<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
SEPTEMBER 30, 1998
------------------
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>
<TABLE>
<S> <C>
1601 MARKET STREET, PHILADELPHIA, PA 19103
- ------------------------------------ -----
(Address of principal executive offices) (zip code)
</TABLE>
(215) 564-6600
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or if such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 22,703,958 shares
of Common Stock, $0.001 par value, outstanding on November 10, 1998.
<PAGE> 2
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
Part I - Financial Information
<S> <C>
Consolidated Balance Sheets - September 30, 1998 and
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income - For the quarters and nine month periods
ended September 30, 1998 and 1997 . . . . . . . . . . . . . . . . 4
Consolidated Statement of Changes in Common Stockholders'
Equity - For the nine month period ended September 30, 1998 . . . 5
Consolidated Statements of Cash Flows - For the nine month periods ended
September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 7
Management's Discussion and Analysis of Results of
Operations and Financial Condition . . . . . . . . . . . . . . . . 8-11
Part II - Other Information, as applicable . . . . . . . . . . . . . . . . . . . . 12
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
-2-
<PAGE> 3
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
--------------- ------------
(Unaudited)
(In thousands, except share amounts)
<S> <C> <C>
Assets
Investments
Fixed maturities held to maturity - at amortized cost (fair value
$518,395 and $517,931) . . . . . . . . . . . . . . . . . . . . . $480,055 $487,941
Fixed maturities available for sale - at fair value
(amortized cost $171,172 and $91,949) . . . . . . . . . . . . . 180,905 97,962
Equity securities available for sale - at fair value (cost $20,044) 18,110 --
Short-term investments . . . . . . . . . . . . . . . . . . . . . . 14,006 11,027
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500 2,364
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . 30,288 25,025
Provisional losses recoverable . . . . . . . . . . . . . . . . . . . . 32,930 31,325
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,066 48,971
-------- --------
$817,860 $704,615
======== ========
Liabilities and Stockholders' Equity
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,528 $ 49,332
Reserve for losses . . . . . . . . . . . . . . . . . . . . . . . . . . 187,879 148,628
Deferred federal income taxes . . . . . . . . . . . . . . . . . . . . 7,851 6,541
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 40,996 30,171
------- -------
279,254 234,672
------- -------
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; 22,703,783 shares and 22,536,674 shares issued
and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . 23 22
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 185,161 179,846
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 308,353 246,166
Net unrealized gain on investments, net of tax . . . . . . . . . . . . 5,069 3,909
------- -------
498,606 429,943
-------- -------
$817,860 $704,615
======== ========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 4
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
(In thousands, except per-share amounts)
<S> <C> <C> <C>
Revenues:
Premiums written:
Direct . . . . . . . . . . . . . . . $ 76,612 $ 66,174 $224,920 $ 180,268
Assumed . . . . . . . . . . . . . . 8 3 116 132
Ceded . . . . . . . . . . . . . . . (8,148) (5,586) (23,531) (16,087)
-------- ---------- ---------- ---------
Net premiums written . . . . . . . . . . 68,472 60,591 201,505 164,313
Decrease in unearned premiums . . . . . 3,236 763 6,911 9,125
-------- ----------- ----------- ----------
Premiums earned . . . . . . . . . . . . 71,708 61,354 208,416 173,438
Net investment income . . . . . . . . . 9,673 8,426 28,444 24,938
Gain on sales of investments . . . . . . 562 312 923 796
Other income . . . . . . . . . . . . . . 2,418 1,263 6,908 3,478
-------- ---------- ---------- ---------
84,361 71,355 244,691 202,650
-------- ---------- ---------- ---------
Expenses:
Provision for losses . . . . . . . . . . 32,973 30,194 98,983 85,213
Policy acquisition costs . . . . . . . . 9,211 7,992 26,715 23,183
Other operating expenses . . . . . . . . 9,741 6,689 27,028 18,966
-------- ---------- ---------- ---------
51,925 44,875 152,726 127,362
-------- ---------- ---------- ---------
Pretax income . . . . . . . . . . . . . . . . . . 32,436 26,480 91,965 75,288
Provision for income taxes . . . . . . . . . . . 9,013 7,192 25,265 20,154
-------- ---------- ---------- ---------
Net income . . . . . . . . . . . . . . . . . . $ 23,423 $ 19,288 $ 66,700 $ 55,134
======== ========== =========== ==========
Basic net income per share . . . . . . . . . . . $ 1.00 $ 0.82 $ 2.84 $ 2.35
======== ========== =========== ==========
Diluted net income per share . . . . . . . . . . $ 0.96 $ 0.79 $ 2.72 $ 2.25
======== ========== =========== ==========
Average number of common shares outstanding -
basic . . . . . . . . . . . . . . . . . . . . . 22,699 22,491 22,642 22,449
======== ========== =========== ==========
Average number of common and common equivalent
shares outstanding - diluted . . . . . . . . . . 23,566 23,473 23,610 23,365
======== ========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE> 5
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net Unrealized
Additional Gain on
Common Paid-In Retained Investments
Stock Capital Earnings (Net of Tax) Total
------- --------- -------- --------------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 . . . . . . . . . . . . . $ 22 $179,846 $246,166 $ 3,909 $429,943
Net income (unaudited) . . . . . . . . . . . . -- -- 66,700 -- 66,700
Change in net unrealized gain on
investments - net of tax (unaudited) . . . -- -- -- 1,160 1,160
Issuance of common stock (unaudited) . . . . . 1 5,315 -- -- 5,316
Dividends (unaudited) . . . . . . . . . . . . -- -- (4,513) -- (4,513)
-------- -------- --------- ------- --------
Balance, September 30, 1998 (unaudited) . . . . . . . $ 23 $185,161 $308,353 $ 5,069 $498,606
======== ======== ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE> 6
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Cash flows from operating activities . . . . . . . . . . . . . . . . . . $ 89,246 $ 65,318
-------- ----------
Cash flows from investing activities:
Proceeds from sales of investments available for sale . . . . . . 15,633 18,995
Proceeds from sales of investments held to maturity . . . . . . . 1,031 --
Proceeds from redemptions of investments available for sale . . . 19,006 11,175
Proceeds from redemptions of investments held to maturity . . . . 8,505 4,235
Purchases of investments available for sale . . . . . . . . . . . (129,945) (12,814)
Purchases of investments held to maturity . . . . . . . . . . . . -- (72,834)
Purchases of short-term investments - net . . . . . . . . . . . . (2,979) (3,267)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 836 (7,752)
--------- ---------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . (87,913) (62,262)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock . . . . . . . . . . . . . . 5,316 3,030
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . (4,513) (4,495)
---------- ----------
Net cash from (used in) financing activities . . . . . . . . . . . . . . 803 (1,465)
---------- ----------
Increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,136 1,591
Cash, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . 2,364 3,189
---------- ---------
Cash, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,500 $ 4,780
========= =========
Supplemental disclosures of cash flow information:
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,250 $ 19,250
========= =========
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36 $ --
========= =========
</TABLE>
See notes to consolidated financial statements.
-6-
<PAGE> 7
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of CMAC
Investment Corporation (the "Company") and its subsidiaries including its
principal operating subsidiary, Commonwealth Mortgage Assurance Company
("CMAC"), and are presented on the basis of generally accepted accounting
principles.
The financial information for the interim periods included herein is
unaudited; however, such information reflects all adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position, results of operations, and cash flows for the interim periods. All
such adjustments are of a normal, recurring nature. The results of operations
for interim periods are not necessarily indicative of results to be expected
for the full year.
Basic net income per share is based on the weighted average number of
common shares outstanding, while diluted net income per share is based on the
weighted average number of common shares outstanding and common share
equivalents that would arise from the exercise of stock options. Preferred
stock dividends are deducted from net income in the net income per share
computation.
For a summary of significant accounting policies and additional
financial information, see the CMAC Investment Corporation Annual Report on
Form 10-K for the year ended December 31, 1997.
2 - COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," effective January 1, 1998. The
Statement requires disclosure of amounts from transactions and other events
which are currently excluded from the statement of operations and are recorded
directly to stockholders' equity. Total comprehensive income for the nine
month periods ended September 30, 1998 and 1997 amounted to $66,937,000 and
$54,431,000, respectively and comprehensive income for the quarters ended
September 30, 1998 and 1997 amounted to $22,859,000 and $19,180,000,
respectively.
3 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The statement is effective for
fiscal years beginning after June 15, 1999 and will not be applied
retroactively. The statement established accounting and reporting standards
for derivative instruments and hedging activity and requires that all
derivatives be measured at fair value and recognized as either assets or
liabilities in the financial statements. Management of the Company does not
believe the adoption of SFAS No. 133 will have a material impact on the
financial statements when such statement is adopted.
-7-
<PAGE> 8
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
Net income for the first nine months of 1998 was $66.7 million, a
21.0% increase compared to $55.1 million for the first nine months of 1997 and
net income for the quarter ended September 30, 1998 was $23.4 million, a 21.4%
increase compared to $19.3 million for the same period in 1997. These
improvements were the result of significant growth in premiums earned and net
investment income, partially offset by a higher provision for losses, and an
increase in both policy acquisition costs and other operating expenses.
New primary insurance written during the first nine months of 1998 was
$15.5 billion, a 61.1% increase compared to $9.6 billion for the first nine
months of 1997 and for the third quarter of 1998, new primary insurance written
of $5.8 billion was 59.0% higher than the $3.6 billion written in the third
quarter of 1997. The increase in CMAC's primary new insurance written was
primarily due to a 51.4% increase in new insurance written volume in the
private mortgage insurance industry for the first nine months of 1998 as
compared to the same period of 1997 and a 51.6% increase in the industry's new
insurance written volume in the third quarter of 1998 as compared to the third
quarter of 1997. In addition, CMAC completed a large seasoned loan
transaction in the second quarter of 1998, insuring approximately $700 million
of California loans with a risk profile similar to the Company's regular
business. CMAC's market share of the industry volume was 11.6% for the nine
months ended September 30, 1998, compared to 10.5% for the same period of 1997.
Additionally, in the first nine months of 1998, CMAC wrote an increased amount
of pool insurance which represented an addition to risk of $263.1 million as
compared to $183.2 million in the same period of 1997 and for the quarter ended
September 30, 1998, CMAC wrote pool insurance representing an addition to risk
of $78.6 million as compared to $72.1 million for the same period in 1997.
Most of this pool insurance volume relates to a group of structured
transactions composed primarily of Fannie Mae- and Freddie Mac-eligible
("GSEs") conforming mortgage loans that are geographically well dispersed
throughout the United States and have lower average loan-to-value ratios than
CMAC's primary business. The performance of this business has been better than
anticipated although the business is relatively young and the historical
performance might not be an indication of future performance. Under a pool
insurance transaction, the exposure to CMAC on each individual loan is
uncapped; however, the aggregate stop-loss percentage (typically 1.0% to 1.5%
of the aggregate original loan balance in the Fannie Mae/Freddie Mac
transactions) is the most that can be paid out in losses before the insurer's
exposure terminates. The Company expects its pool insurance activity to
continue at a similar level throughout 1998 due to commitments outstanding and
will review its capacity and willingness to provide such pool insurance after
these commitments expire. Premium rates on such pool insurance are
significantly lower than on primary insurance loans due to the low stop-loss
levels, which limit the overall risk exposure to CMAC, and the focus of such
product on high quality primary insurance customers. Both Standard & Poor's
and Moody's Investors Service have recently determined that the capital
requirements to support such pool insurance will be significantly more
stringent than on primary insurance due to the low premium rates and low stop
loss levels and CMAC has reviewed its capital levels to ensure compliance with
these requirements. The average stop-loss on pool insurance written during the
first nine months of 1998 was 1.3%.
CMAC's volume in the first nine months of 1998 was positively impacted
by relatively lower interest rates which affected the entire mortgage industry.
The trend toward lower interest rates, which began in the third quarter of
1997, caused refinancing activity during the first three quarters of 1998 to
continue at a higher rate although strong housing prices have caused a large
percentage of the refinanced loans to be closed without private mortgage
insurance at an LTV of 80% or below. Therefore, the rate of growth in the
private mortgage industry has not been as high as that of the entire mortgage
market. CMAC's refinancing activity as a percentage of primary new insurance
written was 30% for the nine month period ended September 30, 1998 as compared
to 15% for the same period in 1997; however, for the third quarter of 1998,
that rate had declined to 24% from 37% and 29% in the first and second quarters
of 1998, respectively, indicating that the current refinance boom is
continuing to slow. The persistency rate, which is defined as the percentage of
policies in force that are renewed in any given year, was 71.9% for the twelve
months ended September 30, 1998 as compared to 88.1% for the twelve months
ended September 30, 1997. This decrease was consistent with the higher level
of refinancing activity during the first nine months of 1998; however, a
decline in the refinancing level toward the end of the second quarter and into
the third quarter suggests a small increase in the relative persistency rate
over the balance of 1998.
CMAC also has recently become involved in insuring sub-prime loans,
specifically Alternative A and A minus
-8-
<PAGE> 9
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(CONTINUED)
loans. Alternative A borrowers have an equal or better credit profile than
CMAC's typical insured borrowers, but these loans are underwritten with reduced
documentation and verification of information. CMAC typically charges a higher
premium rate for this business due to the reduced documentation, but does not
consider this business to be significantly more risky than its normal primary
business. The A minus loan programs typically have non-tradititional credit
standards which are less stringent than standard credit guidelines. To
compensate for this additional risk, CMAC receives a significantly higher
premium for insuring this product that is commensurate with the additional
default risk. During 1998, Alternative A and A minus business has accounted
for 7.6% of CMAC's new primary insurance written.
Net premiums earned in the first nine months of 1998 were $208.4
million, a 20.2% increase compared to $173.4 million for the first nine months
of 1997 and premiums earned for the quarter ended September 30, 1998 were $71.7
million, a 16.9% increase compared to $61.4 million for the same period of
1997. This increase reflected the insurance in force growth resulting from
strong new insurance volume and the increase in pool insurance written during
the first nine months of 1998, and was offset by the decline in persistency
levels. The strong volume led to an increase in direct primary insurance in
force of 11.0%, from $46.9 billion at December 31, 1997 to $52.1 billion at
September 30, 1998. Direct pool risk in force also grew to $783.7 million at
September 30, 1998 from $593.9 million at the end of 1997, an increase of 32.0%
for the nine month period. CMAC and the industry have recently begun to enter
risk sharing arrangements with various customers that are designed to allow the
customer to participate in the risks and rewards of the mortgage insurance
business. One such product is captive reinsurance, in which a mortgage lender
sets up a mortgage reinsurance company that assumes part of the risk associated
with that lenders' insured book of business. In most cases, the risk assumed
by the reinsurance company is an excess layer of aggregate losses that would be
penetrated only in a situation of adverse loss development. For the nine
months ended September 30, 1998, premiums ceded under captive reinsurance
arrangements were $668,400 or less than 1% of total earned premiums and for the
quarter ended September 30, 1998, premiums ceded under captive arrangements
were $330,000 or less than 1% of total earned premiums for the quarter of $71.7
million. CMAC expects to enter into several new agreements in the balance of
1998 and into 1999, although the aggregate amount of captive reinsurance is not
expected to have a material financial impact on CMAC's balance sheet or
financial results in those years.
Net investment income for the first nine months of 1998 was $28.4
million, a 14.1% increase compared to $24.9 million for the same period of 1997
and for the third quarter of 1998, net investment income was $9.7 million as
compared to $8.4 million for the third quarter of 1997, a 14.8% increase.
These increases were a result of continued growth in invested assets primarily
due to positive operating cash flows of $89.2 million for the first nine months
of 1998. The Company has continued to invest new operating cash flow in
tax-advantaged securities, primarily municipal bonds, although the Company did
modify its investment policy to allow the purchase of various other asset
classes, including common stock and convertible securities, beginning in the
second quarter of 1998. The Company's intent is to target the common equity
exposure at 5% of the investment portfolio's market value while the convertible
securities and mortgage-backed securities exposure are each targeted at 10%.
During the second and third quarters of 1998, the Company purchased a total of
$20.0 million of common equities which led to a slight decrease in the growth
in investment income during the third quarter. Although there will be a
short-term decline in investment income from this change in investment policy,
the Company expects no material long-term impact on total investment returns as
a result of this change.
The provision for losses was $99.0 million for the first nine months
of 1998, an increase of 16.2% compared to $85.2 million for the first nine
months of 1997, and for the third quarter of 1998, the provision was $33.0
million as compared to $30.2 million for the third quarter of 1997, an increase
of 9.2%. These increases reflected the significant growth and maturation of
CMAC's book of business over the past several years, which has caused an
increase in defaults reported to CMAC, the continued adverse experience of
California loans (despite signs of an improving trend in California), and the
relatively poor experience of certain "affordable housing" program loans
insured in 1994 and 1995, especially in Florida. Although the ultimate
performance of the books of business that originated since 1994 cannot yet be
determined, it appears that the ultimate loss levels will be higher than
average, partially due to the presence of these "affordable housing" loans.
CMAC's overall default rate at September 30, 1998 was 1.69% as compared to
1.82% at December 31, 1997 and 1.76% at March 31, 1998 while the default rate
on the primary business was 2.39% at September 30, 1998 as compared to 2.32% at
December 31, 1997. The number of defaults rose from 12,359 at December 31,
1997 to 14,104 at September 30, 1998 and the average loss reserve per default
rose from $12,026 at the end of 1997 to $13,321 at
-9-
<PAGE> 10
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(CONTINUED)
September 30, 1998. This increase in average loss reserve per default
reflected the Company's continued implementation of a more conservative reserve
calculation for certain loans in default perceived as having a higher risk of
claim incidence. In addition, an increase in the average loan balance and the
coverage percentage on loans originated beginning in 1995 has necessitated a
higher reserve balance on loans in a default status due to the increased
ultimate exposure on these loans. The default rate in California was 2.7%
(including pool) at September 30, 1998 as compared to 3.6% at December 31, 1997
and claims paid in California during the first nine months of 1998 were $32.8
million, representing approximately 44.9% of total claims as compared to 58.7%
for the same period of 1997. The default rate in Florida was 3.4% (including
pool) at September 30, 1998 as compared to 3.8% at December 31, 1997 and claims
paid in Florida during the first nine months of 1998 were $5.5 million,
representing approximately 12.3% of total claims as compared to only 5.9% for
the same period in 1997. 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. Certain underwriting changes were implemented near
the end of 1996 to compensate for the factors that contributed to the early
default experience on these "affordable housing" loans; however, it is too
early to determine the impact of such changes. In addition, CMAC has reported
an increased number of defaults on the Alternative A and A minus business
insured beginning in 1997. Although the default rate for this business is
higher than on CMAC's normal books, it is not currently higher than was
expected for this type of business and the higher premium rates charged are
expected to compensate for the increased level of default risk.
Underwriting and other operating expenses were $53.7 million for the
first nine months of 1998, an increase of 27.5% compared to $42.1 million for
the same period of 1997. For the third quarter of 1998, these expenses were
$19.0 million as compared to $14.7 million for the third quarter of 1997, an
increase of 29.1%. These expenses consisted of policy acquisition expenses,
which relate directly to the acquisition of new business, and other operating
expenses, which primarily represent contract underwriting expenses, overhead
and administrative costs.
Policy acquisition costs in the first nine months of 1998 were $26.7
million, an increase of 15.2% compared to $23.2 million for the first nine
months of 1997 and these expenses were $9.2 million in the third quarter of
1998, an increase of 15.3% compared to $8.0 million for the same period in
1997. These increases reflect the growth in sales- and underwriting-related
expenses relating to the Company's continued growth in new insurance written.
The Company has continued development of its marketing infrastructure needed to
support a focus on larger, national mortgage lenders in order to take advantage
of the widespread consolidation occurring in the mortgage lending industry.
Other operating expenses for the nine months ended September 30, 1998 were
$27.0 million, an increase of $8.1 million or 42.5% as compared to $19.0
million for the same period in 1997 and these expenses were $9.7 million for
the third quarter of 1998, an increase of 45.6% compared to $6.7 million for
the third quarter of 1998. Most of the increase continued to result from an
increase in expenses associated with the company's ancillary services,
specifically contract underwriting. Contract underwriting expenses for the
nine month period ended September 30, 1998 were $13.8 million as compared to
$7.5 million for the same period of 1997, an increase of 84.4% and these
expenses were $5.3 million for the third quarter of 1998 as compared to $2.9
million for the third quarter of 1997, an increase of 81.7%. The increase in
contract underwriting expenses during the first nine months of 1998 of $6.3
million represented 78.2% of the $8.1 million increase in other operating
expenses for the first nine months of 1998, while the $2.4 million increase in
contract underwriting expenses in the second quarter of 1998 represented 77.6%
of the $3.1 million increase in other operating expenses for the third quarter
of 1998. Some of these additional contract underwriting expenses were
correspondingly offset by increases to other income, which rose 98.6% from $3.5
million in the first nine months of 1997 to $6.9 million for the same period in
1998 and 91.4% from $1.3 million in the third quarter of 1997 to $2.4 million
in the third quarter of 1998. During the first nine months of 1998, loans
underwritten via contract underwriting accounted for 32% of applications, 28%
of insurance commitments, and 24% of certificates issued by CMAC as compared to
29% of applications, 25% of commitments and 22% of certificates in the first
nine months of 1997. The total volume of loans underwritten via contract
underwriting is expected to increase which could result in an increase in other
operating expenses without a corresponding matching increase in mortgage
insurance volume. Changing market conditions have caused the cost of contract
underwriting to increase during 1997 and 1998 due to the high demand for
available resources. However, as further efficiencies are realized in the
contract underwriting process due to the integration with Freddie Mac's Loan
Prospector and Fannie Mae's Desktop Underwriter origination systems, the cost
per contract underwriting loan underwritten could decrease.
-10-
<PAGE> 11
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(CONTINUED)
The effective tax rate for the nine months ended September 30, 1998 was
27.5% as compared to 26.8% for the same period in 1997 and the tax rate for the
third quarter of 1998 was 27.8% as compared to 27.2% for the third quarter of
1997. Operating income accounted for 68.1% and 68.4%, respectively, of net
income for the nine months and quarter ended September 30, 1998 as compared to
65.8% and 67.0%, respectively, for the same periods in 1997, thus resulting in
the small increase in effective tax rates for 1998.
LIQUIDITY AND CAPITAL RESOURCES
CMAC's sources of funds consist primarily of premiums and investment
income. Funds are applied primarily to the payment of CMAC's claims and
operating expenses.
Cash flows from operating activities for the nine months ended September
30, 1998 were $89.2 million as compared to $65.3 million for the same period of
1997. This increase consisted of an increase in net premiums written and
investment income received, partially offset by an increase in claims paid and
operating expenses. Positive cash flows are invested pending future payments
of claims and other expenses; cash flow shortfalls, if any, are funded through
sales of short-term investments and certain other investment portfolio
securities.
Stockholders' equity, which includes redeemable preferred stock of $40.0
million, increased from $469.9 million at December 31, 1997 to $538.6 million
at September 30, 1998, primarily as a result of net income of $66.7 million,
unrealized gains on the Company's investment portfolio of $1.2 million and the
exercise of stock options that provided capital of $5.3 million, partially
offset by dividends of $4.5 million.
As of September 30, 1998, the Company and its subsidiaries had no
material commitments for capital expenditures.
YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000. The Company has conducted an analysis of its systems and has completed
its Year 2000 project to ensure that all of its systems will be Year 2000
compliant by the end of 1998. "Year 2000 compliant" means fault free
performance in the processing of data and date related data (including, but not
limited to, calculating, comparing and sequencing) by all hardware and software
products, individually and in combination. Fault free performance must include
the manipulation of data when dates are in the 20th or 21st century and must be
transparent to the user. The Company has completed the necessary program
modifications to make them Year 2000 compliant and all date sensitive files
have been appropriately modified and updated. The Company has built a
stand-alone testing environment that allowed simulation of different year-end
scenarios and testing of the Year 2000 programming changes and file
modifications was completed in October 1998. In addition, the Company has
undertaken a review of all of its hardware systems to assess Year 2000
compliance. The Company's servers are currently Year 2000 compliant and any
desktop systems not currently Year 2000 compliant are scheduled for replacement
over the next 12 months. Although the Company will be Year 2000 compliant, in
the event that third parties with whom the Company transacts business are not
Year 2000 compliant, potential for an adverse effect on the Company's
operations may remain. The Company has taken precautions to minimize this risk
by contacting each of its mission critical business partners to ascertain their
Year 2000 compliance status. The Company's Year 2000 compliance project has
not resulted in any material costs and has had no material impact on its
financial condition.
-11-
<PAGE> 12
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
<TABLE>
<S> <C>
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - None
ITEM 3. Defaults upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. a. Exhibits -
*Exhibit 11.1 - Statement Re: Computation of Per Share Earnings
*Exhibit 27.1 - Financial Data Schedule
b. Reports on Form 8-K - None
</TABLE>
* Filed Herewith
-12-
<PAGE> 13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CMAC INVESTMENT CORPORATION
Date: November 12, 1998 /s/ C. Robert Quint
-------------------------------------------------
C. Robert Quint
Senior Vice President, Chief Financial Officer
(Principal Accounting Officer)
-13-
<PAGE> 1
EXHIBIT 11.1
CMAC INVESTMENT CORPORATION
SCHEDULE OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
---------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
(In thousands, except per-share amounts and market prices)
<S> <C> <C> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,423 $19,288 $66,700 $55,134
Preferred stock dividend adjustment . . . . . . . . . . . . . . . (825) (825) (1,650) (1,650)
------- ------- ------- --------
Adjusted net income . . . . . . . . . . . . . . . . . . . . . . . $22,598 $18,463 $64,225 $52,659
Average diluted stock options outstanding . . . . . . . . . . . . 1,462.2 1,499.3 1,499.4 1,540.8
Average exercise price per share . . . . . . . . . . . . . . . . 15.73 17.12 19.28 16.48
Average market price per share - diluted basis . . . . . . . . . 50.05 48.58 58.89 41.12
Average common shares outstanding . . . . . . . . . . . . . . . . 22,699 22,491 22,642 22,450
Increase in shares due to exercise of options -
diluted basis . . . . . . . . . . . . . . . . . . . . . . . . . 867 982 968 915
Adjusted shares outstanding - diluted . . . . . . . . . . . . . . 23,566 23,473 23,610 23,365
Net income per share - basic . . . . . . . . . . . . . . . . . . $ 1.00 $ 0.82 $ 2.84 $ 2.35
======= ======= ======== =======
Net income per share - diluted . . . . . . . . . . . . . . . . . $ 0.96 $ 0.79 $ 2.72 $ 2.25
======= ======= ======== =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,500
<SECURITIES> 693,076
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 120,284
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 817,860
<CURRENT-LIABILITIES> 279,254
<BONDS> 0
40,000
0
<COMMON> 23
<OTHER-SE> 498,606
<TOTAL-LIABILITY-AND-EQUITY> 817,860
<SALES> 0
<TOTAL-REVENUES> 244,691
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 53,743
<LOSS-PROVISION> 98,983
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 91,965
<INCOME-TAX> 25,265
<INCOME-CONTINUING> 66,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,700
<EPS-PRIMARY> 2.84
<EPS-DILUTED> 2.72
</TABLE>
