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 SEPTEMBER 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 9/30/98 109,511,046
PAGE 1
MGIC INVESTMENT CORPORATION
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of
September 30, 1998 (Unaudited) and December 31, 1997 3
Consolidated Statement of Operations for the Three and Nine
Month Periods Ended September 30, 1998 and 1997 (Unaudited) 4
Consolidated Statement of Cash Flows for the Nine Months
Ended September 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 9-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
INDEX TO EXHIBITS 20
PAGE 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 1998 (Unaudited) and December 31, 1997
September 30, December 31,
1998 1997
------------ ------------
ASSETS (In thousands of dollars)
- ------
Investment portfolio:
Securities, available-for-sale, at market value:
Fixed maturities $2,583,634 $2,185,954
Equity securities 4,471 116,053
Short-term investments 121,355 114,733
---------- ----------
Total investment portfolio 2,709,460 2,416,740
Cash 5,463 4,893
Accrued investment income 37,473 35,485
Reinsurance recoverable on loss reserves 21,367 26,415
Reinsurance recoverable on unearned premiums 6,864 9,239
Home office and equipment, net 32,882 33,784
Deferred insurance policy acquisition costs 24,665 27,156
Investment in joint venture 52,746 29,400
Other assets 39,286 34,575
---------- ----------
Total assets $2,930,206 $2,617,687
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Loss reserves $ 644,115 $ 598,683
Unearned premiums 179,510 198,305
Notes payable (note 2) 420,000 237,500
Income taxes payable 40,403 27,717
Other liabilities 69,472 68,700
---------- ----------
Total liabilities 1,353,500 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, 9/30/98 - 109,511,046;
1997 - 113,791,593 121,111 121,111
Paid-in surplus 217,804 218,499
Treasury stock (shares at cost, 9/30/98 - 11,599,754;
1997 - 7,319,207) (468,835) (252,942)
Unrealized appreciation in investments, net of tax 113,266 83,985
Retained earnings 1,593,360 1,316,129
---------- ----------
Total shareholders' equity 1,576,706 1,486,782
---------- ----------
Total liabilities and shareholders' equity $2,930,206 $2,617,687
========== ==========
See accompanying notes to consolidated financial statements.
PAGE 3
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three and Nine Month Periods Ended September 30, 1998 and 1997
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
(In thousands of dollars, except per share data)
Revenues:
Premiums written:
Direct $192,107 $184,670 $557,637 $511,069
Assumed 2,190 3,047 6,327 8,906
Ceded (3,730) (3,714) (10,247) (9,450)
-------- -------- -------- --------
Net premiums written 190,567 184,003 553,717 510,525
Decrease (increase) in
unearned premiums 499 (3,461) 16,418 13,788
-------- -------- -------- --------
Net premiums earned 191,066 180,542 570,135 524,313
Investment income, net of
expenses 36,461 31,548 106,175 91,428
Realized investment gains, net 2,639 1,502 13,880 2,098
Other revenue 10,708 10,233 32,676 21,942
-------- -------- -------- --------
Total revenues 240,874 223,825 722,866 639,781
-------- -------- -------- --------
Losses and expenses:
Losses incurred, net 51,487 60,785 163,439 182,230
Underwriting and other
expenses 46,498 39,907 137,188 116,040
Interest expense 5,308 2,530 12,394 2,849
Ceding commission (839) (951) (2,105) (2,459)
-------- -------- -------- --------
Total losses and expenses 102,454 102,271 310,916 298,660
-------- -------- -------- --------
Income before tax 138,420 121,554 411,950 341,121
Provision for income tax 41,928 37,379 126,199 103,895
-------- -------- -------- --------
Net income $ 96,492 $ 84,175 $285,751 $237,226
======== ======== ======== ========
Earnings per share (note 4):
Basic $ 0.87 $ 0.73 $ 2.52 $ 2.03
======== ======== ======== ========
Diluted $ 0.86 $ 0.72 $ 2.49 $ 2.00
======== ======== ======== ========
Weighted average common shares
outstanding - diluted (shares
in thousands, note 4) 112,695 116,386 114,728 118,442
======== ======== ======== ========
Dividends per share $ 0.025 $ 0.025 $ 0.075 $ 0.07
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
PAGE 4
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 1998 and 1997
(Unaudited)
Nine Months Ended
September 30,
----------------------
1998 1997
---- ----
(In thousands of dollars)
Cash flows from operating activities:
Net income $ 285,751 $237,226
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred insurance policy
acquisition costs 16,569 19,163
Increase in deferred insurance policy
acquisition costs (14,078) (15,563)
Depreciation and amortization 5,470 6,198
(Increase) decrease in accrued investment income (1,988) 3,972
Decrease in reinsurance recoverable on loss
reserves 5,048 2,020
Decrease in reinsurance recoverable on unearned
premiums 2,375 2,516
Increase in loss reserves 45,432 61,553
Decrease in unearned premiums (18,795) (16,305)
Equity earnings in joint venture (7,420) (3,100)
Other (23,290) (23,946)
-------- --------
Net cash provided by operating activities 295,074 273,734
-------- --------
Cash flows from investing activities:
Purchase of equity securities (3,886) (93,716)
Purchase of fixed maturities (689,255) (510,789)
Additional investment in joint venture (15,926) (7,350)
Proceeds from sale of equity securities 116,164 3,900
Proceeds from sale or maturity of fixed maturities 348,027 352,287
-------- --------
Net cash used in investing activities (244,876) (255,668)
-------- --------
Cash flows from financing activities:
Dividends paid to shareholders (8,521) (8,173)
Net increase in notes payable 182,500 187,076
Reissuance of treasury stock 14,220 12,378
Repurchase of common stock (231,205) (225,028)
-------- --------
Net cash used in financing activities (43,006) (33,747)
-------- --------
Net increase (decrease) in cash and short-term
investments 7,192 (15,681)
Cash and short-term investments at beginning of period 119,626 143,975
-------- --------
Cash and short-term investments at end of period $126,818 $128,294
======== ========
See accompanying notes to consolidated financial statements.
PAGE 5
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine
months ended September 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 rate on the
notes payable for borrowings under the 1997 and 1998 credit
agreements was 5.89% per annum at September 30,1998.
The 1997 and 1998 credit facilities provide up to $225
million and $250 million, respectively, of availability at
September 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 September 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
Mortgage Guaranty Insurance Corporation ("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 Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
(Shares in thousands)
Weighted-average shares -
Basic EPS 111,417 114,935 113,184 117,109
Common stock equivalents 1,278 1,451 1,544 1,333
------- ------- ------- -------
Weighted-average shares -
Diluted EPS 112,695 116,386 114,728 118,442
======= ======= ======= =======
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 Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
(In thousands of dollars)
Net income $ 96,492 $ 84,175 $285,751 $237,226
Other comprehensive gain
(loss) 35,885 24,149 29,281 26,371
-------- -------- -------- --------
Total comprehensive
income $132,377 $108,324 $315,032 $263,597
======== ======== ======== ========
PAGE 7
The difference between the Company's net income and total
comprehensive income for the three and nine months ended
September 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.
Management does not anticipate the adoption of SFAS 133 will
have a significant effect on the Company's results of
operations or its financial position due to its limited use of
derivative instruments.
PAGE 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Consolidated Operations
Three Months Ended September 30, 1998 Compared With Three
Months Ended September 30, 1997
Net income for the three months ended September 30, 1998
was $96.5 million, compared to $84.2 million for the same
period of 1997, an increase of 15%. Diluted earnings per
share for the three months ended September 30, 1998 was $0.86
compared to $0.72 in the same period last year, an increase of
19%. 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 September 30, 1998 was $11.8 billion, compared to
$9.1 billion in the same period of 1997. Refinancing activity
accounted for 24% of new primary insurance written in the
third quarter of 1998, compared to 12% in the third quarter of
1997.
New insurance written for adjustable-rate mortgages
("ARMs") decreased to 9% of new insurance written in the third
quarter of 1998 from 26% 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 40%
of new insurance written in the third quarter of 1998 from 42%
of new insurance written in the same period of 1997. Also,
mortgages with 95% LTVs and 30% coverage decreased to 37% of
new insurance written in the third quarter of 1998 compared to
39% in the same period of 1997.
The $11.8 billion of new primary insurance written during
the third quarter of 1998 was offset by the cancellation of
$11.5 billion of insurance in force, and resulted in a net
increase of $0.3 billion in primary insurance in force,
compared to new primary insurance written of $9.1 billion, the
cancellation of $6.6 billion, and a net increase of $2.5
billion in insurance in force during the third quarter of
1997. Direct primary insurance in force was $137.8 billion at
September 30, 1998 compared to $138.5 billion at December 31,
1997 and $136.7 billion at September 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 September 30, 1998 was $154 million, which
was virtually all agency pool insurance. The Company's direct
pool risk in force at September 30, 1998 was $966.8 million
compared to $590.3 million at December 31, 1997 and $455.6
million at September 30, 1997 and is expected to increase as a
result of outstanding commitments to write additional agency
pool insurance.
PAGE 9
Cancellation activity increased during the last twelve
months 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 71.5%
at September 30, 1998 from 82.2% at September 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 $190.6 million during the third
quarter of 1998, compared to $184.0 million during the third
quarter of 1997. Net premiums earned were $191.1 million for
the third quarter of 1998 compared to $180.5 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 September 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. New insurance
written subject to risk sharing arrangements is expected to
increase and may have a material impact on underwriting
results in the future.
Investment income for the third quarter of 1998 was $36.5
million, an increase of 16% over the $31.6 million in the
third quarter of 1997. This increase was primarily the result
of an increase in the amortized cost of average invested
assets to $2.5 billion for the third quarter of 1998 from $2.1
billion for the third quarter of 1997, an increase of 16%. The
portfolio's average pre-tax investment yield was 5.7% for the
third 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 third quarter of 1998 and 5.0% for the same period in
1997. The Company realized gains of $2.6 million during the
three months ended September 30, 1998 resulting primarily from
the sale of fixed maturities compared to realized gains of
$1.5 million during the same period in 1997.
Other revenue was $10.7 million for the third quarter of
1998 compared to $10.2 million for the same period in 1997.
The increase is primarily the result of an increase in fee-
based services for underwriting.
Net losses incurred decreased 15% to $51.5 million during
the third quarter of 1998 from $60.8 million during the third
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 September 30, 1998, 55% of MGIC's
insurance in force was written during the preceding eleven
quarters, compared to 53% at September 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 $46.5
million in the third quarter of 1998 from $39.9 million in the
third quarter of 1997, an increase of 17%. This increase was
primarily due to an increase in expenses associated with
underwriting and an increase in premium tax due to higher
premiums written.
Interest expense increased to $5.3 million in the third
quarter of 1998 from $2.5 million during the same period in
1997. The increase is the result of additional debt incurred
to fund the stock repurchase program. See note 2 to the
consolidated financial statements.
The consolidated insurance operations loss ratio was 26.9%
for the third quarter of 1998 compared to 33.7% for the third
quarter of 1997. The consolidated insurance operations expense
and combined ratios were 18.8% and 45.7%, respectively, for
the third quarter of 1998 compared to 17.2% and 50.9% for the
third quarter of 1997.
The effective tax rate was 30.3% in the third quarter of
1998, compared to 30.8% in the third 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 lower effective tax rate in 1998
resulted from a higher percentage of total income before tax
being generated from tax-preferenced investments.
Nine Months Ended September 30, 1998 Compared With Nine
Months Ended September 30, 1997
Net income for the nine months ended September 30, 1998
was $285.8 million, compared to $237.2 million for the same
period of 1997, an increase of 20%. Diluted earnings per
share for the nine months ended September 30, 1998 was $2.49
compared to $2.00 in the same period last year, an increase of
25%. See note 4 to the consolidated financial statements.
The amount of new primary insurance written by MGIC during
the nine months ended September 30, 1998 was $31.1 billion,
compared to $23.3 billion in the same period of 1997.
Refinancing activity accounted for 30% of new primary
insurance written in the first nine months of 1998, compared
to 14% for the same period in 1997.
New insurance written for ARMs decreased to 11% of new
insurance written in the first nine months of 1998 from 27% of
new insurance written in the same period of 1997. Mortgages
with 95% LTVs decreased to 37% of new insurance written in the
first nine months of 1998 from 42% 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 during
the first nine months of 1998 compared to 39% in the same
period of 1997.
PAGE 11
The $31.1 billion of new primary insurance written during
the first nine months of 1998 was offset by the cancellation
of $31.8 billion of insurance in force, and resulted in a net
decrease of $0.7 billion in primary insurance in force,
compared to new primary insurance written of $23.3 billion,
the cancellation of $18.0 billion, and a net increase of $5.3
billion in insurance in force during the first nine months of
1997. Direct primary insurance in force was $137.8 billion
at September 30, 1998 compared to $138.5 billion at December
31, 1997 and $136.7 billion at September 30, 1997. In
addition to providing primary insurance coverage, the Company
also insures pools of mortgage loans. New pool risk written
during the nine months ended September 30, 1998 was $446
million, which was virtually all agency pool insurance. The
Company's direct pool risk in force at September 30, 1998 was
$966.8 million compared to $590.3 million at December 31, 1997
and $455.6 million at September 30, 1997 and is expected to
increase as a result of outstanding commitments to write
additional agency pool insurance.
Cancellation activity increased during the last twelve
months 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 71.5%
at September 30, 1998 from 82.2% at September 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 $553.7 million during the first
nine months of 1998, compared to $510.5 million during the
first nine months of 1997. Net premiums earned were $570.1
million for the first nine months of 1998 compared to $524.3
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 September 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. New insurance
written subject to risk sharing arrangements is expected to
increase and may have a material impact on underwriting
results in the future.
Investment income for the first nine months of 1998 was
$106.2 million, an increase of 16% over the $91.4 million for
the same period in 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 nine months of
1998 from $2.0 billion for the first nine months of 1997, an
increase of 15%. The portfolio's average pre-tax investment
yield was 5.7% for the first nine months of 1998 and 5.8% for
the same period in 1997. The portfolio's average after-tax
investment yield was 4.9% for the first nine months of 1998
and 5.0% for the same period in 1997. The Company realized
gains of $13.9 million during the nine months ended September
30, 1998 resulting primarily from the sale of equity
securities compared to realized gains on investments of $2.1
million during the same period in 1997.
PAGE 12
Other revenue was $32.7 million for the first nine months
of 1998 compared to $21.9 million for the same period in 1997.
The increase is primarily the result of an increase in fee-
based services for underwriting of $8.4 million and an
increase of $4.3 million of equity earnings from C-BASS,
offset by a decrease of $2.2 million in fee-based services for
premium reconciliation and claim administration.
Net losses incurred decreased 10% to $163.4 million during
the first nine months of 1998 from $182.2 million during the
first nine months 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 September 30, 1998, 55% of
MGIC's insurance in force was written during the preceding
eleven quarters, compared to 53% at September 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 $137.2
million in the first nine months of 1998 from $116.0 million
for the same period in 1997, an increase of 18%. This increase
was primarily due to an increase in expenses associated with
underwriting and an increase in premium tax due to higher
premiums written.
Interest expense increased to $12.4 million in the first
nine months of 1998 from $2.8 million during the same period
in 1997. The increase is the result of additional debt
incurred to fund the stock repurchase program. See note 2 to
the consolidated financial statements.
The consolidated insurance operations loss ratio was 28.7%
for the first nine months of 1998 compared to 34.8% for the
first nine months of 1997. The consolidated insurance
operations expense and combined ratios were 19.2% and 47.9%,
respectively, for the first nine months of 1998 compared to
18.6% and 53.4% for the first nine months of 1997.
The effective tax rate was 30.6% in the first nine months
of 1998, compared to 30.5% for the same period in 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 $295.1 million for the nine months ended
September 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 $2.7 billion at
September 30, 1998, compared to $2.4 billion at December 31,
1997, an increase of 12%. This increase is due primarily to
positive cash flow from operations. The investment portfolio
includes unrealized gains on securities marked to market at
September 30, 1998 and December 31, 1997 of $174.3 million and
$129.2 million, respectively. As of September 30, 1998, the
Company had $121.4 million of short-term investments with
maturities of 90 days or less. In addition, at September 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.
The Company's investment in C-BASS was $52.7 million at
September 30, 1998, which includes the Company's share of
C-BASS's earnings since inception of C-BASS. As discussed in
Note 2 to the Consolidated Financial Statements, the Company
is guaranteeing one half of a $50 million C-BASS credit
facility. The Company expects that it will provide additional
funding for C-BASS. C-BASS evaluates, purchases, services
and securitizes assets in the market of sub-performing and
non-performing residential mortgages. In accordance with
generally accepted accounting principles, C-BASS is required
to mark its assets to market. Such mortgage related assets are
exposed to market valuation adjustments which could impact the
Company's share of C-BASS's results of operations.
Consolidated loss reserves increased 8% to $644.1 million
at September 30, 1998 from $598.7 million at December 31, 1997
reflecting an increase in the estimated number of loans in
default. 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 $18.8 million
from $198.3 million at December 31, 1997 to $179.5 million at
September 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 $2.3 million to $6.9 million at September
30, 1998 from $9.2 million at December 31, 1997, primarily
reflecting the reduction in unearned premiums.
PAGE 14
Consolidated shareholders' equity increased to $1.6
billion at September 30, 1998, from $1.5 billion at December
31, 1997, an increase of 6%. This increase consisted of
$285.8 million of net income during the first nine months of
1998, an increase in net unrealized gains on investments of
$29.3 million, net of tax, and $14.5 million from the
reissuance of treasury stock offset by approximately $231.2
million for the repurchase of approximately 4.7 million shares
of the Company's outstanding common stock and dividends
declared of $8.5 million.
MGIC is the principal insurance subsidiary of the Company.
MGIC's risk-to-capital ratio was 13.9:1 at September 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 $393.2 million, net of
reinsurance, during the first nine months of 1998.
The Company's combined insurance risk-to-capital
ratio was 14.5:1 at September 30, 1998, compared to 16.4:1 at
December 31, 1997. The decrease was due to the same reasons
as described above.
During 1998, the Company repurchased approximately 4.7
million shares of its common stock under its current stock
repurchase program at a cost of approximately $231.2 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. See note 2 to the consolidated financial
statements.
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.
PAGE 15
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 first and second
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. The Company intends to contact its largest customers
not participating in the MBA Work Group testing to determine
interest in one-on-one testing.
All costs incurred through September 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.
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.
PAGE 16
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:
--demand for mortgages may be adversely affected by
increases in interest rates, adverse economic
conditions, decreases in housing affordability or as a
result of other factors;
--the Company's new insurance written, new premiums
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 or the
provisions of their charters with respect to credit
enhancements on low down payment mortgages that they
purchase; the competitive environment in the mortgage
insurance industry, including underwriting criteria,
pricing or products offered; decisions by lenders or
investors (including Fannie Mae and Freddie Mac) to
originate or purchase low down payment loans using
reduced levels of mortgage insurance or using
substitutes for mortgage insurance, including to the
extent legally permissible, self-insurance or insurance
provided by affiliates; consolidation among the
Company's customers resulting in changes in their
mortgage insurance relationships; or other reasons;
--insurance in force, persistency and renewal premiums
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 regarding cancellation of mortgage
insurance; or other reasons; and
--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.
PAGE 17
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 September 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 September 30, 1998, the average duration of
the Company's investment portfolio was 5.7 years. The effect
of a 1% increase/decrease in market interest rates would
result in a 5.7% 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 notes payable. See note 2 to the consolidated
financial statements.
PART II. OTHER INFORMATION
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 September 30,
1998.
PAGE 18
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
November 12, 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 19
INDEX TO EXHIBITS
(Item 6)
Exhibit
Number Description of Exhibit
- ------- ----------------------
11.1 Statement Re Computation of Net Income
Per Share
27 Financial Data Schedule
PAGE 20