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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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)
<TABLE>
<S> <C>
DELAWARE 23-2691170
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
1601 MARKET STREET, PHILADELPHIA, PA
(Address of principal executive offices)
19103
(Zip code)
(215) 564-6600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCK, $.001 PAR VALUE NEW YORK STOCK EXCHANGE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X].
The following documents have been incorporated by reference in this Form
10-K, as indicated:
<TABLE>
<CAPTION>
PART AND ITEM NUMBER OF FORM 10-K
DOCUMENT INTO WHICH INCORPORATED
--------------------------------------------- ---------------------------------
<S> <C>
1. 1996 Annual Report to Stockholders Items 5 through 8 of Part II
2. Proxy Statement for the 1997 Annual Items 10 through 13 of Part III
Meeting of Stockholders
</TABLE>
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 22,426,504 shares of Common
Stock, $.001 par value, outstanding on March 17, 1997, and the aggregate market
value of the voting stock held by non-affiliates of the registrant is
$796,140,892.
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PART I
ITEM 1. BUSINESS
GENERAL
CMAC Investment Corporation (the "Company") provides, through its wholly
owned subsidiary, Commonwealth Mortgage Assurance Company ("CMAC"), private
mortgage insurance coverage in the United States to residential mortgage
lenders. Private mortgage insurance protects lenders from default-related losses
on residential first mortgage loans made to home buyers who make down payments
of less than 20% of the home's purchase price. Private mortgage insurance also
facilitates the sale of such mortgage loans in the secondary mortgage market,
principally to the Federal Home Loan Mortgage Corporation ("Freddie Mac") and
Fannie Mae. CMAC is restricted generally by state insurance laws and regulations
and the eligibility requirements of Fannie Mae and Freddie Mac to providing
insurance on residential first mortgage loans only. CMAC currently offers three
principal types of private mortgage insurance coverage: "primary," "traditional
pool" and "modified pool." At December 31, 1996, primary insurance, and
traditional pool and modified pool insurance combined, represented 96.1% and
3.9%, respectively, of CMAC's direct risk in force, and this proportion is not
expected to change materially in the future, although the volume of traditional
pool insurance written is expected to increase significantly in 1997.
CMAC has been engaged in the mortgage insurance business since 1977. The
Company acquired all of the outstanding common stock of CMAC in October 1992 in
order to facilitate the initial public offering of the Company's common stock.
In the offering, the Company's sole stockholder, Commonwealth Land Title
Insurance Company ("Commonwealth"), an indirect subsidiary of Reliance Group
Holdings, Inc. ("Reliance"), sold all of the shares of common stock of the
Company owned by it. As a result of the offering, which was completed in
November 1992, the Company became an independent public company.
Primary Insurance
Primary insurance provides mortgage default protection on individual loans
and covers unpaid loan principal, delinquent interest and certain expenses
associated with the default and subsequent foreclosure (collectively, the "claim
amount"). CMAC's obligation to an insured lender in respect of a claim is
determined by applying the appropriate coverage percentage to the claim amount.
CMAC's "risk" on each insured loan is the loan amount multiplied by the coverage
percentage. Most of CMAC's current business is written with 30% coverage on
loans with a loan-to-value ("LTV") ratio of 95.0% or higher and 25% coverage on
loans with an LTV ratio between 90% and 95%. Under its master policy, CMAC has
the option (which is infrequently used) of paying the entire claim amount and
taking title to the mortgaged property, or paying the coverage percentage in
full satisfaction of its obligations under the insurance written. In the past,
CMAC has underwritten most of its primary insurance on a manual basis, however,
the recent trend for both the industry and CMAC has been toward utilizing
automated underwriting methods.
Pool Insurance
Pool insurance differs from primary insurance in that there is no limit to
the mortgage insurer's exposure on each individual loan. There is an aggregate
exposure limit ("stop loss") on a "pool" of loans which is generally between 1%
and 10% of the initial aggregate loan balance. Modified pool insurance has a
stop loss like pool insurance, but also has exposure limits on each individual
loan. The use of modified pool insurance is much more limited than traditional
pool insurance.
CMAC offers traditional or modified pool insurance on a selected basis to
various state housing finance agencies on the collateral for their bond issues,
as a credit enhancement to mortgage loans included in mortgage-backed securities
or in whole loan sales, and in certain other specific situations. CMAC very
seldom offers pool insurance as a standalone product. Instead, it is offered as
a supplement to a primary insurance transaction or relationship. Recently, CMAC
has begun to offer pool insurance on mortgage product sold to Freddie Mac and
Fannie Mae by CMAC's primary insurance customers. This pool insurance has a very
low stop loss, generally 1.0% to 1.5%, and the insured pools contain loans with
and without primary insurance. CMAC expects the volume of such business to
increase significantly in 1997 due to its popularity in the marketplace. It is
CMAC's current intention to limit pool risk in force to approximately 5% of
CMAC's total risk in force. New premiums written for traditional pool insurance
were $2.1 million in 1996, $1.6 million in 1995 and $5.6 million in 1994.
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Structured Transactions
CMAC, from time to time, engages in structured transactions which may
include either primary insurance, traditional pool insurance or modified pool
insurance or some form of combination. A structured transaction generally
involves insuring a large pool of seasoned loans or issuing a commitment to
insure new loan originations under negotiated terms. Some structured
transactions contain a risk-sharing component under which the insured assumes a
first-loss position or shares in losses in some other manner. The amount of new
premiums written in structured transactions by CMAC in 1996, 1995 and 1994 were
$400,000, $1.3 million and $5.9 million, respectively.
CUSTOMERS
Mortgage originators such as mortgage bankers, mortgage brokers, commercial
banks and savings institutions are CMAC's principal customers, although mortgage
borrowers generally bear the cost of primary insurance coverage. CMAC does, on a
limited basis, offer lender paid mortgage insurance whereby mortgage insurance
premiums are charged to the mortgage lender or loan servicer. On the lender paid
product, the interest rate to the borrower is usually higher to compensate for
the mortgage insurance premium that the lender is paying.
To obtain primary insurance from CMAC, a mortgage lender must first apply
for and receive a master policy from CMAC. CMAC's approval of a lender as a
master policyholder is based, among other factors, upon an evaluation of the
lender's financial position and its management's demonstrated adherence to sound
loan origination practices.
The number of primary individual policies in force at December 31, 1996,
1995 and 1994 was 382,243, 321,090 and 261,750, respectively.
CMAC's top 10 customers were responsible for 21.8% of new primary risk
written in 1996 compared to 24.7% and 22.2% for the years ended December 31,
1995 and 1994, respectively. The largest single customer of CMAC (including
branches and affiliates of such customer), measured by risk written, accounted
for 4.0% of new primary risk written during 1996 compared to 4.2% and 5.2% for
the years ended December 31, 1995 and 1994, respectively.
SALES, MARKETING AND COMPETITION
Sales and Marketing
CMAC employs a field sales force of approximately 100 persons, organized
into six regions, providing local sales representation throughout the United
States. CMAC sales personnel are compensated by salary, commissions on new
insurance written and a production incentive based on the achievement of various
goals. In early 1997, CMAC plans to expand its effort to serve larger national
accounts, which have become a more integral part of the mortgage insurance
market due to consolidation in the mortgage lending industry.
Competition
CMAC and other private mortgage insurers compete directly with various
federal government agencies, principally the Federal Housing Administration
("FHA"). In addition to competition from federal agencies, CMAC and other
private mortgage insurers face competition from state-supported mortgage
insurance funds.
The private mortgage insurance industry consists of CMAC and seven other
active mortgage insurance companies. During 1996, CMAC was the sixth largest
private mortgage insurer and had, according to industry data, a market share of
new primary mortgage insurance written of 9.6%.
UNDERWRITING PRACTICES
CMAC considers effective risk management to be critical to its long-term
financial stability. Market analysis, prudent underwriting, the use of automated
risk evaluation models, quality control and customer service are all important
elements of CMAC's risk management process.
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Underwriting Personnel
In addition to a centralized National Underwriting department in the home
office, each of CMAC's regions has a regional underwriting manager responsible
for evaluating risk and managing all underwriting field staff in the region.
CMAC employs an underwriting and support staff of approximately 130, who are
located in CMAC's 25 field offices; additionally, CMAC has two agency offices in
place.
Underwriting Process
CMAC has generally accepted applications for primary insurance (other than
in connection with structured transactions) under three basic programs: the
traditional fully documented program, the abbreviated "APP Plus" program and the
delegated underwriting program. Programs that involve less than fully documented
file submissions have become more prevalent in recent years. In order to meet
this demand, during 1996, CMAC introduced to the marketplace a new concept in
mortgage insurance underwriting and processing. This process is referred to as
"ExpressTrac(sm)". A lender utilizing ExpressTrac can submit loans to CMAC for
insurance with abbreviated levels of documentation based on the type of loan
being submitted for insurance. The program also allows for a reduction in
standard premium rates (4 basis points) for loans having FICO credit scores
(described below) greater than 680. ExpressTrac is not a delegated underwriting
program. CMAC has agreed to underwrite certain loans with less documentation by
relying upon a scoring model created during 1996 referred to as "Prophet
Score(sm)" (described below).
Delegated Underwriting
CMAC has a delegated underwriting program with certain customers. CMAC's
delegated underwriting program, which was implemented in 1989, currently
involves only lenders that are approved by CMAC's risk management department.
Delegated underwriting programs allow the lender's underwriters to commit CMAC
to insure loans based on agreed upon underwriting guidelines. CMAC routinely
audits loans submitted under these programs. As of December 31, 1996,
approximately 20% of the primary loans on CMAC's books were originated on a
delegated basis and during 1996, 49% of the loans insured by CMAC were
originated on a delegated basis. This compares to 17% and 30%, respectively in
1995.
Automated Underwriting
In 1994, CMAC installed an automated underwriting system which uses
artificial intelligence technology to assist its underwriting staff in the
processing of loan files. The system allows the underwriter to eliminate the
rudimentary underwriting steps and to focus on key aspects of the loan file,
with an ultimate goal of increasing underwriting efficiency while maintaining
the same level of risk exposure. During 1995, the system was fully integrated
into the CMAC underwriting process and improved efficiency was realized. In
1996, CMAC further enhanced the automated underwriting system by adding its
Prophet Score model to the automated underwriting systems' decision making
process. Direct connections between the CMAC system and Fannie Mae and Freddie
Mac systems are scheduled for implementation during 1997.
Mortgage Scoring Models
During the last few years, the use of scoring mechanisms to predict loan
performance has become prevalent in the marketplace, especially with Freddie
Mac's advocacy of the use of credit scores in the mortgage loan underwriting
process. The use of credit scores was pioneered by Fair Isaac and Company and
became popular in the mid-1980's. The FICO model calculates a score based on a
borrower's credit history. This credit score based "scorecard" is used to
predict the future performance of a loan over a one or two year time horizon.
The higher the credit score the lower the likelihood that a borrower will
default on a loan. CMAC's Prophet Score begins with a FICO score then adds
specific additional data regarding the borrower, the loan and the property. It
is this additional mortgage data that expands the integrity of CMAC's Prophet
Score over the entire life of the loan. Beginning in October 1996, the Prophet
Score appeared on each insurance commitment that CMAC issued.
Sub-Prime Loans
An increasingly popular form of lending is in the area of sub-prime loans.
These loan programs typically have new traditional credit standards which are
less stringent than standard credit guidelines. This market was created as
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an avenue to homeownership for borrowers who had not properly maintained their
credit profile over time. CMAC participates in insuring a limited amount of this
product. During 1996, less than 1% of primary insurance written was in this
category and at December 31, 1996, less than 1% of all loans on CMAC's books
fell into this loan type. CMAC receives a significantly higher premium for
insuring this product that is commensurate with the additional default risk. It
is CMAC's current intention to limit the amount of insured product to "A-" loans
rather than "B" or "C" loans and to limit the amount of business insured under
this A- program to specific targeted accounts with proven results and servicing
experience in the sub-prime area.
Contract Underwriting
CMAC utilizes its underwriting skills to provide an outsource contract
underwriting service to its customers. For a fee, CMAC underwrites fully
documented underwriting files for secondary market compliance, while at the same
time assessing the file for mortgage insurance, if applicable. Contract
underwriting has increased in popularity among CMAC's customers over the last
few years. During 1996, loans underwritten via contract underwriting accounted
for 35% of applications, 21% of commitments for insurance and 18% of insurance
certificates issued by CMAC. These percentages are expected to increase in 1997.
The lower relative commitment and certificate figures compared to application
figures reflect the low commitment rate and certification rate for loans
underwritten via contract underwriting due mostly to compliance issues. CMAC
often gives recourse to its customers on loans it underwrites for compliance. If
the loan does not meet agreed upon guidelines and is not salable in the
secondary market for that reason, CMAC agrees to remedy the situation either by
placing mortgage insurance coverage on the loan or by purchasing the loan.
During 1996, less than 1% of all loans were subject to these remedies and the
costs associated with these remedies were negligible. There is no assurance that
these low levels will continue in the future.
RATINGS
CMAC, along with other active private mortgage insurers, has its
claims-paying ability and financial strength rated by Standard & Poor's ("S&P")
and Moody's Investors Service, Inc. ("Moody's"), respectively. These ratings are
an indication to a mortgage insurer's customers of the insurer's present
financial strength and its capacity to honor its future claims payment
obligations. Ratings are generally considered critical to an insurer's ability
to compete for new insurance business. Currently, CMAC is rated "AA" by S&P and
"Aa3" by Moody's.
REINSURANCE
CMAC reinsures all direct insurance in force under an excess of loss
reinsurance program. This program originally utilized three reinsurers, but
beginning on January 1, 1995, the program was reduced to one reinsurer. The
reinsurer is responsible for 100% of CMAC's covered losses in excess of CMAC's
retention. CMAC's annual retention is determined by a formula which contains
variable components. The estimated 1997 retention is approximately $360 million.
The reinsurer's aggregate annual limit of liability is also determined by a
formula with variable components and is currently estimated to be $70 million.
If the reinsurer decides not to renew the reinsurance arrangement and is not
replaced by CMAC, the nonrenewing reinsurer must provide six years of runoff
coverage. There is an overall aggregate limit of liability applicable to any
runoff period equal to four times the annual limit in effect for the calendar
year of such nonrenewal. For 1997, this aggregate limit is estimated to be $280
million.
The excess of loss reinsurance program also provides restrictions and
limitations on (i) payment of dividends by CMAC; (ii) investments; (iii) mergers
or acquisitions involving other private mortgage insurance companies; and (iv)
reinsurance of exposure retained by CMAC.
In addition, CMAC has entered into a variable quota-share ("VQS") treaty
for primary risk in the 1994 to 1997 origination years and most of the pool risk
to be written in 1997. In this treaty, quota-share loss relief is provided at
varying levels ranging from 7.5% to 15.0% based upon the loss ratio on the
reinsured book. The higher CMAC's loss ratio, the greater the potential
reinsurance relief which protects CMAC in adverse loss situations. A ceding
commission is paid by the reinsurer to CMAC and the agreement is noncancelable
for ten years by either party. It is CMAC's present intention to continue a
similar treaty on future books of business. As of December 31, 1996, the risk in
force covered by the VQS treaty was approximately $6.5 billion, or approximately
71% of CMAC's primary risk in force.
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DEFAULTS AND CLAIMS
Defaults
The default and claim cycle on loans which have private mortgage insurance
begins with the insurer's receipt from the lender of notification of a default
on an insured loan. The master policy requires lenders to notify CMAC of an
uncured default on a mortgage loan within 75 days (45 days for an uncured
default in the first year of the loan), although many lenders do so earlier. The
recent trend has been earlier notification of defaults which has contributed to
the increase in CMAC's default rate. The incidence of default is affected by a
variety of factors, including change in borrower income, unemployment, divorce
and illness, the level of interest rates and general borrower creditworthiness.
Defaults that are not cured result in claims to CMAC. Borrowers may cure
defaults by making all delinquent loan payments or by selling the property and
satisfying all amounts due under the mortgage.
The following table shows the number of primary and pool loans insured,
related loans in default and the percentage of loans in default (default rate)
as of the dates indicated:
<TABLE>
<CAPTION>
DEFAULT STATISTICS
DECEMBER 31
-------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PRIMARY INSURANCE:
Insured loans in force.............. 382,243 321,090 261,750 228,884 196,509
Loans in default(1)................. 9,115 6,734 5,377 5,206 5,443
Percentage of loans in default...... 2.4% 2.1% 2.1% 2.3% 2.8%
POOL INSURANCE(2):
Insured loans in force.............. 93,531 43,969 31,658 33,691 31,454
Loans in default(1)................. 1,012 595 549 474 311
Percentage of loans in default...... 1.1% 1.4% 1.7% 1.4% 1.0%
</TABLE>
- ---------------
(1) Loans in default exclude those loans thirty days past due or less and loans
in default for which CMAC will not be liable for a claim payment.
(2) Includes traditional and modified pool insurance.
Regions of the United States may experience different default rates due to
varying economic conditions. The following table shows the default rates by CMAC
region as of the dates indicated.
<TABLE>
<CAPTION>
DEFAULT RATES BY CMAC REGION
DECEMBER 31
----------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
North............................................. 2.64% 2.56% 2.59% 2.53% 2.27%
East.............................................. 3.38 3.34 3.36 3.76 4.01
Southeast......................................... 2.10 1.53 1.51 1.72 2.54
Midwest........................................... 1.28 1.12 0.61 0.92 0.87
Southwest......................................... 1.61 1.38 1.35 1.69 2.35
West.............................................. 2.87 2.52 2.14 2.01 1.91
Alaska............................................ 0.45 0.74 0.67 1.04 1.36
</TABLE>
As of December 31, 1996, default rates for CMAC's two largest states
measured by risk in force, California and Florida, were 4.0% and 3.2%,
respectively, compared to 3.3% and 2.2% at December 31, 1995.
Claims
The likelihood that a claim will result from a default and the amount of
such claim depend principally on the borrower's equity at the time of default
and the borrower's (or the lender's) ability to sell the home for an amount
sufficient to satisfy all amounts due under the mortgage, as well as the
effectiveness of loss mitigation efforts. Claims are also affected by local
housing prices, interest rates, unemployment levels and the housing supply.
Claim activity is not evenly spread through the coverage period of a book
of business. Relatively few claims are received during the first two years
following issuance of the policy. This is followed by a period of rising claims
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which, based on industry experience, has historically reached its highest level
in the third through fifth years after the year of loan origination. Thereafter,
the number of claims received has historically declined at a gradual rate,
although the rate of decline can be affected by conditions in the economy.
Approximately 71% of CMAC's primary risk in force at December 31, 1996 had not
yet reached its anticipated highest claim frequency years. CMAC's cumulative
claim incidence on insurance written, determined four years after policy
issuance, was 1.5% for insurance written in 1990, 2.0% for insurance written in
1991, and 1.5% for insurance written in 1992. Certain "affordable housing" loans
insured in 1994 and 1995 have experienced higher than normal early default and
claim rates, although it is too early to determine how much higher the eventual
claim rates on such loans will be compared to prior books of business. Many of
the reasons for these early defaults have been addressed in the recent
underwriting of such loans.
LOSS MITIGATION
Once a default notice is received, CMAC attempts to mitigate its loss. The
CMAC loan workout department consists of 31 employees, including 17 full-time
workout specialists. Through proactive intervention with insured lenders and
borrowers, CMAC attempts to reduce the number and severity of CMAC's claim
payments. Loss mitigation techniques include pre-foreclosure sales, extensions
of credit to certain borrowers to reinstate insured loans, loan modifications
and deficiency settlements with borrowers. CMAC considers its loss mitigation
efforts to be an effective way to reduce net claim payments.
HOMEOWNERSHIP COUNSELING
In 1995, CMAC established a Homeownership Counseling Center (the "Center")
to work with borrowers receiving insured loans under community homebuyer, 97%
loan-to-value or other "affordable housing" programs. CMAC considers this
counseling to be very important to the future success of those particular
borrowers with regard to sustaining their mortgage payments. In addition, the
Center counsels such borrowers early in the default process in an attempt to
help cure the loan and assist the borrowers in meeting their mortgage
obligation. During 1996, after reviewing results of analyses showing loans
counseled by the Center were performing better than those counseled by certain
others, CMAC took the proactive step of requiring counseling on loans it insures
be done by the Center or by a counseling entity that CMAC has reviewed and
approved.
LOSS RESERVES
CMAC establishes reserves to provide for the estimated costs of settling
claims in respect of loans reported to be in default and loans that are in
default which have not yet been reported to CMAC. Consistent with generally
accepted accounting principles and industry accounting practices, CMAC does not
establish loss reserves for future claims on insured loans which are not
currently in default. In determining the liability for unpaid losses related to
reported outstanding defaults, CMAC establishes loss reserves on a case-by-case
basis. The amount reserved for any particular loan is dependent upon the status
of the loan as reported by the servicer of the insured loan, as well as the
economic condition and estimated foreclosure period in the area in which the
default exists. As the default progresses closer to foreclosure, the amount of
loss reserve for that particular loan will be increased, in stages, to
approximately 100% of CMAC's exposure.
ANALYSIS OF PRIMARY RISK IN FORCE
CMAC's business strategy has been to disperse risk as widely as possible.
CMAC analyzes its portfolio in a number of ways to identify any concentrations
or imbalances in risk dispersion. CMAC believes the quality of its insurance
portfolio is affected significantly by (i) the geographic dispersion of the
properties securing the insured loans; (ii) the quality of loan originations;
(iii) the types of loans insured (including LTV ratio, purpose of the loan, type
of loan instrument and type of underlying property securing the loan); and (iv)
the age of the loans insured.
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GEOGRAPHIC DISPERSION
The following tables reflect the percentage of direct primary risk in force
on CMAC's book of business (by location of property) for the top ten states and
top 15 metropolitan statistical areas ("MSAs") as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
TOP TEN STATES 1996 1995
------------------------------------------------------------------- ---- ----
<S> <C> <C>
California......................................................... 19.8% 20.9%
Florida............................................................ 8.8 8.6
New York........................................................... 8.3 8.6
Texas.............................................................. 5.8 5.9
Georgia............................................................ 5.0 4.8
Pennsylvania....................................................... 4.8 5.3
New Jersey......................................................... 4.4 4.8
Arizona............................................................ 4.3 4.3
Maryland........................................................... 2.7 2.8
Tennessee.......................................................... 2.6 N/A
Massachusetts...................................................... N/A 2.9
---- ----
Total.................................................... 66.5% 68.9%
==== ====
</TABLE>
<TABLE>
<CAPTION>
TOP FIFTEEN MSAS 1996 1995
------------------------------------------------------------------- ---- ----
<S> <C> <C>
Los Angeles, CA.................................................... 5.5% 5.8%
Atlanta, GA........................................................ 4.1 3.9
Philadelphia, PA................................................... 3.5 3.9
Phoenix, AZ........................................................ 3.5 3.5
New York, NY....................................................... 2.9 2.7
Nassau/Suffolk, NY................................................. 2.7 2.9
Washington, DC-MD-VA............................................... 2.6 2.7
Orange County, CA.................................................. 2.3 2.4
Chicago, IL........................................................ 2.1 2.0
Riverside-San Bernadino, CA........................................ 1.9 2.1
Dallas, TX......................................................... 1.9 2.0
Tampa-St. Petersburg, FL........................................... 1.7 1.8
Boston, MA......................................................... 1.5 1.8
Oakland, CA........................................................ 1.4 1.5
Ft. Lauderdale, FL................................................. 1.4 N/A
San Diego, CA...................................................... N/A 1.3
---- ----
Total.................................................... 39.0% 40.3%
==== ====
</TABLE>
LENDER AND PRODUCT CHARACTERISTICS
While geographic dispersion is an important component of overall risk
dispersion and it has been a strategy of the Company to reduce its exposure in
the top ten states and top fifteen MSAs, the Company believes the quality of the
risk in force should be considered in conjunction with other elements of risk
dispersion, such as product distribution, as well as CMAC's risk management and
underwriting practices.
The following table reflects the percentage of direct risk in force (as
determined on the basis of information available on the date of mortgage
origination) by the categories indicated as of December 31, 1996 and 1995.
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DIRECT RISK IN FORCE
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Product Type:
Primary.............................................................. 96.1% 96.8%
Pool(1).............................................................. 3.9 3.2
----- -----
100.0% 100.0%
===== =====
</TABLE>
DIRECT PRIMARY RISK IN FORCE
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Direct Primary Risk in Force (dollars in millions)..................... $8,352 $6,672
Lender Concentration:
Top 10 lenders (by original applicant)............................... 20.7% 22.0%
Top 20 lenders (by original applicant)............................... 29.2% 31.6%
LTV:
95.01% to 97.00%..................................................... 2.2% 1.5%
90.01% to 95.00%..................................................... 44.1 39.2
85.01% to 90.00%..................................................... 46.7 52.9
85.00% and below..................................................... 7.0 6.4
------ ------
Total........................................................ 100.0% 100.0%
====== ======
Loan Type:
Fixed................................................................ 80.6% 77.5%
Adjustable rate mortgage ("ARM") (fully indexed)(2).................. 16.7 19.4
ARM (potential negative amortization)(3)............................. 2.7 3.1
------ ------
Total........................................................ 100.0% 100.0%
====== ======
Mortgage Term:
15 years and under................................................... 3.9% 4.5%
Over 15 years........................................................ 96.1 95.5
------ ------
Total........................................................ 100.0% 100.0%
====== ======
Property Type:
Non-condominium (principally single-family detached)................. 95.2% 90.8%
Condominium.......................................................... 4.8 9.2
------ ------
Total........................................................ 100.0% 100.0%
====== ======
Occupancy Status:
Primary residence.................................................... 97.4% 97.8%
Second home.......................................................... 0.9 0.6
Non-owner occupied................................................... 1.7 1.6
------ ------
Total........................................................ 100.0% 100.0%
====== ======
Mortgage Amount:
$200,000 or less..................................................... 89.7% 91.3%
Over $200,000........................................................ 10.3 8.7
------ ------
Total........................................................ 100.0% 100.0%
====== ======
Loan Purpose:
Purchase............................................................. 83.1% 80.2%
Refinance............................................................ 16.9 19.8
------ ------
Total........................................................ 100.0% 100.0%
====== ======
</TABLE>
- ---------------
(1) Includes traditional and modified pool insurance.
(2) Refers to loans where payment adjustments are the same as mortgage interest
rate adjustments.
(3) Loans with potential negative amortization will not have increasing
principal balances unless interest rates increase as contrasted with
scheduled negative amortization where an increase in loan balance will occur
even if interest rates do not change.
8
<PAGE> 10
One of the most important determinants of claim incidence is the relative
amount of borrower's equity in the home, or down payment. Claim incidence on
loans having an LTV ratio in excess of 90% ("95s") is approximately two times
the claim incidence on loans with LTV ratios equal to or less than 90% and over
85% ("90s"). CMAC believes that the higher premium rates it charges on 95s
adequately reflect the additional risk on these loans. The industry and CMAC
began to insure 97% LTV loans ("97s") in 1995. These loans are expected to have
a higher claim incidence than 95s; however, with proper counseling efforts and
by limiting insurance on these loans to sensible affordable housing programs, it
is CMAC's belief that the claim incidence should not be materially (more than
one and one-half times) worse than on 95s, although this cannot be certain.
Early defaults on 97s as compared to other loans have confirmed CMAC's
expectations, although the eventual performance of these loans cannot yet be
accurately projected. Premium rates on 97s are higher than on 95s to compensate
for the additional risk and the higher expected frequency and severity of
claims. The amount of 97s insured in 1996 and 1995 was approximately 4% of the
total loans insured each year. The percentage of 97s written in 1997 should
approximate the 1995 and 1996 figures.
In recent years, CMAC has increased its insurance of mortgages identified
by its customers as "affordable housing" loans. These loans are typically made
to low- and moderate-income borrowers in conjunction with special programs
developed by state or local housing agencies, Fannie Mae or Freddie Mac. Such
programs usually include 95s and 97s and may require certain underwriting
guidelines to be liberalized in order to achieve their objectives. CMAC's
participation in these programs is dependent upon acceptable borrower
counseling. Early default experience on these programs has been worse than
average, however CMAC does not believe the ultimate claims will materially
affect its financial results.
CMAC's claim frequency on insured ARMs has been higher than on all other
loan types. The Company believes that the risk on ARM loans is greater than on
fixed rate loans due to possible monthly payment increases if interest rates
rise.
The Company believes that 15-year mortgages present a lower level of risk
than 30-year mortgages, primarily as a result of the faster amortization and the
more rapid accumulation of borrower equity in the property.
The Company believes that the risk of claim is also affected by the type of
property securing the insured loan. In the Company's opinion, loans on
single-family detached housing are subject to less risk of claim incidence than
loans on other types of properties. Conversely, loans on attached housing types,
particularly condominiums and cooperatives, are generally considered by the
Company to be a higher risk, due to the higher density of such properties and
because a detached unit is the preferred housing type in most areas.
The Company believes that the risk of claim on relocation loans is
extremely low and has begun to offer lower premium rates on such loans to
compensate for the lower risk.
The Company believes that loans on non-owner occupied homes purchased for
investment purposes represent a substantially higher risk of claim incidence,
and are subject to greater value declines than loans on either primary or second
homes. CMAC underwrites loans on non-owner occupied homes more stringently, and,
where permissible, requires that the investor indemnify CMAC directly for any
loss suffered by CMAC. CMAC also charges a higher premium rate than the rate
charged for insuring loans on owner occupied homes.
The Company believes that higher priced properties experience wider
fluctuations in value than moderately priced residences and that the income of
many people who buy higher priced homes is less stable than that of people with
moderate incomes.
INVESTMENT PORTFOLIO
The Company's income from its investment portfolio is one of the Company's
primary sources of cash flow to support its operations and claim payments.
The Company follows an investment policy which, at a minimum, requires: (i)
95% of its investment portfolio to consist of cash equivalents and debt
securities (including redeemable preferred stocks) which, at the date of
purchase, were rated investment grade by a nationally recognized rating agency
(e.g., "BBB" or better by S&P), and (ii) at least 50% of its investment
portfolio (together with cash assets) to consist of cash, cash equivalents and
debt securities (including redeemable preferred stocks) which, at the date of
purchase, were rated the highest investment grade by a nationally recognized
rating agency (e.g., "AAA" by S&P). CMAC is considering altering
9
<PAGE> 11
these investment guidelines to permit the inclusion of a small percentage of
equity securities (including convertible debt and convertible preferred stocks).
The equity component would most likely not exceed 5% to 10% of the total
investment portfolio. Any such change would be within the context of the
restrictions set forth in CMAC's reinsurance agreements.
At December 31, 1996, the Company's investment portfolio had a carrying
value of $513.2 million and a market value of $529.5 million, including $5.2
million of short-term investments. At December 31, 1996, the Company's
investment portfolio did not include any real estate or mortgage loans. It did
include one private placement investment grade preferred security with a
carrying value of $2.2 million. At December 31, 1996, 100% of the Company's
investment portfolio (which excludes cash) consisted of cash equivalents and
debt securities (including redeemable preferred stocks) rated investment grade.
The Company's investment policies and strategies are subject to change
depending upon regulatory, economic and market conditions and the then existing
or anticipated financial condition and operating requirements, including the tax
position, of the Company.
The diversification of the Company's investment portfolio (other than
short-term investments) at December 31, 1996 is shown in the table below:
INVESTMENT PORTFOLIO DIVERSIFICATION
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------
AMORTIZED
COST FAIR VALUE PERCENT(1)
--------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities held to maturity:
U.S. government securities(2)....................... $ 15,197 $ 15,610 3.9%
State and municipal obligations(3).................. 378,099 394,065 96.1
-------- -------- -----
Total....................................... $ 393,296 $409,675 100.0%
======== ======== =====
Fixed maturities available for sale:
U.S. government agency securities(2)................ $ 18,678 $ 19,355 16.9%
Redeemable preferred stock(3)....................... 91,840 95,311 83.1
-------- -------- -----
Total....................................... $ 110,518 $114,666 100.0%
======== ======== =====
</TABLE>
- ---------------
(1) Percentage of amortized cost.
(2) Substantially all of these securities are backed by the full faith and
credit of the U.S. government.
(3) Consists of investment-grade securities.
10
<PAGE> 12
The following table shows the scheduled maturities of the securities held
in the Company's investment portfolio at December 31, 1996:
INVESTMENT PORTFOLIO SCHEDULED MATURITY(1)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
PERCENT
CARRYING -------
VALUE
--------------
(IN THOUSANDS)
<S> <C> <C>
Short-term investments............................................. $ 5,196 1.0%
Less than one year................................................. 1,970 0.4
One to five years.................................................. 13,752 2.6
Five to ten years.................................................. 155,487 30.3
Over ten years..................................................... 222,087 43.3
Mortgage-backed securities(2)...................................... 19,355 3.8
Redeemable preferred stock (3)..................................... 95,311 18.6
-------- -----
Total......................................................... $513,158 100.0%
======== =====
</TABLE>
- ---------------
(1) Actual maturities may differ as a result of calls prior to scheduled
maturity.
(2) Substantially all of these securities are backed by the Government National
Mortgage Association ("GNMA").
(3) No stated maturity date.
The following table shows the ratings of the Company's investment portfolio
(other than short-term investments) as of December 31, 1996:
INVESTMENT PORTFOLIO BY S&P RATING
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
RATING(1) PERCENT
------------------------------------------------------------------- CARRYING -------
VALUE
--------------
(IN THOUSANDS)
<S> <C> <C>
Fixed maturities:
U.S. government and agency securities............................ $ 34,552 6.8%
AAA.............................................................. 298,706 58.8
AA............................................................... 62,278 12.3
A................................................................ 52,770 10.4
BBB.............................................................. 28,333 5.6
Not rated(2)..................................................... 31,323 6.1
-------- -----
Total......................................................... $507,962 100.0%
======== =====
</TABLE>
- ---------------
(1) Current ratings assigned by S&P.
(2) These securities are not rated by S&P, but are rated investment grade by at
least one other nationally recognized securities rating agency.
The Company adopted Financial Accounting Series Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities (the "Implementation Guide"), effective November 30, 1995.
Concurrent with the adoption of the Implementation Guide, the Company reassessed
the appropriateness of the classification of its securities. In accordance with
this reassessment, the Company determined to transfer certain securities from
held to maturity to available for sale. This transfer resulted in a net
unrealized gain of $1.3 million.
11
<PAGE> 13
REGULATION
Direct Regulation
State Regulation
The Company and its insurance subsidiaries are subject to comprehensive,
detailed regulation principally designed for the protection of policyholders,
rather than for the benefit of investors, by the insurance departments in the
various states where the Company and its insurance subsidiaries are licensed to
transact business. Insurance laws vary from state to state, but generally grant
broad supervisory powers to agencies or officials to examine insurance companies
and enforce rules or exercise discretion affecting almost every significant
aspect of the insurance business.
Insurance regulations relate, among other things, to the licensing of
companies to transact business, claims handling, reinsurance requirements,
premium rates and policy forms offered to customers, financial statements,
periodic reporting, permissible investments and adherence to financial standards
relating to surplus, dividends and other criteria of solvency intended to assure
the satisfaction of obligations to policyholders.
Mortgage insurers are generally restricted to writing residential mortgage
guaranty insurance business only. This restriction essentially prohibits CMAC
from using its capital resources in support of other types of insurance or
non-insurance business. The non-insurance businesses of the Company which
consist of mortgage insurance related services are not generally subject to
regulation under state insurance laws.
Insurance Holding Company Regulation. All states have enacted legislation
that requires each insurance company in an insurance holding company system to
register with the insurance regulatory authority of its state of domicile and to
furnish to such regulator financial and other information concerning the
operations of companies within the holding company system that may materially
affect the operations, management or financial condition of insurers within the
system.
Because the Company is an insurance holding company and CMAC, among the
other insurance subsidiaries, is a Pennsylvania insurance company, the
Pennsylvania insurance laws regulate, among other things, certain transactions
in the Company's Common Stock and certain transactions between CMAC, the other
insurance subsidiaries and their parent or affiliates. Specifically, no person
may, directly or indirectly, offer to acquire or acquire "control" of the
Company, CMAC or the other insurance subsidiaries unless such person files a
statement and other documents with the Pennsylvania Commissioner of Insurance
and obtains the Commissioner's prior approval. The Commissioner may hold a
public hearing on the matter. "Control" is presumed to exist if 10% or more of
CMAC or another of the Company's insurance subsidiaries' voting securities is
owned or controlled, directly or indirectly, by a person, although the
Pennsylvania Commissioner of Insurance may find that "control" in fact does or
does not exist where a person owns or controls either a lesser or greater amount
of securities. In addition, material transactions between CMAC and the Company's
other insurance subsidiaries and their parent or affiliates are subject to
certain conditions, including that they be "fair and reasonable." These
restrictions generally apply to all persons controlling or under common control
with CMAC or the Company's other insurance subsidiaries. Certain transactions
between the Company's insurance subsidiaries and their parent or affiliates may
not be entered into unless the Pennsylvania Commissioner of Insurance is given
30 days prior notification and does not disapprove the transaction during such
30 day period.
Dividends. The insurance laws of Pennsylvania establish a test limiting
the maximum amount of dividends which may be paid without prior approval by the
Pennsylvania Insurance Commissioner. Under such test, CMAC may pay dividends
during any 12-month period in an amount equal to the greater of: (i) 10% of the
preceding year-end statutory policyholders' surplus or (ii) the preceding year's
statutory net income. In accordance with such restrictions, $75.3 million would
be available for dividends in 1997. In addition, an amendment to the
Pennsylvania statute, effective in 1994, requires that dividends and other
distributions be paid out of an insurer's unassigned surplus. Because of the
unique nature of the method of accounting for contingency reserves, CMAC has
negative unassigned surplus. Thus, prior approval by the Pennsylvania Insurance
commissioner is required for CMAC to pay dividends or make other distributions
so long as CMAC has negative unassigned surplus. The Pennsylvania Insurance
Commissioner has approved all dividend payments by CMAC since the passage of
this amendment, and the Insurance Department has given management assurance that
approval for such distributions will be granted in the future, provided that the
financial condition of CMAC does not materially change. The State of California
has a statute requiring mortgage insurers to pay dividends or make other
distributions out of unassigned surplus. CMAC
12
<PAGE> 14
and the California Department of Insurance have reached an understanding under
which CMAC will be able to pay dividends or make other distributions to the
Company provided that the financial condition of CMAC does not materially
change.
Risk to Capital. A number of states and Freddie Mac limit a private
mortgage insurer's risk in force to 25 times the insurer's total policyholders'
surplus (which includes the statutory contingency reserve), commonly known as
the "risk-to-capital" requirement. As of December 31, 1996, CMAC's
risk-to-capital ratio was 18.4 to 1, versus 17.8 to 1 in 1995.
Reserves. For statutory reporting, each year CMAC is required to provide
for additions to the contingency loss reserve in an amount equal to 50% of
earned premiums. Such amounts cannot be withdrawn for a period of 10 years
except under certain circumstances. The contingency loss reserve, designed to be
a reserve against catastrophic losses, essentially restricts dividends and other
distributions by CMAC. Prior to 1995, CMAC had included the contingency reserve
as a component of policyholders' surplus. The Pennsylvania Insurance Department
has determined that the contingency reserve should be classified as a liability
in the statutory balance sheet rather than as a component of policyholders'
surplus. In response to this determination, commencing in January 1995, CMAC
began classifying the contingency reserve as a liability. At December 31, 1996,
CMAC had policyholders' surplus of $142.1 million and a contingency reserve of
$280.5 million.
Premium Rates and Policy Forms. CMAC's premium rates and policy forms are
subject to regulation in every state in which it is licensed to transact
business in order to protect policyholders against the adverse effects of
excessive, inadequate or unfairly discriminatory rates and to encourage
competition in the insurance marketplace. In most states, premium rates and
policy forms must be filed prior to their use. In some states, such rates and
forms must also be approved prior to use. Changes in premium rates are subject
to justification, generally on the basis of the insurer's loss experience,
expenses and future trend analysis. The general default experience in the
mortgage insurance industry may also be considered.
Reinsurance. Certain restrictions apply under the laws of several states
to any licensed company ceding business to an unlicensed reinsurer. Under such
laws, if a reinsurer is not admitted or approved in such states, the company
ceding business to the reinsurer cannot take credit in its statutory financial
statements for the risk ceded to such reinsurer absent compliance with certain
reinsurance security requirements. In addition, several states also have special
restrictions on mortgage guaranty insurance. Also, several states limit the
amount of risk a mortgage insurer may retain with respect to coverage on an
insured loan to 25% of the insured's claim amount. Coverage in excess of 25%
(i.e., deep coverage) must be reinsured.
Examination. The Company's insurance subsidiaries are subject to
examination of their affairs by the insurance departments of each of the states
in which they are licensed to transact business.
Federal Regulation
RESPA. The origination or refinance of a federally related mortgage loan
is a settlement service, and therefore subject to the Real Estate Settlement
Practices Act of 1974, and the regulations promulgated thereunder (collectively,
"RESPA"). In December 1992, new regulations were issued which made clear that
mortgage insurance is also a settlement service, and therefore, that mortgage
insurers are subject to provisions of Section 8(a) of RESPA, which generally
prohibits persons from accepting anything of value for referring real estate
settlement services to any provider of such services. Although many states
prohibit mortgage insurers from giving rebates, RESPA has been interpreted to
cover many non-fee services as well. HUD's interest in pursuing violations of
RESPA has increased awareness of both mortgage insurers and their customers of
the possible sanctions of this law.
HMDA. Most originators of mortgage loans are required to collect and
report data relating to a mortgage loan applicant's race, nationality, gender,
marital status and census tract to HUD or the Federal Reserve under the Home
Mortgage Disclosure Act of 1975 ("HMDA"). The purpose of HMDA is to detect
possible discrimination in home lending and, through disclosure, to discourage
such discrimination. Mortgage insurers are not required pursuant to any law or
regulation to report HMDA data, although under the laws of several states,
mortgage insurers are currently prohibited from discriminating on the basis of
certain classifications.
The active mortgage insurers, through their trade association, Mortgage
Insurance Companies of America ("MICA"), have entered into an agreement with the
Federal Financial Institutions Examinations Council ("FFIEC") to report the same
data on loans submitted for insurance as is required for most mortgage lenders
under
13
<PAGE> 15
HMDA. The first report of HMDA-type data was collected by MICA from its members
for the fourth quarter of 1993 and reported to the FFIEC in the first quarter of
1994. Subsequent reports of HMDA-type data for the mortgage insurance industry
were submitted by MICA to the FFIEC in March 1995 and 1996. Management is not
aware of any pending or expected actions by governmental agencies in response to
the reports submitted by MICA to the FFIEC.
From time to time, proposals have been advanced in Congress which would
permit or require cancellation of mortgage insurance under certain conditions.
No prediction can be made as to the eventual disposition of such proposals by
Congress or the impact of any such legislation on the mortgage insurance
industry.
Other Direct Regulation
Fannie Mae and Freddie Mac. As the most significant purchasers and sellers
of conventional mortgage loans and beneficiaries of private mortgage insurance,
Freddie Mac and Fannie Mae impose requirements on private mortgage insurers in
order for such insurers to be eligible to insure loans sold to such agencies.
Freddie Mac's current eligibility requirements impose limitations on the type of
risk insured, standards for the geographic and customer diversification of risk,
procedures for claims handling, acceptable underwriting practices and financial
requirements which generally mirror state insurance regulatory requirements.
These requirements are subject to change from time to time. Fannie Mae also has
eligibility requirements, although such requirements are not published. CMAC is
an approved mortgage insurer for both Freddie Mac and Fannie Mae.
Legislation has been passed which reforms the oversight of Fannie Mae and
Freddie Mac. This legislation requires Fannie Mae and Freddie Mac to conduct a
study that would examine, among other topics, whether the underwriting standards
used by private mortgage insurers inhibit the purchase of mortgages on homes
located in mixed-use, urban center and predominantly minority neighborhoods or
on homes occupied by low or moderate income families. It is possible that such a
study could lead to legislation that could prohibit private mortgage insurers,
including CMAC, from using certain geographically-based underwriting
restrictions and practices on loans insured and sold to Fannie Mae and Freddie
Mac.
In 1995, Freddie Mac and Fannie Mae began to require deeper coverage on
certain loans with LTV ratios greater than 85%. The Company believes that this
deeper coverage will not have a material effect on its financial results,
although premiums earned and the provision for losses will increase and the
risk-to-capital ratio will be higher as a result of the increase in risk.
In 1995, CMAC issued a new Master Policy which applies to all business
written after June 1, 1995. Changes in the terms include a broader scope of
coverage for certain environmental and bankruptcy related claims, and somewhat
more limited rights to reject claim payments, neither of which the Company
believes will have a material adverse effect on CMAC's operations or financial
results. The new Master Policy has been approved by Fannie Mae and Freddie Mac,
as well as by all states which require approval of policy forms.
Indirect Regulation
The Company and CMAC are also indirectly, but significantly, impacted by
regulations affecting originators and purchasers of mortgage loans, particularly
Freddie Mac and Fannie Mae, and regulations affecting governmental insurers such
as the FHA and VA. Private mortgage insurers, including CMAC, are highly
dependent upon federal housing legislation and other laws and regulations which
affect the demand for private mortgage insurance and the housing market
generally. For example, legislation which increases the number of persons
eligible for FHA or VA mortgages could have a material adverse effect on the
Company's ability to compete with the FHA or VA.
President Clinton's proposed budget for fiscal year 1998 includes a
proposal that would raise the FHA single-family loan limit to as much as
$214,600, matching the limits for Fannie Mae and Freddie Mac new loan purchases.
The Company cannot predict when or if such a proposal will be adopted, but if
adopted, demand for private mortgage insurance may be adversely affected.
Proposals have been advanced which would allow Fannie Mae and Freddie Mac
additional flexibility in determining the amount and nature of alternative
recourse arrangements or other credit enhancements which they could utilize as
substitutes for private mortgage insurance. The Company cannot predict if or
when any of the foregoing legislation or proposals will be adopted, but if
adopted and depending upon the nature and extent of revisions made, demand for
private mortgage insurance may be adversely affected. There can be no assurance
that
14
<PAGE> 16
other federal laws affecting such institutions and entities will not change, or
that new legislation or regulations will not be adopted. In addition, Fannie Mae
and Freddie Mae have entered into, and may in the future seek to enter into,
alternative recourse arrangements or other credit enhancements based on their
existing legislative authority.
Proposed legislation has been introduced in both houses of Congress which,
if enacted, could require the automatic cancellation of mortgage insurance
certificates upon the occurrence of specified events. Such bills are currently
under consideration in committees, and it is unclear whether the triggering
event will be the reduction of the LTV ratio to a specified level, the aging of
the loan for a specified number of years, or some combination. Bills intending
to accomplish the same result have also been introduced in several state
legislatures. Additionally, Fannie Mae has indicated its intention to issue
guidelines to its seller/servicers which would require the automatic
cancellation of mortgage insurance with similar triggering parameters. The
Company cannot predict if or when any of the foregoing legislation or guidelines
will be adopted or effective, but if adopted, and depending upon the nature and
extent of the cancellation parameters required, the persistency of insured loans
could be adversely affected. The Company feels that any possible outcome will
have an immaterial impact on CMAC's insured book of business and on the
Company's financial results.
Political and monetary pressures to reduce the nation's budget deficit
could, among other things, result in the partial or entire loss of the U.S.
federal income tax deduction for mortgage loan interest, which could result in
downward pressure on housing prices. Any reduction or loss of such deduction
could reduce the volume of low down payment mortgages originated and private
mortgage insurance written and adversely impact mortgage default patterns, and
would materially affect the Company's business.
There can be no assurance that the above-mentioned federal laws and
regulations or other federal laws and regulations affecting lenders, private and
governmental mortgage insurers, or purchasers of insured mortgage loans, will
not be amended, or that new legislation or regulations will not be adopted, in
either case in a manner which will adversely affect the demand for private
mortgage insurance.
EMPLOYEES
At December 1996, CMAC had 512 employees, of which approximately one-third
were located at its Philadelphia headquarters facility. CMAC's employees are not
unionized and management considers employee relations to be very good.
ITEM 2. PROPERTIES
The Company leases approximately 59,000 square feet for its corporate
headquarters in Philadelphia under leases which expire in 2003. In addition,
CMAC leases regional and branch office space in various cities throughout the
United States comprising approximately 50,000 square feet under leases expiring
between 1997 and 2001. With respect to all facilities, the Company believes it
will be able to obtain satisfactory lease renewal terms.
The Company believes its existing properties are well utilized and are
suitable and adequate for its present circumstances.
The Company maintains a mini-computer network from its corporate data
center located in its headquarters building to support its data processing
requirements for accounting, claims, marketing, risk management, underwriting
and non-insurance operations. The Company has back-up procedures in place and
has developed and successfully tested a comprehensive disaster recovery plan to
be used in the event of emergency situations.
ITEM 3. LEGAL PROCEEDINGS
The Internal Revenue Service ("IRS") had asserted a federal income tax
deficiency attributable to CMAC for the tax years 1983-1985. The IRS has taken
the position that CMAC must defer deductions for incurred losses until the time
that the insured lender takes title to the mortgaged property. CMAC protested
the deficiency on the grounds that a loss is incurred, and unpaid loss reserves
may be established, at the time that a borrower's loan is in default. As part of
a global settlement with the IRS to close out those tax years which were under
audit, Reliance agreed to the disallowance of the loss reserve deductions that
CMAC had taken. Within the context of a tax indemnification agreement between
the Company and Reliance, there was no effect on the financial statements of the
Company. Subsequent tax years may involve the same issue. The United States Tax
Court held in favor of the IRS on this issue with respect to a different
taxpayer, but this decision was reversed by the United States Court of
15
<PAGE> 17
Appeals for the Seventh Circuit. Based on the Court of Appeals' decision, the
Company believes that CMAC will prevail on this industry-wide issue.
CMAC is involved in certain other litigation arising in the normal course
of its business. CMAC is contesting the allegations in each pending action and
believes, based on current knowledge and after consultation with counsel, that
the outcome of such litigation will not have a material adverse effect on the
Company's consolidated financial position and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1996 to a vote of
holders of the Company's common stock.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information with respect to this item is included on page 31 of the
Company's 1996 Annual Report to Stockholders and is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth in the tables on page 12 of the Company's 1996
Annual Report to Stockholders under the caption "Selected Financial and
Statistical Data" is hereby incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information set forth on pages 27 through 29 in the Company's 1996
Annual Report to Stockholders under the caption "Management's Discussion and
Analysis" is hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated statements of income, of common stockholders' equity and
of cash flows for each of the years in the three-year period ended December 31,
1996, and the related consolidated balance sheets of the Company as of December
31, 1996 and 1995, together with the related notes thereto and the independent
auditors' report, as well as the unaudited quarterly financial data, all set
forth on pages 13 through 26 of the Company's 1996 Annual Report to
Stockholders, are hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information on the directors and executive officers of the Registrant
is included in the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders, and is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
This information is included in the Company's Proxy Statement for the 1997
Annual Meeting of Stockholders, and is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is included in the Company's Proxy Statement for the 1997
Annual Meeting of Stockholders, and is hereby incorporated by reference.
16
<PAGE> 18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is included in the Company's Proxy Statement for the 1997
Annual Meeting of Stockholders, and is hereby incorporated by reference.
PART IV
ITEM 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(a) 1. Financial statements -- The financial statements listed in the
accompanying Index to Consolidated Financial Statements and
Financial Statement Schedules are filed as part of this Form 10-K.
2. Financial statement schedules -- The financial statement schedules
listed in the accompanying Index to Consolidated Financial Statements
and Financial Statement Schedules are filed as part of this Form
10-K.
3. Exhibits -- The exhibits listed in the accompanying Index to Exhibits
are filed as part of this Form 10-K.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1996.
17
<PAGE> 19
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(ITEMS 14(a)1 and 2)
<TABLE>
<CAPTION>
PAGE
-----------------------
ANNUAL
FORM REPORT TO
10-K STOCKHOLDERS*
----- -------------
<S> <C> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets at December 31, 1996 and 1995................. -- 13
Consolidated statements of income for each of the three years in the
period ended December 31, 1996.......................................... -- 14
Consolidated statements of changes in common stockholders' equity for each
of the three years in the period ended December 31, 1996................ -- 15
Consolidated statements of cash flows for each of the three years in the
period ended December 31, 1996.......................................... -- 16
Notes to consolidated financial statements................................ -- 17-25
Independent auditors' report.............................................. -- 26
FINANCIAL STATEMENT SCHEDULES
Independent auditors' report on financial statement schedules............. 22 --
Schedule I -- Summary of investments -- other than investments in
related parties (December 31, 1996)................................. 23 --
Schedule III -- Condensed financial information of Registrant
(December 31, 1996)................................................. 24-28 --
Schedule VI -- Reinsurance (December 31, 1996)....................... 29 --
</TABLE>
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements and notes thereto.
- ---------------
* Incorporated by reference from the indicated pages of the 1996 Annual Report
to Stockholders.
18
<PAGE> 20
INDEX TO EXHIBITS
(ITEM 14(a)3)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- ------------------------------------------------------------------------------
<C> <C> <S>
3.1 -- Amended and restated Certificate of Incorporation of the Company.(2)(Exhibit
3.1)
3.2 -- Amended and restated by-laws of the Company.(4)(Exhibit 3.2)
4.1 -- Specimen certificate for Common Stock.(1)(Exhibit 4.1)
4.2 -- Certificate of Designations relating to $4.125 Preferred Stock of the
Company.(2)(Exhibit 4.2)
4.3 -- Specimen certificate for $4.125 Preferred Stock of the Company.(1)(Exhibit
4.3)
4.4 -- Standstill and Voting Agreement dated October 27, 1992 between the Company and
Reliance Group Holdings, Inc.(2)(Exhibit 4.4)
10.1 -- Service Agreement dated July 20, 1992, between Commonwealth Mortgage Assurance
Company and Commonwealth Land Title Insurance Company.(1)(Exhibit 10.1)
10.2 -- Amended Sublease Agreement dated June 15, 1993, between Commonwealth Mortgage
Assurance Company and Commonwealth Land Title Insurance Company.(3)(Exhibit
10.2)
10.3 -- Tax Indemnification Agreement dated October 28, 1992 among the Company,
Commonwealth Land Title Insurance Company, Reliance Insurance Company and
Reliance Group Holdings, Inc.(2)(Exhibit 10.3)
10.4 -- Tax Allocation Agreement dated as of April 1, 1992, among Reliance Insurance
Company and certain of its subsidiaries, including Commonwealth Mortgage
Assurance Company.(1)(Exhibit 10.4)
10.5 -- Employment Agreement dated August 1, 1992, between the Company and Herbert
Wender.(1)(6)(Exhibit 10.5)
10.6 -- Form of Change of Control Agreement dated January 25, 1995, between the
Company and each of Frank P. Filipps, Douglas J. MacLeod, Harry A. Levine,
Paul F. Fischer, C. Robert Quint, and Thomas J. Shelly, Jr. (5)(6)(Exhibit
10.6)
10.8 -- CMAC Investment Corporation Pension Plan.(2)(6)(Exhibit 10.8)
10.9 -- CMAC Investment Corporation Savings Incentive Plan, as amended and restated
through January 1, 1994.(5)(6) (Exhibit 10.9)
10.10 -- CMAC Investment Corporation 1992 Stock Option Plan as amended as of January 1,
1995. (5)(6)(Exhibit 10.10)
10.11 -- CMAC Investment Corporation Equity Compensation Plan. (5)(6)(Exhibit 10.11)
10.12 -- Purchase Agreement dated October 29, 1992 between the Company and Commonwealth
Land Title Insurance Company regarding $4.125 Preferred Stock.(2)(Exhibit
10.14)
10.13 -- Registration Rights Agreement dated October 27, 1992 between the Company and
Commonwealth Land Title Insurance Company.(2)(Exhibit 10.15)
10.14 -- Form of Commonwealth Mortgage Assurance Company Master Policy.(1)(Exhibit
10.16)
10.15 -- Risk-to-Capital Ratio Maintenance Agreement between the Company and
Commonwealth Mortgage Assurance Company regarding matters relating to Moody's
financial strength rating as amended through October 22, 1993.(3) (Exhibit
10.15)
10.16 -- Reserve Account Agreement dated August 14, 1992, between the Company and
Commonwealth Mortgage Assurance Company regarding $4.125 Preferred
Stock.(1)(Exhibit 10.18)
10.17 -- First Layer Binder of Reinsurance, effective March 1, 1992, among Commonwealth
Mortgage Assurance Company, Commonwealth Mortgage Assurance Company of
Arizona, AXA Reinsurance SA. (1) (Exhibit 10.19)
10.18 -- Capital Mortgage Reinsurance Company Variable Quota Share Reinsurance
Agreement, effective January 1, 1994, between Commonwealth Mortgage Assurance
Company and its affiliates and Capital Mortgage Reinsurance Company.(4)
(Exhibit 10.19)
10.19 -- Capital Reinsurance Company Reinsurance Agreement, effective January 1, 1994,
between Commonwealth Mortgage Assurance Company and Capital Reinsurance
Company.(4) (Exhibit 10.20)
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- ------------------------------------------------------------------------------
<C> <C> <S>
10.20 -- Capital Mortgage Reinsurance Company Variable Quota Share Reinsurance
Agreement, effective January 1, 1995, between Commonwealth Mortgage Assurance
Company and its affiliates and Capital Mortgage Reinsurance Company.
(5)(Exhibit 10.20)
*10.21 -- Capital Mortgage Reinsurance Company Variable Quota Share Reinsurance
Agreement, effective January 1, 1996, between Commonwealth Mortgage Assurance
Company and its affiliates and Capital Mortgage Reinsurance Company.
10.22 -- Amended form of Commonwealth Mortgage Assurance Company Master Policy,
effective June 1, 1995.(4)(Exhibit 10.22)
10.23 -- Employment Agreement, dated December 30, 1994, between the Company and James
C. Miller. (4)(6) (Exhibit 10.21)
*11.1 -- Statement re: computation of per share earnings.
*13.1 -- 1996 Annual Report of the Company to Stockholders. Except to the extent
incorporated in this Annual Report on 10-K, this Exhibit is not being "filed"
for purposes of Section 18 of the Securities Exchange Act of 1934 or
otherwise.
22.1 -- Subsidiaries of the Company.(1)(Exhibit 22.1)
*24.1 -- Consent of Deloitte & Touche.
</TABLE>
- ---------------
* Filed herewith.
(1) Incorporated by reference to the exhibit identified in parentheses, filed as
an exhibit in the Registrant's Registration Statement on Form S-1 filed
August 24, 1992 and amendments thereto (File No. 33-51188).
(2) Incorporated by reference to the exhibit identified in parentheses, filed as
an exhibit in the Registrant's Annual Report on Form 10-K filed March 30,
1993.
(3) Incorporated by reference to the exhibit identified in parentheses, filed as
an exhibit in the Registrant's Annual Report on Form 10-K filed March 30,
1994.
(4) Incorporated by reference to the exhibit identified in parentheses, filed as
an exhibit in the Registrant's Annual Report on Form 10-K filed March 30,
1995.
(5) Incorporated by reference to the exhibit identified in parentheses, filed as
an exhibit in the Registrant's Annual Report on Form 10-K filed March 29,
1996.
(6) Management contract or compensatory plan or arrangement required to be filed
pursuant to Item 14(c) of Form 10-K.
20
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 March 31, 1997.
CMAC Investment Corporation
By: /s/ FRANK P. FILIPPS
------------------------------------
Frank P. Filipps
(principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 31, 1997 by the following persons on
behalf of the registrant and in the capacities indicated.
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------------------ -----------------------------------------------
<S> <C>
/s/ HERBERT WENDER Chairman of the Board and Director
- ------------------------------------------
Herbert Wender
/s/ FRANK P. FILIPPS President and Chief Executive Officer
- ------------------------------------------
Frank P. Filipps
/s/ C. ROBERT QUINT Senior Vice President, Chief Financial Officer
- ------------------------------------------ (principal accounting officer)
C. Robert Quint
/s/ DAVID C. CARNEY Director
- ------------------------------------------
David C. Carney
/s/ CLAIRE M. FAGIN, PH.D., R.N. Director
- ------------------------------------------
Claire M. Fagin, Ph.D., R.N.
/s/ JAMES W. JENNINGS Director
- ------------------------------------------
James W. Jennings
/s/ JAMES C. MILLER Director
- ------------------------------------------
James C. Miller
/s/ RONALD W. MOORE Director
- ------------------------------------------
Ronald W. Moore
/s/ ROBERT W. RICHARDS Director
- ------------------------------------------
Robert W. Richards
/s/ ANTHONY W. SCHWEIGER Director
- ------------------------------------------
Anthony W. Schweiger
</TABLE>
21
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
CMAC Investment Corporation
Philadelphia, Pennsylvania
We have audited the consolidated financial statements of CMAC Investment
Corporation and subsidiaries (the "Company") as of December 31, 1996 and 1995,
and for each of the three years in the period ended December 31, 1996, and have
issued our report thereon dated January 21, 1997; such consolidated financial
statements and report are included in your 1996 Annual Report to Stockholders
and are incorporated herein by reference. Our audits also included the
consolidated financial statement schedules of CMAC Investment Corporation and
subsidiaries, listed in Item 14. These consolidated financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such consolidated
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
January 21, 1997
22
<PAGE> 24
CMAC INVESTMENT CORPORATION
SCHEDULE I
SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
AMOUNT
AT WHICH
SHOWN ON
AMORTIZED MARKET THE BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- ----------------------------------------------------------- --------- -------- -----------
(in thousands)
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
United States government and government agencies and
authorities......................................... $ 33,875 $ 34,965 $ 34,552
State and municipal obligations....................... 378,099 394,065 378,099
Redeemable preferred stock............................ 91,841 95,311 95,311
-------- -------- --------
Total fixed maturities..................................... 503,815 524,341 507,962
Short-term investments..................................... 5,196 5,196 5,196
-------- -------- --------
Total investments other than investments in related
parties.................................................. $ 509,011 $529,537 $ 513,158
======== ======== ========
</TABLE>
23
<PAGE> 25
CMAC INVESTMENT CORPORATION
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
PARENT COMPANY ONLY
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
Assets
Investments
Fixed maturities held to maturity -- at amortized cost............ $ 9,713 $ 9,694
Short-term investments............................................ 491 495
Cash................................................................. 52 224
Investment in subsidiaries, at equity in net assets.................. 387,014 324,642
Federal income taxes................................................. 286 818
Accounts receivable -- affiliates.................................... -- 3,254
Other assets......................................................... 247 175
-------- --------
$397,803 $339,302
======== ========
Liabilities and Stockholders' Equity
Accounts payable -- affiliates....................................... $ 973 $ --
Accounts payable -- other............................................ 73 273
Other liabilities.................................................... 413 413
-------- --------
1,459 686
-------- --------
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; 22,395,124 and 11,129,617 shares, respectively, issued
and outstanding................................................... 22 11
Additional paid-in capital........................................... 176,431 163,665
Retained earnings.................................................... 177,195 131,816
Net unrealized gain on investments, net of tax....................... 2,696 3,124
-------- --------
356,344 298,616
-------- --------
$397,803 $339,302
======== ========
</TABLE>
See supplementary notes.
24
<PAGE> 26
CMAC INVESTMENT CORPORATION
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME
PARENT COMPANY ONLY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1996 1995 1994
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Revenues
Equity in undistributed net income of subsidiaries.......... $62,800 $45,284 $36,097
Dividends received from subsidiaries........................ -- 6,000 6,000
Net investment income....................................... 776 790 104
------- ------- -------
63,576 52,074 42,201
------- ------- -------
Expenses
Operating expenses.......................................... 1,693 1,543 1,849
------- ------- -------
Pretax income................................................. 61,883 50,531 40,352
Income tax benefit............................................ 338 273 777
------- ------- -------
Net income.................................................... $62,221 $50,804 $41,129
======= ======= =======
</TABLE>
See supplementary notes.
25
<PAGE> 27
CMAC INVESTMENT CORPORATION
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
PARENT COMPANY ONLY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net income............................................... $ 62,221 $ 50,804 $ 41,129
Adjustments to reconcile net income to net cash provided
by operating activities
Losses on sales of investments........................ -- -- 548
Equity in undistributed net income of subsidiaries.... (62,800) (45,284) (36,097)
Increase (decrease)in federal income taxes............ 532 271 (1,116)
Net change in other assets, accounts payable and other
liabilities......................................... 3,955 (3,495) (780)
-------- -------- --------
Net cash provided by operating activities.................. 3,908 2,296 3,684
-------- -------- --------
Cash flows from investing activities
Proceeds from sales of investments available for sale.... -- -- 2,113
Proceeds from sales of investments held to maturity...... -- -- 7,388
Purchases of investments held to maturity................ -- -- (9,674)
Sales (purchases) of short-term investments -- net....... 4 35 (530)
Other.................................................... (19) (18) (39)
-------- -------- --------
Net cash (used in) provided by investing activities........ (15) 17 (742)
-------- -------- --------
Cash flows from financing activities
Dividends paid........................................... (5,646) (5,511) (5,494)
Proceeds from issuance of common stock................... 1,581 3,274 496
-------- -------- --------
Net cash used in financing activities...................... (4,065) (2,237) (4,998)
-------- -------- --------
(Decrease)increase in cash................................. (172) 76 (2,056)
Cash, beginning of year.................................... 224 148 2,204
-------- -------- --------
Cash, end of year.......................................... $ 52 $ 224 $ 148
======== ======== ========
</TABLE>
See supplementary notes.
26
<PAGE> 28
CMAC INVESTMENT CORPORATION
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
SUPPLEMENTARY NOTES
NOTE A
The accompanying Parent Company financial statements should be read in
conjunction with the Consolidated Financial Statements and Notes to Consolidated
Financial Statements appearing on pages 13 through 26 of the CMAC Investment
Corporation 1996 Annual Report to Stockholders.
NOTE B
CMAC Investment Corporation (the "Company") was incorporated in December
1991 in order to hold the capital stock of Commonwealth Mortgage Assurance
Company ("CMAC"). In the fourth quarter of 1992, a merger among controlled
subsidiaries of CMAC was consummated with the effect that the Company acquired
all of the outstanding stock of CMAC, and CMAC's sole stockholder, Commonwealth
Land Title Insurance Company ("Commonwealth"), an indirect wholly owned
subsidiary of Reliance Group Holdings, Inc., acquired all of the outstanding
capital stock of the Company.
In the fourth quarter of 1992, the initial public offering of the Company's
common stock (the "Offering") was consummated. In the Offering, Commonwealth
sold all of the 7,000,000 shares owned by it, and the Company issued and sold
3,950,000 shares. In addition, the Company issued and sold 800,000 shares of
$4.125 Preferred Stock to Commonwealth. Aggregate proceeds to the Company from
the sale of common stock were approximately $67,200,000 and from the sale of
preferred stock were $40,000,000.
The preferred stock, issued in connection with the Offering, is entitled to
cumulative annual dividends of $4.125 per share, payable quarterly in arrears.
The preferred stock is redeemable at the option of the Company at $54.125 per
share on or after August 15, 2002, and declining to $50.00 per share on or after
August 15, 2005 (plus in each case accumulated and unpaid dividends), or is
subject to a mandatory redemption at a redemption price of $50.00 per share plus
accumulated and unpaid dividends based upon specified annual sinking fund
requirements from 2002 to 2011.
The Company is a holding company whose principal source of income is
dividends from CMAC. The ability of CMAC to pay dividends on its common stock is
restricted by certain provisions of the insurance laws of the Commonwealth of
Pennsylvania, its state of domicile. The insurance laws of Pennsylvania
establish a test limiting the maximum amount of dividends which may be paid by
an insurer without prior approval by the Pennsylvania Insurance Commissioner.
Under such test, CMAC may pay dividends during any 12-month period in an amount
equal to the greater of (i) 10% of the preceding year-end statutory
policyholders' surplus or (ii) the preceding year's statutory net income. In
accordance with such restrictions, $75,334,000 would be available for dividends
in 1997. In addition, an amendment to the Pennsylvania statute, effective in
1994, requires that dividends and other distributions be paid out of an
insurer's unassigned surplus. Because of the unique nature of the method of
accounting for contingency reserves, CMAC has negative unassigned surplus. Thus,
prior approval by the Pennsylvania Insurance Commissioner is required for CMAC
to pay dividends or make other distributions so long as CMAC has negative
unassigned surplus. The Pennsylvania Insurance Commissioner has approved all
dividend payments by CMAC since the passage of this amendment and the Insurance
Department has given management assurance that approvals for such distributions
will be granted in the future, provided that the financial condition of CMAC
does not materially change.
The State of California has a statute requiring mortgage insurers to pay
dividends or make other distributions out of unassigned surplus. CMAC and the
California Department of Insurance have reached an understanding under which
CMAC will be able to pay dividends or make other distributions to the Company,
provided that the financial condition of CMAC does not materially change.
In addition, CMAC's current excess of loss reinsurance arrangement
prohibits the payment of any dividend which would have the effect of reducing
its total policyholders' surplus (which includes contingency
27
<PAGE> 29
CMAC INVESTMENT CORPORATION
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
SUPPLEMENTARY NOTES (CONTINUED)
reserve) below $85,000,000. As of December 31, 1996, CMAC's total policyholders'
surplus was $422,588,000.
The Company and CMAC have entered into an agreement pursuant to which the
Company has agreed to establish and, for so long as any shares of $4.125
Preferred Stock remain outstanding, maintain a reserve account in an amount
equal to three years of dividend payments on the outstanding shares of $4.125
Preferred Stock (currently $9.9 million), and not to pay dividends on the common
stock at any time when the amount in the reserve account is less than three
years of dividend payments on the shares of $4.125 Preferred Stock then
outstanding. This agreement between the Company and CMAC provides that the
holders of the $4.125 Preferred Stock are entitled to enforce the agreement's
provisions as if such holders were signatories to the agreement.
The Company may not pay any dividends on shares of common stock unless the
Company has paid all accrued dividends on and has complied with all sinking fund
and redemption obligations relating to its outstanding shares of $4.125
Preferred Stock.
NOTE C
On October 15, 1996, the Board of Directors authorized a stock split, paid
on 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 share and per-share data have been
adjusted to give effect to the stock split.
28
<PAGE> 30
CMAC INVESTMENT CORPORATION
SCHEDULE VI -- REINSURANCE
MORTGAGE INSURANCE PREMIUMS EARNED
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------- --------- --------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
1996................................ $203,042 $15,268 $ 147 $187,921 0.08%
======== ======= ==== ========
1995................................ $145,139 $ 8,185 $ 180 $137,134 0.13%
======== ======= ==== ========
1994................................ $110,780 $ 4,886 $ 229 $106,123 0.22%
======== ======= ==== ========
</TABLE>
29
<PAGE> 31
(LOGO)
This document has been printed entirely on recycled paper.
<PAGE> 32
EXHIBIT INDEX
EXHIBITS, INCLUDING THOSE INCORPORATED BY REFERENCE.
The following is a list of exhibits filed as part of this Annual Report
on Form 10-K. Where so indicated by footnote, exhibits which were previously
filed are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated in parentheses. The
page numbers listed refer to the page numbers where such exhibits are located
using the sequential numbering system specified by Rules 0-3 and 403.
EXHIBIT
NUMBER EXHIBIT PAGE
- ------ ------- ------
3.1 Amended and restated Certificate of Incorporation of
the Company.(2)(Exhibit 3.1)
3.2 Amended and restated by-laws of the Company. (4)
(Exhibit 3.2)
4.1 Specimen certificate for Common Stock.(1)(Exhibit 4.1)
4.2 Certificate of Designations relating to
$4.125 Preferred Stock of the Company.(2)(Exhibit 4.2)
4.3 Specimen certificate for $4.125 Preferred Stock of the
Company.(1)(Exhibit 4.3)
4.4 Standstill and Voting Agreement dated October 27, 1992
between the Company and Reliance Group
Holdings, Inc.(2)(Exhibit 4.4)
10.1 Service Agreement dated July 20, 1992, between
Commonwealth Mortgage Assurance Company and
Commonwealth Land Title Insurance
Company.(1)(Exhibit 10.1)
10.2 Amended Sublease Agreement dated June 15, 1993,
between Commonwealth Mortgage Assurance Company and
Commonwealth Land Title Insurance
Company.(3)(Exhibit 10.2)
10.3 Tax Indemnification Agreement dated October 28, 1992
among the Company, Commonwealth Land Title Insurance
Company, Reliance Insurance Company and Reliance Group
Holdings, Inc.(2)(Exhibit 10.3)
10.4 Tax Allocation Agreement dated as of April 1, 1992,
among Reliance Insurance Company and certain of its
subsidiaries, including Commonwealth Mortgage
Assurance Company.(1)(Exhibit 10.4)
10.5 Employment Agreement dated August 1, 1992, between the
Company and Herbert Wender.(1)(6)(Exhibit 10.5)
10.6 Form of Change of Control Agreement dated January 25,
1995, between the Company and each of Frank P.
Filipps, Douglas J. MacLeod, Harry A. Levine, Paul
F. Fischer, C. Robert Quint and Thomas J. Shelly, Jr.
(5)(6) (Exhibit 10.6)
39
<PAGE> 33
10.8 CMAC Investment Corporation Pension Plan.(2)(6)
(Exhibit 10.8)
10.9 CMAC Investment Corporation Savings Incentive Plan,
as amended and restated through January 1,
1994.(5)(6)(Exhibit 10.9)
10.10 CMAC Investment Corporation 1992 Stock Option Plan
as amended as of January 1, 1995. (5)(6)(Exhibit
10.10)
10.11 CMAC Investment Corporation Equity Compensation
Plan. (5)(6)
40
<PAGE> 34
EXHIBIT
NUMBER EXHIBIT PAGE
- ------ ------- ------
10.12 Purchase Agreement dated October 29, 1992 between
the Company and Commonwealth Land Title Insurance
Company regarding $4.125 Preferred Stock.(2)(Exhibit
10.14)
10.13 Registration Rights Agreement dated October 27, 1992
between the Company and Commonwealth Land Title
Insurance Company.(2)(Exhibit 10.15)
10.14 Form of Commonwealth Mortgage Assurance Company
Master Policy.(1)(Exhibit 10.16)
10.15 Risk-to-Capital Ratio Maintenance Agreement between
the Company and Commonwealth Mortgage Assurance
Company regarding matters relating to Moody's
financial strength rating as amended through
October 22, 1993.(3)
(Exhibit 10.15)
10.16 Reserve Account Agreement dated August 14, 1992,
between the Company and Commonwealth Mortgage
Assurance Company regarding $4.125 Preferred
Stock.(1)(Exhibit 10.18)
10.17 First Layer Binder of Reinsurance, effective March 1,
1992, among Commonwealth Mortgage Assurance Company,
Commonwealth Mortgage Assurance Company of Arizona,
AXA Reinsurance SA.(1)(Exhibit 10.19)
10.18 Capital Mortgage Reinsurance Company Variable Quota
Share Reinsurance Agreement, effective January 1,
1994, between Commonwealth Mortgage Assurance Company
and its affiliates and Capital Mortgage Reinsurance
Company. (4)(Exhibit 10.19)
10.19 Capital Reinsurance Company Reinsurance Agreement,
effective January 1, 1994, between Commonwealth
Mortgage Assurance Company and Capital Reinsurance
Company. (4) (Exhibit 10.20)
10.20 Capital Mortgage Reinsurance Company Variable
Quota Share Reinsurance Agreement, effective January 1,
1995, between Commonwealth Mortgage Assurance Company
and its affiliates and Capital Mortgage Reinsurance
Company. (5)(Exhibit 10.20)
*10.21 Capital Mortgage Reinsurance Company Variable
Quota Share Reinsurance Agreement, effective January 1,
1996, between Commonwealth Mortgage Assurance Company
and its affiliates and Capital Mortgage Reinsurance
Company.
10.22 Amended form of Commonwealth Mortgage Assurance
Company Master Policy, effective June 1, 1995.
(4)(Exhibit 10.22)
10.23 Employment Agreement, dated December 30, 1994, between
the Company and James C. Miller. (4)(6)(Exhibit 10.21)
*11.1 Statement re: computation of per share earnings.
41
<PAGE> 35
*13.1 1996 Annual Report of the Company to Stockholders.
Except to the extent incorporated in this Annual
Report on 10-K, this Exhibit is not being "filed"
for purposes of Section 18 of the Securities
Exchange Act of 1934 or otherwise.
22.1 Subsidiaries of the Company.(1)(Exhibit 22.1)
*24.1 Consent of Deloitte & Touche.
* Filed herewith.
(1) Incorporated by reference to the exhibit identified in parentheses,
filed as an exhibit in the Registrant's Registration Statement on Form
S-1 filed August 24, 1992 and amendments thereto (File No.
33-51188).
(2) Incorporated by reference to the exhibit identified in parentheses,
filed as an exhibit in the Registrant's Annual Report on Form 10-K
filed March 30, 1993.
(3) Incorporated by reference to the exhibit identified in parentheses,
filed as an exhibit in the Registrant's Annual Report on Form 10-K
filed March 30, 1994.
(4) Incorporated by reference to the exhibit identified in parentheses,
filed as an exhibit in the Registrant's Annual Report on Form 10K
filed March 30, 1995.
(5) Incorporated by reference to the exhibit identified in parentheses,
filed as an exhibit in the Registrant's Annual Report on Form 10-K
filed March 29, 1996.
(6) Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c) of Form 10-K.
42
<PAGE> 36
VARIABLE SHARE
QUOTA SHARE REINSURANCE AGREEMENT
REINSURED: Commonwealth Mortgage Assurance Company (and
Affiliates)
REINSURER: Capital Mortgage Reinsurance Company
EFFECTIVE DATE: January 1, 1996
TERM: Continuous from the Effective Date until
terminated as provided below.
DEFINITIONS: When used in this Agreement, the following
terms shall have the specific meanings shown
unless the context of any provision hereof
clearly indicates otherwise. Any definitions
set forth herein shall (i) include the
singular as well as plural, and (ii) all
accounting terms involving premium and loss
calculations shall have the meanings
ascribed to them under statutory accounting
principles prescribed or permitted under the
laws and regulations of the Commonwealth of
Pennsylvania.
"Affiliate" means any insurance company
controlled by, controlling or under common
control with the Reinsured or the Reinsurer,
as applicable.
"Agreement" means this Variable Share Quota
Share Reinsurance Agreement.
"Losses" means losses paid plus allocated
loss adjustment expenses paid by the
Reinsured during the Term of this Agreement
arising from Covered Business and reported
by the Reinsured within its statutory
financial statements, net of any salvage in
connection therewith. The Reinsured's
determination of Losses shall be binding on
the Reinsurer.
"Calendar Year" means each whole calendar
year, i.e., each January 1 through December
31.
"Calendar Year's Earned Premium" means for
any Calendar Year, the amount of gross
earned premium allocable to Covered Business
and reported by the Reinsured within its
statutory financial statement for the
particular Calendar Year.
<PAGE> 37
"Calendar Year's Losses" means, for any
Calendar Year, the amount of Losses
allocable to Covered Business and reported
by the Reinsured within its year-end
statutory financial statement for the
particular Calendar Year.
"Calendar Year's Ever to Date Written
Premium" means for any particular Calendar
Year, the aggregate amount of all gross
written premium allocable to Covered
Business reported by the Reinsured within
its year-end financial statements for the
period from the Underwriting Year through
the end of the particular Calendar Year.
"Calendar Year's Ever to Date Covered
Losses" means, for any particular Calendar
Year, the aggregate amount of all Losses
reimbursed, or reimbursable by the Reinsurer
hereunder, whether under the Calendar Year
Variable Quota Share Coverage or the
Underwriting Year Excess Coverage, from the
Effective Date through the end of the
particular Calendar Year.
"Underwriting Year" means the Calendar Year
beginning January 1, 1996 and ending
December 31, 1996.
"Underwriting Year's Written Premium" means
the gross written premium allocable to
Covered Business written by the Reinsured
during the Underwriting Year.
"Underwriting Year's Net Losses" means the
aggregate of all losses allocable to Covered
Business minus the amount of such Losses
reimbursed, or reimbursable by the Reinsurer
pursuant to this Agreement from the
Effective Date through the end of a
particular Calendar Year.
"Gross Risk in Force" means the aggregate
amount of exposure arising from Covered
Business calculated by multiplying the
unpaid principal balance of each mortgage
loan insured by the Reinsured by the
coverage percentage for each such loan.
COVERED BUSINESS: All primary mortgage guaranty insurance
policies issued by the Reinsured during the
Underwriting Year.
EXCLUSIONS: (i) Pool Insurance
(ii) Reinsurance Assumed
2
<PAGE> 38
(iii) Any policy issued as a replacement for
an outstanding mortgage insurance policy of
any entity acquired by the Reinsured.
(iv) Any policy with regard to which the
insured under such policy (or its affiliate)
provides any insurance or co-insurance (or
its functional equivalent) to the Reinsured
in connection with such policy.
COVERAGES: Calendar Year Variable Quota Share Coverage:
The Reinsurer will assume as reinsurance and
be liable for:
(i) 7.5% of the amount of each Calendar
Year's Losses that do not exceed 55%
of such Calendar Year's Earned
Premium.
(ii) 11.25% of the amount of each Calendar
Year's Losses that exceed 55% but are
less than or equal to 180% of such
Calendar Year's Earned Premium.
Provided, however, that for any
Calendar Year in which such Calendar
Year's Losses exceed 55% of such
Calendar Year's Earned Premium, the
Reinsurer shall assume and be liable
for an additional 3.75% of such
Calendar Year's Losses up to 55% of
such Calendar Year's Earned Premium.
(iii) 15% of the amount of each Calendar
Year's Losses that exceed 180% of such
Calendar Year's Earned Premium.
(iv) 100% of the amount of each Calendar
Year's Losses that exceed 85% of the
Reinsured's Gross Risk in Force at the
end of such Calendar Year and are not
covered pursuant to provisions (i)
through (iii) above.
Underwriting Year Excess Coverage: The
Reinsurer will assume as reinsurance and be
liable for:
(i) 100% of the Underwriting Year's Net
Losses incurred by the Reinsured
during Calendar Years one through
four, to the extent that 8% of the
Underwriting Year's Written Premium,
plus any unpaid ceding commission,
exceeds the Calendar Year's Ever to
Date Covered Losses at the end of the
fourth Calendar Year of this
Agreement.
3
<PAGE> 39
(ii) 100% of the Underwriting Year's Net
Losses incurred by the Reinsured
during Calendar Years five through
seven, to the extent that 8% of the
premium allocable to the Underwriting
Year and collected during the first
and second Calendar Years of this
Agreement plus any unpaid ceding
commission, exceeds the Calendar
Year's Ever to Date Covered Losses at
the end of the seventh Calendar Year
of this Agreement.
(iii) 100% of the Underwriting Year's Net
Losses incurred by the Reinsured
through the end of the tenth Calendar
Year of this Agreement, to the extent
that 8% of the premium allocable to
the Underwriting Year, plus any unpaid
ceding commission, exceeds the
Calendar Year's Ever to Date Covered
Losses, at the end of the tenth
Calendar Year of this Agreement.
PREMIUM: The Reinsured shall pay to the Reinsurer a
premium (the "Premium") during the Term of
this Agreement equal to 15% of the
Reinsured's gross written premium allocable
to Covered Business during each calendar
quarter. The Premium, net of any ceding
commission due hereunder, shall be due and
payable within thirty (30) days after the
end of such calendar quarter and shall be
remitted as set forth below.
CEDING
COMMISSION: The Reinsurer shall pay to the Reinsured a
ceding commission of thirty-two percent
(32%) of the Premium paid hereunder,
provided, however, that for any Calendar
Year for which such Calendar Year's Losses
exceed fifty-five percent (55%) of such
Calendar Year's Earned Premium, no ceding
commission shall be paid.
LOSS
PAYMENTS: Calendar Year Variable Quota Share Coverage
The Reinsurer shall pay to the Reinsured a
provisional payment for Losses reinsured
under the Calendar Year Variable Quota Share
Coverage equal to 7.5% of the amount of the
Reinsured's Losses during each calendar
quarter during the Term of this Agreement no
later than the later of (i) thirty (30) days
after the end of such calendar quarter, and
(ii) ten (10) business days following the
receipt
4
<PAGE> 40
by the Reinsurer of a schedule setting forth
the amount of the Reinsured's Losses during
such quarter. Sixty (60) days after the end
of each Calendar Year (or any shorter period
in the event of a termination) the Reinsured
shall prepare and forward to the Reinsurer a
loss account showing for such Calendar Year
(or shorter period) and the Underwriting
Year, all Losses, Written Premium, Earned
Premium and Gross Risk in Force. Within ten
(10) days after the Reinsurer's receipt of
the loss account for a particular Calendar
Year (or shorter period), the Reinsurer and
the Reinsured shall transfer funds between
them so as to reconcile the difference
between (i) the Reinsured's Calendar Year's
Losses reimbursed and reimbursable
hereunder, and (ii) the sum of the
provisional payments for Losses and payments
of ceding commissions made by the Reinsurer
with respect to the calendar quarters during
such Calendar Year (or shorter period).
Underwriting Year Excess Coverage
The Reinsurer shall remit to the Reinsured a
provisional payment of any amounts due the
Reinsured under the Underwriting Year Excess
Coverage on or before the last business day
of the fourth, seventh and tenth Calendar
Years of this Agreement. The Reinsured shall
provide the Reinsurer with a provisional
loss account no later than thirty (30) days
prior to the end of any such Calendar Year.
Sixty (60) days after the end of the fourth,
seventh and tenth Calendar Years of this
Agreement, the Reinsured shall prepare and
forward to the Reinsurer a loss account
showing for such Calendar Year and the
Underwriting Year, all Losses, Written
Premium, Earned Premium and Gross Risk in
Force. Within ten (10) business days after
the Reinsurer's receipt of the loss account
for the fourth, seventh and tenth Calendar
Years, the Reinsurer and the Reinsured shall
transfer funds between them so as to
reconcile the difference between (i) the
Reinsured's Underwriting Year's Net Losses,
and (ii) the sum of the provisional payments
made by the Reinsurer under the Underwriting
Year Excess Coverage with respect to such
Calendar Year.
5
<PAGE> 41
CANCELLATION,
TERMINATION: A. This Agreement is non-cancelable by
either party hereto for a period of ten
years from the effective date hereof, except
as provided in Section (B) below.
B. Upon the occurrence of one or more of the
following events, the Reinsured, upon
providing ninety (90) days prior written
notice to the Reinsurer, shall have the
right to terminate this Agreement on a
cut-off basis, providing that such event or
events have not been corrected prior to the
expiration of such ninety (90) day period:
1. Notice from Standard & Poor's Corporation
("S&P"), Moody's Investor Services, Inc.
("Moody's"), or any other nationally
recognized rating agency that rates the
Reinsured, confirmation of which shall be
provided to the Reinsurer, that the
Reinsured's then-current financial strength
or claims-paying rating cannot be maintained
because of the reinsurance coverage provided
hereunder.
2. Receipt by the Reinsured of written
notice from the Pennsylvania Department of
Insurance, or any other regulatory
authority, a copy of which notice shall be
provided to the Reinsurer, denying to the
Reinsured full financial statement credit
according to the statutory requirements of
the Commonwealth of Pennsylvania or any
other jurisdiction in which the failure of
the Reinsured to obtain such full financial
statement credit would have a material
adverse impact on the Reinsured.
3. Each party shall have the right to
terminate this Agreement in the event of any
actual or alleged breach or non-performance
of a material provision of this Agreement by
the other party which is not corrected or
cured within thirty (30) days of the receipt
by such other party of a written notice
specifying the nature of the claimed breach
or non-performance.
4. Each party shall have the right to
terminate this Agreement on December 31,
2005 (or any subsequent December 31) by
providing at least ninety (90) days prior
written notice of its intention to terminate
this Agreement.
After a termination cut-off pursuant to this
Section, the Reinsurer shall pay to the
Reinsured a profit commission equal to (i)
8% of the current Calendar Year's Ever to
Date Written Premium, plus (ii) any unpaid
ceding commission
6
<PAGE> 42
not paid in any Calendar Year when the
Underwriting Year's Ever to Date Covered
Losses exceeded fifty-five percent (55%) of
such Calendar Year's Earned Premium, minus
(iii) such Calendar Year's ever to Date
Covered Losses.
At any termination of this Agreement, the
Reinsurer shall refund to the Reinsured, in
addition to any other sums due to the
Reinsured hereunder, 14.67% of the
Reinsured's ceded unearned premium with
respect to Covered Business as of the date
of such termination.
FINANCIAL
STATEMENT CREDIT: The Reinsurer shall take all steps
necessary for the Reinsured to obtain full
financial statement credit according to the
statutory requirements of the Commonwealth
of Pennsylvania, the State of New York, and
any other jurisdiction in which the failure
of the Reinsured to obtain such full
financial statement credit would have a
material adverse impact on the Reinsured.
TRUST
AGREEMENT: Upon the execution of this Agreement by the
parties, the Reinsurer shall establish a
trust account (the "Trust") for the benefit
of the Reinsured at a financial institution
and under a trust agreement acceptable to
the Reinsured. The Reinsured shall promptly
reimburse the Reinsurer for the reasonable
and customary fees and expenses of the
administration of the Trust.
The payments of Premium (net of any ceding
commissions due) by the Reinsured hereunder
shall be made in two parts: (i) an amount
equal to 14.67% of any Premium shall be
remitted directly to the Reinsurer; and (ii)
any remaining Premium due, net of any ceding
commission, shall be deposited directly into
the Trust.
Deposits of Premium into the Trust shall be
invested at the discretion of the Reinsurer,
provided, however, that at each quarter-end
(i) at least ninety-five percent (95%) of
the assets of the Trust shall consist of
instruments or securities determined, as of
the date of each quarter-end, to be of
investment grade as defined from time to
time by S&P and/or Moody's, (ii) at least
fifty percent (50%) of the investments and
cash assets of the Trust shall consist of
cash or cash equivalents, or securities
determined, as of the date
7
<PAGE> 43
of purchase, to be of the highest investment
grade as determined from time to time by S&P
and/or Moody's, and (iii) none of the assets
of the Trust may be invested in instruments
or securities with any real estate-related
risk, and (iv) none of the assets of the
Trust may be invested in instruments or
securities of the Reinsurer, the Reinsured
or any Affiliate of either. The Reinsurer
shall be entitled to the investment income
generated by the Trust.
The Reinsured has the right and the
obligation to withdraw assets from the Trust
at any time and from time to time, as the
Reinsured shall elect, in satisfaction of
the Reinsurer's obligations hereunder,
provided that such obligations have not been
previously reimbursed to the Reinsured by
the Reinsurer. In the event that, at any
time, the assets of the Trust are
insufficient to satisfy fully the
obligations of the Reinsurer hereunder, the
Reinsurer shall satisfy such shortfall
directly as provided hereinabove.
The Reinsurer may withdraw, and retain for
its own account, all investment income
earned on the Trust's assets at any time and
from time to time as the Reinsurer shall
elect. The trustee shall allow no other
withdrawals or substitutions of assets from
or to the Trust except as permitted
hereunder.
The trustee shall immediately honor all
withdrawal requests made in accordance
herewith and take all steps necessary to
transfer the applicable assets held under
the Trust to the appropriate party.
Any disputes arising from the Trust may not
be the subject of an arbitration proceeding
between the parties unless both the
Reinsured and the Reinsurer agree in writing
to such an arbitration proceeding.
OTHER
PROVISIONS: This Agreement is subject to the negotiation
and execution of a formal reinsurance treaty
and a trust agreement both acceptable to the
parties containing in addition to the terms
and conditions set forth herein, ordinary
and customary clauses set forth in
reinsurance transactions generally,
including, but not limited to the following:
Follow the Fortunes Clause
Offset Clause
8
<PAGE> 44
Errors and Omissions Clause
Inspections Clause
Taxes Clause
Service of Suit Clause
Insolvency Clause
Arbitration Clause
Assignment Clause
Notices Clause Waiver Clause
Negotiated Agreement Clause
Governing Law Clause (PA)
Salvage Clause
Subrogation Clause
Access to Records Clause
Reports Clause
Parental Wrap of Reinsurer Clause
Penalty Interest for Late Payments
AGREED TO AND ACCEPTED BY:
COMMONWEALTH MORTGAGE ASSURANCE COMPANY
BY: _____________________________________
NAME: _____________________________________
TITLE: _____________________________________
DATE: _____________________________________
CAPITAL MORTGAGE REINSURANCE COMPANY
BY: _____________________________________
NAME: _____________________________________
TITLE: _____________________________________
DATE: _____________________________________
9
<PAGE> 45
CMAC INVESTMENT CORPORATION
SCHEDULE OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1996(1) 1995(1) 1994(1)
------- ------- -------
(In thousands, except per-share amounts and market prices)
<S> <C> <C> <C>
Net income................................................ $ 62,221 $ 50,804 $ 41,129
Preferred stock dividend adjustment....................... (3,300) (3,300) (3,300)
-------- -------- --------
Adjusted net income....................................... $ 58,921 $ 47,504 $ 37,829
Average dilutive stock options outstanding................ 1,494.3 1,435.6 759.6
Average exercise price per share.......................... $ 14.21 $ 12.37 $ 9.11
Average market price - primary basis...................... $ 29.73 $ 21.45 $ 13.74
Average market price - fully diluted basis................ $ 31.33 $ 22.40 $ 13.95
Average common shares outstanding......................... 22,340 22,112 21,948
Increase in shares due to exercise of options-
primary basis............................................ 770 608 256
Increase in shares due to exercise of options -
fully diluted basis...................................... 808 643 264
Adjusted shares outstanding - primary..................... 23,110 22,720 22,204
Adjusted shares outstanding - fully diluted............... 23,148 22,755 22,212
Net income per share - primary and fully diluted.......... $ 2.55 $ 2.09 $ 1.70
======== ======== ========
</TABLE>
(1) All share and per-share data have been restated to reflect the stock split.
See Note C.
<PAGE> 1
EXHIBIT 13
CMAC Investment Corporation and Subsidiaries
SELECTED FINANCIAL AND STATISTICAL DATA
<TABLE>
<CAPTION>
(In millions, except per-share amounts and ratios)
1996 1995 1994 1993 1992(2)
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME
Premiums earned . . . . . . . . . . . . . . . . . . . . $ 187.9 $ 137.1 $ 106.1 $ 81.6 $ 67.1
Net investment income . . . . . . . . . . . . . . . . . . 30.0 25.9 22.6 20.9 13.9
Total revenues . . . . . . . . . . . . . . . . . . . . . 222.6 165.6 130.5 107.1 83.5
Provision for losses . . . . . . . . . . . . . . . . . . 91.9 57.8 38.6 29.1 29.3
Policy acquisition costs and other operating expenses . . 48.1 39.6 35.6 29.9 21.9
Pretax income . . . . . . . . . . . . . . . . . . . . . . 82.6 68.2 56.4 48.2 32.4
Net income . . . . . . . . . . . . . . . . . . . . . . . 62.2 50.8 41.1 35.8(1) 21.8
Net income per share(3) . . . . . . . . . . . . . . . . . $ 2.55 $ 2.09 $ 1.70 $ 1.47(1) $ 1.40
Average shares outstanding(3) . . . . . . . . . . . . . . 23.1 22.7 22.2 22.2 15.2
CONSOLIDATED BALANCE SHEET
Assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 592.7 $ 499.1 $ 410.2 $ 375.1 $ 335.4
Investments . . . . . . . . . . . . . . . . . . . . . . . 513.2 437.5 358.7 327.0 303.8
Unearned premiums . . . . . . . . . . . . . . . . . . . 53.4 56.1 61.9 60.6 44.0
Reserve for losses . . . . . . . . . . . . . . . . . . . 108.2 67.3 46.7 40.7 44.9
Redeemable preferred stock . . . . . . . . . . . . . . . 40.0 40.0 40.0 40.0 40.0
Common stockholders' equity . . . . . . . . . . . . . . . 356.3 298.6 239.7 212.9 180.7
Book value per share . . . . . . . . . . . . . . . . . . $ 15.91 $ 13.42 $ 10.91 $ 9.71 $ 8.25
STATUTORY RATIOS
Loss ratio . . . . . . . . . . . . . . . . . . . . . . . 50.6% 44.3% 37.7% 38.6% 47.0%
Expense ratio . . . . . . . . . . . . . . . . . . . . . 23.2 28.5 27.6 27.6 27.6
-----------------------------------------------------------
Combined ratio . . . . . . . . . . . . . . . . . . . . . 73.8% 72.8% 65.3% 66.2% 74.6%
===========================================================
OTHER STATUTORY DATA
New primary insurance written . . . . . . . . . . . . . . $12,301 $10,607 $ 9,354 $ 8,718 $ 5,407
Direct primary insurance in force . . . . . . . . . . . 39,438 32,362 25,809 21,444 17,118
Direct primary risk in force . . . . . . . . . . . . . . 8,352 6,672 5,031 4,134 3,375
Direct pool insurance in force . . . . . . . . . . . . . 9,101 3,475 2,179 1,776 1,482
Direct pool risk in force . . . . . . . . . . . . . . . . 342 223 167 137 110
</TABLE>
(1) Includes $1.7 million ($0.08 per share) from the cumulative effect of
changes in accounting principles.
(2) The consolidated financial statements of the Company prior to the Offering
are those of CMAC and its subsidiaries in anticipation of the merger. See
note 1.
(3) All share and per-share data for prior periods have been restated to
reflect the stock split. See note 1.
<PAGE> 2
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except share amounts) December 31
---------------------------------------
1996 1995
---------------------------------------
<S> <C> <C>
ASSETS
Investments
Fixed maturities held to maturity - at amortized cost
(fair value $409,675 and $335,779) . . . . . . . . . $393,296 $316,553
Fixed maturities available for sale - at fair value
(amortized cost $110,519 and $111,227) . . . . . . . 114,666 116,033
Short-term investments . . . . . . . . . . . . . . . . . 5,196 4,951
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,189 3,646
Deferred policy acquisition costs . . . . . . . . . . . . . . 23,900 21,350
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 52,501 36,613
---------------------------------------
$592,748 $499,146
=======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . $ 53,384 $ 56,115
Reserve for losses . . . . . . . . . . . . . . . . . . . . . 108,206 67,301
Deferred federal income taxes . . . . . . . . . . . . . . . . 5,266 5,804
Accounts payable and accrued expenses . . . . . . . . . . . . 29,548 31,310
---------------------------------------
196,404 160,530
---------------------------------------
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
---------------------------------------
Commitments and contingencies
Common stockholders' equity
Common stock, par value $.001 per share; 80,000,000 shares
authorized; 22,395,124 and 11,129,617 shares,
respectively, issued and outstanding . . . . . . . . 22 11
Additional paid-in capital . . . . . . . . . . . . . . . 176,431 163,665
Retained earnings . . . . . . . . . . . . . . . . . . . 177,195 131,816
Net unrealized gain on investments, net of tax . . . . . 2,696 3,124
---------------------------------------
356,344 298,616
---------------------------------------
$592,748 $499,146
=======================================
</TABLE>
See notes to consolidated financial statements.
13
<PAGE> 3
CMAC Investment Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(In thousands, except per-share amounts)
Year Ended December 31
----------------------------------------------------
1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C>
REVENUES
Net premiums written . . . . . . . . . . . . . $183,676 $131,689 $105,146
Decrease in unearned premiums . . . . . . . . . 4,245 5,445 977
----------------------------------------------------
Premiums earned . . . . . . . . . . . . . . . . 187,921 137,134 106,123
Net investment income . . . . . . . . . . . . . 30,011 25,952 22,618
Gain on sales of investments, net . . . . . . . 868 260 510
Other income . . . . . . . . . . . . . . . . . . 3,796 2,288 1,280
----------------------------------------------------
222,596 165,634 130,531
----------------------------------------------------
EXPENSES
Provision for losses . . . . . . . . . . . . . . 91,894 57,803 38,586
Policy acquisition costs . . . . . . . . . . . 26,850 23,356 22,466
Other operating expenses . . . . . . . . . . . . 21,277 16,290 13,116
----------------------------------------------------
140,021 97,449 74,168
----------------------------------------------------
Pretax income . . . . . . . . . . . . . . . . . . . 82,575 68,185 56,363
Provision for income taxes . . . . . . . . . . . . (20,354) (17,381) (15,234)
----------------------------------------------------
Net income . . . . . . . . . . . . . . . . . . . . $ 62,221 $ 50,804 $ 41,129
====================================================
Net income per share . . . . . . . . . . . . . . . $ 2.55 $ 2.09 $ 1.70
====================================================
</TABLE>
See notes to consolidated financial statements.
14
<PAGE> 4
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Additional Retained Gain (Loss) on
Common Paid-In Earnings Investments,
Stock Capital (Deficit) Net of Tax Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Balance, January 1, 1994 . . . . . $11 $159,895 $ 50,888 $2,072 $212,866
Net income . . . . . . . . . . . . - - 41,129 - 41,129
Net unrealized loss on investments,
net of tax . . . . . . . . . . - - - (9,249) (9,249)
Issuance of common stock . . . . . - 496 - - 496
Dividends . . . . . . . . . . . . . - - (5,494) - (5,494)
---------------------------------------------------------------------
Balance, December 31, 1994 . . . . 11 160,391 86,523 (7,177) 239,748
Net income . . . . . . . . . . . . - - 50,804 - 50,804
Net unrealized gain on investments,
net of tax . . . . . . . . . . - - - 10,301 10,301
Issuance of common stock . . . . . - 3,274 - - 3,274
Dividends . . . . . . . . . . . . . - - (5,511) - (5,511)
---------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 . . . . 11 163,665 131,816 3,124 298,616
Net income . . . . . . . . . . . . - - 62,221 - 62,221
Net unrealized loss on investments,
net of tax . . . . . . . . . . . - - - (428) (428)
Issuance of common stock . . . . . - 1,581 - - 1,581
Two-for-one stock split . . . . . . 11 11,185 (11,196) - -
Dividends . . . . . . . . . . . . . - - (5,646) - (5,646)
---------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 . . . . $22 $176,431 $177,195 $2,696 $356,344
=====================================================================
</TABLE>
See notes to consolidated financial statements.
15
<PAGE> 5
CMAC Investment Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------
(In thousands) 1996 1995 1994
----------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 62,221 $ 50,804 $ 41,129
Adjustments to reconcile net income to net cash provided
by operating activities
Gain on sales of investments, net . . . . . . . . . . . (868) (260) (510)
(Decrease) increase in unearned premiums . . . . . . . (2,731) (5,747) 1,237
Amortization of deferred policy acquisition costs . . . 26,850 23,356 22,466
Increase in deferred policy acquisition costs . . . . . (29,400) (27,855) (23,085)
Increase in reserve for losses . . . . . . . . . . . . 40,905 20,635 5,982
(Decrease) increase in deferred federal income taxes . (308) 678 268
Net change in other assets, accounts payable and
accrued expenses . . . . . . . . . . . . . . . . . (12,192) (2,489) 1,113
----------------------------------------------
Net cash provided by operating activities . . . . . . . . . . 84,477 59,122 48,600
----------------------------------------------
Cash flows from investing activities
Proceeds from sales of investments available for sale . . 8,974 14,071 28,961
Proceeds from redemptions of investments available for sale 12,389 7,799 4,062
Proceeds from redemptions of investments held to maturity 890 5,906 13,355
Purchases of investments available for sale . . . . . . . (19,755) (27,046) (14,107)
Purchases of investments held to maturity . . . . . . . . (78,876) (56,479) (87,317)
(Purchases) sales of short-term investments, net . . . . . (245) (326) 10,554
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (4,246) (1,090) (2,816)
----------------------------------------------
Net cash used in investing activities . . . . . . . . . . . . (80,869) (57,165) (47,308)
----------------------------------------------
Cash flows from financing activities
Dividends paid . . . . . . . . . . . . . . . . . . . . . . (5,646) (5,511) (5,494)
Proceeds from issuance of common stock . . . . . . . . . . 1,581 3,274 496
----------------------------------------------
Net cash used in financing activities . . . . . . . . . . . . (4,065) (2,237) (4,998)
----------------------------------------------
Decrease in cash . . . . . . . . . . . . . . . . . . . . . . (457) (280) (3,706)
Cash, beginning of year . . . . . . . . . . . . . . . . . . . 3,646 3,926 7,632
----------------------------------------------
Cash, end of year . . . . . . . . . . . . . . . . . . . . . . $ 3,189 $ 3,646 $ 3,926
==============================================
Supplemental disclosures of cash flow information
Income taxes paid . . . . . . . . . . . . . . . . . . . . $ 19,250 $ 18,500 $ 15,625
==============================================
Interest paid . . . . . . . . . . . . . . . . . . . . . . $ 70 $ 114 $ 135
==============================================
</TABLE>
See notes to consolidated financial statements.
16
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
CMAC Investment Corporation (the "Company") was incorporated in December
1991 in order to hold the capital stock of Commonwealth Mortgage Assurance
Company ("CMAC"). In the fourth quarter of 1992, a merger among controlled
subsidiaries of CMAC was consummated with the effect that the Company acquired
all of the outstanding stock of CMAC, and CMAC's sole stockholder, Commonwealth
Land Title Insurance Company ("Commonwealth"), an indirect wholly owned
subsidiary of Reliance Group Holdings, Inc. ("Reliance"), acquired all of the
outstanding capital stock of the Company.
In the fourth quarter of 1992, an initial public offering of the Company's
common stock (the "Offering") was consummated. In this Offering, Commonwealth
sold all of the 7,000,000 shares owned by it, and the Company issued and sold
3,950,000 shares. In addition, the Company issued and sold 800,000 shares of
$4.125 Preferred Stock to Commonwealth. Aggregate proceeds to the Company from
the sale of common stock were approximately $67,200,000 and from the sale of
preferred stock were $40,000,000.
CMAC and its subsidiaries provide private mortgage insurance and risk
management services to mortgage lending institutions located throughout the
United States. Consistent with the private mortgage insurance industry, CMAC's
highest state concentration of risk is in California. Private mortgage
insurance protects lenders from default-related losses on residential first
mortgage loans made to home buyers who make down payments of less than 20
percent of the purchase price and facilitates the sale of these mortgages in
the secondary market.
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles and include the accounts of all
subsidiaries. All material intercompany balances and transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
INSURANCE PREMIUMS
Premiums written on an annual and multiyear basis are initially deferred as
unearned premiums and earned over the policy term, and premiums written on a
monthly basis are primarily earned as they are received. Annual premiums are
amortized on a monthly, straight-line basis. Multiyear premiums are amortized
over the terms of the contracts in accordance with the expiration of risk. For
certain higher risk coverages, principally on mortgages that exceed 90 percent
of the property value, a portion of the first-year premium is deferred and
amortized over the estimated period of increased risk. Ceded premiums written
are initially set up as prepaid reinsurance and are amortized in accordance
with direct premiums earned.
RESERVE FOR LOSSES
The reserve for losses consists of the estimated cost of settling claims on
defaults reported and defaults that have occurred but have not been reported.
Consistent with generally accepted accounting principles and industry
accounting practices, CMAC does not establish loss reserves for future claims
on insured loans that are not currently in default. In determining the
liability for unpaid losses related to reported outstanding defaults, CMAC
establishes loss reserves on a case-by-case basis. The amount reserved for any
particular loan is dependent upon the status of the loan as reported by the
servicer of the insured loan and other factors. As the default progresses
closer to foreclosure, the amount of loss reserve for that particular loan is
increased, in stages, to approximately 100 percent of CMAC's exposure and that
adjustment is included in current operations.
DEFERRED POLICY ACQUISITION COSTS
Costs associated with the acquisition of mortgage insurance business,
consisting of compensation, premium taxes and other policy issuance and
underwriting expenses, are initially deferred. The costs related to annual and
multiyear policies are amortized on a basis consistent with the recognition of
income while costs related to monthly policies are amortized over a period of
two years.
INCOME TAXES
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and the tax basis of the Company's assets and
liabilities using enacted tax rates applicable to future years.
INVESTMENTS
The Company is required to group its investment portfolio in three
categories: held to maturity, available for sale, and trading securities. Debt
securities for which the Company has the positive intent and ability to hold to
maturity are classified as held to maturity and reported at amortized cost.
Debt and equity securities purchased and held principally for the purpose of
selling them in the near term are classified as trading securities and reported
at fair value, with unrealized gains and losses included in earnings. The
Company had no trading securities in its portfolio at December 31, 1996 or
1995. All other investments are classified as available for sale and are
reported at fair value, with unrealized gains and losses (net of tax) reported
in a separate component of stockholders' equity. Realized gains and losses are
determined on a specific identification method and are included in income.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methodology was used by the Company in estimating the fair
value disclosures for its financial instruments: fair values for fixed maturity
securities (including redeemable preferred stock) are based on quoted market
prices, dealer quotes, and prices obtained from independent pricing services.
The carrying amounts reported on the balance sheet for cash and short-term
investments approximate their values.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). FAS 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages, but does not require,
the recognition of compensation expense for the fair value of stock options and
other equity instruments
17
<PAGE> 7
CMAC Investment Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
granted as compensation to employees for fiscal years beginning after December
15, 1995. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
("APB 25") and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.
NET INCOME PER SHARE
Net income per share after the Offering is based on the weighted average
number of common shares outstanding and common share equivalents that would
arise from the exercise of stock options. On October 15, 1996, the Board of
Directors authorized a stock split, payable 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 the par value of the common stock remained
at $.001 per share. Accordingly, all references to common per-share data have
been adjusted to give effect to the stock split. The average number of common
and common equivalent shares for the years ended December 31, 1996, 1995 and
1994, after giving effect to the stock split, was as follows (in thousands):
<TABLE>
<CAPTION>
PRIMARY BASIS FULLY DILUTED BASIS
- --------------------------------------------------------
<S> <C> <C>
1996 23,110 23,148
1995 22,720 22,755
1994 22,204 22,212
</TABLE>
- --------------------------------------------------------------------------------
2. INVESTMENTS
Fixed maturity investments at December 31, 1996 and 1995 consisted of (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------
GROSS GROSS
AMORTIZED FAIR UNREALIZED UNREALIZED
COST VALUE GAINS LOSSES
-------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturities held to maturity at amortized cost:
Bonds and notes:
United States government . . . . . $ 15,197 $ 15,610 $ 413 $ -
State and municipal obligations . . 378,099 394,065 16,408 442
-------------------------------------------------------
$393,296 $409,675 16,821 $442
=======================================================
Fixed maturities available for sale:
Bonds and notes:
Mortgage-backed securities . . . . $ 18,678 $ 19,355 $ 683 $ 6
Redeemable preferred stock . . . . . 91,841 95,311 3,920 450
-------------------------------------------------------
$110,519 $114,666 $ 4,603 $456
=======================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------------------
Gross Gross
Amortized Fair Unrealized Unrealized
Cost Value Gains Losses
-------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturities held to maturity at amortized cost:
Bonds and notes:
United States government . . . . . $ 15,179 $ 16,237 $ 1,058 $ -
State and municipal obligations . . 301,374 319,542 18,293 125
-------------------------------------------------------
$316,553 $335,779 $19,351 $125
=======================================================
Fixed maturities available for sale:
Bonds and notes:
Mortgage-backed securities . . . . . . . $ 28,149 $ 29,582 $ 1,433 $ -
Redeemable preferred stock . . . . . . . . 83,078 86,451 3,720 347
-------------------------------------------------------
$111,227 $116,033 $ 5,153 $347
=======================================================
</TABLE>
18
<PAGE> 8
<TABLE>
<CAPTION>
The contractual maturities of short-term and fixed
maturity investments are as follows (in thousands): DECEMBER 31, 1996
-----------------------------------
AMORTIZED FAIR
COST VALUE
-----------------------------------
<S> <C> <C>
Short-term investments . . . . . . . . . . . . . . . . . $ 5,196 $ 5,196
===================================
Fixed maturities:
1997 . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,970 $ 1,975
1998-2001 . . . . . . . . . . . . . . . . . . . . . . 13,752 14,144
2002-2006 . . . . . . . . . . . . . . . . . . . . . . 155,487 164,313
2007 and thereafter . . . . . . . . . . . . . . . . . 222,087 229,243
Mortgage-backed securities . . . . . . . . . . . . . . 18,678 19,355
Redeemable preferred stock . . . . . . . . . . . . . . 91,841 95,311
-----------------------------------
$503,815 $524,341
===================================
</TABLE>
<TABLE>
<CAPTION>
Net investment income consisted of (in thousands):
Year Ended December 31
---------------------------------------------
1996 1995 1994
---------------------------------------------
<S> <C> <C> <C>
Investment income:
Fixed maturities . . . . . . . . . . . . . . . . . . $29,190 $25,478 $22,108
Short-term investments . . . . . . . . . . . . . . . . 348 270 452
Other . . . . . . . . . . . . . . . . . . . . . . . . 688 515 450
---------------------------------------------
30,226 26,263 23,010
Investment expenses . . . . . . . . . . . . . . . . . . (215) (311) (392)
---------------------------------------------
$30,011 $25,952 $22,618
=============================================
</TABLE>
<TABLE>
<CAPTION>
Gains and losses on sales of investments consisted of
(in thousands): Year Ended December 31
-----------------------------------------------
1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C>
Gains on sales and redemptions of investments available for sale $ 873 $ 475 $ 1,108
Losses on sales and redemptions of investments available for sale (2) (212) (497)
Losses on redemptions of investments held to maturity . . . . . (3) (3) (101)
-----------------------------------------------
$ 868 $ 260 $ 510
===============================================
</TABLE>
<TABLE>
<CAPTION>
Net unrealized (depreciation) appreciation on
invest-ments consisted of (in thousands): Year Ended December 31
------------------------------------------------
1996 1995 1994
------------------------------------------------
<S> <C> <C> <C>
Fixed maturities held to maturity . . . . . . . . . . . . $ (2,847) $28,590 $(24,989)
================================================
Fixed maturities available for sale . . . . . . . . . . . $ (659) $15,847 $(14,229)
Deferred tax benefit (provision) . . . . . . . . . . . . 231 (5,546) 4,980
------------------------------------------------
$ (428) $10,301 $ (9,249)
================================================
</TABLE>
Securities on deposit with various state insurance commissioners amounted to
$4,319,000 at December 31, 1996 and $3,914,000 at December 31, 1995.
The Company adopted Financial Accounting Series Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities" (the "Implementation Guide"), effective November 30,
1995. Concurrent with the adoption of the Implementation Guide, the Company
reassessed the appropriateness of the classification of its securities. In
accordance with this reassessment, the Company determined to transfer certain
securities from held to maturity to available for sale.
Information regarding the transferred securities at November 30, 1995 was as
follows:
<TABLE>
<CAPTION>
Amortized Net Unrealized
Cost Gains
---------------------------------------
<S> <C> <C>
Fixed maturities:
Bonds and notes:
Mortgage-backed
securities $29,896 $1,329
=======================================
</TABLE>
19
<PAGE> 9
CMAC Investment Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. REINSURANCE
CMAC utilizes reinsurance to reduce net risk in force to meet regulatory
risk to capital requirements and to comply with the regulatory maximum policy
coverage percentage limitation of 25 percent. Although the use of reinsurance
does not discharge an insurer from its primary liability to the insured, the
reinsuring company assumes the related liability. Included in other assets are
provisional losses recoverable, amounts recoverable from reinsurers pertaining
to unpaid claims, claims incurred but not reported and unearned premiums
(prepaid reinsurance). Provisional losses recoverable were $18,199,000 and
$8,173,000 at December 31, 1996 and 1995, respectively. Reinsurance recoverable
on unpaid and incurred but not reported claims was $1,033,000 and $481,000 at
December 31, 1996 and 1995, respectively. Prepaid reinsurance premiums were
$7,445,000 and $5,930,000 at December 31, 1996 and 1995, respectively.
The effect of reinsurance on premiums written and earned is as follows for
the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
Premiums written: 1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Direct . . . . . . . . . . . . . . . . . . . . . . . . . . $200,228 $139,469 $112,022
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . 181 152 558
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . (16,733) (7,932) (7,434)
----------------------------------------
Net premiums written . . . . . . . . . . . . . . . . . . . . $183,676 $131,689 $105,146
========================================
Premiums earned:
Direct . . . . . . . . . . . . . . . . . . . . . . . . . . $203,042 $145,139 $110,780
Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . 147 180 229
Ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,268) (8,185) (4,886)
----------------------------------------
Net premiums earned . . . . . . . . . . . . . . . . . . . . $187,921 $137,134 $106,123
========================================
</TABLE>
The 1996, 1995 and 1994 figures included $13,659,000, $6,845,000 and
$3,799,000 for premiums written and $13,494,000, $6,444,000 and $2,689,000 for
premiums earned, respectively, for reinsurance ceded under variable quota share
treaties entered into in 1996, 1995 and 1994 covering the books of business
originated in those years. The 1996, 1995 and 1994 figures included $2,398,000,
$350,000, and $2,611,000 for premiums written and $1,072,000, $891,000 and
$1,635,000 for premiums earned, respectively, of reinsurance ceded under an
excess of loss reinsurance program that was entered into in 1992.
- --------------------------------------------------------------------------------
4. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
As described in note 1, CMAC establishes reserves to provide for the
estimated costs of settling claims in respect of loans reported to be in
default and loans that are in default which have not yet been reported to CMAC.
The following table presents information relating to the liability for
unpaid claims and related expenses (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . $ 67,301 $46,666 $40,684
Less reinsurance recoverables . . . . . . . . . . . . . . . . . 481 193 371
----------------------------------------
Net balance at January 1 . . . . . . . . . . . . . . . . . . . 66,820 46,473 40,313
----------------------------------------
Add losses and LAE incurred in respect of default notices received in:
Current year . . . . . . . . . . . . . . . . . . . . . . . 95,298 54,521 35,192
Prior years . . . . . . . . . . . . . . . . . . . . . . . . (3,404) 3,282 3,394
----------------------------------------
Total incurred . . . . . . . . . . . . . . . . . . . . . . . . 91,894 57,803 38,586
----------------------------------------
Deduct losses and LAE paid in respect of default notices received in:
Current year . . . . . . . . . . . . . . . . . . . . . . . 14,774 8,518 5,976
Prior years . . . . . . . . . . . . . . . . . . . . . . . . 36,767 28,938 26,450
----------------------------------------
Total paid . . . . . . . . . . . . . . . . . . . . . . . . . . 51,541 37,456 32,426
----------------------------------------
Net balance at December 31 . . . . . . . . . . . . . . . . . . 107,173 66,820 46,473
Plus reinsurance recoverables . . . . . . . . . . . . . . . . . 1,033 481 193
----------------------------------------
Balance at December 31 . . . . . . . . . . . . . . . . . . . . $108,206 $67,301 $46,666
========================================
</TABLE>
As a result of changes in estimates of insured events in prior years, the
provision for losses and loss adjustment expenses (net of reinsurance
recoveries of $2,913,000 and $1,243,000 in 1996 and 1995, respectively, and in
addition to reinsurance payables of $414,000 in 1994) decreased by $3,404,000
in 1996 due primarily to lower than anticipated claim payments as compared to
the amounts reserved and increased by $3,282,000 and $3,394,000 in 1995 and
1994, respectively, due primarily to higher than anticipated losses in
California in those years.
20
<PAGE> 10
5. REDEEMABLE PREFERRED STOCK
The preferred stock, issued in connection with the Offering, is entitled to
cumulative annual dividends of $4.125 per share, payable quarterly in arrears.
The preferred stock is redeemable at the option of the Company at $54.125 per
share on or after August 15, 2002, and declining to $50.00 per share on or
after August 15, 2005 (plus in each case accumulated and unpaid dividends), or
is subject to a mandatory redemption at a redemption price of $50.00 per share
plus accumulated and unpaid dividends based upon specified annual sinking fund
requirements from 2002 to 2011.
- --------------------------------------------------------------------------------
6. INCOME TAXES
Deferred income taxes at the end of each period are determined by applying
enacted statutory tax rates applicable to the years in which the taxes are
expected to be paid or recovered. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts for income tax
purposes. The effect on deferred taxes of a change in the tax rate is
recognized in earnings in the period that includes the enactment date.
Provision for income taxes includes a net deferred tax provision in 1996,
1995 and 1994 of $18,143,000, $11,177,000 and $15,143,000, respectively. Of the
1996, 1995 and 1994 provisions, $18,455,000, $10,247,000 and $12,350,000,
respectively, were due to a deduction related to the purchase of U.S.
government non-interest-bearing tax and loss bonds as allowed by federal tax
regulations, with the 1996 and 1995 purchase deduction offset by $2,636,000 and
$5,653,000, respectively, of alternative minimum tax adjustments. All other
amounts arose principally from differences in accounting for deferred policy
acquisition costs and insurance reserve tax adjustments required as a result of
the Tax Reform Act of 1986.
The significant components of the Company's net deferred tax assets and
liabilities are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31
----------------------------------------
1996 1995
----------------------------------------
<S> <C> <C>
Deferred tax assets:
Unearned premiums . . . . . . . . . . . . . . . . . . . . . $ 1,677 $ 1,757
Loss reserves . . . . . . . . . . . . . . . . . . . . . . . 2,705 1,769
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 706 422
----------------------------------------
5,088 3,948
----------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs . . . . . . . . . . . . . (8,368) (7,475)
Net unrealized gain on investments . . . . . . . . . . . . (1,452) (1,682)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . (534) (595)
----------------------------------------
(10,354) (9,752)
----------------------------------------
Net deferred tax liability . . . . . . . . . . . . . . . . . . $ (5,266) $(5,804)
========================================
</TABLE>
There was no valuation allowance recorded against deferred tax assets at
December 31, 1996 or 1995.
The reconciliation of taxes computed at the statutory tax rate of 35 percent
for 1996, 1995 and 1994 to the provision for income taxes is as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Provision for income taxes computed at the statutory tax rate . . . $28,901 $23,865 $19,727
Change in tax provision resulting from:
Tax-exempt municipal bond interest and dividends received
deduction . . . . . . . . . . . . . . . . . . . . . . . . . . (8,498) (6,955) (4,630)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . (49) 471 137
----------------------------------------
Provision for income taxes . . . . . . . . . . . . . . . . . . . . $20,354 $17,381 $15,234
========================================
</TABLE>
The Internal Revenue Service ("IRS") had asserted a federal income tax
deficiency attributable to CMAC for the tax years 1983-1985. The IRS took the
position that CMAC must defer deductions for incurred losses until the time
that the insured lender takes title to the mortgaged property. CMAC protested
the deficiency on the grounds that a loss is incurred, and unpaid loss reserves
may be established, at the time that a borrower's loan is in default. As part
of a global settlement with the IRS to close out those tax years that were
under audit, Reliance agreed to the disallowances of the loss reserve
deductions that CMAC had taken. Within the context of the tax indemnification
agreement with Reliance as described in note 8, there was no effect on the
financial statements of the Company. Subsequent tax years may involve the same
issue. The United States Tax Court held in favor of the IRS on this issue with
respect to a different taxpayer, but this decision was reversed by the United
States Court of Appeals for the Seventh Circuit. Based upon the Court of
Appeals decision, management believes that CMAC will prevail on this
industrywide issue.
21
<PAGE> 11
CMAC Investment Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. STOCKHOLDERS' EQUITY AND DIVIDEND RESTRICTIONS
The Company is a holding company where the principal source of income is
dividends from CMAC. The ability of CMAC to pay dividends on its common stock
is restricted by certain provisions of the insurance laws of the Commonwealth
of Pennsylvania, its state of domicile. The insurance laws of Pennsylvania
establish a test limiting the maximum amount of dividends that may be paid by
an insurer without prior approval by the Pennsylvania Insurance Commissioner.
Under such test, CMAC may pay dividends during any 12-month period in an amount
equal to the greater of (i) 10 percent of the preceding year-end statutory
policyholders' surplus or (ii) the preceding year's statutory net income. In
accordance with such restrictions, $75,334,000 would be available for dividends
in 1997. In addition, an amendment to the Pennsylvania statute, effective in
1994, requires that dividends and other distributions be paid out of an
insurer's unassigned surplus. Because of the unique nature of the method of
accounting for contingency reserves, CMAC has negative unassigned surplus.
Thus, prior approval by the Pennsylvania Insurance Commissioner is required for
CMAC to pay dividends or make other distributions so long as CMAC has negative
unassigned surplus. The Pennsylvania Insurance Commissioner has approved all
dividend payments by CMAC since the passage of this amendment, and the
Insurance Department has given management assurance that approval for such
distributions will be granted in the future, provided that the financial
condition of CMAC does not materially change.
The State of California has a statute requiring mortgage insurers to pay
dividends or make other distributions out of unassigned surplus. CMAC and the
California Department of Insurance have reached an understanding under
whichCMAC will be able to pay dividends or make other distributions to the
Company, provided that the financial condition of CMAC does not materially
change.
The Company and CMAC have entered into an agreement, pursuant to which the
Company has agreed to establish and, for as long as any shares of $4.125
Preferred Stock remain outstanding, maintain a reserve account in an amount
equal to three years of dividend payments on the outstanding shares of $4.125
Preferred Stock (currently $9,900,000), and not to pay dividends on the common
stock at any time when the amount in the reserve account is less than three
years of dividend payments on the shares of $4.125 Preferred Stock then
outstanding. This agreement between the Company and CMAC provides that the
holders of the $4.125 Preferred Stock are entitled to enforce the agreement's
provisions as if such holders were signatories to the agreement.
The Company may not pay any dividends on shares of common stock unless the
Company has paid all accrued dividends on, and has complied with all sinking
fund and redemption obligations relating to, its outstanding shares of $4.125
Preferred Stock.
CMAC's current reinsurance arrangements prohibit the payment of any dividend
that would have the effect of reducing its statutory total policyholders'
surplus (which includes contingency reserve) below $85,000,000. As of December
31, 1996, CMAC had $422,588,000 of total policyholders' surplus.
CMAC, domiciled in Pennsylvania, prepares its statutory financial statements
in accordance with the accounting practices prescribed or permitted by the
Commonwealth of Pennsylvania Insurance Department. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners ("NAIC") as well as state laws,
regulations and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed. CMAC is
required under the NAIC Model Act to provide for a contingency reserve in an
amount equal to 50 percent of earned premiums. Such amounts cannot be withdrawn
for a period of 10 years except under certain circumstances. Prior to 1995,
CMAC had classified its contingency reserve as a separate component of
policyholders' surplus. As of December 31, 1994, this practice increased
statutory policyholders' surplus by $159,302,000 over what it would have been
had the prescribed accounting practice been followed. The Pennsylvania
Insurance Department has determined that the contingency reserve should be
classified as a liability in the statutory balance sheet rather than as a
separate component of policyholders' surplus. In response to this
determination, commencing in January 1995, CMAC began classifying the
contingency reserve as a liability.
CMAC's statutory policyholders' surplus at December 31, 1996 and 1995 was
$142,113,000 and $134,367,000, respectively. CMAC's statutory net income for
1996, 1995 and 1994 was $75,334,000, $56,219,000 and $60,770,000, respectively.
8. RELATED PARTY TRANSACTIONS
In July 1992, the Company and Commonwealth entered into a sublease agreement
for office space, which provides for payments equal to Commonwealth's cost,
including base rent and a pass-through of certain building expenses. The
sublease expired May 31, 1996. In August 1993, substantially all of this
subleased space was leased back to Commonwealth at a market rental rate. The
net amount paid for the subleased space was $95,000, $227,000 and $225,000 in
1996, 1995 and 1994, respectively.
Prior to the Offering, CMAC was included in the consolidated federal tax
return filed by Reliance, and CMAC was a party to a tax-sharing agreement with
Commonwealth. The tax-sharing agreement was terminated upon completion of the
Offering; however, CMAC has reimbursed Reliance for federal income taxes
attributable to CMAC's 1992 operations through the completion of the Offering
as though the tax-sharing agreement were still in effect. CMAC has agreed to
reimburse Reliance for federal income taxes, if any (together with any related
interest or penalties), attributable to CMAC for periods during which CMAC was
a member of Reliance's consolidated group. Reliance has agreed to limit the
amount of such reimbursement, if any, by CMAC to $1,853,000, the amount
included in the federal tax liability account on the Company's June 30, 1992
balance sheet (plus the amount of the tax benefit, if any, obtained by the
Company from making such reimbursement). In addition, CMAC has agreed to
reimburse Reliance for any future federal income taxes (plus post-closing date
interest) resulting from CMAC's federal income taxes in an amount calculated as
if CMAC were entitled to such benefit. Reliance will reimburse CMAC for any
future federal income taxes resulting from CMAC's operations while a member of
Reliance's consolidated group which actually decrease Reliance's consolidated
federal income taxes. Reliance has also indemnified CMAC for federal income
taxes, together with any related interest or penalties, relating to members of
Reliance's consolidated group other than CMAC.
22
<PAGE> 12
9. STOCK OPTION PLAN
In November 1992, the Company's Board of Directors adopted the CMAC
Investment Corporation 1992 Stock Option Plan (the "Stock Option Plan"), which
provides for the granting of nonqualified stock options, either alone or
together with stock appreciation rights. Originally up to 500,000 shares were
subject to stock options. This amount was amended by a vote of the stockholders
to 900,000 in May 1993. These options may be granted to directors, officers,
and key employees of the Company at prices that are not less than 90 percent of
fair market value on the date the options are granted, although all options
have been granted with an exercise price equal to the fair value of the
Company's stock at the date of grant. Accordingly, no compensation expense has
been recognized for the Company's stock-based compensation plans. Each stock
option is exercisable for a period of ten years from the date of the grant and
is subject to a vesting schedule as approved by the Company's Stock Option and
Compensation Committee. In May 1995, the CMAC Investment Corporation Equity
Compensation Plan was instituted by a vote of the stockholders. This plan
provides for the granting of nonqualified stock options, under terms similar to
those in the Stock Option Plan, or other forms of equity-based compensation.
The aggregate number of shares that may be issued under this new plan is
1,100,000, which brought the total number of shares subject to stock options or
other forms of equity-based compensation to 2,000,000. Effective with the stock
split in December 1996, all share totals within the plans were doubled,
bringing the total number of shares subject to stock options or other forms of
equity-based compensation to 4,000,000.
Information regarding the Stock Option Plan and Equity Compensation Plan is as
follows, after giving effect to the stock split:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
NUMBER OF SHARES PER SHARE
----------------------------------------
<S> <C> <C>
Outstanding, January 1, 1994 . . . . . . . . . . . . . . . . 779,940 $ 9.14
Granted . . . . . . . . . . . . . . . . . . . . . . . . . 847,200 14.62
Exercised . . . . . . . . . . . . . . . . . . . . . . . . (16,282) 9.00
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . (18,534) 12.19
----------------
Outstanding, December 31, 1994 . . . . . . . . . . . . . . . 1,592,324 12.02
Granted . . . . . . . . . . . . . . . . . . . . . . . . . 296,800 22.40
Exercised . . . . . . . . . . . . . . . . . . . . . . . . (254,112) 10.80
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . (6,932) 13.22
----------------
Outstanding, December 31, 1995 . . . . . . . . . . . . . . . 1,628,080 14.10
Granted . . . . . . . . . . . . . . . . . . . . . . . . . 9,000 24.69
Exercised . . . . . . . . . . . . . . . . . . . . . . . . (122,658) 10.22
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . (62,300) 16.52
----------------
Outstanding, December 31, 1996 . . . . . . . . . . . . . . . 1,452,122 14.39
================
Exercisable, December 31, 1996 . . . . . . . . . . . . . . . 648,672 10.77
================
Available for grant, December 31, 1996 . . . . . . . . . . . 2,126,300
================
</TABLE>
The Company applies APB 25 in accounting for its stock-based compensation
plans. Had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under FAS 123, the Company's
net income and earnings per share would have been reduced by approximately
$1,026,000 ($0.04 per share) and $58,000 in 1996 and 1995, respectively. The
pro forma effect on net income for 1996 and 1995 is not representative of the
pro forma effect on net income in future years, because it does not take into
consideration pro forma compensation expense related to grants made prior to
1995.
The weighted average fair values of the stock options granted during 1996
and 1995 were $18.25 and $16.68, respectively. The fair value of each stock
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants:
<TABLE>
<CAPTION>
1996 1995
------------------
<S> <C> <C>
Expected life (years) . . . . 9.06 8.96
Risk-free interest rate . . . 5.26% 5.53%
Volatility . . . . . . . . . 64.44% 64.44%
Dividend yield . . . . . . . 0.32% 0.32%
</TABLE>
23
<PAGE> 13
CMAC Investment Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes information concerning currently outstanding and
exercisable options at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------------------------------------------------------------ ----------------------------
<S> <C> <C> <C> <C> <C>
$ 9.00 - $14.69 1,162,122 5.04 $12.37 636,172 $10.50
$22.13 - $24.69 290,000 8.96 22.48 12,500 24.29
------------- ---------------
1,452,122 648,672
============= ===============
</TABLE>
- --------------------------------------------------------------------------------
10. BENEFIT PLANS
The Company maintains a noncontributory defined benefit pension plan
covering substantially all full-time employees that is similar to the pension
plan of Commonwealth that covered all of the Company's employees prior to the
Offering. The new plan did not require an asset transfer, and all eligible
Company employees will be entitled to benefits from both plans. Retirement
benefits are a function of the years of service and the level of compensation.
Assets of the plan consist primarily of balanced mutual funds. The components
of net pension cost for the years ended December 31, 1996, 1995 and 1994 are as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------
<S> <C> <C> <C>
Service cost benefits earned
during the year . . . . . $479 $321 $315
Interest cost on projected
benefit obligation . . . 213 146 102
Return on plan assets . . . (132) (183) 6
Net amortization and
deferral . . . . . . . . 123 191 36
-----------------------
Net pension cost . . . . . $683 $475 $459
=======================
</TABLE>
The projected benefit obligation that arose when the new plan was
consummated is approximately $675,000. This obligation is being amortized into
pension expense over the longer of the expected remaining service life of
eligible employees or 15 years.
A reconciliation of the funded status of the plan with the accrued pension
cost included in accounts payable and accrued expenses at December 31, 1996 and
1995 is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------------------------
<S> <C> <C>
Actual present value of benefit obligations:
Vested . . . . . . . . . . . . . . . . . $1,004 $ 706
Nonvested . . . . . . . . . . . . . . . . 349 335
-------------------------
Accumulated benefit obligation . . . . . 1,353 1,041
Effect of anticipated future
compensation levels . . . . . . . . . 1,983 1,703
-------------------------
Projected benefit obligation . . . . . . 3,336 2,744
Plan assets at fair value . . . . . . . . (1,684) (1,042)
-------------------------
Projected benefit obligation in
excess of plan assets . . . . . . . . 1,652 1,702
Unrecognized net loss . . . . . . . . . (606) (752)
Unrecognized prior service cost . . . . (448) (503)
-------------------------
Accrued pension cost . . . . . . . . . . $ 598 $ 447
=========================
</TABLE>
Assumptions used to determine net pension cost and the actuarial present
value of the projected benefit obligation for 1996, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------
<S> <C> <C> <C>
Discount rates . . . . . . . . . . . 7.5% 7.5% 8.5%
Long-term rates of return on assets . 8.5% 8.5% 8.5%
Rates of increase in
compensation levels . . . . . . . . 6.0% 6.0% 6.0%
Cost of living increases . . . . . . 4.5% 4.5% 4.5%
</TABLE>
In addition to providing pension benefits, the Company will provide certain
health care and life insurance benefits to retired employees. The Company
accounts for such benefits under Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," and accrues the estimated costs of retiree medical and life benefits
over the period during which employees render the service that qualifies them
for benefits. The components of net periodic postretirement benefit costs in
1996, 1995 and 1994 and a reconciliation of the plan's funded status to the
amounts included in accounts payable and accrued expenses as of December 31,
1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------
<S> <C> <C> <C>
Service cost . . . . . . . . $18 $14 $43
Interest cost . . . . . . . 16 13 34
Amortization of gain . . . . (10) (13) (1)
Amortization of prior service cost (11) (11) -
-------------------------
Net periodic postretirement
benefit cost . . . . . . . $13 $ 3 $76
=========================
</TABLE>
<TABLE>
<CAPTION>
1996 1995
----------------
<S> <C> <C>
Accumulated postretirement
benefit obligation . . . . $237 $208
Unrecognized net gain . . . . 195 208
Unrecognized prior service cost 172 183
----------------
Accrued postretirement
benefit cost . . . . . . . $604 $599
================
</TABLE>
24
<PAGE> 14
The actuarial assumptions used in calculations relating to FAS106 were a
discount rate of 7.5 percent and 8.5 percent, respectively, at January 1, 1996
and 1995 for determination of net periodic postretirement benefit cost and a
discount rate of 7.75 percent and 7.5 percent, respectively, at December 31,
1996 and 1995 for disclosure.
The Company also maintains a Savings Incentive Plan, which covers
substantially all full-time employees, to which participants can contribute up
to 15 percent of their base earnings as pre-tax contributions. The Company will
match at least 25 percent of the first 5 percent of base earnings contributed
in any given year. These matching funds are subject to certain vesting
requirements. The expense to the Company for matching funds for the years
ended December 31, 1996, 1995 and 1994 was $474,000, $485,000 and $393,000,
respectively.
11. COMMITMENTS AND CONTINGENCIES
CMACis involved in certain litigation arising in the normal course of its
business. CMACis contesting the allegations in each pending action and
believes, based on current knowledge and consultation with counsel, that the
outcome of such litigation will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
CMAC utilizes its underwriting skills to provide an outsource contract
underwriting service to its customers. CMAC often gives recourse to its
customers on loans it underwrites for compliance. If the loan does not meet
agreed upon guidelines and is not salable in the secondary market for that
reason, CMAC agrees to remedy the situation either by placing mortgage
insurance coverage on the loan or by purchasing the loan. During 1996, less
than 1 percent of all loans were subject to these remedies and the costs
associated with these remedies were negligible.
The Company and CMAC have a $5,000,000 discretionary line of credit to be
used for general corporate purposes. There have been no draws against this line
of credit during 1996 or 1995.
The Company leases office space for use in its underwriting, sales, loan
workout and administrative support operations. Net rental expense in connection
with these leases totaled $1,468,000, $1,432,000 and $1,418,000 in 1996, 1995
and 1994, respectively. The commitment for noncancelable operating leases in
future years is as follows (in thousands):
<TABLE>
<S> <C>
1997 . . . . . . . . . . . . . . . . . $1,707
1998 . . . . . . . . . . . . . . . . . 1,564
1999 . . . . . . . . . . . . . . . . . 1,258
2000 . . . . . . . . . . . . . . . . . 1,145
2001 . . . . . . . . . . . . . . . . . 1,083
2002 and thereafter . . . . . . . . . . 1,550
----------
$8,307
==========
</TABLE>
- --------------------------------------------------------------------------------
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per-share information)
1996 QUARTER
------------------------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net premiums written . . . . . . . . $40,237 $41,847 $46,351 $55,241 $183,676
Net premiums earned . . . . . . . . . 41,946 45,851 48,698 51,426 187,921
Net investment income . . . . . . . . 7,117 7,348 7,623 7,923 30,011
Provision for losses . . . . . . . . 20,026 21,912 23,808 26,148 91,894
Policy acquisition and other expenses 11,435 12,181 12,056 12,455 48,127
Net income . . . . . . . . . . . . . 14,427 15,271 15,957 16,566 62,221
Net income per share . . . . . . . . $ 0.59 $ 0.63 $ 0.65 $ 0.68 $ 2.55
Average shares outstanding . . . . . 23,002 23,074 23,128 23,236 23,110
</TABLE>
<TABLE>
<CAPTION>
1995 Quarter
------------------------------------------------------------------
First Second Third Fourth Year
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net premiums written . . . . . . . . $26,332 $33,037 $33,547 $38,773 $131,689
Net premiums earned . . . . . . . . . 30,410 32,808 35,660 38,256 137,134
Net investment income . . . . . . . . 6,168 6,319 6,578 6,887 25,952
Provision for losses . . . . . . . . 12,170 13,183 15,737 16,713 57,803
Policy acquisition and other expenses 9,472 9,463 10,020 10,691 39,646
Net income . . . . . . . . . . . . . 11,301 12,542 13,028 13,933 50,804
Net income per share . . . . . . . . $ 0.47 $ 0.52 $ 0.53 $ 0.57 $ 2.09
Average shares outstanding . . . . . 22,470 22,722 22,854 22,868 22,720
</TABLE>
25
<PAGE> 15
CMAC Investment Corporation and Subsidiaries
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
CMAC Investment Corporation
Philadelphia, Pennsylvania
We have audited the accompanying consolidated balance
sheets of CMAC Investment Corporation and its subsidiaries (the
"Company") as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in common
stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial position
of CMAC Investment Corporation and its subsidiaries at December
31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
January 21, 1997
26
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
1996 COMPARED TO 1995
Net income for 1996 was $62.2 million, an increase of 22.5% compared to
$50.8 million for 1995. This improvement reflects significant increases in
premiums earned and net investment income, partially offset by increases in the
provision for losses, policy acquisition costs and other operating expenses.
Net primary insurance written during 1996 was $12.3 billion, an increase of
16.0% compared to $10.6 billion for 1995. This increase was primarily due to an
overall increase of 16.1% in the private mortgage insurance market during 1996,
which was aided by strong levels of refinancing during the first six months of
the year brought about by relatively low interest rates. CMAC's market share of
the industry remained constant at 9.6% in 1996. CMAC's market share in the
fourth quarter of 1996 was 10.2%. In addition to the net primary insurance
written, CMAC significantly increased its net pool insurance written during
1996 to $6.1 billion as compared to $1.4 billion for 1995. Most of the pool
insurance written in 1996 related to one transaction that is geographically
dispersed throughout the United States and has a very low stop-loss level. In 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 increase in 1997 and to be composed
primarily of Fannie Mae- and Freddie Mac-eligible conforming mortgage loans.
Premium rates on such pool insurance are significantly lower than on primary
insured loans due to the low stop-loss levels, which limit the overall risk
exposure to CMAC, and the focus of such product on high quantity, high quality
primary insurance customers.
Refinancing represented 16.5% of CMAC's new primary insurance written in
1996 as compared to 11.0% in 1995. Higher interest rates toward the end of the
second quarter of 1996 caused refinance activity to slow significantly in the
third and fourth quarters and should cause refinancing at the beginning of 1997
to return to similar levels as experienced in 1995. The persistency rate, which
is defined as the percentage of policies in force that are renewed in any given
year, was 86.0% as compared to 86.5% for 1995. This slight decrease was
consistent with the higher level of refinancing activity experienced in the
first half of 1996.
As was the case in 1995, the majority of CMAC's business in 1996 reflected
the deeper insurance coverage required by Fannie Mae and Freddie Mac. That
coverage, which is 25% on a 90% LTV loan and 30% on loans with LTVs greater
than 95%, results in higher premiums and losses than the older coverages of 22%
and 17%, respectively, but should not materially affect the Company's financial
results. Monthly premium plans, which allow borrowers to pay premiums on a
monthly basis rather than annually in advance, now account for 91.6% of CMAC's
primary new insurance written as compared to 82.4% in 1995. Although this
program reapportions the cash flow from an insured loan over the life of the
loan, there should be no material financial effect from its widespread use. At
the end of 1995, the industry and CMAC introduced a variation of the monthly
premium plan in which the borrower does not need to pay any mortgage insurance
premium at closing and under which some portion of the first month's premium
can be deferred or forgiven. During 1996, business written under this program
was approximately 11% of CMAC's total.
Net premiums earned in 1996 were $187.9 million, an increase of 37.0%
compared to $137.1 million in 1995. This increase reflected the growth in
insurance-in-force resulting from strong new insurance volume and a
continuation of high persistency levels and increased premium rates on deeper
coverages and higher LTV-insured products during 1996. Direct primary insurance
in force grew from $32.4 billion at December 31, 1995 to $39.4 billion at
December 31, 1996, a 21.9% increase during the year. Direct pool insurance in
force also grew to $9.1 billion at December 31, 1996 from $3.5 billion at
December 31, 1995, an increase of 161.9% for the year. Primary new insurance
written on loans with LTVs greater than 90% represented 45.5% of the total
amount written in 1996 as compared to 48.2% in 1995.
Net investment income was $30.0 million in 1996, an increase of 15.6%
compared to $26.0 million in 1995. This increase was a result of the continued
growth in invested assets due to positive cash flows from operations of $84.5
million, offset slightly by a decrease in investment yields. The Company's
pre-tax investment yield declined from 6.3% at December 31, 1995 to 6.2% at
December 31, 1996. The Company has continued to invest new operating cash flow
in tax-advantaged securities, primarily municipal bonds.
The provision for losses was $91.9 million in 1996, an increase of 59.0%
compared to $57.8 million in 1995. 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 "affordable housing" program loans insured in 1994 and
1995. Although the ultimate performance of the books of business that
originated in 1994 and 1995 cannot yet be determined, it appears that the
ultimate loss levels will be higher than average, mainly due to the presence of
these "affordable housing" loans. CMAC's overall default rate at December 31,
1996 was 2.1% as compared to 2.0% at December 31, 1995. The number of defaults
rose from 7,329 a year ago to 10,127 at December 31, 1996 and the average loss
reserve per default rose from $9,183 at December 31, 1995 to $10,685 at
December 31, 1996. This increase in average loss reserve per default reflected
the Company's continued
27
<PAGE> 17
CMAC Investment Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS (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 rose from 3.3% at December 31, 1995 to 4.0% at December 31, 1996
and claims paid in California represented approximately 61.9% of the total
claims paid in 1996 as compared to 56.0% in 1995. The "affordable housing"
early default experience is a result of insuring certain loans in which the
borrowers' principal and interest reserves and other credit factors were not as
strong as on prior years' books of business. Underwriting changes have recently
been implemented to compensate for such factors. The Company believes that many
loan servicers have changed the timing of reporting loans in default, which has
continued to result in an incremental increase in the number of loans in
default. This change will allow earlier intervention with borrowers in default,
which might lead to a higher cure rate for such loans.
Underwriting and other operating expenses were $48.1 million for 1996, an
increase of 21.4% compared to $39.6 million for 1995. These expenses consist
of policy acquisition expenses, which relate directly to the acquisition of new
business, and other operating expenses, which primarily represent overhead and
administrative costs.
Policy acquisition costs were $26.9 million, a 15.0% increase compared to
$23.4 million in 1995. This reflects the increase in volume of new insurance
written, and increases in sales- and underwriting-related expenses incurred in
an effort to continue a broad geographic coverage. Other operating expenses
were $21.3 million for 1996 as compared to $16.3 million in 1995, an increase
of 30.6%. Much of the increase continued to result from an expansion of the
Company's technology efforts and a significant 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 1996, loans underwritten via contract
underwriting accounted for 35% of applications, 21% of insurance commitments
and 18% of certificates issued by CMAC.
The effective tax rate for 1996 was 24.6%, a decrease compared to 25.5% for
1994. This decrease was due in part to the growing percentage of tax-advantaged
securities in the Company's investment portfolio.
1995 COMPARED TO 1994
Net income for 1995 was $50.8 million, an increase of 23.5% compared to
$41.1 million for 1994. This improvement reflected significant increases in
premiums earned and net investment income, partially offset by increases in the
provision for losses and operating expenses.
Net primary insurance written during 1995 was $10.6 billion, an increase of
13.4%, compared to $9.4 billion for 1994. This increase occurred despite an
overall decrease of 17.3% in the private mortgage insurance market, which
reflected higher interest rates for most of the year and a lower percentage of
refinancing. CMAC's market share of the industry increased from 7.0% in 1994 to
9.6% in 1995. This market share increase was a result of geographic expansion,
primarily in the Midwest, and the success of a marketing focus on larger,
national mortgage lenders in order to take advantage of the widespread
consolidation occurring in the mortgage lending industry.
Refinancing represented 11.0% of CMAC's new insurance written in 1995 as
compared to 19.6% in 1994, due primarily to falling interest rates at the end
of 1995 and into 1996. The persistency rate was 86.5% for 1995 as compared to
80.3% for 1994, which was consistent with the lower level of refinancing.
In 1995, approximately 71% of CMAC's business reflected the newly instituted
deeper insurance coverage required by Fannie Mae and Freddie Mac. Monthly
premium plans also gained popularity in 1995, representing 82.4% of CMAC's
primary new insurance written as compared to 40.8% in 1994. Although this
program reapportions the cash flow from an insured loan over the life of the
loan, there should be no material financial effect from its widespread use. In
addition, a very small amount of business was written in 1995 under the
variation of the monthly premium plan in which the borrower does not need to
pay any mortgage insurance premium at closing and under which some portion of
the first month's premium can be deferred or forgiven.
Net premiums earned in 1995 were $137.1 million, an increase of 29.2%
compared to $106.1 million in 1994. This increase reflected the growth in
insurance-in-force and increased premium rates on deeper coverages and higher
LTV-insured products as compared to previous years. New insurance written on
loans with LTVs greater than 90% represented 48.2% of the total amount written
in 1995 as compared to 40.0% in 1994.
Net investment income was $26.0 million in 1995, an increase of 14.7%,
compared to $22.6 million in 1994. This increase was a result of the
significant increase in invested assets due to positive cash flows from
operations of $59.1 million, offset slightly by a decrease in investment yields
during 1995. The Company has continued to invest cash flow in tax-advantaged
securities, primarily municipal bonds.
The provision for losses was $57.8 million in 1995, an increase of 49.8%
compared to $38.6 million in 1994. This increase reflected the significant
growth in CMAC's insurance-in-force over the past several years, the continued
adverse experience of California loans, and the relatively poor early
experience of "affordable housing" program loans insured in 1994 and 1995.
CMAC's overall default rate at December 31, 1995 was 2.0% as compared to 2.1%
at December 31, 1994. However, the
28
<PAGE> 18
number of defaults rose to 7,329 from 5,926 a year ago and the average loss
reserve per loan in default rose from $7,874 at December 31, 1994 to $9,183 at
December 31, 1995, which reflected the addition of regional economic loss
reserving factors in order to more accurately estimate the cost of claims. The
default rate in California rose from 2.7% at December 31, 1994 to 3.3% at
December 31, 1995 and claims paid in California represented approximately 56.0%
of the total claims paid of $40.4 million in 1995.
Underwriting and other operating expenses were $39.6 million for 1995, an
increase of 11.4% compared to $35.6 million for 1994. These expenses consist
of policy acquisition expenses, which relate directly to the acquisition of new
business, and other operating expenses, which primarily represent overhead and
administrative costs.
Policy acquisition costs were $23.4 million, an increase of 4.0% compared to
$22.5 million in 1994. This small increase, as compared to the increase in
volume, reflected improved efficiency in the underwriting area due to the
increased usage of delegated underwriting and artificial intelligence, and in
the sales area due to the focus on larger, national lenders which provided
higher business volume per salesperson. Other operating expenses were $16.3
million for 1995, an increase of 24.2% compared to $13.1 million in 1994. This
increase was concentrated primarily in two places: the technology area where
systems and support were expanded and upgraded to accommodate the growing need
to automate all areas of the Company's operations; and outside services related
to the increased use of contract underwriting, an important ancillary outsource
service that the Company provided to its customers. Much of this increase in
contract underwriting expense was offset by corresponding increases in other
income.
The effective tax rate for 1995 was 25.5%, a decrease compared to 27.0% for
1994. This reflected continued investment in tax-advantaged securities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of funds consist primarily of premiums and investment
income. The Company generated positive cash flows from operating activities in
1996, 1995 and 1994 of $84.5 million, $59.1 million and $48.6 million,
respectively. The significant increases in operating cash flows reflect the
growth in insurance written and insurance-in-force that has more than offset
any increases in claims paid and other expenses. Positive cash flows are
invested pending future payments of claims and other expenses; cash flow
shortfalls, if any, are funded primarily through sales of short-term
investments and other investment portfolio securities.
Total investments were $513.2 million at December 31, 1996, including $5.2
million of short-term investments with maturities of 90 days or less and $34.6
million of U.S. Treasury equivalents and government agency securities. At
December 31, 1996, virtually all of the Company's investments consisted of
money market and investment-grade, readily marketable, fixed-income securities,
concentrated in maturities of greater than 10 years.
Loss reserves increased from $67.3 million at December 31, 1995 to $108.2
million at December 31, 1996. This increase in loss reserves due to newly
reported defaults, new loans in default that were not reported, and increases
to loss reserves on existing defaults was a result of continued adverse
California experience as well as the continued growth of the in-force insurance
book. In addition, CMAC experienced abnormally high early defaults on the 1994
and 1995 origination year books of business, which reflected the increase in
"affordable housing" program loans insured in that period. Unearned premiums
decreased from $56.1 million at December 31, 1995 to $53.4 million at December
31, 1996, reflecting the continued widespread use of the monthly premium
product, which does not produce unearned premium.
Stockholders' equity, which includes redeemable preferred stock of $40.0
million, increased to $396.3 million at December 31, 1996, an increase of 17.0%
from $338.6 million at December 31, 1995. This increase resulted primarily from
net income for 1996 of $62.2 million, offset by $5.6 million of dividends and a
$0.4 million decrease (net of tax) in the market value of securities available
for sale.
CMAC has plans to upgrade and enhance its computer systems and technological
capabilities in 1997. The Company believes that CMAC will have sufficient funds
to satisfy its claims payments and operating expenses and to pay dividends to
the Company for at least the next 12 months. The Company also believes that it
will be able to satisfy its long-term (more than 12 months) liquidity needs
with cash flow from CMAC. In addition, the Company and CMAC have a $5.0 million
discretionary line of credit to be used for general corporate purposes. There
were no draws against this line of credit during 1996 or 1995, and none have
been planned for 1997. As a holding company, the Company conducts its principal
operations through CMAC. The Company's ability to pay dividends on the $4.125
Preferred Stock is dependent upon CMAC's ability to pay dividends to the
Company. Based on the Company's current intention to pay quarterly common stock
dividends of approximately $0.03 per share, the Company will require dividend
payments from CMAC of $6.0 million annually to pay the dividends on the
outstanding shares of $4.125 Preferred Stock and common stock. There are
regulatory and contractual limitations on the payment of dividends. (See note 7
to the Consolidated Financial Statements.) The Company does not believe that
these restrictions will prevent the payment by CMAC or the Company of these
anticipated dividends in the foreseeable future.
29
<PAGE> 1
Exhibit 24.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
CMAC Investment Corporation on Form S-8 (Registration Nos. 33-57872, 33-67366
and 33-98106) of our report dated January 21, 1997, appearing in this Annual
Report on Form 10-K of CMAC Investment Corporation for the year ended December
31, 1996.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
March 26, 1997
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