Consists primarily of second lien mortgage insurance risk and other structured mortgage-related insurance risk.
Consolidated earned premiums for 2002 of $847.1 million increased $131.2 million or 18.3% from $715.9 million in 2001. Mortgage Insurance contributed $51.1 million of this increase and Financial Guaranty contributed $80.1 million. Net investment income of $178.8 million for 2002 increased $31.3 million or 21.2% from $147.5 million in 2001. This increase was primarily due to a large increase in the investment portfolio balance as a result of continued operating cash flows, the proceeds from the issuance of $220 million of convertible debt in January 2002, as well as a full year’s use of the proceeds from the Company’s $250 million debt offering in May 2001. Other income increased slightly to $44.4 million for 2002 from $42.5 million in 2001.
Net income for 2003 was $279.8 million, a decrease of $14.0 million or 4.8% from $293.8 million in 2002. This net decrease resulted from increases in the provision for losses, policy acquisition costs and other operating expenses and interest expense partially offset by higher earned premiums and other income.
Primary new insurance written during 2003 was $68.4 billion, a 40.2% increase from $48.8 billion written in 2002. This increase in Mortgage Insurance’s primary new insurance written volume in 2003 was primarily due to a large increase in insurance written both through flow business (loans insured on an individual basis) and structured transactions. During 2003, Mortgage Insurance wrote $18.9 billion in structured transactions compared to $11.8 billion in 2002. Of this amount in 2003, $11.0 billion was written in the first three months of the year. The amount written in the first quarter of 2003 includes a large structured transaction for one customer composed of prime mortgage loans originated throughout the United States. The Company’s participation in the structured transaction market is likely to vary from year to year as the Company competes with other mortgage insurers, as well as capital market executions for these transactions. During 2003, Mortgage Insurance wrote $932.5 million of pool insurance risk compared to $173.6 million in 2002. The majority of this pool risk consisted of prime and Alternative A (“Alt-A”) loans.
The Company insures mortgage-related assets in a Pennsylvania domiciled insurer, Radian Insurance. Radian Insurance is rated “AA” by S&P and Fitch Ratings (“Fitch”) and “Aa3” by Moody’s Investors Service and was formed to write credit 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%. Radian Insurance also provides credit enhancement to mortgage-related capital market transactions. In October 2001, Radian Insurance entered into a reinsurance agreement with one of its affiliates, Radian Asset Assurance Inc., for a substantial part of its business
Mortgage Insurance and other companies in the industry have entered into risk/revenue-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 establishes 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 2003, premiums ceded under captive reinsurance arrangements were $73.6 million, or 10.0% of total premiums earned during 2003, as compared to $57.1 million, or 8.3% of total premiums earned for the same period of 2002. New primary insurance written under captive reinsurance arrangements was $21.9 billion, or 32.1% of total new primary insurance written in 2003 as compared to $17.0 billion, or 34.8% of total new primary insurance written in 2002. The Company has experienced a trend toward increased use of these risk/revenue-sharing arrangements at increased percentage levels. The Company continues to evaluate the level of revenue sharing against risk sharing on a customer-by-customer basis.
Primary new insurance written during 2002 was $48.8 billion, an 8.9% increase from $44.8 billion written in 2001. This increase in Mortgage Insurance’s primary new insurance written volume in 2002 was primarily due to a large increase in the mortgage origination market, as well as an increase in insurance written through structured transactions. The industry experienced an approximate 20% increase in new insurance written during 2002 compared to 2001. The Company’s market share of the industry based on new insurance written was 14.4% compared to 15.6% in 2001. During 2002, Mortgage Insurance wrote $11.8 billion in structured transactions compared to $8.7 billion in 2001. During 2002, Mortgage Insurance wrote $173.6 million of pool insurance risk compared to $255.4 million in 2001.
However, Financial Guaranty’s reinsurance customers may view the combined Financial Guaranty company as more of a competitor and a threat to their business and prospects, since the combined Financial Guaranty company would be a larger entity that not only reinsures their obligations, but also could directly insure larger obligations in competition with them. Even if the combined Financial Guaranty company ratings were not changed or reduced as a result of the Potential Merger, any of Financial Guaranty’s customers could: (i) compete with Radian Asset Assurance more vigorously than they do now on the direct financial guaranty company transactions Radian Asset Assurance insures, (ii) materially reduce or eliminate the reinsurance currently ceded by such customer to Radian Reinsurance, (iii) if such customer does not consent to the Potential Merger and its reinsurance agreements with Radian Reinsurance does not permit Radian Reinsurance to merge with another entity, exercise any right to recapture all of the business ceded to Radian Reinsurance under such agreements, or (iv) become more reluctant to partner with Financial Guaranty on transactions. Consequently, Financial Guaranty would: (i) experience a reduction in the number of transactions entered into, the premium received and/or the premium rate relative to the insurance exposure on future direct financial guaranty insurance transactions, (ii) have a material reduction in future reinsurance premiums written and earned, and/or (iii) be required to return unearned premiums previously received by Radian Reinsurance. A reduction in direct insurance or reinsurance premiums received or the premium rates received, or the requirement to return unearned premium to the ceding
In July 2003, the State of California Department of Insurance issued Radian Asset Assurance a Certificate of Authority to write financial guaranty insurance in California. As a result, the Company believes that Radian Asset Assurance has begun to have additional opportunities to write financial guaranty insurance, particularly on public finance obligations, which could favorably increase Radian Asset Assurance’s net premiums written in the public finance direct area in the near future, and subsequently increase Radian Asset Assurance’s net premiums earned as such premium written becomes earned over the life of the obligations insured.
In March 2002, the Company made a $20 million investment in Primus. In connection with the capitalization and Triple A rating of Primus, Radian Reinsurance had provided Primus with an excess of loss insurance policy, which expired March 30, 2003. The Company accounts for the Primus investment under the equity method of accounting.
In connection with the Company’s Internet-based financial services, revenues and the related expenses are recorded when the service is rendered.
Under New York insurance law, the financial guaranty insurance subsidiaries may declare or distribute dividends only out of earned surplus. The maximum amount of dividends, which may be paid by the insurance subsidiaries without prior approval of the New York Superintendent of Insurance, is subject to restrictions relating to statutory surplus and net investment income as defined by statute. Under such requirements, Radian Reinsurance would be able to pay dividends of approximately $37.0 million in 2004 and Radian Asset Assurance has approximately $45.3 million available for dividends in 2004, without prior approval.
The Company prepares its statutory financial statements in accordance with the accounting practices prescribed or permitted by the insurance department of the respective states of domicile of the Company’s insurance subsidiaries. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (“NAIC”) as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed.
With respect to the primary insurer that has exercised its rights, effective January 31, 2004, approximately $16.4 billion of par in force reinsurance ceded to Radian Reinsurance was recaptured. Radian Reinsurance returned approximately $96.4 million of STAT unearned premium reserves for which the carrying value under GAAP was approximately $71.5 million. In addition, Radian Reinsurance was reimbursed for policy acquisition costs of approximately $31.0 million for which the carrying value under GAAP was $21.3 million. Radian
We have audited the accompanying consolidated balance sheets of Radian Group Inc. and subsidiaries (the “Company”) as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.