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 March 31, 2005

¨	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: 86,169,094 shares of Common Stock, $0.001 par value, outstanding on April 28, 2005.

Radian Group Inc. and Subsidiaries

INDEX


		Page Number
Safe Harbor Statement under the Private Securities Litigation Reform Act of 2005		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	5-16
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17-42
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	44

SIGNATURES		45

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 the Company expects or anticipates 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 or regional 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 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 single servicer’s inability to track, prevent or mitigate delinquencies or defaults with respect to mortgages insured by the Company;

•

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, interest-only, adjustable-rate mortgages and non-prime mortgage loans, credit insurance on non-traditional mortgage-related assets such as net interest margin securities, 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 due to a failure by lenders to follow specified underwriting guidelines;

•

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, or other ratings actions with respect to, the insurance financial strength ratings assigned by the major rating agencies to any of the Company’s rated operating subsidiaries at any time, which actions 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;

•

the application of existing federal or state consumer lending and insurance laws and regulations, or unfavorable changes in these laws and regulations or the way they are interpreted or applied, including the possibility of private lawsuits or investigations by state insurance departments and state attorneys general alleging that services offered by the mortgage insurance industry, such as captive reinsurance, pool insurance and contract underwriting, are violative of the Real Estate Settlement Procedures Act and/or similar state regulations (particularly in light of public reports that some insurance departments may review or investigate captive reinsurance practices used in the mortgage insurance industry);

•

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;

•

increases in claim frequency as the Company’s mortgage insurance policies age;

•

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, 2004 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)	March 31 2005			December 31 2004
Assets
Investments
Fixed maturities held to maturity – at amortized cost (fair value $177,686 and $188,063)	$	170,717		$	178,894
Fixed maturities available for sale – at fair value (amortized cost $4,319,678 and $4,228,896)		4,419,572			4,406,366
Trading securities – at fair value (cost $72,271 and $65,359)		95,065			86,342
Equity securities – at fair value (cost $246,298 and $250,558)		308,435			335,495
Short-term investments		225,497			459,718
Other invested assets		3,931			3,253

Total investments		5,223,217			5,470,068
Cash		22,484			30,680
Investment in affiliates		383,023			393,025
Deferred policy acquisition costs		199,943			211,928
Prepaid federal income taxes		481,049			460,149
Provisional losses recoverable		24,284			38,312
Accrued investment income		57,792			60,268
Accounts and notes receivable		66,030			77,125
Property and equipment, at cost (less accumulated depreciation of $52,827 and $48,215)		66,349			69,337
Other assets		198,426			189,928

Total assets	$	6,722,597		$	7,000,820

Liabilities and Stockholders’ Equity
Unearned premiums	$	735,768		$	770,208
Reserve for losses and loss adjustment expenses		797,671			801,012
Long-term debt		717,038			717,640
Deferred federal income taxes		823,305			848,224
Accounts payable and accrued expenses		202,223			174,681

Total liabilities		3,276,005			3,311,765

Commitments and Contingencies
Stockholders’ equity
Common stock: par value $.001 per share; 200,000,000 shares authorized; 96,685,308 and 96,560,912 shares issued in 2005 and 2004, respectively		97			97
Treasury stock: 10,279,599 and 4,280,305 shares in 2005 and 2004, respectively		(469,882	)		(176,242	)
Additional paid-in capital		1,289,526			1,282,433
Retained earnings		2,511,469			2,397,626
Accumulated other comprehensive income		115,382			185,141

Total stockholders’ equity		3,446,592			3,689,055

Total liabilities and stockholders’ equity	$	6,722,597		$	7,000,820

See notes to unaudited condensed consolidated financial statements.

Radian Group Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Quarter Ended March 31
(in thousands, except per-share amounts)	2005			2004
Revenues:
Premiums written:
Direct	$	255,385		$	251,517
Assumed		(16,010	)		(50,273	)
Ceded		(24,535	)		(19,816	)

Net premiums written		214,840			181,428
Decrease in unearned premiums		32,185			61,992

Net premiums earned		247,025			243,420
Net investment income		50,862			49,705
Gains on sales of investments		11,526			26,676
Change in fair value of derivative instruments		(8,960	)		4,647
Other income		6,108			8,400

Total revenues		306,561			332,848

Expenses:
Provision for losses		109,500			114,767
Policy acquisition costs		29,356			22,283
Other operating expenses		51,670			53,159
Interest expense		8,958			9,654

Total expenses		199,484			199,863

Equity in net income of affiliates		51,296			32,482

Pretax income		158,373			165,467
Provision for income taxes		42,761			45,457

Net income	$	115,612		$	120,010

Net income available to common stockholders	$	115,612		$	120,010

Basic net income per share	$	1.29		$	1.28

Diluted net income per share	$	1.24		$	1.22

Average number of common shares outstanding – basic		89,488			94,022

Average number of common and common equivalent shares outstanding - diluted		94,258			98,888

See notes to unaudited condensed consolidated financial statements.

Radian Group Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY

(UNAUDITED)


										Accumulated Other Comprehensive Income (Loss)
(in thousands)	Common Stock		Treasury Stock			Additional Paid-in Capital		Retained Earnings		Foreign Currency Translation Adjustment			Unrealized Holding Gains (Losses)			Total
Balance, January 1, 2005	$	97	$	(176,242	)	$	1,282,433	$	2,397,626	$	14,397		$	170,744		$	3,689,055
Comprehensive income:
Net income		—		—			—		115,612		—			—			115,612
Unrealized foreign currency translation adjustment, net of tax of $2,348		—		—			—		—		(4,362	)		—			(4,362	)
Unrealized holding losses arising during the period, net of tax benefit of $31,180		—		—			—		—		—			(57,905	)
Less: Reclassification adjustment for net gains included in net income, net of tax of $4,034		—		—			—		—		—			(7,492	)

Net unrealized loss on investments, net of tax benefit of $35,214		—		—			—		—		—			(65,397	)		(65,397	)

Comprehensive income		—		—			—		—		—			—			45,853
Issuance of common stock under incentive plans

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