1,388,677 100.0%
========== =====
</TABLE>
- ---------------
(1) Actual maturities may differ as a result of calls prior to scheduled
maturity.
(2) Substantially all of these securities are backed by the Government National
Mortgage Association ("GNMA").
(3) No stated maturity date.
The following table shows the ratings of the Company's investment portfolio
(other than short-term investments) as of December 31, 1999:
INVESTMENT PORTFOLIO BY S&P RATING
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------
CARRYING
RATING(1) VALUE PERCENT
- --------- -------------- -------
(IN THOUSANDS)
<S> <C> <C>
Fixed maturities:
U.S. government and agency securities..................... $ 99,452 7.5%
AAA....................................................... 752,863 56.5
AA........................................................ 203,593 15.3
A......................................................... 82,012 6.1
BBB....................................................... 50,203 3.8
BB and below and other(2)................................. 3,690 0.3
Not rated(3).............................................. 81,512 6.1
Equity securities........................................... 58,378 4.4
---------- -----
Total............................................. $1,331,703 100.0%
========== =====
</TABLE>
- ---------------
(1) Current ratings assigned by S&P.
(2) These securities are either rated non-investment grade by S&P or are not
rated by any nationally recognized securities rating agency.
(3) These securities are not rated by S&P, but are rated investment grade by at
least one other nationally recognized securities rating agency.
15
<PAGE> 17
REGULATION
Direct Regulation
State Regulation
The Company and its insurance subsidiaries are subject to comprehensive,
detailed regulation principally designed for the protection of policyholders,
rather than for the benefit of investors, by the insurance departments in the
various states where the Company and its insurance subsidiaries are licensed to
transact business. Insurance laws vary from state to state, but generally grant
broad supervisory powers to agencies or officials to examine insurance companies
and enforce rules or exercise discretion affecting almost every significant
aspect of the insurance business.
Insurance regulations relate, among other things, to the licensing of
companies to transact business, claims handling, reinsurance requirements,
premium rates and policy forms offered to customers, financial statements,
periodic reporting, permissible investments and adherence to financial standards
relating to surplus, dividends and other criteria of solvency intended to assure
the satisfaction of obligations to policyholders.
Mortgage insurers are generally restricted to writing residential mortgage
guaranty insurance business only. This restriction essentially prohibits Radian
from using its capital resources in support of other types of insurance or
non-insurance business. The non-insurance businesses of the Company, which
consist of mortgage insurance related services, are not generally subject to
regulation under state insurance laws.
Insurance Holding Company Regulation. All states have enacted legislation
that requires each insurance company in an insurance holding company system to
register with the insurance regulatory authority of its state of domicile and to
furnish to such regulator financial and other information concerning the
operations of companies within the holding company system that may materially
affect the operations, management or financial condition of insurers within the
system.
Because the Company is an insurance holding company, Radian Guaranty is a
Pennsylvania insurance company, and Amerin Guaranty is an Illinois insurance
company, the Pennsylvania and Illinois insurance laws regulate, among other
things, certain transactions in the Company's common stock and certain
transactions between Radian Guaranty, Amerin Guaranty, the Company's other
insurance subsidiaries, and their parent or affiliates. Specifically, no person
may, directly or indirectly, offer to acquire or acquire "control" of the
Company, or insurance subsidiaries, unless such person files a statement and
other documents with the relevant state's Commissioner of Insurance and obtains
such Commissioner's prior approval. The Commissioner may hold a public hearing
on the matter. "Control" is presumed to exist if 10% or more of the Company or
its insurance subsidiaries' voting securities are owned or controlled, directly
or indirectly, by a person, although "control" may or may not be deemed to exist
where a person owns or controls a lesser amount of securities. In addition,
material transactions between the Company and its insurance subsidiaries and
their parent or affiliates are subject to certain conditions, including that
they be "fair and reasonable." These restrictions generally apply to all persons
controlling or under common control with the Company or its insurance
subsidiaries. Certain transactions between the Company's insurance subsidiaries
and their parent or affiliates may not be entered into unless the relevant
Commissioner of Insurance is given 30 days prior notification and does not
disapprove the transaction during such 30-day period.
Dividends. The ability of Radian Guaranty to pay dividends on its common
stock is restricted by certain provisions of the insurance laws of the
Commonwealth of Pennsylvania, its state of domicile. The insurance laws of
Pennsylvania establish a test limiting the maximum amount of dividends which may
be paid without prior approval by the Pennsylvania Insurance Commissioner. Under
such test, Radian Guaranty may pay dividends during any 12-month period in an
amount equal to the greater of (i) 10% of the preceding year-end statutory
policyholders' surplus or (ii) the preceding year's statutory net income. In
accordance with such restrictions, $137.1 million would be available for
dividends in 2000. However, an amendment to the Pennsylvania statute requires
that dividends and other distributions be paid out of an insurer's unassigned
surplus. Because of the unique nature of the method of accounting for
contingency reserves, Radian Guaranty has negative unassigned surplus. Thus,
prior approval by the Pennsylvania Insurance Commissioner is required
16
<PAGE> 18
for Radian Guaranty to pay dividends or make other distributions so long as
Radian Guaranty has negative unassigned surplus. The Pennsylvania Insurance
Commissioner has approved all distributions by Radian Guaranty since the passage
of this amendment and management has every expectation that the Insurance
Department will continue to approve such distributions in the future, provided
that the financial condition of Radian Guaranty does not materially change. The
State of California has a statute requiring mortgage insurers to pay dividends
or make other distributions out of unassigned surplus. Radian Guaranty and the
California Department of Insurance have reached an understanding under which
Radian Guaranty will be able to pay dividends or make other distributions to the
Company provided that the financial condition of Radian Guaranty does not
materially change.
The ability of Amerin Guaranty to pay dividends on its common stock is
restricted by certain provisions of the insurance laws of the State of Illinois,
its state of domicile. The insurance laws of Illinois establish a test limiting
the maximum amount of dividends that may be paid from unassigned surplus by an
insurer without prior approval by the Illinois Insurance Commissioner. Under
such test, Amerin Guaranty may pay dividends during any 12-month period in an
amount equal to the greater of (i) 10 percent of the preceding year-end
statutory policyholders' surplus or (ii) the preceding year's statutory net
income. In accordance with such restrictions, $16.2 million would be available
for dividends in 2000 without prior regulatory approval, which represents the
positive unassigned surplus of Amerin Guaranty at December 31, 1999.
The Company and Radian Guaranty have entered into an agreement, pursuant to
which the Company has agreed to establish and, for as long as any shares of
$4.125 Preferred Stock remain outstanding, maintain a reserve account in an
amount equal to three years of dividend payments on the outstanding shares of
$4.125 Preferred Stock (currently $9.9 million), and not to pay dividends on the
common stock at any time when the amount in the reserve account is less than
three years of dividend payments on the shares of $4.125 Preferred Stock then
outstanding. This agreement between the Company and Radian Guaranty provides
that the holders of the $4.125 Preferred Stock are entitled to enforce the
agreement's provisions as if such holders were signatories to the agreement.
The Company may not pay any dividends on its shares of common stock unless
the Company has paid all accrued dividends on, and has complied with all sinking
fund and redemption obligations relating to, its outstanding shares of $4.125
Preferred Stock.
Radian Guaranty's current excess of loss reinsurance agreement prohibits
the payment of any dividend that would have the effect of reducing the total of
its statutory policyholders' surplus plus its contingency reserve below
$85,000,000. As of December 31, 1999, Radian Guaranty had statutory
policyholders' surplus of $157.7 million and a contingency reserve of $613.5
million, for a total of $771.2 million.
Risk-to-Capital. A number of states and Freddie Mac limit a private
mortgage insurer's risk in force to 25 times the total of the insurer's
policyholders' surplus plus the statutory contingency reserve, commonly known as
the "risk-to-capital" requirement. As of December 31, 1999, Radian's
consolidated risk-to-capital ratio was 16.9 to 1, compared to 17.5 to 1 in 1998.
The Guaranty Agreement between Radian Guaranty and Amerin Guaranty makes it
appropriate to look at risk-to-capital on a consolidated basis.
Reserves. For statutory reporting, Radian is annually required to provide
for additions to the contingency reserve in an amount equal to 50% of earned
premiums. Such amounts cannot be withdrawn for a period of 10 years except under
certain circumstances. The contingency reserve, designed to be a reserve against
catastrophic losses, essentially restricts dividends and other distributions by
Radian. Radian classifies the contingency reserve as a statutory liability. At
December 31, 1999, Radian Guaranty had policyholders' surplus of $157.7 million
and a contingency reserve of $613.5 million and Amerin Guaranty had
policyholders' surplus of $243.0 million and a contingency reserve of $218.0
million.
Premium Rates and Policy Forms. Radian's premium rates and policy forms
are subject to regulation in every state in which it is licensed to transact
business in order to protect policyholders against the adverse effects of
excessive, inadequate or unfairly discriminatory rates and to encourage
competition in the insurance marketplace. In most states, premium rates and
policy forms must be filed prior to their use. In some states, such rates and
forms must also be approved prior to use. Changes in premium rates are subject
to justification,
17
<PAGE> 19
generally on the basis of the insurer's loss experience, expenses and future
trend analysis. The general default experience in the mortgage insurance
industry may also be considered.
Reinsurance. Certain restrictions apply under the laws of several states
to any licensed company ceding business to an unlicensed reinsurer. Under such
laws, if a reinsurer is not admitted or approved in such states, the company
ceding business to the reinsurer cannot take credit in its statutory financial
statements for the risk ceded to such reinsurer absent compliance with certain
reinsurance security requirements. In addition, several states also have special
restrictions on mortgage guaranty insurance and, several states limit the amount
of risk a mortgage insurer may retain with respect to coverage on an insured
loan to 25% of the insured's claim amount. Coverage in excess of 25% (i.e., deep
coverage) must be reinsured.
Examination. The Company's insurance subsidiaries are subject to
examination of their affairs by the insurance departments of each of the states
in which they are licensed to transact business.
New York Circular Letter. The New York Insurance Department (the
"Department") issued Circular Letter No. 2 dated February 1, 1999 (the "Letter")
which discusses their position concerning various transactions between mortgage
guaranty insurance companies licensed in New York and mortgage lenders. The
Letter confirms that captive reinsurance transactions are permissible if they
"constitute a legitimate transfer of risk" and "are fair and equitable to the
parties". The Letter also states that "supernotes/performance notes," "dollar
pool" insurance, and "un-captive captives" violate New York law.
Federal Regulation
RESPA. The origination or refinance of a federally regulated mortgage loan
is a settlement service, and therefore subject to the Real Estate Settlement
Practices Act of 1974, and the regulations promulgated thereunder (collectively,
"RESPA"). In December 1992, regulations were issued which made clear that
mortgage insurance is also a settlement service, and therefore, that mortgage
insurers are subject to the provisions of Section 8(a) of RESPA, which generally
prohibits persons from accepting anything of value for referring real estate
settlement services to any provider of such services. Although many states
prohibit mortgage insurers from giving rebates, RESPA has been interpreted to
cover many non-fee services as well. HUD's interest in pursuing violations of
RESPA has increased awareness of both mortgage insurers and their customers of
the possible sanctions of this law.
Four mortgage insurers have been named in a class action lawsuit alleging
violations of RESPA. Specifically, the lawsuit alleges that these insurers
provided certain of their products and services to lenders at below market
prices in return for an agreement or understanding that the lenders would refer
to them primary mortgage insurance business. The Company has not been named in
this lawsuit. The Company believes its products and services comply with RESPA,
as well as all other applicable laws and regulations.
HMDA. Most originators of mortgage loans are required to collect and
report data relating to a mortgage loan applicant's race, nationality, gender,
marital status and census tract to HUD or the Federal Reserve under the Home
Mortgage Disclosure Act of 1975 ("HMDA"). The purpose of HMDA is to detect
possible discrimination in home lending and, through disclosure, to discourage
such discrimination. Mortgage insurers are not required pursuant to any law or
regulation to report HMDA data, although under the laws of several states,
mortgage insurers are currently prohibited from discriminating on the basis of
certain classifications.
The active mortgage insurers, through their trade association, Mortgage
Insurance Companies of America ("MICA"), entered into an agreement with the
Federal Financial Institutions Examinations Council ("FFIEC") to report the same
data on loans submitted for insurance as is required for most mortgage lenders
under HMDA. Reports of HMDA-type data for the mortgage insurance industry have
been submitted by MICA to the FFIEC since 1993. Management is not aware of any
pending or expected actions by governmental agencies in response to the reports
submitted by MICA to the FFIEC.
Mortgage Insurance Cancellation. The Homeowners Protection Act of 1998
(the "Act") was signed into law on July 29, 1998. The Act imposes certain
cancellation and termination requirements for borrower-paid private mortgage
insurance and requires certain disclosures to borrowers regarding their rights
under the
18
<PAGE> 20
law. The Act also requires certain disclosures for loans covered by lender-paid
private mortgage insurance. Specifically, the Act provides that private mortgage
insurance on most loans originated on or after July 29, 1999 may be canceled at
the request of the borrower once the LTV reaches 80%, provided that certain
conditions are satisfied. Private mortgage insurance must be canceled
automatically once the LTV reaches 78% (or, if the loan is not current on that
date, on the date that the loan becomes current). The Act establishes special
rules for the termination of private mortgage insurance in connection with loans
that are "high risk". The Act does not define "high risk" loans but leaves that
determination to Fannie Mae and Freddie Mac for loans up to the conforming loan
limit and to the mortgagee for any other loan. For "high risk" loans above the
conforming loan limit, private mortgage insurance must be terminated on the date
that the LTV is first scheduled to reach 77%. In no case, however, may private
mortgage insurance be required beyond the midpoint of the amortization period of
the loan if the mortgagor is current on the payments required by the terms of
the mortgage. Radian feels that the Act will have an immaterial impact on the
persistency of Radian's insured loans, on Radian's insured book of business, and
on the Company's financial results.
Other Direct Regulation
Freddie Mac and Fannie Mae
As the most significant purchasers and sellers of conventional mortgage
loans and beneficiaries of private mortgage insurance, Freddie Mac and Fannie
Mae impose requirements on private mortgage insurers so that they may be
eligible to insure loans sold to such agencies. Freddie Mac's current
eligibility requirements impose limitations on the type of risk insured,
standards for the geographic and customer diversification of risk, procedures
for claims handling, acceptable underwriting practices and financial
requirements which generally mirror state insurance regulatory requirements.
These requirements are subject to change from time to time. Fannie Mae also has
eligibility requirements, although such requirements are not published. Radian
Guaranty and Amerin Guaranty are approved mortgage insurers for both Freddie Mac
and Fannie Mae.
In 1995, Freddie Mac and Fannie Mae began to require deeper coverage on
certain loans with LTV ratios greater than 85%. Radian believes that this deeper
coverage did not have a material effect on its financial results, although
premiums earned and the level of risk have increased and the risk-to-capital
ratio is relatively higher as a result of the increase in risk.
In 1995, Radian issued a new Master Policy which applies to all business
written after June 1, 1995. Changes in the terms include a broader scope of
coverage for certain environmental and bankruptcy related claims, and somewhat
more limited rights to reject claim payments, neither of which Radian believes
will have a material adverse effect on its operations or financial results. The
new Master Policy has been approved by Fannie Mae and Freddie Mac, as well as by
all states which require approval of policy forms.
In January 1999, Fannie Mae announced a new program which allows for lower
levels of required mortgage insurance coverage for low down payment 30-year
fixed rate loans approved through its Desktop Underwriter automated underwriting
system. The insurance levels are similar to those required prior to 1995. Fannie
Mae will replace some of the coverage with a layer of investor mortgage
insurance coverage provided by at least two mortgage insurers, one of which will
be Radian. Fannie Mae also announced that it intends to purchase additional
insurance for certain eligible "Flex 97" and investor loans, and Radian has been
selected to provide this coverage on a pilot basis. The Company does not believe
that these developments will adversely affect the demand for or the
profitability of mortgage insurance in the near future.
Indirect Regulation
The Company and Radian are also indirectly, but significantly, impacted by
regulations affecting originators and purchasers of mortgage loans, particularly
Freddie Mac and Fannie Mae, and regulations affecting governmental insurers such
as the FHA and VA. Private mortgage insurers, including Radian, are highly
dependent upon federal housing legislation and other laws and regulations which
affect the demand for private mortgage insurance and the housing market
generally. For example, legislation which increases the number of persons
eligible for FHA or VA mortgages could have a material adverse effect on
Radian's ability to compete with the FHA or VA.
19
<PAGE> 21
The FHA single family loan limits were raised in the fall of 1998. These
increased loan limits vary by geographic region from $109,032 to $197,620.
Radian does not believe that demand for private mortgage insurance has been or
will be materially adversely affected by this change.
Proposals have been advanced which would allow Fannie Mae and Freddie Mac
additional flexibility in determining the amount and nature of alternative
recourse arrangements or other credit enhancements which they could utilize as
substitutes for private mortgage insurance. The Company cannot predict if or
when any of the foregoing legislation or proposals will be adopted, but if
adopted and depending upon the nature and extent of revisions made, demand for
private mortgage insurance may be adversely affected. There can be no assurance
that other federal laws affecting such institutions and entities will not
change, or that new legislation or regulations will not be adopted. In addition,
Fannie Mae and Freddie Mac have entered into, and may in the future seek to
enter into, alternative recourse arrangements or other credit enhancements based
on their existing legislative authority.
In the fall of 1998, Freddie Mac proposed to Congress an amendment to its
charter that would have permitted it to substitute other forms of loss
protection for private mortgage insurance. Although the proposed amendment was
defeated, Freddie Mac may be actively exploring alternatives to conventional
mortgage insurance. Although it is not clear what, if any, changes or new
products may emerge, there is a possibility that any changes in this regard may
materially affect the mortgage insurance industry.
Recent discussions with the Federal Trade Commission with regard to the
adverse action disclosure provisions of the Fair Credit Reporting Act ("FCRA")
have raised the possibility that Radian will need to make certain changes to its
loan servicing and tracking procedures in order to give FCRA adverse action
notices directly to borrowers. The Company does not believe that such changes
will have a material effect on its operations.
There can be no assurance that the above-mentioned federal laws and
regulations or other federal laws and regulations affecting lenders, private and
governmental mortgage insurers, or purchasers of insured mortgage loans, will
not be amended, or that new legislation or regulations will not be adopted, in
either case, in a manner which will adversely affect the demand for private
mortgage insurance.
EMPLOYEES
At December 1999, Radian had approximately 680 employees, of which
approximately one-third were located at its Philadelphia headquarters facility.
Radian's employees are not unionized and management considers employee relations
to be very good.
ITEM 2. PROPERTIES
The Company leases approximately 59,000 square feet for its corporate
headquarters in Philadelphia under leases which expire in 2003. In addition, it
leases space for its Regional, Service Center and On-site offices throughout the
United States comprising approximately 57,000 square feet with leases expiring
between 2000 and 2003. With respect to all facilities, the Company believes it
will be able to obtain satisfactory lease renewal terms.
The Company believes its existing properties are well utilized and are
suitable and adequate for its present circumstances.
Radian maintains a mini-computer network from its corporate data center
located in its headquarters building to support its data processing requirements
for accounting, claims, marketing, risk management, underwriting and
non-insurance operations. In 1997, Radian centralized all computer operations.
All the service centers are linked to the home office in Philadelphia via a high
speed frame-relay network. The centralized environment is based on the Business
Recovery Server ("BRS") architecture. The BRS consists of two geographically
dispersed, identical data centers. Each data center is currently running at 35%
of capacity. Either data center is capable of supporting the entire company. The
data centers are linked via a fibre-optic link allowing simultaneous data
updates through disk shadowing. Each center is part of a separate
20
<PAGE> 22
power grid. This redundant configuration provides disaster tolerance and
automatic back-up, resource sharing and fail-over.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain litigation arising in the normal course
of its business. The Company is contesting the allegations in each pending
action and believes, based on current knowledge and after consultation with
counsel, that the outcome of such litigation will not have a material adverse
effect on the Company's consolidated financial position and results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1999 to a vote of
holders of the Company's common stock.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information with respect to this item is included on page 44 of the
Company's 1999 Annual Report to Stockholders under the caption "Common Stock"
and is hereby incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth in the tables on page 18 of the Company's 1999
Annual Report to Stockholders under the caption "Selected Financial and
Statistical Data" is hereby incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information set forth on pages 37 through 42 in the Company's 1999
Annual Report to Stockholders under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition" is hereby
incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth on page 42 in the Company's 1999 Annual Report to
Stockholders under the caption "Management's Discussion and Analysis of Results
of Operations and Financial Condition -- Quantitative and Qualitative
Disclosures about Market Risk" is hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated statements of income, of changes in common stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1999, and the related consolidated balance sheets of the Company as
of December 31, 1999 and 1998, together with the related notes thereto and the
independent auditors' report, as well as the unaudited quarterly financial data,
all set forth on pages 19 through 36 of the Company's 1999 Annual Report to
Stockholders, are hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
<PAGE> 23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information on the directors and executive officers of the Registrant
is included in the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders, and is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
This information is included in the Company's Proxy Statement for the 2000
Annual Meeting of Stockholders, and is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is included in the Company's Proxy Statement for the 2000
Annual Meeting of Stockholders, and is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is included in the Company's Proxy Statement for the 2000
Annual Meeting of Stockholders, and is hereby incorporated by reference.
PART IV
ITEM 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(a) 1. Financial statements -- The financial statements listed in the
accompanying Index to Consolidated Financial Statements and
Financial Statement Schedules are filed as part of this Form 10-K.
2. Financial statement schedules -- The financial statement schedules
listed in the accompanying Index to Consolidated Financial
Statements and Financial Statement Schedules are filed as part of
this Form 10-K.
3. Exhibits -- The exhibits listed in the accompanying Index to
Exhibits are filed as part of this Form 10-K.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
22
<PAGE> 24
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(ITEMS 14(a) 1 AND 2)
<TABLE>
<CAPTION>
PAGE
----------------------------
ANNUAL
FORM REPORT TO
10-K STOCKHOLDERS*
----------- -------------
<S> <C> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets at December 31, 1999 and 1998... -- 19
Consolidated statements of income for each of the three
years in the period ended December 31, 1999............... -- 20
Consolidated statements of changes in common stockholders'
equity for each of the three years in the period ended
December 31, 1999......................................... -- 21
Consolidated statements of cash flows for each of the three
years in the period ended December 31, 1999............... -- 22
Notes to consolidated financial statements.................. -- 23-35
Independent auditors' report................................ -- 36
FINANCIAL STATEMENT SCHEDULES
Independent auditors' report on financial statement
schedules................................................. F-1
Schedule I -- Summary of investments -- other than
investments in related parties (December 31, 1999)........ F-2
Schedule III -- Condensed financial information of
Registrant (December 31, 1999)............................ F-3 - F-7
Schedule VI -- Reinsurance (December 31, 1999).............. F-8
</TABLE>
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements and notes thereto.
23
<PAGE> 25
INDEX TO EXHIBITS
(ITEM 14(a) 3)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <S>
2.1 Agreement and Plan of Merger dated as of November 22, 1998
between CMAC Investment Corporation and Amerin
Corporation.(13) (Appendix 1)
3.1 Second Amended and Restated Certificate of Incorporation of
the Registrant.(14)
3.2 Amended and restated by-laws of the Registrant.(13) (Exhibit
3.2)
*4.1 Specimen certificate for Common Stock.
4.2 Certificate of Designations relating to $4.125 Preferred
Stock of the Company.(2) (Exhibit 4.2)
4.3 Specimen certificate for $4.125 Preferred Stock of the
Company.(1) (Exhibit 4.3)
4.4 Standstill and Voting Agreement dated October 27, 1992
between the Company and Reliance Group Holdings, Inc.(2)
(Exhibit 4.4)
4.5 Amended and Restated Shareholders Rights Agreement.(11)(13)
(Exhibit 4.4)
10.1 Tax Indemnification Agreement dated October 28, 1992 among
the Company, Commonwealth Land Title Insurance Company,
Reliance Insurance Company and Reliance Group Holdings,
Inc.(2) (Exhibit 10.3)
10.2 Tax Allocation Agreement dated as of April 1, 1992, among
Reliance Insurance Company and certain of its subsidiaries,
including Commonwealth Mortgage Assurance Company.(1)
(Exhibit 10.4)
10.3 Form of Change of Control Agreement dated January 25, 1995,
between the Company and each of Frank P. Filipps, Paul F.
Fischer and C. Robert Quint.(5)(10) (Exhibit 10.6)
10.4 Change of Control Agreements dated October 30, 1997, between
the Company and both Howard S. Yaruss.(7)(10) (Exhibit 10.7)
10.5 Change of Control Agreement dated February 6, 1998, between
the Company and Scott Stevens.(8)(10) (Exhibit 10.5)
*10.6 Change of Control Agreement dated June 9, 1999, between the
Company and Andrew Luczakowsky.(10)
10.7 Change of Control Agreement dated March 12, 1999, between
the Company and Roy J. Kasmar.(13) (Exhibit 10.40)
10.8 Employment Agreement dated March 12, 1999, between the
Company and Roy J. Kasmar.(13) (Exhibit 10.39)
10.9 CMAC Investment Corporation Pension Plan.(2)(10) (Exhibit
10.8)
10.10 CMAC Investment Corporation Savings Incentive Plan, as
amended and restated through January 1, 1994.(5)(10)
(Exhibit 10.9)
10.11 CMAC Investment Corporation 1992 Stock Option Plan as
amended as of January 1, 1995.(5)(10) (Exhibit 10.10)
10.12 Amended and restated CMAC Investment Corporation Equity
Compensation Plan.(8)(10) (Exhibit 10.9) (14) (Appendix V)
*10.13 Radian Group Inc. Deferred Compensation Plan.(10)
10.14 Purchase Agreement dated October 29, 1992 between the
Company and Commonwealth Land Title Insurance Company
regarding $4.125 Preferred Stock.(2) (Exhibit 10.14)
10.15 Registration Rights Agreement dated October 27, 1992 between
the Company and Commonwealth Land Title Insurance
Company.(2) (Exhibit 10.15)
10.16 Form of Commonwealth Mortgage Assurance Company Master
Policy.(1) (Exhibit 10.16)
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <S>
10.17 Risk-to-Capital Ratio Maintenance Agreement between the
Company and Commonwealth Mortgage Assurance Company
regarding matters relating to Moody's financial strength
rating as amended through October 22, 1993.(3) (Exhibit
10.15)
10.18 Reserve Account Agreement dated August 14, 1992, between the
Company and Commonwealth Mortgage Assurance Company
regarding $4.125 Preferred Stock.(1) (Exhibit 10.18)
10.19 First Layer Binder of Reinsurance, effective March 1, 1992,
among Commonwealth Mortgage Assurance Company, Commonwealth
Mortgage Assurance Company of Arizona, and AXA Reinsurance
SA.(1) (Exhibit 10.19)
10.20 Capital Mortgage Reinsurance Company Variable Quota Share
Reinsurance Agreement, effective January 1, 1994, between
Commonwealth Mortgage Assurance Company and its affiliates
and Capital Mortgage Reinsurance Company.(4) (Exhibit 10.19)
10.21 Capital Reinsurance Company Reinsurance Agreement, effective
January 1, 1994, between Commonwealth Mortgage Assurance
Company and Capital Reinsurance Company.(4) (Exhibit 10.20)
10.22 Capital Mortgage Reinsurance Company Variable Quota Share
Reinsurance Agreement, effective January 1, 1995, between
Commonwealth Mortgage Assurance Company and its affiliates
and Capital Mortgage Reinsurance Company.(5) (Exhibit 10.20)
10.23 Capital Mortgage Reinsurance Company Variable Quota Share
Reinsurance Agreement, effective January 1, 1996, between
Commonwealth Mortgage Assurance Company and its affiliates
and Capital Mortgage Reinsurance Company.(6) (Exhibit 10.21)
10.24 Capital Mortgage Reinsurance Company Variable Quota Share
Reinsurance Agreement, effective January 1, 1997, between
Commonwealth Mortgage Assurance Company and its affiliates
and Capital Mortgage Reinsurance Company.(7) (Exhibit 10.22)
*10.25 Guaranty Agreement, effective August 11, 1999, between
Radian Guaranty Inc. and Amerin Guaranty Corporation.
10.26 Amended form of Commonwealth Mortgage Assurance Company
Master Policy, effective June 1, 1995.(4) (Exhibit 10.22)
10.27 CMAC Investment Corporation 1997 Employee Stock Purchase
Plan.(9)
10.28 Amended and Restated Amerin Corporation 1992 Long-Term
Incentive Plan.(13) (Exhibit 10.33)
*22.1 Revised Subsidiaries of the Company.
*23.1 Consent of Deloitte & Touche LLP.
*23.2 Consent of Ernst & Young LLP.
*27 Financial Data Schedule.
*99 Independent Auditors Report from Ernst & Young LLP.
</TABLE>
- ---------------
* Filed herewith.
(1) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Registration Statement on Form S-1 filed
August 24, 1992 and amendments thereto (File No. 33-51188).
(2) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K filed March
30, 1993.
(3) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K filed March
30, 1994.
(4) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K filed March
30, 1995.
25
<PAGE> 27
(5) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K filed March
29, 1996.
(6) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K filed March
31, 1997.
(7) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K filed March
31, 1998.
(8) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K filed April
15, 1999.
(9) Incorporated by reference filed in the Registrant's Registration Statement
on Form S-8 filed November 19, 1997 (File No. 333-40623).
(10) Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c) of Form 10-K.
(11) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrants' Report on Form 8-K filed May 1, 1998.
(12) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrants' Report on Form 8-K filed November 25,
1998.
(13) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrants' Registration Statement on Form S-4 filed
May 6, 1999 (File No. 333-77957).
(14) Incorporated by reference to the appendix identified in parentheses, filed
as an appendix to the DEF 14A filed May 11, 1999.
26
<PAGE> 28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 30, 2000.
Radian Group Inc.
By: /s/ FRANK P. FILIPPS
------------------------------------
Frank P. Filipps
(principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 30, 2000 by the following persons on
behalf of the registrant and in the capacities indicated.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
/s/ FRANK P. FILIPPS Chairman of the Board, Chief Executive Officer
- ----------------------------------------------------- and Director
Frank P. Filipps
/s/ ROY J. KASMAR President, Chief Operating Officer and
- ----------------------------------------------------- Director
Roy J. Kasmar
/s/ C. ROBERT QUINT Executive Vice President, Chief Financial
- ----------------------------------------------------- Officer (principal accounting officer)
C. Robert Quint
/s/ DAVID C. CARNEY Director
- -----------------------------------------------------
David C. Carney
/s/ HOWARD B. CULANG Director
- -----------------------------------------------------
Howard B. Culang
/s/ CLAIRE M. FAGIN, PH.D., R.N. Director
- -----------------------------------------------------
Claire M. Fagin, Ph.D., R.N
/s/ ROSEMARIE B. GRECO Director
- -----------------------------------------------------
Rosemarie B. Greco
/s/ STEPHEN T. HOPKINS Director
- -----------------------------------------------------
Stephen T. Hopkins
/s/ JAMES W. JENNINGS Director
- -----------------------------------------------------
James W. Jennings
/s/ JAMES C. MILLER Director
- -----------------------------------------------------
James C. Miller
/s/ RONALD W. MOORE Director
- -----------------------------------------------------
Ronald W. Moore
</TABLE>
27
<PAGE> 29
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
/s/ ROBERT W. RICHARDS Director
- -----------------------------------------------------
Robert W. Richards
/s/ ANTHONY W. SCHWEIGER Director
- -----------------------------------------------------
Anthony W. Schweiger
/s/ LARRY SWEDROE Director
- -----------------------------------------------------
Larry Swedroe
/s/ HERBERT WENDER Director
- -----------------------------------------------------
Herbert Wender
</TABLE>
28
<PAGE> 30
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Radian Group Inc.
Philadelphia, Pennsylvania
We have audited the consolidated financial statements of Radian Group Inc.
and subsidiaries (the "Company") as of December 31, 1999 and 1998, and for each
of the three years in the period ended December 31, 1999, and have issued our
report thereon dated March 10, 2000, which makes reference to the report of
other auditors; such consolidated financial statements and report are included
in your 1999 Annual Report to Stockholders and are incorporated herein by
reference. Our audits also included the financial statement schedules of Radian
Group Inc. and subsidiaries, listed in Item 14. These consolidated financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
based on our audits and the report of other auditors, such consolidated
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
- ---------------------------------------------------------
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
March 10, 2000
F-1
<PAGE> 31
RADIAN GROUP INC.
SCHEDULE I
SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
AMOUNT
AT WHICH
SHOWN ON
AMORTIZED FAIR THE BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
------------------ ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
U. S. government and government agencies and
authorities..................................... $ 104,007 $ 99,431 $ 99,452
State and municipal obligations................... 1,081,962 1,055,309 1,048,580
Corporate obligations............................. 82,167 83,741 83,741
Redeemable preferred stocks....................... 40,258 41,552 41,552
---------- ---------- ----------
Total fixed maturities................................. 1,308,394 1,280,033 1,273,325
Equity securities...................................... 47,719 58,378 58,378
Short-term investments................................. 56,974 56,974 56,974
---------- ---------- ----------
Total investments other than investments in related
parties.............................................. $1,413,087 $1,395,385 $1,388,677
========== ========== ==========
</TABLE>
F-2
<PAGE> 32
RADIAN GROUP INC.
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
PARENT COMPANY ONLY
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1999 1998
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE AMOUNTS) ---------- --------
<S> <C> <C>
ASSETS
Investments
Fixed maturities held to maturity -- at amortized cost
(fair value $10,141 and $10,726)....................... $ 9,781 $ 9,757
Fixed maturities available for sale -- at fair value
(amortized cost $391 and $391)......................... 378 409
Short-term investments.................................... 705 175
Cash........................................................ 106 2,385
Investment in subsidiaries, at equity in net assets......... 1,091,306 957,815
Federal income taxes........................................ 268 3,913
Other assets................................................ 876 3,880
---------- --------
$1,103,420 $978,334
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable -- affiliates.............................. $ 927 $ 3,244
Accounts payable -- other................................... 1,337 435
Notes payable............................................... 3,487 2,043
Other liabilities........................................... 413 413
---------- --------
6,164 6,135
---------- --------
Redeemable preferred stock, par value $.001 per share;
800,000 shares issued and outstanding -- at redemption
value..................................................... 40,000 40,000
---------- --------
Common stockholders' equity
Common stock, par value $.001 per share; 80,000,000 shares
authorized; 37,307,504 and 36,842,550 shares,
respectively, issued and outstanding................... 37 37
Additional paid-in capital................................ 524,408 507,282
Retained earnings......................................... 548,684 407,406
Accumulated other comprehensive (loss) income............. (15,873) 17,474
---------- --------
1,057,256 932,199
---------- --------
$1,103,420 $978,334
========== ========
</TABLE>
See supplementary notes.
F-3
<PAGE> 33
RADIAN GROUP INC.
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME
PARENT COMPANY ONLY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues
Equity in undistributed net income of subsidiaries....... $160,584 $140,291 $113,109
Dividends received from subsidiaries..................... -- 4,000 4,300
Net investment income.................................... 200 669 899
Gain (loss) on sale of investments, net.................. -- 7 (3)
-------- -------- --------
160,784 144,967 118,305
-------- -------- --------
Expenses
Operating expenses....................................... 2,241 3,691 3,345
Merger expenses.......................................... 12,812 -- --
-------- -------- --------
15,053 3,691 3,345
-------- -------- --------
Pretax income.............................................. 145,731 141,276 114,960
Income tax benefit......................................... 2,407 961 166
-------- -------- --------
Net income................................................. $148,138 $142,237 $115,726
======== ======== ========
</TABLE>
See supplementary notes.
F-4
<PAGE> 34
RADIAN GROUP INC.
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
PARENT COMPANY ONLY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities
Net income............................................ $ 148,138 $ 142,237 $ 115,726
Adjustments to reconcile net income to net cash
provided by operating activities...................
Equity in undistributed net income of subsidiaries.... (160,584) (140,291) (113,109)
Increase (decrease) in federal income taxes........... 3,645 (1,910) (740)
Increase in notes payable............................. 1,444 2,009 34
Net change in other assets, accounts payable and other
liabilities........................................ 1,589 (76) 613
--------- --------- ---------
Net cash (used in) provided by operating activities..... (5,768) 1,969 2,524
--------- --------- ---------
Cash flows from investing activities
Proceeds from sales of fixed maturity investments
available for sale................................. -- 1,600 1,198
Purchases of fixed maturity investments available for
sale............................................... -- (1,205) --
(Purchases) sales of short-term investments -- net.... (530) (140) 807
Other................................................. (16) (23) (21)
--------- --------- ---------
Net cash (used in) provided by investing activities..... (546) 232 1,984
--------- --------- ---------
Cash flows from financing activities
Dividends paid........................................ (6,860) (6,019) (5,996)
Capital contribution.................................. (2,593) (1,759) (1,277)
Proceeds from issuance of common stock................ 13,488 7,882 2,665
--------- --------- ---------
Net cash provided by (used in) financing activities..... 4,035 (104) (4,608)
--------- --------- ---------
Decrease (increase) in cash............................. (2,279) 2,305 (100)
Cash, beginning of year................................. 2,385 80 180
--------- --------- ---------
Cash, end of year....................................... $ 106 $ 2,385 $ 80
========= ========= =========
</TABLE>
See supplementary notes.
F-5
<PAGE> 35
RADIAN GROUP INC.
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
SUPPLEMENTARY NOTES
NOTE A
The accompanying Parent Company financial statements should be read in
conjunction with the Consolidated Financial Statements and Notes to Consolidated
Financial Statements appearing on pages 19 through 35 of the Radian Group Inc.
1999 Annual Report to Stockholders.
NOTE B
On November 22, 1998, the board of directors of CMAC Investment Corporation
("CMAC") and the board of directors of Amerin Corporation 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 "Company"). At the same time, the name of the Company's main
operating subsidiary, Commonwealth Mortgage Assurance Company, was changed to
Radian Guaranty Inc. ("Radian Guaranty"), while the main operating subsidiary of
Amerin Corporation, Amerin Guaranty Corporation ("Amerin Guaranty"), retained
its name. As a result of the merger, Amerin Corporation stockholders received
0.5333 shares (14,168,635 shares were issued) of CMAC common stock in a tax-free
exchange for each share of Amerin Corporation common stock that they owned. CMAC
stockholders continued to own their existing shares after the merger. The merger
transaction has been accounted for on a pooling of interests basis and,
therefore, all financial statements presented reflect the combined entity.
The Company's preferred stock is entitled to cumulative annual dividends of
$4.125 per share, payable quarterly in arrears. The preferred stock is
redeemable at the option of the Company at $54.125 per share on or after August
15, 2002, and declining to $50.00 per share on or after August 15, 2005 (plus in
each case accumulated and unpaid dividends), or is subject to mandatory
redemption at a redemption price of $50.00 per share plus accumulated and unpaid
dividends based upon specified annual sinking fund requirements from 2002 to
2011.
The Company is a holding company whose principal source of income is
dividends from Radian Guaranty and Amerin Guaranty. The ability of Radian
Guaranty to pay dividends on its common stock is restricted by certain
provisions of the insurance laws of the Commonwealth of Pennsylvania, its state
of domicile. The insurance laws of Pennsylvania establish a test limiting the
maximum amount of dividends which may be paid by an insurer without prior
approval by the Pennsylvania Insurance Commissioner. Under such test, Radian
Guaranty may pay dividends during any 12-month period in an amount equal to the
greater of (i) 10% of the preceding year-end statutory policyholders' surplus or
(ii) the preceding year's statutory net income. In accordance with such
restrictions, $137,094,000 would be available for dividends in 2000. However, an
amendment to the Pennsylvania statute requires that dividends and other
distributions be paid out of an insurer's unassigned surplus. Because of the
unique nature of the method of accounting for contingency reserves, Radian
Guaranty has negative unassigned surplus. Thus, prior approval by the
Pennsylvania Insurance Commissioner is required for Radian Guaranty to pay
dividends or make other distributions so long as Radian Guaranty has negative
unassigned surplus. The Pennsylvania Insurance Commissioner has approved all
distributions by Radian Guaranty since the passage of this amendment and
management has every expectation that the Commissioner of Insurance will
continue to approve such distributions in the future, provided that the
financial condition of Radian Guaranty does not materially change. The State of
California has a statute requiring mortgage insurers to pay dividends or make
other distributions out of unassigned surplus. Radian Guaranty and the
California Department of Insurance have reached an understanding under which
Radian Guaranty will be able to pay dividends or make other distributions to the
Company provided that the financial condition of Radian Guaranty does not
materially change.
F-6
<PAGE> 36
RADIAN GROUP INC.
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
SUPPLEMENTARY NOTES -- (CONTINUED)
The ability of Amerin Guaranty to pay dividends on its common stock is
restricted by certain provisions of the insurance laws of the State of Illinois,
its state of domicile. The insurance laws of Illinois establish a test limiting
the maximum amount of dividends that may be paid from positive unassigned
surplus by an insurer without prior approval by the Illinois Insurance
Commissioner. Under such test, Amerin Guaranty may pay dividends during any
12-month period in an amount equal to the greater of (i) 10% of the preceding
year-end statutory policyholders' surplus or (ii) the preceding year's statutory
net income. In accordance with such restrictions, $16,177,000 would be available
for dividends in 2000 without prior regulatory approval, which represents the
positive unassigned surplus of Amerin Guaranty at December 31, 1999.
Radian Guaranty's current excess of loss reinsurance arrangement prohibits
the payment of any dividend which would have the effect of reducing the total of
its statutory policyholders' surplus plus its contingency reserve below
$85,000,000. As of December 31, 1999, Radian Guaranty had statutory
policyholders' surplus of $157,693,000 and a contingency reserve of
$613,537,000, for a total of $771,230,000.
The Company and Radian Guaranty have entered into an agreement, pursuant to
which the Company has agreed to establish and, for so long as any shares of
$4.125 Preferred Stock remain outstanding, maintain a reserve account in an
amount equal to three years of dividend payments on the outstanding shares of
$4.125 Preferred Stock (currently $9,900,000), and not to pay dividends on the
common stock at any time when the amount in the reserve account is less than
three years of dividend payments on the shares of $4.125 Preferred Stock then
outstanding. This agreement between the Company and Radian Guaranty provides
that the holders of the $4.125 Preferred Stock are entitled to enforce the
agreement's provisions as if such holders were signatories to the agreement.
The Company may not pay any dividends on shares of common stock unless the
Company has paid all accrued dividends on and has complied with all sinking fund
and redemption obligations relating to its outstanding shares of $4.125
Preferred Stock.
F-7
<PAGE> 37
RADIAN GROUP INC.
SCHEDULE VI -- REINSURANCE
MORTGAGE INSURANCE PREMIUMS EARNED
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------- --------- --------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1999................................ $517,364 $44,816 $ 87 $472,635 0.02%
======== ======= ==== ========
1998................................ $448,668 $43,545 $129 $405,252 0.03%
======== ======= ==== ========
1997................................ $355,641 $25,783 $181 $330,039 0.05%
======== ======= ==== ========
</TABLE>
F-8
<PAGE> 38
This document has been printed entirely on recycled paper.
<PAGE> 39
SELECTED FINANCIAL AND STATISTICAL DATA (1)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(in millions, except per-share amounts and ratios)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME
Premiums earned $ 472.6 $ 405.3 $ 330.0 $ 250.3 $ 164.7
Net investment income 67.3 59.9 52.4 46.9 33.6
Total revenues 552.8 483.6 390.0 302.0 201.3
Provision for losses 174.1 166.4 147.4 112.6 65.6
Policy acquisition costs and other
operating expenses 121.4 118.2 83.4 67.2 53.2
Compensation charge from initial public
offering -- -- -- -- 35.7
Merger expenses 37.8 1.1 -- -- --
Pretax income 219.5 197.9 159.2 122.2 46.8
Net income 148.1 142.2 115.7 90.5 28.0
Net income per share (2) (3) $ 3.83 $ 3.67 $ 2.99 $ 2.35 $ 0.67
Average shares outstanding (2) (3) 37.9 37.8 37.5 37.2 29.2
CONSOLIDATED BALANCE SHEET
Assets $ 1,776.7 $ 1,513.4 $ 1,222.7 $ 1,015.0 $ 856.7
Investments 1,388.7 1,175.5 974.7 842.0 734.5
Unearned premiums 54.9 75.5 72.7 73.9 68.8
Reserve for losses 335.6 245.1 179.9 126.9 74.4
Redeemable preferred stock 40.0 40.0 40.0 40.0 40.0
Common stockholders' equity 1,057.3 932.2 780.16 657.0 572.8
Book value per share (3) $ 28.34 $ 25.30 $ 21.38 $ 18.10 $ 15.86
STATUTORY RATIOS
Loss ratio 37.6% 42.0% 46.1% 46.7% 41.8%
Expense ratio (4) 24.2 24.6 22.5 24.5 31.5
---------- ---------- ---------- ---------- ----------
Combined ratio 61.8% 66.6% 68.6% 71.2% 73.3%
OTHER STATUTORY DATA
New primary insurance written $ 33,256 $ 37,067 $ 21,481 $ 20,018 $ 16,531
Direct primary insurance in force 94,671 81,910 67,294 54,215 40,624
Direct primary risk in force 21,645 18,627 15,158 12,023 8,661
Direct pool risk in force 1,398 993 601 342 223
</TABLE>
(1) Effective June 9, 1999, Radian Group Inc. was formed by the merger of
CMAC Investment Corporation and Amerin Corporation pursuant to an
Agreement and Plan of Merger dated November 22, 1998. The transaction
was accounted for on a pooling of interests basis and, therefore, all
financial statements presented reflect the combined entity. See note 1
of Notes to Consolidated Financial Statements set forth on page 23
herein.
(2) Diluted net income per share and average share information per
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." See note 1 of Notes to Consolidated Financial Statements set
forth on page 24 herein.
(3) All share and per-share data for prior periods have been restated to
reflect the stock split in 1996.
(4) 1999 expense ratio calculated net of merger expenses of $21.8 million
recognized by statutory companies.
18
<PAGE> 40
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
(in thousands, except share and per-share amounts)
ASSETS
Investments
Fixed maturities held to maturity--at amortized cost
(fair value $475,257 and $512,368) $ 468,549 $ 477,518
Fixed maturities available for sale--at fair value
(amortized cost $839,845 and $621,581) 804,776 646,148
Equity securities--at fair value
(cost $47,719 and $25,109) 58,378 27,425
Short-term investments 56,974 24,361
Cash 7,507 9,377
Deferred policy acquisition costs 61,680 48,983
Prepaid federal income taxes 204,701 152,864
Provisional losses recoverable 40,065 32,718
Other assets 74,082 94,011
----------- -----------
$ 1,776,712 $ 1,513,405
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Unearned premiums $ 54,925 $ 75,538
Reserve for losses 335,584 245,125
Deferred federal income taxes 206,168 166,276
Accounts payable and accrued expenses 82,779 54,267
----------- -----------
679,456 541,206
----------- -----------
Redeemable preferred stock, par value $.001 per share;
800,000 shares issued and outstanding--at redemption
value 40,000 40,000
----------- -----------
Commitments and contingencies
Common stockholders' equity
Common stock, par value $.001 per share; 80,000,000
shares authorized; 37,307,504 and 36,842,550 shares,
respectively, issued and outstanding 37 37
Additional paid-in capital 524,408 507,282
Retained earnings 548,684 407,406
Accumulated other comprehensive (loss) income (15,873) 17,474
----------- -----------
1,057,256 932,199
----------- -----------
$ 1,776,712 $ 1,513,405
=========== ===========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 41
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES
Net premiums written $ 451,817 $ 406,467 $ 327,766
Decrease (increase) in unearned premiums 20,818 (1,215) 2,273
--------- --------- ---------
Premiums earned 472,635 405,252 330,039
Net investment income 67,259 59,862 52,394
Gain on sales of investments, net 1,568 3,156 1,973
Other income 11,349 15,317 5,575
--------- --------- ---------
552,811 483,587 389,981
--------- --------- ---------
EXPENSES
Provision for losses 174,143 166,377 147,421
Policy acquisition costs 58,777 58,479 41,807
Other operating expenses 62,659 59,720 41,592
Merger expenses 37,766 1,098 --
--------- --------- ---------
333,345 285,674 230,820
--------- --------- ---------
Pretax income 219,466 197,913 159,161
Provision for income taxes (71,328) (55,676) (43,435)
--------- --------- ---------
Net income 148,138 142,237 115,726
Dividends to preferred stockholder 3,300 3,300 3,300
--------- --------- ---------
Net income available to common
stockholders $ 144,838 $ 138,937 $ 112,426
========= ========= =========
Basic net income per share $ 3.92 $ 3.78 $ 3.09
========= ========= =========
Diluted net income per share $ 3.83 $ 3.67 $ 2.99
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
20
<PAGE> 42
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
COMMON PAID-IN RETAINED INCOME
STOCK CAPITAL EARNINGS (LOSS) TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE, JANUARY 1, 1997 $ 36 $ 492,541 $ 161,458 $ 2,918 $ 656,953
Comprehensive income:
Net income -- 115,726 115,726
Unrealized holding gains
arising during period, net
of tax of $5,658 -- 10,508
Less: Reclassification
adjustment for net gains
included in net income, net
of tax of $693 -- (1,288)
-----------
Net unrealized gain on
investments, net of tax of
$4,965 -- -- 9,220 9,220
-----------
Comprehensive income 124,946
Issuance of common stock -- 4,195 -- 4,195
Dividends -- -- (5,996) -- (5,996)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 36 496,736 271,188 12,138 780,098
Comprehensive income:
Net income -- -- 142,237 -- 142,237
Unrealized holding gains
arising during period, net
of tax of $3,914 -- -- 7,270
Less: Reclassification
adjustment for net gains
included in net income, net
of tax of $1,041 -- (1,934)
-----------
Net unrealized gain on
investments, net of tax of
$2,873 5,336 5,336
-----------
Comprehensive income 147,573
Issuance of common stock 1 10,546 10,547
Dividends -- -- (6,019) -- (6,019)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 37 507,282 407,406 17,474 932,199
Comprehensive income:
Net income -- -- 148,138 -- 148,138
Unrealized holding losses
arising during period, net
of tax benefit of $17,398 -- -- (32,311)
Less: Reclassification adjustment
for net gains included in net
income, net of tax of $558 -- (1,036)
-----------
Net unrealized loss on
investments, net of tax
benefit of $17,956 (33,347) (33,347)
-----------
Comprehensive income 114,791
Issuance of common stock -- 17,126 17,126
Dividends -- -- (6,860) -- (6,860)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 $ 37 $ 524,408 $ 548,684 $ (15,873) $ 1,057,256
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE> 43
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 148,138 $ 142,237 $ 115,726
Adjustments to reconcile net income to net cash
provided by operating activities
Gain on sales of fixed maturity investments, net (1,478) (3,182) (1,973)
(Gain) loss on sales of equity securities
available for sale, net (90) 26 --
(Decrease) increase in unearned premiums (20,613) 2,854 (1,225)
Amortization of deferred policy acquisition costs 58,777 58,479 41,807
Increase in deferred policy acquisition costs (71,474) (74,661) (45,139)
Increase in reserve for losses 90,459 65,217 52,972
Increase in deferred federal income taxes 57,849 49,814 37,023
Increase in prepaid federal income taxes (51,837) (45,993) (35,307)
Increase in provisional losses recoverable (7,347) (1,393) (13,126)
Net change in other assets, accounts payable and
accrued expenses 45,589 (3,340) (2,646)
--------- --------- ---------
Net cash provided by operating activities 247,973 190,058 148,112
--------- --------- ---------
Cash flows from investing activities
Proceeds from sales of fixed maturity investments
available for sale 131,170 234,259 71,426
Proceeds from sales of fixed maturity investments
held to maturity 10 1,031 --
Proceeds from sales of equity securities available
for sale 339 698 --
Proceeds from redemptions of fixed maturity
investments available for sale 24,769 23,973 13,076
Proceeds from redemptions of fixed maturity
investments held to maturity 19,981 13,843 4,945
Proceeds from redemptions of equity securities
available for sale 2,737 125 --
Purchases of fixed maturity investments available
for sale (380,683) (421,754) (128,344)
Purchases of fixed maturity investments held to
maturity -- -- (98,875)
Purchases of equity securities available for sale (25,595) (25,958) --
(Purchases) sales of short-term investments, net (32,560) (10,685) 11,487
Sales (purchases) of property and equipment, net 1,191 (6,468) (15,204)
Other (1,468) (1,093) (2,337)
--------- --------- ---------
Net cash used in investing activities (260,109) (192,029) (143,826)
--------- --------- ---------
Cash flows from financing activities
Dividends paid (6,860) (6,019) (5,996)
Proceeds from issuance of common stock 17,126 10,547 4,165
--------- --------- ---------
Net cash provided by (used in) financing activities 10,266 4,528 (1,831)
--------- --------- ---------
(Decrease) increase in cash (1,870) 2,557 2,455
Cash, beginning of year 9,377 6,820 4,365
--------- --------- ---------
Cash, end of year $ 7,507 $ 9,377 $ 6,820
========= ========= =========
Supplemental disclosures of cash flow information
Income taxes paid $ 61,450 $ 50,700 $ 40,100
========= ========= =========
Interest paid $ 181 $ 66 $ --
========= ========= =========
</TABLE>
See Notes To Consolidated Financial Statements.
22
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On November 22, 1998, the board of directors of CMAC Investment Corporation
("CMACINV") and the board of directors of Amerin Corporation each approved an
Agreement and Plan of Merger pursuant to which CMACINV 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 "Company"). At the same time, the name of the Company's main
operating subsidiary, Commonwealth Mortgage Assurance Company, was changed to
Radian Guaranty Inc. ("Radian Guaranty"), while the main operating subsidiary of
Amerin Corporation, Amerin Guaranty Corporation ("Amerin Guaranty"), retained
its name. As a result of the merger, Amerin Corporation stockholders received
0.5333 shares (14,168,635 shares were issued) of CMACINV common stock in a
tax-free exchange for each share of Amerin Corporation common stock that they
owned. CMACINV's stockholders continued to own their existing shares after the
merger. The merger transaction has been accounted for on a pooling of interests
basis and, therefore, all financial statements presented reflect the combined
entity. There were no intercompany transactions requiring elimination for any
periods presented prior to the merger.
The operating results of the separate companies through the merger in 1999 and
prior to the merger are as follows (in thousands):
<TABLE>
<CAPTION>
NET NET
REVENUES INCOME
-------- --------
<S> <C> <C>
For the year ended December 31, 1999:
Radian Group Inc. $419,611 $110,785
CMAC Investment Corporation (through March 31, 1999) 89,787 22,878
Amerin Corporation (through March 31, 1999) 43,413 14,475
-------- --------
Combined $552,811 $148,138
======== ========
For the year ended December 31, 1998:
CMAC Investment Corporation $332,966 $ 91,054
Amerin Corporation 150,621 51,183
-------- --------
Combined $483,587 $142,237
======== ========
For the year ended December 31, 1997:
CMAC Investment Corporation $277,310 $ 74,967
Amerin Corporation 112,671 40,759
-------- --------
Combined $389,981 $115,726
======== ========
</TABLE>
The Company, through its wholly owned subsidiaries, Radian Guaranty and
Amerin Guaranty (together referred to as "Radian"), provides private mortgage
insurance and risk management services to mortgage lending institutions located
throughout the United States. Consistent with the rest of the private mortgage
insurance industry, Radian's highest state concentration of risk is in
California. As of December 31, 1999, California accounted for 17.6% of Radian's
total direct primary insurance in force and 11.7% of Radian's total direct pool
insurance in force. In addition, California accounted for 16.6% of Radian's
direct primary new insurance written for the year ended December 31, 1999. The
largest single customer of Radian (including branches and affiliates of such
customer), measured by new insurance written, accounted for 12.2% of new
insurance written during 1999, compared to 18.3% in 1998 and 15.8% in 1997.
Private mortgage insurance protects lenders from default-related losses on
residential first mortgage loans made to home buyers who make down payments of
less than 20% of the purchase price and facilitates the sale of these mortgages
in the secondary market.
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles and include the accounts of all
subsidiaries. All material intercompany balances and transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
INSURANCE PREMIUMS
Statement of Financial Accounting Standards ("SFAS") No. 60, "Accounting and
Reporting by Insurance Enterprises," specifically excludes mortgage guaranty
insurance from its guidance relating to the earning of insurance premiums.
Consistent with generally accepted accounting principles and industry accounting
practices, premiums written on an annual and multiyear basis are initially
deferred as unearned premiums and earned over the policy term, and premiums
written on a monthly basis are primarily earned as they are received. Annual
premiums are amortized on a monthly, straight-line basis. Multiyear premiums
are amortized over the terms of the contracts in accordance with the
anticipated claim payment pattern based on historical industry experience.
Ceded premiums written are initially set up as prepaid reinsurance and are
amortized in accordance with direct premiums earned.
23
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
RESERVE FOR LOSSES
The reserve for losses consists of the estimated cost of settling claims on
defaults reported and defaults that have occurred but have not been reported.
SFAS 60 specifically excludes mortgage guaranty insurance from its guidance
relating to the reserve for losses. Consistent with generally accepted
accounting principles and industry accounting practices, the Company does not
establish loss reserves for future claims on insured loans that are not
currently in default. In determining the liability for unpaid losses related to
reported outstanding defaults, the Company establishes loss reserves on a
case-by-case basis. The amount reserved for any particular loan is dependent
upon the characteristics of the loan, the status of the loan as reported by the
servicer of the insured loan as well as the economic condition and estimated
foreclosure period in the area in which the default exists. As the default
progresses closer to foreclosure, the amount of loss reserve for that particular
loan is increased, in stages, to approximately 100% of the Company's exposure
and that adjustment is included in current operations. The Company also reserves
for defaults that have occurred but have not been reported using historical
information on defaults not reported on a timely basis by lending institutions.
The estimates are continually reviewed and, as adjustments to these liabilities
become necessary, such adjustments are reflected in current operations.
DEFERRED POLICY ACQUISITION COSTS
Costs associated with the acquisition of mortgage insurance business, consisting
of compensation and other policy issuance and underwriting expenses, are
initially deferred. Because SFAS 60 specifically excludes mortgage guaranty
insurance from its guidance relating to the amortization of deferred policy
acquisition costs, amortization of these costs for each underwriting year book
of business are charged against revenue in proportion to estimated gross profits
over the life of the policies using the guidance provided by SFAS No. 97,
"Accounting and Reporting by Insurance Enterprises For Certain Long Duration
Contracts and for Realized Gains and Losses From the Sale of Investments." This
includes accruing interest on the unamortized balance of capitalized acquisition
costs. The estimate for each underwriting year is updated annually to reflect
actual experience and any changes to key assumptions such as persistency or loss
development.
INCOME TAXES
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and the tax basis of the Company's assets and
liabilities using enacted tax rates applicable to future years.
INVESTMENTS
The Company is required to group its investment portfolio in three categories:
held to maturity, available for sale, and trading securities. Debt securities
for which the Company has the positive intent and ability to hold to maturity
are classified as held to maturity and reported at amortized cost. Debt and
equity securities purchased and held principally for the purpose of selling them
in the near term are classified as trading securities and are reported at fair
value, with unrealized gains and losses included in earnings. The Company had no
trading securities in its portfolio at December 31, 1999 or 1998. All other
investments are classified as available for sale and are reported at fair value,
with unrealized gains and losses (net of tax) reported in a separate component
of stockholders' equity. Realized gains and losses are determined on a specific
identification method and are included in income.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methodology was used by the Company in estimating the fair value
disclosures for its financial instruments: fair values for fixed maturity
securities (including redeemable preferred stock) and equity securities are
based on quoted market prices, dealer quotes, and prices obtained from
independent pricing services. The carrying amounts reported on the balance sheet
for cash and short-term investments approximate their fair values.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS 123 requires expanded
disclosures of stock-based compensation arrangements with employees and
encourages, but does not require, the recognition of compensation expense for
the fair value of stock options and other equity instruments granted as
compensation to employees. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," "APB 25", and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock.
NET INCOME PER SHARE
In March 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
128, "Earnings Per Share." SFAS 128 requires the Company to disclose both
"basic" earnings per share and "diluted" earnings per share. 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.
24
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The calculation of the basic and diluted net income per share was as follows (in
thousands, except per-share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income $ 148,138 $ 142,237 $ 115,726
Preferred stock dividend adjustment (3,300) (3,300) (3,300)
--------- --------- ---------
Adjusted net income $ 144,838 $ 138,937 $ 112,426
--------- --------- ---------
Average diluted stock options outstanding 2,088.1 2,212.8 2,377.7
Average exercise price per share $ 26.85 $ 22.93 $ 20.58
Average market price per share--diluted basis $ 46.35 $ 54.67 $ 44.66
Average common shares outstanding 36,975 36,722 36,400
Increase in shares due to exercise of options
--diluted basis 881 1,092 1,139
Adjusted shares outstanding--diluted 37,856 37,814 37,539
Net income per share--basic $ 3.92 $ 3.78 $ 3.09
========= ========= =========
Net income per share--diluted $ 3.83 $ 3.67 $ 2.99
========= ========= =========
</TABLE>
COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which requires an entity to present, as a component of comprehensive income, the
amounts from transactions and other events that are currently excluded from the
statement of income and are recorded directly to stockholders' equity. The
Company adopted SFAS No. 130 in 1998.
ACCOUNTING PRINCIPLES ISSUED AND NOT YET ADOPTED
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement, originally effective for
fiscal years beginning after June 15, 1999, was deferred for one year when the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133." The
statement establishes accounting and reporting standards for derivative
instruments and hedging activity and requires that all derivatives be measured
at fair value and recognized as either assets or liabilities in the financial
statements. The impact of the statement will depend on the extent of derivatives
and embedded derivatives at the date the statement is adopted. The Company is
currently evaluating the effect this statement might have on the consolidated
financial position or results of operations.
In October 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-7, "Deposit Accounting; Accounting for Insurance and Reinsurance Contracts
That Do Not Transfer Insurance Risk" ("SOP 98-7"). This statement provides
guidance on how to apply the deposit method of accounting when it is required
for insurance and reinsurance contracts that do not transfer insurance risk.
This statement is effective for financial statements for fiscal years beginning
after June 15, 1999. The Company is currently evaluating the effect this
statement might have on the consolidated financial position or results of
operations.
RECLASSIFICATIONS
Certain items in the 1998 and 1997 consolidated financial statements have been
reclassified to conform with the presentation in the 1999 consolidated financial
statements.
25
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. INVESTMENTS
Fixed maturity and equity investments at December 31, 1999 and 1998
consisted of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
GROSS GROSS
AMORTIZED FAIR UNREALIZED UNREALIZED
COST VALUE GAINS LOSSES
---- ----- ----- ------
<S> <C> <C> <C> <C>
Fixed maturities held to maturity at amortized cost:
Bonds and notes:
United States government $ 10,287 $ 10,266 $ 12 $ 33
State and municipal obligations 458,262 464,991 11,050 4,321
-------- -------- -------- --------
$468,549 $475,257 $ 11,062 $ 4,354
======== ======== ======== ========
Fixed maturities available for sale:
Bonds and notes:
United States government $ 24,167 $ 22,201 $ 44 $ 2,010
State and municipal obligations 623,700 590,318 1,689 35,071
Corporate 82,167 83,741 5,580 4,006
Mortgage-backed securities 69,553 66,964 120 2,709
Redeemable preferred stock 40,258 41,552 2,006 712
-------- -------- -------- --------
$839,845 $804,776 $ 9,439 $ 44,508
======== ======== ======== ========
Equity securities available for sale:
Equity securities $ 47,719 $ 58,378 $ 14,776 $ 4,117
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
GROSS GROSS
AMORTIZED FAIR UNREALIZED UNREALIZED
COST VALUE GAINS LOSSES
---- ----- ----- ------
<S> <C> <C> <C> <C>
Fixed maturities held to maturity at amortized cost:
Bonds and notes:
United States government $ 12,551 $ 13,156 $ 605 $ --
State and municipal obligations 464,967 499,212 34,307 62
-------- -------- -------- --------
$477,518 $512,368 $ 34,912 $ 62
======== ======== ======== ========
Fixed maturities available for sale:
Bonds and notes:
United States government $ 23,871 $ 25,002 $ 1,149 $ 18
State and municipal obligations 436,210 451,813 15,965 362
Corporate 59,770 60,840 1,586 516
Mortgage-backed securities 59,661 60,604 958 15
Redeemable preferred stock 42,069 47,889 5,836 16
-------- -------- -------- --------
$621,581 $646,148 $ 25,494 $ 927
======== ======== ======== ========
Equity securities available for sale:
Equity securities $ 25,109 $ 27,425 $ 3,823 $ 1,507
======== ======== ======== ========
</TABLE>
The contractual maturities of fixed maturity investments are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
AMORTIZED FAIR
COST VALUE
---- -----
<S> <C> <C>
Fixed maturities held to maturity:
2000 $ 1,103 $ 1,110
2001-2004 86,039 88,350
2005-2009 196,078 202,122
2010 and thereafter 185,329 183,675
-------- --------
$468,549 $475,257
======== ========
Fixed maturities available for sale:
2000 $ 4,745 $ 4,982
2001-2004 71,901 72,029
2005-2009 168,330 167,474
2010 and thereafter 485,058 451,775
Mortgage-backed securities 69,553 66,964
Redeemable preferred stock 40,258 41,552
-------- --------
$839,845 $804,776
======== ========
</TABLE>
26
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net investment income consisted of (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Investment income:
Fixed maturities $ 66,090 $ 58,145 $ 51,472
Equity securities 636 291 --
Short-term investments 1,789 1,592 862
Other 667 449 642
-------- -------- --------
69,182 60,477 52,976
Investment expenses (1,923) (615) (582)
-------- -------- --------
$ 67,259 $ 59,862 $ 52,394
======== ======== ========
</TABLE>
Net gain on sales of investments consisted of (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Gains on sales and redemptions of fixed maturity
investments available for sale $ 3,213 $ 4,490 $ 2,052
Losses on sales and redemptions of fixed maturity
investments available for sale (1,752) (1,328) (72)
Gains on sales and redemptions of fixed maturity
investments held to maturity 27 43 --
Losses on redemptions of fixed maturity investments
held to maturity (10) (23) (7)
Gains on sales of equity securities available for sale 273 37 --
Losses on sales of equity securities available for sale (183) (63) --
------- ------- -------
$ 1,568 $ 3,156 $ 1,973
======= ======= =======
</TABLE>
For the year ended December 31, 1999, the Company sold a fixed maturity
investment held to maturity and with an amortized cost of $10,000 that resulted
in no gain or loss and for the year ended December 31, 1998, the Company sold a
fixed maturity investment held to maturity with an amortized cost of $1,061,000
that resulted in a gross realized gain of $30,000. Both investments were sold in
response to a significant deterioration in the issuer's creditworthiness.
Net unrealized appreciation (depreciation) on investments consisted of (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Fixed maturities held to maturity $(28,142) $ 4,860 $ 13,611
======== ======== ========
Fixed maturities available for sale $(59,636) $ 5,894 $ 14,184
Deferred tax benefit (provision) 20,873 (2,063) (4,964)
-------- -------- --------
$(38,763) $ 3,831 $ 9,220
======== ======== ========
Equity securities available for sale $ 8,343 $ 2,316 $ --
Deferred tax provision (2,920) (811) --
-------- -------- --------
$ 5,423 $ 1,505 $ --
======== ======== ========
</TABLE>
Securities on deposit with various state insurance commissioners amounted to
$13,119,000 at December 31, 1999 and $11,229,000 at December 31, 1998.
3. REINSURANCE
Radian utilizes reinsurance to reduce net risk in force to meet regulatory
risk to capital requirements and to comply with the regulatory maximum policy
coverage percentage limitation of 25%. Although the use of reinsurance does not
discharge an insurer from its primary liability to the insured, the reinsuring
company assumes the related liability. Included in other assets are amounts
recoverable from reinsurers pertaining to unpaid claims, claims incurred but not
reported, and unearned premiums (prepaid reinsurance). Prepaid reinsurance
premiums were $10,500,000 and $9,236,000 at December 31, 1999 and 1998,
respectively.
27
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The effect of reinsurance on premiums written and earned is as follows for
the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Premiums written:
Direct $ 496,646 $ 451,572 $ 354,454
Assumed 93 97 143
Ceded (44,922) (45,202) (26,831)
--------- --------- ---------
Net premiums written $ 451,817 $ 406,467 $ 327,766
========= ========= =========
Premiums earned:
Direct $ 517,364 $ 448,668 $ 355,641
Assumed 87 129 181
Ceded (44,816) (43,545) (25,783)
--------- --------- ---------
Net premiums earned $ 472,635 $ 405,252 $ 330,039
========= ========= =========
</TABLE>
The 1999, 1998, and 1997 figures included $14,423,000, $26,676,000, and
$18,847,000 for premiums written and $14,781,000, $27,126,000, and $18,759,000
for premiums earned, respectively, for reinsurance ceded under variable quota
share treaties entered into in 1997, 1996, 1995, and 1994 covering the books of
business originated by Radian Guaranty in those years. The 1999, 1998 and 1997
figures included $3,183,000, $3,614,000, and $1,801,000 for premiums written and
$1,992,000, $2,042,000, and $1,211,000 for premiums earned, respectively, of
reinsurance ceded under an excess of loss reinsurance program that was entered
into in 1992 covering Radian Guaranty's books of business.
Provisional losses recoverable of $40,065,000 and $32,718,000 for 1999 and
1998, respectively, represent amounts due under variable quota share treaties
entered into in 1997, 1996, 1995 and 1994, covering the books of business
originated by Radian Guaranty in those years. The term of each treaty is ten
years and is non-cancelable by either party except under certain conditions. The
treaties also include underwriting year excess coverage in years four, seven,
and ten of the treaty.
Under the terms of the contract, Radian Guaranty cedes premium to the
reinsurer based on 15% of the premiums received by Radian Guaranty on the
covered business. Radian Guaranty is entitled to receive a ceding commission
ranging from 30% to 32% of the premium paid under the treaty provided that
certain loss ratios are not exceeded. In return for the payment of premium,
Radian Guaranty receives variable quota share loss relief at levels ranging from
7.5% to 15.0% based upon the loss ratio on the covered business.
In addition, Radian Guaranty is entitled to receive, under the underwriting
year excess coverage, 8% of the ceded premium written under each treaty to the
extent that this amount is greater than the total amount received under the
variable quota share coverage on paid losses.
Premiums are payable to the reinsurer on a quarterly basis net of ceding
commissions due and any losses calculated under the variable quota share
coverage. At the end of the fourth, seventh, and tenth years of each treaty,
depending on the extent of losses recovered to date under the variable quota
share provisions of the treaty, Radian Guaranty may recover amounts due under
the underwriting year excess coverage provisions of the treaty.
The Company accounts for this reinsurance coverage under guidance provided
in EITF 93-6, "Accounting for Multiple-Year Retrospectively Rated Contracts by
Ceding and Assuming Enterprises." Under EITF 93-6, the Company recognizes an
asset for amounts due from the reinsurer based on experience to date under the
contract.
For the years ended December 31, 1999, 1998, and 1997, Radian Guaranty paid
$14,423,000, $26,676,000, and $18,847,000, respectively, less ceding commissions
of $6,098,000, $9,076,000, and $9,317,000 and recovered variable quota share
losses under the treaties of $6,066,000, $4,600,000, and $4,877,000,
respectively.
Radian has also entered into captive reinsurance arrangements with certain
customers. The arrangements are structured on an excess layer basis with insured
loans grouped by loan origination year. Radian retains the first layer of risk
on a particular book of business, the captive reinsurer assumes the next layer,
and Radian assumes all losses above that point. The captive reinsurers are
required to maintain minimum capitalization equal to 10% of the risk assumed. At
December 31, 1999, approximately $283.1 million of risk was ceded under captive
reinsurance arrangements. For the years ended December 31, 1999, 1998, and 1997,
Radian Guaranty had ceded premiums written of $26,931,000, $14,376,000, and
$5,629,000, respectively and ceded premiums earned of $27,502,000, $13,819,000,
and $5,211,000, respectively, under these various captive reinsurance
arrangements.
In addition, Radian Guaranty reinsures all of its direct insurance in force
under an excess of loss reinsurance program. Under this program, the reinsurer
is responsible for 100% of Radian Guaranty's covered losses (subject to an
annual and aggregate limit) in excess of an annual retention limit. Premiums are
paid to the reinsurer on a quarterly basis, net of any losses due to Radian
Guaranty. For the years ended December 31, 1999, 1998, and 1997, Radian Guaranty
had ceded premiums written of $3,183,000, $3,614,000, and $1,801,000,
respectively, and ceded premiums earned of $1,992,000, $2,042,000, and
$1,211,000, respectively, under this excess of loss reinsurance program.
Amerin Guaranty also reinsures all of its direct insurance in force under a
$100 million excess loss protection treaty that covers Amerin Guaranty in the
event the combined ratio exceeds 100% and the risk to capital ratio exceeds 24.9
to 1. The amount ceded under the treaty is based on the calculated leverage
ratio at the end of each calendar quarter. The total expense recognized under
the treaty included in other operating expenses was $2,650,000, $2,150,000, and
$1,800,000 in 1999, 1998, and 1997, respectively.
28
<PAGE> 50
4. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
As described in note 1, the Company establishes reserves to provide for the
estimated costs of settling claims in respect of loans reported to be in default
and loans that are in default that have not yet been reported to the Company.
The default and claim cycle on loans that Radian covers begins with a
receipt from the lender of notification of a default on an insured loan. The
master policy with each lender requires that lender to inform Radian of an
uncured default on a mortgage loan within 75 days of the default. The incidence
of default is influenced by a number of factors, including change in borrower
income, unemployment, divorce and illness, the level of interest rates, and
general borrower creditworthiness. Defaults that are not cured result in claims
to Radian. Borrowers may cure defaults by making all delinquent loan payments or
by selling the property and satisfying all amounts due under the mortgage.
Different regions of the country experience different default rates due to
varying economic conditions and each state has different rules regarding the
foreclosure process. These rules can impact the amount of time that it takes for
a default to reach foreclosure, so the Company has developed a reserving
methodology that takes these different time periods into account in calculating
the reserve.
When a specific loan initially defaults, it is uncertain that the default
will result in a claim. It is Radian's experience that a significant percentage
of loans in default end up being cured. Increasing the reserve in stages as the
foreclosure progresses approximates the estimated total loss for that particular
claim. At any time during the foreclosure process, until the lender takes title
to the property, the borrower may cure the default. Therefore, it is appropriate
to increase the reserve in stages as new insight and information is obtained. At
the time of title transfer, the Company has approximately 100% of the estimated
total loss reserved.
The following table presents information relating to the liability for
unpaid claims and related expenses (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at January 1 $ 245,125 $ 179,908 $ 126,936
Less reinsurance recoverables -- -- 1,033
--------- --------- ---------
Net balance at January 1 245,125 179,908 125,903
--------- --------- ---------
Add losses and LAE incurred in respect of default
notices received in:
Current year 218,139 179,674 141,384
Prior years (43,996) (13,297) 6,037
--------- --------- ---------
Total incurred 174,143 166,377 147,421
--------- --------- ---------
Deduct losses and LAE paid in respect of default
notices received in:
Current year 7,353 18,196 18,908
Prior years 76,331 82,964 74,508
--------- --------- ---------
Total paid 83,684 101,160 93,416
--------- --------- ---------
Balance at December 31 $ 335,584 $ 245,125 $ 179,908
========= ========= =========
</TABLE>
As a result of changes in estimates of insured events in prior years, the
provision for losses and loss adjustment expenses (net of reinsurance recoveries
of $28,231,000, $11,180,000, and $6,504,000 in 1999, 1998, and 1997,
respectively) decreased by $43,996,000 and $13,297,000 in 1999 and 1998,
respectively, due primarily to lower than anticipated claim payments as compared
to the amounts reserved as a result of strong housing prices and increased by
$6,037,000 in 1997 due primarily to higher-than-anticipated losses on certain
"affordable housing" program loans insured in 1994 and 1995 and
higher-than-anticipated losses in California.
5. REDEEMABLE PREFERRED STOCK
Preferred stock is entitled to cumulative annual dividends of $4.125 per
share, payable quarterly in arrears. The preferred stock is redeemable at the
option of the Company at $54.125 per share on or after August 15, 2002, and
declining to $50.00 per share on or after August 15, 2005 (plus in each case
accumulated and unpaid dividends), or is subject to mandatory redemption at a
redemption price of $50.00 per share plus accumulated and unpaid dividends based
upon specified annual sinking fund requirements from 2002 to 2011.
6. INCOME TAXES
Deferred income taxes at the end of each period are determined by applying
enacted statutory tax rates applicable to the years in which the taxes are
expected to be paid or recovered. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts for income tax
purposes. The effect on deferred taxes of a change in the tax rate is recognized
in earnings in the period that includes the enactment date.
Provision for income taxes includes a net deferred tax provision in 1999,
1998, and 1997 of $58,083,000, $35,875,000, and $26,637,000, respectively. Of
the 1999, 1998, and 1997 provisions, $54,425,000, $45,247,000, and $36,316,000,
respectively, were due to a deduction related to the purchase of U.S. government
non-interest-bearing tax and loss bonds as allowed by federal tax regulations,
with the 1999, 1998, and 1997 purchase deductions offset by $7,053,000,
$4,979,000, and $4,060,000, respectively, of alternative minimum
29
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
tax adjustments. These purchases are treated as prepaid federal income taxes.
The payment for the tax and loss bonds is essentially a prepayment of federal
income taxes that will become due at a later date. All other amounts arose
principally from differences in accounting for deferred policy acquisition costs
and insurance reserve tax adjustments required as a result of the Tax Reform Act
of 1986.
The significant components of the Company's net deferred tax assets and
liabilities are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Unearned premiums $ 2,975 $ 4,317
Loss reserves 7,946 5,384
Employee benefits 648 473
Net unrealized loss on investments 8,547 --
Other -- 1,281
--------- ---------
20,116 11,455
--------- ---------
Deferred tax liabilities:
Deferred policy acquisition costs (21,591) (17,147)
Net unrealized gain on investments -- (9,409)
Depreciation (1,278) (1,256)
Deduction related to purchase of tax and loss (203,343) (148,700)
bonds
Other (72) (1,219)
--------- ---------
(226,284) (177,731)
--------- ---------
Net deferred tax liability $(206,168) $(166,276)
========= =========
</TABLE>
The reconciliation of taxes computed at the statutory tax rate of 35% for
1999, 1998 and 1997 to the provision for income taxes is as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Provision for income taxes computed at the statutory
tax rate $ 76,944 $ 69,269 $ 55,707
Change in tax provision resulting from:
Tax-exempt municipal bond interest and dividends
received deduction (net of proration) (15,535) (13,897) (12,488)
Capitalized merger costs 8,124 -- --
Other, net 1,795 304 216
-------- -------- --------
Provision for income taxes $ 71,328 $ 55,676 $ 43,435
======== ======== ========
</TABLE>
7. STOCKHOLDERS' EQUITY AND DIVIDEND RESTRICTIONS
The Company is a holding company whose principal source of income is
dividends from Radian. The ability of Radian Guaranty to pay dividends on its
common stock is restricted by certain provisions of the insurance laws of the
Commonwealth of Pennsylvania, its state of domicile. The insurance laws of
Pennsylvania establish a test limiting the maximum amount of dividends that may
be paid by an insurer without prior approval by the Pennsylvania Insurance
Commissioner. Under such test, Radian Guaranty may pay dividends during any
12-month period in an amount equal to the greater of (i) 10% of the preceding
year-end statutory policyholders' surplus or (ii) the preceding year's statutory
net income. In accordance with such restrictions, $137,094,000 would be
available for dividends in 2000. However, an amendment to the Pennsylvania
statute requires that dividends and other distributions be paid out of an
insurer's unassigned surplus. Because of the unique nature of the method of
accounting for contingency reserves, Radian Guaranty has negative unassigned
surplus. Thus, prior approval by the Pennsylvania Insurance Commissioner is
required for Radian Guaranty to pay dividends or make other distributions so
long as Radian Guaranty has negative unassigned surplus. The Pennsylvania
Insurance Commissioner has approved all distributions by Radian Guaranty since
the passage of this amendment, and management has every expectation that the
Commissioner of Insurance will continue to approve such distributions in the
future, provided that the financial condition of Radian Guaranty does not
materially change. The State of California has a statute requiring mortgage
insurers to pay dividends or make other distributions out of unassigned surplus.
Radian Guaranty and the California Department of Insurance have reached an
understanding under which Radian Guaranty will be able to pay dividends or make
other distributions to the Company, provided that the financial condition of
Radian Guaranty does not materially change.
The ability of Amerin Guaranty to pay dividends on its common stock is
restricted by certain provisions of the insurance laws of the State of Illinois,
its state of domicile. The insurance laws of Illinois establish a test limiting
the maximum amount of dividends that may be paid from positive unassigned
surplus by an insurer without prior approval by the Illinois Insurance
Commissioner. Under such test, Amerin Guaranty may pay dividends during any
12-month period in an amount equal to the greater of (i) 10% of the preceding
year-end statutory policyholders' surplus or (ii) the preceding year's statutory
net income. In accordance with such restrictions, $16,177,000 would be available
for dividends in 2000 without prior regulatory approval, which represents the
positive unassigned surplus of Amerin Guaranty at December 31, 1999.
30
<PAGE> 52
The Company and Radian Guaranty have entered into an agreement, pursuant to
which the Company has agreed to establish and, for as long as any shares of
$4.125 Preferred Stock remain outstanding, maintain a reserve account in an
amount equal to three years of dividend payments on the outstanding shares of
$4.125 Preferred Stock (currently $9,900,000), and not to pay dividends on the
common stock at any time when the amount in the reserve account is less than
three years of dividend payments on the shares of $4.125 Preferred Stock then
outstanding. This agreement between the Company and Radian Guaranty provides
that the holders of the $4.125 Preferred Stock are entitled to enforce the
agreement's provisions as if such holders were signatories to the agreement.
Radian Guaranty's current excess of loss reinsurance arrangement prohibits
the payment of any dividend that would have the effect of reducing the total of
its statutory policyholders' surplus plus its contingency reserve below
$85,000,000. As of December 31, 1999, Radian Guaranty had statutory
policyholders' surplus of $157,693,000 and a contingency reserve of
$613,537,000, for a total of $771,230,000.
The Company may not pay any dividends on its shares of common stock unless
the Company has paid all accrued dividends on, and has complied with all sinking
fund and redemption obligations relating to, its outstanding shares of $4.125
Preferred Stock.
The Company prepares its statutory financial statements in accordance with
the accounting practices prescribed or permitted by the Insurance Department of
the respective state of domicile. Prescribed statutory accounting practices
include a variety of publications of the National Association of Insurance
Commissioners ("NAIC") as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices encompass all
accounting practices not so prescribed.
Radian Guaranty's statutory policyholders' surplus at December 31, 1999 and
1998 was $157,693,000 and $149,281,000, respectively. Radian Guaranty's
statutory net income for 1999, 1998, and 1997 was $137,094,000, $105,264,000,
and $93,390,000, respectively.
Under Illinois insurance regulations, Amerin Guaranty is required to
maintain statutory basis capital and surplus of $1,500,000. The statutory
policyholders' surplus at December 31, 1999 and 1998 was $242,656,000 and
$229,393,000, respectively. Amerin Guaranty's statutory net income for 1999,
1998, and 1997 was $70,901,000, $71,715,000, and $51,467,000, respectively.
The differences between the statutory net income and surplus and the
consolidated net income and equity presented on a GAAP basis represent
differences between GAAP and statutory accounting practices for the following
reasons:
Under statutory accounting practices, mortgage guaranty insurance companies
are required to establish each year a contingency reserve equal to 50% of
premiums earned in such year. Such amount must be maintained in the contingency
reserve for 10 years after which time it is released to unassigned surplus.
Prior to 10 years, the contingency reserve may be reduced with regulatory
approval to the extent that losses in any calendar year exceed 35% of earned
premiums for such year. Under GAAP, the contingency reserve is not required.
Under statutory accounting practices, insurance policy acquisition costs are
charged against operations in the year incurred. Under GAAP, these costs are
deferred and amortized.
Statutory financial statements only include a provision for current income
taxes due, and purchases of tax and loss bonds are accounted for as investments.
GAAP financial statements provide for deferred income taxes, and purchases of
tax and loss bonds are recorded as prepayments of income taxes.
Under statutory accounting practices, fixed maturity investments are valued
at amortized cost. Under GAAP, those investments that Radian does not have the
ability or intent to hold to maturity are considered to be available for sale
and are recorded at market value, with the unrealized gain or loss recognized,
net of tax, as an increase or decrease to stockholders' equity.
Under statutory accounting practices, certain assets, designated as
non-admitted assets, are charged directly against statutory surplus. Such assets
are reflected on the GAAP financial statements.
In March 1998, the National Association of Insurance Commissioners adopted
the Codification of Statutory Accounting Principles ("Codification"). The
Codification, which is intended to standardize regulatory accounting and
reporting for the insurance industry, is proposed to be effective
January 1, 2001. However, statutory accounting principles will continue to be
established by individual state laws and permitted practices. The Company has
not finalized the quantification of the effects of Codification on the statutory
financial statements when it adopts the Codification effective January 1, 2001.
In April 1998, the Company's board of directors approved a stockholder
rights plan designed to help ensure that all stockholders receive fair value for
their shares of common stock in the event of any proposed takeover of the
Company and to guard against the use of partial tender offers or other coercive
tactics to gain control of the Company without offering fair value to the
stockholders.
8. RELATED PARTY TRANSACTIONS
Prior to November 1992, Radian Guaranty was included in the consolidated
federal tax return filed by Reliance Group Inc. ("Reliance"), its ultimate
parent, and Radian Guaranty was a party to a tax-sharing agreement with
Commonwealth Land Title Insurance Company ("Commonwealth"), its parent. The
tax-sharing agreement was terminated upon completion of the initial public
offering (the "Offering") of CMACINV in the fourth quarter of 1992; however,
Radian Guaranty has reimbursed Reliance for federal income taxes attributable to
Radian Guaranty's 1992 operations through the completion of the Offering as
though the tax-sharing agreement were still in effect. Radian Guaranty has
agreed to reimburse Reliance for federal income taxes, if any (together with any
related interest or penalties), attributable to Radian Guaranty for periods
during which Radian Guaranty was a member
31
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
of Reliance's consolidated group. Reliance has agreed to limit the amount of
such reimbursement, if any, by Radian Guaranty to $1,853,000, the amount
included in the federal tax liability account on Radian Guaranty's June 30, 1992
balance sheet (plus the amount of the tax benefit, if any, obtained by the
Company from making such reimbursement). In addition, the Company has agreed to
reimburse Reliance for any future federal income taxes (plus post-closing date
interest) resulting from Radian Guaranty's operations while a member of
Reliance's consolidated group if the Company could be benefited by a related
adjustment to the Company's federal income taxes in an amount calculated as if
the Company were entitled to such benefit. Reliance will reimburse the Company
for any future federal income taxes resulting from Radian Guaranty's operations
while a member of Reliance's consolidated group, which actually decrease
Reliance's consolidated federal income taxes.
9. STOCK-BASED COMPENSATION
In November 1992, the Company's board of directors adopted the CMAC Investment
Corporation 1992 Stock Option Plan, which provides for the granting of
nonqualified stock options, either alone or together with stock appreciation
rights. Effective with the merger, the name of the plan was changed to the
Radian Group Inc. 1992 Stock Option Plan (the "Stock Option Plan"). Originally
up to 500,000 shares were subject to stock options. This amount was amended by a
vote of the stockholders to 900,000 in May 1993. These options may be granted to
directors, officers, and key employees of the Company at prices that are not
less than 90% of fair market value on the date the options are granted, although
all options have been granted with an exercise price equal to the fair value of
the Company's stock at the date of grant. Accordingly, no compensation expense
has been recognized for the Company's stock-based compensation plans. Each stock
option is exercisable for a period of ten years from the date of the grant and
is subject to a vesting schedule as approved by the Company's Stock Option and
Compensation Committee. In May 1995, the CMAC Investment Corporation Equity
Compensation Plan was instituted by a vote of the stockholders. Effective with
the merger, the name of the plan was changed to the Radian Group Inc. Equity
Compensation Plan (the "Equity Compensation Plan"). This plan provides for the
granting of nonqualified stock options, under terms similar to those in the
Stock Option Plan, or other forms of equity-based compensation. The aggregate
number of shares that may be issued under this new plan was 1,100,000, which
brought the total number of shares subject to stock options or other forms of
equity-based compensation to 2,000,000. Effective with the stock split in
December 1996, all share totals within the plans were doubled, bringing the
total number of shares subject to stock options or other forms of equity-based
compensation to 4,000,000.
In June 1999, the number of shares subject to stock options was amended by a
vote of the stockholders to 5,000,000. At the same time, as a result of the
merger, the number of options outstanding from the prior Amerin plan was added
to the total number of shares subject to stock options or other forms of equity
compensation, bringing the total number of shares to 5,800,177.
Information regarding the Stock Option Plan and Equity Compensation Plan is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER OF PRICE
SHARES PER SHARE
------ ---------
<S> <C> <C>
Outstanding, January 1, 1997 1,955,119 $ 16.19
Granted 892,539 38.61
Exercised (160,986) 10.75
Cancelled (75,077) 28.72
----------
Outstanding, December 31, 1997 2,611,595 23.84
Granted 126,232 42.28
Exercised (351,477) 11.04
Cancelled (79,490) 27.47
----------
Outstanding, December 31, 1998 2,306,860 26.65
Granted 229,921 40.63
Exercised (445,558) 26.40
Cancelled (134,779) 38.52
----------
Outstanding December 31, 1999 1,956,444 27.54
==========
Exercisable, December 31, 1999 1,391,146 22.18
==========
Available for grant, December 31, 1999 2,713,454
==========
</TABLE>
The Company applies APB 25 in accounting for its stock-based compensation
plans. Had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under SFAS 123, the Company's
net income and earnings per share would have been reduced by approximately
$2,932,000 ($.08 per share), $3,952,000 ($.10 per share), and $4,501,000 ($.12
per share) in 1999, 1998, and 1997, respectively. The pro forma effect on net
income for 1999, 1998, and 1997 is not representative of the pro forma effect on
net income in future years because it does not take into consideration pro forma
compensation expense related to grants made prior to 1995.
32
<PAGE> 54
The weighted average fair values of the stock options granted during 1999,
1998, and 1997 were $20.65, $20.64, and $18.76, respectively. The fair value of
each stock option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected life (years) 7.89 6.83 6.77
Risk-free interest rate 4.91% 5.21% 6.59%
Volatility 38.73% 39.05% 35.90%
Dividend yield 0.30% 0.33% 0.32%
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- --------------- ----------- ------------ ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$9.00 - $9.94 324,495 2.96 $ 9.03 324,001 $ 9.03
$12.56 - $14.69 457,900 4.45 14.57 457,900 14.57
$22.13 - $32.50 406,485 6.50 26.30 257,646 24.75
$33.28 - $49.69 555,124 7.94 40.05 280,008 39.41
$50.39 - $55.32 212,440 8.05 53.47 71,591 53.75
--------- ---------
1,956,444 1,391,146
========= =========
</TABLE>
In July 1997, the Company's board of directors adopted the 1997 CMAC
Investment Corporation Employee Stock Purchase Plan and shareholder approval was
granted during the Company's 1998 Annual Meeting. As a result of the merger, the
name of the plan was changed to the 1997 Radian Group Inc. Employee Stock
Purchase Plan (the "ESPP"). A total of 200,000 shares of the Company's
authorized but unissued common stock has been made available under the ESPP. The
ESPP allows eligible employees to purchase shares of the Company's stock at a
discount of 15% of the beginning-of-period or end-of-period (each period being
the first and second six calendar months) fair market value of the stock,
whichever is lower. Eligibility under the ESPP is determined based on standard
weekly work hours and tenure with the Company, and eligible employees are
limited to a maximum contribution of $400 per payroll period toward the purchase
of the Company's stock. Under the ESPP, the Company sold 5,800 and 1,900 shares
to employees in 1999 and 1998, respectively. The Company applies APB 25 in
accounting for the ESPP. The pro forma effect on the Company's net income and
earnings per share had compensation cost been determined under SFAS 123 was
deemed immaterial in 1999 and 1998.
10. BENEFIT PLANS
In 1997, the FASB issued SFAS No. 132, "Employer's Disclosures about Pensions
and Other Postretirement Benefits." This statement, which became effective for
periods beginning after December 15, 1997, modified previous disclosure
requirements. This statement did not impact the Company's balance sheets,
statements of income or statements of cash flows. The Company adopted SFAS No.
132 in 1998.
The Company maintains a noncontributory defined benefit pension plan
covering substantially all full-time employees. Retirement benefits are a
function of the years of service and the level of compensation. Assets of the
plan are allocated in a balanced fashion with approximately 40% in fixed income
securities and 60% in equity securities.
The Company also provides a nonqualified deferred compensation plan covering
certain key executives designated by the board of directors. Under this plan,
participants are eligible to receive benefits in addition to those paid under
the defined benefit pension plan if their base compensation is in excess of the
current IRS compensation limitation for the defined benefit pension plan.
Retirement benefits under the nonqualified plan are a function of the years of
service and the level of compensation and are reduced by any benefits paid under
the defined benefit plan.
In addition to providing pension benefits, the Company will provide certain
health care and life insurance benefits to retired employees. The Company
accounts for such benefits under SFAS No. 106, "Employers Accounting for
Postretirement Benefits Other Than Pensions," and accrues the estimated costs
of retiree medical and life benefits over the period during which employees
render the service that qualifies them for benefits.
33
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The funded status of the defined benefit plans and the postretirement
benefit plan were as follows (in thousands):
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation at beginning of year $ 5,258 $ 4,991 $ 365 $ 306
Service cost
Interest cost 797 748 19 19
Plan participant's contributions 383 362 21 22
Actuarial (gain) loss -- -- 5 --
Benefits paid (555) (823) (84) 23
(39) (20) (12) (5)
Benefit obligation at end of year ------- ------- ------- -------
$ 5,844 $ 5,258 $ 314 $ 365
======= ======= ======= =======
Change in Plan Assets
Fair value of plan assets at beginning of year $ 3,714 $ 2,501 $ -- $ --
Actual return on plan assets 782 595 -- --
Employer contributions 300 638 7 5
Plan participants' contributions -- -- 5 --
Benefits paid (39) (20) (12) (5)
------- ------- ------- -------
Fair value of plan assets at end of year $ 4,757 $ 3,714 $ -- $ --
------- ------- ------- -------
Underfunded status of the plan $(1,087) $(1,544) $ (314) $ (365)
Unrecognized prior service cost 456 525 (139) (150)
Unrecognized net actuarial gain (1,248) (221) (194) (119)
------- ------- ------- -------
Accrued benefit cost $(1,879) $(1,240) $ (647) $ (634)
======= ======= ======= =======
</TABLE>
The components of net pension and net periodic postretirement benefit costs
are as follows (in thousands):
<TABLE>
<CAPTION>
POSTRETIREMENT
DEFINED BENEFIT PLANS BENEFIT PLANS
1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 797 $ 748 $ 588 $ 19 $ 19 $ 18
Interest cost 383 362 281 21 22 19
Expected return on plan
assets (320) (219) (166) -- -- --
Amortization of prior
service cost 69 69 69 (11) (11) (11)
Recognized net actuarial
loss (gain) 10 40 28 (8) (8) (9)
------- ------- ------- ------- ------- -------
Net periodic benefit cost $ 939 $ 1,000 $ 800 $ 21 $ 22 $ 17
======= ======= ======= ======= ======= =======
</TABLE>
Assumptions used to determine net pension and net periodic postretirement
benefit costs are as follows:
<TABLE>
<CAPTION>
POSTRETIREMENT
DEFINED BENEFIT PLANS BENEFIT PLANS
1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Weighted average assumptions as of
December 31:
Discount rate 7.50% 6.75% 7.25% 7.50% 6.75% 7.25%
Expected return on plan assets 8.50% 8.50% 8.50% -- -- --
Rate of compensation increase 4.00% 4.00% 6.00% -- -- --
</TABLE>
Due to the nature of the postretirement benefit plan, no increase is assumed
in the Company's obligation due to any increases in the per capita cost of
covered health care benefits.
In addition to the defined benefit plan, the nonqualified deferred
compensation plan, and the postretirement benefit plan, the Company also
maintains a Savings Incentive Plan, which covers substantially all full-time
employees and all part-time employees employed for a minimum of 90 consecutive
days. Participants can contribute up to 15% of their base earnings as pretax
contributions. The Company will match at least 25% of the first 5% of base
earnings contributed in any given year. These matching funds are subject to
certain vesting requirements. The expense to the Company for matching funds for
the years ended December 31, 1999, 1998, and 1997 was $1,220,000, $918,000, and
$776,000, respectively.
11. COMMITMENTS AND CONTINGENCIES
The Company is involved in certain litigation arising in the normal course
of its business. The Company is contesting the allegations in each pending
action and believes, based on current knowledge and consultation with counsel,
that the outcome of such litigation will not have a material adverse effect on
the Company's consolidated financial position or results of operations.
34
<PAGE> 56
Radian utilizes its underwriting skills to provide an outsource contract
underwriting service to its customers. Radian often gives recourse to its
customers on loans it underwrites for compliance. If the loan does not meet
agreed-upon guidelines and is not salable in the secondary market for that
reason, Radian agrees to remedy the situation either by placing mortgage
insurance coverage on the loan, by purchasing the loan, or indemnifying the loan
against future loss. During 1999, less than 1% of all loans were subject to
these remedies and the costs associated with these remedies were immaterial.
The Company leases office space for use in its underwriting, sales, loan
workout, and administrative support operations. Net rental expense in connection
with these leases totaled $3,145,000, $3,000,000, and $2,636,000 in 1999, 1998,
and 1997, respectively. The commitment for noncancelable operating leases in
future years is as follows (in thousands):
<TABLE>
<S> <C>
2000 $2,873
2001 2,382
2002 1,960
2003 1,355
2004 and thereafter 545
------
$9,115
======
</TABLE>
The commitment for noncancelable operating leases in future years has not
been reduced by future minimum sublease rental payments aggregating
approximately $2,021,000.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per-share information)
<TABLE>
<CAPTION>
1999 QUARTER
----------------------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
----- ------ ----- ------ ----
<S> <C> <C> <C> <C> <C>
Net premiums written $111,355 $115,907 $ 95,537 $129,018 $451,817
Net premiums earned 112,493 116,319 120,031 123,792 472,635
Net investment income 15,913 16,814 16,439 18,093 67,259
Provision for losses 44,242 43,312 42,519 44,070 174,143
Policy acquisition and other
expenses 33,130 32,255 31,122 24,929 121,436
Merger expenses 2,833 22,697 11,353 883 37,766
Net income 37,353 25,094 37,488 48,203 148,138
Net income per share (1) (2) $ 0.97 $ 0.64 $ 0.97 $ 1.25 $ 3.83
Average shares outstanding (1) 37,723 37,891 37,765 38,046 37,856
</TABLE>
<TABLE>
<CAPTION>
1998 QUARTER
----------------------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
----- ------ ----- ------ ----
<S> <C> <C> <C> <C> <C>
Net premiums written $ 89,407 $100,885 $100,928 $115,247 $406,467
Net premiums earned 94,789 99,046 102,945 108,472 405,252
Net investment income 14,392 14,796 14,984 15,690 59,862
Provision for losses 42,371 40,059 42,037 41,910 166,377
Policy acquisition and other
expenses 24,835 28,911 29,615 34,838 118,199
Merger expenses -- -- -- 1,098 1,098
Net income 33,002 34,752 37,407 37,076 142,237
Net income per share (1) (2) $ 0.85 $ 0.90 $ 0.97 $ 0.96 $ 3.67
Average shares outstanding (1) 37,854 37,903 37,816 37,679 37,814
</TABLE>
(1) Diluted net income per share and average shares outstanding per SFAS No.
128, "Earnings Per Share." See note 1.
(2) Net income per share is computed independently for each period presented.
Consequently, the sum of the quarters may not equal the total net income per
share for the year.
35
<PAGE> 57
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Radian Group Inc.
Philadelphia, Pennsylvania
We have audited the consolidated balance sheets of Radian Group Inc. and
subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in common stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements based on
our audits. The consolidated financial statements give retroactive effect to the
merger of CMAC Investment Corporation and Amerin Guaranty Corporation
("Amerin"), which has been accounted for as a pooling of interests as described
in Note 1 to the consolidated financial statements. We did not audit the balance
sheet of Amerin as of December 31, 1998, or the related statements of income,
changes in common stockholders' equity, and cash flows of Amerin for the years
ended December 31, 1998 and 1997, which statements reflect total assets of
$545,232,000 as of December 31, 1998, and total revenues of $145,927,000 and
$112,103,000 for the years ended December 31, 1998 and 1997, respectively. Those
financial statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Amerin for 1998 and 1997, is based solely on the report of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Radian Group Inc. and subsidiaries
at December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 10, 2000
36
<PAGE> 58
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 herein 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
from 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.
1999 COMPARED TO 1998
Net income for 1999 was $148.1 million, a 4.1% increase compared to $142.2
million for 1998. However, net income for 1999 included merger expenses (net of
tax) of $32.7 million as compared to merger expenses net of tax of $714,000 in
1998. Without these merger expenses, net income for 1999 was $180.8 million as
compared to $143.0 million for 1998, an increase of 26.5% or $37.9 million. This
improvement in net income, excluding merger expenses, was a result of
significant growth in premiums earned and net investment income, partially
offset by a higher provision for losses, an increase in policy acquisition costs
and other operating expenses, and a reduction in other income.
New primary insurance written during 1999 was $33.3 billion, a 10.3%
decrease compared to $37.1 billion for 1998. This decrease in Radian's primary
new insurance written volume in 1999 was primarily due to a decline in Radian's
market share of the industry volume, which fell to 17.5% for the year ended
December 31, 1999 as compared to 19.3% for the same period of 1998. This
decrease in market share was slightly offset by an increase in primary new
insurance written volume in the private mortgage insurance industry for 1999 as
compared to 1998 of $775.0 million or 0.4%. Radian believes the market share
decline was primarily due to the reduction in business provided by a few of the
largest national accounts, which rebalanced their mortgage insurance allocation
after the merger. In 1999, Radian wrote a smaller amount of pool insurance,
which represented an addition to risk written of $421.2 million as compared to
$475.0 million in 1998. Most of this pool insurance volume relates to a group of
structured transactions composed primarily of Fannie Mae- and Freddie
Mac-eligible conforming mortgage loans that are geographically well dispersed
throughout the United States and have lower average loan-to-value ratios than
Radian's primary business. This business contains loans with loan-to-value
ratios above 80% which have primary insurance that places the pool insurance in
a secondary loss position and loans with loan-to-value ratios of 80% and below
for which the pool coverage is in a first loss position. The performance of this
business written in prior years has been better than anticipated although the
business is relatively young and the historical performance might not be an
indication of future performance. Under a pool insurance transaction, the
exposure to Radian on each individual loan is uncapped; however, the aggregate
stop-loss percentage (typically 1.0% to 1.5% of the aggregate original loan
balance in the Fannie Mae/Freddie Mac transactions) is the maximum that can be
paid out in losses before the insurer's exposure terminates. The Company expects
its pool insurance activity to decline during 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. Standard & Poor's, Moody's
Investors Service and Duff & Phelps Credit Rating Agency have determined that
the capital requirements to support such pool insurance will be significantly
more stringent than on primary insurance due to the low premium rates and small
stop-loss levels.
Radian's volume in 1999 was positively impacted by relatively lower interest
rates that affected the entire mortgage industry for most of the year. 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 caused a large percentage of the
refinanced loans to be closed without private mortgage insurance at a
loan-to-value ratio of 80% or below. Therefore, the rate of growth in the
private mortgage insurance industry, although substantial, was not as high as
that of the entire mortgage market. An increase in interest rates during the
third quarter of 1999 resulted in a decline in refinancing activity for Radian
and contributed to the 15.2% decrease in the mortgage insurance industry new
insurance written volume for the second half of 1999 compared to the same period
in 1998. Radian's refinancing activity as a percentage of primary new insurance
written was 27% for 1999 as compared to 34% in 1998; however, for the fourth
quarter of 1999, that rate had declined to 13% from 20% in the third quarter of
1999 and 39% in the fourth quarter of 1998. The persistency rate, which is
defined as the percentage of insurance in force that is renewed in any given
year, was 75.0% for 1999 as compared to 66.6% for 1998. This increase was
consistent with the declining level of refinancing activity during the second
half of 1999, which caused the cancellation rate to decrease. The expectation
for 2000 is a smaller industry volume and higher persistency rates, influenced
by higher interest rates.
Radian also has become more involved in insuring non-conforming loans,
specifically Alternative A and A minus loans. Alternative A borrowers have an
equal or better credit profile than Radian's typical insured borrowers, but
these loans are underwritten with reduced documentation and verification of
information. Radian typically charges a higher premium rate for this business
due to the reduced documentation, but does not consider this business to be
significantly more risky than its normal primary business. The A minus loan
programs
37
<PAGE> 59
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION (continued)
typically have non-traditional credit standards that are less stringent than
standard credit guidelines. To compensate for this additional risk, Radian
receives a higher premium for insuring this product that Radian believes is
commensurate with the additional default risk. During 1999, Alternative A and A
minus business accounted for $3.0 billion or 9.0% of Radian's new primary
insurance written as compared to $1.7 billion or 4.7% for the same period in
1998.
Net premiums earned in 1999 were $472.6 million, a 16.6% increase compared
to $405.3 million for 1998. This increase reflected the insurance in force
growth resulting from strong new insurance volume and pool insurance written
during 1999, and was aided by the increase in persistency levels. The strong
volume led to an increase in direct primary insurance in force during 1999 of
15.6%, from $81.9 billion at December 31, 1998 to $94.7 billion at December 31,
1999. Direct pool risk in force also grew to $1.4 billion at December 31, 1999
from $993.0 million at the end of 1998, an increase of 40.8% for the year.
Radian and the industry have entered into risk-sharing arrangements with various
customers that are designed to allow the customer to participate in the risks
and rewards of the mortgage insurance business. One such product is captive
reinsurance, in which a mortgage lender sets up a mortgage reinsurance company
that assumes part of the risk associated with that lender's insured book of
business. In most cases, the risk assumed by the reinsurance company is an
excess layer of aggregate losses that would be penetrated only in a situation of
adverse loss development. For 1999, premiums ceded under captive reinsurance
arrangements were $27.5 million, or 5.8% of total premiums earned during 1999,
as compared to $13.8 million, or 3.4% of total premiums earned for the same
period of 1998. New primary insurance written under captive reinsurance
arrangements was $13.7 billion, or 41.3% of total new primary insurance written
in 1999 as compared to $9.7 billion, or 26.1% of total new primary insurance
written in 1998. Radian expects to enter into several new agreements in 2000.
Net investment income for 1999 was $67.3 million, a 12.4% increase compared
to $59.9 million in 1998. This increase was a result of continued growth in
invested assets primarily due to positive operating cash flows of $248.0 million
during 1999. The Company has continued to invest some of its new operating cash
flows in tax-advantaged securities, primarily municipal bonds, although the
Company did modify its investment policy to allow the purchase of various other
asset classes, including common stock and convertible securities, beginning in
the second quarter of 1998 and some of the Company's cash flows have been used
to purchase these classes of securities.
The Company's intent is to target the common equity exposure at a maximum of
5% of the investment portfolio's market value while the convertible securities
and mortgage-backed securities exposures are targeted not to exceed 10% each.
The Company expects no material long-term impact on total investment returns as
a result of this investment asset diversification.
The provision for losses was $174.1 million in 1999, an increase of 4.7%
compared to $166.4 million in 1998. This increase reflected an increase 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 and the continued poor
experience of certain "affordable housing" program loans insured in 1994 and
1995, especially in Florida. 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 65% of Radian's primary risk in
force and almost all of Radian's pool risk in force at December 31, 1999 had not
yet reached its anticipated highest claim frequency years. Due to the high
cancellation rates and strong new insurance volume in 1998 and the first half of
1999, this percentage of risk in force is significantly higher than normal
levels. Radian's overall default rate at December 31, 1999 was 1.49% as compared
to 1.57% at December 31, 1998, while the default rate on the primary business
was 2.20% at December 31, 1999 as compared to 2.12% at December 31, 1998. The
decrease in Radian's overall default rate is a result of the continued strong
economy and the relatively lower interest rates that have been experienced over
the past few years. A strong economy generally results in better loss experience
and a decrease in the overall level of losses. A weakening of the economy could
negatively impact Radian's overall default rates, which would result in an
increase in the provision for losses. The number of defaults rose from 18,775 at
December 31, 1998 to 22,151 at December 31, 1999 and the average loss reserve
per default rose from $13,056 at the end of 1998 to $15,071 at December 31,
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 1.80% (including pool) at December 31, 1999
as compared to 2.37% at December 31, 1998 and claims paid in California during
1999 were $24.4 million, representing approximately 26.8% of total claims as
compared to 45.1% in 1998. California represented approximately 17.2% of primary
risk in force at December 31, 1999 as compared to 18.6% at December 31, 1998.
The default rate in Florida was 3.08% (including pool) at December 31, 1999 as
compared to 3.28% at December 31, 1998 and claims paid in Florida during 1999
were $12.2 million, representing approximately 13.4% of total claims as compared
to only 11.2% in 1998. Florida represented 7.4% of primary risk in force at
December 31, 1999 as compared to 7.4% 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 ultimate impact
38
<PAGE> 60
of such changes. In addition, Radian has reported an increased number of
defaults on the Alternative A and A minus business insured beginning in 1997
through 1999. Although the default rate for this business is higher than on
Radian's normal books, it is within the expected range for this type of
business, and the higher premium rates charged are expected to compensate for
the increased level of risk. Direct losses paid in 1999 were $88.2 million as
compared to direct losses paid during 1998 of $105.5 million, a decrease of
16.5%. 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 $121.4 million for 1999, an
increase of 2.7% compared to $118.2 million for 1998. These expenses consisted
of policy acquisition expenses, which relate directly to the acquisition of new
business, and other operating expenses, which primarily represent contract
underwriting expenses, overhead, and administrative costs.
Policy acquisition costs were $58.8 million in 1999, an increase of 0.5%
compared to $58.5 million in 1998. This slight increase reflects the growth in
variable sales- and underwriting-related expenses relating to Radian's continued
strong levels of new insurance written, offset by the synergies realized in the
second half of the year as a result of the merger. 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 1999 were $62.7 million, an increase of
4.9% compared to $59.7 million for 1998. Most of the increase was a result of an
increase in expenses associated with the Company's administrative and support
functions. Contract underwriting expenses for 1999 included in other operating
expenses were $32.4 million as compared to $34.4 million for 1998, a decrease of
5.9%. This $2.0 million decrease in contract underwriting expenses during 1999
reflected the decreasing demand for contract underwriting services as mortgage
origination volume has declined. 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 $8.0 million. During 1999, loans underwritten via
contract underwriting accounted for 22.2% of applications, 18.8% of insurance
commitments, and 15.6% of certificates issued by Radian as compared to 21.2% of
applications, 17.9% of commitments, and 15.6% of certificates in 1998. In 2000,
these percentages are 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 contract underwriting 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 1999, the Company incurred merger-related expenses of $37.8 million
as compared to $1.1 million for 1998. Total merger-related expenses were $38.9
million and consisted of the following types of expenses:
- Professional services of $11.8 million;
- Compensation arrangements of $8.5 million;
- Write-offs of fixed and intangible assets of $15.8 million; and
- Miscellaneous merger-related costs of $2.8 million.
The Company expects to incur no additional merger-related expenses in 2000.
The effective tax rate for 1999, excluding merger costs net of tax of $32.7
million, was 30.5% as compared to 28.3% for 1998. Eliminating the merger
expenses of $37.8 million and $1.1 million for 1999 and 1998, respectively,
operating income accounted for 73.3% of net income in 1999 as compared to 68.3%
for the same period in 1998, thus resulting in the increase in effective tax
rates for 1999.
1998 COMPARED TO 1997
Net income for 1998 was $142.2 million, a 22.9% increase compared to $115.7
million for 1997. This improvement was a result of significant growth in
premiums earned, net investment income, and other income, partially offset by a
higher provision for losses and an increase in policy acquisition costs and
other operating expenses.
Primary insurance written during 1998 was $37.1 billion, a 72.6% increase
compared to $21.5 billion for 1997. The increase in Radian's primary new
insurance written was primarily due to a 55.3% increase in primary new insurance
written volume in the private mortgage insurance industry for 1998 as compared
to 1997. In addition, Radian completed a bulk transaction in the second quarter
of 1998, insuring approximately $700 million of seasoned California loans with a
risk profile similar to Radian's regular business. Radian's market share of the
industry volume increased to 19.3% in 1998 compared to 17.6% for 1997.
Additionally, in 1998, Radian wrote an increased amount of pool insurance that
represented risk written of $475.0 million as compared to $284.5 million in
1997. Most of this pool insurance volume relates to a group of structured
transactions composed primarily of Fannie Mae- and Freddie Mac-eligible
conforming mortgage loans that are geographically well dispersed throughout the
United States and have lower average loan-to-value ratios than Radian's primary
business.
Radian's volume in 1998 was positively impacted by low interest rates that
affected the entire mortgage industry. The trend toward lower interest rates,
which began in the third quarter of 1997, caused refinancing activity during
1998 to continue at a higher rate than normal and strong housing prices caused a
large percentage of the refinanced loans to be closed without private mortgage
insurance at a loan-to-value ratio of 80% or below. Therefore, the rate of
growth in the private mortgage insurance industry was not as high as that of the
entire mortgage market. Radian's refinancing activity as a percentage of primary
new insurance written was 34% for 1998 as compared to 16% in 1997. However, for
the fourth quarter of 1998, refinanced loans represented
39
<PAGE> 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION (continued)
39% of new primary insurance written as compared to only 26% for the third
quarter of 1998 as a result of the slight decline in interest rates during the
fourth quarter. The persistency rate was 66.6% for 1998 as compared to 84.4% for
1997. This large decline was consistent with the increase in the level of
refinancing activity during 1998.
Net premiums earned in 1998 were $405.3 million, a 22.8% increase compared
to $330.0 million for 1997. This increase reflected the insurance in force
growth resulting from strong new insurance volume and the increase in pool
insurance written during 1998, and was partially offset by the decline in
persistency levels. The strong volume led to an increase in direct primary
insurance in force during 1998 of 21.7%, from $67.3 billion at December 31, 1997
to $81.9 billion at December 31, 1998. Direct pool risk in force also grew to
$993.0 million at December 31, 1998 from $600.5 million at the end of 1997, an
increase of 65.4% for the year. For 1998, premiums ceded under captive
reinsurance arrangements were $13.8 million, or 3.4% of total premiums earned
during 1998, as compared to $5.2 million, or 1.6% of total premiums earned for
the same period of 1997. New primary insurance written under captive reinsurance
arrangements was $9.7 billion, or 26.1% of total new primary insurance written
in 1998 as compared to $4.1 billion, or 19.0% of total new primary insurance
written in 1997.
Net investment income for 1998 was $59.9 million, a 14.3% increase compared
to $52.4 million in 1997. This increase was a result of continued growth in
invested assets primarily due to positive operating cash flows of $190.1 million
during 1998. During 1998, the Company purchased a total of $26.0 million of
common equities which led to a slight decrease in the growth in investment
income during 1998. Although there will be a short-term decline in investment
income from this change in investment policy, the Company expects no material
long-term impact on total investment returns as a result of this investment
diversification.
The provision for losses was $166.4 million in 1998, an increase of 12.9%
compared to $147.4 million in 1997. This increase reflected the growth of
Radian's book of business over the past several years, which has caused an
increase in the number of defaults reported to Radian, the continued adverse
experience of California loans (despite signs of 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 slightly
higher than average, partially due to the presence of these "affordable housing"
loans. Approximately 69% of Radian's primary risk in force and almost all of
Radian's pool risk in force at December 31, 1998 had not yet reached its
anticipated highest claim frequency years. Radian's overall default rate at
December 31, 1998 was 1.57% as compared to 1.75% at December 31, 1997, while the
default rate on the primary business was 2.12% at December 31, 1998 as compared
to 2.08% at December 31, 1997. The number of defaults rose from 14,711 at
December 31, 1997 to 18,775 at December 31, 1998 and the average loss reserve
per default rose from $12,229 at the end of 1997 to $13,056 at December 31,
1998. This 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 2.37% (including pool) at December 31, 1998
as compared to 3.98% at December 31, 1997 and claims paid in California during
1998 were $48.0 million, representing approximately 45.1% of total claims as
compared to 59.3% in 1997. California represented 18.6% of primary risk in force
at December 31, 1998 as compared to 20.2% at December 31, 1997. The default rate
in Florida was 3.28% (including pool) at December 31, 1998 as compared to 3.47%
at December 31, 1997 and claims paid in Florida during 1998 were $12.0 million,
representing approximately 11.2% of total claims as compared to only 6.4% in
1997. Florida represented 7.4% of primary risk in force at December 31, 1998 as
compared to 7.3% at December 31, 1997. The "affordable housing" early default
experience is a result of insuring certain loans in which the borrowers'
principal and interest reserves and other credit factors were not as strong as
on prior years' books of business. Certain underwriting changes were implemented
near the end of 1996 to compensate for the factors that contributed to the early
default experience on these "affordable housing" loans; however, it is too early
to determine the impact of such changes. In addition, Radian has reported an
increased number of defaults on the Alternative A and A minus business insured
beginning in 1997. Although the default rate for this business is higher than on
Radian's normal books, it was not 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 1998 were $105.5 million as
compared to direct losses paid during 1997 of $99.8 million, an increase of
5.8%.
Underwriting and other operating expenses were $118.2 million for 1998, an
increase of 41.7% compared to $83.4 million for 1997. These expenses consisted
of policy acquisition expenses, which relate directly to the acquisition of new
business, and other operating expenses, which primarily represent contract
underwriting expenses, overhead, and administrative costs.
Policy acquisition costs were $58.5 million in 1998, an increase of 39.9%
compared to $41.8 million in 1997. This increase reflects the growth in variable
sales- and underwriting-related expenses relating to Radian'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 1998 were $59.7 million,
an increase of 43.6% compared to $41.6 million for 1997. 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 1998 included in other operating expenses were $34.4 million as
compared to $11.2 million for 1997, an increase of 207.1%. Some of these
additional contract underwriting expenses were correspondingly offset by
increases to other income, which rose 174.7% from $5.6 million in 1997 to $15.3
million
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<PAGE> 62
in 1998. During 1998, loans underwritten via contract underwriting accounted for
21.2% of applications, 17.9% of insurance commitments, and 15.6% of certificates
issued by Radian as compared to 20.7% of applications, 17.0% of commitments, and
15.2% of certificates in 1997. 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 contract underwriting loan underwritten could decrease.
The effective tax rate for 1998, excluding merger costs net of tax of
$714,000, was 28.3% as compared to 27.3% for 1997. Eliminating the merger
expenses of $1.1 million for 1998, operating income accounted for 68.3% of net
income in 1998 as compared to 65.8% for the same period in 1997, thus resulting
in the increase in effective tax rates for 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of funds consist primarily of premiums and investment
income. Funds are applied primarily to the payment of Radian's claims and
operating expenses. The Company generated positive cash flows from operating
activities in 1999, 1998, and 1997 of $248.0 million, $190.1 million, and $148.1
million, respectively. The significant increases in operating cash flows reflect
the growth in premiums written and insurance in force that has more than offset
any increases in claims paid and other expenses. Also contributing to the
increase in operating cash flows in 1999 was a reduction in claims paid.
Positive cash flows are invested pending future payments of claims and other
expenses; cash flow shortfalls, if any, are funded primarily through sales of
short-term investments and other investment portfolio securities.
Total investments were $1.4 billion at December 31, 1999, including $57.0
million of short-term investments with maturities of 90 days or less and $99.5
million of U.S. Treasury equivalents and government agency securities. At
December 31, 1999, approximately 95.5% of the Company's investments consisted of
money market and investment-grade, readily marketable, fixed-income securities,
concentrated in maturities of greater than five years. In addition, at December
31, 1999, the Company's investment portfolio included $58.4 million of equity
securities, which includes convertible debt and convertible preferred stock.
Loss reserves increased from $245.1 million at December 31, 1998 to $335.6
million at December 31, 1999. This increase in loss reserves due to newly
reported defaults, new loans in default that were not reported, and increases to
loss reserves on existing defaults was a result of continued adverse Florida
experience as well as the continued growth of the in force insurance book. 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.
Radian has experienced abnormally high early defaults on the 1994 and 1995
origination year books of business, which reflected the increase in "affordable
housing" program loans insured in the period. Radian also experienced an
increase in defaults under the Alternative A and A minus programs insured
starting in late 1997, which is a typical pattern for such business. Unearned
premiums decreased from $75.5 million at December 31, 1998 to $54.9 million at
December 31, 1999 due to cancellation of annual and single premium product as a
result of the increased refinancing environment and the corresponding
replacement of that business with primarily monthly premium product that has no
unearned premium.
Stockholders' equity plus redeemable preferred stock increased to $1.1
billion at December 31, 1999, an increase of 12.9% from $972.2 million at
December 31, 1998. This increase resulted primarily from net income for 1999 of
$148.1 million and proceeds from the issuance of common stock of $17.1 million
and was offset by a $33.3 million decrease (net of tax) in the market value of
securities available for sale and $6.9 million of dividends.
As protection against a period of adverse loss development, Radian Guaranty
has entered into a variable quota share reinsurance treaty for the primary books
of business originated by Radian Guaranty in 1994, 1995, 1996, and 1997 as well
as some portion of the pool book of business originated in 1997 by Radian
Guaranty. As per the terms of the reinsurance treaties, Radian Guaranty receives
variable quota share loss relief at levels ranging from 7.5% to 15.0% based upon
the loss ratio on the covered book of business. A ceding commission is paid by
the reinsurer to Radian Guaranty except for certain circumstances where the loss
ratio on the covered book exceeds a stated level. These treaties remain in force
for a period of ten years and are noncancelable by either party until after ten
years have elapsed except under certain circumstances. Premiums are payable to
the reinsurer on a quarterly basis net of ceding commissions due to Radian
Guaranty and any losses calculated under the variable quota share coverage are
recovered on a quarterly basis. At the end of the fourth, seventh, and tenth
years of each treaty, depending on the extent of losses recovered to date on the
calendar year quota share portion of the treaty, a calculation is made to
determine an amount of Underwriting Year Excess Coverage, if any, due to Radian
Guaranty.
In addition, there are two other catastrophic excess loss treaties that
cover Radian's business in periods of catastrophic loss. One treaty covers the
books of business originated by Radian Guaranty while the other covers the books
of business originated by Amerin Guaranty.
As part of its Year 2000 remediation effort, the Company upgraded all
desktop and laptop personal computers and vendor software programs that were not
Year 2000 compliant during 1999. The cost of this upgrade was approximately
$350,000. In 2000, the Company plans to implement system and network monitoring
software at a cost of approximately $400,000 that will enhance the efficiency of
the Company's operating systems.
The Company believes that Radian will have sufficient funds to satisfy its
claim 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) 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
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<PAGE> 63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION (CONTINUED)
on the $4.125 Preferred Stock is dependent upon Radian's ability to pay
dividends or make other distributions to the Company. Based on the Company's
current intention to pay quarterly common stock dividends of approximately $0.03
per share, the Company will require distributions from Radian of $7.8 million
annually to pay the dividends on the outstanding shares of $4.125 Preferred
Stock and common stock. There are regulatory and contractual limitations on the
payment of dividends or other distributions (See note 7 to the Consolidated
Financial Statements.) 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 previously existing computer programs used only two digits to identify a
year in the date field. Those programs were designed and developed without
considering the impact of the change in the century. If not corrected, these
computer applications would have failed or created erroneous results by or at
the year 2000. The Company conducted an analysis of its systems and completed
its Year 2000 project with the result that all of its systems are Year 2000
compliant. "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 completed the necessary program modifications to make them Year
2000 compliant and all date-sensitive files were appropriately modified and
updated. In addition, the Company reviewed all of its hardware systems to assess
Year 2000 compliance and upgraded any systems where necessary. The Company's
servers are currently Year 2000 compliant as are all desktop and laptop systems.
Although the Company is 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 operation may remain. To date, all of the
Company's mission-critical business partners have demonstrated that their
systems that interface with the Company's systems are Year 2000 compliant.
With respect to the Company's non-information technology systems, the
Company has experienced no Year 2000 compliance problems from any providers of
electronic and electro-mechanical devices deemed critical to the Company's
business operations.
The Company did not incur any significant incremental expense related to
Year 2000 issues during 1999.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company manages its investment portfolio to achieve safety and liquidity,
while seeking to maximize total return. The Company believes it can achieve
these objectives by active portfolio management and intensive monitoring of
investments. Market risk represents the potential for loss due to adverse
changes in the fair value of financial instruments. The market risk related to
financial instruments of the Company primarily relates to the investment
portfolio, which exposes the Company to risks related to interest rates, default
prepayments, and declines in equity prices. Interest rate risk is the price
sensitivity of a fixed income security to changes in interest rates. The Company
views these potential changes in price within the overall context of asset and
liability management. The Company's analysts estimate the payout pattern of the
mortgage insurance loss reserves to determine their duration, which is the
weighted average payments expressed in years. The Company sets duration targets
for fixed income investment portfolios that the Company believes mitigates the
overall effect of interest rate risk. As of December 31, 1999, the average
duration of the fixed income portfolio was 6.2 years. Based upon assumptions the
Company uses in its duration calculations, increases in interest rates of 100
and 150 basis points would cause decreases in the market value of the fixed
maturity portfolio (excluding short-term investment) of approximately 7.3% and
10.7%, respectively. Similarly, a decrease in interest rates of 100 and 150
basis points would cause increases in the market value of the fixed maturity
portfolio of approximately 7.3% and 10.6%, respectively.
The Company had no foreign investments or non-investment-grade fixed income
securities in its investment portfolio at December 31, 1999.
At December 31, 1999, the market value and cost of the Company's equity
securities were $58.4 million and $47.7 million. The Company is exposed to
equity price risk as a result of its investment in equity securities. However,
this risk is minimal due to the relatively minor component of the overall
portfolio consisting of equity securities.
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<PAGE> 64
DIRECTORS AND OFFICERS
RADIAN GROUP INC.
DIRECTORS
Frank P. Filipps
Chairman and
Chief Executive Officer
Roy J. Kasmar
President and
Chief Operating Officer
Herbert Wender
Former Vice Chairman
LandAmerica Financial Group, Inc.
David C. Carney
Chairman
ImageMax, Inc.
Howard B. Culang
President
Laurel Corporation
Claire M. Fagin, Ph.D., R.N.
Independent Consultant
Rosemarie B. Greco
Principal
GRECOventures
Stephen T. Hopkins
President
Hopkins and Company LLC
James W. Jennings
Senior Partner
Morgan, Lewis & Bockius LLP
James C. Miller
Former President
CMAC Investment Corporation
Ronald W. Moore
Adjunct Professor of Business
Administration, Graduate School
of Business Administration,
Harvard University
Robert W. Richards
Former Chairman of the Board
Source One Mortgage
Services Corporation
Anthony W. Schweiger
President
The Tomorrow Group LLC
Larry E. Swedroe
Principal
Buckingham Asset
Management, Inc.
OFFICERS
Frank P. Filipps
Chairman and
Chief Executive Officer
Roy J. Kasmar
President and
Chief Operating Officer
C. Robert Quint
Executive Vice President
and Chief Financial Officer
Howard S. Yaruss
Senior Vice President,
Secretary and General Counsel
Albert V. Will
Executive Vice President
Sales and Operations
Andrew R. Luczakowsky
Senior Vice President
Information Services
RADIAN GUARANTY INC.
OFFICERS
Frank P. Filipps
Chairman and
Chief Executive Officer
Roy J. Kasmar
President and
Chief Operating Officer
EXECUTIVE VICE PRESIDENTS
C. Robert Quint
Chief Financial Officer
Albert V. Will
Sales and Operations
SENIOR VICE PRESIDENTS
Michael M. Brown
Regional Business Manager
Paul F. Fischer
Risk Management
Herb T. Janssen Jr.
National Accounts
Francis J. (Skip) Johnson
Regional Business Manager
Sam D. King
GSE Relations
Andrew R. Luczakowsky
Information Services
Jonathan T. McGrain
Marketing Services
Theodore H. Miller Jr.
National Accounts
S. Trezevant Moore Jr.
Product Development
and Structured Transactions
Douglas S. Rossbach
Electronic Commerce
Earl R. Smith III
National Accounts
Scott C. Stevens
Human Resources
and Administration
R. Bruce Van Fleet
National Accounts Manager
Howard S. Yaruss
Secretary and General Counsel
James A. Zarnowski
Regional Business Manager
43
<PAGE> 65
STOCKHOLDERS' INFORMATION
ANNUAL MEETING
The annual meeting of stockholders of Radian Group Inc. will be held on Tuesday,
May 9, 2000, at 10:00 a.m. at 1601 Market Street, 11th floor, Philadelphia,
Pennsylvania.
10-K REPORT
Copies of the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission will be available without charge after March 31, 2000, to
stockholders upon written request to:
Secretary
Radian Group Inc.
1601 Market Street
Philadelphia, PA 19103
TRANSFER AGENT AND REGISTRAR
Bank of New York
P.O. Box 11002
Church Street Station
New York, NY 10286
212 815.2286
CORPORATE HEADQUARTERS
1601 Market Street
Philadelphia, PA 19103
215 564.6600
COMMON STOCK
Radian Group Inc. common stock is listed on The New York Stock Exchange under
the symbol RDN. At December 31, 1999, there were 37,307,504 shares outstanding
and approximately 8,000 holders of record. The following table sets forth the
high and low sales prices of the Company's common stock on The New York Stock
Exchange Composite Tape:
<TABLE>
<CAPTION>
1998 1999
-------------------- --------------------
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
1st Quarter 69 1/4 55 15/16 51 35
2nd Quarter 67 1/4 57 1/16 51 5/16 33 5/16
3rd Quarter 68 11/16 36 5/8 55 9/16 42
4th Quarter 48 13/16 28 55 3/16 41 1/4
</TABLE>
Cash dividends for each share of the Company's common stock were $0.03 for each
quarter of 1998 and 1999.
(C)2000 RADIAN GROUP INC.
Printed entirely on recycled paper.
Design: Inc Design, incdesign.com
44
<PAGE> 1
Exhibit 4.1
Number
RA
RADIAN GROUP INC.
CORPORATE
SEAL
1991
DELAWARE
Common Stock
Shares
RADIAN
RADIAN GROUP INC. [ARTWORK OF
LADY LIBERTY
Incorporated under the laws of the state of Delaware SUPERIMPOSED ON
MAP OF THE UNITED STATES]
See reverse for certain definitions.
THIS CERTIFIES THAT CUSIP 750236 10 1
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
Radian Group Inc, transferable on the books of the Corporation by the holder
hereof in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate is not valid unless
countersigned and registered by the Transfer Agent and Registrar. Witness the
facsimile seal of the Corporation and the facsimile signatures of its duly
authorized officers.
Dated
/s/ Frank P. Filipps
---------------------------------------
Chairman and Chief Executive Officer
/s/ Howard S. Yaruss
---------------------------------------
Secretary
Countersigned and registered: by
THE BANK OF NEW YORK
Transfer Agent and Registrar Authorized Signature
<PAGE> 1
Exhibit 10.6
AGREEMENT
THIS AGREEMENT made and entered into this 9th day of June, 1999 by and between
RADIAN GROUP INC., a corporation organized and existing under the laws of the
state of Delaware (hereinafter referred to as the "Company") and ANDREW R.
LUCZAKOWSKY (hereinafter referred to as the "Employee").
WHEREAS, the Employee is presently employed by the Company as its SENIOR VICE
PRESIDENT FOR INFORMATION SERVICES; and
WHEREAS, the Board of Directors of the Company (the "Board") recognizes that, as
is the case with many publicly-held corporations, the possibility of a change in
control of the Company exists and that such possibility, and the uncertainty and
questions it may raise among management, may result in the departure or
distraction of key management personnel to the detriment of the Company; and
WHEREAS, the Board has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of key members of
the Company's management to their assigned duties without distraction in the
face of potentially disturbing circumstances arising from the possibility of a
change in control of the Company; and
WHEREAS, in order to induce the Employee to remain in the employ of the Company,
the Company agrees that the Employee shall receive the compensation set forth in
this Agreement as a cushion against the financial and career impact on the
Employee in the event that Employee's employment with the Company is terminated
subsequent to a "Change of Control" (as that term is defined in Section 1
hereof).
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and
agreements hereinafter set forth and intending to be legally bound hereby, the
parties hereto agree as follows:
1. DEFINITIONS. When used in this Agreement, the following terms shall have the
specific meanings shown in this Section unless the context of any provision of
this Agreement clearly requires otherwise:
(a) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (the "Exchange Act").
(b) "Beneficial Owner" of any securities shall mean:
(i) that such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to acquire (whether such right
is exercisable immediately or only after the passage of time) pursuant to any
agreement, arrangement or
<PAGE> 2
understanding (whether or not in writing) or upon the exercise of conversion
rights, exchange rights, rights, warrants or options, or otherwise; provided,
however, that a Person shall not be deemed the "Beneficial Owner" of securities
tendered pursuant to a tender or exchange offer made by such Person or any of
such Person's Affiliates or Associates until such tendered securities are
accepted for payment, purchase or exchange;
(ii) that such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or dispose of or has
"beneficial ownership" of (as determined pursuant to Rule 13d-3 of the General
Rules and Regulations under the Exchange Act), including without limitation,
pursuant to any agreement, arrangement or understanding (whether or not in
writing); provided, however, that a Person shall not be deemed the "Beneficial
Owner" of any security under this subsection (ii) as a result of an oral or
written agreement, arrangement or understanding to vote such security if such
agreement, arrangement or understanding (A) arises solely from a revocable proxy
given in response to a public proxy or consent solicitation made pursuant to, an
in accordance with, the applicable provisions of the General Rules and
Regulations under the Exchange Act, and (B) is not then reportable by such
Person on Schedule 13D under the Exchange Act (or any comparable successor
report); or
(iii) where voting securities are beneficially owned, directly
or indirectly, by any other Person (or any Affiliate or Associate thereof) with
which such Person (or any of such Person's Affiliates or Associates) has any
agreement, arrangement or understanding (whether or not in writing) for the
purpose of acquiring, holding, voting (except pursuant to a revocable proxy
described in the proviso to subsection (ii) above) or disposing of any voting
securities of the Company;
provided, however, that nothing in this subsection (b) shall cause a Person
engaged in business as an underwriter of securities to be the "Beneficial Owner"
of any securities acquired through such Person's participation in good faith in
a firm commitment underwriting until expiration of forty (40) days after the
date of such acquisition.
(c) "Change of Control" shall be deemed to have taken place if (i) any
Person (except for the Employee or his family, the Company or any employee
benefit plan of the Company or of any Affiliate, any Person or entity organized,
appointed or established by the Company for or pursuant to the terms of any such
employee benefit plan), together with all Affiliates and Associates of such
Person, shall become the Beneficial Owner in the aggregate of 20% or more of the
shares of the Company then outstanding and entitled to vote for directors
generally, (ii) any Person (except the Employee and his family), together with
all Affiliates and Associates of such Person purchases substantially all of the
assets of the Company, or (iii) during any twenty-four (24) month period,
individuals who at the beginning of such period constituted the Board cease for
any reason to constitute a majority thereof, unless the election, or the
nomination for election by the Company's stockholders, of at least seventy-five
percent (75%) of the directors who were not directors at the beginning of such
period was approved by a vote of at least seventy-five percent (75%) of the
directors in office at the time of such election or nomination who were
directors at the beginning of such period.
<PAGE> 3
(d) "Person" shall mean any individual, firm, corporation, partnership
or other entity.
(e) "Subsidiary" shall have the meaning ascribed to such term in Rule
12b-2 of the General Rules and Regulations under the Exchange Act.
(f) "Termination Date" shall mean the date of receipt of the Notice of
Termination described in Section 2 hereof or any later date specified therein,
as the case may be.
(g) "Termination of Employment" shall mean the termination of the
Employee's actual employment relationship with the Company.
(h) "Termination following a Change of Control" shall mean a
Termination of Employment within two years after a Change of Control either:
(i) initiated by the Company for any reason other than (a) the
Employee's continuous illness, injury or incapacity for a period of twelve
consecutive months or (b) for "cause", which shall mean misappropriation of
funds, habitual insobriety, substance abuse, conviction of a crime involving
moral turpitude, or gross negligence in the performance of duties, which gross
negligence has had a material adverse effect on the business, operations,
assets, properties or financial condition of the Company and its Subsidiaries
taken as a whole; or
(ii) initiated by the Employee upon the occurrence of one or
more of the following:
(A) any failure of the Company to comply with and
satisfy any of the conditions of this Agreement;
(B) any change resulting in a significant reduction
by the Company of the authority, duties or responsibilities of the Employee;
(C) any removal by the Company of the Employee from
the employment grade, compensation level or officer positions which the Employee
holds as of the effective date hereof, except in connection with promotions to a
higher office;
(D) the requirement that the Employee undertake
business travel (or commuting in excess of fifty miles each way) to an extent
substantially greater than is reasonable and customary for the position the
Employee holds.
2. NOTICE OF TERMINATION. Any Termination following a Change of Control shall be
communicated by a Notice of Termination to the other party hereto given in
accordance with Section 14 hereof. For purposes of this Agreement, a "Notice of
Termination" means a written notice which (i) indicates the specific termination
provision in this
<PAGE> 4
Agreement relied upon, (ii) briefly summarizes the facts and circumstances
deemed to provide a basis for termination of the Employee's employment under the
provision so indicated, and (iii) if the Termination Date is other than the date
of receipt of such notice, specifies the Termination Date (which date shall not
be more than fifteen days after the giving of such notice).
3. BENEFITS UPON CHANGE OF CONTROL.
(a) In the event of a Change of Control (i) any stock options
previously granted to the Employee under any Company stock option or equity
compensation plan which have not yet vested shall become vested, and (ii) any
restricted stock previously granted to the Employee under any Company equity
compensation plan which has not yet vested or become freely transferable shall
become vested and freely transferable.
(b) In the event of the Employee's Termination following a Change of
Control the Company shall pay to the Employee, within fifteen days after the
Termination Date, an amount in cash equal to 2.0 times (i) the Employee's then
current annual base compensation, plus (ii) the Employee's then current target
bonus eligibility.
(c) In the event of the Employee's Termination following a Change of
Control, the Employee shall be entitled to continued participation in the
Company's life, disability, accident and health insurance plans for a period not
to exceed thirty-six (36) months following the termination.
4. OTHER PAYMENTS. The payment due under Section 3 hereof shall be in addition
to and not in lieu of any payments or benefits due to the Employee under any
other plan, policy or program of the Company except that no payments shall be
due to the Employee under the Company's then current severance pay plan for
employees, if any.
5. ESTABLISHMENT OF TRUST. The Company has or will establish an irrevocable
trust fund (hereinafter referred to as the "Trust Fund") pursuant to a trust
agreement to hold assets contributed to satisfy its obligations under this
Agreement. Funding of such trust fund shall be subject to the Company's
discretion, as set forth in the trust agreement establishing the Trust Fund.
Notwithstanding the foregoing:
(a) Upon a Change of Control of the Company, the Chief Financial
Officer of the Company, or his authorized representative (hereinafter referred
to collectively as the "Treasurer"), shall immediately remit to the Trustee of
the Trust Fund as a contribution to the applicable trust established as part of
the Trust Fund for the benefit of the Employee the amount due under this
Agreement and not yet contributed to the Trustee as well as an amount estimated
to be sufficient to pay all fees and expenses that may thereafter become due.
The Trustee shall be under no duty to determine the sufficiency, or to enforce
the making, of such contributions.
<PAGE> 5
(b) In the event that the Chairman of the Board determines that a
Change of Control of the Company is imminent, the Treasurer shall make the
payments to the Trustee specified in paragraph (i) above. If a Change of Control
of the Company shall not have occurred within ninety (90) days of the
contribution made pursuant to this Section 5 and the Board adopts a resolution
to the effect that, for purposes of this Agreement, a Change of Control of the
Company is not imminent, any amounts added to the Trust Fund pursuant to this
Section, together with any earnings thereon, shall be paid by the Trustee to the
Company.
6. ENFORCEMENT.
(a) In the event that the Company shall fail or refuse to make payment
of any amounts due the Employee under Sections 3 and 4 hereof within the
respective time periods provided therein, the Company shall pay to the Employee,
in addition to the payment of any other sums provided in this Agreement,
interest, compounded daily, on any amount remaining unpaid from the date payment
is required under Section 3 and 4, as appropriate, until paid to the Employee,
at the rate from time to time announced by PNC Bank, or its successor, as its
"prime rate" plus 2%, each change in such rate to take effect on the effective
date of the change in such prime rate.
(b) It is the intent of the parties that the Employee not be required
to incur any expenses associated with the enforcement of his rights under this
Agreement by arbitration, litigation or other legal action because the cost and
expense thereof would substantially detract from the benefits intended to be
extended to the Employee hereunder. Accordingly, the Company shall pay the
Employee on demand the amount necessary to reimburse the Employee in full for
all expenses (including attorney's fees and legal expenses) incurred by the
Employee in enforcing any of the obligations of the Company under this
Agreement.
7. NO MITIGATION. The Employee shall not be required to mitigate the amount of
any payment or benefit provided for in this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment or benefit provided
for herein be reduced by any compensation earned by other employment or
otherwise.
8. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit
the Employee's continuing or future participation in or rights under any
benefit, bonus, incentive or other plan or program provided by the Company or
any of its Subsidiaries or Affiliates and for which the Employee may qualify;
provided, however, that with respect to a Termination following a Change of
Control, the Employee hereby waives the Employee's right to receive any payments
under any severance pay plan or similar program applicable to other employees of
the Company, and agrees to accept the payment provided in Section 3(b) above in
lieu of any other severance pay plan or similar program.
<PAGE> 6
9. NO SET-OFF. The Company's obligation to make the payments provided for in
this Agreement and otherwise to perform its obligations hereunder shall not be
affected by any circumstances, including, without limitation, any set-off,
counterclaim, recoupment, defense or other right which the Company may have
against the Employee or others.
10. TAXES. Any payment required under this Agreement shall be subject to all
requirements of law with regard to the withholding of taxes, filing, making of
reports and the like, and the Company shall use its best efforts to satisfy
promptly all such requirements.
11. ADJUSTMENT FOR TAXES. In the event that either the Company's independent
public accountants or the Internal Revenue Service determine that any payment,
coverage, benefit or benefit acceleration provided to the Employee, whether
specifically provided for in this Agreement or otherwise, is subject to the
excise tax imposed by Section 4999 (or any successor provision) ("Section 4999")
of the Code, the Company, within thirty (30) days thereafter, shall pay to the
Executive, in addition to any other payment, coverage or benefit due and owing
hereunder, an amount determined by multiplying the rate of excise tax then
imposed by Section 4999 by the amount of the "excess parachute payment" received
by the Executive (determined without regard to any payments made to the
Executive pursuant to this paragraph) and dividing the product so obtained by
the amount obtained by subtracting the aggregate local, estate and Federal
income tax rate applicable to the receipt by the Employee of the "excess
parachute payment" (taking into account the deductibility for Federal income tax
purposes of the payment of state and local income taxes thereon) from the amount
obtained by subtracting from 1.00 the rate of excise tax then imposed by Section
4999 of the Code, it being the Company's intention that the Employee's net after
tax position be identical to that which would have obtained had Sections 280G
and 4999 not been a part of the Code.
12. TERM OF AGREEMENT. The term of this Agreement shall be for 3 years from the
date hereof and shall be automatically renewed for successive one-year periods
unless the Company notifies the Employee in writing that this Agreement will not
be renewed at least sixty (60) days prior to the end of the current term;
provided, however, that (i) after a Change of Control during the term of this
Agreement, this Agreement shall remain in effect until all of the obligations of
the parties hereunder are satisfied or have expired, and (ii) this Agreement
shall terminate if, prior to a Change of Control, the employment of the Employee
with the Company or any of its Subsidiaries, as the case may be, shall terminate
for any reason, or if the Employee shall cease to be an Employee.
13. SUCCESSOR COMPANY. The Company shall require any successor or successors
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company, by
agreement in form and substance satisfactory to the Employee, to acknowledge
expressly that this Agreement is binding upon and enforceable against the
Company in accordance with the terms hereof, and to become jointly and severally
obligated with the Company to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform if no such
succession or successions had taken place. Failure of the
<PAGE> 7
Company to obtain such agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement. As used in this Agreement, the
Company shall mean the Company as herein before defined and any successor or
successors to its business and/or assets, jointly and severally.
14. NOTICE. All notices and other communications required or permitted hereunder
or necessary or convenient herewith shall be in writing and shall be delivered
personally or mailed by registered or certified mail, return receipt requested,
or by overnight express courier service, as follows:
If to the Company, to:
Radian Group Inc.
1601 Market Street
Philadelphia, PA 19103
Attention: Corporate Secretary
If to the Employee, to:
Andrew R. Luczakowsky
12 Virginia Lane
Horsham, PA 19044
or to such other names or addresses as the Company or the Employee, as the case
may be, shall designate by notice to the other party hereto in the manner
specified in this Section 14; provided, however, that if no such notice is given
by the Company following a Change of Control, notice at the last address of the
Company or to any successor pursuant to Section 13 hereof shall be deemed
sufficient for the purposes hereof. Any such notice shall be deemed delivered
and effective when received in the case of personal delivery; five days after
deposit, postage prepaid, with the U.S. Postal Service in the case of registered
or certified mail; or on the next business day in the case of an overnight
express courier service.
15. GOVERNING LAW. This Agreement shall be governed by and construed by and
interpreted under the laws of the Commonwealth of Pennsylvania without giving
effect to any conflict of laws provisions.
16. CONTENTS OF AGREEMENTS, AMENDMENT AND ASSIGNMENT.
(a) This Agreement supersedes all prior agreements and sets forth the
entire understanding between the parties hereto with respect to the subject
matter hereof and cannot be changed, modified, extended or terminated except
upon written amendment executed by the Employee and approved by the Board and
executed on the Company's behalf by a duly authorized officer. The provisions of
this Agreement may provide for payments to the Employee under certain
compensation or bonus plans under circumstances where such plans would not
provide for the payment thereof. It is the
<PAGE> 8
specific intention of the parties that the provisions of this Agreement shall
supersede any provisions to the contrary in such plans, and such plans shall be
deemed to have been amended to correspond with this Agreement without further
action by the Company or the Board.
(b) Nothing in this Agreement shall be construed as giving the Employee
any right to be retained in the employ of the Company.
(c) All of the terms and provisions of this Agreement shall be binding
upon and inure to the benefit of and be enforceable by the respective heirs,
representatives, successors and assigns of the parties hereto, except that the
duties and responsibilities of the Employee and the Company hereunder shall not
be assignable in whole or in part by the Company.
17. SEVERABILITY. If any provision of this Agreement or application thereof to
anyone or under any circumstances shall be determined to be invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provisions or applications of this Agreement which can be given effect without
the invalid or unenforceable provision or application.
18. REMEDIES CUMULATIVE; NO WAIVER. No right conferred upon the Employee by this
Agreement is intended to be exclusive of any other right or remedy, and each and
every such right or remedy shall be cumulative and shall be in addition to any
other right or remedy given hereunder or now or hereafter existing at law or in
equity. No delay or omission by the Employee in exercising any right, remedy or
power hereunder or existing at law or in equity shall be construed as a waiver
thereof, including, without limitation, any delay by the Employee in delivering
a Notice of Termination pursuant to Section 2 hereof after an event has occurred
which would, if the Employee had resigned, have constituted a Termination
following a Change of Control pursuant to this Agreement.
19. MISCELLANEOUS. All section headings are for convenience only. This Agreement
may be executed in several counterparts, each of which is an original. It shall
not be necessary in making proof of this Agreement or any counterpart hereof to
produce or account for any of the other counterparts.
<PAGE> 9
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have
executed this Agreement as of the date first above written.
RADIAN GROUP INC.
By: ________________________________ _________________________________
Frank P. Filipps, President Andrew R. Luczakowsky
Attest: ________________________________
<PAGE> 1
Exhibit 10.13
RADIAN VOLUNTARY DEFERRED
COMPENSATION PLAN FOR DIRECTORS
ARTICLE I - Definitions
"Account" shall mean a bookkeeping record of the accumulated contributions
determined for each Participant, including any earnings credited to or debited
from such contributions. Each Participant's Account shall be fully vested and
nonforfeitable at all times.
"Benefit Commencement Date" means the date irrevocably elected by the
Participant pursuant to Section 2.04.
"Board" means the Board of Directors of Radian Group Inc.
"Company" means Radian Group Inc., a Delaware corporation, and its corporate
successors and assigns, and any Subsidiary which is authorized by the Board to
adopt this Plan by action of its board of directors or other governing body.
"Committee" means the Stock Option and Compensation Committee of the Board.
"Compensation" means the annual fee, meeting fees and any chairmanship fees
payable to Participants during the Plan Year.
"Contingent deferred obligation" means the total amount of the Company's
contingent liability for payment of deferred benefits under the Plan.
"Deferred Compensation" means the amount of Compensation that a Participant has
irrevocably elected to defer under the terms of this Plan.
"Director" means a director of the Company.
"Disabled" and "Disability" shall have the meanings assigned to such terms in
the Company's disability plan.
"Participant" means a Director who elects to participate in the Plan, and
further differentiated as follows:
(i) "Active Participant": A Participant who is a Director at the time in
question.
(ii) "Inactive Participant": A Participant who is not a Director at the time in
question.
"Plan" means this Voluntary Deferred Compensation Plan as it may be amended from
time to time.
"Plan Year" means the calendar year during which a Participant's Compensation is
earned.
"Subsidiary" means a company of which the Company owns, directly or indirectly,
at least a majority of the shares having voting power in the election of
directors.
<PAGE> 2
ARTICLE II - Designation of Participants and Payment of Account
Section 2.01. Each individual who is eligible to participate in the Plan shall
complete such forms and provide such data as are reasonably required by the
Committee as a precondition to Plan participation.
Section 2.02. Each Participant must fully complete the deferral election form
provided by the Company, irrevocably electing to reduce their Compensation by an
amount equal to between 10% and 100% in increments of 1% only. By making such
election, the Participant shall for all purposes be deemed conclusively to have
consented to the provisions of the Plan and to all subsequent amendments
thereto. For the first Plan Year (i.e., 1999), such forms must be filed prior to
January 1, 2000. With respect to all Plan Years other than the first Plan Year,
such forms must be filed prior to January 1 of such Plan Year or at such earlier
time as may be set by the Committee in its sole discretion. A separate deferral
election must be filed for each Plan Year.
Section 2.03. A Participant may elect to receive a single sum payment or annual
installment payments over a term of ten years.
Section 2.04. A Participant may elect to receive payments in January of any year
which is at least two (2) years following the Plan Year for such election. The
Benefit Commencement Date specified in the Participant's deferral election shall
be accelerated upon the Participant's death, Disability or departure from the
Company's Board.
Section 2.05. A Participant shall have the option of postponing an elected
Benefit Commencement Date by making an irrevocable election to roll over such
election prior to the year in which such benefit is payable. A Participant shall
make such election on a form designated by the Committee.
ARTICLE III - Contingent Future Payments, Earnings, Investments and Forfeitures
Section 3.01. The Committee shall cause an Account to be kept in the name of
each Participant which shall reflect the value of the deferred contingent
benefits payable to such Participant or beneficiary under the Plan. Each Account
shall be maintained for bookkeeping purposes only. Neither the Plan nor any of
the Accounts established under the Plan shall hold any actual funds or assets.
Section 3.02. As soon as practicable after each year, each Active Participant's
Account shall be credited with earnings and debited with losses in accordance
with the annual rate of return option elected by the Participant on their
deferral election form. The annual rate of return election is irrevocable. The
annual rate of return options available under the Plan are:
(a) 200 basis points in excess of the average yield on 30-year U.S. Treasuries
on the last business day of each month of the year, and
(b) the Company's reported return on equity (positive or negative) for the year,
using (i) the Company's net income or loss after excluding expenses associated
with transactions that, in the
2
<PAGE> 3
opinion of the Committee, are extraordinary and non-recurring, divided by (ii)
the average of the common stockholders equity calculated as the first day of the
year and the last day of the year.
Section 3.03 As soon as practicable after each year, each Inactive Participant's
Account shall be credited with earnings based upon the average yield on 5-year
U.S. Treasuries on the last business day of each month of such year plus 100
basis points. A Participant who ceases being a Director shall have the rate of
return they selected in accordance with Section 3.02 applied to their Deferred
Compensation until the date they terminated their status as a Director; the rate
of return for Inactive Participants provided under this Section 3.03 shall be
applied to their Deferred Compensation from that date until such compensation is
distributed.
Section 3.04. Each Participant's account shall be credited with the amount of
Deferred Compensation for such Plan Year as of the date such Deferred
Compensation would have been paid to the Participant had it not been deferred in
accordance with this Plan. All earning or losses thereon shall be prorated
accordingly.
Section 3.05. Title to and beneficial ownership of any assets, whether cash or
investments, which the Company may set aside or earmark to meet its contingent
deferred obligation hereunder, shall at all times remain in the Company. All
Plan Participants and beneficiaries are general unsecured creditors of the
Company with respect to the benefits due hereunder and the Plan constitutes a
mere promise by the Company to make benefit payments in the future. It is the
intention of the Company that the Plan be considered unfunded for tax purposes.
Section 3.06. In order to meet its contingent deferred obligations hereunder,
funds may be set aside or earmarked by the Company. These funds may be kept in
cash, or invested and reinvested, in the discretion of the Committee. The
Company may, but is not required to, establish a grantor trust which may be used
to hold assets of the Company which are maintained as reserves against the
Company's unfunded, unsecured obligations hereunder. Such reserves shall at all
times be subject to the claims of the Company's creditors. To the extent such
trust or other vehicle is established, and assets contributed, for the purpose
of fulfilling the Company's obligation hereunder, then such obligation of the
Company shall be reduced to the extent such assets are utilized to meet its
obligations hereunder.
ARTICLE IV - Death Benefits
Section 4.01. In the event that a Participant dies prior to their Benefit
Commencement Date, the Participant's Account shall accrue annual earnings
thereafter in accordance with Section 3.03 until such time as the Account is
distributed. The beneficiary of such Participant shall receive as a death
benefit a single sum equal to the entire value of the Account in January of the
year immediately following the Participant's death.
Section 4.02. In the event that a Participant dies after their Benefit
Commencement Date, the beneficiary of such Participant shall receive as a death
benefit a single sum equal to the entire value of the Account.
3
<PAGE> 4
ARTICLE V - Payment of Benefits
Section 5.01. A Participant's Account shall become payable to the Participant as
soon as administratively practical following the Benefit Commencement Date
specified in their deferral election. If the Participant has elected to receive
their Account in annual installments, the Participant's Account will continue to
be credited with earnings or losses calculated in accordance with their
elections. Each annual payment shall be calculated by dividing the remaining
value of the Account (or portion thereof) by the number of remaining annual
installment payments to be made to the Participant.
Section 5.02. A Participant's death benefit shall be payable to their
beneficiary as set forth in Article IV.
Section 5.03. A Participant shall be paid the value of their Account (or portion
thereof) beginning at the Benefit Commencement Date in a single sum or in
periodic installment payments payable annually for ten years as irrevocably
elected by the Participant.
Section 5.04. The Committee has the authority, in its sole discretion and
judgment, to make all determinations concerning eligibility for benefits under
the Plan, the time or terms of payment, and the form or manner of payment to the
Participant or the Participant's beneficiary, in the event of the death or
Disability of the Participant.
Section 5.05. If a Participant or beneficiary entitled to receive any benefits
hereunder is a minor or is determined to be legally incapable of giving valid
receipt and discharge for such benefits, benefits will be paid to such person as
the Committee may designate for the benefit of such Participant or beneficiary.
Such payments shall be considered a payment to such Participant or beneficiary
and shall, to the extent made, be deemed a complete discharge of any liability
for such payments under the Plan.
Section 5.06. The Committee shall make all reasonable attempts to determine the
identity and/or whereabouts of a Participant or a Participant's beneficiary
entitled to benefits under the Plan, including the mailing by certified mail of
a notice to the last known address shown on the Company's or the Committee's
records. If the Committee is unable to locate such a person entitled to benefits
hereunder, or if there has been no claim made for such benefits, the Company
shall continue to hold the benefit due such person, subject to any applicable
statute of escheats.
Section 5.07. In the event of the Participant's Disability or departure from the
Company's Board prior to their selected Benefit Commencement Date, the
Participant's Benefit Commencement Date shall be adjusted to the January
following the Participant's departure from the Company's Board or Disability.
The Participant's Account shall be paid in the manner prescribed on the
Participant's election form, except with regard to the Participant's originally
selected Benefit Commencement Date.
Section 5.08. Any claim by a Participant or their beneficiary (hereafter the
"Claimant") for benefits shall be submitted in writing to the Committee.
(a) The Committee shall be responsible for deciding whether such claim is
payable, or the claimed relief otherwise is allowable, under the provisions and
rules of the Plan (a "Covered Claim"). The Committee otherwise shall be
responsible for providing a full review of the Committee's decision with regard
to any claim, upon a written request.
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<PAGE> 5
(b) Each Claimant or other interested person shall file with the Committee such
pertinent information as the Committee may specify, and in such manner and form
as the Committee way specify; and, such person shall not have any rights or be
entitled to any benefits, or further benefits, hereunder, as the case may be,
unless the required information is filed by the Claimant or on behalf of the
Claimant. Each Claimant shall supply, at such times and in such manner as may be
required, written proof that the benefit is covered under the Plan. If it is
determined that a Claimant has not incurred a Covered Claim or if the Claimant
shall fail to furnish such proof as is requested, no benefits, or no further
benefits, hereunder, as the case may be, shall be payable to such Claimant.
(c) Notice of any decision by the Committee with respect to a claim generally
shall be furnished to the Claimant within ninety (90) days following the receipt
of the claim by the Committee (or within ninety (90) days following the
expiration of the initial ninety (90) day period in any case where, there are
special circumstances requiring extension of time for processing the claim). If
special circumstances require an extension of time for processing the claim,
written notice of the extension shall be furnished by the Committee to the
Claimant.
(d) Commencement of benefit payments shall constitute notice of approval of a
claim to the extent of the amount of the approved benefit. If such claim shall
be wholly or partially denied, such notice shall be in writing. If the Committee
fails to notify the Claimant of the decision regarding their claim in accordance
with this Section 5.07, the claim shall be "deemed" denied, and the Claimant
then shall be permitted to proceed with the claims review procedure provided for
herein.
(e) Within sixty (60) days following receipt by the Claimant of notice of the
claim denial, or within sixty (60) days following the date of a deemed denial,
the Claimant may appeal denial of the claim by filing a written application for
review with the Committee. Following such request for review, the Committee
shall fully review the decision denying the claim. The decision of the Committee
then shall be made within sixty (60) days following receipt by the Committee of
a timely request for review (or within one hundred and twenty (120) days after
such receipt, in a case where there are special circumstances requiring an
extension of time for reviewing such denied claim). The Committee shall deliver
its decision to the Claimant in writing. If the decision on review is not
furnished within the prescribed time, the claim shall be deemed denied on
review.
(f) For all purposes under the Plan, the decision with respect to a claim (if no
review is requested) and the decision with respect to a claims review (if
requested), shall be final, binding and conclusive on all Participants,
beneficiaries and other interested parties, as to all matters relating to the
Plan and Plan benefits. Further, each claims determination under the Plan shall
be made in the absolute and exclusive discretion and authority of the Committee.
ARTICLE VI - Beneficiary Designation
Section 6.01. A Participant may designate a beneficiary and a contingent
beneficiary as part of their deferral election. Any beneficiary designation
hereunder shall remain effective until changed or revoked.
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<PAGE> 6
Section 6.02. A beneficiary designation may be changed by the Participant at any
time, or from time to time, by filing a new designation in writing with the
Company.
Section 6.03. If the Participant dies without having designated a beneficiary or
if the Participant dies and the beneficiary so named by the Participant has
predeceased the Participant, then the Participant's estate shall be deemed to be
their beneficiary.
ARTICLE VII - Administration
Section 7.01. The books and records to be maintained for the purpose of the Plan
shall be maintained by the officers and employees of the Company at its expense
and subject to the supervision and control of the Committee. The Company shall
pay all expenses of administering the Plan either from funds set aside or
earmarked under the Plan or from other funds.
Section 7.02. To the extent permitted by law, the right of any Participant or
any beneficiary in any benefit or to any payment hereunder shall not be subject
in any manner to attachment or other legal process for the debts of such
Participant or beneficiary; and any such benefit or payment shall not be subject
to anticipation, alienation, sale, transfer, assignment or encumbrance.
Section 7.03. No member of the Board or of the Committee and no officer or
employee of the Company shall be liable to any person for any action taken or
omitted in connection with the administration of this Plan unless attributable
to their own fraud or willful misconduct; nor shall the Company be liable to any
person for any such action unless attributable to fraud or willful misconduct on
the part of a director, officer or employee of the Company.
Section 7.04. The Committee shall be the agent for service of process on the
Plan.
Section 7.05. Benefit payments hereunder shall be subject to withholding, to the
extent required (as determined by the Company) by applicable tax or other laws.
Section 7.06. The Plan shall be binding upon and inure to the benefit of the
Company, its successors and assigns, and the Participant and their heirs,
executors, administrators and legal representatives.
Section 7.07. If any provision of this Plan is held invalid or unenforceable to
the extent necessary to effectuate the purposes of this Plan, its invalidity or
unenforceability shall not affect any other provisions of the Plan and the Plan
shall be construed and enforced as if such provisions had not been included
therein.
ARTICLE VIII - Amendment or Termination of Plan
Section 8.01. The Board may terminate the Plan or amend the Plan in whole or in
part, effective as of any date specified. Notwithstanding the foregoing, in the
event of a "Change in Control" of the Company, as such term is defined in the
Company's Equity Compensation Plan, the Plan may not be amended in any manner
whatsoever that would diminish the value of a Participant's interest in or
ultimate benefits under the Plan or accelerate any payment to a Participant.
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<PAGE> 7
RADIAN VOLUNTARY DEFERRED
COMPENSATION PLAN FOR OFFICERS
ARTICLE I - Definitions
"Account" shall mean a bookkeeping record of the accumulated contributions
determined for each Participant, including any earnings credited to or debited
from such contributions. Except as provided in Section 3.07, a Participant's
Account shall be fully vested and nonforfeitable at all times.
"Benefit Commencement Date" means the date irrevocably elected by the
Participant pursuant to Section 2.04.
"Board" means the Board of Directors of Radian Group Inc.
"Company" means Radian Group Inc., a Delaware corporation, and its corporate
successors and assigns, and any Subsidiary which is authorized by the Board to
adopt this Plan by action of its board of directors or other governing body.
"Committee" means the Stock Option and Compensation Committee of the Board.
"Compensation" means annual bonuses paid to Participants after the close of each
calendar year for which the bonuses are earned.
"Contingent deferred obligation" means the total amount of the Company's
contingent liability for payment of deferred benefits under the Plan.
"Deferred Compensation" means the amount of Compensation that a Participant has
irrevocably elected to defer under the terms of this Plan.
"Disabled" and "Disability" shall have the meanings assigned to such terms in
the Company's disability plan.
"Eligible Executive" means an executive of the Company, or of a Subsidiary, who
has the rank of Senior Vice President or higher and such other officers of the
Company as the Committee may designate.
"Participant" means an Eligible Executive who elects to participate in the Plan,
and further differentiated as follows:
(i) "Active Participant": A Participant who is an employee of the Company at the
time in question.
(ii) "Inactive Participant": A Participant who is not an employee of the Company
at the time in question.
"Plan" means this Voluntary Deferred Compensation Plan as it may be amended from
time to time.
<PAGE> 8
"Plan Year" means the calendar year during which a Participant's Compensation is
earned.
"Retirement" means a Participant's retirement as defined under Radian's Pension
Plan.
"Subsidiary" means a company of which the Company owns, directly or indirectly,
at least a majority of the shares having voting power in the election of
directors.
ARTICLE II - Designation of Participants and Payment of Account
Section 2.01. Each individual who is eligible to participate in the Plan shall
complete such forms and provide such data as are reasonably required by the
Committee as a precondition to Plan participation.
Section 2.02. Each Participant must fully complete the deferral election form
provided by the Company, irrevocably electing to reduce their Compensation by an
amount equal to between 10% and 100% in increments of 1% only. By making such
election, the Participant shall for all purposes be deemed conclusively to have
consented to the provisions of the Plan and to all subsequent amendments
thereto. For the first Plan Year (i.e., 1999), such forms must be filed prior to
January 1, 2000. With respect to all Plan Years other than the first Plan Year,
such forms must be filed prior to January 1 of such Plan Year or at such earlier
time as may be set by the Committee in its sole discretion. A separate deferral
election must be filed for each Plan Year.
Section 2.03. A Participant may elect to receive a single sum payment or annual
installment payments over a term of ten years.
Section 2.04. A Participant may elect to receive payments in January of any year
which is at least two (2) years following the Plan Year for such election. The
Benefit Commencement Date specified in the Participant's deferral election shall
be accelerated upon the Participant's death, Disability or Retirement.
Section 2.05. A Participant shall have the option of postponing an elected
Benefit Commencement Date by making an irrevocable election to roll over such
election prior to the year in which such benefit is payable. A Participant shall
make such election on a form designated by the Committee.
ARTICLE III - Contingent Future Payments, Earnings, Investments and Forfeitures
Section 3.01. The Committee shall cause an Account to be kept in the name of
each Participant which shall reflect the value of the deferred contingent
benefits payable to such Participant or beneficiary under the Plan. Each Account
shall be maintained for bookkeeping purposes only. Neither the Plan nor any of
the Accounts established under the Plan shall hold any actual funds or assets.
Section 3.02. As soon as practicable after each year, each Active Participant's
Account shall be credited with earnings and debited with losses in accordance
with the annual rate of return option
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<PAGE> 9
elected by the Participant on their deferral election form. The annual rate of
return election is irrevocable. The annual rate of return options available
under the Plan are:
(a) 200 basis points in excess of the average yield on 30-year U.S. Treasuries
in effect on the last business day of each month of the year, and
(b) the Company's reported return on equity (positive or negative) for the year,
using (i) the Company's net income or loss after excluding expenses associated
with transactions that, in the opinion of the Committee, are extraordinary and
non-recurring, divided by (ii) the average of the common stockholders equity
calculated as the first day of the year and the last day of the year.
Section 3.03. As soon as practicable after each year, each Inactive
Participant's Account shall be credited with earnings based upon: (i) the
average yield on 5-year U.S. Treasuries on the last business day of each month
of such year plus 100 basis points if they left the Company's employ because of
their death, Disability or Retirement, or (ii) the average yield on 30-year U.S.
Treasuries on the last business day of each month of such year if they left the
Company's employ for any other reason. A Participant who leaves the Company's
employ shall have the rate of return they selected in accordance with Section
3.02 applied to their Deferred Compensation until the date they terminated their
employment status; the rate of return for Inactive Participants provided under
this Section 3.03 shall be applied to their Deferred Compensation from that date
until such compensation is distributed.
Section 3.04. Each Participant's account shall be credited with the amount of
Deferred Compensation for such Plan Year as of the date such Deferred
Compensation would have been paid to the Participant had it not been deferred in
accordance with this Plan. All earning or losses thereon shall be prorated
accordingly.
Section 3.05. Until deferred benefits hereunder are distributed in accordance
with the terms of the Plan, the interest of each Participant and beneficiary
therein is contingent only and is subject to forfeiture as provided in Section
3.07. Title to and beneficial ownership of any assets, whether cash or
investments, which the Company may set aside or earmark to meet its contingent
deferred obligation hereunder, shall at all times remain in the Company. All
Plan Participants and beneficiaries are general unsecured creditors of the
Company with respect to the benefits due hereunder and the Plan constitutes a
mere promise by the Company to make benefit payments in the future. It is the
intention of the Company that the Plan be considered unfunded for tax purposes.
Section 3.06. In order to meet its contingent deferred obligations hereunder,
funds may be set aside or earmarked by the Company. These funds may be kept in
cash, or invested and reinvested, in the discretion of the Committee. The
Company may, but is not required to, establish a grantor trust which may be used
to hold assets of the Company which are maintained as reserves against the
Company's unfunded, unsecured obligations hereunder. Such reserves shall at all
times be subject to the claims of the Company's creditors. To the extent such
trust or other vehicle is established, and assets contributed, for the purpose
of fulfilling the Company's obligation hereunder, then such obligation of the
Company shall be reduced to the extent such assets are utilized to meet its
obligations hereunder.
Section 3.07. The contingent right of a Participant or beneficiary to receive
future payments hereunder shall be forfeited upon the occurrence of any one or
more of the following events:
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<PAGE> 10
(a) If the Participant is discharged from employment by the Company or a
Subsidiary for acts which constitute their willful misconduct in connection with
the performance of their duties to the Company or a Subsidiary, and such conduct
shall have been materially harmful to the Company or a Subsidiary, including,
but without limiting the generality of the foregoing, misappropriation of funds
or property of the Company or a Subsidiary, securing or attempting to secure
personally any profit in connection with any transaction entered into on behalf
of the Company or a Subsidiary, or committing the Company or a Subsidiary to any
transaction adverse to its respective interests except as a result of a good
faith error in judgment, or
(b) If the Participant shall enter into a business or employment which the
Committee determines to be (i) detrimentally competitive with the business of
the Company or a Subsidiary, and (ii) substantially injurious to the Company's
financial interests.
ARTICLE IV - Death Benefits
Section 4.01. In the event that a Participant dies prior to their Benefit
Commencement Date, the Participant's Account shall accrue annual earnings
thereafter in accordance with Section 3.03 until such time as the Account is
distributed. The beneficiary of such Participant shall receive as a death
benefit a single sum equal to the entire value of the Account in January of the
year immediately following the Participant's death.
Section 4.02. In the event that a Participant dies after their Benefit
Commencement Date, the beneficiary of such Participant shall receive as a death
benefit a single sum equal to the entire value of the Account.
ARTICLE V - Payment of Benefits
Section 5.01. A Participant's Account shall become payable to the Participant as
soon as administratively practical following the Benefit Commencement Date
specified in their deferral election. If the Participant has elected to receive
their Account in annual installments, the Participant's Account will continue to
be credited with earnings or losses calculated in accordance with their
elections. Each annual payment shall be calculated by dividing the remaining
value of the Account (or portion thereof) by the number of remaining annual
installment payments to be made to the Participant.
Section 5.02. A Participant's death benefit shall be payable to their
beneficiary as set forth in Article IV.
Section 5.03. A Participant shall be paid the value of their Account (or portion
thereof) beginning at the Benefit Commencement Date in a single sum or in
periodic installment payments payable annually for ten years as irrevocably
elected by the Participant.
Section 5.04. In the event of the death or Disability of the Participant, the
Committee has the authority, in its sole discretion and judgment, to make
determinations concerning eligibility for benefits under the Plan.
Section 5.05. If a Participant or beneficiary entitled to receive any benefits
hereunder is a minor or is determined to be legally incapable of giving valid
receipt and discharge for such benefits,
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<PAGE> 11
benefits will be paid to such person as the Committee may designate for the
benefit of such Participant or beneficiary. Such payments shall be considered a
payment to such Participant or beneficiary and shall, to the extent made, be
deemed a complete discharge of any liability for such payments under the Plan.
Section 5.06. The Committee shall make all reasonable attempts to determine the
identity and/or whereabouts of a Participant or a Participant's beneficiary
entitled to benefits under the Plan, including the mailing by certified mail of
a notice to the last known address shown on the Company's or the Committee's
records. If the Committee is unable to locate such a person entitled to benefits
hereunder, or if there has been no claim made for such benefits, the Company
shall continue to hold the benefit due such person, subject to any applicable
statute of escheats.
Section 5.07. In the event of the Participant's Disability or Retirement prior
to their selected Benefit Commencement Date, the Participant's Benefit
Commencement Date shall be adjusted to the January following the Participant's
Retirement or Disability. The Participant's Account shall be paid in the manner
prescribed on the Participant's election form, except with regard to the
Participant's originally selected Benefit Commencement Date.
ARTICLE VI - Beneficiary Designation
Section 6.01. A Participant may designate a beneficiary and a contingent
beneficiary as part of their deferral election. Any beneficiary designation
hereunder shall remain effective until changed or revoked.
Section 6.02. A beneficiary designation may be changed by the Participant at any
time, or from time to time, by filing a new designation in writing with the
Company.
Section 6.03. If the Participant dies without having designated a beneficiary or
if the Participant dies and the beneficiary so named by the Participant has
predeceased the Participant, then the Participant's estate shall be deemed to be
their beneficiary.
ARTICLE VII - Administration
Section 7.01. The books and records to be maintained for the purpose of the Plan
shall be maintained by the officers and employees of the Company at its expense
and subject to the supervision and control of the Committee. The Company shall
pay all expenses of administering the Plan either from funds set aside or
earmarked under the Plan or from other funds.
Section 7.02. To the extent permitted by law, the right of any Participant or
any beneficiary in any benefit or to any payment hereunder shall not be subject
in any manner to attachment or other legal process for the debts of such
Participant or beneficiary; and any such benefit or payment shall not be subject
to anticipation, alienation, sale, transfer, assignment or encumbrance.
Section 7.03. No member of the Board or of the Committee and no officer or
employee of the Company shall be liable to any person for any action taken or
omitted in connection with the administration of this Plan unless attributable
to their own fraud or willful misconduct; nor shall
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<PAGE> 12
the Company be liable to any person for any such action unless attributable to
fraud or willful misconduct on the part of a director, officer or employee of
the Company.
Section 7.04. The Committee shall be the agent for service of process on the
Plan.
Section 7.05. Benefit payments hereunder shall be subject to withholding, to the
extent required (as determined by the Company) by applicable tax or other laws.
Section 7.06. The Plan shall be binding upon and inure to the benefit of the
Company, its successors and assigns, and the Participant and their heirs,
executors, administrators and legal representatives.
Section 7.07. If any provision of this Plan is held invalid or unenforceable to
the extent necessary to effectuate the purposes of this Plan, its invalidity or
unenforceability shall not affect any other provisions of the Plan and the Plan
shall be construed and enforced as if such provisions had not been included
therein.
ARTICLE VIII - Amendment or Termination of Plan
Section 8.01. The Board may terminate the Plan or amend the Plan in whole or in
part, effective as of any date specified. Notwithstanding the foregoing, in the
event of a "Change in Control" of the Company, as such term is defined in the
Company's Equity Compensation Plan, the Plan may not be amended in any manner
whatsoever that would diminish the value of a Participant's interest in or
ultimate benefits under the Plan or accelerate any payment to a Participant.
6
<PAGE> 1
Exhibit 10.25
GUARANTY AGREEMENT
This Guaranty Agreement (the "Guaranty"), dated as of August 11, 1999, is
entered into by and between Radian Guaranty Inc. ("Radian"), a Pennsylvania
domiciled insurance company, and Amerin Guaranty Corporation ("Amerin"), an
Illinois domiciled insurance company.
WITNESSETH:
WHEREAS, Amerin and Radian are wholly owned subsidiaries of Radian Group Inc., a
Delaware domiciled insurance holding company; and
WHEREAS, both parties desire to be awarded claims paying ability ratings of "AA"
by Standard & Poor's and Duff & Phelps Credit Rating Company and "Aa3" by
Moody's Investors Services, Inc.; and
WHEREAS, each party is willing to guaranty the capacity of the other party to
pay all legitimate insurance and reinsurance claims of such other party on a
timely basis to the extent that such other party fails or is unable to satisfy
such claims in full and as is necessary for such other party to be awarded the
aforementioned claims paying ability ratings; and
WHEREAS, the corporate interests of Radian, Amerin and Radian Group Inc. will be
enhanced by entering into this Guaranty.
NOW, THEREFORE, in consideration of the foregoing, the parties do hereby agree
as follows:
SECTION 1. RADIAN GUARANTY. Radian UNCONDITIONALLY AND IRREVOCABLY GUARANTEES to
Amerin, for the benefit of the owners of insurance and reinsurance contracts
issued by Amerin (the "Amerin's Insureds"), that it will during the term of this
Guaranty, on demand by Amerin, make funds available in cash to Amerin for the
full and complete payment when due of all claims, obligations and liabilities of
Amerin including all claims made under all insurance or reinsurance contracts
issued or assumed by Amerin (collectively, the "Guaranteed Amerin Obligations").
This Guaranty shall inure to the benefit of all of Amerin's Insureds and they
are hereby made third-party beneficiaries and may directly claim upon and
enforce the obligations of Radian hereunder as provided herein. This Guaranty
shall include the full and complete payment of the amount of any claim on any
Guaranteed Amerin Obligation paid by Amerin which is subsequently voided in
whole or in part as a preferential payment under applicable law, including
proceedings in bankruptcy, insolvency, reorganization or other similar laws
affecting creditor's rights generally.
SECTION 2. AMERIN GUARANTY. Amerin UNCONDITIONALLY AND IRREVOCABLY GUARANTEES to
Radian, for the benefit of the owners of insurance and reinsurance contracts
issued by Radian (the "Radian's Insureds"), that it will during the term of this
Guaranty, on demand by Radian, make funds available in cash to Radian for the
full and complete payment when due of all claims, obligations and liabilities of
Radian including all claims made under all insurance or reinsurance contracts
issued or assumed by Radian (collectively, the Guaranteed Radian Obligations").
This Guaranty shall inure to the benefit of all of Radian's Insureds and they
are
<PAGE> 2
hereby made third-party beneficiaries and may directly claim upon and enforce
the obligations of Amerin hereunder as provided herein. This Guaranty shall
include the full and complete payment of the amount of any claim on any claim on
any Guaranteed Radian Obligation paid by Radian which is subsequently voided in
whole or in part as a preferential payment under applicable law, including
proceedings in bankruptcy, insolvency, reorganization or other similar laws
affecting creditor's rights generally.
SECTION 3. OBLIGATIONS UNCONDITIONAL. The obligations under this Guaranty are
irrevocable and unconditional to the fullest extent permitted by applicable law,
irrespective of any other circumstance whatsoever which might otherwise
constitute a legal or equitable discharge of a surety or guarantor, including
fraud in the inducement or fact; the intent of this Guaranty being that the
obligations hereunder shall be absolute and unconditional under all
circumstances and shall not be discharged except by payment as provided for
herein. In order to confirm that a payment hereunder is permitted by applicable
law, the parties hereto shall provide at least thirty days prior notice of such
payment to the insurance department of the state in which the party obliged to
make such payment is domiciled. Radian and Amerin hereby expressly waive
diligence, presentment, notice of acceptance and any requirement that the other
party hereto exhaust any right, remedy or proceed against any obligor.
SECTION 4. SUBROGATION. Each party hereby unconditionally agrees that until the
payment and satisfaction in full of all payments guaranteed hereby, it shall not
exercise any right or remedy arising by reason of any performance by it of this
Guaranty, whether by subrogation or otherwise, against the other party.
SECTION 5. NO WAIVER. No failure on the part either party hereto to exercise, no
delay in exercising, and no course of dealing with respect to, any right or
remedy hereunder will operate as a waiver thereof, nor will any single or
partial exercise of any right or remedy hereunder preclude any other further
exercise thereof or the exercise of any other right or remedy.
SECTION 6. CONTINUING EFFECT; ASSIGNMENT. This Guaranty is a continuing
guarantee and it:
(i) shall apply to all insurance or reinsurance contracts issued or
assumed by the parties during the term of this Guaranty;
(ii) shall remain in full force and effect until payment in full of
such contractual liabilities;
(iii) shall be binding upon the parties, their successors and assigns;
(iv) shall, notwithstanding the insolvency of Amerin nor any payment
made by Radian to Amerin or a liquidator, receiver or conservator
thereof, inure to the benefit of, and be enforceable by, Amerin's
Insureds, its successors and assigns, to the extent of claims on
Guaranteed Amerin Obligations which are not satisfied by Amerin; and
(v) shall, notwithstanding the insolvency of Radian nor any payment
made by Amerin to Radian or a liquidator, receiver or conservator
thereof, inure to the benefit of, and be
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<PAGE> 3
enforceable by, Radian's Insureds, their successors and assigns, to the
extent of claims on Guaranteed Radian Obligations which are not
satisfied by Radian.
SECTION 7. RANK. The obligations of each party hereunder are intended to rank
equally with all other policy obligations of such party, whether now or
hereafter outstanding and which are not otherwise contractually subordinated.
SECTION 8. CONSIDERATION. Each party has entered into this Guaranty in
consideration of the other party entering into this Guaranty.
SECTION 9. EFFECTIVE DATE, AMENDMENT, MODIFICATION OR TERMINATION. The term of
this Guaranty shall commence on the date noted in the first paragraph hereof.
This Guaranty may not be amended or modified provided, however, either party may
terminate its obligations hereunder by giving written notice of such termination
to the other party, at least thirty (30) days prior to such termination. Such
notice shall also be provided to each of the three aforementioned rating
agencies, which will also be provided thirty (30) days' prior written notice of
any amendment or modification. Such termination shall not affect each party's
continuing liability with respect to obligations guaranteed prior to the date of
termination.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this
Guaranty as of the day and year first above written.
RADIAN GUARANTY INC.
By: _____________________________
Title: _____________________________
AMERIN GUARANTY CORPORATION
By: _____________________________
Title: _____________________________
3
<PAGE> 1
Exhibit 22.1
SUBSIDIARIES OF RADIAN GROUP INC.
Radian Group Inc. (Delaware domiciled corporation)
Amerin Guaranty Corporation (Illinois domiciled wholly owned
subsidiary)
Amerin Re Corporation (Illinois domiciled wholly owned subsidiary)
Amerin Investor Services Corporation (Illinois domiciled wholly owned
subsidiary)
CMAC Investment Management Corporation (Delaware domiciled wholly owned
subsidiary)
Radian Reinsurance Company (Vermont domiciled wholly owned subsidiary)
RADIAN GUARANTY INC. (Pennsylvania domiciled wholly owned subsidiary)
Radian Services Inc. (Pennsylvania domiciled wholly owned
subsidiary of Radian Guaranty Inc.)
Commonwealth Mortgage Assurance Company of Texas (Texas
domiciled wholly owned subsidiary Radian Guaranty Inc. )
Commonwealth Mortgage Assurance Company of Arizona (Arizona
domiciled wholly owned subsidiary Radian Guaranty Inc. )
CMAC Mortgage Insurance Company (Pennsylvania domiciled wholly
owned subsidiary of Radian Guaranty Inc.)
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-57872, 33-67366, 33-98106 and 333-40623 of Radian Group Inc. on Forms S-8
of our report dated March 10, 2000, incorporated by reference in this Annual
Report on Form 10-K of Radian Group Inc. for the year ended December 31, 1999.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
March 30, 2000
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (No. 33-57872, 33-67366, 33-98106 and 333-40623) of Radian Group Inc.
of our report dated January 21, 1999, with respect to the consolidated balance
sheet of Amerin Corporation and subsidiaries as of December 31, 1998, and the
related consolidated statements of operations, common stockholders' equity and
cash flows for each of the two years then ended, which report appears in the
Annual Report on Form 10-K of Radian Group Inc. for the year ended December 31,
1999.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Chicago, Illinois
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000890926
<NAME> RADIAN
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 7,507
<SECURITIES> 1,388,677
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 380,528
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,776,712
<CURRENT-LIABILITIES> 679,456
<BONDS> 0
40,000
0
<COMMON> 37
<OTHER-SE> 1,057,219
<TOTAL-LIABILITY-AND-EQUITY> 1,776,712
<SALES> 0
<TOTAL-REVENUES> 552,811
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 159,202
<LOSS-PROVISION> 174,143
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 219,466
<INCOME-TAX> 71,328
<INCOME-CONTINUING> 148,138
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 148,138
<EPS-BASIC> 3.92
<EPS-DILUTED> 3.83
</TABLE>
<PAGE> 1
Exhibit 99
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
Amerin Corporation
We have audited the consolidated balance sheet of Amerin Corporation and
subsidiaries as of December 31, 1998, and the related consolidated statements of
operations, common stockholders' equity, and cash flows for each of the two
years in the period ended December 31, 1998. In connection with our audits of
the consolidated financial statements, we have also audited the financial
statement schedules listed (none of which aforementioned consolidated financial
statements and financial statement schedules are separately presented herein).
These consolidated financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Amerin
Corporation and subsidiaries at December 31, 1998, and the consolidated results
of their operations and their cash flows for each of the two years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Chicago, Illinois
January 21, 1999
