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, 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 9/30/96 58,947,927 PAGE 1
MGIC INVESTMENT CORPORATION TABLE OF CONTENTS Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheet as of September 30, 1996 (Unaudited) and December 31, 1995 3 Consolidated Statement of Operations for the Three and Nine Month Periods Ended September 30, 1996 and 1995 (Unaudited) 4 Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 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 8-14 PART II. OTHER INFORMATION Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 INDEX TO EXHIBITS 17 PAGE 2
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MGIC INVESTMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET September 30, 1996 (Unaudited) and December 31, 1995 September 30, December 31, 1996 1995 ------------- ------------ ASSETS (In thousands of dollars) - ------ Investment portfolio: Securities, available-for-sale, at market value: Fixed maturities $1,813,866 $1,602,806 Equity securities 3,836 3,836 Short-term investments 117,033 80,579 ---------- ---------- Total investment portfolio 1,934,735 1,687,221 Cash 7,949 9,685 Accrued investment income 26,921 29,213 Reinsurance recoverable on loss reserves 29,482 33,856 Reinsurance recoverable on unearned premiums 11,635 15,485 Home office and equipment, net 35,655 38,782 Deferred insurance policy acquisition costs 33,456 37,956 Other assets 25,731 22,521 ---------- ---------- Total assets $2,105,564 $1,874,719 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Liabilities: Loss reserves $ 486,204 $ 371,032 Unearned premiums 220,721 251,163 Mortgages payable 35,516 35,799 Income taxes payable 16,174 33,686 Checks payable 11,697 9,771 Other liabilities 52,803 51,876 ---------- ---------- Total liabilities 823,115 753,327 ---------- ---------- Contingencies (note 2) Shareholders' equity: Common stock, $1 par value, shares authorized 150,000,000; shares issued 60,555,400; shares outstanding, 9/30/96 - 58,947,927; 1995 - 58,629,420 60,555 60,555 Paid-in surplus 268,415 259,430 Treasury stock (shares at cost, 9/30/96 - 1,607,473; 1995 - 1,925,980) (7,084) (8,172) Unrealized appreciation in investments, net of tax 25,896 54,737 Retained earnings 934,667 754,842 ---------- ---------- Total shareholders' equity 1,282,449 1,121,392 ---------- ---------- Total liabilities and shareholders' equity $2,105,564 $1,874,719 ========== ========== See accompanying notes to consolidated financial statements. PAGE 3
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS Three and Nine Month Periods Ended September 30, 1996 and 1995 (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------- 1996 1995 1996 1995 ------ ------ ------ ------ (In thousands of dollars, except per share data) Revenues: Premiums written: Direct $152,544 $130,896 $421,203 $352,074 Assumed 10,131 2,045 13,393 6,081 Ceded (4,143) (5,231) (10,952) (14,388) -------- -------- -------- -------- Net premiums written 158,532 127,710 423,644 343,767 (Increase) decrease in unearned premiums (1,753) 2,901 28,502 23,617 -------- -------- -------- -------- Net premiums earned 156,779 130,611 452,146 367,384 Investment income, net of expenses 26,926 22,339 76,378 63,839 Realized investment gains, net 566 86 979 43 Other revenue 5,405 6,308 17,081 16,840 -------- -------- -------- -------- Total revenues 189,676 159,344 546,584 448,106 -------- -------- -------- -------- Losses and expenses: Losses incurred, net 60,247 49,687 173,973 137,034 Underwriting and other expenses 36,401 33,892 109,731 103,314 Interest expense 952 962 2,843 2,861 Ceding commission (958) (1,111) (3,100) (3,584) -------- -------- -------- -------- Total losses and expenses 96,642 83,430 283,447 239,625 -------- -------- -------- -------- Income before tax 93,034 75,914 263,137 208,481 Provision for income tax 27,249 22,250 76,242 59,654 -------- -------- -------- -------- Net income $ 65,785 $ 53,664 $186,895 $148,827 ======== ======== ======== ======== Net income per share $ 1.11 $ 0.90 $ 3.14 $ 2.51 ======== ======== ======== ======== Weighted average common shares outstanding (shares in thousands) 59,497 59,343 59,464 59,249 ======== ======== ======== ======== Dividends per share $ 0.04 $ 0.04 $ 0.12 $ 0.12 ======== ======== ======== ======== See accompanying notes to consolidated financial statements. PAGE 4
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Nine Months Ended September 30, 1996 and 1995 (Unaudited) Nine Months Ended September 30, --------------------- 1996 1995 ------ ------ (In thousands of dollars) Cash flows from operating activities: Net income $186,895 $148,827 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred insurance policy acquisition costs 23,332 25,978 Increase in deferred insurance policy acquisition costs (18,832) (21,660) Depreciation and amortization 6,884 6,443 Decrease in accrued investment income 2,292 393 Decrease (increase) in reinsurance recoverable on loss reserves 4,374 (695) Decrease in reinsurance recoverable on unearned premiums 3,850 3,710 Increase in loss reserves 115,172 69,739 Decrease in unearned premiums (30,442) (27,328) Other (3,508) (2,636) -------- -------- Net cash provided by operating activities 290,017 202,771 -------- -------- Cash flows from investing activities: Purchase of fixed maturities: Available-for-sale securities (859,864) (348,216) Held-to-maturity securities - (26,987) Proceeds from sale or maturity of fixed maturities: Available-for-sale securities 601,845 90,214 Held-to-maturity securities - 19,653 -------- -------- Net cash used in investing activities (258,019) (265,336) -------- -------- Cash flows from financing activities: Dividends paid to shareholders (7,070) (7,023) Principal repayments on mortgages payable (283) (265) Reissuance of treasury stock 10,073 5,503 -------- -------- Net cash provided by (used in) financing activities 2,720 (1,785) -------- -------- Net increase (decrease) in cash and short-term investments 34,718 (64,350) Cash and short-term investments at beginning of year 90,264 167,289 -------- -------- Cash and short-term investments at end of period $124,982 $102,939 ======== ======== See accompanying notes to consolidated financial statements. PAGE 5
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 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 nine months ended September 30, 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. 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. PAGE 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Consolidated Operations Three Months Ended September 30, 1996 Compared With Three Months Ended September 30, 1995 Net income for the three months ended September 30, 1996 was $65.8 million, compared to $53.7 million for the same period of 1995, an increase of 23%. Net income per share for the three months ended September 30, 1996 was $1.11 compared to $0.90 in the same period last year, an increase of 23%. The amount of new primary insurance written by Mortgage Guaranty Insurance Corporation ("MGIC") during the three months ended September 30, 1996 was $8.6 billion, compared to $9.0 billion in the same period of 1995. Refinancing activity accounted for 10% of new primary insurance written in the third quarter of 1996, compared to 13% in the third quarter of 1995. New insurance written for the third quarter of 1996 reflected an increase in the usage of the monthly premium product to 90% of new insurance written from 86% of new insurance written in the third quarter of 1995. New insurance written for adjustable-rate mortgages ("ARMS") increased to 31% of new insurance written in the third quarter of 1996 from 25% of new insurance written in the same period of 1995. The $8.6 billion of new primary insurance written during the third quarter of 1996 was partially offset by the cancellation of $5.0 billion of insurance in force, and resulted in a net increase of $3.6 billion in primary insurance in force, compared to new primary insurance written of $9.0 billion, the cancellation of $4.4 billion, and a net increase of $4.6 billion during the third quarter of 1995. Direct primary insurance in force was $128.6 billion at September 30, 1996 compared to $116.7 billion at September 30, 1995. Net premiums written were $158.5 million during the third quarter of 1996, compared to $127.7 million during the third quarter of 1995, an increase of $30.8 million or 24%. The increase includes premiums received from the WMAC transaction (as described under Liquidity and Capital Resources) as well as the growth in insurance in force. Net premiums earned were $156.8 million for the third quarter of 1996, compared to $130.6 million for the third quarter of 1995, an increase of $26.2 million, or 20%, primarily reflecting the growth of insurance in force. PAGE 8
Investment income for the third quarter of 1996 was $26.9 million, an increase of 21% over the $22.3 million in the third quarter of 1995. This increase was primarily the result of an increase in the amortized cost of average invested assets to $1,828.3 million for the third quarter of 1996 from $1,485.0 million for the third quarter of 1995, an increase of 23%. The portfolio's average pre-tax investment yield was 5.9% for the third quarter of 1996 compared to 6.0% in the same period of 1995. The portfolio's average after-tax investment yield was 5.0% for the third quarter of 1996 compared to 5.2% for the third 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 third quarter of 1996, compared to $6.3 million in the same period of 1995. The decrease is primarily due to a decrease in fees from contracts with government agencies. Net losses incurred increased to $60.2 million during the third quarter of 1996 from $49.7 million during the third quarter of 1995, an increase of 21%. Such increase was primarily a result of higher reserve levels necessitated by increased notice of default activity on loans insured in 1994 and 1995, the continued growth and maturation of the insurance in force and higher coverages for business written during 1995 and 1996. 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, 1995. The Company expects that, in general, incurred losses will continue to rise as a result of increased delinquency activity primarily related to the higher risk profile of loans insured in 1994 and 1995, and 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 September 30, 1996, 58% of MGIC's insurance in force was written during the preceding eleven quarters, compared to 70% at September 30, 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 7% to $36.4 million in the third quarter of 1996 from $33.9 million in the third quarter of 1995. 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. The consolidated insurance operations loss ratio was 38.4% for the third quarter of 1996 compared to 38.0% for the third quarter of 1995. The consolidated insurance operations expense and combined ratios were 19.8% and 58.2%, respectively, for the third quarter of 1996 compared to 22.3% and 60.3% for the third quarter of 1995. PAGE 9
The effective tax rate was 29.3% in the third quarter of 1996 and 1995. During both periods, the effective tax rate was below the statutory rate of 35%, reflecting the benefits of tax-preferenced investment income. Nine Months Ended September 30, 1996 Compared With Nine Months Ended September 30, 1995 Net income for the nine months ended September 30, 1996 was $186.9 million, compared to $148.8 million for the same period of 1995, an increase of 26%. Net income per share for the nine months ended September 30, 1996 was $3.14 compared to $2.51 in the same period last year, an increase of 25%. The amount of new primary insurance written by MGIC during the nine months ended September 30, 1996 was $25.1 billion, compared to $22.1 billion in the same period of 1995. Refinancing activity accounted for 19% of new primary insurance written in the first nine months of 1996, compared to 9% in the first nine months of 1995. New insurance written for 1996 reflected an increase in the usage of the monthly premium product to 90% of new insurance written from 82% of new insurance written in the first nine months of 1995. New insurance written for ARMS decreased to 24% of new insurance written in the first three quarters of 1996 from 36% 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 41% of new insurance written in the first nine months of 1996 from 44% 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 and the Federal Home Loan Mortgage Corporation, new insurance written for mortgages with LTV ratios in excess of 80% but not more than 90% and coverage of 25% was 39% of new insurance written in the first nine months of 1996 compared to 31% in the same period of 1995. New insurance written for mortgages with LTV ratios of 95% and coverage of 30% was 38% of new insurance written in the first nine months of 1996 compared to 33% in the first nine months of 1995. The $25.1 billion of new primary insurance written during the first three quarters of 1996 was partially offset by the cancellation of $16.8 billion of insurance in force, and resulted in a net increase of $8.3 billion in primary insurance in force, compared to new primary insurance written of $22.1 billion, the cancellation of $9.8 billion, and a net increase of $12.3 billion during the first three quarters of 1995. Direct primary insurance in force was $128.6 billion at September 30, 1996 compared to $116.7 billion at September 30, 1995. Cancellation activity increased in the first nine months of 1996 from the first nine months 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 81.7% at September 30, 1996 from 87.1% at September 30, 1995. PAGE 10
Net premiums written were $423.6 million during the first nine months of 1996, compared to $343.8 million during the first nine months of 1995, an increase of $79.8 million or 23%. The increase includes premiums received from the WMAC transaction (as described under Liquidity and Capital Resources) as well as the growth in insurance in force. Net premiums earned were $452.1 million for the first nine months of 1996, compared to $367.4 million for the first nine months of 1995, an increase of $84.7 million, or 23%, primarily reflecting the growth of insurance in force. Investment income for 1996 was $76.4 million, an increase of 20% over the $63.8 million in the first nine months of 1995. This increase was primarily the result of an increase in the amortized cost of average invested assets to $1,749.0 million for the first nine months of 1996 from $1,428.0 million for the first nine months of 1995, an increase of 22%. The portfolio's average pre-tax investment yield was 5.8% for the first nine months of 1996 compared to 6.0% in the first nine months of 1995. The portfolio's average after-tax investment yield was 5.1% for 1996 compared to 5.2% for the first nine months of 1995. Other revenue, primarily contracts with government agencies for premium reconciliation and claim administration, and fee-based services for underwriting, was $17.1 million in the first nine months of 1996, compared to $16.8 million in the same period of 1995. Fees from underwriting services increased $2.4 million, offset by a decrease in fees from contracts with government agencies of $2.2 million. Ceding commission for 1996 was $3.1 million, compared to $3.6 million for the first nine months of 1995, a decrease of 14%. The decrease was primarily attributable to reductions in premiums ceded under quota share reinsurance agreements. Net losses incurred increased to $174.0 million during the first nine months of 1996 from $137.0 million during the first nine months of 1995, an increase of 27%. Such increase was primarily a result of higher reserve levels necessitated by increased notice of default activity on loans insured in 1994 and 1995, the continued growth and maturation of the insurance in force and higher coverages for business written during 1995 and 1996. 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, 1995. The Company expects that, in general, incurred losses will continue to rise as a result of increased delinquency activity primarily related to the higher risk profile on loans insured in 1994 and 1995, and 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 September 30, 1996, 58% of MGIC's insurance in force was written during the preceding eleven quarters, compared to 70% at September 30, 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.) PAGE 11
Underwriting and other expenses increased 6% to $109.7 million in the first nine months of 1996 from $103.3 million in the same period of 1995. 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. The consolidated insurance operations loss ratio was 38.5% for the first nine months of 1996 compared to 37.3% for the same period of 1995. The consolidated insurance operations expense and combined ratios were 22.4% and 60.9%, respectively, for the first nine months of 1996 compared to 26.0% and 63.3% for the first nine months of 1995. The effective tax rate was 29.0% in the first nine months of 1996, compared to 28.6% in the same period 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 being 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 nine months ended September 30, 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 mortgages payable of $35.4 million, which are secured by the home office and substantially all of the furniture and fixtures of the Company. In September 1996, MGIC signed an agreement with Wisconsin Mortgage Assurance Corporation ("WMAC") and a WMAC reinsurer to assume all of the reinsurer's interest in WMAC mortgage insurance writings, which had been previously ceded to that reinsurer ("WMAC transaction"). WMAC wrote mortgage insurance on first mortgages collateralized by one-to-four-family residences until February 28, 1985. Under the agreement, MGIC assumed reinsurance on approximately $4.2 billion of WMAC's insurance in force (representing approximately $1.1 billion of risk in force) committed to, or written, through February 28, 1985. As a result, the amount of WMAC's insurance in force ceded to MGIC increased to approximately $6.2 billion (representing approximately $1.6 billion of risk in force), with the portion of WMAC's insurance in force reinsured by MGIC increasing from approximately 21% to approximately 65%. MGIC received approximately $40 million as payment for its assumption of existing loss and unearned premium reserves related to the insurance in force being assumed from WMAC. PAGE 12
Consolidated total investments were $1,934.7 million at September 30, 1996, compared to $1,687.2 million at December 31, 1995, an increase of 15%. This increase is due primarily to positive cash flow from operations and approximately $40 million received in conjunction with the WMAC transaction offset by a decrease of $44.4 million in unrealized gains. The investment portfolio includes unrealized gains on securities marked to market at September 30, 1996 and December 31, 1995 of $39.8 million and $84.2 million, respectively. As of September 30, 1996, the Company had $117.0 million of short- term investments with maturities of 90 days or less. In addition, at September 30, 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 31% to $486.2 million at September 30, 1996 from $371.0 million at December 31, 1995, reflecting the higher level of defaults for the reasons described above and the increase in loss reserves assumed from the WMAC transaction. 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 $30.5 million from $251.2 million at December 31, 1995 to $220.7 million at September 30, 1996, primarily reflecting the continued high level of monthly premium policies written, for which there is no unearned premium. Reinsurance recoverable on unearned premiums decreased $3.9 million to $11.6 million at September 30, 1996 from $15.5 million at December 31, 1995, primarily reflecting the reduction in unearned premiums. Consolidated shareholder's equity increased to $1,282.4 million at September 30, 1996, from $1,121.4 million at December 31, 1995, an increase of 14%. This increase consisted of $186.9 million of net income during the first nine months of 1996 and $10.0 million from the reissuance of treasury stock, offset by a decrease in net unrealized gains on investments of $28.8 million, net of tax, and dividends declared of $7.1 million. MGIC is the principal insurance subsidiary of the Company. MGIC's risk-to-capital was 18.6:1 at September 30, 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 $3.5 billion resulting from the $11.2 billion addition to insurance in force, net of reinsurance, during the first nine months of 1996. Part of the increase in risk in force and insurance in force was due to the reinsurance assumed from the WMAC transaction described above. The Company's combined insurance risk-to-capital ratio was 19.3:1 at September 30, 1996, compared to 19.9:1 at December 31, 1995. The decrease was due to the same reasons as described above. PAGE 13
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. PAGE 14
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 September 30, 1996. PAGE 15
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 11, 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 PAGE 16
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 17