<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended
MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from_____________________to_____________________
Commission file number 1-11356
CMAC INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 23-2691170
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1601 MARKET STREET, PHILADELPHIA, PA 19103
(Address of principal executive offices) (zip code)
(215) 564-6600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or if such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 22,752,680 shares of Common
Stock, $0.001 par value, outstanding on May 11, 1999.
<PAGE> 2
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Part I - Financial Information
Consolidated Balance Sheets - March 31, 1999 and
December 31, 1998 ................................... 3
Consolidated Statements of Income - For the quarters ended
March 31, 1999 and 1998 ............................. 4
Consolidated Statement of Changes in Common Stockholders'
Equity and Comprehensive Income - For the quarter
ended March 31, 1999 ................................ 5
Consolidated Statements of Cash Flows - For the quarters ended
March 31, 1999 and 1998 ............................. 6
Notes to Consolidated Financial Statements ................... 7
Management's Discussion and Analysis of Results of
Operations and Financial Condition .................. 8 - 12
Quantitative and Qualitative Disclosures about Market Risk ... 12
Part II - Other Information, as applicable ............................ 13
Signature ............................................................. 14
</TABLE>
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<PAGE> 3
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
(Unaudited)
(In thousands, except share amounts)
<S> <C> <C>
Assets
Investments
Fixed maturities held to maturity - at amortized cost (fair value
$508,591 and $512,368) ......................................... $ 476,680 $477,518
Fixed maturities available for sale - at fair value
(amortized cost $249,736 and $205,047) ......................... 255,192 212,771
Equity securities - at fair value (cost $30,167 and $25,109) ..... 33,926 27,425
Short-term investments ........................................... 17,309 18,596
Cash ................................................................. 2,112 2,191
Deferred policy acquisition costs .................................... 35,778 32,144
Prepaid federal income taxes ......................................... 104,200 103,763
Provisional losses recoverable ....................................... 35,091 32,718
Other assets ......................................................... 61,498 61,047
---------- --------
$1,021,786 $968,173
========== ========
Liabilities and Stockholders' Equity
Unearned premiums .................................................... $ 46,624 $ 49,424
Reserve for losses ................................................... 221,256 201,276
Federal income taxes, principally deferred ........................... 120,951 112,055
Accounts payable and accrued expenses ................................ 48,559 42,449
---------- --------
437,390 405,204
---------- --------
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;
22,757,536 shares and 22,705,958 shares issued
and outstanding .................................................. 23 23
Additional paid-in capital ........................................... 185,810 185,219
Retained earnings .................................................... 352,573 331,201
Accumulated other comprehensive income ............................... 5,990 6,526
---------- --------
544,396 522,969
---------- --------
$1,021,786 $968,173
========== ========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 4
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
March 31
1999 1998
---- ----
(In thousands, except per-share amounts)
<S> <C> <C>
Revenues:
Premiums written:
Direct .......................................... $ 79,952 $ 68,676
Assumed ......................................... 4 10
Ceded ........................................... (6,870) (6,441)
-------- --------
Net premiums written ................................ 73,086 62,245
Decrease in unearned premiums ....................... 2,886 4,935
-------- --------
Premiums earned ..................................... 75,972 67,180
Net investment income ............................... 10,284 9,304
Gain on sales of investments ........................ 372 350
Other income ........................................ 3,159 2,201
-------- --------
89,787 79,035
-------- --------
Expenses:
Provision for losses ................................ 34,072 33,037
Policy acquisition costs ............................ 9,154 8,605
Other operating expenses ............................ 11,853 8,384
Merger expenses ..................................... 2,401 --
-------- --------
57,480 50,026
-------- --------
Pretax income .......................................... 32,307 29,009
Provision for income taxes ............................. (9,429) (7,957)
-------- --------
Net income ............................................. 22,878 21,052
Dividends to preferred stockholder ..................... 825 825
-------- --------
Net income available to common stockholders ............ $ 22,053 $ 20,227
======== ========
Basic net income per share ............................. $ 0.97 $ 0.90
======== ========
Diluted net income per share ........................... $ 0.94 $ 0.86
======== ========
Average number of common shares outstanding - basic .... 22,720 22,578
======== ========
Average number of common and common equivalent shares
outstanding - diluted .................................. 23,485 23,633
======== ========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 5
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income Total
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 ............ $ 23 $185,219 $ 331,201 $ 6,526 $ 522,969
Comprehensive income:
Net income (unaudited) ................ -- -- 22,878 -- 22,878
Unrealized holding losses arising
during period, net of tax of
$(166) (unaudited) .................. -- -- -- (308)
Less: Reclassification adjustment
for net gains included in net income,
net of tax of $123 (unaudited) ...... -- -- -- (228)
-------
Net unrealized loss on investments,
net of tax of $289 (unaudited) ... -- -- -- (536) (536)
---------
Comprehensive income (unaudited) ..... 22,342
Issuance of common stock (unaudited) .. -- 591 -- -- 591
Dividends (unaudited) ................. -- -- (1,506) -- (1,506)
------- -------- --------- ------- ---------
Balance, March 31, 1999 (unaudited) ... $ 23 $185,810 $ 352,573 $ 5,990 $ 544,396
======= ======== ========= ======= =========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 6
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
March 31
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Cash flows from operating activities .............................. $ 45,814 $ 29,188
-------- --------
Cash flows from investing activities:
Proceeds from sales of investments available for sale ........... 13,164 3,320
Proceeds from sales of investments held to maturity ............. -- 1,031
Proceeds from sales of equity securities available for sale ..... 92 --
Proceeds from redemptions of investments available for sale ..... 2,350 6,759
Proceeds from redemptions of investments held to maturity ....... 4,834 3,060
Proceeds from redemptions of equity securities available for sale 436 --
Purchases of investments available for sale ..................... (58,355) (41,105)
Purchases of equity securities available for sale ............... (5,573) --
Sales (purchases) of short-term investments, net ................ 1,287 (6,475)
(Purchases) sales of real estate owned, net ..................... (2,537) 2,657
Other ........................................................... (676) (99)
-------- --------
Net cash used in investing activities ............................. (44,978) (30,852)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock .......................... 591 2,491
Dividends paid .................................................. (1,506) (1,503)
-------- --------
Net cash (used in) from financing activities ...................... (915) 988
-------- --------
Decrease in cash .................................................. (79) (676)
Cash, beginning of period ......................................... 2,191 2,364
-------- --------
Cash, end of period ............................................... $ 2,112 $ 1,688
======== ========
Supplemental disclosures of cash flow information:
Income taxes paid ................................................. $ 500 $ 1,000
======== ========
Interest paid ..................................................... $ 33 $ 1
======== ========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 7
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of CMAC
Investment Corporation (the "Company") and its subsidiaries including its
principal operating subsidiary, Commonwealth Mortgage Assurance Company
("CMAC"), and are presented on the basis of generally accepted accounting
principles.
The financial information for the interim periods included herein is unaudited;
however, such information reflects all adjustments which are, in the opinion of
management, necessary for a fair presentation of the financial position, results
of operations, and cash flows for the interim periods. The results of operations
for interim periods are not necessarily indicative of results to be expected for
the full year.
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, 1998.
2 - PROPOSED MERGER
On November 22, 1998, the board of directors of the Company and the
board of directors of Amerin Corporation ("Amerin") each approved an Agreement
and Plan of Merger pursuant to which the Company and Amerin will merge. The
anticipated merger calls for Amerin stockholders to receive 0.5333 shares of the
Company's common stock in a tax-free exchange for each share of Amerin common
stock that they own. The Company's stockholders will continue to own their
existing shares after the merger at which time the name will be changed to
Radian Group Inc. Completion of the merger is subject to approval by the
stockholders of both companies and, pending this approval, the transaction is
scheduled to close on June 9, 1999. The merger transaction will be accounted for
on a pooling of interests basis.
3 - ACCOUNTING PRINCIPLES ISSUED AND NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards 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 establishes 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. The impact of the statement will depend on the extent of derivatives
and embedded derivatives at the date the statement is adopted. The Company is
currently evaluating the effect this statement might have on the consolidated
financial position or results of operations.
In October 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-7, "Deposit Accounting; Accounting for Insurance and Reinsurance Contracts
That Do Not Transfer Insurance Risk." This statement provides guidance on how to
apply the deposit method of accounting when it is required for insurance and
reinsurance contracts that do not transfer insurance risk. This statement is
effective for financial statements for fiscal years beginning after June 15,
1999. Management does not believe that the impact of applying this statement
will be material to the consolidated financial position or results of operations
of the Company when adopted.
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<PAGE> 8
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following is a "Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995:
The statements contained in this Form 10-Q that are not historical facts
are forward-looking statements. Actual results may differ materially from those
projected in the forward-looking statements. These forward-looking statements
involve risks and uncertainties including, but not limited to, the risk that
housing demand may decrease as a result of higher-than-expected interest rates,
adverse economic conditions, or other reasons; that seasonality may be different
than the historical pattern; that the market share of the segment of the
mortgage market served by the mortgage insurance industry may decline as a
result of competition from government programs or other substitute products; and
that the Company's share of originations having private mortgage insurance may
decline as a result of competition or other factors. Investors are also directed
to other risks discussed in documents filed by the Company with the Securities
and Exchange Commission.
RESULTS OF OPERATIONS
Net income for the first quarter of 1999 was $22.9 million, an 8.7%
increase compared to $21.1 million for the first quarter of 1998. However, net
income for the first quarter of 1999 included merger expenses net of tax of $2.2
million and without these merger expenses, net income was $25.1 million, a 19.2%
increase compared to $21.1 million for the first quarter of 1998. This
improvement was a result of significant growth in premiums earned and net
investment income, partially offset by a higher provision for losses, policy
acquisition costs and other operating expenses.
New primary insurance written during the first quarter of 1999 was $5.9
billion, a 45.8% increase compared to $4.1 billion for the first quarter of
1998. The increase in CMAC's primary new insurance written was primarily due to
a 42.0% increase in new insurance written volume in the private mortgage
insurance industry for the first quarter of 1999 as compared to the first
quarter of 1998. In addition, CMAC's market share of the industry increased to
11.8% in the first quarter of 1998, compared to 11.5% for the same period of
1998. Additionally, in the first quarter of 1999, CMAC wrote an increased amount
of pool insurance which represented risk written of $102.9 million as compared
to $80.1 million in the first quarter of 1998. Most of this pool insurance
volume relates to a group of structured transactions composed primarily of
Fannie Mae- and Freddie Mac-eligible 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 to date 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 maximum that can be paid out in losses
before the insurer"s exposure terminates. The Company expects its pool insurance
activity to decline during the remainder of 1999 as certain outstanding
commitments expire and are not renewed. 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 CMAC has reviewed its capital
and reinsurance levels to measure compliance with these requirements.
CMAC's volume in the first three months of 1999 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 at the beginning of 1999 to continue at a higher
rate than normal and 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 37.0% for the
first quarters of 1999 and 1998. The persistency rate, which is defined as the
percentage of policies in force that are renewed in any given year, was 66.9%
for the twelve months ended March 31, 1999 as compared to 79.5% for the
-8-
<PAGE> 9
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
twelve months ended March 31, 1998. This decrease was consistent with the
continued high level of refinancing activity during the first quarter of 1999
which caused the cancellation rate to increase. The persistency rate for 1999
should continue at a rate lower than normal although if the current refinance
boom slows, the persistency rate could improve.
CMAC also has become involved in insuring non-conforming loans,
specifically Alternative A and A minus 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-traditional 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 the first quarter
of 1999, A minus business accounted for 6.7% of CMAC's new primary insurance
written.
Net premiums earned in the first quarter of 1999 were $76.0 million, a
13.1% increase compared to $67.2 million for the first quarter of 1998. This
increase reflected the insurance in force growth resulting from strong new
insurance volume and the increase in pool insurance written during the first
quarter of 1999 and was partially offset by the decline in persistency levels.
The strong volume led to an increase in direct primary insurance in force for
the quarter of 3.9%, from $53.8 billion at December 31, 1998 to $55.9 billion at
March 31, 1999. Direct pool risk in force also grew to $1.1 billion at March 31,
1999 from $907.3 million at the end of 1998, an increase of 13.2% for the
quarter. CMAC and the industry have entered into 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 lender's 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 first quarter of 1999, premiums ceded under
captive reinsurance arrangements were $757,000 or less than 1% of total premiums
earned during the period and new primary insurance written under captive
reinsurance arrangements was $853 million, or 14.4% of total new primary
insurance written. CMAC expects to enter into several new agreements in 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 1999.
Net investment income for the first quarter of 1999 was $10.3 million, a
10.5% increase compared to $9.3 million for the same period of 1998. This
increase was a result of continued growth in invested assets primarily due to
positive operating cash flows of $45.8 million during the first quarter of 1999.
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 of 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 a maximum
of 5% of the investment portfolio's market value while the convertible
securities and mortgage-backed securities exposures are targeted not to exceed
10% each. The change in the Company's investment guidelines has led to a
continued slight decrease in the growth in investment income during the first
quarter of 1999 and, 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 investment
asset diversification.
The provision for losses was $34.1 million for the first three months of
1999, an increase of 3.1% compared to $33.0 million for the first three months
of 1998. This increase reflected the significant growth and maturation of CMAC's
book of business over the past several years, which has caused an increase in
the number of defaults reported to CMAC, the continued adverse experience of
California loans (despite signs of an improving trend in California), and the
continued 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 slightly higher than average,
partially due to the presence of these "affordable housing" loans. Claim
activity is not evenly spread throughout the coverage period of a book of
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<PAGE> 10
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
business. Relatively few claims are received during the first two years
following issuance of the policy. Historically, claim activity has reached its
highest level in the third through fifth years after the year of loan
origination. Approximately 57% of CMAC's primary risk in force and almost all of
CMAC's pool risk in force at March 31, 1999 had not yet reached its anticipated
highest claim frequency years. CMAC's overall default rate at March 31, 1999 was
1.59% as compared to 1.68% at December 31, 1998, while the default rate on the
primary business was 2.49% at March 31, 1999 as compared to 2.44% at December
31, 1998. The number of defaults rose from 15,525 at December 31, 1998 to 15,990
at March 31, 1999 and the average loss reserve per default rose from $12,965 at
the end of 1998 to $13,837 at March 31, 1999. The average loss reserve per
default on primary business was $15,344 at March 31, 1999. The 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 2.4% (including pool) at March 31, 1999 as
compared to 2.6% at December 31, 1998 and claims paid in California during the
first quarter of 1999 were $7.4 million, representing approximately 35.5% of
total claims as compared to 49.7% in 1998. California represented 18.0% of
primary risk in force at March 31, 1999 as compared to 18.3% at December 31,
1998. The default rate in Florida was 3.4% (including pool) at March 31, 1999 as
compared to 3.6% at December 31, 1998 and claims paid in Florida during the
first quarter of 1999 were $2.3 million, representing approximately 11.2% of
total claims as compared to 9.4% in 1998. Florida represented 7.9% of primary
risk in force at March 31, 1999 as compared to 8.2% at December 31, 1998. 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, the Company 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
risk. Direct losses paid in the first quarter of 1999 were $17.2 million as
compared to $21.4 million for the same quarter of 1998, a decrease of nearly
20.0%.
Underwriting and other operating expenses were $21.0 million for the
first three months of 1999, an increase of 23.7% compared to $17.0 million for
the same period of 1998. 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 were $9.2 million in the first quarter of 1999,
an increase of 6.4% compared to $8.6 million in the first quarter of 1998. This
reflects the increase in variable 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 first quarter of 1999 were $11.9 million, an increase
of 41.4% compared to $8.4 million for the first 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 first quarter of 1999 included in other operating
expenses were $7.0 million as compared to $3.7 million for the same period in
1998, an increase of 87.0%. The $3.2 million increase in contract underwriting
expenses during the first quarter of 1999 represented 90.6% of the $3.5 million
increase in other operating expenses. Some of these additional contract
underwriting expenses were correspondingly offset by increases to other income,
which rose 43.5% from $2.2 million for the first quarter of 1998 to $3.2 million
for the same period in 1999. During the first three months of 1999, loans
underwritten via contract underwriting accounted for 38% of applications, 33% of
insurance commitments, and 25% of certificates issued by CMAC as compared to 33%
of applications, 28% of commitments and 20% of certificates in the first three
months of
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<PAGE> 11
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
1998. In 1999, these percentages are expected to increase if there is a decrease
in refinancing activity. 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.
During the first quarter of 1999, the Company incurred merger-related
expenses of $2.4 million. The Company expects to incur most of the remaining
expenses relating to the proposed merger during the second quarter of 1999,
although there could be some incremental expenses incurred during the third
quarter of 1999 and beyond as the Company and Amerin integrate their operations.
The effective tax rate for the quarter ended March 31, 1999 was 29.2% as
compared to 27.4% for the first quarter of 1998. Operating income accounted for
67.0% of net income in the first quarter of 1999 as compared to 66.7% in the
first quarter of 1998, thus resulting in the increase in effective tax rate for
1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of funds consist primarily of premiums and
investment income. Funds are applied primarily to the payment of CMAC's claims
and operating expenses.
Cash flows from operating activities for the quarter ended March 31, 1999
were $45.8 million as compared to $29.2 million for the same period of 1998.
This increase consisted of an increase in net premiums written and investment
income received, a decrease in claims paid and was partially offset by an
increase in 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 other investment portfolio
securities.
Stockholders' equity plus redeemable preferred stock of $40.0 million,
increased from $563.0 million at December 31, 1998 to $584.4 million at March
31, 1999, primarily as a result of net income of $22.9 million and the exercise
of stock options of $591,000, partially offset by dividends of $1.5 million.
As of March 31, 1999, the Company and its subsidiaries had no material
commitments for capital expenditures.
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. 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 or make other
distributions 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 distributions from CMAC of $6.0 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 or other
distributions; however, the Company does not believe that these restrictions
will prevent the payment by CMAC or the Company of these anticipated dividends
or distributions in the foreseeable future.
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 with the result that all of its systems were
Year 2000
-11-
<PAGE> 12
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
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 fields 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 or laptop systems not currently Year 2000 compliant
are scheduled for replacement in 1999. The replacement of these non-Year 2000
compliant systems has begun in the first quarter of 1999 and should be completed
by the end of the third quarter of 1999. 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. Currently, the Company believes its
most reasonably likely Year 2000 worst case scenario would involve the failure
of its business partners' loan origination, renewal processing or default
reporting systems. The Company is an active participant in the mortgage
industry's Year 2000 testing project and has developed contingency plans to
minimize the risks of business disruptions resulting from its business partners'
Year 2000 issues. These contingency plans include:
- - accepting non-Year 2000 compliant data and using "windowing" logic to
process dates correctly;
- - encouraging customers to order mortgage insurance via the internet
using the company's MI Online system;
- - accepting paper or fax submissions of mortgage insurance applications;
- - encouraging customers to effect servicing transactions via the internet
using the Company's ServiceLink system;
- - deferring or delaying renewal billing of policyholders to a mutually
agreed upon date; and
- - suspending automatic cancellation for non-payment.
With respect to the Company's non-information technology systems, the
Company has made reasonable efforts to contact providers of products and
services concerning their Year 2000 readiness. Discussions with suppliers of
electronic and electro-mechanical devices deemed critical to the Company's
business operations are ongoing. Based on this contact and discussions, the
Company believes that it does not have material exposure to the Year 2000 issue
with respect to its non-information systems.
The Company did not incur any significant incremental expense related
to Year 2000 issues during the first quarter of 1999 and does not expect that
its Year 2000 compliance program will result in any material costs or have a
material impact on its financial condition. The Company has not used any
independent verification and/or validation processes to assure the reliability
of its risk and cost estimates.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion about the potential impact of interest rate changes upon
the fair value of the financial instruments in the Company's investment
portfolio, see "Quantitative and Qualitative Disclosures about Market Risk" in
the Company's 1998 Form 10-K. There has been no material change in the fair
value of the Company's investment portfolio since December 31, 1998.
-12-
<PAGE> 13
CMAC INVESTMENT CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - None
ITEM 3. Defaults upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. a. Exhibits -
*Exhibit 11.1 - Statement Re: Computation of Per Share Earnings
*Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K - None
* Filed Herewith
-13-
<PAGE> 14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CMAC INVESTMENT CORPORATION
Date: May 14, 1999 C. Robert Quint
-------------------------------------------------
C. Robert Quint
Executive Vice President, Chief Financial Officer
(Principal Accounting Officer)
-14-
<PAGE> 1
CMAC INVESTMENT CORPORATION
SCHEDULE OF NET INCOME PER SHARE
EXHIBIT 11.1
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31
----------------------
1999 1998
---- ----
(In thousands, except per-share
amounts and market prices)
<S> <C> <C>
Net income ......................................... $ 22,878 $ 21,052
Preferred stock dividend adjustment ................ (825) (825)
-------- --------
Adjusted net income ................................ $ 22,053 $ 20,227
Average diluted stock options outstanding .......... 1,663.1 1,562.8
Average exercise price per share ................... $ 23.98 $ 20.84
Average market price per share - diluted basis ..... $ 42.63 $ 64.14
Average common shares outstanding .................. 22,720 22,578
Increase in shares due to exercise of options -
diluted basis ..................................... 765 1,055
Adjusted shares outstanding - diluted .............. 23,485 23,633
Net income per share - basic ....................... $ 0.97 $ 0.90
======== ========
Net income per share - diluted ..................... $ 0.94 $ 0.86
======== ========
</TABLE>
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,112
<SECURITIES> 783,107
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 236,567
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,021,786
<CURRENT-LIABILITIES> 437,390
<BONDS> 0
40,000
0
<COMMON> 23
<OTHER-SE> 544,373
<TOTAL-LIABILITY-AND-EQUITY> 1,021,786
<SALES> 0
<TOTAL-REVENUES> 89,787
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 23,408
<LOSS-PROVISION> 34,072
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 32,307
<INCOME-TAX> 9,429
<INCOME-CONTINUING> 22,878
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,878
<EPS-PRIMARY> 0.97
<EPS-DILUTED> 0.94
</TABLE>
