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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 MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-11356
CMAC INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2691170
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1601 MARKET STREET, PHILADELPHIA, PA 19103
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(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: 22,633,365 shares of
Common Stock, $0.001 par value, outstanding on May 11, 1998.
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CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
INDEX
PAGE NUMBER
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Part I - Financial Information
Consolidated Balance Sheets - March 31, 1998 and
December 31, 1997............................................................ 3
Consolidated Statements of Income - For the quarters ended
March 31, 1998 and 1997...................................................... 4
Consolidated Statement of Changes in Common Stockholders'
Equity - For the quarter ended March 31, 1998................................ 5
Consolidated Statements of Cash Flows - For the quarters ended
March 31, 1998 and 1997...................................................... 6
Notes to Consolidated Financial Statements............................................ 7
Management's Discussion and Analysis of Results of
Operations and Financial Condition........................................... 8-10
Part II - Other Information, as applicable..................................................... 11
Signature...................................................................................... 12
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CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31 December 31
1998 1997
-------- --------
(Unaudited)
(In thousands, except share amounts)
Assets
Investments
Fixed maturities held to maturity - at amortized cost (fair value
$591,167 and $517,931) ......................................... $483,934 $487,941
Fixed maturities available for sale - at fair value
(amortized cost $125,681 and $91,949) .......................... 132,206 97,962
Short-term investments ........................................... 17,502 11,027
Cash ................................................................. 1,688 2,364
Deferred policy acquisition costs .................................... 25,806 25,025
Provisional losses recoverable ....................................... 34,039 31,325
Other assets ......................................................... 46,068 48,971
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$741,243 $704,615
======== ========
Liabilities and Stockholders' Equity
Unearned premiums .................................................... $ 42,724 $ 49,332
Reserve for losses ................................................... 161,258 148,628
Deferred federal income taxes ........................................ 11,360 6,541
Accounts payable and accrued expenses ................................ 33,586 30,171
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248,928 234,672
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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
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Common stockholders' equity
Common stock, par value $.001 per share; 80,000,000 shares authorized;
22,609,965 shares and 22,536,674 shares issued
and outstanding .................................................. 23 22
Additional paid-in capital ........................................... 182,336 179,846
Retained earnings .................................................... 265,715 246,166
Net unrealized gain on investments, net of tax ....................... 4,241 3,909
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452,315 429,943
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$741,243 $704,615
======== ========
See notes to consolidated financial statements.
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CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter Ended
March 31
1998 1997
-------- --------
(In thousands, except per-share amounts)
Revenues:
Premiums written:
Direct ....................................... $ 68,676 $ 51,707
Assumed ...................................... 10 19
Ceded ........................................ (6,441) (4,642)
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Net premiums written ............................. 62,245 47,084
Decrease in unearned premiums .................... 4,935 7,228
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Premiums earned .................................. 67,180 54,312
Net investment income ............................ 9,304 8,084
Gain on sales of investments ..................... 350 112
Other income ..................................... 2,201 1,090
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79,035 63,598
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Expenses:
Provision for losses ............................. 33,037 26,753
Policy acquisition costs ......................... 8,605 7,438
Other operating expenses ......................... 8,384 5,946
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50,026 40,137
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Pretax income ....................................... 29,009 23,461
Provision for income taxes .......................... (7,957) (6,177)
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Net income .......................................... $ 21,052 $ 17,284
======== ========
Basic net income per share .......................... $ 0.90 $ 0.73
======== ========
Diluted net income per share ........................ $ 0.86 $ 0.71
======== ========
Average number of common shares outstanding - basic . 22,578 22,417
======== ========
Average number of common and common equivalent shares
outstanding - diluted ............................... 23,633 23,263
======== ========
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
Common Paid-In Retained on Investments
Stock Capital Earnings (Net of Tax) Total
--- -------- --------- ------ ---------
(In thousands)
Balance, December 31, 1997 ................ $22 $179,846 $ 246,166 $3,909 $ 429,943
Net income (unaudited) .................. -- -- 21,052 -- 21,052
Change in net unrealized gain on
investments - net of tax (unaudited) -- -- -- 332 332
Issuance of common stock (unaudited) .... 1 2,490 -- -- 2,491
Dividends (unaudited) ................... -- -- (1,503) -- (1,503)
--- -------- --------- ------ ---------
Balance, March 31, 1998 (unaudited) ....... $23 $182,336 $ 265,715 $4,241 $ 452,315
=== ======== ========= ====== =========
See notes to consolidated financial statements.
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CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Quarter Ended
March 31
1998 1997
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(In thousands)
Cash flows from operating activities ............................. $ 29,188 $ 21,200
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Cash flows from investing activities:
Proceeds from sales of investments available for sale ..... 3,320 --
Proceeds from sales of investments held to maturity ....... 1,031 --
Proceeds from redemptions of investments available for sale 6,759 6,239
Proceeds from redemptions of investments held to maturity . 3,060 2,050
Purchases of investments available for sale ............... (41,105) (4,389)
Purchases of investments held to maturity ................. -- (24,178)
(Purchases)sales of short-term investments - net .......... (6,475) 151
Other ..................................................... 2,558 (1,542)
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Net cash used in investing activities ............................ (30,852) (21,669)
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Cash flows from financing activities:
Proceeds from issuance of common stock .................... 2,491 837
Dividends paid ............................................ (1,503) (1,497)
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Net cash from (used in) financing activities ..................... 988 (660)
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Decrease in cash ................................................. (676) (1,129)
Cash, beginning of period ........................................ 2,364 3,189
-------- --------
Cash, end of period .............................................. $ 1,688 $ 2,060
======== ========
Supplemental disclosures of cash flow information:
Income taxes paid ................................................ $ 1,000 $ 250
======== ========
Interest paid .................................................... $ 1 $ 0
======== ========
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.
Basic net income per share is based on the weighted average number of
common shares outstanding, while diluted net income per share is based on the
weighted average number of common shares outstanding and common share
equivalents that 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, 1997.
2 - COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," effective January 1, 1998. The Statement
requires disclosure of amounts from transactions and other events which are
currently excluded from the statement of operations and are recorded directly to
stockholders' equity. Total comprehensive income for the three month periods
ended March 31, 1998 and 1997 amounted to $21,034,000 and $16,843,000,
respectively.
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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 quarter of 1998 was $21.1 million, a 21.8%
increase compared to $17.3 million for the first quarter of 1997. This
improvement was a result of significant growth in premiums earned and net
investment income, partially offset by a higher provision for losses, policy
acquisition costs and other operating
New primary insurance written during the first quarter of 1998 was $4.1
billion, a 42.5% increase compared to $2.8 billion for the first quarter of
1997. The primary reason for this increase was a 39.7% increase in new insurance
written volume in the private mortgage insurance industry for the first quarter
of 1998 as compared to the first quarter of 1997. In addition, CMAC's market
share of the industry increased to 11.5% in the first quarter of 1998, compared
to 10.2% for the same period of 1997. In the first quarter of 1998, CMAC wrote
an increased amount of pool insurance which represented an addition to risk of
$80.1 million as compared to $51.1 million in the first quarter of 1997. Most of
this pool insurance volume related to a group of structured transactions
composed primarily of Fannie Mae- and Freddie Mac-eligible ("GSEs") conforming
mortgage loans that are geographically dispersed throughout the United States
and that have lower average loan-to-value ratios than CMAC's primary business.
Under a pool insurance transaction, the exposure to CMAC on each individual loan
is uncapped; however, the aggregate stop-loss percentage (typically 1.0% to 1.5%
in the Fannie Mae/Freddie Mac transactions) is the most that can be paid out in
losses before the insurer's exposure terminates. The Company expects its pool
insurance activity to continue at this same level throughout 1998 due to
commitments outstanding and the continued willingness of the GSEs to offer the
product, but will review its policy after these commitments expire. Premium
rates on such pool insurance are significantly lower than on primary insurance
loans due to the low stop-loss levels, which limit the overall risk exposure to
CMAC, and the focus of such product on high quality primary insurance customers.
Standard & Poor's has recently determined that the capital requirements to
support such pool insurance will be significantly more stringent than on primary
insurance due to the low premium rates and CMAC has reviewed its capital and
reinsurance levels to ensure compliance with these requirements. The average
stop-loss on all pool insurance written during the first quarter of 1998 was
1.4%.
CMAC's volume in the first three months of 1998 was positively impacted
by relatively lower interest rates which affected the entire mortgage industry.
These lower interest rates, which began in the third quarter of 1997, have
caused refinancing activity at the beginning of 1998 to continue at a higher
rate although strong housing prices have caused a large percentage of the
refinanced loans to be transacted without private mortgage insurance at an LTV
of 80% or below. The persistency rate, which is defined as the percentage of
policies in force that are renewed in any given year, was 79.5% for the twelve
months ended March 31, 1998 as compared to 84.9% for the twelve months ended
March 31, 1997. This decrease was consistent with the increased level of
refinancing activity during the first quarter of 1998 which caused the
cancellation rate to increase and should continue at this lower rate in the
second quarter of 1998 due to the level of refinancing activity.
Net premiums earned in the first quarter of 1998 were $67.2 million, a
23.7% increase compared to $54.3 million for the first quarter of 1997. This
increase reflected the insurance in force growth resulting from strong new
insurance volume and the increase in pool insurance written during the first
quarter of 1998, and was offset by the decline in persistency levels. The strong
volume led to an increase in direct primary insurance in force for the quarter
of 2.5%, from $46.9 billion at December 31, 1997 to $48.1 billion at March 31,
1998 and direct primary risk in force grew from $10.0 billion at the end of 1997
to $10.4 billion at March 31, 1998, an increase of 3.7% for the quarter. Direct
pool risk in force also grew to $651.0 million at March 31, 1998 from $593.9
million at the end of 1997, an increase of 9.6% for the quarter.
Net investment income for the first quarter of 1998 was $9.3 million, a
15.1% increase compared to $8.1 million for the same period of 1997. This
increase was a result of continued growth in invested assets primarily due to
positive operating cash flows of $29.2 million. The Company has continued to
invest new operating cash flow in tax-advantaged securities, primarily municipal
bonds. The Company has modified its investment policy to allow the purchase of
equities, which includes both common stock and convertible securities, beginning
in the second and third quarters of 1998. Equity exposure is limited to 20% of
the investment portfolio's market value and the Company intends to limit
investments in common equities and convertible securities to 5% and 10%,
respectively of the portfolio's market value. Additionally , beginning in the
third quarter of 1998, the Company intends to gradually increase investments in
mortgage-backed
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CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
securities, primarily securities issued by the Government National Mortgage
Association, up to a maximum of 10% of the investment portfolio's market value.
There should not be a material effect on operating cash flows or investment
yields as a result of these changes in the Company's investment policy and asset
allocations.
The provision for losses was $33.0 million for the first three months of
1998, an increase of 23.5% compared to $26.8 million for the first three months
of 1997. This increase reflected the significant growth and maturation of CMAC's
book of business over the past several years, the continued adverse experience
of California loans, and the relatively poor experience of certain "affordable
housing" program loans insured starting in 1994. Although the ultimate
performance of the books of business that originated since 1994 cannot yet be
determined, it appears that the ultimate loss levels will be higher than
average, due in part to the presence of these "affordable housing" loans. CMAC's
overall default rate at March 31, 1998 was 1.76% as compared to 1.82% at
December 31, 1997. The number of defaults rose from 12,359 at December 31, 1997
to 12,776 at March 31, 1998 and the average loss reserve per default rose from
$12,026 at the end of 1997 to $12,622 at March 31, 1998. CMAC establishes loss
reserves on a case-by-case basis and the amount reserved for any particular loan
is dependent upon the status of the loan as reported by the servicer of the
insured loan, as well as the economic condition and estimated foreclosure period
in the area in which the loan exists. The increase in average loss reserve per
default reflected the Company's continued implementation of a more conservative
reserve calculation for certain loans in default perceived as having a higher
risk of claim incidence. In addition, an increase in the coverage percentage on
loans originated beginning in 1995 has necessitated a higher reserve balance on
loans in a default status due to the increased ultimate exposure on these loans.
The default rate in California was 3.4% (including pool) at March 31, 1998 as
compared to 3.6% at December 31, 1997 and claims paid in California during the
first quarter of 1998 were $11.7 million, representing approximately 49.7% of
total claims as compared to 57.0% in 1997. The "affordable housing" early
default experience is a result of insuring certain loans in which the borrowers'
principal and interest reserves and other credit factors were not as strong as
on prior years' books of business. Certain underwriting changes were implemented
near the end of 1996 to compensate for the factors that contributed to the early
default experience on these "affordable housing" loans; however, it is too early
to determine the impact of such changes. The Company believes that many loan
servicers have changed the timing of reporting loans in default, which has
continued to result in an incremental increase in the number of loans in
default. This change allows for earlier intervention with borrowers in default,
which might lead to a higher cure rate for such loans.
Underwriting and other operating expenses were $17.0 million for the
first three months of 1998, an increase of 26.9% compared to $13.4 million for
the same period of 1997. These expenses consisted of policy acquisition
expenses, which relate directly to the acquisition of new business, and other
operating expenses, which primarily represent overhead and administrative costs,
as well as a large percentage of contract underwriting costs.
Policy acquisition costs were $8.6 million in the first quarter of 1998,
an increase of 15.7% compared to $7.4 million in the first quarter of 1997. This
reflects the increase in sales- and underwriting-related expenses relating to
the Company's continued market share expansion and the development of the
Company's marketing infrastructure needed to support a focus on larger, national
mortgage lenders in order to take advantage of the widespread consolidation
occurring in the mortgage lending industry. Other operating expenses for the
first quarter of 1998 were $8.4 million, an increase of 41.0% compared to $5.9
million for the first quarter of 1997. Much of the increase continued to result
from an expansion of the Company's technology efforts and an 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, which rose 101.9% from $1.1
million in the first quarter of 1997 to $2.2 million for the same period in
1998, although the main purpose of the contract underwriting effort is to
support the sales effort by generating incremental mortgage insurance business.
During the first three months of 1998, loans underwritten via contract
underwriting accounted for 33% of applications, 28% of insurance commitments,
and 20% of certificates issued by CMAC as compared to 24% of applications, 25%
of commitments and 22% of certificates in the first three months of 1997. These
percentages are expected to continue at this level for the second quarter of
1998 due to the relatively high levels of refinancing activity and strong
housing prices which result in a decrease in loans needing private mortgage
insurance. However, the total volume of loans underwritten via contract
underwriting is expected to increase which will result in an increase in other
operating expenses without a corresponding increase in mortgage insurance
business. Changing market conditions caused the cost
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CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
of contract underwriting to increase during 1997 due to the lack of available
resources and this is expected to continue in the second quarter of 1998 as
refinancing activity continues at a high rate.
The effective tax rate for the quarter ended March 31, 1998 was 27.4% as
compared to 26.3% for the first quarter of 1997. Operating income was 66.7% of
net income in the first quarter of 1998 as compared to 65.1% in the first
quarter of 1997, thus resulting in the increase in effective tax rate for 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company'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 quarter ended March 31, 1998
were $29.2 million as compared to $21.2 million for the same period of 1997.
This increase consisted of an increase in net premiums written and investment
income received, partially offset by an increase in claims paid and operating
expenses. 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.
Stockholders' equity, which includes redeemable preferred stock of $40.0
million, increased from $469.9 million at December 31, 1997 to $492.3 million at
March 31, 1998, primarily as a result of net income of $21.1 million and the
exercise of stock options of $2.5 million, partially offset by dividends of $1.5
million.
As of March 31, 1998, the Company and its subsidiaries had no material
commitments for capital expenditures.
The Company believes that CMAC will have sufficient funds to satisfy its
claims payments and operating expenses and to pay dividends to the Company for
at least the next 12 months. The Company also believes that it will be able to
satisfy its long-term (more than 12 months) liquidity needs with cash flow from
CMAC. As a holding company, the Company conducts its principal operations
through CMAC. The Company's ability to pay dividends on the $4.125 Preferred
Stock is dependent upon CMAC's ability to pay dividends or make other
distributions to the Company. Based on the Company's current intention to pay
quarterly common stock dividends of approximately $0.03 per share, the Company
will require distributions from CMAC of $6.0 annually to pay the dividends on
the outstanding shares of $4.125 Preferred Stock and common stock. There are
regulatory and contractual limitations on the payment of dividends or other
distributions; however, the Company does not believe that these restrictions
will prevent the payment by CMAC or the Company of these anticipated dividends
or distributions in the foreseeable future.
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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
*Exhibit 27.1 - Financial Data Schedule
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: May 14, 1998 C. Robert Quint
-------------------------------
C. Robert Quint
Senior Vice President, Chief Financial Officer
(Principal Accounting Officer)
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