RADIAN GROUP INC - 10-Q Quarterly Report

UNITED STATES

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, 2004

¨	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 incorporation or organization)		(I.R.S. Employer 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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: 91,881,647 shares of Common Stock, $0.001 par value, outstanding on October 31, 2004.

Radian Group Inc. and Subsidiaries

INDEX


			Page Number
FORWARD - LOOKING STATEMENT DISCLAIMER			i

PART I - FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets	1
		Condensed Consolidated Statements of Income	2
		Condensed Consolidated Statement of Changes in Common Stockholders’ Equity	3
		Condensed Consolidated Statements of Cash Flows	4
		Notes to Unaudited Condensed Consolidated Financial Statements	5-17
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18-43
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
	Item 4.	Controls and Procedures	43

PART II - OTHER INFORMATION
	Item 1.	Legal Proceedings	44
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

	Item 6.	Exhibits	45

SIGNATURES			46

EXHIBIT INDEX

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995:

All statements in this report that address operating performance, events or developments that we expect or anticipate may occur in the future are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the U.S. Private Securities Litigation Reform Act of 1995. These statements are made on the basis of management’s current views and assumptions with respect to future events. The forward-looking statements, as well as the Company’s prospects as a whole, are subject to risks and uncertainties including the following:

•

changes in general financial and political conditions, such as extended national economic recessions, business failures, changes in housing values, changes in unemployment rates, changes or volatility in interest rates, changes in investor perceptions of the strength of private mortgage insurers or financial guaranty providers, investor concern over the credit quality of municipalities and corporations, and specific risks faced by the particular businesses, municipalities or pools of assets covered by the Company’s insurance;

•

economic changes in geographic regions where the Company’s mortgage insurance or financial guaranty insurance in force is more concentrated;

•

the loss of significant customers with whom the Company has a concentration of its mortgage insurance and financial guaranty insurance in force;

•

increased concentration of servicers in the mortgage lending industry making the Company’s mortgage insurance business vulnerable to a rise in delinquencies in its insured portfolio;

•

increased severity or frequency of losses associated with certain of the Company’s products that are riskier than traditional mortgage insurance and financial guaranty insurance policies, such as insurance on high-LTV, adjustable-rate mortgage and non-prime mortgage loans, credit insurance on non-traditional mortgage-related assets such as second mortgages and manufactured housing, credit enhancement of mortgage-related capital market transactions, guaranties on certain asset-backed transactions and securitizations, guaranties on obligations under credit default swaps and trade credit reinsurance;

•

increased commitment to insure mortgage loans with unacceptable risk profiles through the Company’s delegated underwriting program;

•

material changes in persistency rates of the Company’s mortgage insurance policies caused by changes in refinancing activity, appreciating or depreciating home values and changes in the mortgage insurance cancellation requirements of mortgage lenders and investors;

•

reduced ability to recover amounts paid on defaulted mortgages by taking title to a mortgaged property due to a failure of housing values to appreciate;

•

downgrades of the insurance financial strength ratings assigned by the major rating agencies to any of the Company’s operating subsidiaries at any time, which have occurred in the past;

•

intense competition for the Company’s mortgage insurance business from others such as the Federal Housing Administration and Veterans Administration or other private mortgage insurers, and from alternative products such as “80-10-10 loan” structures used by mortgage lenders or other forms of credit enhancement used by investors;

•

changes in the business practices of Fannie Mae and Freddie Mac, the largest purchasers of mortgage loans insured by the Company;

•

intense competition for the Company’s financial guaranty business from other financial guaranty insurers, and from other forms of credit enhancement such as letters of credit, guaranties and credit default swaps provided by foreign and domestic banks and other financial institutions;

•

changes in the demand for private mortgage insurance caused by legislative and regulatory changes such as increases in the maximum loan amount that the Federal Housing Administration can insure;

•

changes in claims against mortgage insurance products as a result of aging of the Company’s mortgage insurance policies;

•

changes in the demand for financial guaranty insurance caused by changes in laws and regulations affecting the municipal, asset-backed securities markets and trade credit reinsurance;

•

changes in the Company’s ability to maintain sufficient reinsurance capacity needed to comply with regulatory, rating agency and internal single-risk retention limits in an increasingly concentrated reinsurance market;

•

vulnerability to the performance of the Company’s strategic investments; and

•

the loss of executive officers or other key personnel.

You also should refer to the risks discussed in other documents the Company files with the SEC, including the risk factors detailed in its annual report on Form 10-K for the year ended December 31, 2003 in the section immediately preceding Part I of the report. The Company does not intend to and disclaims any duty or obligation to update or revise any forward-looking statements made in this report to reflect new information or future events or for any other reason.

PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

Radian Group Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


(In thousands except share and per share amounts)	September 30 2004			December 31 2003
Assets
Investments
Fixed maturities held to maturity – at amortized cost (fair value $197,950 and $291,060)	$	187,152		$	273,995
Fixed maturities available for sale – at fair value (amortized cost $4,303,066 and $3,996,275)		4,467,054			4,170,261
Trading securities – at fair value (cost $51,570 and $50,436)		48,947			53,806
Equity securities – at fair value (cost $244,252 and $213,281)		294,695			249,634
Short-term investments		272,062			255,073
Other invested assets		3,850			4,593

Total investments		5,273,760			5,007,362
Cash		30,186			67,169
Investment in affiliates		347,404			328,478
Deferred policy acquisition costs		207,453			218,779
Prepaid federal income taxes		426,813			358,840
Provisional losses recoverable		36,679			48,557
Accrued investment income		57,964			53,702
Accounts and notes receivable		70,926			73,856
Property and equipment, at cost (less accumulated depreciation of $42,888 and $30,217)		70,417			71,436
Other assets		178,418			217,588

Total assets	$	6,700,020		$	6,445,767

Liabilities and Stockholders’ Equity
Unearned premiums	$	742,691		$	718,649
Reserve for losses and loss adjustment expenses		776,903			790,380
Long-term debt		717,579			717,404
Current income taxes		—			24,092
Deferred federal income taxes		769,342			688,262
Accounts payable and accrued expenses		209,901			281,136

Total liabilities		3,216,416			3,219,923

Commitments and Contingencies
Common stockholders’ equity
Common stock: par value $.001 per share; 200,000,000 shares authorized; 96,229,486 and 95,851,346 shares issued in 2004 and 2003, respectively		96			96
Treasury stock: 4,317,499 and 1,840,044 shares in 2004 and 2003, respectively		(176,181	)		(60,503	)
Additional paid-in capital		1,272,974			1,259,559
Retained earnings		2,243,400			1,886,548
Accumulated other comprehensive income		143,315			140,144

Total stockholders’ equity		3,483,604			3,225,844

Total liabilities and stockholders’ equity	$	6,700,020		$	6,445,767

See notes to unaudited condensed consolidated financial statements.

Radian Group Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Quarter Ended September 30						Nine Months Ended September 30
(In thousands, except per share amounts)	2004			2003			2004			2003
Revenues:
Premiums written:
Direct	$	265,881		$	260,714		$	828,613		$	711,928
Assumed		38,734			43,951			30,381			155,732
Ceded		(22,085	)		(19,148	)		(63,767	)		(55,887	)

Net premiums written		282,530			285,517			795,227			811,773
Increase in unearned premiums		(18,482	)		(24,474	)		(28,510	)		(69,589	)

Premiums earned		264,048			261,043			766,717			742,184
Net investment income		51,086			46,365			151,670			140,041
Gains on sales of investments		8,993			1,778			40,956			8,627
Change in fair value of derivative instruments		(2,083	)		6,072			2,576			(6,655	)
Other income		7,200			18,489			22,996			48,449

Total revenues		329,244			333,747			984,915			932,646

Expenses:
Provision for losses		114,125			100,762			345,452			264,060
Policy acquisition costs		35,903			33,787			89,558			96,172
Other operating expenses		47,659			51,423			153,242			152,429
Interest expense		7,996			9,652			26,014			27,888

Total expenses		205,683			195,624			614,266			540,549

Equity in net income of affiliates		45,926			21,287			130,580			70,034

Pretax income		169,487			159,410			501,229			462,131
Provision for income taxes		47,316			45,432			138,545			131,707

Net income	$	122,171		$	113,978		$	362,684		$	330,424

Net income available to common stockholders	$	122,171		$	113,978		$	362,684		$	330,424

Basic net income per share	$	1.32		$	1.22		$	3.88		$	3.54

Diluted net income per share	$	1.31		$	1.20		$	3.84		$	3.50

Average number of common shares outstanding – basic		92,384			93,558			93,416			93,431

Average number of common and common equivalent shares outstanding - diluted		93,387			94,886			94,456			94,514

See notes to unaudited condensed consolidated financial statements.

Radian Group Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY

(UNAUDITED)

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