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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, 1997
[ ] 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 9/30/97 114,167,401
MGIC INVESTMENT CORPORATION
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of
September 30, 1997 (Unaudited) and December 31, 1996 3
Consolidated Statement of Operations for the Three and Nine
Month Periods Ended September 30, 1997 and 1996 (Unaudited) 4
Consolidated Statement of Cash Flows for the Nine Months
Ended September 30, 1997 and 1996 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
INDEX TO EXHIBITS 18
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 1997 (Unaudited) and December 31, 1996
September 30 December 31,
1997 1996
------------ ------------
ASSETS
- ------ (In thousands of dollars)
Investment portfolio:
Securities, available-for-sale, at market value:
Fixed maturities $2,081,045 $1,892,081
Equity securities 103,596 4,039
Short-term investments 121,195 140,114
---------- ----------
Total investment portfolio 2,305,836 2,036,234
Cash 7,099 3,861
Accrued investment income 29,391 33,363
Reinsurance recoverable on loss reserves 27,807 29,827
Reinsurance recoverable on unearned premiums 9,229 11,745
Home office and equipment, net 33,792 35,050
Deferred insurance policy acquisition costs 28,356 31,956
Other assets 55,170 40,279
---------- ----------
Total assets $2,496,680 $2,222,315
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Loss reserves $ 575,595 $ 514,042
Unearned premiums 203,002 219,307
Notes payable (note 2) 222,500 35,424
Income taxes payable 20,176 23,111
Other liabilities 66,518 64,316
---------- ----------
Total liabilities 1,087,791 856,200
---------- ----------
Contingencies (note 3)
Shareholders' equity (note 4):
Common stock, $1 par value, shares authorized
150,000,000; shares issued 121,110,800;
shares outstanding, 9/30/97 - 114,167,401;
1996 - 117,900,868 121,111 121,111
Paid-in surplus 218,440 207,984
Treasury stock (shares at cost, 9/30/97 - 6,943,399;
1996 - 3,209,932) (230,179) (7,073)
Unrealized appreciation in investments, net of tax 67,056 40,685
Retained earnings 1,232,461 1,003,408
---------- ----------
Total shareholders' equity 1,408,889 1,366,115
---------- ----------
Total liabilities and shareholders' equity $2,496,680 $2,222,315
========== ==========
See accompanying notes to consolidated financial statements.
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three and Nine Month Periods Ended September 30, 1997 and 1996
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
(In thousands of dollars, except per share data)
Revenues:
Premiums written:
Direct $184,670 $152,544 $511,069 $421,203
Assumed 3,047 10,131 8,906 13,393
Ceded (3,714) (4,143) (9,450) (10,952)
-------- -------- -------- --------
Net premiums written 184,003 158,532 510,525 423,644
(Increase) decrease in
unearned premiums (3,461) (1,753) 13,788 28,502
-------- -------- -------- --------
Net premiums earned 180,542 156,779 524,313 452,146
Investment income, net of
expenses 31,548 26,926 91,428 76,378
Realized investment gains, net 1,502 566 2,098 979
Other revenue 10,233 5,405 21,942 17,081
-------- -------- -------- --------
Total revenues 223,825 189,676 639,781 546,584
-------- -------- -------- --------
Losses and expenses:
Losses incurred, net 60,785 60,247 182,230 173,973
Underwriting and other expenses 39,907 36,401 116,040 109,731
Interest expense 2,530 952 2,849 2,843
Ceding commission (951) (958) (2,459) (3,100)
-------- -------- -------- --------
Total losses and expenses 102,271 96,642 298,660 283,447
-------- -------- -------- --------
Income before tax 121,554 93,034 341,121 263,137
Provision for income tax 37,379 27,249 103,895 76,242
-------- -------- -------- --------
Net income $ 84,175 $ 65,785 $237,226 $186,895
======== ======== ======== ========
Net income per share
(notes 4 and 5) $ 0.72 $ 0.55 $ 2.00 $ 1.57
======== ======== ======== ========
Weighted average common shares
outstanding (shares in
thousands, note 4) 116,386 118,994 118,442 118,929
======== ======== ======== ========
Dividends per share (note 4) $ 0.025 $ 0.02 $ 0.07 $ 0.06
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 1997 and 1996
(Unaudited)
Nine Months Ended
September 30,
---------------------
1997 1996
--------- ---------
(In thousands of dollars)
Cash flows from operating activities:
Net income $ 237,226 $ 186,895
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred insurance policy
acquisition costs 19,163 23,332
Increase in deferred insurance policy
acquisition costs (15,563) (18,832)
Depreciation and amortization 6,198 6,884
Decrease in accrued investment income 3,972 2,292
Decrease in reinsurance recoverable
on loss reserves 2,020 4,374
Decrease in reinsurance recoverable on
unearned premiums 2,516 3,850
Increase in loss reserves 61,553 115,172
Decrease in unearned premiums (16,305) (30,442)
Other (32,298) (3,508)
---------- ----------
Net cash provided by operating activities 268,482 290,017
---------- ----------
Cash flows from investing activities:
Purchase of equity securities (93,716) - -
Purchase of fixed maturities (510,789) (859,864)
Proceeds from sale of equity securities 3,935 - -
Proceeds from sale or maturity of fixed maturities 350,154 601,845
---------- ----------
Net cash used in investing activities (250,416) (258,019)
---------- ----------
Cash flows from financing activities:
Dividends paid to shareholders (8,173) (7,070)
Net increase in notes payable 187,076 (283)
Reissuance of treasury stock 12,378 10,073
Repurchase of MGIC Investment Corporation
common stock (225,028) -
---------- ----------
Net cash (used in) provided by financing activities (33,747) 2,720
---------- ----------
Net (decrease) increase in cash and
short-term investments (15,681) 34,718
Cash and short-term investments at beginning of period 143,975 90,264
---------- ----------
Cash and short-term investments at end of period $ 128,294 $ 124,982
========== ==========
See accompanying notes to consolidated financial statements.
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(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, 1996
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, 1997 may not be indicative of the
results that may be expected for the year ending December 31,
1997.
The Company's equity earnings from C-BASS, a joint venture
with Enhance Financial Services Group, Inc., are included in
other revenue.
Note 2 - Notes payable
In January 1997, the Company repaid mortgages payable of
$35.4 million, which were secured by the home office and
substantially all of the furniture and fixtures of the
Company. In July 1997, the Company repurchased 4,260,985
shares of its outstanding common stock ("stock repurchase
program") from a financial intermediary at a cost of
approximately $225 million. Funds to repurchase the shares
were primarily provided under a credit facility in the form of
a note payable.
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.
In addition to the litigation referred to above, Mortgage
Guaranty Insurance Corporation ("MGIC") is a defendant in a
lawsuit commenced by a borrower challenging the necessity of
maintaining mortgage insurance in certain circumstances,
primarily when the loan-to-value ratio is below 80%. The
lawsuit purports to be brought on behalf of a class of
borrowers. This case appears to be based to some degree upon
guidelines issued by the Federal Home Loan Mortgage
Corporation or the Federal National Mortgage Association to
their respective mortgage servicers under which the mortgage
servicers may be required in certain circumstances to cancel
borrower-purchased insurance upon the borrower's request. The
plaintiff alleges that MGIC has a common law duty to inform a
borrower that the insurance may be cancelled in these
circumstances. The relief sought is equitable relief as well
as the return of premiums paid after the insurance was
cancellable under the applicable guidelines. The Company
believes that MGIC has a meritorious defense to this action in
that, in the absence of a specific statute (no statutory duty
other than under a general consumer fraud statute is alleged),
there appears to be no legal authority requiring a mortgage
insurer to inform a borrower that insurance may be cancelled.
Summary judgment was granted to MGIC in another case involving
similar issues. Similar cases are pending against other
mortgage insurers, mortgage lenders and mortgage loan
servicers.
Note 4 - Shareholders' equity
On June 2, 1997 the Company effected a two-for-one stock
split of the Company's common stock in the form of a 100%
stock dividend. Per share and certain equity amounts set forth
in the accompanying financial statements have been adjusted
appropriately to take into account the stock split.
Note 5 - New accounting standards
In February 1997, the Financial Accounting Standards Board
issued Statement of Accounting Standards No. 128, Earnings Per
Share ("SFAS 128"), which will be effective for financial
statements issued after December 15, 1997. The current
primary/fully diluted earnings per share ("EPS") under APB
No. 15 will be replaced with a new basic/diluted EPS
calculation that is intended to provide greater consistency
and comparability. It is not anticipated that the effects of
SFAS 128 on EPS will be material.
In June 1997, the Financial Accounting Standards
Board issued Statement of Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS 130"), which is
effective for fiscal years beginning after December 15, 1997.
SFAS 130 establishes standards for the reporting and display
of comprehensive income and its components in financial
statements. SFAS 130 will not impact the Company's financial
position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Consolidated Operations
Three Months Ended September 30, 1997 Compared With Three Months
Ended September 30, 1996
Net income for the three months ended September 30, 1997
was $84.2 million, compared to $65.8 million for the same
period of 1996, an increase of 28%. After giving effect to
the Company's two-for-one stock split, net income per
share for the three months ended September 30, 1997 was $0.72
compared to $0.55 in the same period last year, an increase of
31%. 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, 1997 was $9.1 billion, compared to
$8.6 billion in the same period of 1996. Refinancing activity
accounted for 12% of new primary insurance written in the
third quarter of 1997, compared to 10% in the third quarter of
1996.
New insurance written for the third quarter of 1997
reflected an increase in the usage of the monthly premium
product to 92% of new insurance written from 90% of new
insurance written in the third quarter of 1996. New insurance
written for adjustable-rate mortgages ("ARMS") decreased to
26% of new insurance written in the third quarter of 1997 from
31% of new insurance written in the same period of 1996.
Also, mortgages with loan-to-value ("LTV") ratios in excess of
90% but not more than 95% ("95%") decreased to 42% of new
insurance written in the third quarter of 1997 from 44% of new
insurance written in the same period of 1996.
The $9.1 billion of new primary insurance written during
the third quarter of 1997 was partially offset by the
cancellation of $6.6 billion of insurance in force, and
resulted in a net increase of $2.5 billion in primary
insurance in force, compared to new primary insurance written
of $8.6 billion, the cancellation of $5.0 billion, and a net
increase of $3.6 billion during the third quarter of 1996.
Direct primary insurance in force was $136.7 billion at
September 30, 1997 compared to $128.6 billion at September 30,
1996. Cancellation activity could increase in the future as
the result of recently adopted and proposed legislation
regarding cancellation of mortgage insurance. (See Safe
Harbor Statement at the end of this document.)
During the first quarter of 1997, the Company began
writing pool insurance generally covering fixed-rate, 30-year
mortgage loans delivered to the Federal Home Loan Mortgage
Corporation and Federal National Mortgage Association ("agency
pool insurance"). The aggregate loss limit on agency pool
insurance generally does not exceed 1% of the aggregate
original principal balance of the mortgage loans in the pool.
New pool risk written during the three months ended September
30, 1997 was $120 million which was virtually all agency pool
insurance. A minimal amount of new pool risk written was
associated with loans insured under state housing finance
programs. The Company expects that it will write additional
agency pool risk but does not anticipate that new risk written
under this product will be material to its total risk in
force. In October 1997, the California Commissioner of
Insurance was asked by a California legislator to review the
legality of arrangements involving agency pool insurance.
Net premiums written were $184.0 million during the third
quarter of 1997, compared to $158.5 million during the third
quarter of 1996, an increase of $25.5 million or 16%. The
increase was primarily a result of the growth in insurance in
force.
Net premiums earned were $180.5 million for the third
quarter of 1997, compared to $156.8 million for the third
quarter of 1996, an increase of $23.7 million, or 15%,
primarily reflecting the growth of insurance in force.
Investment income for the third quarter of 1997 was $31.5
million, an increase of 17% over the $26.9 million in the
third quarter of 1996. This increase was primarily the result
of an increase in the amortized cost of average invested
assets to $2,146.7 million for the third quarter of 1997 from
$1,828.3 million for the third quarter of 1996, an increase of
17%. The portfolio's average pre-tax investment yield was 5.9%
for the third quarter of 1997 and 1996. The portfolio's
average after-tax investment yield was 5.0% for the third
quarter of 1997 and 1996.
Other revenue, primarily contracts with government
agencies for premium reconciliation and claim administration,
fee-based services for underwriting and equity earnings from C-
BASS, the Company's joint venture with Enhance Financial
Services Group, Inc., was $10.2 million in the third quarter
of 1997, compared to $5.4 million in the same period of 1996.
The increase is primarily the result of equity earnings from
C-BASS.
Net losses incurred increased slightly to $60.8 million
during the third quarter of 1997 from $60.2 million during the
third quarter of 1996. Such increase was primarily due to a
higher level of defaults which resulted from a higher
percentage of the Company's insurance in force reaching its
peak claim paying years and higher delinquency levels on
insurance written from 1994 through 1996. Net incurred losses
also increased due to an increase in severity as a result of
the continued high level of loss activity in certain high cost
geographic regions and an increase in claim amounts on
defaults with higher coverages. The increase was offset by a
redundancy in prior year loss reserves resulting from actual
claim rates and actual claim amounts being lower than those
estimated by the Company when originally establishing the
reserve at December 31, 1996. At September 30, 1997, 53% of
MGIC's insurance in force was written during the preceding
eleven quarters, compared to 58% at September 30, 1996. The
highest claim frequency years have typically been the third
through fifth year after the year of loan origination.
Underwriting and other expenses increased to $39.9
million in the third quarter of 1997 from $36.4 million in the
third quarter of 1996, an increase of 10%. This increase was
primarily due to an increase in expenses associated with the
fee-based services for underwriting and an increase in premium
tax due to higher premiums written.
Interest expense increased to $2.5 million in the third
quarter of 1997 from $1.0 million during the same period in
1996, an increase of 166%. Interest expense in the current
period is the result of debt incurred to fund the stock
repurchase program. Interest expense for the same period in
1996 was the result of mortgage debt. There was no interest
expense on mortgage debt during the quarter ended September
30, 1997 as a result of repayment in January 1997 of the
mortgages payable. See note 2 to the consolidated financial
statements.
The consolidated insurance operations loss ratio was 33.7%
for the third quarter of 1997 compared to 38.4% for the third
quarter of 1996. The consolidated insurance operations
expense and combined ratios were 17.2% and 50.9%,
respectively, for the third quarter of 1997 compared to 19.8%
and 58.2% for the third quarter of 1996.
The effective tax rate was 30.8% in the third quarter of
1997, compared to 29.3% in the third quarter of 1996. 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 1997
resulted from a lower percentage of total income before tax
being generated from tax-preferenced investments.
Nine Months Ended September 30, 1997 Compared With Nine Months
Ended September 30, 1996
Net income for the nine months ended September 30, 1997
was $237.2 million, compared to $186.9 million for the same
period of 1996, an increase of 27%. After giving effect to
the Company's two-for-one stock split, net income per share
for the nine months ended September 30, 1997 was $2.00
compared to $1.57 in the same period last year, an increase of
27%. See note 4 to the consolidated financial statements.
The amount of new primary insurance written by MGIC during
the nine months ended September 30, 1997 was $23.3 billion,
compared to $25.1 billion in the same period of 1996.
Refinancing activity accounted for 14% of new primary
insurance written in the first nine months of 1997, compared
to 19% in the first nine months of 1996.
New insurance written for the first nine months of 1997
reflected an increase in the usage of the monthly premium
product to 92% of new insurance written from 90% of new
insurance written in the first nine months of 1996. New
insurance written for ARMS increased to 27% of new insurance
written in the first nine months of 1997 from 24% of new
insurance written in the same period of 1996. Also, mortgages
with 95% LTVs increased to 42% of new insurance written in the
first nine months of 1997 compared to 41% for the same period
in 1996.
The $23.3 billion of new primary insurance written during
the first nine months of 1997 was partially offset by the
cancellation of $18.0 billion of insurance in force, and
resulted in a net increase of $5.3 billion in primary
insurance in force, compared to new primary insurance written
of $25.1 billion, the cancellation of $16.8 billion, and a net
increase of $8.3 billion during the first nine months of 1996.
Direct primary insurance in force was $136.7 billion at
September 30, 1997 compared to $128.6 billion at September 30,
1996. Cancellation activity could increase in the future as
the result of recently adopted and proposed legislation
regarding cancellation of mortgage insurance. (See Safe
Harbor Statement at the end of this document.)
During the first quarter of 1997, the Company began
writing pool insurance generally covering fixed-rate, 30-year
mortgage loans delivered to the Federal Home Loan Mortgage
Corporation and Federal National Mortgage Association ("agency
pool insurance"). The aggregate loss limit on agency pool
insurance generally does not exceed 1% of the aggregate
original principal balance of the mortgage loans in the pool.
New pool risk written during the nine months ended September
30, 1997 was $253 million which was virtually all agency pool
insurance. A minimal amount of new pool risk written was
associated with loans insured under state housing finance
programs. The Company expects that it will write additional
agency pool risk but does not anticipate that new risk written
under this product will be material to its total risk in
force. In October 1997, the California Commissioner of
Insurance was asked by a California legislator to review the
legality of arrangements involving agency pool insurance.
Net premiums written were $510.5 million during the first
nine months of 1997, compared to $423.6 million during the
first nine months of 1996, an increase of $86.9 million or
21%. The increase was primarily a result of the growth in
insurance in force.
Net premiums earned were $524.3 million for the first nine
months of 1997, compared to $452.1 million for the first nine
months of 1996, an increase of $72.2 million, or 16%,
primarily reflecting the growth of insurance in force.
Investment income for the first nine months of 1997 was
$91.4 million, an increase of 20% over the $76.4 million in
the first nine months of 1996. This increase was primarily
the result of an increase in the amortized cost of average
invested assets to $2,088.3 million for the first nine months
of 1997 from $1,749.0 million for the first nine months of
1996, an increase of 19%. The portfolio's average pre-tax
investment yield was 5.8% for the first nine months of 1997
and 1996. The portfolio's average after-tax investment yield
was 5.0% for the first nine months of 1997 compared to 5.1%
for the first nine months of 1996.
Other revenue, primarily contracts with government
agencies for premium reconciliation and claim administration,
fee-based services for underwriting and equity earnings from C-
BASS, the Company's joint venture with Enhance Financial
Services Group, Inc., was $21.9 million in the first nine
months of 1997, compared to $17.1 million in the same period
of 1996. The increase is primarily the result of equity
earnings from C-BASS.
Net losses incurred increased to $182.2 million during the
first nine months of 1997 from $174.0 million during the first
nine months of 1996, an increase of 5%. Such increase was
primarily due to a higher level of defaults which resulted
from a higher percentage of the Company's insurance in force
reaching its peak claim paying years and higher delinquency
levels on insurance written from 1994 through 1996. Net
incurred losses also increased due to an increase in severity
as a result of the continued high level of loss activity in
certain high cost geographic regions and an increase in claim
amounts on defaults with higher coverages. The increase was
partially offset by a redundancy in prior year loss reserves
resulting from actual claim rates and actual claim amounts
being lower than those estimated by the Company when
originally establishing the reserve at December 31, 1996. At
September 30, 1997, 53% of MGIC's insurance in force was
written during the preceding eleven quarters, compared to 58%
at September 30, 1996. The highest claim frequency years have
typically been the third through fifth year after the year of
loan origination.
Underwriting and other expenses increased 6% to $116.0
million in the first nine months of 1997 from $109.7 million
in the first nine months of 1996. This increase was primarily
due to an increase in expenses associated with the fee-based
services for underwriting and an increase in premium tax due
to higher premiums written.
Interest expense was $2.8 million during the nine months
ended September 30, 1997 and 1996. Interest expense in the
current period is primarily the result of debt incurred to
fund the stock repurchase program. Interest expense for the
same period in 1996 was the result of mortgage debt. See note
2 to the consolidated financial statements.
The consolidated insurance operations loss ratio was 34.8%
for the first nine months of 1997 compared to 38.5% for the
first nine months of 1996. The consolidated insurance
operations expense and combined ratios were 18.6% and 53.4%,
respectively, for the first nine months of 1997 compared to
22.4% and 60.9% for the first nine months of 1996.
The effective tax rate was 30.5% in the first nine months
of 1997, compared to 29.0% in the first nine months of 1996.
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 1997 resulted from a lower percentage of total income
before tax being generated from tax-preferenced investments.
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 for the nine months ended September 30, 1997, 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. In January 1997, the Company repaid mortgages
payable of $35.4 million, which were secured by the home
office and substantially all of the furniture and fixtures of
the Company, with internally generated funds.
Consolidated total investments were $2,305.8 million at
September 30, 1997, compared to $2,036.2 million at December
31, 1996, an increase of 13%. This increase is due primarily
to positive cash flow from operations offset by the $35.4
million repayment of the mortgages payable. The investment
portfolio includes unrealized gains on securities marked to
market at September 30, 1997 and December 31, 1996 of $103.2
million and $62.6 million, respectively. As of September 30,
1997, the Company had $121.2 million of short-term investments
with maturities of 90 days or less. In addition, at September
30, 1997, based on amortized cost, the Company's total
investments, which were primarily comprised of fixed
maturities, were approximately 98% invested in "A" rated and
above, readily marketable securities, concentrated in
maturities of less than 15 years.
Consolidated loss reserves increased 12% to $575.6
million at September 30, 1997 from $514.0 million at December
31, 1996, reflecting a higher level of defaults for the
reasons described above. 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 $16.3 million
from $219.3 million at December 31, 1996 to $203.0 million at
September 30, 1997, primarily reflecting the continued high
level of monthly premium policies written, for which there is
no unearned premium. Reinsurance recoverable on unearned
premiums decreased $2.5 million to $9.2 million at September
30, 1997 from $11.7 million at December 31, 1996, primarily
reflecting the reduction in unearned premiums.
Consolidated shareholders' equity increased to $1,408.9
million at September 30, 1997, from $1,366.1 million at
December 31, 1996, an increase of 3%. This increase consisted
of $237.2 million of net income during the first nine months
of 1997, an increase in net unrealized gains on investments of
$26.4 million, net of tax, and $12.4 million from the
reissuance of treasury stock offset by approximately $225.0
for the repurchase of 4,260,985 shares of the Company's
outstanding common stock and dividends declared of $8.2
million.
MGIC is the principal insurance subsidiary of the Company.
MGIC's risk-to-capital ratio was 16.2:1 at September 30, 1997
compared to 18.1:1 at December 31, 1996. The decrease was due
to MGIC's increased policyholders' reserves, partially offset
by the net additional risk in force of $1.8 billion, net of
reinsurance, during the first nine months of 1997.
The Company's combined insurance risk-to-capital ratio was
17.0:1 at September 30, 1997, compared to 18.8:1 at December
31, 1996. The decrease was due to the same reasons as
described above.
In July 1997, the Company repurchased 4,260,985
shares of its common stock from a financial intermediary at a
total cost of approximately $225.0 million. Funds to
repurchase the shares were primarily provided under a credit
facility in the form of a note payable.
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 risk:
- that cancellations may be higher than
projected and persistency may be lower than
projected due to refinancings, changes in the
Federal Home Loan Mortgage Corporation or Federal
National Mortgage Association cancellation policies
or legislation or other factors.
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,
1997.
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 13, 1997.
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
INDEX TO EXHIBITS
(Item 6)
Exhibit
Number Description of Exhibit
11.1 Statement Re Computation of Net Income
Per Share
27 Financial Data Schedule
EXHIBIT 11.1
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF NET INCOME PER SHARE (1)
Three and Nine Month Periods Ended September 30, 1997 and 1996
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
(In thousands of dollars, except per share data)
PRIMARY NET INCOME PER SHARE
Adjusted shares outstanding:
Average common shares
outstanding 114,935 117,866 117,109 117,750
Net shares to be issued upon
exercise of dilutive stock
options after applying
treasury stock method 1,451 1,128 1,333 1,179
-------- -------- -------- --------
Adjusted shares outstanding 116,386 118,994 118,442 118,929
======== ======== ======== ========
Net income $ 84,175 $ 65,785 $237,226 $186,895
======== ======== ======== ========
Primary net income per share $ 0.72 $ 0.55 $ 2.00 $ 1.57
======== ======== ======== ========
FULLY DILUTED NET INCOME PER SHARE
Adjusted shares outstanding:
Average common shares
outstanding 114,935 117,866 117,109 117,750
Net shares to be issued upon
exercise of dilutive stock
options after applying
treasury stock method 1,537 1,178 1,564 1,257
-------- -------- -------- --------
Adjusted shares outstanding 116,472 119,044 118,673 119,007
======== ======== ======== ========
Net income $ 84,175 $ 65,785 $237,226 $186,895
======== ======== ======== ========
Fully diluted net income
per share $ 0.72 $ 0.55 $ 2.00 $ 1.57
======== ======== ======== ========
(1) The current and prior year share and per share amounts have been
adjusted to reflect the Company's two-for-one stock split in the
form of a 100% stock dividend effective June 2, 1997.