Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 1999, for CMAC Investment Corporation (the registrant), which is in the process of merging with Amerin Corporation to form Radian Group Inc. The Company operates primarily through its subsidiary, Commonwealth Mortgage Assurance Company (CMAC), providing private mortgage insurance. The merger is scheduled to close on June 9, 1999, subject to shareholder approval.
Key Financial Metrics
| Metric | Q1 1999 | Q1 1998 |
|---|---|---|
| Net Premiums Earned | $75,972,000 | $67,180,000 |
| Net Investment Income | $10,284,000 | $9,304,000 |
| Total Revenues | $89,787,000 | $79,035,000 |
| Provision for Losses | $34,072,000 | $33,037,000 |
| Net Income | $22,878,000 | $21,052,000 |
| Net Income Available to Common Stockholders | $22,053,000 | $20,227,000 |
| Diluted EPS | $0.94 | $0.86 |
| Cash Flow from Operating Activities | $45,814,000 | $29,188,000 |
| Total Assets | $1,021,786,000 | $968,173,000 |
| Stockholders' Equity | $544,396,000 | $522,969,000 |
Material Changes vs. Prior Period
- Revenue Growth: Net premiums earned increased 13.1% to $76.0 million, driven by a 45.8% increase in new primary insurance written ($5.9 billion vs. $4.1 billion) and growth in pool insurance.
- Profitability: Net income rose 8.7% to $22.9 million. Excluding $2.4 million in merger expenses, adjusted net income would have increased 19.2%.
- Expense Increases: Other operating expenses surged 41.4% to $11.9 million, primarily due to an 87.0% increase in contract underwriting expenses ($7.0 million). Policy acquisition costs rose 6.4% to $9.2 million.
- Loss Reserves: The provision for losses increased 3.1% to $34.1 million. The overall default rate improved slightly to 1.59% from 1.68%, though the primary business default rate rose to 2.49%.
- Investment Portfolio: Net investment income grew 10.5% to $10.3 million, supported by positive operating cash flows and portfolio growth.
Guidance, Outlook, and Risks
- Merger Status: The merger with Amerin Corporation is pending shareholder approval and scheduled to close June 9, 1999. Most remaining merger expenses are expected in Q2 1999.
- Market Outlook: Management anticipates pool insurance activity to decline in the remainder of 1999 as commitments expire. Persistency rates are expected to remain lower than normal due to high refinancing activity, though this may improve if the refinance boom slows.
- Investment Policy: The Company modified its investment policy to include common stock (target max 5%) and convertible securities (target max 10%), which may cause a short-term decline in investment income growth.
- Risks and Contingencies:
- Credit Risk: Continued adverse experience in California and Florida, specifically regarding "affordable housing" loans from 1994-1995 and higher default rates in Alternative A and A-minus loan programs.
- Year 2000: The Company is compliant, but risks remain regarding third-party business partners' systems. Contingency plans are in place.
- Regulatory: Capital requirements for pool insurance are becoming more stringent due to low premium rates.
- Liquidity: The Company believes it has sufficient funds to satisfy claims and operating expenses for at least the next 12 months. No material capital expenditure commitments exist.
Investor Verification Checklist
- Verify the final closing date and terms of the merger with Amerin Corporation.
- Monitor the trend in persistency rates and the impact of high refinancing activity on future premium volume.
- Review the loss development trends for "affordable housing" loans and Alternative A/A-minus portfolios.
- Assess the impact of the new investment policy on future investment income yields.
- Confirm the status of third-party Year 2000 compliance among key business partners.