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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 MARCH 31, 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 3/31/97 59,149,086
PAGE 1
MGIC INVESTMENT CORPORATION
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of
March 31, 1997 (Unaudited) and December 31, 1996 3
Consolidated Statement of Operations for the Three
Months Ended March 31, 1997 and 1996 (Unaudited) 4
Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 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 8-11
PART II. OTHER INFORMATION
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
INDEX TO EXHIBITS 14
PAGE 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 1997 (Unaudited) and December 31, 1996
March 31, December 31,
1997 1996
--------- ------------
ASSETS (In thousands of dollars)
- ------
Investment portfolio:
Securities, available-for-sale, at market value:
Fixed maturities $1,912,393 $1,892,081
Equity securities 4,039 4,039
Short-term investments 157,917 140,114
---------- ----------
Total investment portfolio 2,074,349 2,036,234
Cash 6,590 3,861
Accrued investment income 28,573 33,363
Reinsurance recoverable on loss reserves 28,799 29,827
Reinsurance recoverable on unearned premiums 10,140 11,745
Home office and equipment, net 34,302 35,050
Deferred insurance policy acquisition costs 30,756 31,956
Other assets 43,264 40,279
---------- ----------
Total assets $2,256,773 $2,222,315
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Loss reserves $ 536,974 $ 514,042
Unearned premiums 203,016 219,307
Mortgages payable (note 2) - 35,424
Income taxes payable 20,949 23,111
Other liabilities 73,408 64,316
---------- ----------
Total liabilities 834,347 856,200
---------- ----------
Contingencies (note 3)
Shareholders' equity:
Common stock, $1 par value, shares authorized
150,000,000; shares issued 60,555,400;
shares outstanding, 3/31/97 - 59,149,086;
1996 - 58,950,434 60,555 60,555
Paid-in surplus 276,793 268,540
Treasury stock (shares at cost, 3/31/97 - 1,406,314;
1996 - 1,604,966) (6,236) (7,073)
Unrealized appreciation in investments, net of tax 17,834 40,685
Retained earnings 1,073,480 1,003,408
---------- ----------
Total shareholders' equity 1,422,426 1,366,115
---------- ----------
Total liabilities and shareholders' equity $2,256,773 $2,222,315
========== ==========
See accompanying notes to consolidated financial statements.
PAGE 3
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended March 31, 1997 and 1996
(Unaudited)
Three Months Ended
March 31,
------------------
1997 1996
------ ------
(In thousands of dollars,
except per share data)
Revenues:
Premiums written:
Direct $155,289 $125,011
Assumed 2,794 1,661
Ceded (2,477) (3,144)
-------- --------
Net premiums written 155,606 123,528
Decrease in unearned premiums 14,686 21,112
--------- --------
Net premiums earned 170,292 144,640
Investment income, net of expenses 29,508 24,261
Realized investment gains, net 89 339
Other revenue 5,202 5,397
-------- --------
Total revenues 205,091 174,637
-------- --------
Losses and expenses:
Losses incurred, net 63,194 56,837
Underwriting and other expenses 38,213 35,704
Interest expense (note 2) 319 947
Ceding commission (542) (841)
-------- --------
Total losses and expenses 101,184 92,647
-------- --------
Income before tax 103,907 81,990
Provision for income tax 31,471 23,530
-------- --------
Net income $ 72,436 $ 58,460
======== ========
Net income per share $ 1.21 $ 0.98
======== ========
Weighted average common shares
outstanding (shares in thousands) 59,661 59,408
======== ========
Dividends per share $ 0.04 $ 0.04
======== ========
Pro forma earnings per share (unaudited; see note 4) $ 0.61 $ 0.49
======== ========
See accompanying notes to consolidated financial statements.
PAGE 4
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31, 1997 and 1996
(Unaudited)
Three Months Ended
March 31,
------------------
1997 1996
------ ------
(In thousands of dollars)
Cash flows from operating activities:
Net income $ 72,436 $ 58,460
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred insurance policy
acquisition costs 7,317 7,893
Increase in deferred insurance policy
acquisition costs (6,117) (6,393)
Depreciation and amortization 2,017 2,142
Decrease in accrued investment income 4,790 2,893
Decrease in reinsurance recoverable
on loss reserves 1,028 807
Decrease in reinsurance recoverable on
unearned premiums 1,605 2,074
Increase in loss reserves 22,932 30,109
Decrease in unearned premiums (16,291) (23,185)
Other 15,726 5,118
-------- --------
Net cash provided by operating activities 105,443 79,918
-------- --------
Cash flows from investing activities:
Purchase of fixed maturities:
Available-for-sale securities (165,998) (104,609)
Proceeds from sale or maturity of fixed maturities:
Available-for-sale securities 109,782 30,964
-------- --------
Net cash used in investing activities (56,216) (73,645)
-------- --------
Cash flows from financing activities:
Dividends paid to shareholders (2,361) (2,354)
Principal repayments on mortgages payable (35,424) (95)
Reissuance of treasury stock 9,090 8,720
-------- --------
Net cash (used in) provided by financing activities (28,695) 6,271
-------- --------
Net increase in cash and short-term investments 20,532 12,544
Cash and short-term investments at beginning of year 143,975 90,264
-------- --------
Cash and short-term investments at end of period $164,507 $102,808
======== ========
See accompanying notes to consolidated financial statements.
PAGE 5
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 three months
ended March 31, 1997 may not be indicative of the results that
may be expected for the year ending December 31, 1997.
Note 2 - Mortgages 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. As a result, interest expense on the mortgages
decreased to $.3 million during the three months ended March
31, 1997 from $.9 million for the same period in 1996.
Note 3 - Contingencies
The Company is involved in litigation in the normal 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.
PAGE 6
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 - Subsequent events
On May 1, 1997 the Company's Board of Directors declared a
two-for-one stock split of the Company's common stock in the
form of a 100% stock dividend. The additional shares of
common stock will be issued on June 2, 1997 to shareholders
of record on May 19, 1997. In addition, the Company's Board
of Directors also declared a cash dividend on the outstanding
shares of common stock of $0.05 per share, before giving
effect to the two-for-one stock split, which represents a 25%
increase from the previous rate of $0.04. The cash dividend is
payable June 2, 1997, to shareholders of record at the close
of business on May 19, 1997.
Unaudited pro forma shareholders' equity information at
March 31, 1997, giving effect to the stock split, is as
follows:
Shares of common stock issued 121,110,800
Shares of common stock outstanding 118,298,172
Common stock, $1 par value $121.1 million
Paid-in surplus $216.2 million
Unaudited pro forma earnings per share, giving effect to
the stock split, is presented on the Consolidated Statement of
Operations.
PAGE 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Consolidated Operations
Three Months Ended March 31, 1997 Compared With Three Months
Ended March 31, 1996
Net income for the three months ended March 31, 1997 was
$72.4 million, compared to $58.5 million for the same period
of 1996, an increase of 24%. Net income per share for the
three months ended March 31, 1997 was $1.21 compared to $0.98
in the same period last year, an increase of 24%.
The amount of new primary insurance written by Mortgage
Guaranty Insurance Corporation ("MGIC") during the three
months ended March 31, 1997 was $6.5 billion, compared to $7.5
billion in the same period of 1996. Refinancing activity
accounted for 17% of new primary insurance written in the
first quarter of 1997, compared to 29% in the first quarter of
1996.
New insurance written for the first quarter of 1997
reflected an increase in the usage of the monthly premium
product to 92% of new insurance written from 88% of new
insurance written in the first quarter of 1996. New insurance
written for adjustable-rate mortgages ("ARMS") increased to
26% of new insurance written in the first quarter of 1997 from
17% of new insurance written in the same period of 1996.
The $6.5 billion of new primary insurance written during
the first quarter of 1997 was partially offset by the
cancellation of $5.1 billion of insurance in force, and
resulted in a net increase of $1.4 billion in primary
insurance in force, compared to new primary insurance written
of $7.5 billion, the cancellation of $5.6 billion, and a net
increase of $1.9 billion during the first quarter of 1996.
Direct primary insurance in force was $132.8 billion at
March 31, 1997 compared to $122.2 billion at March 31, 1996.
Cancellation activity could increase in 1997 if proposed
legislation regarding cancellation of mortgage insurance is
enacted. (See Safe Harbor Statement at the end of this
document.)
During the first quarter of 1997, the Company began
writing new 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 insurance written during the three months ended March
31, 1997 was $3.0 billion which was virtually all agency pool
insurance. A minimal amount of new pool insurance written was
associated with loans insured under state housing finance
programs. The new risk written related to the agency pool
insurance was approximately $30 million. The Company expects
the use of the agency pool product to increase in 1997 but
does not anticipate that new risk written under this product
will be material to its total risk in force.
PAGE 8
Net premiums written were $155.6 million during the first
quarter of 1997, compared to $123.5 million during the first
quarter of 1996, an increase of $32.1 million or 26%. The
increase was primarily a result of the growth in insurance in
force.
Net premiums earned were $170.3 million for the first
quarter of 1997, compared to $144.6 million for the first
quarter of 1996, an increase of $25.7 million, or 18%,
primarily reflecting the growth of insurance in force.
Investment income for the first quarter of 1997 was $29.5
million, an increase of 22% over the $24.3 million in the
first quarter of 1996. This increase was primarily the result
of an increase in the amortized cost of average invested
assets to $2,010.3 million for the first quarter of 1997 from
$1,648.4 million for the first quarter of 1996, an increase of
22%. The portfolio's average pre-tax investment yield was 5.9%
for the first quarter of 1997 and 1996. The portfolio's
average after-tax investment yield was 5.0% for the first
quarter of 1997 compared to 5.1% for the first quarter of
1996.
Other revenue, primarily contracts with government
agencies for premium reconciliation and claim administration
and fee-based services for underwriting, was $5.2 million in
the first quarter of 1997, slightly below the $5.4 million in
the same period of 1996.
Net losses incurred increased to $63.2 million during the
first quarter of 1997 from $56.8 million during the first
quarter of 1996, an increase of 11%. Such increase was
primarily due to an increase in the notice inventory, 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 Company expects that, in general, incurred losses will
continue to rise as a result of the factors mentioned above.
At March 31, 1997, 63% of MGIC's insurance in force was
written during the preceding thirteen quarters, compared to 74%
at March 31, 1996. The highest claim frequency years have
typically been the third through fifth year after the year
of loan origination. However, the pattern of claims frequency
for refinance loans may be different from the historical
pattern of other loans. A substantial portion of the
insurance written in 1992 and 1993 represented insurance
on the refinance of mortgage loans originated in earlier
years. (See Safe Harbor Statement at the end of this document.)
Underwriting and other expenses increased 7% to $38.2
million in the first quarter of 1997 from $35.7 million in the
first quarter 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 on the mortgages decreased to $.3 million
during the quarter ended March 31, 1997 from $.9 million for
the same period in 1996. The decrease is a result of the
repayment of the mortgages payable in January 1997.
PAGE 9
The consolidated insurance operations loss ratio was 37.1%
for the first quarter of 1997 compared to 39.3% for the first
quarter of 1996. The consolidated insurance operations
expense and combined ratios were 21.1% and 58.2%,
respectively, for the first quarter of 1997 compared to 25.5%
and 64.8% for the first quarter of 1996.
The effective tax rate was 30.3% in the first quarter of
1997, compared to 28.7% in the first 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.
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 three months ended March 31, 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 $2,074.3 million at
March 31, 1997, compared to $2,036.2 million at December 31,
1996, an increase of 2%. This increase is due primarily to
positive cash flow from operations offset by the $35.4 million
repayment of the mortgages payable and by a $35.2 million
decrease in unrealized gains. The investment portfolio
includes unrealized gains on securities marked to market at
March 31, 1997 and December 31, 1996 of $27.4 million and
$62.6 million, respectively. As of March 31, 1997, the
Company had $157.9 million of short-term investments with
maturities of 90 days or less. In addition, at March 31,
1997, based on amortized cost, the Company's total
investments, which were virtually all comprised of fixed
maturities, were approximately 99% invested in "A" rated and
above, readily marketable securities, concentrated in
maturities of less than 15 years.
Consolidated loss reserves increased 4% to $537.0 million
at March 31, 1997 from $514.0 million at December 31, 1996,
reflecting the 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.
PAGE 10
Consolidated unearned premiums decreased $16.3 million
from $219.3 million at December 31, 1996 to $203.0 million at
March 31, 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 $1.6 million to $10.1 million at March
31, 1997 from $11.7 million at December 31, 1996, primarily
reflecting the reduction in unearned premiums.
Consolidated shareholder's equity increased to $1,422.4
million at March 31, 1997, from $1,366.1 million at December
31, 1996, an increase of 4%. This increase consisted of $72.4
million of net income during the first three months of 1997
and $9.1 million from the reissuance of treasury stock, offset
by a decrease in net unrealized gains on investments of $22.8
million, net of tax, and dividends declared of $2.4 million.
MGIC is the principal insurance subsidiary of the Company.
MGIC's risk-to-capital ratio was 17.5:1 at March 31, 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 $.5 billion, net of
reinsurance, during the first three months of 1997.
The Company's combined insurance risk-to-capital ratio was
18.2:1 at March 31, 1997, compared to 18.8:1 at December 31,
1996. The decrease was due to the same reasons as described
above.
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
comtemplated by the forward looking statements.
These forward looking statements involve risks
and uncertainties, including but not limited to,
the following risks:
- 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; and
- that delinquencies, incurred losses or paid losses
may increase faster than projected as a result of
adverse changes in regional or national economies,
a reduction in the growth of borrower income, a
reduced level of borrower creditworthiness, and a
reduced level of housing appreciation.
PAGE 11
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
For a discussion of certain litigation brought by
borrowers challenging the necessity of maintaining
mortgage insurance in certain circumstances, see the
last paragraph of Note 3 to the Consolidated Financial
Statements (Unaudited) of the Company contained in Part
I above.
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 March 31, 1997.
PAGE 12
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
May 8, 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
PAGE 13
INDEX TO EXHIBITS
(Item 6)
Exhibit
Number Description of Exhibit
- ------- ----------------------
11.1 Statement Re Computation of Net Income
Per Share
27 Financial Data Schedule
PAGE 14
EXHIBIT 11.1
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF NET INCOME PER SHARE
Three Months Ended March 31, 1997 and 1996
Three Months Ended
March 31,
------------------
1997 1996
------ ------
(In thousands of dollars,
except per share data)
PRIMARY NET INCOME PER SHARE
Adjusted shares outstanding:
Average common shares outstanding 59,054 58,788
Net shares to be issued upon exercise of
dilutive stock options after applying
treasury stock method 607 620
------- -------
Adjusted shares outstanding 59,661 59,408
======= =======
Net income $72,436 $58,460
======= =======
Primary net income per share $ 1.21 $ 0.98
======= =======
FULLY DILUTED NET INCOME PER SHARE
Adjusted shares outstanding:
Average common shares outstanding 59,054 58,788
Net shares to be issued upon exercise of
dilutive stock options after applying
treasury stock method 607 620
------- -------
Adjusted shares outstanding 59,661 59,408
======= =======
Net income $72,436 $58,460
======= =======
Fully diluted net income per share $ 1.21 $ 0.98
======= =======