EXHIBIT 13
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MGIC INVESTMENT CORPORATION & SUBSIDIARIES -- YEARS ENDED DECEMBER 31, 1999,
1998, 1997, 1996 AND 1995
- -----------------Five-Year Summary of Financial Information---------------------
1999 1998 1997 1996 1995
-------------- -------------- -------------- ------------- -------------
(In thousands of dollars, except per share data)
Summary of Operations
Revenues:
Net premiums written...................... $ 792,345 $ 749,161 $ 690,248 $ 588,927 $ 480,312
============== ============== ============== ============= =============
Net premiums earned....................... $ 792,581 $ 763,284 $ 708,744 $ 617,043 $ 506,500
Investment income, net.................... 153,071 143,019 123,602 105,355 87,543
Realized investment gains, net............ 3,406 18,288 3,261 1,220 1,496
Other revenue............................. 47,697 47,075 32,665 22,013 22,347
-------------- -------------- -------------- ------------- -------------
Total revenues.......................... 996,755 971,666 868,272 745,631 617,886
-------------- -------------- -------------- ------------- -------------
Losses and expenses:
Losses incurred, net...................... 97,196 211,354 242,362 234,350 189,982
Underwriting and other expenses........... 200,779 190,031 157,194 146,483 137,559
Interest expense.......................... 20,402 18,624 6,399 3,793 3,821
Ceding commission......................... (2,632) (2,928) (3,056) (4,023) (4,885)
-------------- -------------- -------------- ------------- -------------
Total losses and expenses............... 315,745 417,081 402,899 380,603 326,477
-------------- -------------- -------------- ------------- -------------
Income before tax............................ 681,010 554,585 465,373 365,028 291,409
Provision for income tax..................... 210,809 169,120 141,623 107,037 83,844
-------------- -------------- -------------- ------------- -------------
Net income................................... $ 470,201 $ 385,465 $ 323,750 $ 257,991 $ 207,565
============== ============== ============== ============= =============
Weighted average common shares
outstanding (in thousands) (1)............ 109,258 113,582 117,924 119,046 118,567
============== ============== ============== ============= =============
Diluted earnings per share (1)............... $ 4.30 $ 3.39 $ 2.75 $ 2.17 $ 1.75
============== ============== ============== ============= =============
Dividends per share (1)...................... $ .10 $ .10 $ .095 $ .08 $ .08
============== ============== ============== ============= =============
Balance sheet data
Total investments......................... $ 2,789,734 $ 2,779,706 $ 2,416,740 $ 2,036,234 $ 1,687,221
Total assets.............................. 3,104,393 3,050,541 2,617,687 2,222,315 1,874,719
Loss reserves............................. 641,978 681,274 598,683 514,042 371,032
Long-term notes payable................... 425,000 442,000 237,500 - 35,799
Shareholders' equity...................... 1,775,989 1,640,591 1,486,782 1,366,115 1,121,392
Book value per share...................... 16.79 15.05 13.07 11.59 9.56
(1) In May 1997, the Company declared a two-for-one stock split of the common stock in the form of a 100% stock dividend.
The additional shares were issued on June 2, 1997. Prior year shares, dividends per share and earnings per share have
been restated to reflect the split.
- -----------------------------------------------------------------------------------------------------------------------------
A brief description of the Company's business is contained in Note 1 to the Consolidated Financial Statements of the Company,
page eighteen.
one
MGIC INVESTMENT CORPORATION & SUBSIDIARIES -- YEARS ENDED DECEMBER 31, 1999,
1998, 1997, 1996 AND 1995
- -----------------Five-Year Summary of Financial Information---------------------
1999 1998 1997 1996 1995
-------------- -------------- ------------- ------------- -------------
New primary insurance written ($ millions)... $ 46,953 $ 43,697 $ 32,250 $ 32,756 $ 30,277
New primary risk written ($ millions)........ 11,422 10,850 8,305 8,305 7,599
New pool risk written ($ millions)........... 564 618 394 2 1
Insurance in force (at year-end) ($ millions)
Direct primary insurance.................. 147,607 137,990 138,497 131,397 120,341
Direct primary risk....................... 35,623 32,891 32,175 29,308 25,502
Direct pool risk.......................... 1,557 1,133 590 232 254
Primary loans in default ratios
Policies in force......................... 1,370,020 1,320,994 1,342,976 1,299,038 1,219,304
Loans in default.......................... 29,761 29,253 28,493 25,034 19,980
Percentage of loans in default............ 2.17% 2.21% 2.12% 1.93% 1.64%
Insurance operating ratios (GAAP)
Loss ratio................................ 12.3% 27.7% 34.2% 38.0% 37.5%
Expense ratio............................. 19.7% 19.6% 18.4% 21.6% 24.6%
-------------- -------------- ------------- ------------- -------------
Combined ratio............................ 32.0% 47.3% 52.6% 59.6% 62.1%
============== ============== ============= ============= =============
Risk-to-capital ratios (statutory)
Combined insurance subsidiaries........... 12.9:1 13.6:1 16.4:1 18.8:1 19.9:1
MGIC...................................... 11.9:1 12.9:1 15.7:1 18.1:1 19.1:1
two
Management's Discussion and Analysis
Results of Consolidated Operations
1999 Compared with 1998
Net income for 1999 was $470.2 million, compared with $385.5 million in 1998, an
increase of 22%. Diluted earnings per share for 1999 was $4.30, compared with
$3.39 in 1998, an increase of 27%. Included in the 1999 diluted earnings per
share was $0.02 for realized gains compared with $0.10 for realized gains in
1998. The percentage increase in diluted earnings per share was favorably
affected by the lower adjusted shares outstanding in 1999 as a result of common
stock repurchased by the Company in the second half of 1998 and during the third
quarter of 1999.
The amount of new primary insurance written by Mortgage Guaranty Insurance
Corporation ("MGIC") during 1999 was $47.0 billion, compared with $43.7 billion
in 1998. Refinancing activity decreased to 25% of new primary insurance written
in 1999, compared to 31% in 1998 as a result of the increasing mortgage interest
rate environment of the second half of 1999.
The $47.0 billion of new primary insurance written during 1999 was offset by the
cancellation of $37.4 billion of insurance in force, and resulted in a net
increase of $9.6 billion in primary insurance in force, compared to new primary
insurance written of $43.7 billion, cancellation of $44.2 billion, and a net
decrease of $0.5 billion in insurance in force during 1998. Direct primary
insurance in force was $147.6 billion at December 31, 1999, compared to $138.0
billion at December 31, 1998.
In addition to providing direct primary insurance coverage, the Company also
insures pools of mortgage loans. New pool risk written during 1999 and 1998,
which was virtually all agency pool insurance, was $563.8 million and $618.1
million, respectively. The Company's direct pool risk in force at December 31,
1999 was $1.6 billion compared to $1.1 billion at December 31, 1998.
In December 1999, a complaint seeking class action status on behalf of a
nationwide class of home mortgage borrowers was filed against MGIC in Federal
District Court in Augusta, Georgia (the "RESPA Litigation"). The complaint in
the RESPA Litigation alleges that MGIC violated the Real Estate Settlement
Procedures Act ("RESPA") by providing agency pool insurance and entering into
other transactions with lenders that were not properly priced, in return for the
referral of mortgage insurance. The complaint seeks damages of three times the
amount of the mortgage insurance premiums that have been paid and that will be
paid for the mortgage insurance that is found to be involved in a violation of
RESPA. In February 2000, MGIC answered the complaint and denied liability. There
can be no assurance, however, that the ultimate outcome of the RESPA Litigation
will not materially affect the Company.
Cancellation activity has historically been affected by the level of mortgage
interest rates, with cancellations generally moving inversely to the change in
the direction of interest rates. Cancellations decreased during 1999 due to
increasing mortgage interest rates which resulted in an increase in the MGIC
persistency rate (percentage of insurance remaining in force from one year
prior) to 72.9% at December 31, 1999, from 68.1% at December 31, 1998. Future
cancellation activity could be somewhat higher than it otherwise would have been
as a result of legislation that went into effect in July 1999 regarding
cancellation of mortgage insurance.
Net premiums written increased 6% to $792.3 million in 1999, from $749.2 million
in 1998. Net premiums earned increased 4% to $792.6 million in 1999, from $763.3
million in
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1998. The increases were primarily a result of a higher percentage of renewal
premiums on mortgage loans with deeper coverages and the growth in insurance in
force offset by an increase in ceded premiums to $26.2 million in 1999, compared
to $14.8 million in 1998, primarily due to an increase in captive mortgage
reinsurance.
Mortgages (newly insured during 1999 or 1998) equal to approximately 32% of
MGIC's new insurance written during 1999 were subject to captive mortgage
reinsurance and similar arrangements compared to 16% during 1998. Such
arrangements entered into during a reporting period customarily include loans
newly insured in a prior reporting period. As a result, the percentages cited
above would be lower if only the current reporting period's newly insured
mortgages subject to such arrangements were included. The percentage of new
insurance written subject to captive mortgage reinsurance arrangements is
expected to increase during 2000 as new transactions are consummated. At
December 31, 1999 approximately 15% of MGIC's risk in force was subject to
captive reinsurance and similar arrangements compared to 7% at December 31,
1998. In a February 1999 circular letter, the New York Department of Insurance
said it was in the process of developing guidelines that would articulate the
parameters under which captive mortgage reinsurance is permissible under New
York insurance law. The complaint in the RESPA Litigation alleges that MGIC pays
"inflated" captive mortgage reinsurance premiums in violation of RESPA.
During the first quarter of 1999, Fannie Mae and Freddie Mac ("GSEs") changed
their mortgage insurance requirements for certain mortgages approved by their
automated underwriting services. The changes permit lower coverage percentages
on these loans than the deeper coverage percentages that went into effect in
1995. MGIC's premium rates vary with the depth of coverage. While lower coverage
percentages result in lower premium revenue, lower coverage percentages should
also result in lower incurred losses at the same level of claim incidence.
MGIC's results could also be affected to the extent the GSEs are compensated for
assuming default risk that would otherwise be insured by the private mortgage
insurance industry. The GSEs have programs under which a delivery fee is paid to
them, with mortgage insurance coverage reduced below the coverage that would be
required in the absence of the delivery fee.
In partnership with mortgage insurers, the GSEs are also beginning to offer
programs under which, on delivery of an insured loan to a GSE, the primary
coverage is restructured to an initial shallow tier of coverage followed by a
second tier that is subject to an overall loss limit and, depending on the
program, some compensation may be paid to the GSE for services. Because lenders
receive guaranty fee relief from the GSEs on mortgages delivered with these
restructured coverages, participation in these programs is competitively
significant to mortgage insurers.
In March 1999, the Office of Federal Housing Enterprise Oversight ("OFHEO")
released a proposed risk-based capital stress test for the GSEs. One of the
elements of the proposed stress test is that future claim payments made by a
private mortgage insurer on GSE loans are reduced below the amount provided by
the mortgage insurance policy to reflect the risk that the insurer will fail to
pay. Claim payments from an insurer whose claims-paying ability rating is `AAA'
are subject to a 10% reduction over the 10-year period of the stress test, while
claim payments from a `AA' rated insurer, such as MGIC, are subject to a 20%
reduction. The effect of the differentiation among insurers is to require the
GSEs to have additional capital for coverage on loans provided by a private
mortgage insurer
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whose claims-paying rating is less than `AAA.' As a result, if adopted as
proposed, there is an incentive for the GSEs to use private mortgage insurance
provided by a `AAA' rated insurer. The Company does not believe there should be
a reduction in claim payments from private mortgage insurance nor should there
be a distinction between `AAA' and `AA' rated private mortgage insurers. The
proposed stress test covers many topics in addition to capital credit for
private mortgage insurance and is not expected to become final for some time. If
the stress test ultimately gives the GSEs an incentive to use `AAA' mortgage
insurance, MGIC may need `AAA' capacity, which in turn would entail using
capital to support such a facility as well as additional expenses. The Company
cannot predict whether the portion of the stress test discussed above will be
adopted in its present form.
Investment income for 1999 was $153.1 million, an increase of 7% over the $143.0
million in 1998. This increase was primarily the result of an increase in the
amortized cost of average investment assets to $2.7 billion for 1999, from $2.5
billion for 1998, an increase of 11%. The portfolio's average pre-tax investment
yield was 5.6% in 1999 and 1998. The portfolio's average after-tax investment
yield was 4.9% in 1999 and 1998. The Company realized gains of $3.4 million
during 1999 compared to $18.3 million in 1998. The decrease is primarily the
result of gains on the sale of equity securities in 1998 compared to no such
gains in 1999.
Other revenue, which is composed of various components, was $47.7 million in
1999, compared with $47.1 million in 1998. The change is primarily the result of
an increase in equity earnings from Credit-Based Asset Servicing and
Securitization LLC and Litton Loan Servicing LP (collectively, "C-BASS"), a
joint venture with Enhance Financial Services Group Inc. ("Enhance"), offset by
equity losses from two joint ventures formed in 1999, Sherman Financial Group
LLC, ("Sherman," another joint venture with Enhance) and Customers Forever LLC
("Customers Forever," a joint venture with Marshall & Ilsley Corporation) and a
decrease in contract underwriting revenue.
C-BASS engages in the acquisition and resolution of delinquent single-family
residential mortgage loans ("mortgage loans"). C-BASS also purchases and sells
mortgage-backed securities ("mortgage securities"), interests in real estate
mortgage investment conduit residuals and performs mortgage loan servicing. In
addition, C-BASS issues mortgage-backed debt securities collateralized by
mortgage loans and mortgage securities. C-BASS's results of operations are
affected by the timing of these securitization transactions. Substantially all
of C-BASS's mortgage-related assets do not have readily ascertainable market
values and as a result their value for financial statement purposes is estimated
by the management of C-BASS. Market value adjustments could impact the Company's
share of C-BASS's results of operations.
At December 31, 1999 the Company had contributed approximately $54 million of
capital to C-BASS. Total combined assets of C-BASS at December 31, 1999 and 1998
were approximately $934 million and $623 million, respectively, of which
approximately $773 million and $550 million, respectively, were mortgage-related
assets, including open trades. Total liabilities at December 31, 1999 and 1998
were approximately $744 million and $468 million, respectively, of which
approximately $617 million and $459 million, respectively, were funding
arrangements, including accrued interest. For the years ended December 31, 1999
and 1998, revenues of approximately $112 million and $70 million, respectively,
and expenses of approximately $72 million and $44 million, respectively,
five
resulted in income before tax of approximately $40 million and $26 million,
respectively.
Sherman is engaged in the business of purchasing, servicing and securitizing
delinquent unsecured consumer assets such as credit card loans and Chapter 13
bankruptcy debt. A substantial portion of Sherman's consolidated assets are
investments in receivable portfolios that do not have readily ascertainable
market values and as a result their value for financial statement purposes is
estimated by the management of Sherman. Market value adjustments could impact
the Company's share of Sherman's results of operations.
Customers Forever, established during the third quarter of 1999, is an
Internet-focused transaction service company dedicated to helping large
residential mortgage servicers retain and enhance relationships with their
customers nationwide.
Net losses incurred decreased 54% to $97.2 million in 1999, from $211.4 million
in 1998. Such decrease was primarily due to generally strong economic
conditions, improvement in the California real estate market, and MGIC's claims
mitigation efforts, which in the aggregate resulted in a decline in losses paid
and led the Company to reduce its estimate of the claim rate and the severity
(the "reserve factors") for loans in both the primary and pool notice inventory.
Partially offsetting the reduction in reserve factors was an increase in the
primary insurance notice inventory from 29,253 at December 31, 1998 to 29,761 at
December 31, 1999 and an increase in pool insurance notice inventory from 6,524
at December 31, 1998 to 11,638 at December 31, 1999. The reasons for the
decrease in net losses incurred discussed above contributed to an increase in
the redundancy in prior year loss reserves. The redundancy results from actual
claim rates and actual claim amounts being lower than those estimated by the
Company when originally establishing the reserve at December 31, 1998. For
additional information, see Note 6 of the Notes to the Consolidated Financial
Statements.
At December 31, 1999, 65% of the primary insurance in force was written during
the last three years, compared to 60% at December 31, 1998. The highest claim
frequency years have typically been the third through fifth years after the year
of loan origination. However, the pattern of claims frequency for refinance
loans may be different from the historical pattern of other loans.
Underwriting and other expenses increased 6% in 1999 to $200.8 million from
$190.0 million in 1998. This increase was primarily due to the increase in new
primary insurance written and the related underwriting expenses.
Interest expense in 1999 increased to $20.4 million from $18.6 million in 1998
due to a higher weighted average outstanding notes payable balance in 1999
compared to 1998.
The Company utilized financial derivative transactions during 1999 consisting of
interest rate swaps to reduce and manage interest rate risk on its notes
payable. Earnings on such transactions aggregated approximately $3.8 million and
were netted against interest expense. In 1998, earnings on an interest rate swap
and premium income on three put-swaptions aggregating approximately $0.5 million
for all such transactions were netted against interest expense.
The consolidated insurance operations loss ratio was 12.3% for 1999 compared to
27.7% for 1998. The consolidated insurance operations expense and combined
ratios were 19.7% and 32.0%, respectively, for 1999 compared to 19.6% and 47.3%,
respectively, for 1998.
six
The effective tax rate was 31.0% in 1999, compared with 30.5% in 1998. During
both years, the effective tax rate was below the statutory rate of 35%,
reflecting the benefits of tax-preferenced investment income. The higher
effective tax rate in 1999 resulted from a lower percentage of total income
before tax being generated from tax-preferenced investments in 1999.
1998 Compared with 1997
Net income for 1998 was $385.5 million, compared with $323.8 million in 1997, an
increase of 19%. Diluted earnings per share for 1998 was $3.39, compared with
$2.75 in 1997, an increase of 23%. The percentage increase in diluted earnings
per share was favorably affected by the lower adjusted shares outstanding in
1998 as a result of common stock repurchased by the Company in the second half
of 1997 and during 1998.
The amount of new primary insurance written by MGIC during 1998 was $43.7
billion, compared with $32.2 billion in 1997. Reflecting the favorable mortgage
interest rate environment that prevailed throughout 1998, refinancing activity
accounted for 31% of new primary insurance written in 1998, compared to 15% in
1997.
The $43.7 billion of new primary insurance written during 1998 was offset by the
cancellation of $44.2 billion of insurance in force, and resulted in a net
decrease of $0.5 billion in primary insurance in force, compared to new primary
insurance written of $32.2 billion, cancellation of $25.1 billion, and a net
increase of $7.1 billion in insurance in force during 1997. Direct primary
insurance in force was $138.0 billion at December 31, 1998, compared to $138.5
billion at December 31, 1997. In addition to providing direct primary insurance
coverage, the Company also insures pools of mortgage loans. New pool risk
written during 1998 and 1997, which was virtually all agency pool insurance, was
$618.1 million and $394.4 million, respectively. The Company's direct pool risk
in force at December 31, 1998 was $1.1 billion compared to $590.3 million at
December 31, 1997.
Cancellation activity has historically been affected by the level of mortgage
interest rates and increased during 1998 due to favorable mortgage interest
rates which resulted in a decrease in the MGIC persistency rate to 68.1% at
December 31, 1998, from 80.9% at December 31, 1997.
Net premiums written increased 9% to $749.2 million in 1998, from $690.2 million
in 1997. Net premiums earned increased 8% to $763.3 million in 1998, from $708.7
million in 1997. The increases were primarily a result of a higher percentage of
renewal premiums on mortgage loans with deeper coverages.
For a discussion of captive mortgage reinsurance and similar arrangements,
certain programs with the GSEs regarding mortgage insurance and proposed capital
regulations for the GSEs, see the 1999 compared with 1998 discussion.
Investment income for 1998 was $143.0 million, an increase of 16% over the
$123.6 million in 1997. This increase was primarily the result of an increase in
the amortized cost of average investment assets to $2.5 billion for 1998, from
$2.1 billion for 1997, an increase of 16%. The increase was partially offset by
a decrease in the portfolio's average pre-tax investment yield to 5.6% in 1998
from 5.8% in 1997. The portfolio's average after-tax investment yield was 4.9%
for 1998 compared to 5.0% for 1997. The Company realized gains of $18.3 million
during 1998 compared to $3.3 million in 1997. The increase
seven
is primarily the result of the sale of equity securities in 1998.
Other revenue was $47.1 million in 1998, compared with $32.7 million in 1997.
The increase is primarily the result of an increase in contract underwriting
revenue of $11.8 million and an increase of $5.3 million in equity earnings from
C-BASS, a joint venture with Enhance Financial Services Group Inc., offset by a
$2.7 million reduction in fee-based services under government contracts. In
accordance with generally accepted accounting principles, C-BASS is required to
mark to market its mortgage related assets which, including open trades, were
$550 million at December 31, 1998. Substantially all of these mortgage-related
assets do not have readily ascertainable market values and as a result their
value for financial statement purposes is estimated by the management of C-BASS.
Market valuation adjustments could impact the Company's share of C-BASS's
results of operations.
Net losses incurred decreased 13% to $211.4 million in 1998, from $242.4 million
in 1997. Such decrease was primarily attributable to an increase in the
redundancy in prior year loss reserves, generally favorable economic conditions
throughout the country and only a moderate increase in the primary notice
inventory from 28,493 at December 31, 1997 to 29,253 at December 31, 1998. The
redundancy results from actual claim rates and actual claim amounts being lower
than those estimated by the Company when originally establishing the reserve at
December 31, 1997. The pool notice inventory increased from 2,098 at December
31, 1997 to 6,524 at December 31, 1998, attributable to defaults on new agency
pool insurance written during 1997 and 1998. At December 31, 1998, 60% of the
primary insurance in force was written during the last three years, compared to
57% at December 31, 1997. The highest claim frequency years have typically been
the third through fifth years after the year of loan origination. However, the
pattern of claims frequency for refinance loans may be different from the
historical pattern of other loans.
Underwriting and other expenses increased 21% in 1998 to $190.0 million from
$157.2 million in 1997. This increase was primarily due to increases associated
with contract and field office underwriting expenses and an increase in premium
tax due to higher premiums written.
Interest expense in 1998 increased to $18.6 million from $6.4 million in 1997
due to higher outstanding notes payable, the proceeds of which were used to
repurchase common stock.
The Company entered into financial derivative transactions in 1998, consisting
of interest rate swaps and put-swaptions to reduce and manage interest rate risk
on its notes payable. In 1998, earnings on an interest rate swap and premium
income on three put-swaptions aggregating approximately $0.5 million for all
such transactions were netted against interest expense.
The consolidated insurance operations loss ratio was 27.7% for 1998 compared to
34.2% for 1997. The consolidated insurance operations expense and combined
ratios were 19.6% and 47.3%, respectively, for 1998 compared to 18.4% and 52.6%,
respectively, for 1997.
The effective tax rate was 30.5% in 1998, compared with 30.4% in 1997. During
both years, the effective tax rate was below the statutory rate of 35%,
reflecting the benefits of tax-preferenced investment income. The higher
effective tax rate in 1998 resulted from a lower percentage of total income
before tax being generated from tax-preferenced investments in 1998.
eight
Financial Condition
Consolidated total investments were $2.8 billion at December 31, 1999 and
December 31, 1998. During 1999, positive net cash flow of approximately $220
million was offset by unrealized losses on securities marked to market of $208.2
million. The Company generated consolidated cash flows from operating activities
of $455.0 million during 1999, compared to $411.8 million generated during 1998.
The difference between the $220 million of positive net cash flow and the $455
million of positive cash flow from operating activities is primarily the result
of cash used in financing activities. The increase in operating cash flows
during 1999 compared to 1998 is due primarily to an increase in renewal premiums
and investment income and a decrease in losses paid offset by an increase in
underwriting expenses. As of December 31, 1999, the Company had $107.7 million
of short-term investments with maturities of 90 days or less, and 75% of the
portfolio was invested in tax-preferenced securities. In addition, at December
31, 1999, based on book value, the Company's fixed income securities were
approximately 99% invested in `A' rated and above, readily marketable
securities, concentrated in maturities of less than 15 years. At December 31,
1999 the Company had $15.4 million of investments in equity securities compared
to $4.6 million at December 31, 1998.
At December 31, 1999, the Company had no derivative financial instruments in its
investment portfolio. The Company places its investments in instruments that
meet high credit quality standards, as specified in the Company's investment
policy guidelines; the policy also limits the amount of credit exposure to any
one issue, issuer and type of instrument. At December 31, 1999, the average
duration of the Company's investment portfolio was 6.6 years. The effect of a 1%
increase/decrease in market interest rates would result in a 6.6%
decrease/increase in the value of the Company's fixed income portfolio.
The Company's investments in joint ventures increased $26.2 million from $75.3
million at December 31, 1998 to $101.5 million at December 31, 1999 as a result
of additional investments of $13.6 million and equity earnings of $12.6 million.
Consolidated loss reserves decreased 6% to $642.0 million at December 31, 1999
from $681.3 million at December 31, 1998, reflecting a reduction in the primary
and pool reserve factors partially offset by increases in the primary and pool
insurance notice inventories all of which were discussed earlier. Consistent
with industry practices, the Company does not establish loss reserves for future
claims on insured loans which are not currently in default.
Consolidated unearned premiums decreased $2.3 million from $183.7 million at
December 31, 1998, to $181.4 million at December 31, 1999, primarily reflecting
the continued high level of monthly premium policies written (for which there is
no unearned premium) offset by an increase in unearned premiums for agency pool
insurance written.
Consolidated shareholders' equity increased to $1.8 billion at December 31,
1999, from $1.6 billion at December 31, 1998, an increase of 8%. This increase
consisted of $470.2 million of net income during 1999 and $11.9 million from the
reissuance of treasury stock, offset by the repurchase of $200.5 million of
outstanding common shares, unrealized losses on investments, net of tax, of
$135.3 million and dividends declared of $10.8 million.
nine
Liquidity and Capital Resources
The Company's consolidated sources of funds consist primarily of premiums
written and investment income. Funds are applied primarily to the payment of
claims and expenses. Approximately 71% of underwriting expenses are
personnel-related costs, most of which are considered by the Company to be fixed
costs over the short term. Approximately 6% of operating expenses relate to
occupancy costs, which are fixed costs. Substantially all of the remaining
operating expenses are considered by the Company to be variable in nature, with
data processing costs and taxes, licenses and fees representing approximately 3%
and 8%, respectively, of total operating expenses. The Company generated
positive cash flows of approximately $455.0 million, $411.8 million and $374.0
million in 1999, 1998 and 1997, respectively, as shown on the Consolidated
Statement of Cash Flows. Positive cash flows are invested pending future
payments of claims and other expenses. Cash-flow shortfalls, if any, could be
funded through sales of short-term investments and other investment portfolio
securities.
During 1999, 1998 and 1997, the Company repurchased approximately 3.6 million,
5.3 million and 4.7 million shares, respectively, of its outstanding common
stock at a cost of approximately $201 million, $247 million and $248 million,
respectively. Funds to repurchase the shares in 1997 and 1998 were primarily
provided by borrowings under credit facilities evidenced by notes payable. The
shares repurchased in 1999 were funded with a $150 million special dividend from
MGIC and cash flow. The Company cannot predict whether it will repurchase
additional shares in 2000.
The 1997 and 1998 credit facilities provide up to $200 million and $225 million,
respectively, of availability at December 31, 1999. The 1997 credit facility
will decrease by $25 million each year through June 20, 2001. Any outstanding
borrowings under this facility mature on June 20, 2002. The 1998 credit facility
will decrease by $25 million each year through June 9, 2002. Any outstanding
borrowings under this facility mature on June 9, 2003. The Company has the
option on notice to lenders, to prepay any borrowings under the agreements
subject to certain provisions. In addition to the 1997 and 1998 credit
facilities, the Company entered into a $100 million credit facility in November
1999. At December 31, 1999, there were no outstanding borrowings under this
facility.
MGIC had guaranteed one half of a $50 million credit facility for C-BASS that
was repaid in July 1999. MGIC is guaranteeing one half of a $50 million credit
facility for Sherman that is scheduled to expire in June 2000. The Company
expects it will provide additional funding to the joint ventures.
MGIC is the principal insurance subsidiary of the Company. MGIC's
risk-to-capital ratio was 11.9:1 at December 31, 1999 compared to 12.9:1 at
December 31, 1998. The decrease was due to MGIC's increased policyholders'
reserves, partially offset by the net additional risk in force of $2.5 billion,
net of reinsurance, during 1999.
The Company's combined insurance risk-to-capital ratio was 12.9:1 at December
31, 1999, compared to 13.6:1 at December 31, 1998. The decrease was due to the
same reasons as described above.
The risk-to-capital ratios set forth above have been computed on a statutory
basis. However, the methodology used by the rating agencies to assign
claims-paying ability ratings permits less leverage than under statutory
requirements. As a result, the amount of capital required under
ten
statutory regulations may be lower than the capital required for rating agency
purposes. In addition to capital adequacy, the rating agencies consider other
factors in determining a mortgage insurer's claims-paying rating, including its
competitive position, business outlook, management, corporate strategy, and
historical and projected operating performance.
The Company is a holding company and the payment of dividends from its insurance
subsidiaries is restricted by insurance regulation. For a discussion of these
restrictions, see Note 11 of the Notes to the Consolidated Financial Statements.
For certain material risks of the Company's business, see "Risk Factors" below.
Risk Factors
The Company and its business may be materially affected by the factors discussed
below. These factors may also cause actual results to differ materially from the
results contemplated by forward looking statements that the Company may make.
Reductions in the volume of low down payment home mortgage originations may
adversely affect the amount of private mortgage insurance (PMI) written by the
PMI industry. The factors that affect the volume of low down payment mortgage
originations include:
o the level of home mortgage interest rates,
o the health of the domestic economy as well as conditions in regional and
local economies,
o housing affordability,
o population trends, including the rate of household formation,
o the rate of home price appreciation, which in times of heavy refinancing
affects whether refinance loans have loan-to-value ratios that require PMI,
and
o government housing policy encouraging loans to first-time homebuyers.
By selecting alternatives to PMI, lenders and investors may adversely affect the
amount of PMI written by the PMI industry. These alternatives include:
o government mortgage insurance programs, including those of the Federal
Housing Administration and the Veterans Administration,
o holding mortgages in portfolio and self-insuring,
o use of credit enhancements by investors, including Fannie Mae and Freddie
Mac, other than PMI or using other credit enhancements in conjunction with
reduced levels of PMI coverage, and
o mortgage originations structured to avoid PMI, such as a first mortgage
with an 80% loan-to-value ratio and a second mortgage with a 10%
loan-to-value ratio (referred to as an 80-10-10 loan) rather than a first
mortgage with a 90% loan-to-value ratio.
Fannie Mae and Freddie Mac have a material impact on the PMI industry. Because
Fannie Mae and Freddie Mac are the largest purchasers of low down payment
conventional mortgages, the business practices of these GSEs have a direct
effect on private mortgage insurers. These practices affect the entire
relationship between the GSEs and mortgage insurers and include:
eleven
o the level of PMI coverage, subject to the limitations of the GSEs' charters
when PMI is used as the required credit enhancement on low down payment
mortgages,
o whether the GSE influences the mortgage lender's selection of the mortgage
insurer providing coverage and, if so, any transactions that are related to
that selection,
o whether a GSE will give mortgage lenders an incentive to select a mortgage
insurer which has a `AAA' claims-paying ability rating to benefit from the
lower capital required of the GSE under OFHEO's proposed stress test when a
mortgage is insured by a `AAA' company,
o the underwriting standards that determine what loans are eligible for
purchase by the GSEs, which thereby affect the quality of the risk insured
by the mortgage insurer, as well as the availability of mortgage loans,
o the terms on which mortgage insurance coverage can be canceled before
reaching the cancellation thresholds established by law, and
o the circumstances in which mortgage servicers must perform activities
intended to avoid or mitigate loss on insured mortgages that are
delinquent.
The Company expects the level of competition within the PMI industry to remain
intense. Competition for PMI premiums occurs not only among private mortgage
insurers but increasingly with mortgage lenders through captive mortgage
reinsurance transactions in which a lender's affiliate reinsures a portion of
the insurance written by a private mortgage insurer on mortgages originated by
the lender. The level of competition within the PMI industry has also increased
as many large mortgage lenders have reduced the number of private mortgage
insurers with whom they do business at the same time as consolidation among
mortgage lenders has increased the share of the mortgage lending market held by
large lenders.
Changes in interest rates, house prices and cancellation policies may materially
affect persistency. In each year, most of MGIC's premiums are from insurance
that has been written in prior years. As a result, the length of time insurance
remains in force is an important determinant of revenues. The factors affecting
persistency of the insurance in force include:
o the level of current mortgage interest rates compared to the mortgage
coupon rates on the insurance in force, which affects the vulnerability of
the insurance in force to refinancings, and
o mortgage insurance cancellation policies of mortgage investors along with
the rate of home price appreciation experienced by the homes underlying the
mortgages in the insurance in force.
The strong economic climate that has existed throughout the United States for
some time has favorably impacted losses and encouraged competition to assume
default risk. Losses result from events that adversely affect a borrower's
ability to continue to make mortgage payments, such as unemployment, and whether
the home of a borrower who defaults on his mortgage can be sold for an amount
that will cover unpaid principal and interest and the expenses of the sale.
Favorable economic conditions generally reduce the likelihood that borrowers
will lack sufficient income to pay their mortgages and also favorably affect the
value of homes, thereby reducing and in some cases even eliminating a loss from
a mortgage default. A significant deterioration in economic conditions would
adversely affect MGIC's losses. The low level of losses that has recently
prevailed in the private
twelve
mortgage insurance industry has encouraged competition to assume default risk
through captive reinsurance arrangements, self-insurance, 80-10-10 loans and
other means.
Litigation against mortgage lenders and settlement service providers has been
increasing. In recent years, consumers have brought a growing number of lawsuits
against home mortgage lenders and settlement service providers seeking monetary
damages. In particular, MGIC is a defendant in a lawsuit filed in December 1999
alleging violations of the Real Estate Settlement Procedures Act ("RESPA"). The
lawsuit seeks damages of three times the amount of the mortgage insurance
premiums that have been paid and that will be paid for the mortgage insurance
that is found to be involved in a violation of RESPA. There can be no assurance
that the lawsuit against MGIC will not have a material adverse effect on the
Company.
The pace of change in the home mortgage lending and mortgage insurance
industries will likely accelerate. The Company expects the processes involved in
home mortgage lending will continue to evolve through greater use of technology.
This evolution could effect fundamental changes in the way home mortgages are
distributed. Affiliates of lenders who are regulated depositary institutions
gained expanded insurance powers under financial modernization and the capital
markets may emerge as providers of insurance in competition with traditional
insurance companies. These trends and others increase the level of uncertainty
attendant to the PMI business, demand rapid response to change and place a
premium on innovation.
thirteen
MGIC INVESTMENT CORPORATION & SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Consolidated Statement of Operations
1999 1998 1997
-------------- --------------- ---------------
REVENUES: (In thousands of dollars, except per share data)
Premiums written:
Direct.................................................... $ 816,351 $ 755,620 $ 692,134
Assumed................................................... 2,215 8,352 11,597
Ceded (note 7)............................................ (26,221) (14,811) (13,483)
-------------- --------------- ---------------
Net premiums written........................................ 792,345 749,161 690,248
Decrease in unearned premiums............................... 236 14,123 18,496
-------------- --------------- ---------------
Net premiums earned (note 7)................................ 792,581 763,284 708,744
Investment income, net of expenses (note 4)................. 153,071 143,019 123,602
Realized investment gains, net (note 4)..................... 3,406 18,288 3,261
Other revenue............................................... 47,697 47,075 32,665
-------------- --------------- ---------------
Total revenues............................................ 996,755 971,666 868,272
-------------- --------------- ---------------
LOSSES AND EXPENSES:
Losses incurred, net (notes 6 and 7)........................ 97,196 211,354 242,362
Underwriting and other expenses............................. 200,779 190,031 157,194
Interest expense............................................ 20,402 18,624 6,399
Ceding commission (note 7).................................. (2,632) (2,928) (3,056)
-------------- --------------- ---------------
Total losses and expenses................................. 315,745 417,081 402,899
-------------- --------------- ---------------
Income before tax.............................................. 681,010 554,585 465,373
Provision for income tax (note 10)............................. 210,809 169,120 141,623
-------------- --------------- ---------------
Net income..................................................... $ 470,201 $ 385,465 $ 323,750
============== =============== ===============
Earnings per share (note 11):
Basic....................................................... $ 4.35 $ 3.44 $ 2.78
=============== =============== ===============
Diluted..................................................... $ 4.30 $ 3.39 $ 2.75
=============== =============== ===============
See accompanying notes to consolidated financial statements.
fourteen
MGIC INVESTMENT CORPORATION & SUBSIDIARIES
December 31, 1999 and 1998
Consolidated Balance Sheet
1999 1998
---------------- -----------------
ASSETS (In thousands of dollars)
- ------
Investment portfolio (note 4):
Securities, available-for-sale, at market value:
Fixed maturities........................................................ $ 2,666,562 $ 2,602,870
Equity securities....................................................... 15,426 4,627
Short-term investments.................................................. 107,746 172,209
---------------- -----------------
Total investment portfolio............................................ 2,789,734 2,779,706
Cash ........................................................................ 2,322 4,650
Accrued investment income.................................................... 46,713 41,477
Reinsurance recoverable on loss reserves (note 7)............................ 35,821 45,527
Reinsurance recoverable on unearned premiums (note 7)........................ 6,630 8,756
Home office and equipment, net............................................... 32,880 32,400
Deferred insurance policy acquisition costs.................................. 22,350 24,065
Investments in joint ventures (note 8)....................................... 101,545 75,246
Other assets................................................................. 66,398 38,714
---------------- -----------------
Total assets.......................................................... $ 3,104,393 $ 3,050,541
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Loss reserves (notes 6 and 7)............................................. $ 641,978 $ 681,274
Unearned premiums (note 7)................................................ 181,378 183,739
Notes payable (note 5).................................................... 425,000 442,000
Other liabilities......................................................... 80,048 102,937
---------------- -----------------
Total liabilities..................................................... 1,328,404 1,409,950
---------------- -----------------
Contingencies (note 13)
Shareholders' equity (note 11):
Common stock, $1 par value, shares authorized 300,000,000;
shares issued 121,110,800; outstanding 1999 - 105,798,034;
1998 - 109,003,032...................................................... 121,111 121,111
Paid-in surplus........................................................... 211,593 217,022
Treasury stock (shares at cost 1999 - 15,312,766;
1998 - 12,107,768)...................................................... (665,707) (482,465)
Accumulated other comprehensive income - unrealized
(depreciation) appreciation in investments, net of tax (note 2)......... (40,735) 94,572
Retained earnings (note 11)............................................... 2,149,727 1,690,351
---------------- -----------------
Total shareholders' equity.............................................. 1,775,989 1,640,591
---------------- -----------------
Total liabilities and shareholders' equity.............................. $ 3,104,393 $ 3,050,541
================ =================
See accompanying notes to consolidated financial statements.
fifteen
MGIC INVESTMENT CORPORATION & SUBSIDIARIES
Years Ended December 31, 1999, 1998 and 1997
Consolidated Statement of Shareholders' Equity
Accumulated
other
Common Paid-in Treasury comprehensive Retained Comprehensive
stock surplus stock income(note 2) earnings income
------------ ------------ ------------ -------------- ------------ -------------
(In thousands of dollars)
Balance, December 31, 1996......... $ 121,111 $ 207,984 $ (7,073) $ 40,685 $ 1,003,408
Net income......................... - - - - 323,750 $ 323,750
Unrealized investment gains, net... - - - 43,300 - 43,300
-------------
Comprehensive income............... - - - - - $ 367,050
=============
Dividends declared................. - - (248,426) - (11,029)
Reissuance of treasury stock....... - 10,515 2,557 - -
------------ ------------ ------------ -------------- ------------
Balance, December 31, 1997......... 121,111 218,499 (252,942) 83,985 1,316,129
Net income......................... - - - - 385,465 $ 385,465
Unrealized investment gains, net... - - - 10,587 - 10,587
-------------
Comprehensive income............... - - - - - $ 396,052
=============
Dividends declared................. - - - - (11,243)
Repurchase of outstanding common
shares........................... - - (246,840) - -
Reissuance of treasury stock....... - (1,477) 17,317 - -
------------ ------------ ------------ -------------- ------------
Balance, December 31, 1998......... 121,111 217,022 (482,465) 94,572 1,690,351
Net income......................... - - - - 470,201 $ 470,201
Unrealized investment losses, net.. - - - (135,307) - (135,307)
-------------
Comprehensive income............... - - - - - $ 334,894
=============
Dividends declared................. - - - - (10,825)
Repurchase of outstanding common
shares........................... - - (200,533) - -
Reissuance of treasury stock....... - (5,429) 17,291 - -
------------ ------------ ------------ -------------- ------------
Balance, December 31, 1999......... $ 121,111 $ 211,593 $ (665,707) $ (40,735) $ 2,149,727
============ ============ ============ ============== ============
See accompanying notes to consolidated financial statements.
sixteen
MGIC INVESTMENT CORPORATION & SUBSIDIARIES
Years Ended December 31, 1999, 1998 and 1997
Consolidated Statement of Cash Flows
1999 1998 1997
---------------- --------------- ----------------
(In thousands of dollars)
Cash flows from operating activities:
Net income....................................................... $ 470,201 $ 385,465 $ 323,750
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred insurance policy
acquisition costs.......................................... 16,822 20,717 21,373
Increase in deferred insurance policy acquisition costs...... (15,107) (17,626) (16,573)
Depreciation and other amortization.......................... 11,746 7,742 8,187
Increase in accrued investment income........................ (5,236) (5,992) (2,122)
Decrease (increase) in reinsurance recoverable on
loss reserves.............................................. 9,706 (19,112) 3,412
Decrease in reinsurance recoverable on unearned
premiums................................................... 2,126 483 2,506
(Decrease) increase in loss reserves......................... (39,296) 82,591 84,641
Decrease in unearned premiums................................ (2,361) (14,566) (21,002)
Equity earnings in joint ventures............................ (12,700) (12,420) (7,100)
Other........................................................ 19,114 (15,500) (23,023)
---------------- --------------- ----------------
Net cash provided by operating activities........................... 455,015 411,782 374,049
---------------- --------------- ----------------
Cash flows from investing activities:
Purchase of equity securities.................................... (14,035) (3,886) (112,780)
Purchase of fixed maturities..................................... (1,223,599) (916,129) (685,217)
Investments in joint ventures.................................... (13,599) (33,426) (7,350)
Proceeds from sale of equity securities.......................... 4,150 116,164 9,971
Proceeds from sale or maturity of fixed maturities............... 949,723 529,358 447,284
---------------- --------------- ----------------
Net cash used in investing activities............................... (297,360) (307,919) (348,092)
---------------- --------------- ----------------
Cash flows from financing activities:
Dividends paid to shareholders................................... (10,825) (11,243) (11,029)
Net (decrease) increase in notes payable......................... (17,000) 204,500 202,076
Reissuance of treasury stock..................................... 3,912 6,953 7,073
Repurchase of common stock....................................... (200,533) (246,840) (248,426)
---------------- --------------- ----------------
Net cash used in financing activities............................... (224,446) (46,630) (50,306)
---------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents................ (66,791) 57,233 (24,349)
Cash and cash equivalents at beginning of year...................... 176,859 119,626 143,975
---------------- --------------- ----------------
Cash and cash equivalents at end of year............................ $ 110,068 $ 176,859 $ 119,626
================ =============== ================
See accompanying notes to consolidated financial statements.
seventeen
MGIC Investment Corporation & Subsidiaries -- December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
1. Nature of business
MGIC Investment Corporation ("Company") is a holding company which, through
Mortgage Guaranty Insurance Corporation ("MGIC") and several other subsidiaries,
is principally engaged in the mortgage insurance business. The Company provides
mortgage insurance to lenders throughout the United States to protect against
loss from defaults on low down payment residential mortgage loans. Through
certain other non-insurance subsidiaries, the Company also provides various
services for the mortgage finance industry, such as contract underwriting and
portfolio analysis.
At December 31, 1999, the Company's direct primary insurance in force
(representing the current principal balance of all mortgage loans that are
currently insured) and direct primary risk in force, excluding Wisconsin
Mortgage Assurance Corporation ("WMAC"), was approximately $147.6 billion and
$35.6 billion, respectively. In addition to providing direct primary insurance
coverage, the Company also insures pools of mortgage loans. The Company's direct
pool risk in force at December 31, 1999 was approximately $1.6 billion.
On December 31, 1998, the Company purchased WMAC from a third party for $2
million. MGIC contributed an additional $13 million of capital to WMAC to comply
with minimum regulatory capital requirements. WMAC wrote mortgage insurance on
first mortgages collateralized by one- to four-family residences until February
28, 1985 at which time it ceased writing new business. WMAC's direct primary
insurance in force, direct primary risk in force and direct pool risk in force
was approximately $2.3 billion, $0.6 billion and $0.4 billion, respectively, at
December 31, 1999. (See note 7.)
2. Basis of presentation and summary of significant accounting policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at 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.
Principles of consolidation
The consolidated financial statements include the accounts of MGIC
Investment Corporation and its wholly-owned subsidiaries. All intercompany
transactions have been eliminated. The Company's 48% investments in Credit-Based
Asset Servicing and Securitization LLC and Litton Loan Servicing LP
(collectively, "C-BASS") and 45.5% investment in Sherman Financial Group LLC,
("Sherman"), joint ventures with Enhance Financial Services Group Inc. and 47%
investment in Customers Forever LLC, ("Customers Forever"), a joint venture with
Marshall & Ilsley Corporation, are accounted for on the equity method and
recorded on the balance sheet as investments in joint ventures. The Company's
equity earnings from these joint ventures are included in other revenue. (See
note 8.)
Investments
The Company categorizes its investment portfolio according to its ability
and intent to hold the investments to maturity. Investments which the Company
does not have the ability and intent to hold to maturity are considered to be
available-for-sale and must be recorded at market and the unrealized gains or
losses recognized as an increase or decrease to shareholders' equity. During
1997, 1998 and 1999, the Company's entire investment portfolio was classified as
available-for-sale. Realized investment gains and losses are reported in income
based upon specific identification of securities sold. (See note 4.)
Home office and equipment
Home office and equipment is carried at cost net of depreciation. For
financial statement reporting purposes, depreciation is determined on a
straight-line basis for the home office, equipment and data processing hardware
over estimated lives of 45, 5 and 3 years, respectively. For income tax
purposes, the Company uses accelerated depreciation methods.
Home office and equipment is shown net of accumulated depreciation of $31.5
million and $45.2 million at December 31, 1999 and 1998, respectively.
eighteen
Deferred insurance policy acquisition costs
The cost of acquiring insurance policies, including compensation, premium
taxes and other underwriting expenses, is deferred, to the extent recoverable,
and amortized as the related premiums are earned. No expenses are deferred on
monthly premium policies.
Loss reserves
Reserves are established for reported insurance losses and loss adjustment
expenses based on when notices of default on insured mortgage loans are
received. Reserves are also established for estimated losses incurred on notices
of default not yet reported by the lender. Consistent with industry practices,
the Company does not establish loss reserves for future claims on insured loans
which are not currently in default. Reserves are established by management using
estimated claims rates and claims amounts in estimating the ultimate loss.
Amounts for salvage recoverable are considered in the determination of the
reserve estimates. Adjustments to reserve estimates are reflected in the
financial statements in the years in which the adjustments are made. The
liability for reinsurance assumed is based on information provided by the ceding
companies. (See note 6.)
Income recognition
The insurance subsidiaries write policies which are guaranteed renewable
contracts at the insured's option on a single, annual or monthly premium basis.
The insurance subsidiaries have no ability to reunderwrite or reprice these
contracts. Premiums written on a single premium basis and an annual premium
basis are initially deferred as unearned premium reserve and earned over the
policy term. Premiums written on policies covering more than one year are
amortized over the policy life in accordance with the expiration of risk.
Premiums written on annual policies are earned on a monthly pro rata basis.
Premiums written on monthly policies are earned as the premiums are due.
Fee income of the non-insurance subsidiaries is earned as the services are
provided.
Income taxes
The Company and its subsidiaries file a consolidated federal income tax
return. A formal tax sharing agreement exists between the Company and its
subsidiaries. Each subsidiary determines income taxes based upon the utilization
of all tax deferral elections available. This assumes Tax and Loss Bonds are
purchased and held to the extent they would have been purchased and held on a
separate company basis since the tax sharing agreement provides that the
redemption or non-purchase of such bonds shall not increase such member's
separate taxable income and tax liability on a separate company basis.
Federal tax law permits mortgage guaranty insurance companies to deduct from
taxable income, subject to certain limitations, the amounts added to contingency
loss reserves. Generally, the amounts so deducted must be included in taxable
income in the tenth subsequent year. The deduction is allowed only to the extent
that U.S. government non-interest bearing Tax and Loss Bonds are purchased and
held in an amount equal to the tax benefit attributable to such deduction. The
Company accounts for these purchases as a payment of current federal income
taxes.
Deferred income taxes are provided under the liability method which
recognizes the future tax effects of temporary differences between amounts
reported in the financial statements and the tax bases of these items. The
expected tax effects are computed at the current federal tax rate. (See note
10.)
Benefit plans
The Company has a non-contributory defined benefit pension plan covering
substantially all employees. Retirement benefits are based on compensation and
years of service. The Company's policy is to fund pension cost as required under
the Employee Retirement Income Security Act of 1974. (See note 9.)
The Company 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 Company offers both medical and dental benefits for retired
employees and their spouses. Benefits are generally funded on a pay-as-you-go
basis. (See note 9.)
Reinsurance
Loss reserves and unearned premiums are reported before taking credit for
amounts ceded under reinsurance treaties. Ceded loss reserves are reflected as
"Reinsurance recoverable on loss reserves." Ceded unearned premiums are
reflected as "Reinsurance recoverable on unearned premiums." The Company
nineteen
remains contingently liable for all reinsurance ceded. (See note 7.)
Earnings per share
The Company's basic and diluted earnings per share ("EPS") have been
calculated in accordance with Statement of Financial Accounting Standards No.
128, Earnings Per Share ("SFAS 128"). The Company's net income is the same for
both basic and diluted EPS. Basic EPS is based on the weighted-average number of
common shares outstanding. Diluted EPS is based on the weighted-average number
of common shares outstanding and common stock equivalents which would arise from
the exercise of stock options. The following is a reconciliation of the
weighted-average number of shares used for basic EPS and diluted EPS. (See note
11.)
Years Ended December 31,
---------------------------------
1999 1998 1997
---- ---- ----
(shares in thousands)
Weighted-average shares -
Basic EPS 108,061 112,135 116,332
Common stock equivalents 1,197 1,447 1,592
---------- --------- ----------
Weighted-average shares -
Diluted EPS 109,258 113,582 117,924
========== ========= ==========
Statement of cash flows
For purposes of the consolidated statement of cash flows, the Company
considers short-term investments to be cash equivalents, as short-term
investments have original maturities of three months or less.
Comprehensive income
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income. The Company's other comprehensive income
consists of the change in unrealized appreciation (depreciation) on investments,
net of tax. Realized investment gains of $3.4 million and $18.3 million in 1999
and 1998, respectively, include sales of securities which had unrealized
appreciation of $27.9 million and $19.0 million at December 31, 1998 and 1997,
respectively.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"), which will be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. Management does not anticipate adoption of SFAS 133 will
have a significant effect on the Company's results of operations or its
financial position due to its limited use of derivative instruments. (See note
4.)
Reclassifications
Certain reclassifications have been made in the accompanying financial
statements to 1998 and 1997 amounts to allow for consistent financial reporting.
3. Related party transactions
The Northwestern Mutual Life Insurance Company ("NML") held approximately
11% of the common stock of the Company at December 31, 1999. The Company
contracts with Northwestern Mutual Investment Services, Inc., a subsidiary of
NML, for investment portfolio management. The Company incurred expense of $1.0
million, $1.0 million and $1.1 million for these services in 1999, 1998 and
1997, respectively.
The Company provided certain services to C-BASS during 1999, 1998 and 1997,
and Customers Forever in 1999 in exchange for an immaterial amount of fees. In
addition, C-BASS provided certain services to the Company during 1999 in
exchange for an immaterial amount of fees.
twenty
4. Investments
The following table summarizes the Company's investments at December 31,
1999 and 1998:
Financial
Amortized Market Statement
Cost Value Value
------------- -------------- -------------
(In thousands of dollars)
At December 31, 1999:
- --------------------
Securities, available-for-sale:
Fixed maturities.......................................................... $ 2,732,451 $ 2,666,562 $ 2,666,562
Equity securities......................................................... 12,203 15,426 15,426
Short-term investments.................................................... 107,746 107,746 107,746
-------------- --------------- --------------
Total investment portfolio.................................................. $ 2,852,400 $ 2,789,734 $ 2,789,734
============== =============== ==============
At December 31, 1998:
- --------------------
Securities, available-for-sale:
Fixed maturities.......................................................... $ 2,460,418 $ 2,602,870 $ 2,602,870
Equity securities......................................................... 1,583 4,627 4,627
Short-term investments.................................................... 172,209 172,209 172,209
-------------- --------------- --------------
Total investment portfolio.................................................. $ 2,634,210 $ 2,779,706 $ 2,779,706
============== =============== ==============
The amortized cost and market value of investments at December 31, 1999 are
as follows:
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1999: Cost Gains Losses Value
- ----------------- --------------- --------------- --------------- ---------------
(In thousands of dollars)
U.S. Treasury securities and obligations of U.S. government
corporations and agencies.................................. $ 163,663 $ 305 $ (9,162) $ 154,806
Obligations of states and political subdivisions.............. 2,195,031 25,196 (71,323) 2,148,904
Corporate securities.......................................... 466,204 469 (11,406) 455,267
Mortgage-backed securities.................................... 1,366 - (8) 1,358
Debt securities issued by foreign sovereign governments....... 13,933 55 (15) 13,973
--------------- --------------- --------------- ---------------
Total debt securities...................................... 2,840,197 26,025 (91,914) 2,774,308
Equity securities............................................. 12,203 3,223 - 15,426
--------------- --------------- --------------- ---------------
Total investment portfolio................................. $ 2,852,400 $ 29,248 $ (91,914) $ 2,789,734
=============== =============== =============== ===============
The amortized cost and market value of investments at December 31, 1998 are
as follows:
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1998: Cost Gains Losses Value
- ----------------- --------------- --------------- --------------- ---------------
(In thousands of dollars)
U.S. Treasury securities and obligations of U.S. government
corporations and agencies.................................. $ 65,811 $ 5,746 $ (141) $ 71,416
Obligations of states and political subdivisions.............. 2,030,847 120,033 (1,290) 2,149,590
Corporate securities.......................................... 518,965 16,819 (100) 535,684
Mortgage-backed securities.................................... 1,120 16 (3) 1,133
Debt securities issued by foreign sovereign governments....... 15,884 1,372 - 17,256
--------------- --------------- --------------- ---------------
Total debt securities...................................... 2,632,627 143,986 (1,534) 2,775,079
Equity securities............................................. 1,583 3,044 - 4,627
--------------- --------------- --------------- ---------------
Total investment portfolio................................. $ 2,634,210 $ 147,030 $ (1,534) $ 2,779,706
=============== =============== =============== ===============
twenty-one
The amortized cost and market values of debt securities at December 31,
1999, by contractual maturity, are shown below. Debt securities consist of fixed
maturities and short-term investments. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Market
Cost Value
------------- ------------
(In thousands of dollars)
Due in one year or less........ $ 116,762 $ 116,852
Due after one year through
five years................... 458,897 462,135
Due after five years through
ten years.................... 886,841 881,439
Due after ten years............ 1,376,331 1,312,524
------------- ------------
2,838,831 2,772,950
Mortgage-backed securities..... 1,366 1,358
------------- ------------
Total at December 31, 1999..... $ 2,840,197 $ 2,774,308
============= ============
Net investment income is comprised of the following:
1999 1998 1997
----------- ----------- ----------
(In thousands of dollars)
Fixed maturities....... $ 144,614 $ 133,307 $ 117,448
Equity securities...... 975 1,133 485
Short-term investments. 8,865 9,603 6,813
Other ................. 46 79 65
----------- ----------- ----------
Investment income...... 154,500 144,122 124,811
Investment expenses.... (1,429) (1,103) (1,209)
----------- ----------- ----------
Net investment income.. $ 153,071 $ 143,019 $ 123,602
=========== =========== ==========
The net realized investment gains (losses) and change in net unrealized
appreciation (depreciation) of investments are as follows:
1999 1998 1997
--------- ---------- ----------
(In thousands of dollars)
Net realized investment gains
(losses), on sale of
investments:
Fixed maturities........ $ 3,409 $ 8,349 $ 3,734
Equity securities....... - 9,941 (472)
Short-term investments.. (3) (2) (1)
---------- ---------- ----------
3,406 18,288 3,261
---------- ---------- ----------
Change in net unrealized
appreciation (depreciation):
Fixed maturities........ (208,338) 25,631 56,934
Equity securities....... 179 (9,339) 9,677
Short-term investments.. - - -
---------- ---------- ----------
(208,159) 16,292 66,611
---------- ---------- ----------
Net realized investment
gains (losses) and change
in net unrealized
appreciation (depreciation) $(204,753) $ 34,580 $ 69,872
========== ========== ==========
The gross realized gains and the gross realized losses on sales of
available-for-sale securities were $14.5 million and $11.1 million,
respectively, in 1999, $22.7 million and $4.4 million, respectively, in 1998 and
$5.7 million and $2.4 million, respectively, in 1997.
The tax expense (benefit) of the changes in net unrealized appreciation
(depreciation) was ($72.9) million, $5.7 million and $23.3 million for 1999,
1998 and 1997, respectively.
5. Notes payable
During 1999, 1998 and 1997, the Company repurchased approximately 3.6
million, 5.3 million and 4.7 million shares, respectively, of its outstanding
common stock at a cost of approximately $201, $247 and $248 million,
respectively. Funds to repurchase the shares in 1997 and 1998 were primarily
provided by borrowings under credit facilities evidenced by notes payable. The
shares repurchased in 1999 were funded with a $150 million special dividend from
MGIC and cash flow.
The 1997 and 1998 credit facilities provide up to $200 million and $225
million, respectively, of availability at December 31, 1999. The 1997 credit
facility will decrease by $25 million each year through June 20, 2001. Any
outstanding borrowings under this facility mature on June 20, 2002. The 1998
credit facility will decrease by $25 million each year through June 9, 2002. Any
outstanding borrowings under this facility mature on June 9, 2003. The Company
has the option on notice to lenders, to prepay any borrowings under the
agreements subject to certain provisions.
At December 31, 1999, the Company's outstanding balance of the notes payable
on the 1997 and 1998 credit facilities were $200 million and $225 million,
respectively, which approximated market value. The interest rate on the notes
payable varies based on LIBOR and at December 31, 1999 and December 31, 1998 the
rate was 6.17% and 5.80%, respectively. The weighted average interest rate on
the notes payable for borrowings under the 1997 and 1998 credit
twenty-two
agreements was 5.57% and 5.86% per annum for the years ended December 31, 1999
and 1998, respectively. Interest payments on the notes payable were $22.0
million and $17.7 million for the years ended December 31, 1999 and 1998,
respectively. In addition to the 1997 and 1998 credit facilities, the Company
entered into a $100 million credit facility in November 1999. At December 31,
1999, there were no outstanding borrowings under this facility.
Under the terms of the credit facilities, the Company must maintain
shareholders' equity of at least $1 billion and MGIC must maintain a claims
paying ability rating of `AA-' or better with Standard & Poor's Corporation
("S&P"). At December 31, 1999, the Company had shareholders' equity of $1,776
million and MGIC had a claims paying ability rating of `AA+' from S&P.
During the twelve months ended December 1999, the Company utilized three
interest rate swaps each with a notional amount of $100 million to reduce and
manage interest rate risk on a portion of the variable rate debt under the
credit facilities. With respect to all such transactions, the notional amount of
$100 million represents the stated principal balance used as a basis for
calculating payments. On the swaps, the Company receives and pays amounts based
on rates that can be fixed or variable depending on the terms negotiated. Two of
the swaps renew monthly and one expires in October 2000. Earnings during the
twelve months ended December 1999 on the swaps of approximately $3.8 million are
netted against interest expense in the Consolidated Statement of Operations.
During 1998, the Company earned approximately $0.2 million as a result of an
interest rate swap with a $100 million notional amount entered into during the
fourth quarter of 1998. In addition, during the fourth quarter of 1998, the
Company sold three successive $100 million put-swaptions for investment
purposes. All three put-swaptions expired unexercised, the last expiring on
January 6, 1999. Premium income in 1998 on the put-swaptions of approximately
$0.3 million and the $0.2 million of earnings on the swap were netted against
interest expense in the 1998 Consolidated Statement of Operations.
6. Loss reserves
Loss reserve activity was as follows:
1999 1998 1997
------------ ------------ ------------
(In thousands of dollars)
Reserve at beginning
of year $ 681,274 $ 598,683 $ 514,042
Less reinsurance
recoverable......... 45,527 26,415 29,827
------------ ------------ ------------
Net reserve at
beginning of year... 635,747 572,268 484,215
Reserve transfer (1).. 833 538 537
------------ ------------ ------------
Adjusted reserve at
beginning of year... 636,580 572,806 484,752
Losses incurred:
Losses and LAE
incurred in respect of
default notices
received in:
Current year.... 333,193 377,786 360,623
Prior years (2). (235,997) (166,432) (118,261)
------------ ------------ ------------
Subtotal...... 97,196 211,354 242,362
------------ ------------ ------------
Losses paid:
Losses and LAE paid
in respect of default
notices received in:
Current year.... 7,601 8,752 15,257
Prior years..... 120,018 139,661 139,589
------------ ------------ ------------
Subtotal...... 127,619 148,413 154,846
------------ ------------ ------------
Net reserve at end of year 606,157 635,747 572,268
Plus reinsurance
recoverables........ 35,821 45,527 26,415
------------ ------------ ------------
Reserve at end of year $ 641,978 $ 681,274 $ 598,683
============ ============ ============
(1) Received in conjunction with the cancellation of certain reinsurance
treaties. (See note 7.)
(2) A negative number for a prior year indicates a redundancy of loss reserves,
and a positive number for a prior year indicates a deficiency of loss reserves.
The top portion of the table above shows losses incurred on default notices
received in the current year and in prior years, respectively. The amount of
losses incurred relating to default notices received in the current year
represents the estimated amount to be ultimately paid on such default notices.
The amount of losses incurred relating to default notices received in prior
years represents an adjustment made in the current year for defaults which were
included in the loss reserve at the end of the prior year.
Current year losses incurred decreased from 1998 to 1999 primarily due to
generally strong economic conditions, improvement in the California real estate
market, and MGIC's claims mitigation efforts which
twenty-three
resulted in a decline in losses paid and a reduction in both primary and pool
reserve factors. Partially offsetting the reduction in factors was an increase
in the primary insurance notice inventory from 29,253 at December 31, 1998 to
29,761 at December 31, 1999 and an increase in pool insurance notice inventory
from 6,524 at December 31, 1998 to 11,638 at December 31, 1999. These events
contributed to an increase in the redundancy in prior year loss reserves.
The favorable development of the reserves in 1999, 1998 and 1997 is
reflected in the prior year line, and results from the actual claim rates and
actual claim amounts being lower than those estimated by the Company when
originally establishing the reserve at December 31, 1998, 1997 and 1996,
respectively.
The lower portion of the table above shows the breakdown between claims paid
on default notices received in the current year and default notices received in
prior years. Since it takes, on average, about twelve months for a default which
is not cured to develop into a paid claim, most losses paid relate to default
notices received in prior years.
7. Reinsurance
The Company cedes a portion of its business to reinsurers and records assets
for reinsurance recoverable on estimated reserves for unpaid losses and unearned
premiums. Business written between 1985 and 1993 is ceded under various quota
share reinsurance agreements with several reinsurers. The Company receives a
ceding commission in connection with this reinsurance. Beginning in 1997, the
Company cedes business to captive reinsurance subsidiaries of certain mortgage
lenders primarily under excess of loss reinsurance agreements.
During 1997, 1998 and 1999, MGIC signed agreements with WMAC and certain
WMAC reinsurers to assume all of the reinsurers' interest in WMAC mortgage
insurance writings, which had been previously ceded to those reinsurers. As a
result, the portion of WMAC's insurance in force reinsured by MGIC increased
from approximately 65 percent to approximately 68 percent. (See note 1.)
As a result of the purchase of WMAC on December 31, 1998, reinsurance
recoverable on loss reserves as shown in the Consolidated Balance Sheet includes
approximately $19 million and $26 million of reinsured loss reserves at December
31, 1999 and December 31, 1998, respectively.
The effect of reinsurance on premiums earned and losses incurred is as
follows:
1999 1998 1997
------------ ------------ ------------
(In thousands of dollars)
Premiums earned:
Direct.............. $ 810,974 $ 770,775 $ 712,069
Assumed............. 7,008 9,670 12,665
Ceded .............. (25,401) (17,161) (15,990)
------------ ------------ ------------
Net premiums earned. $ 792,581 $ 763,284 $ 708,744
============ ============ ============
Losses incurred:
Direct.............. $ 94,920 $ 216,340 $ 247,137
Assumed............. (1,332) (3,234) 3,683
Ceded .............. 3,608 (1,752) (8,458)
------------ ------------ ------------
Net losses incurred. $ 97,196 $ 211,354 $ 242,362
============ ============ ============
8. Investments in joint ventures
C-BASS engages in the acquisition and resolution of delinquent single-family
residential mortgage loans ("mortgage loans"). C-BASS also purchases and sells
mortgage-backed securities ("mortgage securities"), interests in real estate
mortgage investment conduit residuals and performs mortgage loan servicing. In
addition, C-BASS issues mortgage-backed debt securities collateralized by
mortgage loans and mortgage securities. Substantially all of C-BASS's
mortgage-related assets do not have readily ascertainable market values and as a
result their value for financial statement purposes is estimated by the
management of C-BASS. Market value adjustments could impact the Company's share
of C-BASS's results of operations.
At December 31, 1999 the Company had contributed approximately $54 million
of capital to C-BASS. Total combined assets of C-BASS at December 31, 1999 and
1998 were approximately $934 million and $623 million, respectively, of which
approximately $773 million and $550 million, respectively, were mortgage-related
assets, including open trades. Total liabilities at December 31, 1999 and 1998
were approximately $744 million and $468 million, respectively, of which
approximately $617 million and $459 million, respectively, were funding
arrangements, including accrued interest.
twenty-four
For the years ended December 31, 1999 and 1998, revenues of approximately $112
million and $70 million, respectively, and expenses of approximately $72 million
and $44 million, respectively, resulted in income before tax of approximately
$40 million and $26 million, respectively. MGIC had guaranteed one half of a $50
million credit facility for C-BASS that was repaid in July 1999.
Sherman is engaged in the business of purchasing, servicing and securitizing
delinquent unsecured consumer assets such as credit card loans and Chapter 13
bankruptcy debt. A substantial portion of Sherman's consolidated assets are
investments in receivable portfolios that do not have readily ascertainable
market values and as a result their value for financial statement purposes is
estimated by the management of Sherman. Market value adjustments could impact
the Company's share of Sherman's results of operations. At December 31, 1999 the
Company had contributed approximately $9 million of capital to Sherman. MGIC is
guaranteeing one half of a $50 million Sherman credit facility that is scheduled
to expire in June 2000.
Customers Forever is an Internet-focused transaction service company
dedicated to helping large residential mortgage servicers retain and enhance
relationships with their customers nationwide. At December 31, 1999 the Company
had contributed approximately $7 million of capital to Customers Forever.
The Company expects that it will provide additional funding to the joint
ventures.
9. Benefit plans
The following tables provide reconciliations of the changes in the benefit obligation, fair value of plan assets and
funded status of the pension and other postretirement benefit plans:
Other Postretirement
Pension Benefits Benefits
-------------------------- --------------------------
1999 1998 1999 1998
------------ ----------- ------------ ------------
(In thousands of dollars)
Reconciliation of benefit obligation:
- ------------------------------------
Benefit obligation at beginning of year.................................. $ 66,280 $ 51,190 $ 23,010 $ 19,364
Service cost.......................................................... 5,869 4,064 2,041 1,612
Interest cost......................................................... 4,677 3,959 1,644 1,357
Actuarial (gain) loss................................................. (5,917) 7,908 (2,044) 883
Benefits paid......................................................... (938) (841) (139) (206)
------------ ----------- ------------ ------------
Benefit obligation at end of year........................................ $ 69,971 $ 66,280 $ 24,512 $ 23,010
============ =========== ============ ============
Reconciliation of fair value of plan assets:
- -------------------------------------------
Fair value of plan assets at beginning of year........................... $ 73,822 $ 57,578 $ 11,045 $ 8,632
Actual return on plan assets.......................................... 6,390 9,895 422 1,141
Employer contributions................................................ 7,574 7,190 1,863 1,272
Benefits paid......................................................... (938) (841) - -
------------ ----------- ------------ ------------
Fair value of plan assets at end of year................................. $ 86,848 $ 73,822 $ 13,330 $ 11,045
============ =========== ============ ============
Reconciliation of funded status:
- -------------------------------
Benefit obligation at end of year........................................ $ (69,971) $ (66,280) $ (24,512) $ (23,010)
Fair value of plan assets at end of year................................. 86,848 73,822 13,330 11,045
------------ ----------- ------------ ------------
Funded status at end of year............................................. 16,877 7,542 (11,182) (11,965)
twenty-five
Notes continued
Unrecognized net actuarial gain....................................... (12,011) (4,741) (4,959) (3,145)
Unrecognized net transition obligation................................ 31 63 6,889 7,419
Unrecognized prior service cost....................................... 2,359 2,542 - -
------------ ----------- ------------ ------------
Prepaid (accrued) benefit cost........................................... $ 7,256 $ 5,406 $ (9,252) $ (7,691)
============ =========== ============ ============
The following table provides the components of net periodic benefit cost for
the pension and other postretirement benefit
plans:
Other Postretirement
Pension Benefits Benefits
----------------------------------------- -----------------------------------------
1999 1998 1997 1999 1998 1997
------------ ------------ ------------ ------------ ------------ ------------
(In thousands of dollars)
Service cost................................ $ 5,869 $ 4,064 $ 3,569 $ 2,041 $ 1,612 $ 1,379
Interest cost............................... 4,677 3,959 3,169 1,644 1,357 1,267
Expected return on plan assets.............. (5,543) (4,674) (3,521) (844) (696) (506)
Recognized net actuarial gain............... - - - (17) (170) (67)
Amortization of transition obligation....... 32 32 32 530 530 530
Amortization of prior service cost.......... 183 183 (20) - - -
------------ ------------ ------------ ------------ ------------ ------------
Net periodic benefit cost................... $ 5,218 $ 3,564 $ 3,229 $ 3,354 $ 2,633 $ 2,603
============ ============ ============ ============ ============ ============
The assumptions used in the measurement of the Company's pension and other
postretirement benefit obligations are shown in the following table:
Other Postretirement
Pension Benefits Benefits
----------------------------------------- -----------------------------------------
1999 1998 1997 1999 1998 1997
------------ ------------ ------------- ------------ ------------ ------------
Weighted-average interest rate assumptions
as of December 31:
Discount rate.......................... 7.5% 7.0% 7.5% 7.5% 7.0% 7.5%
Expected return on plan assets......... 7.5% 7.5% 7.5% 7.5% 7.5% 7.5%
Rate of compensation increase.......... 6.0% 6.0% 6.0% N/A N/A N/A
Plan assets consist of fixed maturities and equity securities. The Company
is amortizing the unrecognized transition obligation for other postretirement
benefits over 20 years. The assumed health care cost trend rate used in
measuring the accumulated postretirement benefit obligation is 6.5% decreasing
to 6% for 2000 and remaining level thereafter. A 1% change in the health care
trend rate assumption would have the following effects on other postretirement
benefits:
1-Percentage 1-Percentage
Point Point
Increase Decrease
------------ ------------
(In thousands of dollars)
- -------------------------------
Effect on total service and
interest cost components.... $ 843 $ (706)
Effect on postretirement
benefit obligation.......... 4,960 (4,138)
The Company has a profit sharing and 401(k) savings plan for employees. At
the discretion of the Board of Directors, the Company may make a profit sharing
contribution of up to 5% of each participant's compensation. The Company
provides a matching 401(k) savings contribution on employees' before-tax
contributions at a rate of 80% of the first $1,000 contributed and 40% of the
next $2,000 contributed. Profit sharing costs and the Company's matching
contributions to the 401(k) savings plan were $5.3 million, $5.0 million and
$3.8 million in 1999, 1998 and 1997, respectively.
10. Income taxes
The components of the net deferred tax (asset) liability as of December 31,
1999 and 1998 are recorded on the Consolidated Balance Sheet as part of other
assets or other liabilities and are as follows:
1999 1998
----------- -----------
(In thousands of dollars)
Unearned premium reserves................ $ (17,726) $ (16,897)
twenty-six
Deferred policy acquisition costs.... 7,822 8,423
Loss reserves........................ (8,119) (11,688)
Unrealized appreciation in
investments........................ (21,933) 50,923
Contingency reserve.................. 29,029 4,473
Other ............................... (4,521) (6,700)
----------- -----------
Net deferred tax (asset) liability... $ (15,448) $ 28,534
=========== ===========
At December 31, 1999, gross deferred tax assets and liabilities amounted to
$84.8 million and $69.4 million, respectively. Management believes that all
gross deferred tax assets at December 31, 1999 are fully realizable and no
valuation reserve has been established.
The following summarizes the components of the provision for income tax:
1999 1998 1997
----------- ----------- -----------
(In thousands of dollars)
Federal:
Current.............. $ 179,423 $ 171,244 $ 147,983
Deferred............. 28,874 (4,198) (7,833)
State ............... 2,512 2,074 1,473
----------- ----------- -----------
Provision for income
tax $ 210,809 $ 169,120 $ 141,623
=========== =========== ===========
The Company paid $173.1 million, $160.6 million and $151.1 million in
federal income tax in 1999, 1998 and 1997, respectively. At December 31, 1999
and 1998, the Company owned $704.1 million and $600.8 million, respectively, of
tax and loss bonds.
The reconciliation of the tax provision computed at the federal tax rate of
35% to the reported provision for income tax is as follows:
1999 1998 1997
----------- ----------- -----------
(In thousands of dollars)
Tax provision computed
at federal tax rate..... $ 238,354 $ 194,105 $ 162,881
(Decrease) increase in
tax provision resulting
from:
Tax exempt
municipal bond
interest............ (31,851) (28,973) (24,926)
Other, net............ 4,306 3,988 3,668
----------- ----------- -----------
Provision for income tax $ 210,809 $ 169,120 $ 141,623
=========== =========== ===========
The Internal Revenue Service has completed examining the Company's income
tax returns through 1994. The results of these examinations had no material
effect on the financial statements.
11. Shareholders' equity and dividend restrictions
The Company's insurance subsidiaries are subject to statutory regulations as
to maintenance of policyholders' surplus and payment of dividends. The maximum
amount of dividends that the insurance subsidiaries may pay in any twelve-month
period without regulatory approval by the Office of the Commissioner of
Insurance of the State of Wisconsin ("OCI") is the lesser of adjusted statutory
net income or 10% of statutory policyholders' surplus as of the preceding
calendar year end. Adjusted statutory net income is defined for this purpose to
be the greater of statutory net income, net of realized investment gains, for
the calendar year preceding the date of the dividend or statutory net income,
net of realized investment gains, for the three calendar years preceding the
date of the dividend less dividends paid within the first two of the preceding
three calendar years. As a result of the $150 million special dividend paid by
MGIC in 1999, MGIC is required to obtain regulatory approval prior to the
payment of dividends in 2000. The other insurance subsidiaries of the Company
can pay $6.3 million of dividends in 2000 without such regulatory approval.
Certain of the Company's non-insurance subsidiaries also have requirements
as to maintenance of net worth. These restrictions could also affect the
Company's ability to pay dividends.
In 1999, 1998 and 1997, the Company paid dividends of $10.8 million, $11.2
million and $11.0 million, respectively or $.10 per share in 1999 and 1998 and
$.095 per share in 1997.
The principles used in determining statutory financial amounts differ from
generally accepted accounting principles ("GAAP"), primarily for the following
reasons:
Under statutory accounting practices, mortgage guaranty insurance companies
are required to maintain contingency loss reserves equal to 50% of premiums
earned. Such amounts cannot be withdrawn for a period of ten years except
as permitted by insurance regulations. Contingency loss reserves are not
reflected as liabilities under GAAP.
twenty-seven
Under statutory accounting practices, insurance policy acquisition costs
are charged against operations in the year incurred. Under GAAP, these
costs are deferred and amortized as the related premiums are earned
commensurate with the expiration of risk.
Statutory financial statements only include a provision for current income
taxes due, and purchases of Tax and Loss Bonds are accounted for as
investments. GAAP financial statements provide for deferred income taxes,
and purchases of Tax and Loss Bonds are recorded as payments of current
income taxes.
Under statutory accounting practices, fixed maturity investments are valued
at amortized cost. Under GAAP, those investments which the Company does not
have the ability and intent to hold to maturity are considered to be
available for sale and are recorded at market, with the unrealized gain or
loss recognized, net of tax, as an increase or decrease to shareholders'
equity.
The statutory net income, equity and the contingency reserve liability of
the insurance subsidiaries (excluding the non-insurance companies) are as
follows:
Year Ended Net Contingency
December 31, Income Equity Reserve
- -------------- ----------- ------------ ------------
(In thousands of dollars)
1999 $ 296,287 $ 637,234 $ 2,253,418
1998 187,535 585,280 1,939,626
1997 144,963 394,274 1,625,810
The differences between the statutory net income and equity presented above
for the insurance subsidiaries and the consolidated net income and equity
presented on a GAAP basis primarily represent the differences between GAAP and
statutory accounting practices, and the effect of the treasury shares on
consolidated equity.
The Company has two stock option plans which permit certain officers and
employees to purchase common stock at specified prices. A summary of activity in
the stock option plans during 1997, 1998 and 1999 is as follows:
Average Shares
Exercise Subject to
Price Option
----------- -------------
Outstanding, December 31, 1996... $ 10.40 2,604,626
Granted....................... 37.04 1,592,000
Exercised..................... 9.08 (532,332)
Canceled...................... 31.19 (29,420)
----------- -----------
Outstanding, December 31, 1997... 22.09 3,634,874
Granted....................... 62.28 109,500
Exercised..................... 10.99 (478,848)
Canceled...................... 33.99 (70,002)
----------- -----------
Outstanding, December 31, 1998... 24.87 3,195,524
Granted....................... 42.29 791,750
Exercised..................... 8.74 (413,930)
Canceled...................... 45.94 (17,200)
----------- -----------
Outstanding, December 31, 1999... $ 30.52 3,556,144
=========== ===========
The exercise price of the options granted in 1997, 1998 and 1999 was equal
to the market value of the stock on the date of grant. The options are
exercisable between one and ten years after the date of grant. At December 31,
1999, 2,895,028 shares were available for future grant under the stock option
plans.
The Company adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123"). Had compensation cost for the Company's stock option plans been
determined based on the fair value method described by SFAS 123, the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below (in thousands, except per share data):
Year Ended December 31,
--------------------------------------
1999 1998 1997
----------- ---------- -----------
Net income $ 464,793 $ 381,689 $ 320,416
Earnings per share:
Basic $ 4.30 $ 3.40 $ 2.75
Diluted $ 4.25 $ 3.36 $ 2.72
The fair value of these options was estimated at grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions for each year:
twenty-eight
Year Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
Risk free interest rate 6.00% 6.37% 6.44%
Expected life.......... 6.38 years 6.82 years 6.88 years
Expected volatility.... 29.72% 27.98% 28.07%
Expected dividend yield 0.17% 0.17% 0.16%
The following is a summary of stock options outstanding at December 31,
1999:
Options Outstanding Options Exercisable
----------------------------- --------------------
Remaining Average Average
Exercise Average Exercise Exercise
Price Range Shares Life(yrs.) Price Shares Price
- --------------- --------- ---------- -------- --------- ---------
$2.50-$3.45 356,000 1.0 $3.44 356,000 $ 3.44
$9.63-$20.88 815,260 3.9 15.36 810,060 15.35
$26.69-$46.06 2,264,984 8.0 38.40 528,254 36.11
$60.25-$68.63 119,900 8.7 65.21 26,890 65.01
--------- ---------- -------- --------- ---------
Total 3,556,144 6.4 $30.52 1,721,204 $ 20.03
========= ========= ======== ========= =========
At December 31, 1998 and 1997, option shares of 1,751,725 and 1,540,076 were
exercisable at an average exercise price of $14.01 and $8.56, respectively. The
Company also granted an immaterial amount of equity instruments other than
options during 1998 and 1999.
On June 2, 1997 the Company effected a two-for-one stock split of the
Company's common stock in the form of a 100% stock dividend. Per share and
certain equity amounts set forth in the accompanying financial statements and
notes have been adjusted to take into account the stock split.
The Company adopted a Shareholder Rights Plan on July 22, 1999. Under terms
of the plan, on August 9, 1999, Common Share Purchase Rights were distributed as
a dividend at the rate of one Common Share Purchase Right for each outstanding
share of the Company's Common Stock. The "Distribution Date" occurs ten days
after an announcement that a person has acquired 15 percent or more of the
Company's Common Stock (the date on which such an acquisition occurs is the
"Shares Acquisition Date" and a person who makes such an acquisition is an
"Acquiring Person"), or ten business days after a person announces or begins a
tender offer in which consummation of such offer would result in ownership by a
person of 15 percent or more of the Common Stock. The Rights are not exercisable
until the Distribution Date. Each Right will initially entitle shareholders to
buy one-half of one share of the Company's Common Stock at a Purchase Price of
$225 per full share (equivalent to $112.50 for each one-half share), subject to
adjustment. If there is an Acquiring Person, then each Right (subject to certain
limitations) will entitle its holder to purchase, at the Rights' then-current
Purchase Price, a number of shares of Common Stock of the Company (or if after
the Shares Acquisition Date, the Company is acquired in a business combination,
common shares of the acquiror) having a market value at the time equal to twice
the Purchase Price. The Rights will expire on July 22, 2009, subject to
extension. The Rights are redeemable at a price of $.001 per Right at any time
prior to the time a person becomes an Acquiring Person. Other than certain
amendments, the Board of Directors may amend the Rights in any respect without
the consent of the holders of the Rights.
12. Leases
The Company leases certain office space as well as data processing equipment
and autos under operating leases that expire during the next seven years.
Generally, all rental payments are fixed.
Total rental expense under operating leases was $5.5 million, $5.4 million
and $5.3 million in 1999, 1998 and 1997, respectively.
At December 31, 1999, minimum future operating lease payments are as follows
(in thousands of dollars):
2000........................... $ 4,072
2001........................... 3,324
2002........................... 2,158
2003........................... 1,056
2004........................... 403
2005 and thereafter............ 387
--------
Total..................... $ 11,400
========
13. Contingencies
The Company is involved in litigation in the ordinary course of business. In
the opinion of management, the ultimate disposition of this litigation
twenty-nine
Notes (continued)
will not have a material adverse effect on the financial position of the
Company.
In addition, on December 17, 1999, a class action complaint was filed
against MGIC in Federal District Court for the Southern District of Georgia,
Augusta division, alleging that MGIC violated the Real Estate Settlement
Procedures Act by entering into various transactions with lenders (including GSE
pool insurance, captive mortgage reinsurance and contract underwriting) that
were not properly priced, in return for the referral of mortgage insurance. On
December 24, 1999, the Company issued a press release saying that it will
aggressively defend against this lawsuit and in due course will answer the
complaint and deny liability.
thirty
Report of Independent Accountants
To the Board of Directors & Shareholders of
MGIC Investment Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of MGIC
Investment Corporation and Subsidiaries (the "Company") at December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. 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 of these statements in accordance with auditing standards
generally accepted in the United States, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
January 12, 2000
thirty-one
Unaudited quarterly financial data
Quarter 1999
---------------------------------------------------------------
1999 First Second Third Fourth Year
- ---------------------------------------------- ------------- ------------- ------------- ------------- -------------
(In thousands of dollars, except per share data)
Net premiums written........................... $ 184,011 $ 196,374 $ 207,582 $ 204,378 $ 792,345
Net premiums earned............................ 193,981 194,766 200,042 203,792 792,581
Investment income, net of expenses............. 36,915 38,627 39,303 38,226 153,071
Losses incurred, net........................... 44,232 30,941 19,533 2,490 97,196
Underwriting and other expenses................ 53,233 51,949 48,289 47,308 200,779
Net income..................................... 100,418 112,934 122,909 133,940 470,201
Earnings per share (a):
Basic....................................... .92 1.04 1.13 1.27 4.35
Diluted..................................... .91 1.02 1.11 1.25 4.30
Quarter 1998
---------------------------------------------------------------
1998 First Second Third Fourth Year
- ---------------------------------------------- ------------- ------------- ------------- ------------- -------------
(In thousands of dollars, except per share data)
Net premiums written........................... $ 176,487 $ 186,663 $ 190,567 $ 195,444 $ 749,161
Net premiums earned............................ 189,821 189,248 191,066 193,149 763,284
Investment income, net of expenses............. 34,389 35,325 36,461 36,844 143,019
Losses incurred, net........................... 59,438 52,514 51,487 47,915 211,354
Underwriting and other expenses................ 45,158 45,532 46,498 52,843 190,031
Net income..................................... 94,047 95,212 96,492 99,714 385,465
Earnings per share (a):
Basic....................................... .83 .83 .87 .91 3.44
Diluted..................................... .81 .82 .86 .91 3.39
(a) Due to the use of weighted average shares outstanding when calculating earnings per share, the sum of the quarterly per
share data may not equal the per share data for the year.
thirty-two
Shareholder Information
MGIC Stock
- ----------
MGIC Investment Corporation Common Stock is listed on the New York Stock
Exchange under the symbol MTG. At December 31, 1999, 105,798,034 shares were
outstanding. The following table sets forth for 1998 and 1999 by quarter the
high and low sales prices of the Common Stock on the New York Stock Exchange
Composite Tape.
1998 1999
------------------------- ------------------------
Quarters High Low High Low
1st $ 74.5000 $ 62.0000 $ 45.625 $ 30.125
2nd 69.0000 55.3750 51.625 34.750
3rd 65.4375 36.8750 56.750 40.250
4th 48.2500 24.2500 62.750 46.500
In 1998 and 1999 the Company declared and paid the following cash dividends:
1998 1999
----------------- ------------------
Quarters
1st $ .025 $ .025
2nd .025 .025
3rd .025 .025
4th .025 .025
============= ============
$ .100 $ .100
============= ============
As of February 14, 2000, the number of shareholders of record was 313. In
addition, there were approximately 24,900 beneficial owners of shares held by
brokers and fiduciaries.