FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
[ ] 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 1-10816
MGIC INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1486475
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
250 E. KILBOURN AVENUE 53202
MILWAUKEE, WISCONSIN (Zip Code)
(Address of principal executive offices)
(414) 347-6480
(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 for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
-------- --------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OF STOCK PAR VALUE DATE NUMBER OF SHARES
- -------------- --------- ---- ----------------
Common stock $1.00 6/30/98 113,340,426
PAGE 1
MGIC INVESTMENT CORPORATION
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of
June 30, 1998 (Unaudited) and December 31, 1997 3
Consolidated Statement of Operations for the Three and Six
Month Periods Ended June 30, 1998 and 1997 (Unaudited) 4
Consolidated Statement of Cash Flows for the Six Months
Ended June 30, 1998 and 1997 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 2. Changes in Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18-19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
INDEX TO EXHIBITS 22
PAGE 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1998 (Unaudited) and December 31, 1997
June 30, December 31,
1998 1997
-------- ------------
ASSETS (In thousands of dollars)
- ------
Investment portfolio:
Securities, available-for-sale, at market value:
Fixed maturities $2,441,750 $2,185,954
Equity securities 4,221 116,053
Short-term investments 124,649 114,733
---------- ----------
Total investment portfolio 2,570,620 2,416,740
Cash 10,876 4,893
Accrued investment income 39,283 35,485
Reinsurance recoverable on loss reserves 22,111 26,415
Reinsurance recoverable on unearned premiums 7,147 9,239
Home office and equipment, net 32,997 33,784
Deferred insurance policy acquisition costs 25,265 27,156
Investment in joint venture 49,320 29,400
Other assets 37,662 34,575
---------- ----------
Total assets $2,795,281 $2,617,687
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Loss reserves $ 630,951 $ 598,683
Unearned premiums 180,293 198,305
Notes payable (note 2) 245,000 237,500
Income taxes payable 22,064 27,717
Other liabilities 87,900 68,700
---------- ----------
Total liabilities 1,166,208 1,130,905
---------- ----------
Contingencies (note 3)
Shareholders' equity:
Common stock, $1 par value, shares authorized
300,000,000; shares issued 121,110,800;
shares outstanding, 6/30/98 - 113,340,426;
1997 - 113,791,593 121,111 121,111
Paid-in surplus 218,317 218,499
Treasury stock (shares at cost, 6/30/98 - 7,770,374;
1997 - 7,319,207) (287,421) (252,942)
Unrealized appreciation in investments, net of tax
(note 6) 77,381 83,985
Retained earnings 1,499,685 1,316,129
---------- ----------
Total shareholders' equity 1,629,073 1,486,782
---------- ----------
Total liabilities and shareholders' equity $2,795,281 $2,617,687
========== ==========
See accompanying notes to consolidated financial statements.
PAGE 3
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three and Six Month Periods Ended June 30, 1998 and 1997
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
1998 1997 1998 1997
---- ---- ---- ----
(In thousands of dollars, except per share data)
Revenues:
Premiums written:
Direct $187,733 $171,110 $365,530 $326,399
Assumed 2,168 3,065 4,137 5,859
Ceded (3,238) (3,259) (6,517) (5,736)
-------- -------- -------- --------
Net premiums written 186,663 170,916 363,150 326,522
Decrease in unearned premiums 2,585 2,563 15,919 17,249
-------- -------- -------- --------
Net premiums earned 189,248 173,479 379,069 343,771
Investment income, net of
expenses 35,325 30,372 69,714 59,880
Realized investment gains, net 946 507 11,241 596
Other revenue 12,507 6,507 21,968 11,709
-------- -------- -------- --------
Total revenues 238,026 210,865 481,992 415,956
-------- -------- -------- --------
Losses and expenses:
Losses incurred, net 52,514 58,251 111,952 121,445
Underwriting and other
expenses 45,532 37,920 90,690 76,133
Interest expense 3,456 - 7,086 319
Ceding commission (929) (966) (1,266) (1,508)
-------- -------- -------- --------
Total losses and expenses 100,573 95,205 208,462 196,389
-------- -------- -------- --------
Income before tax 137,453 115,660 273,530 219,567
Provision for income tax 42,241 35,045 84,271 66,516
-------- -------- -------- --------
Net income $ 95,212 $ 80,615 $189,259 $153,051
======== ======== ======== ========
Earnings per share (note 4):
Basic $ 0.83 $ 0.68 $ 1.66 $ 1.29
======= ======= ======= =======
Diluted $ 0.82 $ 0.67 $ 1.64 $ 1.28
======= ======= ======= =======
Weighted average common shares
outstanding - diluted (shares
in thousands, note 4) 115,713 119,594 115,727 119,473
======= ======= ======= =======
Dividends per share $ 0.025 $ 0.025 $ 0.050 $ 0.045
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
PAGE 4
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 1998 and 1997
(Unaudited)
Six Months Ended
June 30,
---------------------
1998 1997
---- ----
(In thousands of dollars)
Cash flows from operating activities:
Net income $189,259 $153,051
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred insurance policy
acquisition costs 11,249 14,672
Increase in deferred insurance policy
acquisition costs (9,358) (12,272)
Depreciation and amortization 3,503 4,055
Increase in accrued investment income (3,798) (765)
Decrease in reinsurance recoverable on loss
reserves 4,304 3,561
Decrease in reinsurance recoverable on unearned
premiums 2,092 2,328
Increase in loss reserves 32,268 39,358
Decrease in unearned premiums (18,012) (19,578)
Equity earnings in joint venture (4,920) 500
Other (4,866) (23,625)
-------- --------
Net cash provided by operating activities 201,721 161,285
-------- --------
Cash flows from investing activities:
Purchase of equity securities (3,886) (41,579)
Purchase of fixed maturities (503,774) (356,099)
Additional investment in joint venture (15,000) (6,850)
Proceeds from sale of equity securities 106,223 -
Proceeds from sale or maturity of fixed maturities 245,910 226,989
-------- --------
Net cash used in investing activities (170,527) (177,539)
-------- --------
Cash flows from financing activities:
Dividends paid to shareholders (5,705) (5,319)
Net increase (decrease) in notes payable 7,500 (35,424)
Reissuance of treasury stock 12,210 10,931
Repurchase of common stock (29,300) -
-------- --------
Net cash used in financing activities (15,295) (29,812)
-------- --------
Net increase (decrease) in cash and short-term
investments 15,899 (46,066)
Cash and short-term investments at beginning of period 119,626 143,975
-------- --------
Cash and short-term investments at end of period $135,525 $ 97,909
======== ========
See accompanying notes to consolidated financial statements.
PAGE 5
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
Note 1 - Basis of presentation
The accompanying unaudited consolidated financial
statements of MGIC Investment Corporation (the "Company") and
its wholly-owned subsidiaries have been prepared in accordance
with the instructions to Form 10-Q and do not include all of
the other information and disclosures required by generally
accepted accounting principles. These statements should be
read in conjunction with the consolidated financial statements
and notes thereto for the year ended December 31, 1997
included in the Company's Annual Report on Form 10-K for that
year.
The accompanying consolidated financial statements have
not been audited by independent accountants in accordance with
generally accepted auditing standards, but in the opinion of
management such financial statements include all adjustments,
consisting only of normal recurring accruals, necessary to
summarize fairly the Company's financial position and results
of operations. The results of operations for the six months
ended June 30, 1998 may not be indicative of the results that
may be expected for the year ending December 31, 1998.
Note 2 - Notes payable
In June of 1998, the Company completed a $250 million bank
loan agreement with several lending institutions to finance a
Stock Repurchase program in addition to the repurchase program
completed in 1997. The weighted average interest rates on the
notes payable for borrowings under the 1997 and 1998 credit
agreements were 5.89% and 5.91% per annum, respectively, at
June 30,1998.
The 1997 and 1998 credit facilities provide up to $225
million and $250 million, respectively, of availability at
June 30, 1998. The 1997 credit facility will decrease by $25
million each year through June 20, 2001. Any outstanding
borrowings under this facility mature on June 20, 2002. The
1998 credit facility decreases by $25 million each year
beginning June 9, 1999 through June 9, 2002. Any outstanding
borrowings under this facility mature on June 9, 2003. The
Company has the option, on notice to lenders, to prepay any
borrowings under the agreements subject to certain provisions.
Under the terms of the credit facilities, the Company must
maintain shareholders' equity of at least $1 billion and MGIC
must maintain a claims paying ability rating of AA- or better
with Standard & Poor's Corporation ("S&P"). At June 30, 1998,
the Company had shareholders' equity of $1.6 billion and MGIC
had a claims paying ability rating of AA+ from S&P.
PAGE 6
MGIC is guaranteeing one half of a $50 million credit
facility for C-BASS, a 48% owned unconsolidated joint venture.
The facility matures in July 1999.
Note 3 - Contingencies
The Company is involved in litigation in the ordinary
course of business. In the opinion of management, the
ultimate disposition of the pending litigation will not have a
material adverse effect on the financial position of the
Company.
Note 4 - Earnings per share
The Company's basic and diluted earnings per share ("EPS")
have been calculated in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share ("SFAS 128").
The following is a reconciliation of the weighted-average
number of shares used for basic EPS and diluted EPS.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
(Shares in thousands)
Weighted-average shares -
Basic EPS 114,144 118,322 114,067 118,215
Common stock equivalents 1,569 1,272 1,660 1,258
------- ------- ------- -------
Weighted-average shares -
Diluted EPS 115,713 119,594 115,727 119,473
======= ======= ======= =======
Earnings per share for 1997 has been restated to reflect
the provisions of SFAS 128. The Company's previously reported
EPS for 1997 equaled diluted EPS under SFAS 128.
Note 5 - Comprehensive income
Effective January 1, 1998, the Company adopted Statement
of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130"). The statement establishes
standards for the reporting and display of comprehensive
income and its components in annual financial statements. The
Company's total comprehensive income, as calculated per SFAS
130, was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
(In thousands of dollars)
Net income $ 95,212 $ 80,615 $189,259 $153,051
Other comprehensive gain
(loss) 4,188 25,073 (6,604) 2,222
-------- -------- -------- --------
Total comprehensive
income $ 99,400 $105,688 $182,655 $155,273
======== ======== ======== ========
PAGE 7
The difference between the Company's net income and
total comprehensive income for the three and six months ended
June 30, 1998 and 1997 is due to the change in unrealized
appreciation on investments, net of tax.
Note 6 - New accounting standards
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"), which will be effective for all fiscal quarters
of all fiscal years beginning after June 15, 1999. The
statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It is not
anticipated that the effects of SFAS 133 will be material to
MGIC.
PAGE 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Consolidated Operations
Three Months Ended June 30, 1998 Compared With Three Months
Ended June 30, 1997
Net income for the three months ended June 30, 1998 was
$95.2 million, compared to $80.6 million for the same period
of 1997, an increase of 18%. Diluted earnings per share for
the three months ended June 30, 1998 was $0.82 compared to
$0.67 in the same period last year, an increase of 22%. See
note 4 to the consolidated financial statements.
The amount of new primary insurance written by Mortgage
Guaranty Insurance Corporation ("MGIC") during the three
months ended June 30, 1998 was $10.7 billion, compared to $7.7
billion in the same period of 1997. Refinancing activity
accounted for 32% of new primary insurance written in the
second quarter of 1998, compared to 12% in the second quarter
of 1997.
New insurance written for the second quarter of 1998
reflected an increase in the usage of the monthly premium
product to 94% of new insurance written from 92% of new
insurance written in the second quarter of 1997. New insurance
written for adjustable-rate mortgages ("ARMs") decreased to
11% of new insurance written in the second quarter of 1998
from 30% of new insurance written in the same period of 1997.
Mortgages with loan-to-value ("LTV") ratios in excess of 90%
but not more than 95% ("95%") decreased to 36% of new
insurance written in the second quarter of 1998 from 43% of
new insurance written in the same period of 1997. Also,
mortgages with 95% LTVs and 30% coverage decreased to 34% of
new insurance written in the second quarter compared to 40% in
the same period of 1997.
The $10.7 billion of new primary insurance written during
the second quarter of 1998 was offset by the cancellation of
$11.5 billion of insurance in force, and resulted in a net
decrease of $0.8 billion in primary insurance in force,
compared to new primary insurance written of $7.7 billion, the
cancellation of $6.3 billion, and a net increase of $1.4
billion in insurance in force during the second quarter of
1997. Direct primary insurance in force was $137.5 billion
at June 30, 1998 compared to $138.5 billion at December 31,
1997 and $134.2 billion at June 30, 1997. In addition to
providing primary insurance coverage, the Company also
insures pools of mortgage loans. New pool risk written during
the three months ended June 30, 1998 was $148 million, which
was virtually all agency pool insurance. The Company's direct
pool risk in force at June 30, 1998 was $860.9 million
compared to $590.3 million at December 31, 1997 and $348.0
million at June 30, 1997 and is expected to increase during
the remainder of 1998 as a result of outstanding commitments
to write additional agency pool insurance.
PAGE 9
Cancellation activity increased during 1997 and the first
half of 1998 due to favorable mortgage interest rates which
resulted in a decrease in the MGIC persistency rate
(percentage of insurance remaining in force from one year
prior) to 74.7% at June 30, 1998 from 83.0% at June 30, 1997.
Cancellation activity could increase due to factors other than
refinances and home sales due to recently enacted legislation
regarding cancellation of mortgage insurance.
Net premiums written were $186.7 million during the second
quarter of 1998, compared to $170.9 million during the second
quarter of 1997, an increase of 9%. Net premiums earned were
$189.2 million for the second quarter of 1998, an increase of
9% over the $173.5 million for the same period in 1997. The
increases were primarily a result of a higher percentage of
renewal premiums on mortgage loans with deeper coverages and
the growth in insurance in force since June 30, 1997.
MGIC continues to enter various risk sharing arrangements
with its customers. These arrangements have not had a material
impact on underwriting income thus far in 1998. The volume of
risk sharing arrangements is expected to increase during the
remainder of 1998 and may have a material impact on
underwriting results in the future.
Investment income for the second quarter of 1998 was $35.3
million, an increase of 16% over the $30.4 million in the
second quarter of 1997. This increase was primarily the
result of an increase in the amortized cost of average
invested assets to $2.4 billion for the second quarter of 1998
from $2.1 billion for the second quarter of 1997, an increase
of 18%. The portfolio's average pre-tax investment yield was
5.8% for the second quarter of 1998 and 5.9% for the same
period in 1997. The portfolio's average after-tax investment
yield was 4.9% for the second quarter of 1998 and 5.0% for the
same period in 1997.
Other revenue was $12.5 million for the second quarter of
1998 compared to $6.5 million for the same period in 1997.
The increase is primarily the result of $3.0 million of equity
earnings from C-BASS, the Company's joint venture with Enhance
Financial Services Group Inc. and an increase in fee-based
services for underwriting.
Net losses incurred decreased 10% to $52.5 million during
the second quarter of 1998 from $58.3 million during the
second quarter of 1997. Such decrease was primarily
attributed to an increase in the redundancy in prior year
loss reserves and generally favorable economic conditions
throughout the country. The redundancy results from actual
claim rates and actual claim amounts being lower than those
estimated by the Company when originally establishing the
reserve at December 31, 1997. At June 30, 1998, 63% of MGIC's
insurance in force was written during the preceding fourteen
quarters, compared to 65% at June 30, 1997. The highest claim
frequency years have typically been the third through fifth
year after the year of loan origination. However, the pattern
of claims frequency for refinance loans may be different from
the historical pattern of other loans.
PAGE 10
Underwriting and other expenses increased to $45.5
million in the second quarter of 1998 from $37.9 million in
the second quarter of 1997, an increase of 20%. This increase
was primarily due to an increase in expenses associated with
the fee-based services for underwriting and an increase in
premium tax due to higher premiums written.
Interest expense increased to $3.5 million in the second
quarter of 1998. There was no interest expense during the
quarter ended June 30, 1997. Interest expense in the current
period is the result of debt incurred to fund the stock
repurchase program. See note 2 to the consolidated financial
statements.
The consolidated insurance operations loss ratio was 27.7%
for the second quarter of 1998 compared to 33.6% for the
second quarter of 1997. The consolidated insurance operations
expense and combined ratios were 19.1% and 46.8%,
respectively, for the second quarter of 1998 compared to 17.9%
and 51.5% for the second quarter of 1997.
The effective tax rate was 30.7% in the second quarter of
1998, compared to 30.3% in the second quarter of 1997. During
both periods, the effective tax rate was below the statutory
rate of 35%, reflecting the benefits of tax-preferenced
investment income. The higher effective tax rate in 1998
resulted from a lower percentage of total income before tax
being generated from tax-preferenced investments.
Six Months Ended June 30, 1998 Compared With Six Months Ended
June 30, 1997
Net income for the six months ended June 30, 1998 was
$189.3 million, compared to $153.1 million for the same period
of 1997, an increase of 24%. Diluted earnings per share for
the six months ended June 30, 1998 was $1.64 compared to $1.28
in the same period last year, an increase of 28%. See note 4
to the consolidated financial statements.
The amount of new primary insurance written by MGIC during
the six months ended June 30, 1998 was $19.2 billion, compared
to $14.2 billion in the same period of 1997. Refinancing
activity accounted for 34% of new primary insurance written in
the first half of 1998, compared to 14% in the first half of
1997.
New insurance written for the first half of 1998 reflected
an increase in the usage of the monthly premium product to 94%
of new insurance written from 92% of new insurance written in
the first half of 1997. New insurance written for ARMs
decreased to 12% of new insurance written in the first half of
1998 from 28% of new insurance written in the same period of
1997. Mortgages with 95% LTVs decreased to 35% of new
insurance written in the first half of 1998 from 42% of new
insurance written in the same period of 1997. Also, mortgages
with 95% LTVs and 30% coverage decreased to 33% of new
insurance written during the first half of 1998 compared to
39% in the same period of 1997.
PAGE 11
The $19.2 billion of new primary insurance written during
the first half of 1998 was offset by the cancellation of $20.2
billion of insurance in force, and resulted in a net decrease
of $1.0 billion in primary insurance in force, compared to new
primary insurance written of $14.2 billion, the cancellation
of $11.4 billion, and a net increase of $2.8 billion in
insurance in force during the first half of 1997. Direct
primary insurance in force was $137.5 billion at June 30,
1998 compared to $138.5 billion at December 31, 1997 and
$134.2 billion at June 30, 1997. In addition to providing
primary insurance coverage, the Company also insures pools of
mortgage loans. New pool risk written during the six months
ended June 30, 1998 was $292 million, which was virtually all
agency pool insurance. The Company's direct pool risk in
force at June 30, 1998 was $860.9 million compared to $590.3
million at December 31, 1997 and $348.0 million at June 30,
1997 and is expected to increase during the remainder of 1998
as a result of outstanding commitments to write additional
agency pool insurance.
Cancellation activity increased during 1997 and the first
half of 1998 due to favorable mortgage interest rates which
resulted in a decrease in the MGIC persistency rate
(percentage of insurance remaining in force from one year
prior) to 74.7% at June 30, 1998 from 83.0% at June 30, 1997.
Cancellation activity could increase due to factors other than
refinances and home sales due to recently enacted legislation
regarding cancellation of mortgage insurance.
Net premiums written were $363.2 million during the first
half of 1998, compared to $326.5 million during the first half
of 1997, an increase of 11%. Net premiums earned were $379.1
million for the first half of 1998, an increase of 10% over
the $343.8 million for the same period in 1997. The increases
were primarily a result of a higher percentage of renewal
premiums on mortgage loans with deeper coverages and the
growth in insurance in force since June 30, 1997.
MGIC continues to enter various risk sharing arrangements
with its customers. These arrangements have not had a material
impact on underwriting income thus far in 1998. The volume of
risk sharing arrangements is expected to increase during the
remainder of 1998 and may have a material impact on
underwriting results in the future.
Investment income for the first half of 1998 was $69.7
million, an increase of 16% over the $59.9 million in the
first half of 1997. This increase was primarily the result of
an increase in the amortized cost of average invested assets
to $2.4 billion for the first half of 1998 from $2.0 billion
for the first half of 1997, an increase of 17%. The
portfolio's average pre-tax investment yield was 5.8% for the
first half of 1998 and 5.9% for the same period in 1997. The
portfolio's average after-tax investment yield was 4.9% for
the first half of 1998 and 5.0% for the same period in 1997.
The Company realized gains of $11.2 million during the six
months ended June 30, 1998 resulting primarily from the sale
of equity securities compared to realized gains on investments
of $0.6 million during the same period in 1997.
PAGE 12
Other revenue was $22.0 million for the first half of 1998
compared to $11.7 million for the same period in 1997. The
increase is primarily the result of $4.9 million of equity
earnings from C-BASS, the Company's joint venture with Enhance
Financial Services Group Inc. and an increase in fee-based
services for underwriting.
Net losses incurred decreased 8% to $112.0 million during
the first half of 1998 from $121.4 million during the first
half of 1997. Such decrease was primarily attributed to an
increase in the redundancy in prior year loss reserves and
generally favorable economic conditions throughout the
country. The redundancy results from actual claim rates and
actual claim amounts being lower than those estimated by
the Company when originally establishing the reserve at
December 31, 1997. At June 30, 1998, 63% of MGIC's insurance
in force was written during the preceding fourteen quarters,
compared to 65% at June 30, 1997. The highest claim frequency
years have typically been the third through fifth year after
the year of loan origination. However, the pattern of claims
frequency for refinance loans may be different from the
historical pattern of other loans.
Underwriting and other expenses increased to $90.7
million in the first half of 1998 from $76.1 million in the
first half of 1997, an increase of 19%. This increase was
primarily due to an increase in expenses associated with the
fee-based services for underwriting and an increase in premium
tax due to higher premiums written.
Interest expense increased to $7.1 million in the first
half of 1998 from $0.3 million during the same period in 1997.
Interest expense in the current period is the result of debt
incurred to fund the stock repurchase program. Interest
expense for the first half of 1997 represents interest prior
to the repayment in January 1997 of mortgages payable. See
note 2 to the consolidated financial statements.
The consolidated insurance operations loss ratio was 29.5%
for the first half of 1998 compared to 35.3% for the first
half of 1997. The consolidated insurance operations expense
and combined ratios were 19.5% and 49.0%, respectively, for
the first half of 1998 compared to 19.4% and 54.7% for the
first half of 1997.
The effective tax rate was 30.8% in the first half of
1998, compared to 30.3% in the first half of 1997. During
both periods, the effective tax rate was below the statutory
rate of 35%, reflecting the benefits of tax-preferenced
investment income. The higher effective tax rate in 1998
resulted from a lower percentage of total income before tax
being generated from tax-preferenced investments.
PAGE 13
Liquidity and Capital Resources
The Company's consolidated sources of funds consist
primarily of premiums written and investment income. The
Company generated positive cash flows from operating
activities of $201.7 million for the six months ended June 30,
1998, as shown on the Consolidated Statement of Cash Flows.
Funds are applied primarily to the payment of claims and
expenses. The Company's business does not require significant
capital expenditures on an ongoing basis. Positive cash flows
are invested pending future payments of claims and other
expenses; cash flow shortfalls, if any, could be funded
through sales of short-term investments and other investment
portfolio securities.
Consolidated total investments were $2.6 billion at June
30, 1998, compared to $2.4 billion at December 31, 1997, an
increase of 6%. This increase is due primarily to positive
cash flow from operations. The investment portfolio includes
unrealized gains on securities marked to market at June 30,
1998 and December 31, 1997 of $119.0 million and $129.2
million, respectively. As of June 30, 1998, the Company had
$124.6 million of short-term investments with maturities of 90
days or less. In addition, at June 30, 1998, based on
amortized cost, the Company's total investments, which were
primarily comprised of fixed maturities, were approximately
99% invested in "A" rated and above, readily marketable
securities, concentrated in maturities of less than 15 years.
Consolidated loss reserves increased 5% to $631.0 million
at June 30, 1998 from $598.7 million at December 31, 1997.
Consistent with industry practices, the Company does not
establish loss reserves for future claims on insured loans
which are not currently in default.
Consolidated unearned premiums decreased $18.0 million
from $198.3 million at December 31, 1997 to $180.3 million at
June 30, 1998, primarily reflecting the continued high level
of monthly premium policies written, for which there is no
unearned premium. Reinsurance recoverable on unearned
premiums decreased $2.1 million to $7.1 million at June 30,
1998 from $9.2 million at December 31, 1997, primarily
reflecting the reduction in unearned premiums.
Consolidated shareholders' equity increased to $1.6
billion at June 30, 1998, from $1.5 billion at December 31,
1997, an increase of 10%. This increase consisted of $189.3
million of net income during the first six months of 1998 and
$13.1 million from the reissuance of treasury stock offset by
approximately $47.8 million for the repurchase of 837,000
shares of the Company's outstanding common stock, a decrease
in net unrealized gains on investments of $6.6 million, net of
tax, and dividends declared of $5.7 million.
MGIC is the principal insurance subsidiary of the Company.
MGIC's risk-to-capital ratio was 14.5:1 at June 30, 1998
compared to 15.7:1 at December 31, 1997. The decrease was due
to MGIC's increased policyholders' reserves, partially offset
by the net additional risk in force of $172.5 million, net of
reinsurance, during the first six months of 1998.
PAGE 14
The Company's combined insurance risk-to-capital ratio was
15.0:1 at June 30, 1998, compared to 16.4:1 at December 31,
1997. The decrease was due to the same reasons as described
above.
On May 7, 1998, the Company's Board of Directors
authorized the repurchase of shares of the Company's common
stock with an aggregate purchase price of up to $250 million.
Funds for the repurchase program are provided under a bank
loan facility and from operating cash flow. The Company's
previous $250 million stock repurchase program was completed
in 1997.
Year 2000 Compliance
Almost all of the Company's information technology
systems ("IT Systems"), including all of its "business
critical" IT Systems, either have been originally developed to
be Year 2000 compliant or have been reprogrammed. The Company
plans to reprogram the remaining Systems (the "Remaining
Systems") and to complete internal testing of all IT Systems
for Year 2000 compliance by the end of the second quarter of
1999. In general, the Remaining IT Systems have either been
developed and maintained by the Company's Information
Technology Department or use off-the-shelf software from
national software vendors such as Microsoft and IBM who have
publicly announced that their software is Year 2000 compliant.
All of the IT Systems developed and maintained by the
Information Technology Department have already been assessed
for Year 2000 compliance and a portion of the Systems using
off-the-shelf software have been assessed. If the Company is
unable to complete any required reprogramming of the Remaining
Systems on a timely basis, the efficiency of certain of the
Company's business processes will likely decline but this
consequence is not expected to be material to the Company.
Some of the Company's "business critical" IT Systems
interface with computer systems of third parties. The
Company, Fannie Mae, Freddie Mac and many of these third
parties are participating in the Mortgage Bankers Association
Year 2000 Inter-Industry Work Group (the "MBA Work Group").
The Company understands that the MBA Work Group is surveying
its participants about their interest in conducting and
scheduling compliance testing during the second and third
quarters of 1999 as well as how such testing should be
structured. The Company and one national service bureau have
already conducted certain successful Year 2000 compliance
testing and it is possible the Company will conduct additional
Year 2000 compliance testing with individual companies in
advance of the MBA Work Group testing. However, the Company
understands it is the position of a number of larger companies
in the MBA Work Group not to engage in any testing with third
parties in advance of the testing sponsored by the MBA Work
Group.
All costs incurred through June 1998 for IT Systems for
Year 2000 compliance have been expensed and were immaterial.
The costs of the remaining reprogramming and testing are
expected to be immaterial.
PAGE 15
If the Company is unable to do business with third parties
electronically, the Company would seek to do business with
them on a paper basis. As discussed below, the Company is in
the process of developing a Year 2000 contingency plan and has
not yet made an assessment of the effects on its operations of
having to replace a substantial portion of the business
conducted electronically with business conducted on a paper
basis.
Telecommunications services and electricity are essential
to the Company's ability to conduct business. The Company's
long-distance voice and data telecommunications suppliers and
the local telephone company serving the Company's owned
headquarters and warehouse facilities have written to the
Company to the effect that their respective systems will be
Year 2000 compliant. The electric company serving these
facilities has given the Company oral assurance that it will
also be Year 2000 compliant. In addition, the Company is
exploring the feasibility of acquiring back-up power for its
headquarters. The Company is seeking assurance regarding Year
2000 compliance from landlords of the Company's underwriting
service centers and has received letters from the local
telephone companies providing service to those centers that
they will be Year 2000 compliant.
The Company has begun developing a Year 2000 contingency
plan. The process to complete a plan is expected to extend
into 1999.
For the portion of the Company's "Safe Harbor" Statement
relating to Year 2000 matters, see "Safe Harbor" Statement
below.
SAFE HARBOR STATEMENT
The following is a "Safe Harbor" Statement under the
Private Securities Litigation Reform Act of 1995, which
applies to all statements in this Form 10-Q, which are not
historical facts and to all oral statements that the Company
may make from time to time relating thereto which are not
historical facts (such written and oral statements are herein
referred to as "forward looking statements"):
Actual results may differ materially from those
contemplated by the forward looking statements. These
forward looking statements involve risks and
uncertainties, including but not limited to, the
following:
--the risk that demand for mortgages may be adversely
affected by increases in interest rates, adverse
economic conditions, or other factors;
PAGE 16
--that the Company's new insurance written or, with
respect to certain of the factors below, its market
share may be adversely affected as a result of: factors
affecting or relating to mortgage demand, government
housing policy (including the FHA) and the programs of
Freddie Mac and Fannie Mae; the competitive environment
in the mortgage insurance industry, including
underwriting criteria, pricing or products offered;
decisions by lenders or investors to originate or
purchase low down payment loans having reduced levels
of mortgage insurance or using substitutes for mortgage
insurance, including self-insurance, or to the extent
legally permissible, to provide insurance themselves;
or for other reasons;
--that insurance in force and persistency may be
adversely affected due to refinancings (which are
affected by changes in interest rates), changes in
Fannie Mae or Freddie Mac cancellation policies,
legislation or other reasons; and
--that credit quality may be adversely affected as a
result of adverse changes in regional or national
economies which affect borrowers' incomes or housing
values.
The foregoing "Safe Harbor" Statement also identifies certain
material risks of the Company's business.
In addition, with respect to forward looking statements
regarding Year 2000 compliance, there is the risk that the
timetables for completing Year 2000 compliance actions may be
delayed due to Company personnel devoting time and attention
to non-Year 2000 projects.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
At June 30, 1998, the Company had no derivative financial
instruments in its investment portfolio. The Company places
its investments in instruments that meet high credit quality
standards, as specified in the Company's investment policy
guidelines; the policy also limits the amount of credit
exposure to any one issue, issuer and type of instrument. At
June 30, 1998, the average duration of the Company's
investment portfolio was 5.9 years. The effect of a 1%
increase/decrease in market interest rates would result in a
5.9% decrease/increase in the value of the Company's
investment portfolio.
The Company's borrowings under the credit facilities are
subject to interest rates that are variable. Changes in
market interest rates would have minimal impact on the value
of the note payable. See note 2 to the consolidated financial
statements.
PAGE 17
PART II.OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(a), (c), (d) Not applicable
(b) The Company's bank loan agreements referred to in
Note 2 to the Consolidated Financial Statements
appearing elsewhere herein require that the Company
maintain consolidated shareholders' equity,
determined under generally accepted accounting
principles, of at least $1 billion. The Company's
consolidated shareholders' equity at June 30, 1998
exceeded $1.6 billion. The foregoing requirement
to maintain at least $1 billion of consolidated
shareholders' equity could limit the payment of
future dividends by the Company, although the
Company does not currently expect that its ability
to pay dividends will be limited by this requirement.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of the
Company was held on May 7, 1998.
(b) At the Annual Meeting, the following
Directors were elected to the Board of Directors,
for a term expiring at the Annual Meeting of
Shareholders to be held in 2001 or until a successor
is duly elected and qualified:
James A. Abbott
James D. Ericson
Daniel Gross
Sheldon B. Lubar
Edward J. Zore
Directors with continuing terms of office are:
Term expiring 1999: Mary K. Bush
David S. Engelman
Kenneth M. Jastrow, II
William H. Lacy
Term expiring 2000: Karl E. Case
William A. McIntosh
Leslie M. Muma
Peter J. Wallison
PAGE 18
(c) Matters voted upon at the Annual Meeting and
the number of shares voted for, against, withheld,
abstaining from voting and broker non-votes were as
follows:
(1) Election of four Directors for a term
expiring in 2001.
FOR WITHHELD
--- --------
James A. Abbott 102,906,864 1,004,956
James D. Ericson 102,894,251 1,017,569
Daniel Gross 102,902,629 1,009,191
Sheldon B. Lubar 102,896,872 1,014,948
Edward J. Zore 102,894,501 1,017,319
(2) Approval of an amendment to the
Company's Articles of Incorporation to increase
the authorized shares of Common Stock to 300
million shares.
For: 98,553,144
Against: 5,197,746
Abstaining from Voting: 160,930
(3) Approval of an amendment to the
Company's Articles of Incorporation to authorize
10 million shares of Preferred Stock, issuable
in series.
For: 74,169,643
Against: 16,257,583
Abstaining from Voting: 209,174
Broker Non-votes: 13,275,420
(4) Ratification of the appointment of Price
Waterhouse LLP as independent public accountants
for the Company for 1998.
For: 103,789,981
Against: 50,722
Abstaining from Voting: 71,117
There were no broker non-votes on any matter other than the
amendment to the Company's Articles of Incorporation to
authorize 10 million shares of Preferred Stock, issuable in
series.
(d) Not applicable
PAGE 19
ITEM 5.OTHER INFORMATION
On May 13, 1998, the Circuit Court of Jefferson County,
Alabama, Bessemer Division entered an order dismissing with
prejudice against MGIC the claims of the named plaintiffs in
Crenshaw v. Chemical Mortgage Company, Inc., Mortgage Guaranty
Insurance Corporation, et. al. pending in such Court. Earlier
in May, 1998, MGIC and the named plaintiffs entered into a
stipulation of dismissal of the action. The action challenges
the necessity of maintaining private mortgage insurance in
certain circumstances, primarily when the loan-to-value ratio
is below 80%. While MGIC is no longer a defendant in the
action, neither the Court's order nor the stipulation affects
the rights, if any, of the members of the purported class on
whose behalf the action was brought, other than the rights of
named plaintiffs, who are precluded from further pursuing
their claims against MGIC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits - The exhibits listed in the
accompanying Index to Exhibits are filed as part of
this Form 10-Q.
(b)Reports on Form 8-K - No reports were filed on
Form 8-K during the quarter ended June 30, 1998.
PAGE 20
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, on
August 13, 1998.
MGIC INVESTMENT CORPORATION
/s/ J. Michael Lauer
------------------------------
J. Michael Lauer
Executive Vice President and
Chief Financial Officer
/s/ Patrick Sinks
-------------------------------
Patrick Sinks
Vice President, Controller and
Chief Accounting Officer
PAGE 21
INDEX TO EXHIBITS
(Item 6)
Exhibit
Number Description of Exhibit
- ------- ----------------------
3 Articles of Incorporation
10 1991 Stock Incentive Plan, As Amended
11.1 Statement Re Computation of Net Income
Per Share
27 Financial Data Schedule
PAGE 22