<PAGE> 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 MARCH 31, 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: 22,438,188 shares of
Common Stock, $0.001 par value, outstanding on May 11, 1997.
<PAGE> 2
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C>
Part I - Financial Information
Consolidated Balance Sheets - March 31, 1997 and
December 31, 1996.................................................................. 3
Consolidated Statements of Income - For the quarters ended
March 31, 1997 and 1996............................................................ 4
Consolidated Statement of Changes in Common Stockholders'
Equity - For the three month period ended March 31, 1997........................... 5
Consolidated Statements of Cash Flows - For the three month periods ended
March 31, 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>
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<PAGE> 3
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 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
$425,815 and $409,675) ....................................... $416,257 $393,296
Fixed maturities available for sale - at fair value
(amortized cost $108,768 and $110,519) ....................... 112,409 114,666
Short-term investments .......................................... 5,045 5,196
Cash ................................................................... 2,060 3,189
Deferred policy acquisition costs ...................................... 23,990 23,900
Other assets ........................................................... 54,768 52,501
-------- --------
$614,529 $592,748
======== ========
Liabilities and Stockholders' Equity
Unearned premiums ...................................................... $ 47,052 $ 53,384
Reserve for losses ..................................................... 116,365 108,206
Deferred federal income taxes .......................................... 9,974 5,266
Accounts payable and accrued expenses .................................. 28,499 29,548
-------- --------
201,890 196,404
-------- --------
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;
22,427,504 shares and 22,395,124 shares issued
and outstanding ................................................. 22 22
Additional paid-in capital ............................................. 177,268 176,431
Retained earnings ...................................................... 192,982 177,195
Net unrealized gain on investments, net of tax ......................... 2,367 2,696
-------- --------
372,639 356,344
-------- --------
$614,529 $592,748
======== ========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 4
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
March 31
1997 1996
-------- --------
(In thousands, except per-share amounts)
<S> <C> <C>
Revenues:
Premiums written:
Direct ................................... $ 51,707 $ 44,424
Assumed .................................. 19 6
Ceded .................................... (4,642) (4,193)
-------- --------
Net premiums written ............................ 47,084 40,237
Decrease in unearned premiums ................... 7,228 1,709
-------- --------
Premiums earned ................................. 54,312 41,946
Net investment income ........................... 8,084 7,117
Gain on sales of investments .................... 112 438
Other income .................................... 1,090 1,030
-------- --------
63,598 50,531
-------- --------
Expenses:
Provision for losses ............................ 26,753 20,026
Policy acquisition costs ........................ 7,438 6,412
Other operating expenses ........................ 5,946 5,023
-------- --------
40,137 31,461
-------- --------
Pretax income ....................................... 23,461 19,070
Provision for income taxes .......................... (6,177) (4,643)
-------- --------
Net income .......................................... $ 17,284 $ 14,427
======== ========
Net income per share ................................ $ 0.71 $ 0.59
======== ========
Average number of common and common equivalent shares
outstanding ......................................... 23,263 23,002
======== ========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 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
--------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 .................... $ 22 $ 176,431 $ 177,195 $ 2,696 $ 356,344
Net income (unaudited) ..................... -- -- 17,284 -- 17,284
Change in net unrealized gain (loss) on
investments - net of tax (unaudited) ..... -- -- -- (329) (329)
Issuance of common stock (unaudited) ....... -- 837 -- -- 837
Dividends (unaudited) ...................... -- -- (1,497) -- (1,497)
--------- --------- --------- --------- ---------
Balance, March 31, 1997 (unaudited) ........... $ 22 $ 177,268 $ 192,982 $ 2,367 $ 372,639
========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 6
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
March 31
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Cash flows from operating activities ................................. $ 21,200 $ 20,065
-------- --------
Cash flows from investing activities:
Proceeds from sales of investments available for sale ..... -- 5,883
Proceeds from redemptions of investments
available for sale ...................................... 6,239 6,990
Proceeds from redemptions of investments
held to maturity ........................................ 2,050 375
Purchases of investments available for sale ............... (4,389) (9,365)
Purchases of investments held to maturity ................. (24,178) (23,794)
Sales of short-term investments - net ..................... 151 401
Other ..................................................... (1,542) (1,827)
-------- --------
Net cash used in investing activities ................................ (21,669) (21,337)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock .................... 837 790
Dividends paid ............................................ (1,497) (1,382)
-------- --------
Net cash used in financing activities ................................ (660) (592)
-------- --------
Decrease in cash ..................................................... (1,129) (1,864)
Cash, beginning of period ............................................ 3,189 3,646
-------- --------
Cash, end of period .................................................. $ 2,060 $ 1,782
======== ========
Supplemental disclosures of cash flow information:
Income taxes paid .................................................... $ 250 $ 0
======== ========
Interest paid ........................................................ $ 0 $ 25
======== ========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 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.
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-
<PAGE> 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 quarter of 1997 was $17.3 million, a 19.8%
increase compared to $14.4 million for the first quarter of 1996. This
improvement was 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 quarter of 1997 were $54.3 million, a
29.5% increase compared to $41.9 million for the first quarter of 1996. This
increase reflected the insurance in force growth resulting from strong new
insurance volume and a continuation of high persistency levels. Persistency is
defined as the percentage of policies in force that are renewed in any given
year. New primary insurance written in the first quarter of 1997 was $2.8
billion, a 1.0% decrease compared to $2.9 billion in the first quarter of 1996.
Volume for CMAC decreased as a result of a 14.5 % decrease in the private
mortgage insurance market. However, CMAC's volume decline was substantially
offset by an increase in market share to 11.3% for the first quarter of 1997,
compared to 9.7% in the first quarter of 1996. The volume in the first quarter
of 1997 was negatively impacted by higher interest rates. Refinanced loans
represented 17.1% of new primary insurance written by CMAC as compared to 26.5%
in the first quarter of 1996. Additionally, in the first quarter of 1997, CMAC
wrote $3.3 billion of pool insurance as compared to $2.2 billion for the first
quarter of 1996, a 44.8% increase. This pool insurance written represented an
addition to risk of $51.3 million for the first quarter of 1997 as compared to
$44.9 million for the same period 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 a similar level throughout 1997. 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. The average stop-loss on
pool insurance written during the first quarter of 1997 was 1.6%. The
persistency rate for the year ended March 31, 1997 was 86.4% as compared to
86.9% for the year ended March 31, 1996. The strong volume and high persistency
led to an increase in direct primary insurance in force for the quarter of 5.7%,
from $39.4 billion at December 31, 1996 to $41.7 billion at March 31, 1997.
Direct pool insurance in force also grew to $12.2 billion at March 31, 1997 from
$9.1 billion at the end of 1996, an increase of 34.4% for the quarter.
Net investment income for the first quarter of 1997 was $8.1 million
for the first quarter of 1997, a 13.6% increase compared to $7.1 million for the
first quarter of 1996. This increase was 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 quarter of 1997 was $26.8
million, an increase of 33.6% compared to $20.0 million in 1996. This increase
reflected the significant growth and maturation of CMAC's book of business over
the past several years, the continued adverse experience of California loans,
and the relatively poor early experience of certain "affordable housing" program
loans CMAC 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 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 March 31, 1997 was 2.0% as compared to 2.1% at December 31,
1996. The number of defaults rose from 10,127 at December 31, 1996 to 10,457 at
March 31, 1997 and the average loss reserve per default rose from $10,685 at the
end of 1996 to $11,128 at March 31, 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. The default rate in California
decreased to 3.9% (including pool) at March 31, 1997 as compared to 4.0% at
December 31, 1996 and claims paid in California for the first quarter of 1997
were $11.9 million, representing approximately 62.3% of total claims.
-8-
<PAGE> 9
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(CONTINUED)
Policy acquisition costs in the first quarter of 1997 were $7.4 million, an
increase of 16.0% compared to $6.4 million in the first 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 quarter ended
March 31, 1997 were $5.9 million, an increase of 18.4% compared to $5.0 million
in 1996. 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 quarter of 1997, loans underwritten via
contract underwriting accounted for 24% of applications, 25% of insurance
commitments, and 22% of certificates issued by CMAC.
The effective tax rate for the quarter ended March 31, 1997 was
26.3%. This compares to 24.3% for the quarter ended March 31, 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 quarter ended March 31,
1997 were $21.2 million as compared to $20.1 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 $372.6 million at March 31, 1997, primarily as a result of net
income of $17.3 million, partially offset by dividends of $1.5 million.
As of March 31, 1997, the Company and its subsidiaries had
commitments for capital expenditures to upgrade and enhance its computer systems
and technological capabilities totaling $1.3 million. These upgraded computer
systems are 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. These expenditures are expected to
be made during the second quarter of 1997.
-9-
<PAGE> 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 - None
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-
<PAGE> 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: May 14, 1997 C. Robert Quint
----------------------------------------------
C. Robert Quint
Senior Vice President, Chief Financial Officer
(Principal Accounting Officer)
-11-
<PAGE> 1
CMAC INVESTMENT CORPORATION
SCHEDULE OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31
-------------------------
1997 1996(1)
-------- --------
(In thousands, except per-share amounts and market prices)
<S> <C> <C>
Net income .................................................. $ 17,284 $ 14,427
Preferred stock dividend adjustment ......................... (825) (825)
-------- --------
Adjusted net income ......................................... $ 16,459 $ 13,602
Average dilutive stock options outstanding .................. 1,576.9 1,509.1
Average exercise price per share ............................ $ 16.13 $ 13.95
Average market prices - primary basis ....................... $ 34.91 $ 26.51
Average market price - fully diluted basis .................. $ 34.91(2) $ 28.25
Average common share outstanding ............................ 22,417 22,287
Increase in shares due to exercise of options -
primary basis .............................................. 846 715
Increase in shares due to exercise of options -
fully diluted basis ........................................ 846(2) 764
Adjusted shares outstanding - primary ....................... 23,263 23,002
Adjusted shares outstanding - fully diluted ................. 23,263(2) 23,051
Net income per share - primary and fully diluted ............ $ 0.71 $ 0.59
======== ========
</TABLE>
(1) All share and per-share data have been restated to reflect the stock
split. See Note 3.
(2) Market price at March 31, 1997 was $33.38 and therefore, the average
market price for the quarter has been used in the computation of fully
diluted shares outstanding and net income per share on a fully diluted
basis.
EXHIBIT 11.1
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,060
<SECURITIES> 533,711
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 78,758
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 614,529
<CURRENT-LIABILITIES> 201,890
<BONDS> 0
40,000
0
<COMMON> 22
<OTHER-SE> 372,617
<TOTAL-LIABILITY-AND-EQUITY> 614,529
<SALES> 0
<TOTAL-REVENUES> 63,598
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,384
<LOSS-PROVISION> 26,753
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 23,461
<INCOME-TAX> 6,177
<INCOME-CONTINUING> 17,284
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,284
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.71
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,782
<SECURITIES> 450,544
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 61,153
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 513,479
<CURRENT-LIABILITIES> 163,618
<BONDS> 0
40,000
0
<COMMON> 11
<OTHER-SE> 309,850
<TOTAL-LIABILITY-AND-EQUITY> 513,479
<SALES> 0
<TOTAL-REVENUES> 50,531
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,435
<LOSS-PROVISION> 20,026
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 19,070
<INCOME-TAX> 4,643
<INCOME-CONTINUING> 14,427
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,427
<EPS-PRIMARY> .59
<EPS-DILUTED> .59
</TABLE>
