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 JUNE 30, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission file number 1-10816 MGIC INVESTMENT CORPORATION (Exact name of registrant as specified in its charter) WISCONSIN 39-1486475 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 250 E. KILBOURN AVENUE 53202 MILWAUKEE, WISCONSIN (Zip Code) (Address of principal executive offices) (414) 347-6480 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --------- --------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OF STOCK PAR VALUE DATE NUMBER OF SHARES - -------------- --------- ---- ---------------- Common stock $1.00 7/18/97 114,122,499 PAGE 1
MGIC INVESTMENT CORPORATION TABLE OF CONTENTS Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheet as of June 30, 1997 (Unaudited) and December 31, 1996 3 Consolidated Statement of Operations for the Three and Six Month Periods Ended June 30, 1997 and 1996 (Unaudited) 4 Consolidated Statement of Cash Flows for the Six Months Ended June 30, 1997 and 1996 (Unaudited) 5 Notes to Consolidated Financial Statements (Unaudited) 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-15 PART II. OTHER INFORMATION Item 2. Changes in Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16-17 Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18 INDEX TO EXHIBITS 19 PAGE 2
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MGIC INVESTMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET June 30, 1997 (Unaudited) and December 31, 1996 June 30, December 31, 1997 1996 -------- ------------ ASSETS (In thousands of dollars) - ------ Investment portfolio: Securities, available-for-sale, at market value: Fixed maturities $2,019,757 $1,892,081 Equity securities 45,618 4,039 Short-term investments 90,848 140,114 ---------- ---------- Total investment portfolio 2,156,223 2,036,234 Cash 7,061 3,861 Accrued investment income 34,128 33,363 Reinsurance recoverable on loss reserves 26,266 29,827 Reinsurance recoverable on unearned premiums 9,417 11,745 Home office and equipment, net 34,408 35,050 Deferred insurance policy acquisition costs 29,556 31,956 Other assets 52,266 40,279 ---------- ---------- Total assets $2,349,325 $2,222,315 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Loss reserves $ 553,400 $ 514,042 Unearned premiums 199,729 219,307 Mortgages payable (note 2) - 35,424 Income taxes payable 9,022 23,111 Other liabilities 60,175 64,316 ---------- ---------- Total liabilities 822,326 856,200 ---------- ---------- Contingencies (note 3) Shareholders' equity (note 4): Common stock, $1 par value, shares authorized 150,000,000; shares issued 121,110,800; shares outstanding, 6/30/97 - 118,381,084; 1996 - 117,900,868 121,111 121,111 Paid-in surplus 217,894 207,984 Treasury stock (shares at cost, 6/30/97 - 2,729,716; 1996 - 3,209,932) (6,052) (7,073) Unrealized appreciation in investments, net of tax 42,907 40,685 Retained earnings 1,151,139 1,003,408 ---------- ---------- Total shareholders' equity 1,526,999 1,366,115 ---------- ---------- Total liabilities and shareholders' equity $2,349,325 $2,222,315 ========== ========== See accompanying notes to consolidated financial statements. PAGE 3
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS Three and Six Month Periods Ended June 30, 1997 and 1996 (Unaudited) Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- 1997 1996 1997 1996 ------ ------ ------ ------ (In thousands of dollars, except per share data) Revenues: Premiums written: Direct $171,110 $143,648 $326,399 $268,659 Assumed 3,065 1,601 5,859 3,262 Ceded (3,259) (3,665) (5,736) (6,809) -------- -------- -------- -------- Net premiums written 170,916 141,584 326,522 265,112 Decrease in unearned premiums 2,563 9,143 17,249 30,255 -------- -------- -------- -------- Net premiums earned 173,479 150,727 343,771 295,367 Investment income, net of expenses 30,372 25,191 59,880 49,452 Realized investment gains, net 507 74 596 413 Other revenue 6,507 6,279 11,709 11,676 -------- -------- -------- -------- Total revenues 210,865 182,271 415,956 356,908 -------- -------- -------- -------- Losses and expenses: Losses incurred, net 58,251 56,889 121,445 113,726 Underwriting and other expenses 37,920 37,626 76,133 73,330 Interest expense (note 2) - 944 319 1,891 Ceding commission (966) (1,301) (1,508) (2,142) -------- -------- -------- -------- Total losses and expenses 95,205 94,158 196,389 186,805 -------- -------- -------- -------- Income before tax 115,660 88,113 219,567 170,103 Provision for income tax 35,045 25,463 66,516 48,993 -------- -------- -------- -------- Net income $ 80,615 $ 62,650 $153,051 $121,110 ======== ======== ======== ======== Net income per share (notes 4 and 5) $ 0.67 $ 0.53 $ 1.28 $ 1.02 ======== ======== ======== ======== Weighted average common shares outstanding (shares in thousands, note 4) 119,594 118,931 119,473 118,900 ======== ======== ======== ======== Dividends per share (note 4) $ 0.025 $ 0.02 $ 0.045 $ 0.04 ======== ======== ======== ======== See accompanying notes to consolidated financial statements. PAGE 4
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Six Months Ended June 30, 1997 and 1996 (Unaudited) Six Months Ended June 30, ------------------- 1997 1996 ------ ------ (In thousands of dollars) Cash flows from operating activities: Net income $153,051 $121,110 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred insurance policy acquisition costs 14,672 16,763 Increase in deferred insurance policy acquisition costs (12,272) (13,763) Depreciation and amortization 4,055 4,522 Increase in accrued investment income (765) (2,106) Decrease in reinsurance recoverable on loss reserves 3,561 2,757 Decrease in reinsurance recoverable on unearned premiums 2,328 3,375 Increase in loss reserves 39,358 55,507 Decrease in unearned premiums (19,578) (33,629) Other (29,975) (2,316) -------- -------- Net cash provided by operating activities 154,435 152,220 -------- -------- Cash flows from investing activities: Purchase of equity securities (41,579) - Purchase of fixed maturities: Available-for-sale securities (356,099) (387,210) Proceeds from sale or maturity of fixed maturities: Available-for-sale securities 226,989 227,664 -------- -------- Net cash used in investing activities (170,689) (159,546) -------- -------- Cash flows from financing activities: Dividends paid to shareholders (5,319) (4,709) Principal repayments on mortgages payable (35,424) (193) Reissuance of treasury stock 10,931 8,715 -------- -------- Net cash (used in) provided by financing activities (29,812) 3,813 -------- -------- Net decrease in cash and short-term investments (46,066) (3,513) Cash and short-term investments at beginning of year 143,975 90,264 -------- -------- Cash and short-term investments at end of period $ 97,909 $ 86,751 ======== ======== See accompanying notes to consolidated financial statements. PAGE 5
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 1997 (Unaudited) Note 1 - Basis of presentation The accompanying unaudited consolidated financial statements of MGIC Investment Corporation (the "Company") and its wholly-owned subsidiaries have been prepared in accordance with the instructions to Form 10-Q and do not include all of the other information and disclosures required by generally accepted accounting principles. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 1996 included in the Company's Annual Report on Form 10-K for that year. The accompanying consolidated financial statements have not been audited by independent accountants in accordance with generally accepted auditing standards, but in the opinion of management such financial statements include all adjustments, consisting only of normal recurring accruals, necessary to summarize fairly the Company's financial position and results of operations. The results of operations for the six months ended June 30, 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 $0 and $.3 million during the three months and six months ended June 30, 1997, respectively, from $.9 million and $1.9 million for the same periods in 1996, respectively. See note 6 to the consolidated financial statements. Note 3 - Contingencies The Company is involved in litigation in the ordinary course of business. In the opinion of management, the ultimate disposition of the pending litigation will not have a material adverse effect on the financial position of the Company. 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 - Shareholders' equity On June 2, 1997 the Company effected a two-for-one stock split of the Company's common stock in the form of a 100% stock dividend. The current and prior year share, per share and certain equity amounts set forth in the accompanying financial statements have been adjusted to take into account the stock split. Note 5 - SFAS 128 In February 1997 the Financial Accounting Standards Board issued Statement of Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), which will be effective for financial statements issued after December 15, 1997. The current primary/fully diluted earnings per share ("EPS") under APB No. 15 will be replaced with a new basic/diluted EPS calculation that is intended to provide greater consistency and comparability. It is not anticipated that the effects of SFAS 128 on the Company will be material. Note 6 - Subsequent events In July 1997, the Company repurchased 4,260,985 shares of its outstanding common stock ("stock repurchase program") from a financial intermediary at a price of $46.9375 per share, subject to a market price adjustment provision. Funds to repurchase the shares were provided under the credit facility filed as Exhibit 4 and these borrowings will result in interest expense incurred beginning in the third quarter. PAGE 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Consolidated Operations Three Months Ended June 30, 1997 Compared With Three Months Ended June 30, 1996 Net income for the three months ended June 30, 1997 was $80.6 million, compared to $62.7 million for the same period of 1996, an increase of 29%. After giving effect to the Company's two-for-one stock split, net income per share for the three months ended June 30, 1997 was $0.67 compared to $0.53 in the same period last year, an increase of 26%. See note 4 to the consolidated financial statements. The amount of new primary insurance written by Mortgage Guaranty Insurance Corporation ("MGIC") during the three months ended June 30, 1997 was $7.7 billion, compared to $8.9 billion in the same period of 1996. Refinancing activity accounted for 12% of new primary insurance written in the second quarter of 1997, compared to 19% in the second quarter of 1996. New insurance written for the second quarter of 1997 reflected an increase in the usage of the monthly premium product to 92% of new insurance written from 90% of new insurance written in the second quarter of 1996. New insurance written for adjustable-rate mortgages ("ARMS") increased to 30% of new insurance written in the second quarter of 1997 from 23% of new insurance written in the same period of 1996. Also, mortgages with loan-to-value ("LTV") ratios in excess of 90% but not more than 95% ("95%") increased to 43% of new insurance written in the second quarter of 1997 from 41% of new insurance written in the same period of 1996. The $7.7 billion of new primary insurance written during the second quarter of 1997 was partially offset by the cancellation of $6.3 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 $8.9 billion, the cancellation of $6.1 billion, and a net increase of $2.8 billion during the second quarter of 1996. Direct primary insurance in force was $134.2 billion at June 30, 1997 compared to $125.0 billion at June 30, 1996. Cancellation activity could increase in the future as the result of recently adopted and proposed legislation regarding cancellation of mortgage insurance. (See Safe Harbor Statement at the end of this document.) PAGE 8
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 risk written during the three months ended June 30, 1997 was $103 million which was virtually all agency pool insurance. A minimal amount of new pool risk written was associated with loans insured under state housing finance programs. The Company expects that it will write additional risk during the remainder of 1997 for coverage committed to under existing agency pool policies but does not anticipate that new risk written under this product will be material to its total risk in force. Net premiums written were $170.9 million during the second quarter of 1997, compared to $141.6 million during the second quarter of 1996, an increase of $29.3 million or 21%. The increase was primarily a result of the growth in insurance in force. Net premiums earned were $173.5 million for the second quarter of 1997, compared to $150.7 million for the second quarter of 1996, an increase of $22.8 million, or 15%, primarily reflecting the growth of insurance in force. Investment income for the second quarter of 1997 was $30.4 million, an increase of 21% over the $25.2 million in the second quarter of 1996. This increase was primarily the result of an increase in the amortized cost of average invested assets to $2,068.7 million for the second quarter of 1997 from $1,727.7 million for the second quarter of 1996, an increase of 20%. The portfolio's average pre-tax investment yield was 5.9% for the second quarter of 1997, compared to 5.8% for the same period in 1996. The portfolio's average after-tax investment yield was 5.0% for the second quarter of 1997 compared to 5.1% for the second quarter of 1996. Other revenue, primarily contracts with government agencies for premium reconciliation and claim administration and fee-based services for underwriting, was $6.5 million in the second quarter of 1997, compared to $6.3 million in the same period of 1996. Net losses incurred increased to $58.3 million during the second quarter of 1997 from $56.9 million during the second quarter of 1996, an increase of 2%. Such increase was primarily due to a higher level of defaults estimated to have been incurred which resulted from a higher percentage of the Company's insurance in force reaching its peak claim paying years and higher delinquency levels on insurance written from 1994 through 1996. Net incurred losses also increased due to an increase in severity as a result of the continued high level of loss activity in certain high cost geographic regions and an increase in claim amounts on defaults with higher coverages. The increase was partially offset by a redundancy in prior year loss reserves resulting from actual claim rates and actual claim amounts being lower than those estimated by the Company when originally establishing the reserve at December 31, 1996. At June 30, 1997, 65% of MGIC's insurance in force was written during the preceding fourteen quarters, compared to 76% at June 30, 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. PAGE 9
Underwriting and other expenses increased slightly to $37.9 million in the second quarter of 1997 from $37.6 million in the second 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. There was no interest expense during the quarter ended June 30, 1997 as a result of repayment in January 1997 of the mortgages payable. This compares to interest expense of $.9 million for the second quarter of 1996. Interest expense is expected to increase during the remainder of the year as a result of debt incurred in the third quarter to fund the stock repurchase program. See note 6 to the consolidated financial statements. The consolidated insurance operations loss ratio was 33.6% for the second quarter of 1997 compared to 37.7% for the second quarter of 1996. The consolidated insurance operations expense and combined ratios were 22.2% and 55.8%, respectively, for the second quarter of 1997 compared to 22.7% and 60.4% for the second quarter of 1996. The effective tax rate was 30.3% in the second quarter of 1997, compared to 28.9% in the second 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. PAGE 10
Six Months Ended June 30, 1997 Compared With Six Months Ended June 30, 1996 Net income for the six months ended June 30, 1997 was $153.1 million, compared to $121.1 million for the same period of 1996, an increase of 26%. After giving effect to the Company's two-for-one stock split, net income per share for the six months ended June 30, 1997 was $1.28 compared to $1.02 in the same period last year, an increase of 25%. See note 4 to the consolidated financial statements. The amount of new primary insurance written by MGIC during the six months ended June 30, 1997 was $14.2 billion, compared to $16.5 billion in the same period of 1996. Refinancing activity accounted for 14% of new primary insurance written in the first half of 1997, compared to 24% in the first half of 1996. New insurance written for the first half of 1997 reflected an increase in the usage of the monthly premium product to 92% of new insurance written from 89% of new insurance written in the first half of 1996. New insurance written for ARMS increased to 28% of new insurance written in the first half of 1997 from 20% of new insurance written in the same period of 1996. Also, mortgages with 95% LTVs increased to 42% of new insurance written in the first half of 1997 compared to 39% for the same period in 1996. The $14.2 billion of new primary insurance written during the first half of 1997 was partially offset by the cancellation of $11.4 billion of insurance in force, and resulted in a net increase of $2.8 billion in primary insurance in force, compared to new primary insurance written of $16.5 billion, the cancellation of $11.8 billion, and a net increase of $4.7 billion during the first half of 1996. Direct primary insurance in force was $134.2 billion at June 30, 1997 compared to $125.0 billion at June 30, 1996. Cancellation activity could increase in the future as the result of recently adopted and proposed legislation regarding cancellation of mortgage insurance. (See Safe Harbor Statement at the end of this document.) During the first quarter of 1997, the Company began writing 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 risk written during the six months ended June 30, 1997 was $133 million which was virtually all agency pool insurance. A minimal amount of new pool risk written was associated with loans insured under state housing finance programs. The Company expects that it will write additional risk during the remainder of 1997 for coverage committed to under existing agency pool policies but does not anticipate that new risk written under this product will be material to its total risk in force. Net premiums written were $326.5 million during the first half of 1997, compared to $265.1 million during the first half of 1996, an increase of $61.4 million or 23%. The increase was primarily a result of the growth in insurance in force. PAGE 11
Net premiums earned were $343.8 million for the first half of 1997, compared to $295.4 million for the first half of 1996, an increase of $48.4 million, or 16%, primarily reflecting the growth of insurance in force. Investment income for the first half of 1997 was $59.9 million, an increase of 21% over the $49.5 million in the first half of 1996. This increase was primarily the result of an increase in the amortized cost of average invested assets to $2,032.0 million for the first half of 1997 from $1,682.3 million for the first half of 1996, an increase of 21%. The portfolio's average pre-tax investment yield was 5.9% for the first half of 1997 and 1996. The portfolio's average after-tax investment yield was 5.0% for the first half of 1997 compared to 5.1% for the first half of 1996. Other revenue, primarily contracts with government agencies for premium reconciliation and claim administration and fee-based services for underwriting, was $11.7 million in the first half of 1997 and 1996. Net losses incurred increased to $121.4 million during the first half of 1997 from $113.7 million during the first half of 1996, an increase of 7%. Such increase was primarily due to a higher level of defaults estimated to have been incurred which resulted from a higher percentage of the Company's insurance in force reaching its peak claim paying years and higher delinquency levels on insurance written from 1994 through 1996. Net incurred losses also increased due to an increase in severity as a result of the continued high level of loss activity in certain high cost geographic regions and an increase in claim amounts on defaults with higher coverages. The increase was partially offset by a redundancy in prior year loss reserves resulting from actual claim rates and actual claim amounts being lower than those estimated by the Company when originally establishing the reserve at December 31, 1996. At June 30, 1997, 65% of MGIC's insurance in force was written during the preceding fourteen quarters, compared to 76% at June 30, 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. Underwriting and other expenses increased 4% to $76.1 million in the first half of 1997 from $73.3 million in the first half 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. PAGE 12
Interest expense decreased to $.3 million during the six months ended June 30, 1997 from $1.9 million for the same period in 1996. The decrease is a result of repayment in January 1997 of the mortgages payable. Interest expense is expected to increase during the remainder of the year as a result of debt incurred to fund the previously mentioned stock repurchase program. See note 6 to the consolidated financial statements. The consolidated insurance operations loss ratio was 35.3% for the first half of 1997 compared to 38.5% for the first half of 1996. The consolidated insurance operations expense and combined ratios were 23.3% and 58.6%, respectively, for the first half of 1997 compared to 24.0% and 62.5% for the first half of 1996. The effective tax rate was 30.3% in the first half of 1997, compared to 28.8% in the first half 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 six months ended June 30, 1997, as shown on the Consolidated Statement of Cash Flows. Funds are applied primarily to the payment of claims and expenses. The Company's business does not require significant capital expenditures on an ongoing basis. Positive cash flows are invested pending future payments of claims and other expenses; cash flow shortfalls, if any, could be funded through sales of short-term investments and other investment portfolio securities. In January 1997, the Company repaid mortgages payable of $35.4 million, which were secured by the home office and substantially all of the furniture and fixtures of the Company, with internally generated funds. Consolidated total investments were $2,156.2 million at June 30, 1997, compared to $2,036.2 million at December 31, 1996, an increase of 6%. This increase is due primarily to positive cash flow from operations offset by the $35.4 million repayment of the mortgages payable. The investment portfolio includes unrealized gains on securities marked to market at June 30, 1997 and December 31, 1996 of $66.0 million and $62.6 million, respectively. As of June 30, 1997, the Company had $90.8 million of short-term investments with maturities of 90 days or less. In addition, at June 30, 1997, based on amortized cost, the Company's total investments, which were primarily comprised of fixed maturities, were approximately 98% invested in "A" rated and above, readily marketable securities, concentrated in maturities of less than 15 years. Consolidated loss reserves increased 8% to $553.4 million at June 30, 1997 from $514.0 million at December 31, 1996, reflecting a higher level of defaults estimated to have been incurred. Consistent with industry practices, the Company does not establish loss reserves for future claims on insured loans which are not currently in default. PAGE 13
Consolidated unearned premiums decreased $19.6 million from $219.3 million at December 31, 1996 to $199.7 million at June 30, 1997, primarily reflecting the continued high level of monthly premium policies written, for which there is no unearned premium. Reinsurance recoverable on unearned premiums decreased $2.3 million to $9.4 million at June 30, 1997 from $11.7 million at December 31, 1996, primarily reflecting the reduction in unearned premiums. Consolidated shareholders' equity increased to $1,527.0 million at June 30, 1997, from $1,366.1 million at December 31, 1996, an increase of 12%. This increase consisted of $153.1 million of net income during the first six months of 1997, $10.9 million from the reissuance of treasury stock and an increase in net unrealized gains on investments of $2.2 million, net of tax, offset by dividends declared of $5.3 million. MGIC is the principal insurance subsidiary of the Company. MGIC's risk-to-capital ratio was 16.8:1 at June 30, 1997 compared to 18.1:1 at December 31, 1996. The decrease was due to MGIC's increased policyholders' reserves, partially offset by the net additional risk in force of $1.0 billion, net of reinsurance, during the first six months of 1997. The Company's combined insurance risk-to-capital ratio was 17.5:1 at June 30, 1997, compared to 18.8:1 at December 31, 1996. The decrease was due to the same reasons as described above. In May 1997, the Company's board of directors authorized the repurchase of shares of the Company's outstanding common stock with an aggregate purchase price of up to $250 million. In June 1997, the Company entered into a credit facility (see Exhibit 4) to provide funds for the repurchase of common stock and for other general corporate purposes. In July 1997, the Company repurchased 4,260,985 shares of its common stock from a financial intermediary at a price of $46.9375 per share, subject to a market price adjustment provision. Funds to repurchase the shares were provided under this credit facility. The Company's consolidated shareholders' equity at June 30, 1997, as adjusted for the repurchase of shares without giving effect to any market price adjustment, was approximately $1,327 million. PAGE 14
SAFE HARBOR STATEMENT The following is a "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995, which applies to all statements in this Form 10-Q, which are not historical facts and to all oral statements that the Company may make from time to time relating thereto which are not historical facts (such written and oral statements are herein referred to as "forward looking statements"): Actual results may differ materially from those contemplated by the forward looking statements. These forward looking statements involve risks and uncertainties, including but not limited to, the following 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 15 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES (a), (c) Not applicable (b) The Company's Credit Agreement, which is filed as Exhibit 4, requires that the Company maintain consolidated shareholders' equity, determined under generally accepted accounting principles, of at least $900 million. As adjusted for the repurchase of shares of Common Stock discussed in Part I of this Quarterly Report on Form 10-Q, the Company's consolidated shareholders' equity at June 30, 1997 exceeded $1.3 billion. The foregoing requirement to maintain $900 million of consolidated shareholders' equity could limit the payment of future dividends by the Company, although the Company does not currently expect that its ability to pay dividends will be limited by this requirement. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Annual Meeting of Shareholders of the Company was held on May 1, 1997. (b) At the Annual Meeting, the following Directors were elected to the Board of Directors, for a term expiring at the annual meeting of shareholders to be held in 2000 or until a successor is duly elected and qualified: Karl E. Case, William A. McIntosh, Leslie M. Muma, and Peter J. Wallison Directors with continuing terms of office are: Term expiring 1998: James A. Abbott James D. Ericson Sheldon B. Lubar Edward J. Zore Term expiring 1999: Mary K. Bush David S. Engelman Kenneth M. Jastrow, II William H. Lacy PAGE 16
(c) Matters voted upon at the Annual Meeting and the number of shares voted for, or against or withheld, or abstaining from voting, (prior to the June 2, 1997 two-for-one stock split) are as follows: (1) Election of four Directors for a term expiring in 2000. FOR WITHHELD --- -------- Karl E. Case 53,127,018 93,443 William A. McIntosh 53,125,575 94,886 Leslie M. Muma 53,128,720 91,741 Peter J. Wallison 52,432,387 788,074 (2) Approval of amendments to the MGIC Investment Corporation 1991 Stock Incentive Plan. For: 51,285,012 Against: 1,779,332 Abstaining from Voting: 156,117 (3) Ratification of the appointment of Price Waterhouse LLP as independent public accountants for the Company for 1997. For: 52,849,087 Against: 71,478 Abstaining from Voting: 299,896 There were no "broker non-votes" applicable to any of these matters described above. (d) Not applicable 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 June 30, 1997. PAGE 17
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 August 13, 1997. MGIC INVESTMENT CORPORATION /s/ J. Michael Lauer ---------------------------- J. Michael Lauer Executive Vice President and Chief Financial Officer /s/ Patrick Sinks ---------------------------- Patrick Sinks Vice President, Controller and Chief Accounting Officer PAGE 18
INDEX TO EXHIBITS (Item 6) Exhibit Number Description of Exhibit - ------- ---------------------- 4 Credit Agreement, dated as of June 20, 1997, among MGIC Investment Corporation, Bank of America National Trust and Savings Association, as Agent, and the Other Financial Institutions Party Thereto 10 MGIC Investment Corporation 1991 Stock Incentive Plan, As Amended (incorporated by reference to Exhibit A to the Company's definitive proxy statement for its May 1, 1997 Annual Meeting of Shareholders) 11.1 Statement Re Computation of Net Income Per Share 27 Financial Data Schedule PAGE 19