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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____________________to_____________________
Commission file number 1-11356
CMAC INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2691170
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1601 MARKET STREET, PHILADELPHIA, PA 19103
- ------------------------------------ -----
(Address of principal executive offices) (zip code)
(215) 564-6600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or if such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No_____________
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 11,179,403 shares
of Common Stock, $0.001 par value, outstanding on August 12, 1996.
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CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
INDEX
PAGE NUMBER
Part I - Financial Information
Consolidated Balance Sheets - June 30, 1996 and
December 31, 1995 ........................................................................ 3
Consolidated Statements of Income - For the quarters and six month periods
ended June 30, 1996 and 1995 ............................................................. 4
Consolidated Statement of Changes in Common Stockholders'
Equity - For the six month period ended June 30, 1996 .................................... 5
Consolidated Statements of Cash Flows - For the six month periods ended
June 30, 1996 and 1995 ................................................................... 6
Notes to Consolidated Financial Statements ....................................................... 7
Management's Discussion and Analysis of Results of
Operations and Financial Condition ....................................................... 8-9
Part II - Other Information, as applicable ................................................................ 10
Signature ................................................................................................. 11
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CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30 December 31
1996 1995
----------- -----------
(Unaudited)
(In thousands, except share amounts)
Assets
Investments
Fixed maturities held to maturity - at amortized cost (fair value
$361,143 and $335,779) ............................................... $353,082 $316,553
Fixed maturities available for sale - at fair value
(amortized cost $108,120 and $111,227) ............................... 108,815 116,033
Short-term investments ........................................................... 5,595 4,951
Cash ............................................................................. 4,554 3,646
Deferred policy acquisition costs ................................................ 21,880 21,350
Other assets ..................................................................... 42,794 36,613
-------- --------
$536,720 $499,146
======== ========
Liabilities and Stockholders' Equity
Unearned premiums ................................................................ $ 51,645 $ 56,115
Reserve for losses ............................................................... 86,814 67,301
Deferred federal income taxes .................................................... 3,739 5,804
Accounts payable and accrued expenses ............................................ 30,531 31,310
-------- --------
172,729 160,530
-------- --------
Preferred stockholder's equity
Redeemable preferred stock, par value $.001 per share;
800,000 shares issued and outstanding - at
redemption value ................................................................. 40,000 40,000
------ ------
Common stockholders' equity
Common stock, par value $.001 per share; 80,000,000 shares
authorized; 11,174,035 shares and 11,129,617 shares issued
and outstanding .......................................................... 11 11
Additional paid-in capital ....................................................... 164,779 163,665
Retained earnings ................................................................ 158,749 131,816
Net unrealized gain on investments, net of tax ................................... 452 3,124
-------- --------
323,991 298,616
-------- --------
$536,720 $499,146
======== ========
See notes to consolidated financial statements.
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CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
---- ---- ---- ----
(In thousands, except per-share amounts)
Revenues:
Premiums written:
Direct ........................... $45,722 $35,793 $ 90,146 $64,420
Assumed .......................... 109 166 115 206
Ceded ............................ (3,984) (2,922) (8,177) (5,257)
------- ------- -------- -------
Net premiums written ..................... 41,847 33,037 82,084 59,369
Decrease (increase) in unearned premiums . 4,004 (229) 5,713 3,849
------- ------- -------- -------
Premiums earned .......................... 45,851 32,808 87,797 63,218
Net investment income .................... 7,348 6,319 14,465 12,487
Gain (loss) on sales of investments ...... 332 (1) 770 69
Other income ............................. 951 563 1,981 845
------- ------- -------- -------
54,482 39,689 105,013 76,619
------- ------- -------- -------
Expenses:
Provision for losses ..................... 21,912 13,183 41,938 25,353
Policy acquisition costs ................. 6,717 5,635 13,129 11,024
Other operating expenses ................. 5,464 3,828 10,487 7,911
34,093 22,646 65,554 44,288
------- ------- -------- -------
Pretax income .............................. 20,389 17,043 39,459 32,331
Provision for income taxes ................. 5,118 4,501 9,761 8,488
------- ------- -------- -------
Net income ................................. $15,271 $12,542 $ 29,698 $23,843
======= ======= ======== =======
Net income per share ....................... $ 1.25 $ 1.03 $ 2.43 $ 1.96
======= ======= ======== ========
Average number of common and common
eqvuivalent shares outstanding ............. 11,537 11,361 11,519 11,298
======= ======= ======== =======
See notes to consolidated financial statements.
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CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
Net Unrealized
Additional Gain (Loss)
Common Paid-In Retained on Investments
Stock Capital Earnings (Net of Tax) Total
----- ------- -------- ----------- -----
(In thousands)
Balance, December 31, 1995 .............................. $ 11 $163,665 $131,816 $ 3,124 $298,616
Net income (unaudited) ................................ -- -- 29,698 -- 29,698
Change in net unrealized gain (loss) on
investments - net of tax (unaudited) .......... -- -- -- (2,672) (2,672)
Issuance of common stock (unaudited) .................. -- 1,114 -- -- 1,114
Dividends (unaudited) ................................. -- -- (2,765) -- (2,765)
---- -------- ------- ------- --------
Balance, June 30, 1996 (unaudited) ...................... $ 11 $164,779 $158,749 $ 452 $323,991
==== ======== ======== ======= ========
See notes to consolidated financial statements.
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CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30
1996 1995
---- ----
(In thousands)
Cash flows from operating activities $ 39,624 $ 22,599
---------- ----------
Cash flows from investing activities:
Proceeds from sales of investments available for sale ............ 6,382 6,830
Proceeds from redemptions of investments available for sale ...... 10,838 4,799
Proceeds from redemptions of investments held to maturity ........ 375 1,615
Purchases of investments available for sale ...................... (13,318) (18,655)
Purchases of investments held to maturity ........................ (38,174) (19,190)
(Purchases) sales of short-term investments - net ................ (644) 917
Other ............................................................ (2,524) (294)
---------- ----------
Net cash used in investing activities .............................. (37,065) (23,978)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock .................... 1,114 1,656
Dividends paid ............................................ (2,765) (2,753)
---------- ----------
Net cash used in financing activities .............................. (1,651) (1,097)
---------- ----------
Increase (decrease) in cash ........................................ 908 (2,476)
Cash, beginning of period .......................................... 3,646 3,926
---------- ----------
Cash, end of period ................................................ $ 4,554 $ 1,450
========== ==========
Supplemental disclosures of cash flow information:
Income taxes paid .................................................. $ 8,500 $ 9,000
========== ==========
Interest paid ...................................................... $ 48 $ 60
========== ==========
See notes to consolidated financial statements.
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CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of CMAC
Investment Corporation (the "Company") and its subsidiaries including its
principal operating subsidiary, Commonwealth Mortgage Assurance Company
("CMAC"), and are presented on the basis of generally accepted accounting
principles.
The financial information for the interim periods included herein is
unaudited; however, such information reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position, results of operations, and cash flows for the interim periods. The
results of operations for interim periods are not necessarily indicative of
results to be expected for the full year.
Net income per share is based on the average number of common shares
outstanding and common share equivalents which would arise from the exercise of
stock options. Preferred stock dividends are deducted from net income in the
net income per share computation.
For a summary of significant accounting policies and additional
financial information, see the CMAC Investment Corporation Annual Report on
Form 10-K for the year ended December 31, 1995.
2 - NEW ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123" ). FAS 123 requires expanded disclosures
of stock-based compensation arrangements with employees and encourages, but
does not require, the recognition of compensation expense for the fair value of
stock options and other equity instruments granted as compensation to employees
for fiscal years beginning after December 15, 1995. The Company is currently
evaluating the effect that FAS 123 would have on its financial position and
earnings.
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CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
Net income for the first six months of 1996 was $29.7 million, a 24.6%
increase compared to $23.8 million for the first six months of 1995 and net
income for the quarter ended June 30, 1996 was $15.3 million, a 21.8% increase
compared to $12.5 million for the same period in 1995. These improvements
resulted primarily from significant growth in premiums earned, investment
income and other income, partially offset by a higher provision for losses and
increased operating expenses.
Premiums earned for the first six months of 1996 were $87.8 million, a
38.9% increase compared to $63.2 million for the first six months of 1995 and
premiums earned for the quarter ended June 30, 1996 were $45.9 million, a 39.8%
increase compared to $32.8 million for the same period of 1995. These
significant increases reflect the growth in insurance in force resulting from
strong new insurance volume and a continuation of high persistency levels.
Persistency is defined as the percentage of policies in force that are renewed
in any given year. New primary insurance written in the first six months of
1996 was $6.2 billion, an increase of 42.2% compared to $4.4 billion for the
first six months of 1995, and for the second quarter of 1996, new primary
insurance written of $3.3 billion was 33.1% more than $2.5 billion in the
second quarter of 1995. This volume increased as a result of an increase in
the private mortgage insurance market which was aided by strong levels of
refinancing due to relatively low interest rates. Refinanced loans represented
22.0% of new primary insurance written in the first six months of 1996 as
compared to 6.6% in the first six months of 1995 and for the quarter ended June
30, 1996, refinanced loans represented 18.1% of new primary insurance written
as compared to 6.7% for the comparable period of 1995. Higher interest rates
toward the end of the second quarter will cause refinance activity to slow
significantly in the third quarter. Additionally, in the first six months of
1996, CMAC wrote $3.6 billion of pool insurance as compared to $686.2 million
for the same period of 1995. Most of the pool insurance written in 1996
related to one structured transaction which is geographically dispersed
throughout the United States and has a very low stop-loss level. The
persistency rate for the year ended June 30, 1996 was 85.7% compared to 86.8%
for the year ended June 30, 1995. The strong volume and high persistency led
to an increase in direct primary insurance in force of 12.5% from $32.4 billion
at December 31, 1995 to $36.4 billion at June 30, 1996.
Net investment income for the first six months of 1996 was $14.5
million, a 15.8% increase compared to $12.5 million for the first six months of
1995 and for the quarter ended June 30, 1996, net investment income was $7.3
million, an increase of 16.3% compared to $6.3 million for the second quarter
of 1995. These increases were a result of continued growth in invested assets
primarily due to positive operating cash flow. The Company continues to invest
new operating cash flow in tax-advantaged securities, primarily municipal
bonds.
The provision for losses in the first six months of 1996 was $41.9
million, an increase of 65.4% compared to $25.4 million in 1995 and for the
second quarter of 1996, this provision was $21.9 million, an increase of 66.2%
compared to $13.2 million in 1994. In addition to the maturation of CMAC's
growing book of business which has led to higher levels of defaults, the early
default experience of the 1994 and 1995 origination year books of business has
been higher than expected, although the ultimate performance of these books
cannot yet be determined. CMAC also continues to experience excessive defaults
and claims in California. The default rate in California increased to 3.6% at
June 30, 1996 as compared to 2.8% at June 30, 1995 and claims paid in
California for the first six months of 1996 were $14.2 million, representing
approximately 60% of total claims. The Company has also continued
implementation of a more conservative reserve calculation for certain loans in
default perceived as having a higher risk of claim incidence. The Company
believes that many loan servicers have changed the timing of reporting loans in
default which has resulted in an incremental increase in the number of loans in
default. This change will allow earlier intervention with borrowers in default
which might lead to a higher cure rate for such loans.
Policy acquisition costs in the first six months of 1996 were $13.1
million, an increase of 19.1% compared to $11.0 million in 1995. For the
second quarter of 1996, these expenses were $6.7 million, an increase of 19.2%
compared to $5.6 million for the comparable period of 1995. This reflects the
increase in volume of new insurance written, and increases in sales-related
expenses incurred in an effort to continue a broad geographic coverage. Other
operating expenses for the six months ended June 30, 1996 were $10.5 million,
an increase of 32.6% compared to $7.9 million in 1995 and these expenses were
$5.5 million for the second quarter of 1996, an increase of 42.7% compared to
$3.8 million for the second quarter of 1995. Much of the increase continued to
result from an expansion of the Company's technology efforts and a significant
increase in expenses associated with the Company's ancillary services,
specifically contract underwriting. Some of these additional contract
underwriting expenses were correspondingly offset by increases to other income
although the main purpose of the contract underwriting effort is to support the
sales effort by generating incremental mortgage insurance business.
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The effective income tax rate for the six months ended June 30, 1996
was 24.7% and this rate was 25.1% for the quarter ended June 30, 1996. This
compares to 26.3% and 26.4%, respectively, for the six months and quarter ended
June 30, 1995. This decrease is due in part to the growing percentage of
tax-advantaged securities in the Company's investment portfolio, and in part to
an increase in the exercise of non- qualified stock options.
LIQUIDITY AND CAPITAL RESOURCES
CMAC's sources of funds consist primarily of premiums and investment
income. Funds are applied primarily to the payment of CMAC's claims and
operating expenses.
Cash flows from operating activities for the six months ended June 30,
1996 were $39.6 million as compared to $22.6 million for the same period of
1995. This increase consisted of a significant increase in net premiums
written, partially offset by an increase in claims paid and operating expenses.
Monthly premiums, which now constitute over 90% of new business, have
negatively impacted cash flow in the short term although long-term cash flow is
not expected to be materially affected. Positive cash flows are invested
pending future payments of claims and other expenses; cash flow shortfalls, if
any, are funded through sales of short-term investments and certain other
investment portfolio securities.
Common stockholders' equity increased from $298.6 million at December
31, 1995 to $324.0 million at June 30, 1996, primarily as a result of net
income of $29.7 million, offset by a net decrease of $2.7 million in the value
of investments classified as available for sale and by dividends of $2.8
million.
As of June 30, 1996, the Company and its subsidiaries had no material
commitments for capital expenditures.
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CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - None
ITEM 3. Defaults upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders
On May 8, 1996, the Annual Meeting of Stockholders of
CMAC Investment Corporation was held. The
stockholders re- elected three nominees from the
existing Board of Directors to a term of three years
expiring in 1999. The Stockholders also approved the
designation of Deloitte & Touche as independent
auditors.
The number of votes cast for and withheld from the
election of each director nominee is set forth below.
There were no votes against, abstentions or broker
non-votes in the election of directors.
Election of Directors:
For Withheld
--- --------
David C. Carney 10,072,914 24,088
Ronald W. Moore 10,072,914 24,088
Claire M. Fagin 10,072,329 24,673
The number of votes cast for, against and abstentions
relating to the designation of Deloitte & Touche as
independent auditors is set forth below. There were
no broker non-votes in the approval of Deloitte &
Touche.
For Against Abstain
Approval of the designation
of Deloitte & Touche as
independent auditors: 10,080,969 10,503 5,530
ITEM 5. Other Information - None
ITEM 6.
a. Exhibits -
*Exhibit 11.1 - Statement Re: Computation of
Per Share Earnings
b. Reports on Form 8-K - None
* Filed Herewith
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SIGNATURE
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.
CMAC INVESTMENT CORPORATION
Date: August 12, 1996 C. Robert Quint
--------------------------------------------------------
C. Robert Quint
Senior Vice President, Chief Financial
(Principal Accounting Officer)
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