-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EuIWJOYBi1Ryp3/lbz4qqofhl3XBA2z9jrcbGbVgsNcY/gAGWJXcGTA+vMYFBEkg d4HRDlnu41NZtHol1uBkaQ== 0000893220-02-000995.txt : 20020813 0000893220-02-000995.hdr.sgml : 20020813 20020813165749 ACCESSION NUMBER: 0000893220-02-000995 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RADIAN GROUP INC CENTRAL INDEX KEY: 0000890926 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 232691170 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11356 FILM NUMBER: 02730414 BUSINESS ADDRESS: STREET 1: 1601 MARKET STREET STREET 2: 12TH FLOOR CITY: PHILADELPHIA STATE: PA ZIP: 19103 BUSINESS PHONE: 2155646600 MAIL ADDRESS: STREET 1: 1601 MARKET ST STREET 2: 12TH FLOOR CITY: PHILADELPHIA STATE: PA ZIP: 19103 FORMER COMPANY: FORMER CONFORMED NAME: CMAC INVESTMENT CORP DATE OF NAME CHANGE: 19960126 10-Q 1 w62887e10vq.txt FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_____________________to_____________________ Commission file number 1-11356 RADIAN GROUP INC. ----------------- (Exact name of registrant as specified in its charter) DELAWARE 23-2691170 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1601 MARKET STREET, PHILADELPHIA, PA 19103 ------------------------------------ ----- (Address of principal executive offices) (zip code) (215) 564-6600 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 ____ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ____ No ____ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 94,822,256 shares of Common Stock, $0.001 par value, outstanding on August 8, 2002. 1 RADIAN GROUP INC. AND SUBSIDIARIES INDEX
PAGE NUMBER ----------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets .......................................... 3 Condensed Consolidated Statements of Income .................................... 4 Condensed Consolidated Statement of Changes in Common Stockholders' Equity ..... 5 Condensed Consolidated Statements of Cash Flows ................................ 6 Notes to Unaudited Condensed Consolidated Financial Statements ................. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................................12 Item 3. Quantitative and Qualitative Disclosures about Market Risk .....................21 PART II - OTHER INFORMATION Item 1. Legal Proceedings ...............................................................22 Item 4. Submission of Matters to a Vote of Security Holders .............................22 Item 6. Exhibits and Reports on Form 8-K ................................................22 SIGNATURES ...................................................................................23
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RADIAN GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30 December 31 2002 2001 ----------- ----------- (In thousands, except share amounts) Assets Investments Fixed maturities held to maturity - at amortized cost (fair value $463,368 and $461,962) $ 413,323 $ 442,198 Fixed maturities available for sale - at fair value (amortized cost $3,090,264 and $2,552,930) 3,138,419 2,567,200 Trading securities - at fair value (cost $42,337 and $22,599) 34,823 21,659 Equity securities - at fair value (cost $156,217 and $116,978) 146,111 120,320 Short-term investments 287,282 210,788 Other invested assets 7,733 7,310 ----------- ----------- Total Investments 4,027,691 3,369,475 ----------- ----------- Cash 20,194 60,159 Investment in affiliates 223,284 177,465 Deferred policy acquisition costs 171,546 151,037 Prepaid federal income taxes 270,150 326,514 Provisional losses recoverable 46,580 47,229 Other assets 335,796 306,747 ----------- ----------- $ 5,095,241 $ 4,438,626 =========== =========== Liabilities and Stockholders' Equity Unearned premiums $ 552,311 $ 513,932 Reserve for losses 603,221 588,643 Long-term and short-term debt 544,110 324,076 Deferred federal income taxes 478,536 432,098 Accounts payable and accrued expenses 323,554 233,549 ----------- ----------- 2,501,732 2,092,298 ----------- ----------- 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; 200,000,000 shares authorized; 95,001,195 and 94,170,300 shares issued in 2002 and 2001, respectively 95 94 Treasury stock; 188,092 shares in 2002 and 2001 (7,874) (7,874) Additional paid-in capital 1,235,550 1,210,088 Retained earnings 1,301,006 1,093,580 Accumulated other comprehensive income 24,732 10,440 ----------- ----------- 2,553,509 2,306,328 ----------- ----------- $ 5,095,241 $ 4,438,626 =========== ===========
See notes to unaudited condensed consolidated financial statements. 3 RADIAN GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter Ended Six Months Ended June 30 June 30 ------------------------ ------------------------ 2002 2001 2002 2001 --------- --------- --------- --------- (In thousands, except per-share amounts) Revenues: Premiums written: Direct $ 221,076 $ 182,748 $ 423,940 $ 347,155 Assumed 34,092 33,585 69,494 41,307 Ceded (17,558) (17,130) (31,186) (29,010) --------- --------- --------- --------- Net premiums written 237,610 199,203 462,248 359,452 Increase in unearned premiums (26,579) (19,962) (42,028) (24,448) --------- --------- --------- --------- Premiums earned 211,031 179,241 420,220 335,004 Net investment income 44,485 39,455 87,238 67,475 Equity in net income of affiliates 26,774 12,760 45,394 24,804 Other income 10,965 9,284 22,247 15,575 --------- --------- --------- --------- 293,255 240,740 575,099 442,858 --------- --------- --------- --------- Expenses: Provision for losses 57,576 52,310 115,003 101,582 Policy acquisition costs 25,603 21,996 49,050 39,037 Other operating expenses 44,500 32,942 89,245 56,899 Interest expense 7,239 4,448 14,393 5,849 --------- --------- --------- --------- 134,918 111,696 267,691 203,367 --------- --------- --------- --------- Gains and losses: Net gains (losses) on sales of investments 2,462 (662) 3,083 2,762 Change in fair value of derivative instruments (5,764) 1,410 (9,006) (191) --------- --------- --------- --------- (3,302) 748 (5,923) 2,571 --------- --------- --------- --------- Pretax income 155,035 129,792 301,485 242,062 Provision for income taxes 46,113 37,115 88,630 69,228 --------- --------- --------- --------- Net income 108,922 92,677 212,855 172,834 Dividends to preferred stockholder 825 825 1,650 1,650 --------- --------- --------- --------- Net income available to common stockholders $ 108,097 $ 91,852 $ 211,205 $ 171,184 ========= ========= ========= ========= Basic net income per share $ 1.14 $ 0.99 $ 2.24 $ 1.96 ========= ========= ========= ========= Diluted net income per share $ 1.12 $ 0.97 $ 2.20 $ 1.92 ========= ========= ========= ========= Average number of common shares outstanding - basic 94,708 93,124 94,466 87,400 ========= ========= ========= ========= Average number of common and common equivalent shares outstanding - diluted 96,387 94,854 96,134 88,946 ========= ========= ========= =========
See notes to unaudited condensed consolidated financial statements. 4 RADIAN GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (UNAUDITED)
Accumulated Other Comprehensive Income (Loss) --------------------------- Foreign Unrealized Additional Currency Holding Common Treasury Paid-in Retained Translation Gains Stock Stock Capital Earnings Adjustment (Losses) Total ----------- ----------- ----------- ----------- ----------- ----------- ----------- (In thousands) Balance, January 1, 2002 $ 94 $ (7,874) $ 1,210,088 $ 1,093,580 $ (586) $ 11,026 $ 2,306,328 Comprehensive income: Net income -- -- -- 212,855 -- -- 212,855 Unrealized foreign currency translation adjustment, net of tax of $381 -- -- -- -- 707 -- 707 Unrealized holding gains arising during period, net of tax of $8,394 -- -- -- -- -- 15,589 Less: Reclassification adjustment for net gains included in net income, net of tax of $1,079 -- -- -- -- -- (2,004) ----------- Net unrealized gain on investments, net of tax of $7,315 -- -- -- -- -- 13,585 13,585 ------ Comprehensive income 227,147 Issuance of common stock under incentive plans 1 -- 25,462 -- -- -- 25,463 Dividends -- -- -- (5,429) -- -- (5,429) ----------- ----------- ----------- ----------- --------- ----------- ----------- Balance, June 30, 2002 $ 95 $ (7,874) $ 1,235,550 $ 1,301,006 $ 121 $ 24,611 $ 2,553,509 =========== =========== =========== =========== ========= =========== ===========
See notes to unaudited condensed consolidated financial statements. 5 RADIAN GROUP INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30 ------------------------------- 2002 2001 ----------- ----------- (in thousands) Cash flows from operating activities $ 267,803 $ 213,368 =========== =========== Cash flows from investing activities: Proceeds from sales of fixed maturity investments available for sale 954,337 288,639 Proceeds from sales of equity securities available for sale 7,449 2,253 Proceeds from redemptions of fixed maturity investments available for sale 44,844 74,068 Proceeds from redemptions of fixed maturity investments held to maturity 31,069 5,381 Purchases of fixed maturity investments available for sale (1,463,991) (567,614) Purchases of equity securities available for sale (63,070) (18,143) Purchases of short-term investments, net (76,476) (27,078) Payable for securities 51,015 -- Purchases of property and equipment, net (27,997) (3,854) Sales (Purchases) of other invested assets 1,956 (515) Acquisitions, net of cash acquired -- 6,788 Investment in affiliates (20,000) (15,020) Distributions from affiliates 20,095 5,261 Other (2,987) (567) ----------- ----------- Net cash used in investing activities (543,756) (250,401) ----------- ----------- Cash flows from financing activities: Proceeds from issuance of common stock under incentive plans 25,463 20,410 Acquisition costs -- (7,223) Issuance of long-term debt 215,954 247,100 Repayment of short-term debt -- (173,724) Dividends paid (5,429) (4,655) ----------- ----------- Net cash provided by financing activities 235,988 81,908 ----------- ----------- (Decrease)/Increase in cash (39,965) 44,875 Cash, beginning of period 60,159 2,424 ----------- ----------- Cash, end of period $ 20,194 $ 47,299 =========== =========== Supplemental disclosures of cash flow information: Income taxes (received) paid ($ 68,428) $ 37,826 =========== =========== Interest paid $ 12,631 $ 6,439 =========== ===========
See notes to unaudited condensed consolidated financial statements. 6 RADIAN GROUP INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. CONSOLIDATED FINANCIAL STATEMENTS - BASIS OF PRESENTATION The consolidated financial statements included herein, include the accounts of Radian Group Inc. (the "Company") and its subsidiaries, including its principal mortgage guaranty subsidiaries, Radian Guaranty Inc. ("Radian Guaranty"), Amerin Guaranty Corporation ("Amerin Guaranty") and Radian Insurance Inc. ("Radian Insurance") (together referred to as "Mortgage Insurance") and its principal financial guaranty operating subsidiaries, Radian Reinsurance Inc. ("Radian Re") and Radian Asset Assurance Inc. ("Radian Asset Assurance"). The Company also has a partial equity interest in two active credit-based asset businesses, Credit-Based Asset Servicing and Securitization LLC ("C-BASS") and Sherman Financial Group LLC ("Sherman"). The Company has a 46.0% interest in C-BASS and a 45.5% interest in Sherman. These statements are presented on the basis of accounting principles generally accepted in the United States of America ("GAAP"). The Company has condensed or omitted certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP pursuant to such rules and regulations. The financial information for the interim periods is unaudited; however, such information reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2001. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year or for any other period. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Basic net income per share is based on the weighted average number of common shares outstanding, while diluted net income per share is based on the weighted average number of common shares outstanding and common share equivalents that would arise from the exercise of stock options. Preferred stock dividends are deducted from net income in the net income per share computation. Certain prior period balances have been reclassified to conform to the current period presentation. 2 - ACQUISITION OF ENHANCE FINANCIAL On February 28, 2001, the Company acquired the financial guaranty and other businesses of Enhance Financial Services Group Inc. ("Financial Guaranty"), a New York based insurance holding company that primarily insures and reinsures credit-based risks, at a purchase price of approximately $581.5 million. The 2001 results include the results of Financial Guaranty's operations for the period from the date of the acquisition. The following unaudited pro forma information presents a summary of the consolidated operating results of the Company for the six month period ended June 30, 2001, as if the acquisition of Financial Guaranty had occurred on January 1, 2001 (in thousands, except per-share information):
Six Months Ended June 30, 2001 ------------- Total revenues $ 446,863 Net income 77,562 Net income per share-basic $ 0.87 Net income per share-diluted $ 0.85
7 3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended, on January 1, 2001. Transactions that the Company has entered into that are accounted for under SFAS No. 133, as amended, include convertible securities, credit default swaps and certain financial guaranty contracts that are considered credit default swaps. Credit default swaps and certain financial guaranty contracts that are accounted for under SFAS No. 133 are part of the Company's overall business strategy of offering financial guaranty protection to its customers. Currently, none of the derivatives qualify as hedges under SFAS No. 133. At June 30, 2002, the fair value of the Company's derivative instruments, classified as trading securities, was $34.8 million, as compared to an amortized value of $42.3 million, and the Company recognized $4.3 million, net of tax, of loss on changes in the fair value of trading securities in the consolidated statements of income for 2002. The notional value of the Company's credit default swaps and certain other financial guaranty contracts accounted for under SFAS No. 133 was $4.6 billion at June 30, 2002 and the Company recognized $1.8 million, net of tax, of loss on these instruments. Net unrealized depreciation on credit default swaps of $7.7 million at June 30, 2002 was comprised of gross unrealized gains of $33.0 million and gross unrealized losses of $40.7 million. The application of SFAS 133, as amended, could result in volatility from period to period in gains and losses as reported on the Company's consolidated statements of income. The Company is unable to predict the effect this volatility may have on its financial position or results of operations. 4 - SEGMENT REPORTING The Company has three reportable segments: mortgage insurance, financial guaranty and mortgage services. The mortgage insurance segment provides private mortgage insurance and risk management services to mortgage lending institutions located throughout the United States. Private mortgage insurance primarily protects lenders from default-related losses on residential first mortgage loans made to homebuyers who make downpayments of less than 20% of the purchase price and facilitates the sale of these mortgages in the secondary market. The financial guaranty segment provides credit-related insurance coverage to meet the needs of customers in a wide variety of domestic and international markets. For the periods presented in this report, revenues attributable to foreign countries was not material. In addition, long-lived assets located in foreign countries were not material for periods presented. The Company's insurance businesses within this segment include the assumption of reinsurance from the monoline financial guaranty insurers for both municipal bonds and structured finance obligations. The Company also provides direct financial guaranty insurance for municipal bonds, structured finance, trade credit reinsurance and excess Securities Investor Protection Corporation ("SIPC") insurance. The mortgage services segment deals primarily with credit-based servicing and securitization of assets in underserved markets, in particular, the purchase and servicing of and securitization of special assets, including sub-performing/non-performing mortgages, seller financed residential mortgages and delinquent consumer assets. In addition, mortgage services includes the results of RadianExpress.com ("RadianExpress"), an internet-based settlement company that provides real estate information products and services to the first and second lien mortgage industry. The Company's reportable segments are strategic business units, which are managed separately, as each business requires different marketing and sales expertise. Certain corporate expenses have been allocated to the segments. Prior period information has been restated to conform with the current year segment definitions. In the mortgage insurance segment, the highest state concentration of risk is California at 16.7%. At June 30, 2002, California also accounted for 16.7% of Mortgage Insurance's total direct primary insurance in force and 11.1% of Mortgage Insurance's total direct pool insurance in force. California accounted for 19.5% of Mortgage Insurance's direct primary new insurance written in the first six months of 2002. The largest single customer of Mortgage Insurance (including branches and affiliates of such customer) measured by new insurance written, accounted for 16.4% of new insurance written during the first six months of 2002 compared to 12.6% for full year 2001 and 11.2% for full year 2000. The amount reported in 2002 includes a large structured transaction, for $3.9 billion, for one customer comprised of prime mortgage loans originated throughout the United States. In the financial guaranty segment, the Company derives a substantial portion of its premiums written from a small number of primary insurers. In the first six months of 2002, 21.6% of gross written premiums were derived from two primary insurers. Four primary insurers were responsible for 27.4% of gross written premiums. This customer concentration results from the small number of primary insurance companies licensed to write financial guaranty insurance. 8 The Company evaluates performance based on net income. Summarized financial information concerning the Company's operating segments as of and for the year-to-date periods indicated, is presented in the following tables:
Quarter Ended Six Months Ended June 30 June 30 MORTGAGE INSURANCE ------------------------------- ------------------------------ (in thousands) 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Net premiums written $ 164,328 $ 159,416 $ 326,390 $ 310,050 =========== =========== =========== =========== Net premiums earned $ 167,873 $ 148,508 $ 336,912 $ 293,083 Net investment income 26,963 24,507 52,814 47,492 Equity in net income of affiliates -- -- -- -- Other income 4,393 5,802 8,410 9,780 ----------- ----------- ----------- ----------- Total revenues 199,229 178,817 398,136 350,355 ----------- ----------- ----------- ----------- Provision for losses 47,318 43,506 92,416 89,950 Policy acquisition costs 17,326 15,718 32,898 30,846 Other operating expenses 27,248 24,337 56,054 41,225 Interest expense 4,633 2,386 8,675 3,347 ----------- ----------- ----------- ----------- Total expenses 96,525 85,947 190,043 165,368 ----------- ----------- ----------- ----------- Net gains (losses) (616) 1,362 (931) 3,211 ----------- ----------- ----------- ----------- Pretax income 102,088 94,232 207,162 188,198 Income tax provision 28,439 25,784 57,387 51,548 ----------- ----------- ----------- ----------- Net income $ 73,649 $ 68,448 $ 149,775 $ 136,650 =========== =========== =========== =========== Total assets $ 3,114,928 $ 2,551,219 Deferred policy acquisition costs 79,243 73,573 Reserve for losses 475,288 435,202 Unearned premiums 94,402 94,898 Equity 1,539,185 1,303,944
9
Quarter Ended Six Months Ended June 30 June 30 FINANCIAL GUARANTY ------------------------------- ------------------------------- (in thousands) 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Net premiums written $ 73,282 $ 39,787 $ 135,858 $ 49,402 Net premiums earned $ 43,158 $ 30,733 $ 83,308 $ 41,921 Net investment income 17,511 14,902 34,370 19,905 Equity in net income of affiliates (135) (1,521) (19) (1,322) Other income 262 391 831 805 ----------- ----------- ----------- ----------- Total revenues 60,796 44,505 118,490 61,309 ----------- ----------- ----------- ----------- Provision for losses 10,258 8,804 22,587 11,632 Policy acquisition costs 8,277 6,278 16,152 8,191 Other operating expenses 7,791 4,249 16,492 8,215 Interest expense 2,129 1,710 4,733 2,055 ----------- ----------- ----------- ----------- Total expenses 28,455 21,041 59,964 30,093 ----------- ----------- ----------- ----------- Net gains (losses) (3,543) (539) (5,781) (566) ----------- ----------- ----------- ----------- Pretax income 28,798 22,925 52,745 30,650 Income tax provision 8,014 6,277 14,611 8,395 ----------- ----------- ----------- ----------- Net income $ 20,784 $ 16,648 $ 38,134 $ 22,255 =========== =========== =========== =========== Total assets $ 1,763,462 $ 1,343,429 Deferred policy acquisition costs 92,303 62,907 Reserve for losses 127,933 118,097 Unearned premiums 457,909 378,490 Equity 839,636 665,557
Quarter Ended Six Months Ended June 30 June 30 MORTGAGE SERVICES --------------------------- --------------------------- (in thousands) 2002 2001 2002 2001 --------- --------- --------- --------- Net premiums written -- -- -- -- ========= ========= ========= ========= Net premiums earned -- -- -- -- Net investment income $ 11 $ 46 $ 54 $ 78 Equity in net income of affiliates 26,909 14,281 45,413 26,126 Other income 6,310 3,090 13,006 4,990 --------- --------- --------- --------- Total revenues 33,230 17,417 58,473 31,194 --------- --------- --------- --------- Provision for losses Policy acquisition costs Other operating expenses 9,461 4,356 16,699 7,459 Interest expense 477 351 985 447 --------- --------- --------- --------- Total expenses 9,938 4,707 17,684 7,906 --------- --------- --------- --------- Net gains (losses) 857 (75) 789 (74) --------- --------- --------- --------- Pretax income 24,149 12,635 41,578 23,214 Income tax provision 9,660 5,054 16,632 9,285 --------- --------- --------- --------- Net income $ 14,489 $ 7,581 $ 24,946 $ 13,929 ========= ========= ========= ========= Total assets $ 216,851 $ 188,859 Deferred policy acquisition costs Reserve for losses Unearned premiums Equity 174,688 144,917
10 The reconciliation of segment net income to consolidated net income is as follows:
Quarter Ended Six Months Ended June 30 June 30 CONSOLIDATED ------------------------ ------------------------ (in thousands) 2002 2001 2002 2001 -------- -------- -------- -------- Net income: Mortgage Insurance $ 73,649 $ 68,448 $149,775 $136,650 Financial Guaranty 20,784 16,648 38,134 22,255 Mortgage Services 14,489 7,581 24,946 13,929 -------- -------- -------- -------- Total $108,922 $ 92,677 $212,855 $172,834 -------- -------- -------- --------
5 - LONG-TERM AND SHORT-TERM DEBT In January 2002, the Company sold $220 million of Senior Convertible Debentures. The debentures bear interest at the rate of 2.25% per year and interest is payable semi-annually on January 1 and July 1, beginning July 1, 2002. The Company will also pay contingent interest on specified semi-annual periods, if the sale price of its common stock for a specified period of time is less than 60% of the conversion price. The debentures are convertible, at the purchaser's option, into shares of common stock at prices and on dates specified in the offering. At that time, the shares become common shares for the purposes of calculating earnings per share. The composition of long-term and short-term debt was as follows:
June 30 December 31 ($ in thousands) 2002 2001 -------- -------- 2.25% Senior Convertible Debentures due 2022 $220,000 $ -- 7.75% debentures due 2011 249,110 249,076 6.75% debentures due 2003 75,000 75,000 -------- -------- $544,110 $324,076 ======== ========
6 - SUBSEQUENT EVENTS In July 2002, the Company issued a notice of redemption for the Company's $4.125 Preferred Stock, par value $.001 per share. The notice calls for the redemption of all 800,000 outstanding shares of the Company's preferred stock on August 15, 2002. Pursuant to the Company's sinking fund redemption obligation, 72,000 shares will be redeemed at $50.00 per share, and the remaining 728,000 shares will be redeemed at $54.125 per share. Accrued and unpaid dividends on the shares to the date of redemption will also be paid as part of the redemption price. The amount paid over the carrying value of the preferred stock will result in an approximate $.03 reduction in earnings per share for the third quarter of 2002. 7 - RECENT ACCOUNTING PRONOUNCEMENTS In April 2002, the Financial Accounting Standards Board ("FASB") issued Statements of Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The provisions of this statement related to the rescission of SFAS No. 4 are effective for fiscal years beginning after May 15, 2002. Certain provisions of the statement relating to SFAS No. 13 are effective for transactions occurring after May 15, 2002. All other provisions of the statement are effective for financial statements issued on or after May 15, 2002. Management has determined that the provisions of this statement will have no impact on the Company's financial statements. In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal 11 plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with restructuring, discontinued operations, plant closing, or other exit or disposal activity. Statement 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: The statements contained in this Form 10-Q that are not historical facts are forward-looking statements. Actual results may differ materially from those projected in the forward-looking statements. These forward-looking statements involve risks and uncertainties including, but not limited to: the possibility that interest rates may increase rather than remain stable or decrease; the possibility that housing demand may decrease for any number of reasons, some of which may be out of the control of the Company, including changes in interest rates, adverse economic conditions, or other reasons; the Company's market share may decrease as a result of changes in underwriting criteria by the Company or its competitors, or other reasons; performance of the financial markets generally, changes in the demand for and market acceptance of the Company's products, increased competition from government programs and the use of substitutes for mortgage insurance, changes in government regulation or tax laws that may affect one or more of the Company's businesses, changes in investor perceptions regarding the strength of financial guaranty providers and the guaranty offered by such providers, changes in investor concern regarding the credit quality of municipalities and corporations, including the need or desirability for financial guaranty insurance at all or as an alternative for other credit enhancement; and changes in general financial conditions. Investors are also directed to other risks discussed in documents filed by the Company with the Securities and Exchange Commission. RESULTS OF CONSOLIDATED OPERATIONS Net income for the second quarter of 2002 was $108.9 million or $1.12 per share compared to $92.7 million or $0.97 per share for the second quarter of 2001. Net income for the first six months of 2002 was $212.9 million or $2.20 per share, compared to $172.8 million or $1.92 per share for the six months ended June 30, 2001. The 17.5% increase in net income for the second quarter was primarily a result of growth in the Company's business volumes. Insurance in force for Mortgage Insurance increased from $104.3 billion at June 30, 2001 to $111.4 billion at June 30, 2002. Total net debt service outstanding for Financial Guaranty increased from $90.8 billion at June 30, 2001 to $102.4 billion at June 30, 2002. These increases in business volumes produced increases in written and earned premiums, investment income and other income. In addition, equity in net income of affiliates increased by $14.0 million in the second quarter of 2002 from the $12.8 million recorded in the second quarter of 2001 primarily due to strong results at Credit-Based Asset Servicing and Securitization LLC ("C-BASS") and Sherman Financial Services Group LLC ("Sherman"). Partially offsetting these increases were increases in the provision for losses, policy acquisition costs, operating expenses and interest expense to support the higher business volumes. The 23.2% increase in net income for the six months ended June 30, 2002 was primarily due to the reasons stated above, as well as the inclusion of Financial Guaranty and much of Mortgage Services for six months in 2002, compared to four months in 2001, as a result of the acquisition of Financial Guaranty on February 28, 2001. Consolidated earned premiums of $211.0 million increased $31.8 million or 17.7% from $179.2 million in the second quarter of 2001. Mortgage Insurance contributed $19.4 million of this increase and Financial Guaranty contributed $12.4 million to this increase. Net investment income for the second quarter of 2002 increased to $44.5 million from $39.5 million in the second quarter of 2001. The $5.0 million or 12.7% increase was primarily due to a large investment portfolio balance as a result of continued positive operating cash flows. Other income increased to $11.0 million in the second quarter of 2002 from $9.3 million in the same period of 2001, primarily related to the activities of RadianExpress, our internet-based settlement company. Consolidated earned premiums for the first six months of 2002 were $420.2 million, up 25.4% from $335.0 million for the same period of 2001. Financial Guaranty contributed $41.4 million of this increase, partially due to the inclusion of that segment for six months during 2002 compared to four months in 2001. The remaining increase came from Mortgage Insurance. Net investment income of $87.2 million for the six months ended June 30, 2002 increased $19.7 million or 29.2% from $67.5 million reported in the comparable period of 2001. Equity in net income of affiliates increased 83.1% from $24.8 million for the first six months of 2001 to $45.4 million for the same period of 2002. Other income increased 42.3% to $22.2 million for the first six months of 2002 compared to $15.6 million in the comparable period of 2001. 12 The provision for losses was $57.6 million for the second quarter of 2002, an increase of $5.3 million or 10.1% from the $52.3 million reported for the second quarter of 2001. Approximately $3.8 million of this was related to Mortgage Insurance to support an increase in claims payments, and $1.5 million was due to balance sheet strengthening at Financial Guaranty. Policy acquisition costs for the second quarter of 2002 were $25.6 million, up from $22.0 million in the second quarter of 2001. Other operating expenses of $44.5 million increased $11.6 million or 35.3% from the $32.9 million reported in the second quarter of 2001. This was primarily due to increases in salaries and benefits related to an increase in headcount to support higher volumes, increased legal fees and fees for outside services, and increased depreciation and software costs due to increased capital expenditures in late 2001 and 2002. Interest expense of $7.2 million increased from $4.4 million for the second quarter of 2001, as a result of the issuance of $250 million of long-term debt in May 2001 and $220 million of convertible debt in January 2002, combined with the $75 million of debt acquired as a result of the Financial Guaranty acquisition in February 2001. The provision for losses of $115.0 million for the first six months of 2002 increased $13.4 million or 13.2% from the same period of 2001. The increase in the provision for losses for the six month period of 2002 was primarily related to increased claims and balance sheet strengthening at Financial Guaranty. Policy acquisition costs were $49.1 million for the six months ended June 30, 2002 compared to $39.0 million for the first six months of 2001. Other operating expenses were $89.2 million for the first six months of 2002, a $32.3 million or 56.8% increase from the same period of 2001. Interest expense of $14.4 million increased from $5.8 million for the first six months of 2001, due to the increases in levels of long-term debt to support higher business volumes discussed above. The consolidated effective tax rate for the three and six months ended June 30, 2002 was 29.7% and 29.4%, respectively, compared to 28.6% for both the three and six month periods of 2001. MORTGAGE INSURANCE - RESULTS OF OPERATIONS Net income for the second quarter was $73.6 million, up from $68.4 million in the second quarter of 2001. This increase was due to an increase in earned premiums and investment income partially offset by decreases in other income and an increase in the provision for losses, policy acquisition costs, other operating expenses and interest expense. Primary new insurance written during the second quarter of 2002 was $10.1 billion, a 6% decrease compared to $10.8 billion for the second quarter of 2001. This decrease in Mortgage Insurance's primary new insurance written volume for the second quarter of 2002 was primarily due to a decrease in insurance written through contract underwriting due to a reduction in contract underwriting staff. The industry experienced a 15% increase in new insurance written volume for the second quarter of 2002 as compared to the second quarter of 2001. The Company's market share of the industry based on new insurance written decreased to 11.7% in the second quarter of 2002, compared to almost 18% in the first quarter of 2002 and 14.3% in the second quarter of 2001. The Company's market share of the industry based on new insurance written for the first six months of 2002 was 14.6%. During the first six months of 2002, Mortgage Insurance wrote $6.4 billion or 26.7% of new insurance written in structured transactions as compared to $2.6 billion or 13.4% of new insurance written in the same period of 2001. Of this amount in 2002, $4.8 million was written in the first three months of the year. The amount originated in the first quarter of 2002 includes a large structured transaction for $3.9 billion for one customer comprised of prime mortgage loans originated throughout the United States. The Company's participation in the structured transactions market is likely to vary significantly from quarter to quarter as the Company competes with other mortgage insurers as well as capital market executions for these transactions. In the second quarter and year-to-date periods of 2002, Mortgage Insurance wrote $35 million and $121 million of pool insurance risk as compared to $55 million and $88 million in the same periods of 2001. Mortgage Insurance's volume in the second quarter and year-to-date period of 2002 continued to be positively impacted by relatively lower interest rates that affected the entire mortgage industry. The continued low interest rate environment caused refinancing activity at the beginning of 2002 to continue to remain high and contributed to relatively strong new insurance volume through the second quarter of 2002. Mortgage Insurance's refinancing activity as a percentage of primary new insurance written was 44% for the second quarter of 2002 as compared to 42% for the same period in 2001. The refinancing percentages for the six months ended June 30, 2002 and 2001, were 40% and 39%, respectively. The persistency rate, which is defined as the percentage of insurance in force that is renewed in any given year, was 59.3% for the twelve months ended June 30, 2002 as compared to 72.6% for the twelve months ended June 30, 2001. This decrease was consistent with the increasing level of refinancing activity, which caused the cancellation rate to increase. The expectation for the balance of 2002 is a 13 continuation of strong industry volume and a gradual increase in persistency rates, influenced by a leveling off of interest rates. The Company insures non-traditional loans, specifically Alternative A and A minus loans (collectively, referred to as "non-prime" business). Alternative A borrowers have a similar credit profile to the Company's typical insured borrowers, but these loans are underwritten with reduced documentation and verification of information. The Company typically charges a higher premium rate for this business due to the reduced documentation, but does not consider this business to be significantly more risky than its prime business. The A minus loan programs typically have non-traditional credit standards that are less stringent than standard credit guidelines. To compensate for this additional risk, the Company receives a higher premium for insuring this product that the Company believes is commensurate with the additional default risk. During the second quarter and year-to-date period of 2002, non-prime business accounted for $3.3 billion and $7.8 billion or 32.7% and 32.5%, respectively of Mortgage Insurance's primary new insurance written. This compared to $3.0 billion and $5.3 billion or 27.8% and 27.3% for the same periods in 2001. Of the $3.3 billion of non-prime business for the second quarter of 2002 and $7.8 billion year-to-date 2002, $2.3 billion and $5.8 billion, respectively, was Alternative A. The Company insures mortgage-related assets in a Pennsylvania domiciled insurer, Radian Insurance Inc. ("Radian Insurance"). Radian Insurance is rated AA by Standard & Poor's Insurance Rating Service and Fitch Ratings and Aa3 by Moody's Investors Service and was formed to write credit insurance and financial guaranty insurance on mortgage-related assets that are not permitted to be insured by monoline mortgage guaranty insurers. Such assets include second mortgages, manufactured housing loans, home equity loans and mortgages with loan-to-value ratios above 100%. Beginning in October 2001, Radian Insurance entered into a reinsurance agreement with one of its affiliates, Radian Asset Assurance, whereby Radian Insurance ceded substantially all of the insurance business and premium associated with certain obligations secured by mortgage-backed securities and manufactured housing loans. Because most Financial Guaranty business on mortgage related assets will be written in Radian Asset Assurance and Amerin will be the primary writer of second mortgage insurance in the future, the business written by Radian Insurance will be substantially reduced in 2002. The second mortgage new insurance written by Amerin in the second quarter and first six months of 2002 was $139.6 million and $168.6 million, respectively. The comparable amounts of second mortgage new insurance written in 2001 were $807.0 million and $1.9 billion, respectively. This reduction was a result of the tightening of underwriting guidelines. Radian Insurance originated $10 million par amount of financial guaranty insurance in the second quarter and first six months of 2002. The business originated by Radian Insurance related to certain non-investment grade financial guaranty insurance on mortgage related assets. Net premiums earned in the second quarter and first six months of 2002 were $167.9 million and $336.9 million, respectively. These amounts represent increases of 13.1% and 14.9% respectively, compared to the comparable periods of 2001. These increases, which were greater than the increase in insurance in force, reflected a significant increase in new insurance volume, which are monthly policies. This increase included a slightly higher percentage of non-prime business. This type of business has higher premium rates, which are commensurate with the increased level of risk associated with the insurance. The insurance in force growth resulting from strong new insurance volume in the second quarter of 2002 was offset by the decrease in persistency levels. These lower persistency levels will impact premiums earned in future periods. There was an increase in direct primary insurance in force for the first six months of 3.2%, from $107.9 billion at December 31, 2001 to $111.4 billion at June 30, 2002. Total pool risk in force was $1.7 billion at June 30, 2002 compared to $1.6 billion at December 31, 2001. Mortgage Insurance and other companies in the industry have entered into risk-sharing arrangements with various customers that are designed to allow the customer to participate in the risks and rewards of the mortgage insurance business. One such product is captive reinsurance, in which a mortgage lender sets up a mortgage reinsurance company that assumes part of the risk associated with that lender's insured book of business. In most cases, the risk assumed by the reinsurance company is an excess layer of aggregate losses that would be penetrated only in a situation of adverse loss development. For the second quarter of 2002, premiums ceded under captive reinsurance arrangements were $13.7 million, or 8.2% of total premiums earned during the period, as compared to $13.4 million, or 9.0% of total premiums earned for the same period of 2001. For the year-to-date period of 2002, premiums ceded under captive reinsurance arrangements were $24.9 million, or 7.4% of total premiums earned during the period, as compared to $25.4 million, or 8.7% of total premiums earned for the same period of 2001. Primary new insurance written under captive reinsurance arrangements for the three and six months ended June 30, 2002 was $4.4 billion and $8.2 billion, respectively, or 42.9% and 34.1%, respectively, of total primary new insurance written for the second quarter and year to date period of 2002 as compared to $2.9 billion and $5.8 billion, 14 respectively, for the three and six months ended June 30, 2001, or 26.9% and 29.6%, respectively, of total primary new insurance written. Net investment income for the second quarter of 2002 was $27.0 million, a 10.2% increase compared to $24.5 million for the same period of 2001. This increase was a result of continued growth in invested assets primarily due to positive operating cash flows during the second quarter of 2002 and the allocation of interest income from net financing activities. The Company has continued to invest some of its net operating cash flow in tax-advantaged securities, primarily municipal bonds, although the Company's investment policy allows the purchase of various other asset classes, including common stock and convertible securities. The Company's intent is to target the common equity exposure at a maximum of 5% of the investment portfolio's market value while the investment-grade convertible securities and investment-grade asset-backed securities exposures are each targeted not to exceed 10% each. Net investment income was $52.8 million for the six months ended June 30, 2002 compared to $47.5 million for the same period of 2001, also due to the reasons stated above. The provision for losses was $47.3 million for the three months ended June 30, 2002, an increase of 8.7% compared to $43.5 million for the comparable three months of 2001. Claims activity is not spread evenly throughout the coverage period of a book of business. Relatively few claims are received during the first two years following issuance of the policy. Historically, claim activity has reached its highest level in the third through fifth years after the year of loan origination. Approximately 67.9% of the primary risk in force and approximately 43.1% of the pool risk in force at June 30, 2002 had not yet reached its anticipated highest claim frequency years. The overall default rate for both primary and pool insurance at June 30, 2002 was 2.3%, compared to 2.2% at December 31, 2001, while the default rate on the primary business was 3.5% at June 30, 2002 consistent with December 31, 2001. The change in the primary default rate resulted from a 43 basis point decline in the delinquency rate on our prime loans, partially offset by a 190 basis point increase in the non-prime delinquency rate. A strong economy generally results in better loss experience and a decrease in the overall level of losses. A continued weakening of the economy could negatively impact the Company's overall default rates, which would result in an increase in the provision for losses. The number of defaults increased slightly from 41,147 at December 31, 2001 to 41,275 at June 30, 2002 while the average loss reserve per default increased from $11,291 at the end of 2001 to $11,789 at June 30, 2002. The reserve as a percentage of risk in force was 1.7% at June 30, 2002 and 1.6% at December 31, 2001. Mortgage Insurance has reported an increased number of defaults on non-prime business insured beginning in 1997. Although the default rate for this business is higher than on the prime book of business, it is within the expected range for this type of business, and the higher premium rates charged are expected to compensate for the increased level of risk. The number of non-prime loans in default at June 30, 2002 was 11,643, which represented 36.8% of the total number of primary loans in default as compared to 7,704 at December 31, 2001, which represented 24.8% of the primary loans in default. The default rate on this business rose from 5.5% at December 31, 2001 to 7.4% at June 30, 2002 as compared to the primary default rate on the prime business of 2.7% at June 30, 2002 and 3.1% at December 31, 2001. Direct losses paid in the second quarter of 2002 increased to $39.3 million as compared to $37.0 million in the first quarter of 2002 and $19.9 million for the second quarter of 2001. Direct paid losses for the first six months of 2002 were $76.2 million as compared to $41.6 million for the same period of 2001, an increase of 83.2%. Claims paid for the second mortgage business for the second quarter and first six months of 2002 were $2.6 million and $8.5 million, respectively. The severity of loss payments has increased due to deeper coverage amounts and larger loan balances, and any negative impact on future property values would most likely increase the loss severity. In addition, the claims in the six months of 2002 have been impacted by the rise in delinquencies from 2001 that have proceeded to foreclosure. The following table provides selected information as of and for the periods indicated for the Mortgage Insurance segment:
Three Months Ended Six Months Ended ------------------------------------ ---------------------- June 30, March 31, June 30, June 30, June 30, ($ thousands, unless specified otherwise) 2002 2002 2001 2002 2001 -------- -------- -------- -------- -------- Provision for losses $ 47,318 $ 45,098 $ 43,506 $ 92,416 $ 89,950 Reserve for losses $475,288 $471,268 $435,202
15
Three Months Ended Six Months Ended ------------------------------------ ---------------------- June 30, March 31, June 30, June 30, June 30, 2002 2002 2001 2002 2001 -------- -------- -------- -------- -------- PRIMARY INSURANCE: Prime: Number of insured loans 749,065 763,990 788,880 Number of loans in default 20,012 20,244 19,448 Percentage of total loans in default 2.67% 2.65% 2.47% Non-Prime: Number of insured loans 156,521 144,617 92,065 Number of loans in default 11,643 10,593 4,398 Percentage of total loans in default 7.44% 7.32% 4.78% Total: Number of insured loans 905,586 908,607 880,945 Number of loans in default 31,655 30,837 23,846 Percentage of total loans in default 3.50% 3.39% 2.71% Claims paid: Georgia $ 2,774 $ 3,686 $ 665 $ 6,460 $ 1,372 California 2,879 2,702 1,705 5,581 3,615 Utah 2,010 2,505 870 4,515 2,001 Texas 2,668 1,611 864 4,279 1,776 Florida 1,926 1,674 1,891 3,600 4,323 Total Claims Paid $ 37,892 $ 31,755 $ 19,504 $ 69,647 $ 42,434 Percentage of total claims paid: Georgia 7.3% 11.6% 3.4% 9.3% 3.2% California 7.6 8.5 8.7 8.0 8.5 Utah 5.3 7.9 4.5 6.5 4.7 Texas 7.0 5.1 4.4 6.1 4.2 Florida 5.1 5.3 9.7 5.2 10.2 Risk in Force: ($ millions) California $ 4,459 $ 4,463 $ 4,031 Florida 2,037 2,008 1,868 New York 1,629 1,643 1,526 Texas 1,401 1,401 1,325 Georgia 1,196 1,203 1,102 Total Risk in Force $ 26,716 $ 26,715 $ 25,072 Percentage of total risk in force: California 16.7% 16.7% 16.1% Florida 7.6 7.5 7.5 New York 6.1 6.1 6.1 Texas 5.2 5.2 5.3 Georgia 4.5 4.5 4.4 Reserve for Losses as a % of Risk in Force 1.7% 1.7% 1.6%
16
Three Months Ended Six Months Ended ------------------------------------ ---------------------- June 30, March 31, June 30, June 30, June 30, 2002 2002 2001 2002 2001 -------- -------- -------- -------- -------- New insurance written: ($ millions) Prime $ 6,838 $ 9,378 $ 7,812 $ 16,216 $ 14,067 Non-Prime 3,309 4,485 3,012 7,794 5,347 -------- -------- -------- -------- -------- Total $ 10,147 $ 13,863 $ 10,824 $ 24,010 $ 19,414 Primary risk written ($ millions) 2,501 3,591 2,641 6,092 4,741 Direct primary insurance in force ($ millions) $111,424 $107,918 $104,257 POOL INSURANCE: Pool risk written ($ millions) $ 35 $ 86 $ 55 $ 121 $ 88 GSE pool risk in force ($ millions) $ 1,222 $ 1,224 $ 1,212 Total pool risk in force ($ millions) $ 1,745 $ 1,723 $ 1,517
Underwriting and other operating expenses were $44.6 million for the second quarter of 2002, an increase of 11.2% compared to $40.1 million for the same period of 2001. For the six months ended June 30, 2002, these expenses were $89.0 million, an increase of 23.4% compared to $72.1 million for the comparable period of 2001. These expenses consist of policy acquisition expenses, which relate directly to the acquisition of new business, and other operating expenses, which primarily represent contract underwriting expenses, overhead and administrative costs. Policy acquisition costs were $17.3 million in the second quarter of 2002, an increase of 10.2% compared to $15.7 million in the second quarter of 2001. While new insurance written volume has not increased, the amortization of expenses is related to the premium recognition over the life of an account. Much of the amortization in the current year represents costs that were expended in 2001. Other operating expenses for the second quarter of 2002 were $27.2 million, an increase of 11.9% compared to $24.3 million for the second quarter of 2001. This reflects an increase in expenses associated with the Company's technological, administrative and support functions. Contract underwriting expenses for the second quarter of 2002 included in other operating expenses were $10.3 million as compared to $11.9 million for the same period in 2001, a decrease of 13.4%. This $1.6 million decrease in contract underwriting expenses during the second quarter of 2002 reflected the slightly lower demand for contract underwriting services. Other income related to contract underwriting services was $3.4 million for the second quarter of 2002 as compared to $4.1 million for the same period in 2001. During the first six months of 2002, loans underwritten via contract underwriting accounted for 31.8% of applications, 29.7% of insurance commitments, and 22.6% of certificates issued by the Company as compared to 31.4% of applications, 30.2% of commitments and 23.4% of certificates in the first six months of 2001. The effective tax rate for the quarter and year-to-date period ended June 30, 2002 was 27.9% and 27.7% as compared to 27.4% for the second quarter and the year-to-date period of 2001. The U.S. Department of Housing and Urban Development has proposed a rule under the Real Estate Settlement Procedures Act ("RESPA") to create a safe harbor from the provisions of RESPA that prohibit the giving of any fee, kickback or thing of value pursuant to any agreement or understanding that real estate settlement services will be referred. The proposed rule would make the safe harbor available to lenders that, at the time a borrower submits a loan application, give the borrower a firm, guaranteed price for all the settlement services associated with the loan. Mortgage insurance could be included as one of these settlement services. The proposed rule was published in the Federal Register on July 29, 2002 and is subject to a 90-day comment period. If the rule is implemented, the premiums charged for mortgage insurance could be affected. 17 FINANCIAL GUARANTY INSURANCE - RESULTS OF OPERATIONS The financial guaranty insurance operations are conducted through Financial Guaranty and primarily involve the direct insurance and reinsurance of municipal bonds and structured finance obligations. Reinsurance is assumed primarily from the four primary monoline financial guaranty insurers. Radian Reinsurance Inc., a subsidiary of Financial Guaranty ("Radian Re"), currently derives substantially all of its reinsurance premium revenues from those four monolines. Approximately 27.4% of total gross written premiums for Financial Guaranty were derived from these four monolines in 2002. A substantial reduction in the amount of insurance ceded by one or more of these four principal clients could have a material adverse effect on Financial Guaranty's gross written premiums and, consequently, its results of operations. Financial Guaranty is also dependent on reinsurance for trade credit insurance written. The results of operations for the year-to-date period of 2001 include the results of Financial Guaranty from the date of acquisition, February 28, 2001. Since the acquisition, business volumes in Financial Guaranty have increased significantly, leading to large increases in premiums written and more gradual increases in premiums earned since premiums are often earned over many years. Net income for the second quarter of 2002 was $20.8 million compared to $16.6 million in the same period of 2001. Net premiums written and earned for the second quarter of 2002 were $73.3 million and $43.2 million, respectively, compared to $39.8 million and $30.7 million, respectively, for the same periods of 2001. Net income for the six months ended June 30, 2002 was $38.1 million compared to $22.3 million for the same period of 2001. Net premiums written and earned for the six month period of 2002 were $135.9 million and $83.3 million, respectively, compared to $49.4 million and $41.9 million, respectively, for the comparable period in 2001. For the second quarter of 2002, there was $521.0 million of par insured originated in the municipal bond insurance area including $225.0 million in the healthcare sector and $225.0 million in the higher education sector. In the non-municipal or global structured products area, Financial Guaranty wrote $1.7 billion of par, primarily in the form of credit protection on synthetic, static pools of investment-grade collateralized debt obligations. The following table shows the breakdown of premiums written and earned for each period.
Quarter Ended Six Months Ended June 30 June 30 --------------------- --------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (in thousands) (in thousands) Net premiums written: Muni direct $ 15,956 $ 5,497 $ 30,540 $ 6,678 Muni reinsurance 7,212 14,260 23,194 16,251 Non-muni direct 21,669 2,102 29,684 2,815 Non-muni reinsurance 15,256 10,412 30,970 12,866 Trade credit 13,189 7,516 21,470 10,792 -------- -------- -------- -------- Total net premiums written $ 73,282 $ 39,787 $135,858 $ 49,402 ======== ======== ======== ======== Net premiums earned: Muni direct $ 3,314 $ 3,336 $ 6,833 $ 5,410 Muni reinsurance 10,840 6,891 18,505 9,014 Non-muni direct 8,944 3,323 15,499 4,522 Non-muni reinsurance 12,565 10,114 27,605 13,243 Trade credit 7,495 7,069 14,866 9,732 -------- -------- -------- -------- Total net premiums earned $ 43,158 $ 30,733 $ 83,308 $ 41,921 ======== ======== ======== ========
Included in net premiums earned for the second quarter and year-to-date periods of 2002 were refundings of $3,264,000 and $3,903,000, respectively, compared to $1,575,000 and $2,805,000 for the same periods of 2001. Net investment income was $17.5 million and $34.4 million for the second quarter and year-to-date periods of 2002, compared to $14.9 million and $19.9 million for the similar periods of 2001. The provision for losses was $10.3 million for the second quarter of 2002 compared to $8.8 million for the second quarter of 2001 and the year-to-date 2002 provision was $22.6 million compared to $11.6 million in 2001. The provision represented 23.8% and 27.1% of earned premiums for the second quarter and year-to-date periods of 2002 compared to 28.6% and 27.7% in the same periods of 2001. Financial Guaranty paid one large claim for approximately $9.0 million in the year-to- 18 date period of 2002. The remaining claims of $9.5 million relate primarily to trade credit insurance. Policy acquisition and other operating expenses were $16.1 million and $32.6 million for the three and six month periods of 2002 compared to $10.5 million and $16.4 million for the three and six month periods of 2001. This resulted in an expense ratio of 37.2% and 38.0% for the second quarter and year-to-date period of 2002 compared to 34.3% and 39.1% for the 2001 periods. Interest expense for the second quarter of 2002 was $2.1 million compared to $1.7 million in the second quarter of 2001. For the year-to-date periods of 2002 and 2001, interest expense was $4.7 million and $2.1 million, respectively. All periods include interest allocated on the Company's debt financing. Net losses of $3.5 million and $5.8 million for the second quarter and year-to-date periods of 2002 related primarily to the change in the fair value of derivative instruments, primarily convertible debt securities and financial guaranty contracts that are considered to be a derivative instrument. The effective tax rate was 27.8% and 27.7% for the three and six months ended June 30, 2002 compared to 27.4% for both periods of 2001. MORTGAGE SERVICES - RESULTS OF OPERATIONS The mortgage services results include the operations of RadianExpress.com Inc. ("RadianExpress") and the asset-based businesses conducted through Financial Guaranty's minority owned subsidiaries, C-BASS and Sherman. The Company owns a 46% interest in C-BASS and a 45.5% interest in Sherman. C-BASS is engaged in the purchasing, servicing and/or securitizing of special assets, including sub-performing/non-performing and seller-financed residential mortgages, real estate and subordinated residential mortgage-based securities. Sherman conducts a business that focuses on purchasing and servicing delinquent, primarily unsecured consumer assets. Net income for the second quarter and year-to-date periods of 2002 was $14.5 and $24.9 million compared to $7.6 million and $13.9 million for the same periods in 2001. Equity in net income of affiliates (pre-tax) was $26.9 million for the second quarter of 2002 compared to $14.3 million for the comparable period in 2001. For the year-to-date periods of 2002 and 2001, equity in net income of affiliates was $45.4 million and $26.1 million, respectively. C-BASS accounted for $21.5 million (pre-tax) of the total income from affiliates in the second quarter of 2002 and $37.6 million (pre-tax) of the year-to-date 2002 amount. These results could vary significantly from period to period due to a substantial portion of C-BASS's income being generated from sales of mortgage-backed securities in the capital markets. These markets can be volatile, subject to change in interest rates, the credit environment and liquidity. RadianExpress contributed $5.8 million of other income and $6.2 million of operating expenses for the second quarter of 2002 compared to $3.1 million and $3.6 million, respectively, for the second quarter of 2001. Year-to-date 2002, RadianExpress had revenues of $11.5 million and expenses of $12.6 million, compared to $5.0 million and $6.3 million, respectively in the year-to-date period of 2001. RadianExpress processed approximately 105,000 applications during the second quarter of 2002 and 225,000 applications year-to-date 2002. In the second quarter and year to date periods of 2001, RadianExpress processed 79,000 and 164,000 applications, respectively. In June 2002, the Company received a cease and desist order from the State of California in connection with the offering of its Radian Lien Protection product. This cease and desist order has not had a material impact on the Company's overall operations, but it has significantly reduced the potential for future revenues of RadianExpress. The Company is vigorously appealing this cease and desist order. OTHER Two wholly-owned subsidiaries of Financial Guaranty, Singer Asset Finance Company, L.L.C. ("Singer") and Enhance Consumer Services LLC ("ECS"), which had been engaged in the purchase, servicing, and securitization of assets including state lottery awards, structured settlement payments and viatical settlements, are currently operating on a run-off basis. Their operations consist of servicing the prior originations of non-consolidated special purpose vehicles and the results of these subsidiaries are not expected to be material to the financial results of the Company. At June 30, 2002, the Company has approximately $533.0 million and $509.0 million of non-consolidated assets and liabilities, respectively, associated with the Singer special purpose vehicles. The Company's investment in these special purpose vehicles is $25.0 million at June 30, 2002. Another insurance subsidiary, Van-American Insurance Company, Inc., is engaged on a run-off basis, in reclamation bonds for the coal mining industry and surety bonds covering closure and post-closure obligations of 19 landfill operators. Such business is not expected to be material to the financial results of the Company. At June 30, 2002, the Company, through its ownership of Financial Guaranty, owned an indirect 36.5% equity interest in Exporters Insurance Company Ltd., an insurer of primarily foreign trade receivables for multinational companies. Financial Guaranty provides significant reinsurance capacity to this joint venture on a quota-share, surplus share and excess-of-loss basis. LIQUIDITY AND CAPITAL RESOURCES The Company's sources of funds consist primarily of premiums and investment income. Funds are applied primarily to the payment of the Company's claims and operating expenses. Cash flows from operating activities for the six months ended June 30, 2002 were $267.8 million as compared to $213.4 million for the same period of 2001. This increase consisted of an increase in net premiums written and investment income received partially offset by increases in losses paid and operating expenses. Positive cash flows are invested pending future payments of claims and other expenses; excess cash flow needs, if any, are funded through sales of short-term investments and other investment portfolio securities. Stockholders' equity, plus redeemable preferred stock of $40.0 million, increased to $2.6 billion at June 30, 2002 from $2.3 billion at December 31, 2001. This resulted from net income of $212.9 million, proceeds from the issuance of common stock of $25.5 million and an increase in the market value of securities available for sale of $14.3 million, net of tax, offset by dividends of $5.4 million. As of June 30, 2002, the Company and its subsidiaries had plans to continue investing in significant information technology and infrastructure upgrades over the next two years at an estimated cost of $25 million to $30 million. The Company plans to move its Data Center to Dayton, Ohio in the coming year. Cash flows from operations will be used to fund these expenditures. Financial Guaranty was party to a credit agreement (as amended, the "Credit Agreement") with major commercial banks providing Financial Guaranty with a borrowing facility aggregating up to $175.0 million, the proceeds of which were used for general corporate purposes. The outstanding principal balance under the Credit Agreement of $173.7 million was retired on May 29, 2001. The Company owns a 46% interest in C-BASS. The Company did not make any capital contributions to C-BASS since the Company acquired its interest in C-BASS in connection with the acquisition of Financial Guaranty. C-BASS paid $20.1 million of dividends to the Company during the first six months of 2002 and $12.8 million during all of 2001. The Company owns a 45.5% interest in Sherman. The Company did not made any capital contributions to Sherman in the first six months of 2002, but made $15.0 million of contributions during full year 2001. In conjunction with the acquisition of its interest in Sherman, the Company guaranteed payment of up to $25.0 million of a revolving credit facility issued to Sherman. There were no outstanding drawdowns on the line of credit as of June 30, 2002. In January 2002, the Company sold $220 million of Senior Convertible Debentures. Approximately $125 million of the proceeds from the offering was used to increase capital at Radian Asset Assurance. The remainder will be used for general corporate purposes. The debentures bear interest at the rate of 2.25% per year and interest is payable semi-annually on January 1 and July 1, beginning July 1, 2002. The Company will also pay contingent interest on specified semi-annual periods, if the sale price of its common stock for a specified period of time is less than 60% of the conversion price. The debentures are convertible, at the purchaser's option, into shares of common stock at prices and on dates specified in the offering. At that time, the shares become common shares for the purposes of calculating earnings per share. The Company may redeem all or some of the debentures on or after January 1, 2005. In February 2002, the Company closed on a $50 million Senior Revolving Credit Facility. The facility is unsecured and expires in one year. The facility will be used for working capital and general corporate purposes. The facility bears interest on any amounts drawn at either the Borrower's Base rate as defined in the agreement, or at 20 a rate above LIBOR based on certain debt to capital ratios. There have been no drawdowns on this facility. In March 2002, the Company made a $20 million investment in Primus Guaranty, Ltd, a Bermuda holding company and parent company to Primus Financial Products, Inc. ("Primus"), a Triple A rated company that provides credit risk protection to derivatives dealers and credit portfolio managers on individual investment-grade entities. In connection with the capitalization and Triple A rating of Primus, Radian Re has provided Primus with an excess of loss insurance policy. The Company accounts for the Primus investment under the equity method of accounting. Their results for the second quarter of 2002 were immaterial to the consolidated financial statements. In July 2002, the Company issued a notice of redemption for the Company's $4.125 Preferred Stock, par value $.001 per share. The notice calls for the redemption of all 800,000 outstanding shares of the Company's preferred stock on August 15, 2002. Pursuant to the Company's sinking fund redemption obligation, 72,000 shares will be redeemed at $50.00 per share, and the remaining 728,000 shares will be redeemed at $54.125 per share. Accrued and unpaid dividends on the shares to the date of redemption will also be paid as part of the redemption price. The Company believes that Radian Guaranty will have sufficient funds to satisfy its claims payments and operating expenses and to pay dividends to the Company for at least the next 12 months. The Company also believes that it will be able to satisfy its long-term (more than 12 months) liquidity needs with cash flow from Mortgage Insurance and Financial Guaranty. As a holding company, the Company conducts its principal operations through Mortgage Insurance and Financial Guaranty. The Company's ability to pay dividends on the $4.125 Preferred Stock is dependent upon dividends or other distributions from Mortgage Insurance or Financial Guaranty. In connection with obtaining approval from the New York Insurance Department for the change of control of Financial Guaranty when the Company acquired Financial Guaranty, Financial Guaranty agreed not to declare or pay dividends for a period of two years following consummation of the acquisition. Consequently, the Company cannot rely upon or expect any dividends or other distributions from Financial Guaranty. Based on the Company's current intention to pay quarterly common stock dividends of approximately $0.02 per share, the Company will require approximately $7.6 million annually to pay the dividends on the outstanding shares of common stock. The Company will also require $29.4 million annually to pay the debt service on its long-term and short-term debt financing and approximately $43.4 million to redeem its preferred stock. The Company believes that it has the resources to meet these cash requirements for the next twelve months. There are regulatory and contractual limitations on the payment of dividends or other distributions from its insurance subsidiaries. The Company does not believe that any of these restrictions will prevent the payment by its subsidiaries or the Company of these anticipated dividends or distributions in the foreseeable future. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK During the first six months of 2002, the Company experienced an increase in the fair market value of the available for sale portfolio, which resulted in an increase in the net unrealized gain on the investment portfolio of $14.3 million. The accumulated net unrealized gain at June 30, 2002 was $24.7 million compared to $10.4 million at December 31, 2001. This increase in value was a result of changes in market interest rates and not a result of changes in the composition of the Company's investment portfolio. The market value of the Company's long-term and short-term debt at June 30, 2002 was $588.0 million. For a more complete discussion about the potential impact of interest rate changes upon the fair value of the financial instruments in the Company's investment portfolio, see "Quantitative and Qualitative Disclosures about Market Risk" in the Company's 2001 Form 10-K. 21 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There have been no material developments in legal proceedings involving the Company or its subsidiaries since those reported in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. The Company is involved in certain litigation arising in the normal course of its business. The Company is contesting the allegations in each such pending action and believes, based on current knowledge and after consultation with counsel, that the outcome of such litigation will not have a material adverse effect on the Company's consolidated financial position and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 7, 2002, the Annual Meeting of Stockholders of the Company was held. At the meeting, the following matters were submitted to a vote of the stockholders of the Company, with the voting results indicated below: 1) The election of four directors to serve for a three-year term beginning at the 2002 Annual Meeting of Stockholders and expiring at the 2005 Annual Meeting of Stockholders.
For Withheld ---------- --------- David C. Carney 83,110,162 1,002,617 Howard B. Culang 83,909,581 203,198 Rosemarie B. Greco 83,910,525 202,254 Ronald W. Moore 83,908,080 204,699
2) The approval of the appointment of Deloitte & Touche LLP as the Company's independent auditors for the year ending December 31, 2002.
For Against Abstain - ---------- --------- ------ 79,676,136 4,399,579 37,064
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS
Exhibit No. Exhibit Name - ----------- ------------ 11 Statement Re: Computation of Per Share Earnings.
(b) REPORTS ON FORM 8-K Current Report on Form 8-K filed with the Securities and Exchange Commission on July 16, 2002 reporting the Company's announcement that it has called for redemption all of the outstanding shares of its $4.125 Preferred Stock, par value $.001 per share. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RADIAN GROUP INC. Date: August 13, 2002 /s/ C. Robert Quint -------------------- C. Robert Quint Executive Vice President and Chief Financial Officer /s/ John J. Calamari --------------------- John J. Calamari Vice President and Corporate Controller 23 EXHIBIT INDEX
Exhibit No. Exhibit Name - ----------- ------------ 11 Statement Re: Computation of Per Share Earnings.
24 EX-11 4 w62887exv11.txt STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 RADIAN GROUP INC. SCHEDULE OF NET INCOME PER SHARE EXHIBIT 11
Quarter Ended Six Months Ended June 30, June 30, ------------------------ -------------------------- 2002 2001 2002 2001 --------- --------- --------- ----------- (In thousands, except per-share amounts and market prices) Net income $ 108,922 $ 92,677 $ 212,855 $ 172,834 Preferred stock dividend adjustment (825) (825) (1,650) (1,650) --------- --------- --------- ----------- Adjusted net income $ 108,097 $ 91,852 $ 211,205 $ 171,184 Average diluted stock options outstanding 5,102.8 5,915.2 5,297.7 6,363.6 Average exercise price per share $ 27.58 $ 24.00 $ 27.21 $ 24.98 Average market price per share - diluted basis $ 51.88 $ 39.14 $ 48.80 $ 35.16 Average common shares outstanding 94,708 93,124 94,466 87,400 Increase in shares due to exercise of options - diluted basis 1,679 1,730 1,668 1,546 --------- --------- --------- ----------- Adjusted shares outstanding - diluted 96,387 94,854 96,134 88,946 Net income per share - basic $ 1.14 $ .99 $ 2.24 $ 1.96 ========= ========= ========= =========== Net income per share - diluted $ 1.12 $ .97 $ 2.20 $ 1.92 ========= ========= ========= ===========
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