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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, 1996
[ ] 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 3/31/96 58,903,680
MGIC INVESTMENT CORPORATION
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of
March 31, 1996 (Unaudited) and December 31, 1995. 3
Consolidated Statement of Operations for the Three Months
Ended March 31, 1996 and 1995 (Unaudited). 4
Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1996 and 1995 (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
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 1996 (Unaudited) and December 31, 1995
March 31, December 31,
1996 1995
---------- ------------
ASSETS (In thousands of dollars)
- ------
Investment portfolio:
Securities, available-for-sale, at market value:
Fixed maturities $1,632,536 $1,602,806
Equity securities 3,836 3,836
Short-term investments 98,417 80,579
---------- ----------
Total investment portfolio 1,734,789 1,687,221
Cash 4,391 9,685
Accrued investment income 26,320 29,213
Reinsurance recoverable on loss reserves 33,049 33,856
Reinsurance recoverable on unearned premiums 13,411 15,485
Home office and equipment, net 37,433 38,782
Deferred insurance policy acquisition costs 36,456 37,956
Other assets 20,998 22,521
---------- ----------
Total assets $1,906,847 $1,874,719
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Loss reserves $ 401,141 $ 371,032
Unearned premiums 227,978 251,163
Long-term debt 35,704 35,799
Income taxes payable 31,608 33,686
Checks payable 12,337 9,771
Other liabilities 39,913 51,876
---------- ----------
Total liabilities 748,681 753,327
---------- ----------
Contingencies (note 2)
Shareholders' equity:
Common stock, $1 par value, shares authorized
150,000,000; shares issued 60,555,400;
shares outstanding, 3/31/96 - 58,903,680;
1995 - 58,629,420 60,555 60,555
Paid-in surplus 266,987 259,430
Treasury stock (shares at cost, 3/31/96 - 1,651,720;
1995 - 1,925,980) (7,009) (8,172)
Unrealized appreciation in investments, net of tax 26,685 54,737
Retained earnings 810,948 754,842
---------- ----------
Total shareholders' equity 1,158,166 1,121,392
---------- ----------
Total liabilities and shareholders' equity $1,906,847 $1,874,719
========== ==========
See accompanying notes to consolidated financial statements.
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended March 31, 1996 and 1995
(Unaudited)
Three Months Ended
March 31,
-------------------
1996 1995
-------- --------
(In thousands of dollars,
except per share data)
Revenues:
Premiums written:
Direct $125,011 $ 99,864
Assumed 1,661 1,903
Ceded (3,144) (3,853)
-------- --------
Net premiums written 123,528 97,914
Decrease in unearned premiums 21,112 16,501
-------- --------
Net premiums earned 144,640 114,415
Investment income, net of expenses 24,261 20,295
Realized investment gains (losses), net 339 (47)
Other revenue 5,397 5,500
-------- --------
Total revenues 174,637 140,163
-------- --------
Losses and expenses:
Losses incurred, net 56,837 43,338
Underwriting and other expenses 35,704 34,317
Interest expense on long-term debt 947 946
Ceding commission (841) (1,067)
-------- --------
Total losses and expenses 92,647 77,534
-------- --------
Income before tax 81,990 62,629
Provision for income tax 23,530 17,411
-------- --------
Net income $ 58,460 $ 45,218
======== ========
Net income per share $ 0.98 $ 0.76
======== ========
Weighted average common shares
outstanding (shares in thousands) 59,408 59,119
======== ========
Dividends per share $ 0.04 $ 0.04
======== ========
See accompanying notes to consolidated financial statements.
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31, 1996 and 1995
(Unaudited)
Three Months Ended
March 31,
----------------------
1996 1995
---------- ---------
(In thousands of dollars)
Cash flows from operating activities:
Net income $ 58,460 $ 45,218
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred insurance policy
acquisition costs 7,893 10,035
Increase in deferred insurance policy
acquisition costs (6,393) (8,537)
Depreciation and amortization 2,142 914
Decrease in accrued investment income 2,893 4,584
Decrease (increase) in reinsurance recoverable
on loss reserves 807 (236)
Decrease in reinsurance recoverable on unearned
premiums 2,074 2,265
Increase in loss reserves 30,109 22,804
Decrease in unearned premiums (23,185) (18,768)
Other 5,118 10,565
--------- ---------
Net cash provided by operating activities 79,918 68,844
--------- ---------
Cash flows from investing activities:
Purchase of fixed maturities:
Available-for-sale securities (104,609) (28,439)
Held-to-maturity securities - (22,929)
Proceeds from sale or maturity of fixed maturities:
Available-for-sale securities 30,964 10,078
Held-to-maturity securities - 8,687
-------- --------
Net cash used in investing activities (73,645) (32,603)
-------- --------
Cash flows from financing activities:
Dividends paid to shareholders (2,354) (2,337)
Principal repayments on long-term debt (95) (97)
Reissuance of treasury stock 8,720 1,240
-------- --------
Net cash provided by (used in) financing activities 6,271 (1,194)
-------- --------
Net increase in cash and short-term investments 12,544 35,047
Cash and short-term investments at beginning of year 90,264 167,289
-------- --------
Cash and short-term investments at end of period $102,808 $202,336
======== ========
See accompanying notes to consolidated financial statements.
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(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, 1995 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, 1996 may not be indicative of the results that may be expected for
the year ending December 31, 1996.
NOTE 2 - CONTINGENCIES
The Internal Revenue Service ("IRS") is presently examining the
Company's income tax returns for 1991 and 1992. The Company has received
proposed tax assessments relating to 1989 and 1990. Management does not
agree with all of the findings of the IRS and has appealed the proposed tax
assessments.
In examinations through 1988, the IRS had proposed to delay the
deduction for loss reserves on mortgage loans in default until the lender
takes title to the mortgaged property. In August 1992, this issue was
decided in favor of another private mortgage insurer by the Court of Appeals
for the federal circuit applicable to the Company. However, the IRS has
continued to pursue this position with other private mortgage insurers in
other circuits.
Management believes that adequate provision has been made in the
financial statements for any amounts which may become due with respect to the
open years.
The Company is also 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.
In addition to the litigation referred to above, Mortgage Guaranty
Insurance Corporation ("MGIC") is a defendant in two lawsuits commenced by
borrowers challenging the necessity of maintaining mortgage insurance in
certain circumstances, primarily when the loan-to-value ratio is below 80%.
Most of the claims purport to be brought on behalf of classes of borrowers.
Although the facts and legal theories asserted differ in these cases, both of
them appear 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 if a specified loan-to-value ratio is achieved.
The plaintiffs allege that MGIC has a common law duty to inform a borrower
that the insurance may be cancelled in these circumstances. The relief
sought in these cases is equitable relief as well as the return of premiums
paid after the specified loan-to-value ratio was achieved. The Company
believes that MGIC has a meritorious defense to these actions in that, in the
absence of a specific statute (no statutory duty other than under a general
consumer fraud statute is alleged in these cases), there appears to be no
legal authority requiring a mortgage insurer to inform a borrower that
insurance may be cancelled. Similar cases are pending against other mortgage
insurers, mortgage lenders and mortgage loan servicers.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF CONSOLIDATED OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1995
Net income for the three months ended March 31, 1996 was $58.5 million,
compared to $45.2 million for the same period of 1995, an increase of 29%.
Net income per share for the three months ended March 31, 1996 was $0.98
compared to $0.76 in the same period last year, an increase of 29%.
The amount of new primary insurance written by Mortgage Guaranty
Insurance Corporation ("MGIC") during the three months ended March 31, 1996
was $7.5 billion, compared to $6.1 billion in the same period of 1995.
Refinancing activity accounted for 29.0% of new primary insurance written in
the first quarter of 1996, compared to 7.2% in the first quarter of 1995.
New insurance written for 1996 reflected an increase in the usage of
the monthly premium product to 88.4% of new insurance written from 76.5% of
new insurance written in the first quarter of 1995. New insurance written for
adjustable-rate mortgages ("ARMS") decreased to 17.2% of new insurance
written in the first quarter of 1996 from 53.2% of new insurance written in
the same period of 1995. Also, mortgages with loan-to-value ("LTV") ratios
in excess of 90% but not more than 95% ("95%") decreased to 36.6% of new
insurance written in 1996 from 42.5% of new insurance written in the same
period of 1995.
Principally as a result of changes in the coverage requirements by the
Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"), new insurance written for mortgages with LTV
ratios in excess of 80% but not more than 90% and coverage of 25% was 41.0%
of new insurance written in the first quarter of 1996 compared to 19.6% in
the first quarter of 1995. New insurance written for mortgages with LTV
ratios of 95% and coverage of 30% was 34.1% of new insurance written in the
first quarter of 1996 compared to 17.8% in the first quarter of 1995.
The $7.5 billion of new primary insurance written during the first
quarter of 1996 was partially offset by the cancellation of $5.6 billion of
insurance in force, and resulted in a net increase of $1.9 billion in primary
insurance in force, compared to new primary insurance written of $6.1
billion, the cancellation of $2.5 billion, and a net increase of $3.6 billion
during the first quarter of 1995. Direct primary insurance in force was
$122.2 billion at March 31, 1996 compared to $108.0 billion at March 31,
1995.
Cancellation activity increased in the first quarter of 1996 from the
first quarter of 1995 due to the increased refinancing activity which
resulted in a decrease in the MGIC persistency rate (percentage of insurance
remaining in force from one year prior) to 83.8% at March 31, 1996 from 85.4%
at March 31, 1995.
Net premiums written were $123.5 million during the first quarter of
1996, compared to $97.9 million during the first quarter of 1995, an increase
of $25.6 million or 26%. The increase was primarily a result of the growth
in insurance in force.
Net premiums earned were $144.6 million for the first quarter of 1996,
compared to $114.4 million for the first quarter of 1995, an increase of
$30.2 million, or 26%, primarily reflecting the growth of insurance in force.
Investment income for 1996 was $24.3 million, an increase of 20% over
the $20.3 million in the first quarter of 1995. This increase was primarily
the result of an increase in the amortized cost of average invested assets to
$1,648.4 million for the first quarter of 1996 from $1,362.4 million for the
first quarter of 1995, an increase of 21%. The portfolio's average pre-tax
investment yield was 5.9% for the first quarter of 1996 compared to 6.0% in
the first quarter of 1995. The portfolio's average after-tax investment
yield was 5.1% for 1996 compared to 5.3% for the first quarter of 1995.
Other revenue, primarily contracts with government agencies for premium
reconciliation and claim administration, and fee-based services for
underwriting, was $5.4 million in the first quarter of 1996, compared to $5.5
million in the first quarter of 1995. Fees from contracts with government
agencies decreased $1.0 million, offset by an increase in underwriting
services of $0.8 million.
Ceding commission for 1996 was $0.8 million, compared to $1.1 million
for the first quarter of 1995, a decrease of 27%. The decrease was primarily
attributable to reductions in premiums ceded under quota share reinsurance
agreements.
Net losses incurred increased to $56.8 million during the first
quarter of 1996 from $43.3 million during the first quarter of 1995, an
increase of 31%. Such increase was primarily a result of higher reserve
levels necessitated by increased notice of default activity on loans insured
in late 1994 and the first half of 1995 which had a higher risk profile than
the insurance in force as a whole, the continued growth and maturation of the
insurance in force and higher coverages for business written during 1995. The
Company expects that, in general, incurred losses will continue to rise as a
result of increased delinquency activity primarily related to the continued
growth and maturing of its insurance in force as well as anticipated higher
severity resulting from higher coverages for business written beginning in
1995. At March 31, 1996, 51% of MGIC's insurance in force was written during
the preceding nine quarters, compared to 65% at March 31, 1995. 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 4% to $35.7 million in the
first quarter of 1996 from $34.3 million in the first quarter of 1995. This
increase was primarily due to an increase in expenses associated with the
mortgage services operations and an increase in premium tax.
The consolidated insurance operations loss ratio was 39.3% for the
first quarter of 1996 compared to 37.9% for the first quarter of 1995. The
consolidated insurance operations expense and combined ratios were 25.5% and
64.8%, respectively, for the first quarter of 1996 compared to 31.1% and
69.0% for the first quarter of 1995.
The effective tax rate was 28.7% in the first quarter of 1996, compared
to 27.8% in the first quarter of 1995. 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 1996 resulted
from a lower percentage of total income before tax generated from tax-
preferenced investments in 1996.
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, 1996, 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 is obligated to repay long-term debt of $35.4 million,
which is secured by the home office and substantially all of the furniture
and fixtures of the Company.
Consolidated total investments were $1,734.8 million at March 31, 1996,
compared to $1,687.2 million at December 31, 1995, an increase of 3%.
Included in the change in investments was a decrease of $43.1 million in
unrealized gains. The investment portfolio includes unrealized gains on
securities marked to market at March 31, 1996 and December 31, 1995 of $41.1
million and $84.2 million, respectively. As of March 31, 1996, the Company
had $98.4 million of short-term investments with maturities of 90 days or
less. In addition, at March 31, 1996, based on amortized cost, the Company's
total investments, which were virtually all 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 8% to $401.1 million at March 31,
1996 from $371.0 million at December 31, 1995, reflecting the higher level of
defaults for the reasons described above. Reinsurance recoverable on loss
reserves decreased to $33.0 million at March 31, 1996 from $33.9 million at
December 31, 1995. 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 $23.2 million from $251.2
million at December 31, 1995 to $228.0 million at March 31, 1996, reflecting
the continued high level of monthly premium policies written, for which there
is no unearned premium. Reinsurance recoverable on unearned premiums
decreased $2.1 million to $13.4 million at March 31, 1996 from $15.5 million
at December 31, 1995, primarily reflecting the reduction in unearned
premiums.
Consolidated shareholder's equity increased to $1,158.2 million at
March 31, 1996, from $1,121.4 million at December 31, 1995, an increase of
3%. This increase consisted of $58.5 million of net income during the first
three months of 1996 and $8.7 million from the reissuance of treasury stock,
offset by a decrease in net unrealized gains on investments of $28.0 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 was 18.7:1 at March 31, 1996 compared to 19.1:1 at December
31, 1995. The decrease was due to MGIC's increased policyholders' reserves,
partially offset by the additional risk in force of $0.6 billion resulting
from the $1.7 billion addition to insurance in force, net of reinsurance,
during the first three months of 1996.
The Company's combined insurance risk-to-capital ratio was 19.3:1 at
March 31, 1996, compared to 19.9:1 at December 31, 1995. 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 as follows to all statements
relating to incurred losses, delinquency activity and claims frequency in
this Form 10-Q that are not historical facts:
Such statements that are not historical facts are forward looking
statements. Actual future incurred losses, increased delinquency
activity and claims frequency may differ materially from those
expected or projected in the forward looking statements. These
forward looking statements involve risks and uncertainties that
the incidence and severity of losses, delinquencies and claims
may increase beyond expectations or projections for various
reasons, including but not limited to, the following: a
reduction in the growth of borrower income, a reduced level of
borrower creditworthiness, and increased unemployment; higher
interest rates and adverse economic conditions; and a reduced
level of housing price appreciation and a reduced ability of
homeowners to sell homes to satisfy their mortgage obligations.
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 2 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,
1996.
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 9, 1996.
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
Three Months Ended March 31, 1996 and 1995
Three Months Ended
March 31,
------------------
1996 1995
------- ------
(In thousands of dollars,
except per share data)
PRIMARY NET INCOME PER SHARE
Adjusted shares outstanding:
Average common shares outstanding 58,788 58,424
Net shares to be issued upon exercise of
dilutive stock options after applying
treasury stock method 620 695
Adjusted shares outstanding 59,408 59,119
------- -------
Net income $58,460 $45,218
======= =======
Primary net income per share $ 0.98 $ 0.76
======= =======
FULLY DILUTED NET INCOME PER SHARE
Adjusted shares outstanding:
Average common shares outstanding 58,788 58,424
Net shares to be issued upon exercise of
dilutive stock options after applying
treasury stock method 620 741
------- -------
Adjusted shares outstanding 59,408 59,165
======= =======
Net income $58,460 $45,218
======= =======
Fully diluted net income per share $ 0.98 $ 0.76
======= =======