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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
SEPTEMBER 30, 1996
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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
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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
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(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: 11,194,028 shares
of Common Stock, $0.001 par value, outstanding on November 11, 1996.
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CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
INDEX
PAGE NUMBER
Part I - Financial Information
Consolidated Balance Sheets - September 30, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income - For the quarters and nine month periods
ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . 4
Consolidated Statement of Changes in Common Stockholders'
Equity - For the nine month period ended September 30, 1996 . . . 5
Consolidated Statements of Cash Flows - For the nine month periods ended
September 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
September 30 December 31
1996 1995
------------ -----------
(Unaudited)
(In thousands, except share amounts)
Assets
Investments
Fixed maturities held to maturity - at amortized cost (fair value
$379,914 and $335,779) . . . . . . . . . . . . . . . . . . . . . $368,643 $316,553
Fixed maturities available for sale - at fair value
(amortized cost $108,891 and $111,227) . . . . . . . . . . . . . 110,001 116,033
Short-term investments . . . . . . . . . . . . . . . . . . . . . . 8,912 4,951
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,342 3,646
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . 22,789 21,350
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,246 36,613
-------- --------
$558,933 $499,146
======== ========
Liabilities and Stockholders' Equity
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49,496 $ 56,115
Reserve for losses . . . . . . . . . . . . . . . . . . . . . . . . . . 97,139 67,301
Deferred federal income taxes . . . . . . . . . . . . . . . . . . . . 4,161 5,804
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 29,056 31,310
-------- --------
179,852 160,530
-------- --------
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; 11,186,903 shares and 11,129,617 shares issued
and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . 11 11
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 165,026 163,665
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 173,322 131,816
Net unrealized gain on investments, net of tax . . . . . . . . . . . . 722 3,124
-------- --------
339,081 298,616
-------- --------
$558,933 $499,146
======== ========
See notes to consolidated financial statements.
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CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
---- ---- ---- ----
(In thousands, except per-share amounts)
Revenues:
Premiums written:
Direct . . . . . . . . . . . . . . . . $ 50,495 $ 33,649 $ 140,641 $ 98,069
Assumed . . . . . . . . . . . . . . . 31 120 146 326
Ceded . . . . . . . . . . . . . . . . (4,175) (222) (12,352) (5,479)
-------- -------- --------- --------
Net premiums written . . . . . . . . . . . . . 46,351 33,547 128,435 92,916
Decrease in unearned premiums . . . . . . . . 2,347 2,113 8,060 5,962
-------- -------- --------- --------
Premiums earned . . . . . . . . . . . . . . . 48,698 35,660 136,495 98,878
Net investment income . . . . . . . . . . . . 7,623 6,578 22,088 19,065
Gain (loss) on sales of investments . . . . . (2) (3) 768 66
Other income . . . . . . . . . . . . . . . . . 905 802 2,886 1,647
-------- -------- --------- --------
57,224 43,037 162,237 119,656
-------- -------- --------- --------
Expenses:
Provision for losses . . . . . . . . . . . . . 23,808 15,737 65,746 41,090
Policy acquisition costs . . . . . . . . . . . 6,775 6,020 19,904 17,044
Other operating expenses . . . . . . . . . . . 5,281 4,000 15,768 11,911
-------- -------- --------- --------
35,864 25,757 101,418 70,045
-------- -------- --------- --------
Pretax income . . . . . . . . . . . . . . . . . . . 21,360 17,280 60,819 49,611
Provision for income taxes . . . . . . . . . . . . 5,403 4,252 15,164 12,740
-------- -------- --------- --------
Net income . . . . . . . . . . . . . . . . . . . $ 15,957 $ 13,028 $ 45,655 $ 36,871
======== ======== ========= ========
Net income per share . . . . . . . . . . . . . . . $ 0.65 $ 0.53 $ 1.87 $ 1.52
======== ======== ========= ========
Average number of common and common equivalent
shares outstanding . . . . . . . . . . . . . . . . 23,128 22,854 23,068 22,670
======== ========= ========= ========
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) . . . . . . . . . . -- -- 45,655 -- 45,655
Change in net unrealized gain (loss) on
investments - net of tax (unaudited) . . -- -- -- (2,402) (2,402)
Issuance of common stock (unaudited) . . . -- 1,361 -- -- 1,361
Dividends (unaudited) . . . . . . . . . . . -- -- (4,149) -- (4,149)
---------- -------- -------- ------- --------
Balance, September 30, 1996 (unaudited) . . . . . $ 11 $165,026 $173,322 $ 722 $339,081
========== ======== ======== ======= ========
See notes to consolidated financial statements.
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CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30
1996 1995
---- ----
(In thousands)
Cash flows from operating activities . . . . . . . . . . . . . . . . . . $ 60,339 $ 38,866
---------- -----------
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 . . . 11,775 4,799
Proceeds from redemptions of investments held to maturity . . . . 660 3,240
Purchases of investments available for sale . . . . . . . . . . . (15,018) (19,647)
Purchases of investments held to maturity . . . . . . . . . . . . (55,713) (35,750)
(Purchases) sales of short-term investments - net . . . . . . . . (3,961) 2,175
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,980) (586)
---------- -----------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . (59,855) (38,939)
---------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock . . . . . . . . . . . . . . 1,361 2,075
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . (4,149) (4,132)
---------- -----------
Net cash used in financing activities . . . . . . . . . . . . . . . . . . (2,788) (2,057)
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Decrease in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,304) (2,130)
Cash, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . 3,646 3,926
---------- -----------
Cash, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,342 $ 1,796
========== ===========
Supplemental disclosures of cash flow information:
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,000 $ 13,500
========== ===========
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70 $ 87
========== ===========
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 has elected to
continue to measure compensation costs for stock-based compensation
arrangements using the methods prescribed by APB No. 25, "Accounting for Stock
Issued to Employees". As such, FAS 123 did not have a material impact on the
financial position or earnings of the Company.
3 - SUBSEQUENT EVENT
On October 15, 1996, the Board of Directors authorized a stock split,
payable December 2, 1996, in the form of a dividend of one additional share of
the Company's common stock for each share owned by stockholders of record on
November 7, 1996. The dividend will be accounted for as a two-for-one stock
split and par value will remain at $.001 per share.
Accordingly, all references to common per share data have been adjusted
to give effect to the stock split.
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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 nine months of 1996 was $45.7 million, a 23.8%
increase compared to $36.9 million for the first nine months of 1995 and net
income for the quarter ended September 30, 1996 was $16.0 million, a 22.5%
increase compared to $13.0 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 nine months of 1996 were $136.5 million, a
38.0% increase compared to $98.9 million for the first nine months of 1995 and
premiums earned for the quarter ended September 30, 1996 were $48.7 million, a
36.6% increase compared to $35.7 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, which is defined as the percentage of policies in force that are
renewed in any given year, was 84.4% for the year ended September 30, 1996,
compared to 87.7% for the year ended September 30, 1995. New primary insurance
written in the first nine months of 1996 was $9.4 billion, an increase of 24.2%
compared to $7.5 billion for the first nine months of 1995, and new primary
insurance written for the third quarters of 1996 and 1995 was $3.2 billion.
The year-to-date volume increased as a result of an increase in the private
mortgage insurance market which was aided by strong levels of refinancing
during the first six months of the year brought about by relatively low
interest rates. Refinanced loans represented 18.0% of new primary insurance
written in the first nine months of 1996 as compared to 8.9% in the first nine
months of 1995 while for the quarter ended September 30, 1996, refinanced loans
represented 10.1% of new primary insurance written as compared to 12.1% for the
comparable period of 1995. Higher interest rates toward the end of the second
quarter caused refinance activity to slow significantly in the third quarter.
Additionally, in the first nine months of 1996, CMAC wrote $4.6 billion of pool
insurance as compared to $976.1 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. Under a pool insurance transaction, the exposure to CMAC on
each individual loan is uncapped; however, the aggregate stop loss percentage
is the most that can be paid out in losses before the insurer's exposure
terminates. The Company expects its pool insurance activity to increase in the
fourth quarter and in 1997 and to be composed primarily of Fannie Mae- and
Freddie Mac-eligible conforming mortgage loans. Premium rates on such pool
insurance are significantly lower than on primary insured loans due to the low
stop loss. The strong volume and high persistency led to an increase in direct
primary insurance in force of 16.9% from $32.4 billion at December 31, 1995 to
$37.8 billion at September 30, 1996 and an increase in pool insurance in force
of 122.1% from $3.5 billion at December 31, 1995 to $7.7 billion at September
30, 1996.
Net investment income for the first nine months of 1996 was $22.1
million, a 15.9% increase compared to $19.1 million for the first nine months
of 1995 and for the quarter ended September 30, 1996, net investment income was
$7.6 million, an increase of 15.9% compared to $6.6 million for the third
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 nine months of 1996 was $65.7
million, an increase of 60.0% compared to $41.1 million in 1995 and for the
third quarter of 1996, this provision was $23.8 million, an increase of 51.3%
compared to $15.7 million in 1995. 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, it appears that the ultimate loss levels will be
higher than average. CMAC also continues to experience excessive defaults and
claims in California. The default rate in California increased to 3.6%
(including pool) at September 30, 1996 as compared to 3.1% at September 30,
1995 and claims paid in California for the first nine months of 1996 were $23.5
million, representing approximately 61.6% 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 nine months of 1996 were $19.9
million, an increase of 16.8% compared to $17.0 million in 1995. For the third
quarter of 1996, these expenses were $6.8 million, an increase of 12.5%
compared to $6.0 million
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for the comparable period of 1995. This reflects the increase in volume of new
insurance written, and increases in sales- and underwriting-related expenses
incurred in an effort to continue a broad geographic coverage. Other operating
expenses for the nine months ended September 30, 1996 were $15.8 million, an
increase of 32.4% compared to $11.9 million in 1995 and these expenses were
$5.3 million for the third quarter of 1996, an increase of 32.0% compared to
$4.0 million for the third 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.
The effective income tax rate for the nine months ended September 30,
1996 was 24.9% and this rate was 25.3% for the quarter ended September 30,
1996. This compares to 25.7% and 24.6%, respectively, for the nine months and
quarter ended September 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 nine months ended September
30, 1996 were $60.3 million as compared to $38.9 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 $339.1 million at September 30, 1996, as a result of net income of
$45.7 million and $1.3 million from the issuance of common stock, offset by a
net decrease of $2.4 million in the value of investments classified as
available for sale and by dividends of $4.1 million.
As of September 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 - None
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: November 14, 1996 C. Robert Quint
----------------------------------------------
C. Robert Quint
Senior Vice President, Chief Financial Officer
(Principal Accounting Officer)
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