1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [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 OR [ ] 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 1-11356 CMAC INVESTMENT CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 23-2691170 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1601 MARKET STREET, PHILADELPHIA, PA 19103 (Address of principal executive offices) (zip code) (215) 564-6600 (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 if 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: 22,482,140 shares of Common Stock, $0.001 par value, outstanding on August 12, 1997.
2 CMAC INVESTMENT CORPORATION AND SUBSIDIARIES <TABLE> <CAPTION> INDEX PAGE NUMBER <S> <C> Part I - Financial Information Consolidated Balance Sheets - June 30, 1997 and December 31, 1996..................................................... 3 Consolidated Statements of Income - For the three and six month periods ended June 30, 1997 and 1996.......................................... 4 Consolidated Statement of Changes in Common Stockholders' Equity - For the six month period ended June 30, 1997................. 5 Consolidated Statements of Cash Flows - For the six month periods ended June 30, 1997 and 1996................................................ 6 Notes to Consolidated Financial Statements..................................... 7 Management's Discussion and Analysis of Results of Operations and Financial Condition.................................... 8-9 Part II - Other Information, as applicable.............................................. 10 Signature............................................................................... 11 </TABLE> -2-
3 CMAC INVESTMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> June 30 December 31 1997 1996 -------- -------- (Unaudited) <S> <C> <C> (In thousands, except share amounts) Assets Investments Fixed maturities held to maturity - at amortized cost (fair value $452,477 and $409,675) ......................................... $435,459 $393,296 Fixed maturities available for sale - at fair value (amortized cost $103,413 and $110,519) ......................... 107,390 114,666 Short-term investments ........................................... 9,839 5,196 Cash ................................................................. 3,642 3,189 Deferred policy acquisition costs .................................... 24,285 23,900 Other assets ......................................................... 61,941 52,501 -------- -------- $642,556 $592,748 ======== ======== Liabilities and Stockholders' Equity Unearned premiums .................................................... $ 46,092 $ 53,384 Reserve for losses ................................................... 125,157 108,206 Deferred federal income taxes ........................................ 5,087 5,266 Accounts payable and accrued expenses ................................ 35,598 29,548 -------- -------- 211,934 196,404 -------- -------- Preferred stockholder's equity Redeemable preferred stock, par value $.001 per share; 800,000 shares issued and outstanding - at redemption value ................................................. 40,000 40,000 -------- -------- Common stockholders' equity Common stock, par value $.001 per share; 80,000,000 shares authorized; 22,455,040 shares and 22,395,124 shares issued and outstanding .................................................. 22 22 Additional paid-in capital ........................................... 177,969 176,431 Retained earnings .................................................... 210,046 177,195 Net unrealized gain on investments, net of tax ....................... 2,585 2,696 -------- -------- 390,622 356,344 -------- -------- $642,556 $592,748 ======== ======== </TABLE> See notes to consolidated financial statements. -3-
4 CMAC INVESTMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> Quarter Ended Six Months Ended June 30 June 30 1997 1996 1997 1996 --------- --------- --------- -------- <S> <C> <C> <C> <C> (In thousands, except per-share amounts) Revenues: Premiums written: Direct ......................... $ 62,387 $ 45,722 $ 114,094 $ 90,146 Assumed ........................ 110 109 129 115 Ceded .......................... (5,859) (3,984) (10,501) (8,177) --------- --------- --------- -------- Net premiums written ................ 56,638 41,847 103,722 82,084 Decrease in unearned premiums ....... 1,134 4,004 8,362 5,713 --------- --------- --------- -------- Premiums earned ..................... 57,772 45,851 112,084 87,797 Net investment income ............... 8,428 7,348 16,512 14,465 Gain on sales of investments ........ 372 332 484 770 Other income ........................ 1,125 951 2,215 1,981 --------- --------- --------- -------- 67,697 54,482 131,295 105,013 --------- --------- --------- -------- Expenses: Provision for losses ................ 28,266 21,912 55,019 41,938 Policy acquisition costs ............ 7,753 6,717 15,191 13,129 Other operating expenses ............ 6,331 5,464 12,277 10,487 --------- --------- --------- -------- 42,350 34,093 82,487 65,554 --------- --------- --------- -------- Pretax income ................................ 25,347 20,389 48,808 39,459 Provision for income taxes ................... 6,785 5,118 12,962 9,761 --------- --------- --------- -------- Net income ................................... $ 18,562 $ 15,271 $ 35,846 $ 29,698 ========= ========= ========= ======== Net income per share ......................... $ 0.76 $ 0.63 $ 1.47 $ 1.22 ========= ========= ========= ======== Average number of common and common equivalent shares outstanding ........................... 23,358 23,074 23,311 23,038 ========= ========= ========= ======== </TABLE> See notes to consolidated financial statements. -4-
5 CMAC INVESTMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY <TABLE> <CAPTION> Net Unrealized Additional Gain (Loss) Common Paid-In Retained on Investments Stock Capital Earnings (Net of Tax) Total ------ ---------- -------- -------------- ----- <S> <C> <C> <C> <C> <C> (In thousands) Balance, December 31, 1996 .................... $22 $176,431 $ 177,195 $ 2,696 $ 356,344 Net income (unaudited) ................. -- -- 35,846 -- 35,846 Change in net unrealized gain (loss) on investments - net of tax (unaudited) -- -- -- (111) (111) Issuance of common stock (unaudited) ... -- 1,538 -- -- 1,538 Dividends (unaudited) .................. -- -- (2,995) -- (2,995) --- -------- --------- ------- --------- Balance, June 30, 1997 (unaudited) ............ $22 $177,969 $ 210,046 $ 2,585 $ 390,622 === ======== ========= ======= ========= </TABLE> See notes to consolidated financial statements. -5-
6 CMAC INVESTMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> Six Months Ended June 30 1997 1996 -------- -------- <S> <C> <C> (In thousands) Cash flows from operating activities ............................. $ 40,731 $ 39,624 -------- -------- Cash flows from investing activities: Proceeds from sales of investments available for sale ..... 11,187 6,382 Proceeds from redemptions of investments available for sale 8,191 10,838 Proceeds from redemptions of investments held to maturity . 3,120 375 Purchases of investments available for sale ............... (11,820) (13,318) Purchases of investments held to maturity ................. (40,971) (38,174) Purchases of short-term investments - net ................. (4,643) (644) Other ..................................................... (3,885) (2,524) -------- -------- Net cash used in investing activities ............................ (38,821) (37,065) -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock .................... 1,538 1,114 Dividends paid ............................................ (2,995) (2,765) -------- -------- Net cash used in financing activities ............................ (1,457) (1,651) -------- -------- Increase in cash ................................................. 453 908 Cash, beginning of period ........................................ 3,189 3,646 -------- -------- Cash, end of period .............................................. $ 3,642 $ 4,554 ======== ======== Supplemental disclosures of cash flow information: Income taxes paid ................................................ $ 13,000 $ 8,500 ======== ======== Interest paid .................................................... $ 0 $ 48 ======== ======== </TABLE> See notes to consolidated financial statements. -6-
7 CMAC INVESTMENT CORPORATION AND SUBSIDIARIES (UNAUDITED) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 - UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements include the accounts of CMAC Investment Corporation (the "Company") and its subsidiaries including its principal operating subsidiary, Commonwealth Mortgage Assurance Company ("CMAC"), and are presented on the basis of generally accepted accounting principles. The financial information for the interim periods included herein is unaudited; however, such information reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year. Net income per share is based on the average number of common shares outstanding and common share equivalents which would arise from the exercise of stock options. Preferred stock dividends are deducted from net income in the net income per share computation. For a summary of significant accounting policies and additional financial information, see the CMAC Investment Corporation Annual Report on Form 10-K for the year ended December 31, 1996. 2 - NEW ACCOUNTING STANDARDS In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS 128 requires the Company to disclose both "basic" earnings per share and "dilutive" earnings per share for annual and interim periods ending after December 15, 1997. The Company has determined that FAS 128 will not have a significant effect on its net income per share calculation when such Standard is adopted. 3 - STOCK SPLIT On October 15, 1996, the Board of Directors authorized a stock split, paid December 2, 1996, in the form of a dividend of one additional share of the Company's common stock for each share owned by stockholders of record on November 7, 1996. The dividend was accounted for as a two-for-one stock split and par value remained at $.001 per share. Accordingly, all references to common per share data have been adjusted to give effect to the stock split. -7-
8 CMAC INVESTMENT CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Net income for the first six months of 1997 was $35.8 million, a 20.7% increase compared to $29.7 million for the first six months of 1996 and net income for the quarter ended June 30, 1997 was $18.6 million, a 21.6% increase compared to $15.3 million for the same period in 1996. These improvements were a result of significant growth in premiums earned and net investment income, partially offset by a higher provision for losses, policy acquisition costs and other operating expenses. Premiums earned for the first six months of 1997 were $112.1 million, a 27.7% increase compared to $87.8 million for the first six months of 1996 and premiums earned for the quarter ended June 30, 1997 were $57.8 million, a 26.0% increase compared to $45.9 million for the same period of 1996. These increases reflect a continuation of high persistency levels and the insurance in force growth resulting from strong new insurance volume. Persistency is defined as the percentage of policies in force that are renewed in any given year. The persistency rate for the year ended June 30, 1997 was 87.9% as compared to 85.7% for the year ended June 30, 1996. New primary insurance written in the first six months of 1997 was $6.0 billion, a 2.9% decrease compared to $6.2 billion for the first six months of 1996 and for the second quarter of 1997, new primary insurance written of $3.2 billion was 4.5% lower than the $3.3 billion written in the second quarter of 1996. However, the $3.2 billion of new primary insurance written in the second quarter of 1997 was 11.3% higher than the volume written during the first quarter of 1997 of $2.8 billion. Volume for CMAC decreased as a result of a 15.5% decrease in the private mortgage insurance market in the first six months of 1997 and a decrease of 16.3% for the quarter ended June 30, 1997. However, CMAC's volume decline was substantially offset by an increase in market share to 11.0% for the first six months of 1997, compared to 9.6% for the same period of 1996. The volume in the first half of 1997 was negatively impacted by higher interest rates. Refinanced loans represented 16% of new primary insurance written as compared to 22% in the first six months of 1996 and for the quarter ended June 30, 1997, refinanced loans represented 13% as compared to 18% for the same quarter of 1996. Additionally, in the first six months of 1997, CMAC wrote pool insurance which represented an addition to risk of $111.3 million as compared to $68.8 million for the first six months of 1996 and $60.0 million for the second quarter of 1997 as compared to $23.8 million for the same quarter of 1996. Most of this pool insurance volume related to a group of structured transactions composed primarily of Fannie Mae- and Freddie Mac-eligible conforming mortgage loans that are geographically dispersed throughout the United States and that have lower loan-to-value ratios than CMAC's primary business. Under a pool insurance transaction, the exposure to CMAC on each individual loan is uncapped; however, the aggregate stop-loss percentage is the most that can be paid out in losses before the insurer's exposure terminates. The Company expects its pool insurance activity to continue at this same level throughout the remainder of 1997 due to commitments outstanding but will review its policy after these commitments expire. Premium rates on such pool insurance are significantly lower than on primary insurance loans due to the low stop-loss levels, which limit the overall risk exposure to CMAC, and the focus of such product on high quality primary insurance customers. Standard & Poor's has recently determined that the capital requirements to support such pool insurance will be significantly more stringent than on primary insurance due to the low premium rates. The average stop-loss on pool insurance written during the first six months of 1997 was 1.6%. The strong volume and high persistency led to an increase in direct primary insurance in force for the first half of 1997 of 10.5%, from $39.4 billion at December 31, 1996 to $43.6 billion at June 30, 1997. Direct pool risk in force also grew to $438.4 million at June 30, 1997 from $341.9 million at the end of 1996, an increase of 28.2% for the six months ended June 30, 1997. Net investment income for the first half of 1997 was $16.5 million, a 14.2% increase compared to $14.5 million for the first six months of 1996 and for the second quarter of 1997, net investment income was $8.4 million as compared to $7.3 million in the same period of 1996, a 14.7% increase. These increases were a result of continued growth in invested assets primarily due to positive operating cash flow. The Company continues to invest new operating cash flow in tax-advantaged securities, primarily municipal bonds. The provision for losses in the first six months of 1997 was $55.0 million, an increase of 31.2% compared to $41.9 million in 1996, and for the second quarter of 1997, the provision was $28.3 million as compared to $21.9 million for the second quarter of 1996, an increase of 29.0%. These increases reflect the significant growth and maturation of CMAC's book of business over the past several years, the continued adverse experience of California loans (despite early signs of an improving trend in California), and the relatively poor early experience of certain "affordable housing" program loans insured starting in 1994. Although the ultimate performance of the books of business that originated since 1994 cannot yet be determined, it appears that the ultimate loss levels will be higher than average, partially due to the presence of these "affordable -8-
9 CMAC INVESTMENT CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) housing" loans. Certain underwriting changes were implemented near the end of 1996 to compensate for the factors that contributed to the early default experience on these "affordable housing" loans; however, it is too early to determine the impact of such changes. CMAC's overall default rate at June 30, 1997 was 1.9% as compared to 2.1% at December 31, 1996 and 2.0% at March 31, 1997. The number of defaults rose from 10,127 at December 31, 1996 to 10,692 at June 30, 1997 and the average loss reserve per default rose from $10,685 at the end of 1996 to $11,706 at June 30, 1997. This increase in average loss reserve per default reflected the Company's continued implementation of a more conservative reserve calculation for certain loans in default perceived as having a higher risk of claim incidence. In addition, an increase in the coverage percentage on loans originated beginning in 1995 have necessitated a higher reserve balance on loans in a default status due to the increased ultimate exposure on these loans. The default rate in California decreased to 3.7% (including pool) at June 30, 1997 as compared to 4.0% at December 31, 1996 and claims paid in California for the first six months of 1997 were $24.5 million, representing approximately 61.5% of total claims. Policy acquisition costs in the first six months of 1997 were $15.2 million, an increase of 15.7% compared to $13.1 million in the same period of 1996. For the second quarter of 1997, these expenses were $7.8 million, an increase of 15.4% compared to $6.7 million for the second quarter of 1996. This reflects increases in sales- and underwriting-related expenses relating to the Company's continued market share expansion and the development of the Company's marketing infrastructure needed to support a focus on larger, national mortgage lenders in order to take advantage of the widespread consolidation occurring in the mortgage lending industry. Other operating expenses for the six months ended June 30, 1997 were $12.3 million, an increase of 17.1% compared to $10.5 million for the same period in 1996 and these expenses were $6.3 million for the second quarter of 1997 as compared to $5.5 million for the second quarter of 1996, an increase of 15.9%. Much of the increase continued to result from an expansion of the Company's technology efforts and an increase in expenses associated with the company's ancillary services, specifically contract underwriting. Some of these additional contract underwriting expenses were correspondingly offset by increases to other income although the main purpose of the contract underwriting effort is to support the sales effort by generating incremental mortgage insurance business. During the first half of 1997, loans underwritten via contract underwriting accounted for 29% of applications, 25% of insurance commitments, and 22% of certificates issued by CMAC. The effective tax rate for the six months ended June 30, 1997 was 26.6% and this rate was 26.8% for the quarter ended June 30, 1997. This compares to 24.7% and 25.1%, respectively, for the six months and quarter ended June 30, 1996. LIQUIDITY AND CAPITAL RESOURCES CMAC's sources of funds consist primarily of premiums and investment income. Funds are applied primarily to the payment of CMAC's claims and operating expenses. Cash flows from operating activities for the six months ended June 30, 1997 were $40.7 million as compared to $39.6 million for the same period of 1996. This increase consisted of an increase in net premiums written and investment income received, partially offset by an increase in claims paid and operating expenses. Monthly premiums, which now constitute about 95% of new business, have negatively impacted cash flow in the short term although long-term cash flow is not expected to be materially affected. Positive cash flows are invested pending future payments of claims and other expenses; cash flow shortfalls, if any, are funded through sales of short-term investments and certain other investment portfolio securities. Common stockholders' equity increased from $356.3 million at December 31, 1996 to $390.6 million at June 30, 1997. This increase was primarily a result of net income of $35.8 million and common stock of $1.5 million issued due to the exercise of stock options, partially offset by dividends of $3.0 million. As of June 30, 1997, the Company and its subsidiaries had purchased computer equipment designed to upgrade and enhance their computer systems and technological capabilities totaling $1.3 million. These upgraded computer systems were needed to support CMAC's newly structured centralized processing operations as well as the redesigned disaster recovery plan that was implemented in conjunction with the centralized system. -9-
10 CMAC INVESTMENT CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1. Legal Proceedings - None ITEM 2. Changes in Securities - None ITEM 3. Defaults upon Senior Securities - None ITEM 4. Submission of Matters to a Vote of Security Holders On May 14, 1997, the Annual Meeting of Stockholders of CMAC Investment Corporation was held. The stockholders re-elected three nominees from the existing Board of Directors to a term of three years expiring in 2000. The Stockholders also approved the designation of Deloitte & Touche as independent auditors. The number of votes cast for and withheld from the election of each director nominee is set forth below. There were no votes against, abstentions or broker non-votes in the election of directors. Election of Directors: <TABLE> <CAPTION> For Withheld --- -------- <S> <C> <C> Frank P. Filipps 18,699,482 1,018,613 James C. Miller 18,698,206 1,019,889 Anthony W. Schweiger 18,699,302 1,018,793 </TABLE> The number of votes cast for, against and abstentions relating to the designation of Deloitte & Touche as independent auditors is set forth below. There were no broker non-votes in the approval of Deloitte & Touche. <TABLE> <CAPTION> For Against Abstain --- ------- ------- <S> <C> <C> <C> Approval of the designation of Deloitte & Touche as independent auditors: 19,710,574 2,359 5,162 </TABLE> ITEM 5. Other Information - None ITEM 6. a. Exhibits - *Exhibit 11.1 - Statement Re: Computation of Per Share Earnings b. Reports on Form 8-K - None * Filed Herewith -10-
11 SIGNATURE 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. CMAC INVESTMENT CORPORATION Date: August 14, 1997 C. Robert Quint ---------------------------------------------- C. Robert Quint Senior Vice President, Chief Financial Officer (Principal Accounting Officer) -11-