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