FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
Commission file number 1-10816
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MGIC Investment Corporation
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1486475
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
MGIC Plaza, 250 East Kilbourn Avenue, Milwaukee, Wisconsin 53202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (414) 347-6480
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Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class: Common Stock, Par Value $1 Per Share
Common Share Purchase Rights
Name of Each Exchange
on Which Registered: New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Class: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant as of February 1, 2001: $5.6 billion*
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* Solely for purposes of computing such value and without thereby admitting that
such persons are affiliates of the Registrant, shares held by The Northwestern
Mutual Life Insurance Company and by directors and executive officers of the
Registrant are deemed to be held by affiliates of the Registrant. Shares held
are those shares beneficially owned for purposes of Rule 13d-3 under the
Securities Exchange Act of 1934 but excluding shares subject to stock options.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of February 1, 2001: 106,858,747.
The following documents have been incorporated by reference in this Form 10-K,
as indicated:
Part and Item Number of
Form 10-K Into Which
Document Incorporated
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1. Information from 2000 Annual Report to Item 1 of Part I
Shareholders (for Fiscal Year Items 5 through 8 of Part II
Ended December 31, 2000)
2. Proxy Statement for the 2001 Annual Items 10 through 13 of Part III
Meeting of Shareholders
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __
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Part I
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Item 1. Business.
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A. General
MGIC Investment Corporation (the "Company") is a holding company which,
through its wholly owned subsidiary, Mortgage Guaranty Insurance Corporation
("MGIC"), is the leading provider of private mortgage insurance coverage in the
United States to the home mortgage lending industry. Private mortgage insurance
covers residential first mortgage loans and expands home ownership opportunities
by enabling people to purchase homes with less than 20% down payments. If the
home owner defaults, private mortgage insurance reduces and, in some instances,
eliminates the loss to the insured institution. Private mortgage insurance also
facilitates the sale of low down payment mortgage loans in the secondary
mortgage market, principally to the Federal National Mortgage Association
("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac")
(Fannie Mae and Freddie Mac are collectively referred to as the "GSEs"). In
addition to mortgage insurance on first liens, the Company, through other
subsidiaries, insures residential second mortgages and provides lenders with
various underwriting and other services and products related to home mortgage
lending.
MGIC is licensed in all 50 states of the United States, the District of
Columbia and Puerto Rico. The Company is a Wisconsin corporation. Its principal
office is located at MGIC Plaza, 250 East Kilbourn Avenue, Milwaukee, Wisconsin
53202 (telephone number (414) 347-6480).
The Company and its business may be materially affected by the factors
discussed in "Management's Discussion and Analysis -- Risk Factors" in
Exhibit 13 to this Annual Report on Form 10-K. These factors may also cause
actual results to differ materially from the results contemplated by forward
looking statements that the Company may make.
B. The MGIC Book
Types of Product
In general, there are two principal types of private mortgage insurance:
"primary" and "pool."
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Primary Insurance. Primary insurance provides mortgage default protection
on individual loans and covers unpaid loan principal, delinquent interest and
certain expenses associated with the default and subsequent foreclosure
(collectively, the "claim amount"). The insurer generally pays the coverage
percentage of the claim amount specified in the primary policy, but has the
option to pay 100% of the claim amount and acquire title to the property. The
claim amount averages about 115% of the unpaid principal balance of the loan.
Primary insurance generally applies to owner occupied, first mortgage loans on
one-to-four family homes, including condominiums. Primary coverage can be used
on any type of residential mortgage loan instrument approved by the mortgage
insurer. References in this document to amounts of insurance written or in
force, risk written or in force and other historical data related to MGIC's
insurance refer only to direct (before giving effect to reinsurance) primary
insurance, unless otherwise indicated.
The following table shows, on a direct basis, primary insurance in force
(the unpaid principal balance of insured loans as reflected in MGIC's records)
and primary risk in force (the coverage percentage applied to the unpaid
principal balance), for insurance that has been written by MGIC (the "MGIC
Book") as of the dates indicated:
Primary Insurance and Risk In Force
December 31,
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2000 1999 1998 1997 1996
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(In millions of dollars)
Direct Primary
Insurance In Force..... $160,192 $147,607 $137,990 $138,497 $131,397
Direct Primary
Risk In Force.......... $39,090 $35,623 $32,891 $32,175 $29,308
The coverage percentage provided by MGIC is determined by the lender. For
loans sold by lenders to Fannie Mae or Freddie Mac, the coverage percentage must
comply with the requirements established by the particular GSE to which the loan
is delivered. Effective in the first quarter of 1995, Freddie Mac and Fannie Mae
increased their coverage requirements for, among other loan types, 30-year fixed
rate mortgages with loan-to-value ratios, determined at loan origination
("LTVs"), of 90.01-95.00% ("95s") from 25% coverage to 30% coverage and for such
mortgages with LTVs of 85.01-90.00% ("90s") from 17% to 25%. During the first
quarter of 1999, the GSEs changed their mortgage insurance requirements for
fixed rate and certain other mortgages on owner occupied properties having terms
greater than 20 years when the loan is approved by their automated underwriting
services. Lenders may deliver these loans to the GSEs with the prior coverage
requirements (30% for a 95 and 25% for a 90), or in the case of 95s, with either
(i) 25% coverage or (ii) 18% coverage and the payment of a delivery fee to the
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GSE, and in the case of 90s, with either (i) 17% coverage or (ii) 12% coverage
and the payment of a delivery fee to the GSE.
The following table shows new insurance written during the last four years
for 95s with 30% coverage and for 90s with 25% coverage:
Coverage Categories as a Percentage of New Insurance Written
Year Ended December 31
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LTV/
Coverage 2000 1999 1998 1997
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95 / 30% 32.2% 32.0% 33.9% 38.7%
90 / 25% 29.6% 34.7% 38.6 39.1%
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Total 61.8% 66.7% 72.5% 77.8%
The Company expects the aggregate percentage of its new insurance written with
95/30% and 90/25% coverage will continue to decline in response to the GSEs
changed mortgage insurance requirements.
MGIC charges higher premium rates for higher coverages, and the deeper
coverage requirements imposed by the GSEs beginning in 1995 have resulted in
higher earned premiums for loans with the same characteristics (such as LTV and
loan type). MGIC believes depth of coverage requirements have no significant
impact on frequency of default. Higher coverage percentages generally result in
increased severity (which is the amount paid on a claim), and lower coverage
percentages generally result in decreased severity. In accordance with industry
accounting practice, reserves for losses are only established for loans in
default. Because relatively few defaults occur in the early years of a book of
business (see "Past Industry Losses; Defaults; and Claims--Claims" below), the
higher premium revenue from deeper coverage is recognized before any higher
losses resulting from that deeper coverage may be incurred. On the other hand,
while a decline in coverage percentage will result in lower premium revenue, it
should also result in lower incurred (and paid) losses at the same level of
claim incidence. However, given the historical pattern of claims, the decline in
revenue will precede the benefits of reduced severity. MGIC's premium pricing
methodology generally targets substantially similar returns on capital
regardless of the depth of coverage. However, there can be no assurance that
changes in the level of premium rates adequately reflect the risks associated
with changes in the depth of coverage.
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In partnership with mortgage insurers, the GSEs are also offering 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,
compensation may be paid to the GSE reflecting services or other benefits
realized by the mortgage insurer from the coverage conversion. Lenders receive
guaranty fee relief from the GSEs on mortgages delivered with these restructured
coverages.
Mortgage insurance coverage cannot be terminated by the insurer, except for
non-payment of premium, and remains renewable at the option of the insured
lender, generally at the renewal rate fixed when the loan was initially insured.
Lenders may cancel insurance at any time at their option or because of mortgage
repayment, which may be accelerated because of the refinancing of mortgages. In
the case of a loan purchased by Freddie Mac or Fannie Mae, a borrower meeting
certain conditions may require the mortgage servicer to cancel insurance upon
the borrower's request when the principal balance of the loan is 80% or less of
the home's current value.
Under the federal Homeowners Protection Act (the "HPA") a borrower has the
right to stop paying premiums for private mortgage insurance on loans closed
after July 28, 1999 secured by a property comprised of one dwelling unit that is
the borrower's primary residence when certain LTV ratio thresholds determined by
the value of the home at loan origination and other requirements are met. In
general, a borrower may stop making mortgage insurance payments when the LTV
ratio is scheduled to reach 80% (based on the loan's amortization schedule
established at loan origination) if the borrower so requests and if certain
requirements relating to the borrower's payment history and the absence of
junior liens and a decline in the property's value since origination are
satisfied. In addition, a borrower's obligation to make payments for private
mortgage insurance generally terminates regardless of whether a borrower so
requests when the LTV ratio reaches 78% of the unpaid principal balance of the
mortgage and the borrower is (or thereafter becomes) current in his mortgage
payments. A borrower's right to stop paying for private mortgage insurance
applies only to borrower paid mortgage insurance. The HPA requires that lenders
give borrowers certain notices with regard to the cancellation of private
mortgage insurance.
In addition, some states require that mortgage servicers periodically
notify borrowers of the circumstances in which they may request a mortgage
servicer to cancel private mortgage insurance and some states allow the borrower
to require the mortgage servicer to cancel private mortgage insurance under
certain circumstances or require the mortgage servicer to cancel such insurance
automatically in certain circumstances.
Coverage tends to continue in areas experiencing economic contraction and
housing price depreciation. The persistency of coverage in such areas coupled
with cancellation of coverage in areas experiencing economic expansion and
housing price appreciation can increase the percentage of the insurer's
portfolio comprised of loans in economically weak areas. This development can
also occur during periods of heavy mortgage refinancing because refinanced loans
in areas of economic expansion experiencing property value appreciation are less
likely to require mortgage insurance at the time of refinancing, while
refinanced loans in economically weak areas not
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experiencing property value appreciation are more likely to require mortgage
insurance at the time of refinancing or not qualify for refinancing at all and,
thus, remain subject to the mortgage insurance coverage.
When a borrower refinances an MGIC-insured mortgage loan by paying it off
in full with the proceeds of a new mortgage, the insurance on that existing
mortgage is cancelled, and insurance on the new mortgage is considered to be new
primary insurance written. Therefore, continuation of MGIC's coverage from a
refinanced loan to a new loan results in both a cancellation of insurance and
new insurance written. The percentage of primary risk written with respect to
loans representing refinances was 18.0% in 2000 compared to 22.3% in 1999 and
25.6% in 1998.
In addition to varying with the coverage percentage, MGIC's premium rates
vary depending upon the perceived risk of a claim on the insured loan and, thus,
take into account the LTV, the loan type (fixed payment versus non-fixed
payment) and mortgage term and, for subprime loans, where the borrower's credit
score falls within a range of credit scores. In general, subprime loans are
mortgages that would not meet the standard underwriting guidelines of Fannie Mae
and Freddie Mac for prime mortgages due to credit quality, documentation, or
other factors, such as in a refinance transaction exceeding a specified increase
in the amount of mortgage debt due to cash being paid to the borrower.
Premium rates cannot be changed after the issuance of coverage. Because the
Company believes that over the long term each region of the United States is
subject to similar factors affecting risk of loss on insurance written, MGIC
generally utilizes a nationally based, rather than a regional or local, premium
rate policy.
The borrower's mortgage loan instrument may require the borrower to pay the
mortgage insurance premium ("borrower paid mortgage insurance") or there may be
no such requirement imposed on the borrower, in which case the premium is paid
by the lender, who may recover the premium through an increase in the note rate
on the mortgage ("lender paid mortgage insurance"). Almost all of MGIC's primary
insurance in force and new insurance written, other than through bulk
transactions, is borrower paid mortgage insurance.
Under the monthly premium plan, a monthly premium payment is made to MGIC
to provide only one month of coverage, rather than one year of coverage provided
by the annual premium plan. Under the annual premium plan, the initial premium
is paid to MGIC in advance, and earned over the next twelve months of coverage,
with annual renewal premiums paid in advance thereafter and earned over the
subsequent twelve months of coverage. The annual premiums can be paid with
either a higher premium rate for the initial year of coverage and lower premium
rates for the renewal years, or with premium rates which are equal (level) for
the initial year and subsequent renewal years. Under the single premium plan, a
single payment is made to MGIC, covering a specified term exceeding 12 months.
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During each of the last three years, the monthly premium plan represented
more than 90% of MGIC's new insurance written. The annual premium plan
represented substantially all of the remaining new insurance written.
Pool Insurance. Pool insurance is generally used as an additional "credit
enhancement" for certain secondary market mortgage transactions. Pool insurance
generally covers the loss on a defaulted mortgage loan which exceeds the claim
payment under the primary coverage, if primary insurance is required on that
mortgage loan, as well as the total loss on a defaulted mortgage loan which did
not require primary insurance, in each case up to a stated aggregate loss limit.
During the first quarter of 1997, the Company began writing pool insurance
generally covering fixed-rate, 30-year mortgage loans delivered to Freddie Mac
and Fannie Mae ("agency pool insurance"). The aggregate loss limit on agency
pool insurance generally does not exceed 1% of the aggregate original principal
balance of the mortgage loans in the pool. New pool risk written during 2000 was
$345 million and was $564 million in 1999. New pool risk written during these
years was virtually all agency pool insurance, with the remaining risk written
associated with loans insured under state housing finance programs. Net (giving
effect to external reinsurance) MGIC Book pool risk in force at December 31,
2000 was $1.5 billion compared to $1.4 billion and $0.9 billion at December 31,
1999 and 1998, respectively.
For a discussion of litigation brought as a nationwide class action
alleging 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 (the "RESPA Litigation"), see Item 3
"Legal Proceedings." The proposed settlement of the RESPA Litigation, which has
been preliminarily approved by the Court, includes an injunction that specifies
the basis on which agency pool insurance may be provided in compliance with
RESPA.
In a February 1, 1999 circular addressed to all mortgage guaranty insurers
licensed in New York, the New York Department of Insurance ("NYID") advised that
"significantly underpriced" agency pool insurance would violate the provisions
of New York insurance law that prohibit mortgage guaranty insurers from
providing lenders with inducements to obtain mortgage guaranty business. The
NYID circular does not provide standards under which the NYID will evaluate
whether agency pool insurance is "significantly underpriced." In response to
subsequent inquiries from the NYID, MGIC provided various information about
agency pool insurance to the NYID. In a January 31, 2000 letter addressed to all
mortgage guaranty insurers licensed in Illinois, the Illinois Department of
Insurance advised that providing pool insurance at a "discounted or below market
premium" in return for the referral of primary mortgage insurance would violate
Illinois law.
Captive Mortgage Reinsurance. MGIC's products include captive mortgage
reinsurance in which an affiliate of a lender reinsures a portion of the risk on
loans originated or purchased by the lender which have MGIC primary insurance.
Approximately 21% of MGIC's primary risk in force at December 31, 2000 was
subject to captive mortgage reinsurance and other similar arrangements compared
to approximately 15% at year-end 1999. The complaint in the RESPA Litigation
alleges
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that MGIC pays "inflated" captive mortgage reinsurance premiums in violation of
RESPA. The proposed settlement includes an injunction that specifies the basis
on which captive mortgage reinsurance may be provided in compliance with RESPA.
Other Reinsurance. At December 31, 2000, disregarding reinsurance under
captive structures, less than 5% of MGIC's insurance in force was reinsured.
Reinsuring against possible loan losses does not discharge MGIC from liability
to a policyholder; however, the reinsurer agrees to indemnify MGIC for the
reinsurer's share of losses incurred.
Bulk Transactions
Primary insurance may be written on a flow basis, in which loans are
insured in individual, loan-by-loan transactions, or may be written on a bulk
basis, in which loans in an existing portfolio are insured in a single, bulk
transaction. Generally, in bulk transactions, the individual loans in the
insured portfolio are insured to specified levels of coverage and there is an
aggregate loss limit applicable to all of the insured loans. Bulk transaction
are frequently effected in connection with the securitization of mortgage loans
by securitizers other than the GSEs. The premium in a bulk transaction is based
on the mortgage insurer's evaluation of the overall risk of the insured loans
included in the transaction and is negotiated with the securitizer or other
owner of the loans. Most of the subprime loans insured by MGIC in 2000 were
insured in bulk transactions.
Customers
Originators of residential mortgage loans such as mortgage bankers, savings
institutions, commercial banks, mortgage brokers, credit unions and other
lenders have historically determined the placement of mortgage insurance written
on flow basis and as a result are the customers of MGIC. To obtain primary
insurance from MGIC written on flow basis, a mortgage lender must first apply
for and receive a mortgage guaranty master policy ("Master Policy") from MGIC.
MGIC had approximately 12,000 master policyholders at December 31, 2000 (not
including policies issued to branches and affiliates of large lenders). In 2000,
MGIC issued coverage on mortgage loans for approximately 4,200 of its master
policyholders. MGIC's top 10 customers generated 36.2% of its new insurance
written in 2000, compared to 32.5% in 1999 and 33.7% in 1998. These percentages
do not include new insurance written in subprime bulk transactions.
Sales and Marketing and Competition
Sales and Marketing. MGIC sells its insurance products through its own
employees, located throughout the United States. At December 31, 2000, MGIC had
27 underwriting centers located in 19 states and in Puerto Rico.
Competition. MGIC and other private mortgage insurers compete directly with
federal and state governmental and quasi-governmental agencies, principally the
FHA and, to a lesser degree, the Veterans Administration ("VA"). These agencies
sponsor government-backed
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mortgage insurance programs, which during 2000 accounted for approximately 41%
(compared to approximately 48% during 1999) of the total low down payment
residential mortgages which were subject to governmental or private mortgage
insurance. See "Regulation, Indirect Regulation" below. Loans insured by the FHA
and the VA cannot exceed maximum principal amounts which are determined by a
percentage of the conforming loan limit (which is the annually adjusted maximum
unpaid principal amount of loans that can be purchased by Fannie Mae and Freddie
Mac). For 2000, the maximum FHA and VA loan amount for homes with one dwelling
unit in "high cost" areas may be as high as $239,250 compared to $219,849 in
1999.
In addition to competition from the FHA and the VA, MGIC and other private
mortgage insurers face competition from state-supported mortgage insurance funds
in several states, including California, Illinois and New York. From time to
time, other state legislatures and agencies consider expansions of the authority
of their state governments to insure residential mortgages.
Private mortgage insurers may also be subject to competition from Fannie
Mae and Freddie Mac to the extent the GSEs are compensated for assuming default
risk that would otherwise be insured by the private mortgage insurance industry.
Fannie Mae and Freddie Mac each have programs under which an up-front delivery
fee can be paid to the GSE and primary mortgage insurance coverage is
substantially reduced compared to the coverage requirements that would apply in
the absence of the program. See "Types of Product--Primary Insurance" above. In
October 1998, Freddie Mac's charter was amended (and the amendment immediately
repealed) to give Freddie Mac flexibility to use protection against default in
addition to private mortgage insurance and the two other types of credit
enhancement required by the charter for low down payment mortgages purchased by
Freddie Mac. In addition, to the extent up-front delivery fees are not retained
by the GSEs to compensate for their assumption of default risk, and are used
instead to purchase supplemental coverage from mortgage insurers, the resulting
concentration of purchasing power in the hands of the GSEs could increase
competition among insurers to provide such coverage.
The capital markets may also develop as competitors to private mortgage
insurers. During 1998, a newly-organized off-shore company funded by the sale of
notes to institutional investors provided "reinsurance" to Freddie Mac against
default on a specified pool of mortgages owned by Freddie Mac.
MGIC and other mortgage insurers also compete with transactions structured
to avoid mortgage insurance on low down payment mortgage loans. Such
transactions include self-insuring and originating loans comprised of both a
first and a second mortgage, with the LTV ratio of the first mortgage below what
investors require for mortgage insurance, instead of originating a loan in which
the first mortgage covers the entire borrowed amount. Captive mortgage
reinsurance and similar transactions also result in mortgage originators
receiving a portion of the premium and the risk.
The private mortgage insurance industry currently consists of eight active
mortgage insurers and their affiliates; one of the eight is a joint venture in
which a mortgage insurer is one of the joint
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venturers. The names of these mortgage insurers are listed in "Management's
Discussion and Analysis--Risk Factors" in Exhibit 13 to this Annual Report on
Form 10-K. For 1995 and subsequent years, MGIC has been the largest private
mortgage insurer based on new primary insurance written (with a market share of
24.5% in 2000, 24.3% in 1999 and 23.1% in 1998) and at December 31, 2000, MGIC
also had the largest book of direct primary insurance in force. As a result of
bulk transactions, quarterly market share in 2000 reflected greater volatility
than in the past, a circumstance that may continue in 2001.
The private mortgage insurance industry is highly competitive and, in
recent years, the dynamics of industry competition have undergone significant
change. The Company believes it competes with other private mortgage insurers
for flow business principally on the basis of programs involving agency pool
insurance, captive mortgage reinsurance and other similar structures involving
lenders; the provision of contract underwriting and related fee-based services
to lenders; the provision of other products and services that meet lender needs
for underwriting risk management, affordable housing, loss mitigation, capital
markets and training support; the strength of MGIC's management team and field
organization; and the effective use of technology and innovation in the delivery
and servicing of MGIC's insurance products. The Company believes MGIC's
additional competitive strengths, compared to other private insurers, are its
customer relationships, name recognition, reputation and the depth of its
database covering loans it has insured.
The complaint in the RESPA Litigation alleges, among other things, that
agency pool insurance, captive mortgage reinsurance and contract underwriting as
provided by the Company violate RESPA. The proposed settlement includes an
injunction that specifies the basis on which these products and services may be
provided in compliance with RESPA.
Certain private mortgage insurers compete by offering lower premium rates
than other companies, including MGIC, either in general or with respect to
particular classes of business. MGIC on a case-by-case basis will adjust premium
rates, generally depending on the risk characteristics, loss performance or
class of business of the loans to be insured, or the costs associated with doing
such business.
If the risk-based capital stress test for the GSEs proposed in March 1999
by the Office of Federal Housing Enterprise Oversight ("OFHEO") as finally
adopted gives more capital credit to mortgage insurance provided by a
"AAA"-rated insurer (as discussed under "Regulation--Direct Regulation" below,
MGIC's claims-paying ability is rated "AA+"), the availability of "AAA" capacity
or the provision of equivalent coverage would likely become a competitive factor
among mortgage insurers. See "Management's Discussion and Analysis--Results of
Consolidated Operations--2000 Compared with 1999--Other Matters" in Exhibit 13
hereof for additional information about the proposed OFHEO stress test.
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Contract Underwriting and Related Services
The Company performs contract underwriting services for lenders in which
the Company judges whether the data relating to the borrower and the loan
contained in the lender's mortgage loan application file comply with the
lender's loan underwriting guidelines. The Company also provides an interface to
submit such data to the automated underwriting systems of the GSEs, which
independently judge the data. These services are provided for loans that require
private mortgage insurance as well as for loans that do not require private
mortgage insurance. A material portion of the Company's new insurance written in
recent years involved loans for which the Company provided contract underwriting
services. The complaint in the RESPA Litigation alleges, among other things,
that the pricing of contract underwriting provided by the Company violates
RESPA. The proposed settlement specifies the basis on which contract
underwriting may be provided in compliance with RESPA.
Risk Management
Risk Management Approach. MGIC evaluates four major elements of risk:
o Individual Loan and Borrower. Except to the extent its delegated
underwriting program is being utilized or for loans approved by the
automated underwriting services of the GSEs (see "Delegated
Underwriting and GSE Automated Underwriting Approvals" below), MGIC
evaluates insurance applications based on its analysis of the
borrower's ability to repay the mortgage loan and the characteristics
and value of the property. The analysis of the borrower includes
reviewing the borrower's FICO credit score, as reported by credit
reporting agencies, as well as the borrower's housing and total debt
ratios. In the case of delegated underwriting, compliance with program
parameters is monitored by periodic audits of delegated business.
o Geographic Market. MGIC places significant emphasis on the condition
of the housing markets around the nation in determining its
underwriting policies.
o Product. The type of mortgage instrument that the borrower selects and
the purpose of the loan are important factors in MGIC's analysis of
mortgage default risk. MGIC analyzes four general characteristics of
the product to quantify this risk evaluation: (i) LTV ratio; (ii) type
of loan instrument; (iii) type of property; and (iv) purpose of the
loan. In addition to its underwriting guidelines (as referred to
below), pricing is MGIC's principal method used to manage these risks.
Loans with higher LTV ratios generally have a higher premium, as do
instruments such as ARMs with an initial interest period of less than
five years and loans with a maturity longer than fifteen years.
o Mortgage Lender. MGIC evaluates from time to time its major customers
and the performance of their business which MGIC has insured.
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The Company believes that, excluding other factors, the claim incidence for
95s is substantially higher than for 90s or loans with lower LTV ratios; for
loans with LTVs greater than 95 (which include loans with LTVs of up to 103) is
substantially higher than for 95s; for ARMs during a prolonged period of rising
interest rates would be substantially higher than for fixed rate loans; for
loans in which the original loan amount exceeds the conforming loan limit is
higher than for loans where such amount is below the conforming loan limit; and
for loans with lower FICO credit scores (which include subprime loans) is higher
than for loans with higher FICO credit scores. MGIC charges higher premium rates
to reflect the increased risk of claim incidence that it perceives is associated
with a loan. However, there can be no assurance that MGIC's premium rates
adequately reflect the increased risk, particularly in a period of economic
recession.
There are also other types of loan characteristics relating to the
individual loan or borrower which affect the risk potential for a loan. The
presence of a number of higher-risk characteristics in a loan materially
increases the likelihood of a claim on such a loan unless there are other
characteristics to lower the risk.
Underwriting Process. To obtain primary insurance on a specific mortgage
loan for which delegated underwriting is not being used, a master policyholder
typically submits an application to MGIC, supported by various documents, if
required by MGIC. MGIC utilizes national underwriting guidelines to evaluate the
potential risk of default on mortgage loans submitted for insurance coverage.
These guidelines generally are consistent with Fannie Mae and Freddie Mac
underwriting guidelines and take into account the applicable premium rates
charged by MGIC and the loss experience of the private mortgage insurance
industry, as well as the initiatives to expand home ownership opportunities
undertaken by Fannie Mae and Freddie Mac. MGIC's underwriters have discretionary
authority to insure loans which deviate in one or more respects from MGIC's
underwriting guidelines. In most such cases, offsetting underwriting strengths
must be identified.
In order to react to local or regional economic conditions, MGIC has also
developed for use by its underwriting staff certain modified guidelines which
attempt to address particular regional or local market developments. These
"special market underwriting guidelines" are updated from time to time and
deviate in varying degrees from MGIC's national guidelines based on MGIC's
analysis of area housing markets and related economic indicators and conditions.
The special market underwriting guidelines are more liberal than the published
national guidelines in some markets, but in other markets are more restrictive.
To assist its staff of underwriters, MGIC utilizes a computer-assisted
underwriting system which analyzes and approves certain mortgage insurance
applications based on MGIC's underwriting standards, but without personal
underwriter intervention, thereby allowing MGIC's underwriting staff to devote
additional attention to evaluating more difficult underwriting decisions. MGIC
audits a representative sample of applications approved by the system.
Delegated Underwriting and GSE Automated Underwriting Approvals. Delegated
underwriting is a program whereby approved lenders are allowed to commit MGIC to
insure loans utilizing their MGIC-approved underwriting guidelines and
underwriting evaluation. For delegated
-13-
loans insured on a flow basis, while MGIC does not underwrite on a loan-by-loan
basis the credit of the borrower, the value of the property, or other factors
which it normally considers in its underwriting decision, it does audit on a
regular basis a sample of the loans insured. Loans insured in bulk transactions
are categorized as delegated underwritten loans. For these loans, the audit is
conducted prior to the commitment for the insurance and includes other
procedures for certain loans that are not audited.
At December 31, 2000, MGIC's delegated underwriting program involved
approximately 580 lenders, including all of MGIC's top twenty customers. Loans
insured under MGIC's delegated underwriting program accounted for approximately
37.4% of MGIC's total risk in force at December 31, 2000. The percentage of new
risk written by delegated underwriters increased to 46.8% in 2000 from 38.4% in
1999 (this increase is principally due to loans insured in bulk transactions)
and was 36.2% in 1998.
Loans covered under agency pool insurance are not underwritten by MGIC on a
loan-by-loan basis. If the loan has primary insurance provided by MGIC,
delegated underwriting is used, and if the loan has primary insurance provided
by another mortgage insurer or has no primary insurance, the lender underwrites
the loan to standards set forth in the agency pool insurance agreement with the
lender.
MGIC also has a reduced document submission program under which it approves
a loan for insurance if the borrower satisfies certain minimum criteria for
credit scores and debt ratios.
Loans approved by the automated underwriting services of the GSEs are
deemed acceptable for MGIC mortgage insurance without MGIC itself underwriting
the loan.
Past Industry Losses; Defaults; and Claims
Past Industry Losses. The private mortgage insurance industry experienced
substantial unanticipated incurred losses in the mid-to-late 1980s. From the
1970s until 1981, rising home prices in the United States generally led to
profitable insurance underwriting results for the industry and caused private
mortgage insurers to emphasize market share. To maximize market share, until the
mid-1980s, private mortgage insurers employed liberal underwriting practices,
and charged premium rates which, in retrospect, generally did not adequately
reflect the risk assumed (particularly on pool insurance). These industry
practices compounded the losses which resulted from changing economic and market
conditions which occurred during the early and mid-1980s, including (i) severe
regional recessions and attendant declines in property values in the nation's
energy producing states; (ii) the development by lenders of new mortgage
products to defer the impact on home buyers of double digit mortgage interest
rates; and (iii) changes in federal income tax incentives which initially
encouraged the growth of investment in non-owner occupied properties.
-14-
Defaults. The claim cycle on private mortgage insurance begins with the
insurer's receipt of notification of a default on an insured loan from the
lender. Lenders are required to notify MGIC of defaults within 130 days after
the initial default, although most lenders do so earlier. The incidence of
default is affected by a variety of factors, including the level of borrower
income growth, unemployment, divorce and illness, the level of interest rates
and general borrower creditworthiness. Defaults that are not cured result in a
claim to MGIC. Defaults may be cured by the borrower bringing current the
delinquent loan payments or by a sale of the property and the satisfaction of
all amounts due under the mortgage.
The following table shows the number of primary and pool loans insured in
the MGIC Book, including for new insurance written in 2000 and 1999 on loans
classified by MGIC as subprime loans, the related number of loans in default and
the percentage of loans in default (default rate) as of the dates indicated:
Default Statistics for the MGIC Book
December 31,
--------------------------------------------------------------------------------------
2000 1999 19981) 1997(1) 1996(1)
---- ---- ------ ------- -------
PRIMARY INSURANCE
Insured loans in force ... 1,448,348 1,370,020 1,320,994 1,342,976 1,299,038
Loans in default ......... 37,422 29,761 29,253 28,493 25,034
Percentage of loans in default
(default rate) ........... 2.58% 2.17% 2.21% 2.12% 1.93%
Loans in default excluding
subprime loans............ 29,226 27,055 - - -
Percentage of loans in default
excluding subprime loans. . 2.16% 2.03% - - -
Subprime loans in force... 94,682 36,599 - - -
Subprime loans in default. 8,196 2,706 - - -
Subprime percentage of loans in
default (default rate).... 8.66% 7.39% - - -
POOL INSURANCE
Insured loans in force ... 1,360,059 1,181,512 899,063 374,378 19,123
Loans in default ......... 18,209 11,638 6,524 2,174 855
Percentage of loans in default
(default rate) ........... 1.34% 0.99% 0.73% 0.58% 4.47%
(1)Information relating to defaults excluding subprime loans and to subprime defaults in 1996--1998 is not presented and
is not material.
The default rate for primary loans excluding subprime loans has generally
increased due to an increase in the risk profile of loans insured in late 1994
and the first half of 1995 and the continued maturation of MGIC's insurance in
force. The default rate for subprime loans reflects the
-15-
higher default rate associated with such loans. The number of pool insurance
loans in force increased at December 31, 1997-2000 as a result of agency pool
insurance writings, and the number of pool insurance loans in default at those
dates increased due to the increase in pool insurance in force and the aging of
the loans in the pools. The percentage of pool insurance loans in default
decreased from 1996 to 1997 as a result of the increase in pool insurance in
force and increased from 1997 to 2000 due to the aging of the loans in the
pools.
Regions of the United States may experience different default rates due to
varying localized economic conditions from year to year. The following table
shows the percentage of the MGIC Book's primary loans in default by MGIC region
at the dates indicated:
Default Rates for Primary Insurance By Region*
Dec. 31 Dec. 31 Dec. 31
2000 1999 1998
---- ----- ----
MGIC REGION:
New England............. 1.84% 1.60% 1.78%
Northeast............... 3.15 3.02 3.05
Mid-Atlantic............ 2.69 2.19 2.28
Southeast............... 2.72 2.24 2.23
Great Lakes............. 2.68 2.09 1.89
North Central........... 2.22 1.85 1.91
South Central........... 2.56 2.00 2.00
Plains.................. 1.98 1.40 1.40
Pacific................. 2.63 2.42 2.73
National............. 2.58% 2.17 2.21%
- --------------------
* The default rate is affected by both the number of loans in default at any
given date as well as the number of insured loans in force at such date.
Claims. Claims result from defaults which are not cured. Whether a claim
results from an uncured default principally depends on the borrower's equity in
the home at the time of default and the borrower's (or the lender's) ability to
sell the home for an amount sufficient to satisfy all amounts due under the
mortgage. Claims are affected by various factors, including local housing prices
and employment levels, and interest rates.
Under the terms of the Master Policy, the lender is required to file a
claim for primary insurance with MGIC within 60 days after it has acquired good
and marketable title to the underlying property through foreclosure. Depending
on the applicable state foreclosure law, an average of about 12 months
transpires from the date of default to payment of a claim on an uncured
-16-
default. The claim amount generally averages about 115% of the unpaid principal
amount of the loan.
Within 60 days after the claim has been filed, MGIC has the option of
either (i) paying the coverage percentage specified for that loan, with the
insured retaining title to the underlying property and receiving all proceeds
from the eventual sale of the property or (ii) paying 100% of the claim amount
in exchange for the lender's conveyance of good and marketable title to the
property to MGIC, with MGIC then selling the property for its own account.
Claim activity is not evenly spread throughout the coverage period of a
book of primary business. For prime loans, relatively few claims are received
during the first two years following issuance of coverage on a loan. This is
followed by a period of rising claims which, based on industry experience, has
historically reached its highest level in the third through fifth years after
the year of loan origination. Thereafter, the number of claims received has
historically declined at a gradual rate, although the rate of decline can be
affected by conditions in the economy, including lower housing price
appreciation. There can be no assurance that this historical pattern of claims
will continue in the future and MGIC expects that the peak claim period for
subprime loans will occur earlier than for prime loans. Moreover, when a loan is
refinanced, because the new loan replaces, and is a continuation of, an earlier
loan, the pattern of claims frequency for that new loan may be different from
the historical pattern of other loans. As of December 31, 2000, 66.8% of the
MGIC Book primary insurance in force had been written during 1998, 1999 and
2000, although a portion of such insurance arose from the refinancing of earlier
originations.
In addition to the increasing level of claim activity arising from the
maturing of the MGIC Book, another important factor affecting MGIC Book losses
is the amount of the average claim paid, which is generally referred to as claim
severity. The main determinants of claim severity are the amount of the mortgage
loan and coverage percentage on the loan. The average claim severity on the MGIC
Book primary insurance was $18,977 for 2000 as compared to $19,444 in 1999,
reflecting the decline in the number of claims paid from certain high cost
regions of the country.
Loss Reserves
A significant period of time may elapse between the occurrence of the
borrower's default on a mortgage payment (the event triggering a potential
future claim payment by MGIC), the reporting of such default to MGIC and the
eventual payment of the claim related to such uncured default. To recognize the
liability for unpaid losses related to outstanding reported defaults (known as
the default inventory), the Company (similar to other private mortgage insurers)
establishes loss reserves, representing the estimated percentage of defaults
which will ultimately result in a claim (known as the claim rate), and estimates
of the severity of each claim which will arise from the defaults included in the
default inventory. In accordance with industry accounting practices, the Company
does not establish loss reserves for future claims on insured loans which are
not currently in default.
-17-
The Company also establishes reserves to provide for the estimated costs of
settling claims, including legal and other fees, and general expenses of
administering the claims settlement process ("loss adjustment expenses"), and
for losses and loss adjustment expenses from defaults which have occurred, but
which have not yet been reported to the insurer.
The Company's reserving process is based upon the assumption that past
experience, adjusted for the anticipated effect of current economic conditions
and projected future economic trends, provides a reasonable basis for estimating
future events. However, estimation of loss reserves is a difficult process.
Economic conditions that have affected the development of the loss reserves in
the past may not necessarily affect development patterns in the future, in
either a similar manner or degree.
For a further information about loss reserves, see Note 6 to the
consolidated financial statements of the Company, included in Exhibit 13 to this
Annual Report on Form 10-K.
Geographic Dispersion
The following table reflects the percentage of primary risk in force in the
top 10 states and top 10 metropolitan statistical areas ("MSAs") for the MGIC
Book at December 31, 2000:
Dispersion of Primary Risk in Force
Top 10 States Top 10 MSAs
------------- -----------
1. California 11.2% 1. Chicago 4.2%
2. Texas 6.3 2. Los Angeles 3.0
3. Florida 5.7 3. Washington, DC 2.7
4. Michigan 5.6 4. Boston 2.6
5. Illinois 5.5 5. Atlanta 2.6
6. Ohio 4.5 6. Detroit 2.3
7. New York 4.4 7. Philadelphia 2.0
8. Pennsylvania 4.1 8. Phoenix 1.8
9. Georgia 3.3 9. Houston 1.7
10. Wisconsin 3.1 10. New York 1.6
----- -------
Total 53.7% Total 24.5%
===== =====
The percentages shown above for various MSAs can be affected by changes,
from time to time, in the federal government's definition of an MSA.
-18-
Insurance in Force by Policy Year
The following table sets forth the dispersion of MGIC's primary insurance
in force as of December 31, 2000, by year(s) of policy origination since MGIC
began operations in 1985:
Primary Insurance In Force by Policy Year
Primary
Insurance in Percent of
Policy Year Force Total
----------- ----- ----------
(In millions of dollars)
1985-1994 $ 22,316 13.9%
1995 7,319 4.6
1996 9,636 6.0
1997 13,864 8.7
1998 32,411 20.2
1999 37,254 23.3
2000 37,392 23.3
------ ----
Total $160,192 100.0%
======== ======
Product Characteristics of Risk in Force
At December 31, 2000 and 1999, 95.9% and 95.8%, respectively, of MGIC's
risk in force was primary insurance and the remaining risk in force was pool
insurance. The following table reflects at the dates indicated the (i) total
dollar amount of primary risk in force for the MGIC Book and (ii) percentage of
such primary risk in force (as determined on the basis of information available
on the date of mortgage origination) by the categories indicated.
-19-
Characteristics of Primary Risk in Force
December 31, December 31,
2000 1999
----------------------------
Direct Risk in Force (Dollars in Millions):............. $39,090 $35,623
Lender Concentration:
Top 10 lenders...................................... 28.8% 28.4%
Top 20 lenders...................................... 40.6% 39.7%
LTV: (1)
100s(2)............................................. 5.6% 4.5%
95s................................................. 44.7 45.3
90s(3).............................................. 47.0 49.8
80s................................................. 2.7 0.4
----- -----
Total........................................... 100.0% 100.0%
===== =====
Loan Type:
Fixed(4)............................................ 87.7% 89.8%
ARM(5).............................................. 11.1 8.6
Balloon(6).......................................... 1.2 1.5
Other............................................... 0.0 0.1
----- -----
Total........................................... 100.0% 100.0%
===== =====
Original Insured Loan Amount(7):
Conforming loan limit and below..................... 90.8% 91.4%
Non-conforming...................................... 9.2 8.6
----- -----
Total........................................... 100.0% 100.0%
===== =====
Mortgage Term:
15-years and under.................................. 3.6% 4.6%
Over 15 years....................................... 96.4 95.4
----- -----
Total........................................... 100.0% 100.0%
===== =====
Property Type:
Single-family(8).................................... 93.9% 94.0%
Condominium......................................... 5.8 5.7
Other(9)............................................ 0.3 0.3
----- -----
Total........................................... 100.0% 100.0%
===== =====
Occupancy Status:
Primary residence................................... 97.1% 97.7%
Second home......................................... 1.5 1.4
Non-owner occupied.................................. 1.4 0.9
----- -----
Total........................................... 100.0% 100.0%
===== =====
- --------------------
-20-
(1) Loan-to-value represents the ratio (expressed as a percentage) of the
dollar amount of the mortgage loan to the value of the property at the time
the loan became insured. For purposes of the table, LTV ratios are
classified as in excess of 95% ("100s"); in excess of 90% LTV and up to 95%
LTV ("95s"); in excess of 80% LTV and up to 90% LTV ("90s"); and equal to
or less than 80% LTV ("80s").
(2) Includes 97% to 100% LTV loans for year 2000. In 1999, the maximum LTV
insured by MGIC was 97%.
(3) MGIC includes in its classification of 90s, loans where the borrower makes
a down payment of 10% and finances the associated mortgage insurance
premium payment as part of the mortgage loan. At December 31, 2000 and
1999, 2.7% and 2.9%, respectively, of the primary risk in force consisted
of these types of loans.
(4) Includes fixed rate mortgages with temporary buydowns (where in effect, the
applicable interest rate is typically reduced by one or two percentage
points during the first two years of the loan) and adjustable rate
mortgages in which the initial interest rate is fixed for at least five
years.
(5) Includes ARMs where payments adjust fully with interest rate adjustments.
Also includes ARMs with negative amortization, which at December 31, 2000
and 1999, represented 1.2% and 1.1%, respectively, of primary risk in
force. Does not include ARMs in which the initial interest rate is fixed
for at least five years. As of December 31, 2000 and 1999, ARMs with LTVs
in excess of 90% represented 3.2% and 7.0%, respectively, of primary risk
in force.
(6) Balloon payment mortgages are loans with a maturity, typically five to
seven years, that is shorter than the loans' amortization period.
(7) Loans within the conforming loan limit have an original principal balance
that does not exceed the maximum original principal balance of loans that
the GSEs are eligible to purchase. The conforming loan limit is subject to
annual upward adjustment and was $252,700 for 2000 and $240,000 for 1999.
Non-conforming loans are loans with an original principal balance above the
conforming loan limit.
(8) Includes townhouse-style attached housing with fee simple ownership.
(9) Includes cooperatives and manufactured homes deemed to be real estate.
C. Other Business
The Company, through subsidiaries, provides various mortgage services for
the mortgage finance industry, such as contract underwriting, portfolio
retention and secondary marketing of mortgage-related assets. At December 31,
2000, the Company also owned approximately 46% of Credit-Based Asset Servicing
and Securitization LLC ("C-BASS") and approximately 46% of Sherman Financial
Group LLC, joint ventures with senior management of the joint ventures and
Enhance Financial Services Group Inc. (which was acquired in February 2001 by
Radian Guaranty Inc., the parent of a competitor of MGIC), and approximately 46%
of Customers Forever LLC, a joint venture with senior management of the joint
venture and Marshall & Ilsley Corporation. For further information about these
joint ventures, see "Management's Discussion and Analysis--Results of
Consolidated Operations--2000 Compared to 1999" and Note 8 to the consolidated
financial statements of the Company, both of which are included in Exhibit 13 to
this Annual Report on Form 10-K. The revenues recognized from these mortgage
services operations,
-21-
other non-insurance services and the joint ventures represented 3.6% and 4.8% of
the Company's consolidated revenues in both 2000 and 1999, respectively.
The Company's eMagic.com, LLC subsidiary, launched in January 2000,
provides an Internet portal through which mortgage originators can access
products and services of wholesalers, investors, and vendors necessary to make a
home mortgage loan.
In 1997, the Company, through subsidiaries, began insuring second
mortgages, including home equity loans. New insurance written on second
mortgages in both 1999 and 2000 was approximately $1.1 billion and was
immaterial in 1998.
D. Investment Portfolio
Policy and Strategy
Cash flow from the Company's investment portfolio represented approximately
36% of its total cash flow from operations during 2000. Approximately 79% of the
Company's long-term investment portfolio is managed by a subsidiary of The
Northwestern Mutual Life Insurance Company, although the Company maintains
overall control of investment policy and strategy. The Company maintains direct
management of the remainder of its investment portfolio.
The Company's current policies emphasize preservation of capital, as well
as total return. Therefore, the Company's investment portfolio consists almost
entirely of high-quality, fixed-income investments. Liquidity is sought through
diversification and investment in publicly traded securities. The Company
attempts to maintain a level of liquidity commensurate with its perceived
business outlook and the expected timing, direction and degree of changes in
interest rates. The Company's investment policies in effect at December 31, 2000
limited investments in the securities of a single issuer (other than the U.S.
government and its agencies) and generally did not permit purchasing fixed
income securities rated below "A."
At December 31, 2000, based on amortized cost, approximately 98.4% of the
Company's total fixed income investment portfolio was invested in securities
rated "A" or better, with 66.5% which were rated "AAA" and 23.0% which were
rated "AA," in each case by at least one nationally recognized securities rating
organization.
The Company's investment policies and strategies are subject to change
depending upon regulatory, economic and market conditions and the existing or
anticipated financial condition and operating requirements, including the tax
position, of the Company.
-22-
Investment Operations
At December 31, 2000, the consolidated book value (which is equal to market
value) of the Company's investment portfolio was approximately $3.5 billion. At
December 31, 2000, municipal securities represented 71.7% of the market value of
the total investment portfolio. Securities due within one year, within one to
five years, within five to ten years, and after ten years, represented 5.2%,
19.1%, 26.7% and 49.0%, respectively, of the total book value of the Company's
investment in debt securities. The Company's net pre-tax investment income was
$178.5 million for the year ended December 31, 2000. At December 31, 2000, the
Company's after-tax yield of 4.9% for the year which was comparable to 1999.
For further information concerning investment operations, see Note 4 to the
consolidated financial statements of the Company, included in Exhibit 13 to this
Annual Report on Form 10-K.
E. Regulation
Direct Regulation
The Company and its insurance subsidiaries, including MGIC, are subject to
regulation, principally for the protection of policyholders, by the insurance
departments of the various states in which each is licensed to do business. The
nature and extent of such regulation varies, but generally depends on statutes
which delegate regulatory, supervisory and administrative powers to state
insurance commissioners.
In general, such regulation relates, among other things, to licenses to
transact business; policy forms; premium rates; annual and other reports on
financial condition; the basis upon which assets and liabilities must be stated;
requirements regarding contingency reserves equal to 50% of premiums earned;
minimum capital levels and adequacy ratios; reinsurance requirements;
limitations on the types of investment instruments which may be held in an
investment portfolio; the size of risks and limits on coverage of individual
risks which may be insured; deposits of securities; limits on dividends payable;
and claims handling. Most states also regulate transactions between insurance
companies and their parents or affiliates and have restrictions on transactions
that have the effect of inducing lenders to place business with the insurer. For
a discussion of a February 1, 1999 circular letter from the NYID and a January
31, 2000 letter from the Illinois Department of Insurance, see "The MGIC
Book--Types of Product--Pool Insurance" and "--Captive Mortgage Reinsurance."
For a description of limits on dividends payable, see Note 11 to the
consolidated financial statements of the Company included in Exhibit 13 to this
Annual Report on Form 10-K.
Mortgage insurance premium rates are also subject to state regulation to
protect policyholders against the adverse effects of excessive, inadequate or
unfairly discriminatory rates and to encourage competition in the insurance
marketplace. Any increase in premium rates must be justified, generally on the
basis of the insurer's loss experience, expenses and future trend analysis. The
general mortgage default experience may also be considered. Premium rates are
subject to review and challenge by state regulators.
-23-
A number of states generally limit the amount of insurance risk which may
be written by a private mortgage insurer to 25 times the insurer's total
policyholders' reserves, commonly known as the "risk-to-capital" requirement.
MGIC is required to contribute to a contingency loss reserve an amount
equal to 50% of earned premiums. Such amounts cannot be withdrawn for a period
of 10 years, except under certain circumstances.
Mortgage insurers are generally single-line companies, restricted to
writing residential mortgage insurance business only. Although the Company, as
an insurance holding company, is prohibited from engaging in certain
transactions with MGIC without submission to and, in some instances, prior
approval of applicable insurance departments, the Company is not subject to
insurance company regulation on its non-insurance businesses.
As the most significant purchasers and sellers of conventional mortgage
loans and beneficiaries of private mortgage insurance, Freddie Mac and Fannie
Mae impose requirements on private mortgage insurers in order for such insurers
to be eligible to insure loans sold to such agencies. These requirements of
Freddie Mac and Fannie Mae are subject to change from time to time. Currently,
MGIC is an approved mortgage insurer for both Freddie Mac and Fannie Mae. In
addition, to the extent Fannie Mae or Freddie Mac assumes default risk for
itself that would otherwise be insured, changes current guarantee fee
arrangements (including as a result of primary mortgage insurance coverage being
restructured as described under "The MGIC Book--Types of Product--Primary
Insurance"), allows alternative credit enhancement, alters or liberalizes
underwriting guidelines on low down payment mortgages they purchase, or
otherwise changes its business practices or processes with respect to such
mortgages, private mortgage insurers may be affected.
Fannie Mae has issued primary mortgage insurance master policy guidelines
applicable to MGIC and all other Fannie Mae-approved private mortgage insurers,
establishing certain minimum terms of coverage necessary in order for an insurer
to be eligible to insure loans purchased by Fannie Mae. The terms of MGIC's
Master Policy comply with these guidelines.
MGIC's claims-paying ability is rated "AA+" by Standard & Poor's
Corporation and "Aa2" by Moody's Investors Service, Inc. Maintenance of a
claims-paying ability rating of at least AA-/Aa3 is critical to a mortgage
insurer's ability to continue to write new business. In assigning claims-paying
ability ratings, rating agencies review a mortgage insurer's competitive
position and business, management, corporate strategy, historical and projected
operating and underwriting performance, adequacy of capital to withstand extreme
loss scenarios under assumptions determined by the rating agency, as well as
other factors. The rating agency issuing the claims-paying ability rating can
withdraw or change its rating at any time.
-24-
Indirect Regulation
The Company and MGIC are also indirectly, but significantly, impacted by
regulations affecting purchasers of mortgage loans, such as Freddie Mac and
Fannie Mae, and regulations affecting governmental insurers, such as the FHA and
VA, and lenders. Private mortgage insurers, including MGIC, are highly dependent
upon federal housing legislation and other laws and regulations to the extent
they affect the demand for private mortgage insurance and the housing market
generally. From time to time, those laws and regulations have been amended to
affect competition from government agencies. See "The MGIC Book - Sales and
Marketing and Competition - Competition." Proposals are discussed from time to
time by Congress and certain federal agencies to reform or modify the FHA and
the Government National Mortgage Association, which securitizes mortgages
insured by the FHA.
Subject to certain exceptions, in general, RESPA prohibits any person from
giving or receiving any "thing of value" pursuant to an agreement or
understanding to refer settlement services. See "Item 3--Legal Proceedings."
The OTS, the OCC, the Federal Reserve Board, and the Federal Deposit
Insurance Corporation have uniform guidelines on real estate lending by insured
lending institutions under their supervision. The guidelines specify that a
residential mortgage loan originated with an LTV of 90% or greater should have
appropriate credit enhancement in the form of mortgage insurance or readily
marketable collateral, although no depth of coverage percentage is specified in
the guidelines.
Lenders are subject to various laws, including the Home Mortgage Disclosure
Act, the Community Reinvestment Act and the Fair Housing Act, and Fannie Mae and
Freddie Mac are subject to various laws, including laws relating to government
sponsored enterprises, which may impose obligations or create incentives for
increased lending to low and moderate income persons, or in targeted areas.
There can be no assurance that other federal laws and regulations affecting
such institutions and entities will not change, or that new legislation or
regulations will not be adopted which will adversely affect the private mortgage
insurance industry.
F. Employees
At December 31, 2000, the Company had 1,093 full- and part-time employees,
of whom approximately 58% were assigned to its Milwaukee headquarters and 42% to
its field offices. The number of employees given above does not include
"on-call" employees. The number of "on-call" employees can vary substantially,
primarily as a result of changes in demand for contract underwriting services.
-25-
Item 2. Properties.
- -------------------
At December 31, 2000, the Company leased office space in various cities
throughout the United States under leases expiring between 2001 and 2006 and
which required annual rentals of $2.7 million in 2000.
The Company owns its headquarters facility and an additional
office/warehouse facility, both located in Milwaukee, Wisconsin, which contain
an aggregate of approximately 310,000 square feet of space.
Item 3. Legal Proceedings.
- --------------------------
The Company is involved in litigation in the ordinary course of business.
No pending litigation is expected to have a material adverse affect on the
financial position of the Company.
In addition, on December 15, 2000, MGIC entered into an agreement to settle
Downey et. al. v. MGIC, filed in May 2000 following the dismissal of a similar
case filed in December, 1999, which is pending in Federal District Court for the
Southern District of Georgia. The Court has preliminarily approved the
settlement agreement, certified a nationwide class of borrowers and scheduled a
hearing for June 15, 2001 to consider whether it should enter a final order
approving the settlement. The Company has recorded a $23.2 million charge to
cover the estimated costs of the settlement, including payments to borrowers.
The settlement includes an injunction that prohibits certain practices and
specifies the basis on which agency pool insurance, captive mortgage
reinsurance, contract underwriting and other products may be provided in
compliance with RESPA.
The complaint in the case alleges that MGIC violated RESPA by providing
agency pool insurance, captive mortgage reinsurance, contract underwriting and
other products 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 at the
time of judgment for the mortgage insurance found to be involved in a violation
of RESPA. The complaint also seeks injunctive relief, including prohibiting MGIC
from receiving future premium payments. If the Court does not enter a final
order approving the settlement, the litigation will continue. In these
circumstances, there can be no assurance that the ultimate outcome of the
litigation will not materially affect the Company's financial position or
results of operations.
In February, 2001, a complaint entitled Moore v. Radian Group, Inc. et al.
which seeks class action certification on behalf of a nationwide class of home
mortgage borrowers, was filed in Federal District Court for the Eastern District
of Texas against Radian Guaranty, Inc., Norwest Financial Services, Inc., their
respective corporate parents, John Doe Lenders I-X and John Doe PMI Carriers
I-X. The complaint alleges that the named and unnamed defendants violated RESPA
by providing agency pool insurance that was not properly priced in return for
the referral of mortgage insurance. The complaint seeks damages of three times
the amount of the charge paid by the class members for their mortgage insurance
settlement services and also seeks injunctive relief,
-26-
including prohibiting the defendants from receiving further premium payments.
The Company has not been served with the complaint in this action nor has it
been named as a defendant.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
None.
Executive Officers
Certain information with respect to the Company's executive officers as of
March 1, 2001 is set forth below:
Name and Age Title
- ------------ -----
Curt S. Culver, 48.............. President and Chief Executive Officer of the
Company and MGIC; Director of the Company and
MGIC
J. Michael Lauer, 56............ Executive Vice President and Chief Financial
Officer of the Company and MGIC
James S. MacLeod, 53............ Executive Vice President--Field Operations of
MGIC
Lawrence J. Pierzchalski, 48.... Executive Vice President--Risk Management of
MGIC
Lou T. Zellner, 50.............. Executive Vice President--Corporate Development
of MGIC
Jeffrey H. Lane, 51............. Senior Vice President, General Counsel and
Secretary of the Company and MGIC
Mr. Culver has served as President of the Company since January 1999 and as
Chief Executive Officer since January 2000. He has been President of MGIC since
May 1996 and was Chief Operating Officer of MGIC from May 1996 until he became
Chief Executive Officer in January 1999. Mr. Culver has been a senior officer of
MGIC since 1988 having responsibility at various times during his career with
MGIC for field operations, marketing and corporate development. From March 1985
to 1988, he held various management positions with MGIC in the areas of
marketing and sales.
Mr. Lauer has served as Executive Vice President and Chief Financial
Officer of the Company and MGIC since March 1989.
Mr. MacLeod has served as Executive Vice President-Field Operations of MGIC
since January 1998 and was Senior Vice President-Field Operations of MGIC from
May 1996 to January
-27-
1998. Mr. MacLeod has been a senior officer of MGIC since 1987 having
responsibility at various times during his career with MGIC for sales, business
development and marketing. From March 1985 to 1987, he held various management
positions with MGIC in the areas of underwriting and risk management .
Mr. Pierzchalski has served as Executive Vice President-Risk Management of
MGIC since May 1996 and prior thereto as Senior Vice President-Risk Management
or Vice President-Risk Management of MGIC from April 1990. From March 1985 to
April 1990, he held various management positions with MGIC in the areas of
market research, corporate planning and risk management.
Mrs. Zellner has served as Executive Vice President-Corporate Development
of MGIC since January 1999. Prior thereto, she was a senior officer of MGIC
since 1986 having responsibility at various times during her career with MGIC
for corporate development, non-insurance operations, claims and reinsurance.
From 1983--1986, Mrs. Zellner was Wisconsin Deputy Commissioner of Insurance.
Mr. Lane has served as Senior Vice President, General Counsel and
Secretary of the Company and MGIC since August 1996. For more than five years
prior to his joining the Company, Mr. Lane was a partner of Foley & Lardner, a
law firm headquartered in Milwaukee, Wisconsin.
-28-
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------- ---------------------------------------------------------------------
The information set forth under the caption "MGIC Stock" in Exhibit 13
to this Annual Report on Form 10-K is incorporated herein by
reference.
Item 6. Selected Financial Data.
- ------ -----------------------
The information set forth in the tables under the caption "Five-Year
Summary of Financial Information" in Exhibit 13 to this Annual Report
on Form 10-K is hereby incorporated by reference in answer to this
Item.
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations.
---------------------
The information set forth under the caption "Management's Discussion
and Analysis" in Exhibit 13 to this Annual Report on Form 10-K is
hereby incorporated by reference in answer to this Item.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
- ------- ----------------------------------------------------------
The information set forth in the second paragraph under the caption
"Management's Discussion and Analysis - Financial Condition," in the
fourth to last paragraph under the caption "Management's Discussion
and Analysis - Liquidity and Capital Resources," and in Note 5 of the
Notes to the consolidated financial statements, all in Exhibit 13 to
this Annual Report on Form 10-K, is hereby incorporated by reference
in answer to this Item.
Item 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
The consolidated statements of operations, of shareholders' equity and
of cash flows for each of the years in the three-year period ended
December 31, 2000, and the related consolidated balance sheet of the
Company as of December 31, 2000 and 1999, together with the related
notes thereto and the report of independent accountants, as well as
the unaudited quarterly financial data, all set forth in Exhibit 13 to
this Annual Report on Form 10-K, are hereby incorporated by reference
in answer to this Item.
-29-
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------ ---------------------------------------------------------------
Financial Disclosure.
---------------------
None.
-30-
PART III
--------
Item 10. Directors and Executive Officers of the Registrant.
- ------- --------------------------------------------------
This information (other than for executive officers) is included in
the Company's Proxy Statement for the 2001 Annual Meeting of
Shareholders, and is hereby incorporated by reference. The information
on the executive officers appears at the end of Part I of this Form
10-K.
Item 11. Executive Compensation.
- ------- ----------------------
This information is included in the Company's Proxy Statement for the
2001 Annual Meeting of Shareholders and, other than information
covered by Instruction (9) to Item 402 (a) of Regulation S-K of the
Securities and Exchange Commission, is hereby incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------- --------------------------------------------------------------
This information is included in the Company's Proxy Statement for the
2001 Annual Meeting of Shareholders, and is hereby incorporated by
reference.
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
This information is included in the Company's Proxy Statement for the
2001 Annual Meeting of Shareholders, and is hereby incorporated by
reference.
-31-
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- -------- ----------------------------------------------------------------
(a) 1. Financial statements. The financial statements listed in the
accompanying Index to Consolidated Financial Statements and
Financial Statement Schedules are filed as part of this Form
10-K.
2. Financial statement schedules. The financial statement
schedules listed in the accompanying Index to Consolidated
Financial Statements and Financial Statement Schedules are
filed as part of this Form 10-K.
3. Exhibits. The accompanying Index to Exhibits is incorporated
by reference in answer to this portion of this Item and the
Exhibits listed in such Index are filed as part of this Form
10-K.
(b) Reports on Form 8-K
Reports on Form 8-K - During the quarter ended December 31, 2000,
Current Reports on Form 8-K were filed to report information
under Item 5, Other Information, on October 10, 2000, October 18,
2000 and November 20, 2000.
-32-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
---------------------------------
[Item 14(a) 1 and 2]
Consolidated Financial Statements (all contained in Exhibit 13 to this Annual
Report on Form 10-K)
Consolidated statement of operations for each of the three years in the period
ended December 31, 2000
Consolidated balance sheet at December 31, 2000 and 1999
Consolidated statement of shareholders' equity for each of the three years in
the period ended December 31, 2000
Consolidated statement of cash flows for each of the three years in the period
ended December 31, 2000
Notes to consolidated financial statements
Report of independent accountants
Financial Statement Schedules (all contained immediately following the signature
page to this Annual Report on Form 10-K)
Report of independent accountants on financial statement schedules
Schedules at and for the specified years in the three-year period ended
December 31, 2000:
Schedule I -- Summary of investments, other than investments in related
parties
Schedule II -- Condensed financial information of Registrant
Schedule IV -- Reinsurance
All other schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedules, or
because the information required is included in the consolidated financial
statements and notes thereto.
-33-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 29, 2001.
MGIC INVESTMENT CORPORATION
By /s/ Curt S. Culver
-----------------------------------------
Curt S. Culver
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below as of the date set forth above by the following persons on
behalf of the registrant and in the capacities indicated.
Name and Title
- --------------
/s/ Curt S. Culver /s/ David S. Engelman
- -------------------------------------- ---------------------------------
Curt S. Culver David S. Engelman, Director
President, Chief Executive Officer
and Director
/s/ James D. Ericson
---------------------------------
James D. Ericson, Director
/s/ J. Michael Lauer /s/ Kenneth M. Jastrow, II
- -------------------------------------- ---------------------------------
J. Michael Lauer Kenneth M. Jastrow, II, Director
Executive Vice President and
Chief Financial Officer /s/ Daniel P. Kearney
(Principal Financial Officer) ---------------------------------
Daniel P. Kearney, Director
/s/ Patrick Sinks /s/ Sheldon B. Lubar
- -------------------------------------- ---------------------------------
Patrick Sinks Sheldon B. Lubar, Director
Senior Vice President, Controller and
Chief Accounting Officer /s/ William A. McIntosh
(Principal Accounting Officer) ----------------------------------
William A. McIntosh, Director
/s/ James A. Abbott /s/ Leslie M. Muma
- -------------------------------------- ---------------------------------
James A. Abbott, Director Leslie M. Muma, Director
/s/ Mary K. Bush /s/ Edward J. Zore
- -------------------------------------- ---------------------------------
Mary K. Bush, Director Edward J. Zore, Director
/s/ Karl E. Case
- --------------------------------------
Karl E. Case, Director
-34-
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors
of MGIC Investment Corporation:
Our audits of the consolidated financial statements referred to in our report
dated January 9, 2001 appearing in the 2000 Annual Report to Shareholders of
MGIC Investment Corporation (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedules listed in Item
14(a)(2) of this Form 10-K. In our opinion, these financial statement
schedules present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
January 9, 2001
-35-
MGIC INVESTMENT CORPORATION
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2000
Amount at
Amortized Market which shown in
Type of Investment Cost Value the balance sheet
------------------ ----------------- ----------------- ------------------
(In thousands of dollars)
Fixed maturities:
Bonds:
United States Government and government
agencies and authorities $ 220,168 $ 225,609 $ 225,609
States, municipalities and political subdivisions 2,382,766 2,488,316 2,488,316
Foreign governments 13,958 14,586 14,586
Public utilities 51,885 49,893 49,893
All other corporate bonds 513,286 520,157 520,157
----------------- ----------------- -----------------
Total fixed maturities 3,182,063 3,298,561 3,298,561
Equity securities:
Common stocks:
Banks, trust and insurance companies 1,333 2,090 2,090
Industrial, miscellaneous and all other 20,570 19,952 19,952
----------------- ----------------- -----------------
Total equity securities 21,903 22,042 22,042
----------------- ----------------- -----------------
Short-term investments 151,592 151,592 151,592
----------------- ----------------- -----------------
Total investments $ 3,355,558 $ 3,472,195 $ 3,472,195
================= ================= =================
-36-
MGIC INVESTMENT CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
PARENT COMPANY ONLY
December 31, 2000 and 1999
2000 1999
---- ----
(In thousands of dollars)
ASSETS
Investment portfolio, at market value:
Fixed maturities $ 1,373 $ 12,729
Short-term investments 8,172 1,663
--------------- ---------------
Total investment portfolio 9,545 14,392
Investment in subsidiaries, at equity in net assets 2,854,667 2,183,599
Income taxes receivable - affiliates 1,167 4,518
Accrued investment income 19 209
Other assets 10,094 958
--------------- ---------------
Total assets $ 2,875,492 $ 2,203,676
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Long-term debt $ 397,364 $ 425,000
Other liabilities 13,246 2,687
--------------- ---------------
Total liabilities 410,610 427,687
--------------- ---------------
Shareholders' equity (note B):
Common stock, $1 par value, shares authorized
300,000,000; shares issued 121,110,800;
outstanding 2000 - 106,825,758; 1999 - 105,798,034 121,111 121,111
Paid-in surplus 207,882 211,593
Treasury stock (shares at cost, 2000 - 14,285,042;
1999 - 15,312,766) (621,033) (665,707)
Accumulated other comprehensive income - unrealized appreciation
(depreciation) in investment portfolio of subsidiaries, net of tax 75,814 (40,735)
Retained earnings 2,681,108 2,149,727
--------------- ---------------
Total shareholders' equity 2,464,882 1,775,989
--------------- ---------------
Total liabilities and shareholders' equity $ 2,875,492 $ 2,203,676
=============== ===============
See accompanying supplementary notes to Parent Company condensed financial statements.
-37-
MGIC INVESTMENT CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF OPERATIONS
PARENT COMPANY ONLY
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
(In thousands of dollars)
Revenue:
Equity in undistributed net income of subsidiaries $ 550,014 $ 313,292 $ 368,242
Dividends received from subsidiaries 11,091 169,650 28,394
Investment income, net 800 1,362 1,117
Realized investment (losses) gains, net (659) (216) 334
Other income - - 9
--------------- ------------- -------------
Total revenue 561,246 484,088 398,096
--------------- ------------- -------------
Expenses:
Operating expenses 735 312 180
Interest expense 28,759 20,402 18,624
--------------- ------------- -------------
Total expenses 29,494 20,714 18,804
--------------- ------------- -------------
Income before tax 531,752 463,374 379,292
Credit for income tax (10,247) (6,827) (6,173)
--------------- ------------- -------------
Net income 541,999 470,201 385,465
--------------- ------------- -------------
Other comprehensive income - unrealized
investment gains (losses), net 116,549 (135,307) 10,587
--------------- ------------- -------------
Comprehensive income $ 658,548 $ 334,894 $ 396,052
=============== ============= =============
-38-
MGIC INVESTMENT CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF CASH FLOWS
PARENT COMPANY ONLY
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
(In thousands of dollars)
Cash flows from operating activities:
Net income $ 541,999 $ 470,201 $ 385,465
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (550,014) (313,292) (368,242)
Decrease (increase) in income taxes receivable 3,351 (4,259) 18,653
Decrease (increase) in accrued investment income 190 (182) 197
Increase (decrease) in other liabilities 10,559 (1,517) 939
(Increase) decrease in other assets (9,136) (110) (839)
Other 29,005 (1,916) 16,633
---------------- -------------- --------------
Net cash provided by operating activities 25,954 148,925 52,806
---------------- -------------- --------------
Cash flows from investing activities:
Transactions with subsidiaries (5,050) 67,801 -
Purchase of fixed maturities (10,500) (14,448) (500)
Sale of fixed maturities 21,920 1,843 10,901
------------- ------------ ------------
Net cash provided by investing activities 6,370 55,196 10,401
---------------- -------------- --------------
Cash flows from financing activities:
Dividends paid to shareholders (10,618) (10,825) (11,243)
Proceeds from issuance of long-term debt 309,079 43,000 262,000
Repayment of long-term debt (336,751) (60,000) (57,500)
Reissuance of treasury stock 18,699 3,912 6,953
Repurchase of common stock (6,224) (200,533) (246,840)
---------------- -------------- --------------
Net cash used in financing activities (25,815) (224,446) (46,630)
---------------- -------------- --------------
Net increase (decrease) in cash and short-term investments 6,509 (20,325) 16,577
Cash and short-term investments at beginning of year 1,663 21,988 5,411
---------------- -------------- --------------
Cash and short-term investments at end of year $ 8,172 $ 1,663 $ 21,988
================ ============== ==============
See accompanying notes to Parent Company condensed financial statements.
-39-
MGIC INVESTMENT CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
SUPPLEMENTARY NOTES
Note A
The accompanying Parent Company financial statements should be read in
conjunction with the Consolidated Financial Statements and Notes to Consolidated
Financial Statements appearing on pages 14 through 29 of the MGIC Investment
Corporation 2000 Annual Report to Shareholders.
Note B
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 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. In 2001, MGIC can pay $92.0 million of dividends
and the other insurance subsidiaries of the Company can pay $7.1 million of
dividends 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 2000, 1999 and 1998, the Company paid dividends of $10.6 million, $10.8
million and $11.2 million, respectively, or $0.10 per share.
-40-
MGIC INVESTMENT CORPORATION
SCHEDULE IV - REINSURANCE
MORTGAGE INSURANCE PREMIUMS EARNED
Years Ended December 31, 2000, 1999 and 1998
Assumed Percentage
Ceded to From of Amount
Gross Other Other Net Assumed to
Amount Companies Companies Amount Net
-------------- ------------- -------------- -------------- -------------
(In thousands of dollars)
Year ended December 31,
2000 $ 939,981 $ 50,889 $ 999 $ 890,091 0.1%
============== ============= ============== ==============
1999 $ 819,485 $ 28,346 $ 1,442 $ 792,581 0.2%
============== ============= ============== ==============
1998 $ 770,775 $ 17,161 $ 9,670 $ 763,284 1.3%
============== ============= ============== ==============
-41-
INDEX TO EXHIBITS
-----------------
[Item 14(a)3]
Exhibit
Numbers Description of Exhibits
- ------- -----------------------
3.1 Articles of Incorporation, as amended.(1)
3.2 Amended and Restated Bylaws. (2)
4.1 Article 6 of the Articles of Incorporation (included within Exhibit
3.1)
4.2 Amended and Restated Bylaws (included as Exhibit 3.2)
4.3 Rights Agreement, dated as of July 22, 1999, between MGIC Investment
Corporation and Firstar Bank Milwaukee, N.A., which includes as
Exhibit A thereto the Form of Right Certificate and as Exhibit B
thereto the Summary of Rights to Purchase Common shares(3)
4.4 Indenture, dated as of October 15, 2000, between MGIC Investment
Corporation and Bank One Trust Company, National Association, as
Trustee(4)
4.5 Officer's Certificate, dated as of October 17, 2000, executed and
delivered in connection with the issuance and sale of MGIC Investment
Corporation's 7-1/2% Senior Notes due 2005(5) [The Company is a party
to separate Credit Agreements with different groups of financial
institutions. These Credit Agreements are not being filed pursuant to
Reg. S-K Item 602(b) (4) (iii) (A). The Company hereby agrees to
furnish a copy of such Credit Agreements to the Commission upon its
request.]
10.1 Common Stock Purchase Agreement between the Company and The
Northwestern Mutual Life Insurance Company ("NML"), dated November 30,
1984(6)
-42-
Exhibit
Numbers Description of Exhibits
- ------- -----------------------
10.2 Amended and Restated Investment Advisory and Servicing Agreement
between the Company and Northwestern Mutual Investment Services, Inc.
("NMIS"), dated December 5, 1997.(7) [Northwestern Mutual Investment
Services, LLC has succeeded NMIS as a party to such Agreement.]
10.3 MGIC Investment Corporation 1991 Stock Incentive Plan.(8)
10.4 Two Forms of Stock Option Agreement under 1991 Stock Incentive
Plan.(9)
10.5 Two Forms of Restricted Stock Award Agreement under 1991 Stock
Incentive Plan.(10)
10.6 Executive Bonus Plan
10.7 Supplemental Executive Retirement Plan (11)
10.8 MGIC Investment Corporation Deferred Compensation Plan for
Non-Employee Directors.(12)
10.9 MGIC Investment Corporation 1993 Restricted Stock Plan for
Non-Employee Directors.(13)
10.10 Two Forms of Award Agreement under MGIC Investment Corporation 1993
Restricted Stock Plan for Non-Employee Directors.(14)
10.11 Form of MGIC Mortgage Guaranty Master Policy, in effect generally for
insurance commitments issued beginning March 1, 1995, including the
Master Policy Program Endorsement relating to delegated
underwriting.(15)
10.12 Form of Key Executive Employment and Severance Agreement.(16)
11 Statement re: computation of per share earnings
13 Information from the 2000 Annual Report of the Company to Shareholders
which is incorporated by reference in this Annual Report on Form 10-K.
21 List of Subsidiaries
23 Consent of PricewaterhouseCoopers LLP
-43-
Exhibit
Numbers Description of Exhibits
- ------- -----------------------
Supplementary List of the above Exhibits which relate to management
contracts or compensatory plans or arrangements.
10.3 MGIC Investment Corporation 1991 Stock Incentive Plan.
10.4 Two Forms of Stock Option Agreement under 1991 Stock Incentive Plan.
10.5 Two Forms of Restricted Stock Award Agreement under 1991 Stock
Incentive Plan.
10.6 Executive Bonus Plan
10.7 Supplemental Executive Retirement Plan.
10.8 MGIC Investment Corporation Deferred Compensation Plan for
Non-Employee Directors.
10.9 MGIC Investment Corporation 1993 Restricted Stock Plan for
Non-Employee Directors.
10.10 Two Forms of Award Agreement under MGIC Investment Corporation 1993
Restricted Stock Plan for Non-Employee Directors.
10.12 Form of Key Executive Employment and Severance Agreement
-44-
The following documents, identified in the footnote references above,
are incorporated by reference, as indicated, to: the Company's Annual Reports on
Form 10-K for the years ended December 31, 1993, 1994, 1997 or 1999 (the "1993
10-K," "1994 10-K," "1997 10-K," and "1999 10-K," respectively); to the
Company's Quarterly Reports on Form 10-Q for the Quarters ended June 30, 1994,
1998 or 2000 (the "June 30, 1994 10-Q," "June 30, 1998 10-Q" and "June 30, 2000
10-Q," respectively); to the Company's registration Statement Form 8-A filed
July 27, 1999 (the "8-A"); to the Company's Current Report on form 8-K dated
October 17, 2000 (the "8-K"); or to the Company's Form S-1 Registration
Statement (No. 33-41289) (the "S-1"). The documents are further identified by
cross-reference to the Exhibits in the respective documents where they were
originally filed:
(1) Exhibit 3 to the June 30, 1998 10-Q.
(2) Exhibit 3.2 to the 1999 10-K.
(3) Exhibit 4.1 to the 8-A.
(4) Exhibit 4.1 to the 8-K.
(5) Exhibit 4.2 to the 8-K.
(6) Exhibit 10.1 to the S-1.
(7) Exhibit 10.5 to the 1997 10-K.
(8) Exhibit 10.7 to the 1999 10-K.
(9) Exhibit 10.9 to the 19999 10-K.
(10) Exhibit 10.10 to the 1999 10-K.
(11) Exhibit 10 to the June 30, 2000 10-Q.
(12) Exhibit 10.23 to the 1993 10-K.
(13) Exhibit 10.24 to the 1993 10-K.
(14) Exhibits 10.27 and 10.28 to the June 30, 1994 10-Q.
(15) Exhibit 10.26 to the 1994 10-K.
(16) Exhibit 10.17 to the 1999 10-K.
-45-