<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended
SEPTEMBER 30, 2000
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
--------------------- ---------------------
Commission file number 1-11356
RADIAN GROUP INC.
-----------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-2691170
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1601 MARKET STREET, PHILADELPHIA, PA 19103
------------------------------------ -----
(Address of principal executive offices) (zip code)
(215) 564-6600
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or if such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----------- -------------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 37,839,735 shares of
Common Stock, $0.001 par value, outstanding on November 10, 2000.
<PAGE> 2
RADIAN GROUP INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C>
Part I - Financial Information
Consolidated Balance Sheets - September 30, 2000 (Unaudited) and
December 31, 1999..................................................... 3
Consolidated Statements of Income - For the quarters and nine month periods
ended September 30, 2000 (Unaudited) and 1999 (Unaudited)............. 4
Consolidated Statement of Changes in Common Stockholders' Equity - For
the nine month period ended September 30, 2000 (Unaudited) ........... 5
Consolidated Statements of Cash Flows - For the nine month periods ended
September 30, 2000 (Unaudited) and 1999 (Unaudited)................... 6
Notes to Consolidated Financial Statements..................................... 7-8
Management's Discussion and Analysis of Results of
Operations and Financial Condition.................................... 9-14
Quantitative and Qualitative Disclosures about Market Risk..................... 14
Part II - Other Information, as applicable.............................................. 15
Signature............................................................................... 16
</TABLE>
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<PAGE> 3
RADIAN GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
---- ----
(Unaudited)
(In thousands, except share amounts)
<S> <C> <C>
Assets
Investments
Fixed maturities held to maturity - at amortized cost (fair value
$480,598 and $475,257) ................................................ $ 467,442 $ 468,549
Fixed maturities available for sale - at fair value
(amortized cost $1,064,461 and $839,845) .............................. 1,057,325 804,776
Equity securities - at fair value (cost $58,960 and $47,719) ............ 69,797 58,378
Short-term investments .................................................. 70,581 56,974
Cash.................................................................. ...... 3,983 7,507
Deferred policy acquisition costs ........................................... 67,103 61,680
Prepaid federal income taxes ................................................ 265,250 204,701
Provisional losses recoverable .............................................. 43,822 40,065
Other assets ................................................................ 71,471 74,082
----------- -----------
$ 2,116,774 $ 1,776,712
=========== ===========
Liabilities and Stockholders' Equity
Unearned premiums ........................................................... $ 67,169 $ 54,925
Reserve for losses .......................................................... 374,474 335,584
Deferred federal income taxes ............................................... 277,578 206,168
Accounts payable and accrued expenses ....................................... 88,290 82,779
----------- -----------
807,511 679,456
----------- -----------
Preferred stockholder's equity
Redeemable preferred stock, par value $.001 per share; 800,000 shares
issued and outstanding - at redemption value ............................ 40,000 40,000
----------- -----------
Common stockholders' equity
Common stock, par value $.001 per share; 80,000,000 shares authorized;
37,782,334 shares and 37,307,504 shares issued and outstanding .......... 38 37
Treasury stock; 38,006 shares redeemed ...................................... (2,159) --
Additional paid-in capital .................................................. 541,600 524,408
Retained earnings ........................................................... 727,379 548,684
Accumulated other comprehensive income (loss) ............................... 2,405 (15,873)
----------- -----------
1,269,263 1,057,256
----------- -----------
$ 2,116,774 $ 1,776,712
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 4
RADIAN GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
(In thousands, except per-share amounts)
Revenues:
Premiums written:
Direct................................. $144,969 $102,571 $430,506 $351,961
Assumed................................ 2 3 75 86
Ceded.................................. (8,824) (7,037) (29,892) (29,248)
-------- -------- -------- --------
Net premiums written........................ 136,147 95,537 400,689 322,799
(Increase) decrease in unearned premiums.... (5,911) 24,494 (13,617) 26,044
-------- -------- ------- --------
Premiums earned............................. 130,236 120,031 387,072 348,843
Net investment income....................... 21,179 16,439 60,310 49,166
Gain on sales of investments................ 2,313 378 3,410 1,206
Other income .............................. 2,003 2,190 4,642 9,901
-------- -------- -------- --------
155,731 139,038 455,434 409,116
-------- -------- -------- --------
Expenses:
Provision for losses........................ 38,251 42,519 115,038 130,073
Policy acquisition costs.................... 12,428 15,660 38,822 48,913
Other operating expenses.................... 14,503 15,462 40,314 47,594
Merger expenses............................. -- 11,353 -- 36,883
-------- -------- -------- --------
65,182 84,994 194,174 263,463
-------- -------- -------- --------
Pretax income ....................................... 90,549 54,044 261,260 145,653
Provision for income taxes........................... 26,480 16,556 76,733 45,718
-------- -------- -------- --------
Net income ....................................... 64,069 37,488 184,527 99,935
Dividends to preferred stockholder................... 825 825 2,475 2,475
-------- -------- -------- --------
Net income available to common stockholders.......... $ 63,244 $ 36,663 $182,052 $ 97,460
======== ======== ======== ========
Basic net income per share........................... $ 1.68 $ 0.99 $ 4.84 $ 2.64
======== ======== ======== ========
Diluted net income per share......................... $ 1.66 $ 0.97 $ 4.78 $ 2.58
======== ======== ======== ========
Average number of common shares outstanding -
basic ............................................... 37,740 36,974 37,586 36,914
======== ======== ======== ========
Average number of common and common equivalent
shares outstanding - diluted......................... 38,192 37,765 38,065 37,793
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 5
RADIAN GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Treasury Paid-In Retained Comprehensive
Stock Stock Capital Earnings Income (Loss) Total
----- ----- ------- -------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Balance, December 31, 1999............................. $37 $ -- $524,408 $548,684 $(15,873) $1,057,256
Comprehensive income (loss):
Net income (unaudited).......................... -- -- -- 184,527 -- 184,527
Unrealized holding gains arising during period,
net of tax of $11,038 (unaudited).......... -- -- -- -- 20,499
Less: Reclassification adjustment for net gains
included in net income, net of tax of
$1,196 (unaudited).......................... -- -- -- -- (2,221)
--------
Net unrealized gain on investments - net of tax
of $9,842 (unaudited)....................... -- -- -- -- 18,278 18,278
----------
Comprehensive income (unaudited)................ 202,805
Issuance of common stock (unaudited).............. 1 -- 17,192 -- -- 17,193
Treasury stock redeemed (unaudited)............... -- (2,159) -- -- -- (2,159)
Dividends (unaudited)............................. -- -- -- (5,832) -- (5,832)
--- ------- -------- -------- -------- ----------
Balance, September 30, 2000 (unaudited)................ $38 $(2,159) $541,600 $727,379 $ 2,405 $1,269,263
=== ======= ======== ======== ======== ==========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 6
RADIAN GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
2000 1999
---- ----
<S> <C> <C>
(In thousands)
Cash flows from operating activities......................................... $ 231,917 $ 175,856
--------- ----------
Cash flows from investing activities:
Proceeds from sales of investments available for sale................. 365,445 79,728
Proceeds from sales of investments held to maturity................... -- 10
Proceeds from sales of equity securities available for sale........... 16,873 136
Proceeds from redemptions of investments available for sale........... 29,175 21,543
Proceeds from redemptions of investments held to maturity............. 2,245 14,182
Purchases of investments available for sale........................... (613,401) (260,562)
Purchases of equity securities available for sale..................... (27,947) (17,330)
Purchases of property and equipment - net............................. (2,037) (9,938)
Purchases of short-term investments - net............................. (13,607) (7,278)
Other ............................................................... (1,389) (1,130)
--------- ----------
Net cash used in investing activities........................................ (244,643) (180,639)
--------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock................................ 17,193 4,427
Redemption of treasury stock.......................................... (2,159) --
Dividends paid........................................................ (5,832) (4,934)
--------- ----------
Net cash from (used in) financing activities................................. 9,202 (507)
--------- ----------
Decrease in cash............................................................. (3,524) (5,290)
Cash, beginning of period.................................................... 7,507 9,377
--------- ----------
Cash, end of period.......................................................... $ 3,983 $ 4,087
========= ==========
Supplemental disclosures of cash flow information:
Income taxes paid............................................................ $ 69,768 $ 37,050
========= ==========
Interest paid ............................................................... $ 602 $ 144
========= ==========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 7
RADIAN GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of Radian
Group Inc. (the "Company") and its subsidiaries including its principal
operating subsidiaries, Radian Guaranty Inc. and Amerin Guaranty Corporation,
(collectively referred to as "Radian"), and are presented on the basis of
generally accepted accounting principles.
The financial information for the interim periods included herein is
unaudited; however, such information reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position, results of operations, and cash flows for the interim periods. All
such adjustments are of a normal, recurring nature. The results of operations
for interim periods are not necessarily indicative of results to be expected for
the full year.
Basic net income per share is based on the weighted average number of
common shares outstanding, while diluted net income per share is based on the
weighted average number of common shares outstanding and common share
equivalents that would arise from the exercise of stock options. Preferred stock
dividends are deducted from net income in the net income per share computation.
For a summary of significant accounting policies and additional
financial information, see the Radian Group Inc. Annual Report on Form 10-K for
the year ended December 31, 1999.
2 - MERGER
On November 22, 1998, the board of directors of CMAC Investment
Corporation ("CMAC") and the board of directors of Amerin Corporation ("Amerin")
each approved an Agreement and Plan of Merger pursuant to which CMAC and Amerin
have merged. The merger closed on June 9, 1999 after approval by the
stockholders of both companies, at which time the name of the merged company was
changed to Radian Group Inc. The merger called for Amerin stockholders to
receive 0.5333 shares of CMAC common stock in a tax-free exchange for each share
of Amerin common stock that they owned. CMAC's stockholders continued to own
their existing shares after the merger. The merger transaction has been
accounted for on a pooling of interests basis and, therefore, all financial
statements presented reflect the combined entity.
3 - RECENT ACCOUNTING PRINCIPLES
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The statement, originally
effective for fiscal years beginning after June 15, 1999, was deferred for one
year when the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133." The statement establishes accounting and reporting standards for
derivative instruments and hedging activity and requires that all derivatives be
measured at fair value and recognized as either assets or liabilities in the
financial statements. The impact of the statement will depend on the extent of
derivatives and embedded derivatives at the date the statement is adopted. The
Company is currently evaluating the effect this statement might have on the
consolidated financial position or results of operations.
In October 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public 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. The
Company adopted SOP 98-7 in 2000. The adoption of SOP 98-7 did not have a
material impact on the financial position or results of operations of the
Company.
-7-
<PAGE> 8
RADIAN GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4 - SUBSEQUENT EVENTS
In October 2000, the Company signed a letter of intent to acquire
ExpressClose.com, an Internet-based settlement company that provides real estate
information products and services to the first and second mortgage industry. The
transaction closed on November 10, 2000 and will be accounted for as a purchase
business combination. The transaction is not material to the Company's
consolidated financial statements.
-8-
<PAGE> 9
RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
The following is a "Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995:
The statements contained in this Form 10-Q that are not historical facts
are forward-looking statements. Actual results may differ materially from those
projected in the forward-looking statements. These forward-looking statements
involve risks and uncertainties including, but not limited to, the following
risks: that interest rates may increase rather than remain stable or decrease;
that housing demand may decrease for any number of reasons, including changes in
interest rates, adverse economic conditions or other reasons; that Radian's
market share may decrease as a result of changes in underwriting criteria by
Radian or its competitors, or other reasons; and changes in the performance of
the financial markets, in the demand for and market acceptance of Radian
products, increased competition from government programs and the use of
substitutes for mortgage insurance, and in general conditions. Investors are
also directed to other risks discussed in documents filed by the Company with
the Securities and Exchange Commission.
RESULTS OF OPERATIONS
Net income for the first nine months of 2000 was $184.5 million, an
84.6% increase compared to $99.9 million for the first nine months of 1999 and
net income for the quarter ended September 30, 2000 was $64.1 million, a 70.9%
increase compared to $37.5 million for the same period in 1999. However, net
income for the first nine months and third quarter of 1999 included merger
expenses net of tax of $29.8 million and $8.4 million, respectively, and without
these merger expenses, net income for the first nine months and third quarter of
1999 was $129.7 million and $45.9 million, respectively. Excluding merger
expenses, net income for the first nine months of 2000 increased by 42.3% as
compared to the same period of 1999 and net income for the third quarter of 2000
increased by 39.7% as compared to the same quarter of 1999. These improvements
in net income, excluding merger expenses, were the result of growth in premiums
earned and net investment income, combined with a lower provision for losses and
a reduction in policy acquisition costs and other operating expenses.
New primary insurance written during the first nine months of 2000 was
$17.6 billion, a 34.0% decrease compared to $26.7 billion for the first nine
months of 1999 and for the third quarter of 2000, new primary insurance written
of $7.0 billion was 18.9% lower than the $8.7 billion written in the third
quarter of 1999. This decrease in Radian's primary new insurance written volume
for the first nine months and third quarter of 2000 was partially due to a 20.1%
and 9.9%, respectively, decrease in new insurance written volume in the private
mortgage insurance industry compared to the same periods of 1999. In addition,
Radian's market share of the industry decreased to 14.7% and 15.5%,
respectively, for the nine months and quarter ended September 30, 2000 as
compared to 17.8% and 17.2%, respectively, for the same periods of 1999. Radian
believes the market share decline was due in part to the reduction in business
provided by a few of the largest national accounts, which rebalanced their
mortgage insurance allocation after the merger. In addition, the Company
believes that certain large bulk transactions written primarily by other
companies within the industry are included in industry new insurance written
figures. For the quarter and nine months ended September 30, 2000, Radian wrote
$389.9 million of such bulk transactions. In the first nine months of 2000,
Radian reduced the volume of pool insurance it wrote to $130.0 million of risk
written as compared to $343.3 million in the first nine months of 1999 and for
the quarter ended September 30, 2000, Radian's pool risk written was $25.7
million as compared to $73.0 million for the same period of 1999. 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
("GSE Pool") 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
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<PAGE> 10
RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
insurance transaction, the exposure to Radian on each individual loan is
uncapped; however, the aggregate stop-loss percentage (typically 1.0% to 1.5% in
the Fannie Mae/Freddie Mac transactions) is the maximum that can be paid out in
losses before the insurer's exposure terminates. The Company expects its pool
insurance activity to continue at the current reduced levels during the
remainder of 2000. 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 Insurance Rating Service ("S&P"),
Moody's Investors Service ("Moody's") and Fitch Investors Service, Inc. 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 low stop loss levels which increase expected losses as a percentage of
risk outstanding.
Radian's volume in the first nine months of 2000 was negatively
impacted by relatively higher interest rates which affected the entire mortgage
industry. The trend toward higher interest rates, which began in the third
quarter of 1999, caused refinancing activity during the first nine months of
2000 to decline to a more normal rate and contributed to the decrease in the
mortgage insurance industry new insurance written volume for the first nine
months of 2000. Radian's refinancing activity as a percentage of primary new
insurance written was 12.0% for both the nine months and quarter ended September
30, 2000 as compared to 30.0% and 20.0%, respectively, for the same periods in
1999. The persistency rate, which is defined as the percentage of insurance in
force that is renewed in any given year, was 79.4% for the twelve months ended
September 30, 2000 as compared to 69.7% for the twelve months ended September
30, 1999. This increase was consistent with the declining level of refinancing
activity during the second half of 1999 which has continued into the first nine
months of 2000.
Radian insures non-traditional 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 typically have non-traditional
credit standards which are less stringent than standard credit guidelines. To
compensate for this additional risk, Radian receives a higher premium for
insuring this product that Radian believes is commensurate with the additional
default risk. During the nine months and quarter ended September 30, 2000,
Alternative A and A-minus business accounted for $3.1 billion and $1.4 billion,
respectively, or 17.3% and 19.2%, respectively, of Radian's new primary
insurance written as compared to $2.5 billion and $1.4 billion, respectively,
for the same periods of 1999, which accounted for 9.3% and 16.2%, respectively,
of Radian's new primary insurance written during 1999.
In the third quarter of 2000, the Company began to insure
mortgage-related assets in a Pennsylvania domiciled insurer, Radian Insurance
Inc. "(Radian Insurance"). Radian Insurance is rated AA by S&P and Aa3 by
Moody's and was formed to insure assets that are not permitted to be insured by
monoline mortgage guaranty insurers. Such assets include manufactured housing
loans, second mortgages, home equity loans and mortgages with loan-to-value
ratios above 100%. During the third quarter of 2000, Radian Insurance wrote $1.2
billion of insurance which represented $132 million of risk. Such business is
similar to mortgage guaranty insurance, however, the structures can vary and
thus premium rates and commensurate risk levels will vary from deal to deal.
Net premiums earned in the first nine months of 2000 were $387.1
million, an 11.0% increase compared to $348.8 million for the first nine months
of 1999 and premiums earned for the quarter ended September 30, 2000 were $130.2
million, an 8.5% increase compared to $120.0 million for the same period of
1998. This increase reflected the change in the mix of new insurance written
volume originated by Radian during the second half of 1999
-10-
<PAGE> 11
RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
and the first nine months of 2000, which has become more heavily weighted toward
Adjustable Rate Mortgage ("ARMs") business, loans with loan-to-value ratios of
95% or higher and Alternative A or A-minus business. These types of business
have higher premium rates, which are commensurate with the increased level of
risk associated with the insurance. Radian's ARM activity as a percentage of
primary new insurance written was 14.0% and 11.0%, respectively, for the nine
months and quarter ended September 30, 2000 as compared to 8.0% and 12.0% for
the same periods in 1999 while Radian's higher loan-to-value activity was 46.0%
and 48.0%, respectively, for the nine months and quarter ended September 30,
2000 as compared to 40.0% and 44.0%, respectively, for the same periods in 1999.
The reduced level of refinancing activity and the resulting increase in
persistency led to an increase in direct primary insurance in force for the nine
months of 1.9%, from $97.1 billion at December 31, 1999 to $98.9 billion at
September 30, 2000. GSE pool risk in force grew to $1.1 billion at September 30,
2000, an increase of 3.7% for the nine month period. 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
the first nine months and third quarter of 2000, premiums ceded under captive
reinsurance arrangements were $24.0 million and $8.0 million, respectively, or
5.7% and 5.8%, of total premiums earned during the period and for the same
periods of 1999, premiums ceded were $16.6 million and $5.1 million,
respectively, or 5.1% and 5.3%, of total premiums earned during the period. New
primary insurance written under captive reinsurance arrangements for the nine
months and quarter ended September 30, 2000 were $5.7 billion and $2.6 billion,
respectively, accounting for 32.5% and 37.5%, of total new primary insurance
written during the periods. For the same periods of 1999, new primary insurance
written under captive reinsurance arrangements was $8.5 billion and $3.4
billion, respectively, representing 31.9% and 38.8%, of total new primary
insurance written during those periods in 1999.
Net investment income for the first nine months of 2000 was $60.3
million, a 22.7% increase, compared to $49.2 million for the same period of 1999
and for the third quarter of 2000, net investment income was $21.2 million as
compared to $16.4 million for the third quarter of 1999, a 28.8% increase. These
increases were a result of continued growth in invested assets primarily due to
positive operating cash flows of $231.9 million for the first nine months of
2000. The Company has continued to invest some of its new operating cash flow in
tax-advantaged securities, primarily municipal bonds, although the Company
modified 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 since then 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 asset-backed securities
exposures are targeted not to exceed 10% each and must be 100% investment grade
assets. 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 $115.0 million for the first nine months
of 2000, a decrease of 11.6% compared to $130.1 million for the first nine
months of 1999, and for the third quarter of 2000, the provision was $38.3
million as compared to $42.5 million for the third quarter of 1999, a decrease
of 10.0%. These decreases were due to a decline in Radian's delinquency rate,
offset by a slight increase in the amount of paid claims and the number of
delinquent loans as a result of the growth and maturation of Radian's book of
business over the past several years, higher delinquency rates of Alternative A
and A minus loans, and the continued poor experience of certain "affordable
housing" program loans insured in 1994 and 1995, especially in Florida.
Historically, claim activity has reached its highest level in the third through
fifth years after the year of loan origination. Approximately 75% of
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<PAGE> 12
RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
Radian's primary risk in force and almost all of Radian's pool risk in force at
September 30, 2000 had not yet reached its anticipated highest claim frequency
years. Due to the high cancellation rates and strong new insurance volume in
1998 and 1999, this percentage of risk in force is significantly higher than
normal levels. Radian's overall default rate at September 30, 2000 was 1.46% as
compared to 1.49% at December 31, 1999, while the default rate on the primary
business was 2.15% at September 30, 2000 as compared to 2.20% at December 31,
1999. The decrease in Radian's overall default rate is a result of the continued
strong economy that has 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 22,151 at December 31,
1999 to 23,279 at September 30, 2000 and the average loss reserve per default
rose from $15,071 at the end of 1999 to $16,086 at September 30, 2000. The
increase in average loss reserve per default was primarily the result of an
increase in the average loan balance and the coverage percentage on loans
originated beginning in 1995, which 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 1.56% (including pool) at September 30, 2000
as compared to 1.80% at December 31, 1999 and claims paid in California during
the first nine months of 2000 were $12.9 million, representing approximately
17.0% of total claims as compared to 27.8% for the same period of 1999.
California represented approximately 17.5% of primary risk in force at September
30, 2000 as compared to 17.2% at December 31, 1999. The default rate in Florida
was 2.94% (including pool) at September 30, 2000 as compared to 3.08% at
December 31, 1999 and claims paid in Florida during the first nine months of
2000 were $10.6 million, representing approximately 14.1% of total claims as
compared to 13.7% for the same period of 1999. Florida represented approximately
7.1% of primary risk in force at September 30, 2000 as compared to 7.4% at
December 31, 1999. 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. 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 is
within the expected range for this type of business and the higher premium rates
charged are expected to compensate for the increased level of risk. The number
of Alternative A and A minus loans in default at September 30, 2000 was 2,219
which represented 11.6% of the total number of primary loans in default and the
default rate on this business was 4.37% at the end of the quarter as compared to
the primary default rate on Radian's A business of 2.14% at September 30, 2000.
Direct losses paid in the first nine months of 2000 were $72.2 million as
compared to $67.6 million in the same period of 1999, an increase of 6.8% and
direct losses paid during the third quarter of 2000 were $23.7 million, a 9.5%
increase compared to $21.7 for the same period in 1999. 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 $79.1 million for the
first nine months of 2000, a decrease of 18.0% compared to $96.5 million for the
same period of 1999 and for the third quarter of 2000, these expenses were $26.9
million as compared to $31.1 million for the third quarter of 1999, a decrease
of 13.5%. These expenses consisted of policy acquisition expenses, which relate
directly to the acquisition of new business, and other operating expenses, which
primarily represent contract underwriting expenses, overhead and administrative
costs.
Policy acquisition costs in the first nine months of 2000 were $38.8
million, a decrease of 20.6% compared to $48.9 million for the first nine months
of 1999 and these expenses were $12.4 million in the third quarter of 2000, a
decrease of 20.6% compared to $15.7 million for the same period in 1999. This
reflects the synergies achieved as a result of the merger and the decrease in
the level of new insurance written for the first nine months of 2000. Other
operating expenses for the nine months ended September 30, 2000 were $40.3
million, a decrease of $6.1 million or 15.3% as compared to $47.6 million for
the same period in 1999 and these expenses were $14.5 million for the third
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<PAGE> 13
RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
quarter of 2000, a decrease of 6.2% compared to $15.5 million for the third
quarter of 1999. This reflects a decrease in expenses associated with contract
underwriting services offset by an increase in expenses associated with the
Company's administrative and support functions. Contract underwriting expenses
for the nine month period ended September 30, 2000 included in other operating
expenses were $13.5 million as compared to $25.4 million for the same period of
1999, an increase of 47.1%; however, these expenses were $6.2 million for the
third quarter of 2000 as compared to $5.4 million for the third quarter of 1999,
an increase of 15.3%. This $12.0 million decrease in contract underwriting
expenses during the first nine months of 2000 reflected the decreased demand for
contract underwriting services as mortgage origination volume declined; however,
the increase in expenses for the third quarter of 2000 reflected the increasing
demand for contract underwriting services as more lenders take advantage of the
integration of the contract underwriting process with Freddie Mac's Loan
Prospector and Fannie Mae's Desktop Underwriter originations systems and
eliminate back office originations functions. Consistent with the decline in
contract underwriting expenses, other income decreased 53.1% to $4.6 million for
the first nine months of 2000 as compared to $9.9 million for the same period in
1999. For the third quarter of 2000, other income decreased 8.5% to $2.0 million
as compared to $2.2 million for the third quarter of 1999. During the first nine
months of 2000, loans underwritten via contract underwriting accounted for 30.8%
of applications, 27.0% of commitments, and 20.1% of certificates issued by
Radian as compared to 22.5% of applications, 19.2% of commitments, and 17.3% of
certificates issued in the first nine months of 1999.
During the nine months and quarter ended September 30, 1999, the
Company incurred merger-related expenses of $36.9 million and $11.4 million,
respectively. The Company expects to incur no additional merger-related in 2000
or beyond related to the CMAC/Amerin merger.
The effective tax rate for the nine months ended September 30, 2000 was
29.4% and, excluding merger costs net of tax of $29.8 million, the effective tax
rate for the same period in 1999 was 28.9%. The tax rate for the third quarter
of 2000 was 29.2% as compared to 29.9% for the third quarter of 1999, excluding
merger costs net of tax of $8.4 million incurred in the third quarter of 1999.
Eliminating the merger expenses of $36.9 million and $11.4 million,
respectively, for the nine months and quarter ended September 30, 1999,
operating income accounted for 72.4% and 70.1%, respectively, of net income for
the nine months and quarter ended September 30, 1999, as compared to 75.6% and
74.1%, respectively, for the same periods in 2000, thus resulting in the
increase in effective tax rates for 2000.
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.
Cash flows from operating activities for the nine months ended
September 30, 2000 were $231.9 million as compared to $175.9 million for the
same period of 1999. This increase consisted of an increase in net premiums
written and investment income received combined with a decrease in operating and
merger-related expenses and was offset by an increase in claims. Positive cash
flows are invested pending future payments of claims and other expenses; cash
flow shortfalls, if any, are funded through sales of short-term investments and
other investment portfolio securities.
Stockholders' equity plus redeemable preferred stock of $40.0 million,
increased from $1.1 billion at December 31, 1999 to $1.3 billion at September
30, 2000, primarily as a result of net income of $184.5 million, an increase in
the market value of securities available for sale of $18.3 million, net of tax,
and proceeds from the issuance of common stock, partially offset by dividends of
$5.8 million and the purchase of treasury stock of $2.2 million.
As of September 30, 2000, the Company and its subsidiaries had no
material commitments for capital
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<PAGE> 14
RADIAN GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
expenditures.
The Company believes that Radian will have sufficient funds to satisfy
its claims payments and operating expenses and to pay dividends to the Company
for at least the next 12 months. The Company also believes that it will be able
to satisfy its long-term (more than 12 months) liquidity needs with cash flow
from Radian. As a holding company, the Company conducts its principal operations
through Radian. The Company's ability to pay dividends on the $4.125 Preferred
Stock is dependent upon Radian's ability to pay dividends or make other
distributions to the Company. Based on the Company's current intention to pay
quarterly common stock dividends of approximately $0.03 per share, the Company
will require distributions from Radian of $7.8 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; however, the Company does not believe that these
restrictions will prevent the payment by Radian or the Company of these
anticipated dividends or distributions in the foreseeable future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the first nine months of 2000, the Company experienced an increase
in the fair market value of the available for sale portfolio, which resulted in
a decrease in the net unrealized loss on the investment portfolio of $18.3
million, from a net unrealized loss of $15.9 million at December 31, 1999 to a
net unrealized gain of $2.4 million at September 30, 2000. This increase in
value was a result of changes in market interest rates and not as a result of
changes in the composition of the Company's investment portfolio. For a more
complete discussion about the potential impact of interest rate changes upon the
fair value of the financial instruments in the Company's investment portfolio,
see "Quantitative and Qualitative Disclosures about Market Risk" in the
Company's 1999 Form 10-K.
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<PAGE> 15
RADIAN GROUP INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - None
ITEM 3. Defaults upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. a. Exhibits
*Exhibit 11.1 - Statement Re: Computation of Per
Share Earnings
*Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K - None
* Filed Herewith
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<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RADIAN GROUP INC.
Date: November 13, 2000 /s/ C. Robert Quint
-------------------------------------------------
C. Robert Quint
Executive Vice President, Chief Financial Officer
(Principal Accounting Officer)
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