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, 2002 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 MGIC Investment Corporation (Exact name of registrant as specified in its charter) Wisconsin 39-1486475 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) MGIC Plaza, 250 East Kilbourn Avenue, Milwaukee, Wisconsin 53202 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (414) 347-6480 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 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2002: $7.0 billion* * Solely for purposes of computing such value and without thereby admitting that such persons are affiliates of the Registrant, shares held 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 15, 2003: 99,243,731. The following documents have been incorporated by reference in this Form 10-K, as indicated: Part and Item Number of Form 10-K Into Document Which Incorporated* - -------- -------------------- 1. Information from 2002 Annual Report to Item 1 of Part I Shareholders (for Fiscal Year Ended Items 5 through 8 of Part II December 31, 2002) 2. Proxy Statement for the 2003 Annual Item 5 of Part II Meeting of Shareholders Items 10 through 13 of Part III *In each case, to the extent provided in the Items listed 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. [X] Part I Item 1. Business. 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 homeowner 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, 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." 1 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. References in this document to "primary insurance" include insurance written in bulk transactions (see "Bulk Transactions" below) that is supplemental to mortgage insurance written in connection with the origination of the loan. Effective with the third quarter of 2001, in reports by private mortgage insurers to the trade association for the private mortgage insurance industry, mortgage insurance that is supplemental to other mortgage insurance is classified as pool insurance. The trade association classification is used by members of the private mortgage insurance industry in reports to a mortgage industry publication that computes and publishes primary market share information. 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 and for risk in force as of December 31, 2000 - 2002, taking into account any loss limit that is applicable to a portfolio or group of insured loans), for insurance that has been written by MGIC (the "MGIC Book") as of the dates indicated: Primary Insurance and Risk In Force December 31, ------------------------------------------------ 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- (In millions of dollars) Direct Primary Insurance In Force......... $196,988 $183,904 $160,192 $147,607 $137,990 Direct Primary Risk In Force(1)........... $ 47,623 $ 42,678 $ 39,090 $ 35,623 $ 32,891 (1) Net of aggregate loss limits for 2002, 2001 and 2000. Aggregate loss limits for years prior to 2000 are immaterial and are not reflected. 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 2 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 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 five 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, ------------------------------------------------- LTV/ Coverage 2002 2001 2000 1999 1998 -------- ---- ---- ---- ---- ---- 95 / 30% 23.9% 26.5% 32.2% 32.0% 33.9% 90 / 25% 29.0% 29.7% 29.6% 34.7% 38.6% ---- ---- ---- ---- ---- Total 52.9% 56.2% 61.8% 66.7% 72.5% 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. The amount of 90s and 95s that MGIC insures as a percentage of its new insurance written is also affected by refinance activity, which generally involves loans with lower LTVs. Refinance activity was a higher percentage of new insurance written in 1998, 2001 and 2002 than in the other years shown in the table. The amount of 90s and 95s written through the bulk channel is substantially lower than insurance written through the flow channel. (MGIC's bulk business prior to 2000 was not significant.) 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 3 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. 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 4 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 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 43.8% in 2002 compared to 43.7% in 2001 and 18.0% in 2000. 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 A- and subprime loans, the location of the borrower's credit score within a range of credit scores. In general, A- loans have FICO scores between 575 and 619 and subprime loans have FICO credit scores of less than 575. 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. New insurance written through bulk transactions is generally paid by the securitization vehicles that hold the mortgages; the mortgage note rate generally does not reflect the premium for the 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 5 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. 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 2002 was $674 million and was $412 million in 2001. New pool risk written during these years was comprised of agency pool insurance, risk associated with loans delivered to the Federal Home Loan Banks under their mortgage purchase programs and risk associated with loans made under state housing finance programs. Net (giving effect to external reinsurance) MGIC Book pool risk in force at December 31, 2002 was $2.4 billion compared to $1.8 billion and $1.5 billion at December 31, 2001 and 2000, respectively. The risk amounts referred to above are contractual aggregate loss limits and, for the year ended December 31, 2002, for $3.0 billion of risk without such limits, risk calculated at $276 million for new risk written and $274 million for risk in force, representing the estimated amount that would credit enhance these loans to a 'AA' level. 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 settlement of the RESPA Litigation, which was approved by the District Court in June 2001 but which has been challenged through an appeal of a related order, includes an injunction that specifies the basis on which agency pool insurance may be provided in compliance with RESPA. There can be no assurance that the standards established by the injunction will be determinative of compliance with RESPA were additional litigation to be brought in the future. 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" 6 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. Risk Sharing Arrangements. MGIC's products include risk sharing arrangements with the GSEs and 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. During the nine months ended September 30, 2002, about 53% of MGIC's new insurance written on a flow basis was subject to risk sharing arrangements compared to 50% for the year ended December 31, 2001. (New insurance written through the bulk channel is not subject to such arrangements.) The percentage of new insurance written during a quarter covered by such arrangements normally increases after the end of the quarter because, among other reasons, the transfer of a loan in the secondary market can result in a mortgage insured during a quarter becoming part of such an arrangement in a subsequent quarter. Therefore, the percentage of new insurance written covered by such arrangements is shown only for the nine months ended September 30, 2002. The complaint in the RESPA Litigation alleges that MGIC pays "inflated" captive mortgage reinsurance premiums in violation of RESPA. The settlement includes an injunction that specifies the basis on which captive mortgage reinsurance may be provided in compliance with RESPA. There can be no assurance that the standards established by the injunction will be determinative of compliance with RESPA were additional litigation to be brought in the future. A substantial portion of the Company's captive mortgage reinsurance arrangements are structured on an excess of loss basis. The Company has decided that, effective March 31, 2003, it will not participate in excess of loss risk sharing arrangements with net premium cessions in excess of 25% on terms which are generally present in the market. The captive mortgage reinsurance programs of larger lenders generally are not consistent with the Company's position. Hence, the Company expects its position with respect to such risk sharing arrangements will result in a reduction in business from some of these lenders. See "The MGIC Book-Customers." External Reinsurance. At December 31, 2002, disregarding reinsurance under captive structures, less than 3% of MGIC's insurance in force was externally 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 a portfolio of loans is 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 may be an aggregate loss limit applicable to all of the insured loans. The premium in a bulk 7 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. In general, the loans insured by MGIC in bulk transactions consist of Alt A loans; jumbo loans with FICO credit scores of at least 700; A- loans; and subprime loans. Alt A loans meet the conforming loan limit referred to below and have FICO credit scores of at least 620, which is viewed as the cut-off for prime quality loans, but do not meet the standard underwriting requirements of the GSEs because of reduced documentation or other factors, such as in a refinance transaction exceeding a specified increase in the amount of the mortgage debt due to cash being paid to the borrower. A jumbo loan has an unpaid principal balance that exceeds the conforming loan limit. The conforming loan limit is the maximum unpaid principal amount of a mortgage loan that can be purchased by the GSEs. The conforming loan limit is subject to annual adjustment, and for mortgages covering a home with one dwelling unit is $322,700 for 2003 and was $300,700 in 2002 and $275,000 in 2001. A- loans have FICO scores between 575 and 619 and subprime loans have FICO credit scores of less than 575. Approximately 55% of MGIC's bulk loan risk in force at December 31, 2002 had FICO credit scores of at least 620. Approximately 27% of MGIC's bulk loan risk in force at December 31, 2002 had A- FICO credit scores, and approximately 18% had subprime credit scores. Most of the subprime loans insured by MGIC in 2002 were insured in bulk transactions. More than half of MGIC's bulk loan risk in force at December 31, 2002 had LTV ratios of 80% and below. New insurance written for bulk transactions was $22.5 billion during 2002 compared to $25.7 billion for 2001 and $7.0 billion for 2000. The Company's writings of bulk insurance are in part sensitive to the volume of securitization transactions involving non-conforming loans. A securitization involves the sale of whole loans held by the securitizer. The Company believes that the relatively high historical spread between the cost of funding mortgages and mortgage coupon rates during portions of the second half of 2002 resulted in increased prices for whole loans which had the effect of reducing the supply of mortgages available for current securitization. The Company's writings of bulk insurance are also sensitive to competition from other methods of providing credit enhancement in a securitization, including the willingness of investors to purchase tranches of the securitization with a higher degree of credit risk. 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 12,900 master policyholders at December 31, 2002 (not including policies issued to branches and affiliates of large lenders). In 2002, MGIC issued coverage on mortgage loans for approximately 4,800 of its master policyholders. MGIC's top 10 customers generated 39.5% of its new insurance written on a flow basis in 2002, compared to 38.4% in 2001, 36.2% in 2000 and 20.0% in 1996. 8 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, 2002, MGIC had 30 underwriting centers located in 21 states and in Puerto Rico. Competition. For flow business, 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 mortgage insurance programs, which during 2002 accounted for approximately 36% (compared to approximately 37% during 2001) 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 cannot exceed maximum principal amounts which are determined by a percentage of the conforming loan limit. For 2003, the maximum FHA loan amount for homes with one dwelling unit in "high cost" areas is as high as $280,749 and was as high as $261,609 in 2002 and $239,250 in 2001. Loans insured by the VA do not have mandated maximum principal amounts but have maximum limits on the amount of the guaranty provided by the VA to the lender. For loans closed after December 27, 2001 the maximum VA guarantee is $60,000. 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 9 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 "80-10-10" loans, which are loans comprised of both a first and a second mortgage (for example, an 80% LTV first mortgage and a 10% LTV second mortgage), with the LTV ratio of the first mortgage below what investors require for mortgage insurance, compared to a loan in which the first mortgage covers the entire borrowed amount (which in the preceding example would be a 90% LTV mortgage). 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 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. According to Inside Mortgage Finance, a mortgage industry publication, which obtains its data from reports to it by MGIC and other mortgage insurers that are to be prepared on the same basis as the reports by insurers to the trade association for the private mortgage insurance industry, for 1995 and subsequent years, MGIC has been the largest private mortgage insurer based on new primary insurance written (with a market share of 24.8% in 2002, 25.0% in 2001 and 24.5% in 2000) and at December 31, 2001, MGIC also had the largest book of direct primary insurance in force. Effective with the third quarter of 2001, these reports do not include as "primary mortgage insurance" insurance on certain loans classified by MGIC as primary insurance, such as loans insured through bulk transactions that already had mortgage insurance placed on the loans at origination. The private mortgage insurance industry is highly competitive. The Company believes it competes with other private mortgage insurers for flow business principally on the basis of programs involving captive mortgage reinsurance (as discussed under "Risk Sharing Arrangements" above, effective March 31, 2003, MGIC will not participate in excess of loss risk sharing arrangements with net premium cessions in excess of 25% on terms which are generally present in the market), agency pool insurance, 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 Company believes it competes for bulk business principally on the basis of the premium rate and the portion of loans submitted for insurance that the Company is willing to insure. The complaint in the RESPA Litigation alleges, among other things, that captive mortgage reinsurance, agency pool insurance, and contract underwriting as provided by the Company violate 10 RESPA. The settlement includes an injunction that specifies the basis on which these products and services may be provided in compliance with RESPA. There can be no assurance that the standards established by the injunction will be determinative of compliance with RESPA were additional litigation to be brought in the future. Certain private mortgage insurers compete for flow business 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. In the third quarter of 2001, the Office of Federal Housing Enterprise Oversight ("OFHEO") adopted a risk-based capital stress test for the GSEs, which was amended in February 2002. One of the elements of the stress test is that future claim payments made by a private mortgage insurer on GSE loans are reduced below the amount provided by the mortgage insurance policy to reflect the risk that the insurer will fail to pay. Claim payments from an insurer whose claims-paying ability rating is 'AAA' are subject to a 3.5% reduction over the 10-year period of the stress test, while claim payments from a 'AA' rated insurer, such as MGIC, are subject to a 8.75% reduction. The effect of the differentiation among insurers is to require the GSEs to have additional capital for coverage on loans provided by a private mortgage insurer whose claims-paying rating is less than 'AAA.' As a result, there is an incentive for the GSEs to use private mortgage insurance provided by a 'AAA' rated insurer. 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 settlement specifies the basis on which contract underwriting may be provided in compliance with RESPA. There can be no assurance that the standards established by the injunction will be determinative of compliance with RESPA were additional litigation to be brought in the future. Risk Management Risk Management Philosophy. MGIC's risk management philosophy has traditionally focused on evaluating four major elements of risk: 11 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. 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. 12 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. As discussed under "GSE Automated Underwriting Approvals" below, a substantial percentage of the loans insured by MGIC through the flow channel are approved for mortgage insurance as a result of the approval of such loans by the automated underwriting services of the GSEs. 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. 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 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. 13 At December 31, 2002, MGIC's delegated underwriting program involved approximately 519 lenders, including all of MGIC's top twenty customers. Loans insured under MGIC's delegated underwriting program accounted for approximately 47.8% of MGIC's total risk in force at December 31, 2002. The percentage of new risk written by delegated underwriters increased to 54.9% in 2002 from 53.1% in 2001 (this increase is principally due to loans insured in bulk transactions) and was 46.8% in 2000. 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. GSE Automated Underwriting Approvals. Since 2000, loans approved by the automated underwriting services of the GSEs have been automatically approved for MGIC mortgage insurance and were generally insured at premium rates applicable to prime quality loans. MGIC observed that some of the loans approved by these services had higher risk than prime quality loans, and effective August 1, 2002, MGIC began charging A- minus premium rates for such loans with such risk characteristics. During 2002, approximately 60% of the loans insured by MGIC through the flow channel were approved as a result of loan approvals by the automated underwriting services of the GSEs. The loan approval criteria of those services are within the risk management discretion and control of the GSEs. As a result of accepting the loan approval decisions of these services, MGIC does not have the ability to control in advance the risk characteristics of such loans. 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 at December 31, 1999 - 2002, loans insured in bulk transactions and A- and subprime loans), the related number of loans in default and the percentage of loans in default (default rate) as of those dates: 15 Default Statistics for the MGIC Book December 31, -------------------------------------------------------------- 2002 2001 2000 1999 1998(1) PRIMARY INSURANCE Insured loans in force ....... 1,655,887 1,580,283 1,448,348 1,370,020 1,320,994 Loans in default ............. 73,648 54,653 37,422 29,761 29,253 Percentage of loans in default (default rate) ...... 4.45% 3.46% 2.58% 2.17% 2.21% Flow loans in default ........ 43,196 36,193 29,889 27,062 - Percentage of flow loans in default (default rate) ... 3.19% 2.65% 2.19% 2.02% - Bulk loans in force .......... 301,859 214,917 83,513 33,569 - Bulk loans in default ........ 30,452 18,460 7,533 2,699 - Percentage of bulk loans in default (default rate) ... 10.09% 8.59% 9.02% 8.04% - A-minus and subprime loans in force(2) ........... 201,195 134,888 64,086 36,599 - A-minus and subprime loans in default(2) ......... 25,504 15,649 6,126 2,706 - Percentage of A-minus and subprime loans in default (default rate) ...... 12.68% 11.60% 9.34% 7.39% - POOL INSURANCE Insured loans in force ....... 1,208,157 1,351,266 1,360,059 1,181,512 899,063 Loans in default ............. 26,676 23,623 18,209 11,638 6,524 Percentage of loans in default(default rate) ....... 2.21% 1.75% 1.34% 0.99% 0.73% (1) The information not separately presented at December 31, 1998 is not material. (2) A portion of A-minus and subprime loans is included in the data for flow loans and the remainder is included in the data for bulk loans. Most A-minus and subprime credit loans are written through the bulk channel. The default rate for flow loans has generally increased due to an increase in the risk profile of loans insured since 1998 and the continued maturation of MGIC's insurance in force. The default rate for bulk loans reflects the higher default rate associated with such loans. The default rate for bulk loans is expected to continue to increase. The number of pool insurance loans in force increased at December 31, 1998-2002 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. 16 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 Dec. 31 Dec. 31 2002 2001 2000 1999 1998 ------- ------- ------- ------- ------- MGIC REGION: New England............ 2.91% 2.27% 1.84% 1.60% 1.78% Northeast.............. 4.74 3.90 3.15 3.02 3.05 Mid-Atlantic........... 4.05 3.27 2.69 2.19 2.28 Southeast.............. 4.87 3.65 2.72 2.24 2.23 Great Lakes............ 5.17 3.74 2.68 2.09 1.89 North Central.......... 4.22 3.21 2.22 1.85 1.91 South Central.......... 4.65 3.56 2.56 2.00 2.00 Plains................. 3.41 2.76 1.98 1.40 1.40 Pacific................ 3.73 3.38 2.63 2.42 2.73 National............ 4.45% 3.46% 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 default. The claim amount generally averages about 115% of the unpaid principal amount of the loan. 17 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 due in part to the subprime component of loans insured in bulk transactions, MGIC expects that the peak claim period for bulk 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, 2002, 82.4% of the MGIC Book primary insurance in force had been written during 1999 - 2002, 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 $20,115 for 2002 as compared to $18,607 in 2001. 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. 18 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 inherently judgmental. 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 "Management's Discussion and Analysis-Results of Consolidated Operations-2002 Compared with 2001" and Note 6 to the consolidated financial statements of the Company, both of which are 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, 2001: Dispersion of Primary Risk in Force Top 10 States Top 10 MSAs - ---------------------------- ----------------------------------------- 1. California 12.0% 1. Chicago 3.8% 2. Florida 6.7 2. Los Angeles 3.4 3. Texas 6.1 3. Atlanta 2.4 4. Michigan 5.2 4. Detroit 2.3 5. Illinois 5.1 5. Phoenix 2.2 6. Ohio 4.7 6. Washington, D.C. 2.1 7. New York 4.1 7. Boston 1.8 8. Pennsylvania 3.8 8. Riverside-San Bernardino 1.8 9. Georgia 3.2 9. Houston 1.7 10. Arizona 2.8 10. New York 1.5 ---- ---- Total 53.7% Total 23.1% ==== ==== 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. 19 Insurance in Force by Policy Year The following table sets forth the dispersion of MGIC's primary insurance in force as of December 31, 2002, by year(s) of policy origination since MGIC began operations in 1985: Primary Insurance In Force by Policy Year Primary Insurance Percent Policy Year in Force of Total ------------------------------------------------------------------ (In millions of dollars) 1985-1996 $ 16,526 8.4% 1997 4,830 2.4 1998 13,360 6.8 1999 14,159 7.2 2000 12,907 6.6 2001 57,528 29.2 2002 77,678 39.4 -------- ----- Total $196,988 100.0% ======== ===== Product Characteristics of Risk in Force At December 31, 2002 and 2001, 94.9% and 95.6%, 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. 20 Characteristics of Primary Risk in Force December 31, December 31, 2002 2001 ------------- ------------ Direct Risk in Force (Dollars in Millions):..... $47,623 $42,678 Lender Concentration: Top 10 lenders................................ 28.0% 29.5% Top 20 lenders................................ 37.8% 39.7% LTV: (1) 100s.......................................... 8.5% 6.4% 95s........................................... 36.9 40.6 90s(2)........................................ 45.4 46.2 80s........................................... 9.2 6.8 Total..................................... 100.0% 100.0% Loan Type: Fixed(3)...................................... 81.5% 85.3% Adjustable rate mortgages ("ARMs")(4)......... 17.8 13.9 Balloon(5).................................... 0.7 0.8 Total..................................... 100.0% 100.0% Original Insured Loan Amount(6): Conforming loan limit and below............... 92.5% 91.0% Non-conforming................................ 7.5 9.0 Total..................................... 100.0% 100.0% Mortgage Term: 15-years and under............................ 4.7% 3.9% Over 15 years................................. 95.3 96.1 Total..................................... 100.0% 100.0% Property Type: Single-family(7).............................. 93.8% 93.8% Condominium................................... 6.0 5.9 Other(8)...................................... 0.2 0.3 Total..................................... 100.0% 100.0% Occupancy Status: Primary residence............................. 95.1% 96.2% Second home................................... 1.7 1.7 Non-owner occupied............................ 3.2 2.1 Total..................................... 100.0% 100.0% __________________ 21 (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", a classification that includes 97% to 103% LTV loans); 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) 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, 2002 and 2001, 2.0% and 2.4%, respectively, of the primary risk in force consisted of these types of loans. (3) 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 ARMs in which the initial interest rate is fixed for at least five years. (4) Includes ARMs where payments adjust fully with interest rate adjustments. Also includes ARMs with negative amortization, which at December 31, 2002 and 2001, represented 0.7% and 0.9%, 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, 2002 and 2001, ARMs with LTVs in excess of 90% represented 3.3% and 2.5%, respectively, of primary risk in force. (5) Balloon payment mortgages are loans with a maturity, typically five to seven years, that is shorter than the loans' amortization period. (6) 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 $300,700 for 2002 and $275,000 for 2001. Non-conforming loans are loans with an original principal balance above the conforming loan limit. (7) Includes townhouse-style attached housing with fee simple ownership. (8) Includes cooperatives and manufactured homes deemed to be real estate. C. Other Business and Joint Ventures The Company, through subsidiaries, provides various mortgage services for the mortgage finance industry, such as contract underwriting, portfolio retention, secondary marketing of mortgage-related assets and, through its majority-owned Equix Financial Services LLC subsidiary, mortgage loan origination and fulfillment services. The Company's eMagic.com LLC subsidiary 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. At December 31, 2002, 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 Radian Group Inc. Effective January 1, 2003, the Company and Radian Group Inc. each sold 4 percentage points of their respective interest in Sherman to Sherman's management for cash. For further information about the C-BASS and Sherman joint ventures, see "Management's Discussion and Analysis--Results of Consolidated Operations--2002 Compared to 2001" and Note 8 to the 22 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, other non-insurance services and the joint ventures represented 9.4% and 5.4% of the Company's consolidated revenues in 2002 and 2001, respectively. In 1997, the Company, through subsidiaries, began insuring second mortgages, including home equity loans. New insurance written on second mortgages in 2002, 2001 and 2000 was approximately $37.2 million, $1.3 billion and $1.1 billion. The Company discontinued writing new second mortgage risk for loans closing after December 31, 2001. D. Investment Portfolio Policy and Strategy Cash flow from the Company's investment portfolio represented approximately 38% of its total cash flow from operations during 2002. 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, 2002 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, 2002, based on amortized cost, approximately 98.5% of the Company's total fixed income investment portfolio was invested in securities rated 'A' or better, with 78.7% which were rated 'AAA' and 17.7% 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. 23 Investment Operations At December 31, 2002, the market value of the Company's investment portfolio was approximately $4.7 billion. At December 31, 2002, municipal securities represented 83.7% 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 3.7%, 16.4%, 23.5% and 56.4%, respectively, of the total book value of the Company's investment in debt securities. The Company's net pre-tax investment income was $207.5 million for the year ended December 31, 2002. The Company's after-tax yield for 2002 was 4.2%, which was lower than the after-tax yield in 2001 of 4.6%. 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 "Management's Discussion and Analysis-Liquidity and Capital Resources" and Note 11 to the consolidated financial statements of the Company, both of which are 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. 24 The general mortgage default experience may also be considered. Premium rates are subject to review and challenge by state regulators. 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 establish a contingency loss reserve in 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. Wisconsin's insurance regulations generally provide that no person may acquire control of the Company unless the transaction in which control is acquired has been approved by the Office of the Commissioner of Insurance of Wisconsin. The regulations provide for a rebuttable presumption of control when a person owns or has the right to vote more than 10% of the voting securities. 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 25 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. 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. In this regard, see the penultimate risk factor under "Management's Discussion and Analysis - Risk Factors" which is included in Exhibit 13 to this Annual Report on Form 10-K. 26 F. Employees At December 31, 2002, the Company and its consolidated subsidiaries had approximately 1,300 full- and part-time employees, of whom approximately 38% were assigned to MGIC's 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. G. Website Access The Company makes available free of charge through its Internet website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically files such material with the SEC. The address of the Company's website is www.mgic.com and such reports may be accessed through the "Investor-News and Financials-Filings With SEC" portion of the website. Item 2. Properties. At December 31, 2002, the Company leased office space in various cities throughout the United States under leases expiring between 2003 and 2006 and which required annual rentals of $4.7 million in 2002. 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. In the opinion of management, the ultimate resolution of this pending litigation will not have a material adverse effect on the financial position or results of operations of the Company. In addition, MGIC is a defendant in Downey et. al. v. MGIC, filed in Federal District Court for the Southern District of Georgia in May 2000 following the dismissal of a similar case filed in December, 1999. The Downey case sought certification as nationwide class action. Equivalent actions seeking nationwide class action certification were filed in December 1999 against three other mortgage insurers (PMI, Republic and United Guaranty) . In August 2000, the Federal District Court dismissed the cases against PMI, Republic and United Guaranty on the ground that the Federal McCarran-Ferguson Act barred the RESPA claims brought by the individual plaintiffs in those cases. Because the pending case against MGIC dated only from May 2000, the time for MGIC to file a motion to dismiss the case against it under the motion schedule established by the Court had not yet occurred. 27 In December 2000 MGIC, PMI and United Guaranty entered into a settlement agreement with the plaintiffs. In the fourth quarter of 2000, the Company recorded a $23.2 million charge to cover the estimated costs of the settlement, including payments to borrowers. In June 2001, the Federal District Court issued a final order approving the December 2000 settlement agreement and certified a nationwide class of borrowers. Due to appeals of related orders denying certain class members the right to intervene to challenge certain aspects of the settlement in Downey and the PMI and United Guaranty cases, payments to borrowers in the settlement are delayed pending the outcome of the appeals. 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 the Real Estate Settlement Procedures Act. There can be no assurance that the standards established by the injunction will be determinative of compliance with RESPA were additional litigation to be brought in the future. The complaint in the case alleges that MGIC violated the Real Estate Settlement Procedures Act 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 the Real Estate Settlement Procedures Act. The complaint also seeks injunctive relief, including prohibiting MGIC from receiving future premium payments. If the settlement is not fully implemented, 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. 28 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, 2003 is set forth below: Name and Age Title - ------------ ----- Curt S. Culver, 50................ President and Chief Executive Officer of the Company and MGIC; Director of the Company and MGIC John D. Fisk, 46.................. Executive Vice President--Strategic Planning of the Company and MGIC J. Michael Lauer, 58.............. Executive Vice President and Chief Financial Officer of the Company and MGIC James S. MacLeod, 55.............. Executive Vice President--Field Operations of MGIC Lawrence J. Pierzchalski, 50...... Executive Vice President--Risk Management of MGIC Jeffrey H. Lane, 53............... 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. Fisk joined the Company in February 2002. From January 2000 to May 2001 he was Chief Executive Officer of LoanChannel.com, an internet small business lending portal. For more than 17 years before then, he held various positions with Freddie Mac, including Senior Vice President--Investor & Dealer Services from May 1993 to September 1997 and Executive Vice President--Single Family Securitization Group from September 1997 to January 2000 when he left to found LoanChannel.com. 29 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 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. 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. 30 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. To the extent required by Instruction 1 to Item 10(c) of Schedule 14A or other rules of the Securities and Exchange Commission, the information set forth under "Item 2 -Approval of Performance Goals for Restricted Stock and Restricted Stock Units Awarded Under 2002 Stock Incentive Plan - Securities Authorized for Issuance Under Equity Compensation Plans" in the Company's Proxy Statement for the 2003 Annual Meeting of Shareholders 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 third paragraph under the caption "Management's Discussion and Analysis - Financial Condition," and in the eight and ninth paragraphs under the caption "Management's Discussion and Analysis - Liquidity and Capital Resources," all in Exhibit 13 to this Annual Report on Form 10-K, is hereby incorporated by reference in answer to this Item. 31 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, 2002, and the related consolidated balance sheet of the Company as of December 31, 2002 and 2001, 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. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 32 PART III Item 10. Directors and Executive Officers of the Registrant. This information (other than on the executive officers) is included in the Company's Proxy Statement for the 2003 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 2003 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 2003 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 2003 Annual Meeting of Shareholders, and is hereby incorporated by reference. Item 14. Controls and Procedures. The Company's principal executive officer and principal financial officer have each concluded that, based on his evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended), as of a date within 90 days prior to the filing of this Annual Report on Form 10-K, such controls and procedures were effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 33 PART IV Item 15. 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, except as otherwise indicated in the next sentence, the Exhibits listed in such Index are filed as part of this Form 10-K. Exhibits 99.1 and 99.2 are not filed as part of this Form 10-K but accompany this Form 10-K. (b) Reports on Form 8-K A report on Form 8-K dated October 23, 2002 was filed under Item 9. A report on Form 8-K dated October 28, 2002 was filed under Items 7 and 9. 34 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES [Item 15(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, 2002 Consolidated balance sheet at December 31, 2002 and 2001 Consolidated statement of shareholders' equity for each of the three years in the period ended December 31, 2002 Consolidated statement of cash flows for each of the three years in the period ended December 31, 2002 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, 2002: 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. 35 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 28, 2003. 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/ Thomas M. Hagerty ---------------------------------- /s/ J. Michael Lauer Thomas M. Hagerty, Director - ---------------------------------- J. Michael Lauer /s/ Kenneth M. Jastrow, II Executive Vice President and ---------------------------------- Chief Financial Officer Kenneth M. Jastrow, II, Director (Principal Financial Officer) /s/ Daniel P. Kearney /s/ Joseph J. Komanecki ---------------------------------- - ---------------------------------- Daniel P. Kearney, Director Joseph J. Komanecki Senior Vice President, Controller /s/ Michael E. Lehman and Chief Accounting Officer ---------------------------------- (Principal Accounting Officer) Michael E. Lehman, Director /s/ James A. Abbott /s/ Sheldon B. Lubar - ---------------------------------- ---------------------------------- James A. Abbott, Director Sheldon B. Lubar, Director /s/ Mary K. Bush /s/ William A. McIntosh - ---------------------------------- ---------------------------------- Mary K. Bush, Director William A. McIntosh, Director /s/ Karl E. Case /s/ Leslie M. Muma - ---------------------------------- ---------------------------------- Karl E. Case, Director Leslie M. Muma, Director 36 I, Curt S. Culver, certify that: 1. I have reviewed this annual report on Form 10-K of MGIC Investment Corporation ("the registrant"). 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d -14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 37 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 \s\ Curt S. Culver ----------------------------------- Curt S. Culver Chief Executive Officer 38 I, J. Michael Lauer, certify that: 1. I have reviewed this annual report on Form 10-K of MGIC Investment Corporation ("the registrant"). 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d -14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 39 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 \s\ J. Michael Lauer ----------------------------------- J. Michael Lauer Chief Financial Office 40 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 8, 2003 appearing in the 2002 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. /s/ PricewaterhouseCoopers LLP PRICEWATERHOUSECOOPERS LLP Milwaukee, Wisconsin January 8, 2003 41 MGIC INVESTMENT CORPORATION SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 2002 Amount at which Amortized shown in the Type of Investment Cost Fair Value balance sheet ------------------ ----------- ----------- --------------- (In thousands of dollars) Fixed maturities: Bonds: United States Government and government agencies and authorities $ 392,346 $ 404,272 $ 404,272 States, municipalities and political subdivisions 3,725,062 3,956,282 3,956,282 Foreign governments 14,014 15,704 15,704 Public utilities 30,054 32,896 32,896 All other corporate bonds 191,698 204,308 204,308 ----------- ----------- ----------- Total fixed maturities 4,353,174 4,613,462 4,613,462 Equity securities: Common stocks: Industrial, miscellaneous and all other 10,779 10,780 10,780 ----------- ------------ ----------- Total equity securities 10,779 10,780 10,780 ----------- ----------- ----------- Short-term investments 102,230 102,230 102,230 ----------- ----------- ----------- Total investments $ 4,466,183 $ 4,726,472 $ 4,726,472 =========== =========== =========== 42 MGIC INVESTMENT CORPORATION SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEET PARENT COMPANY ONLY December 31, 2002 and 2001 2002 2001 ------------- ------------ (In thousands of dollars) ASSETS Investment portfolio, at market value: Fixed maturities $ 1,418 $ 1,709 Short-term investments 180 20,774 ------------- ------------ Total investment portfolio 1,598 22,483 Investment in subsidiaries, at equity in net assets 4,088,518 3,486,574 Income taxes receivable - affiliates 3,074 2,897 Accrued investment income 7 87 Other assets 6,343 5,271 ------------- ------------ Total assets $ 4,099,540 $ 3,517,312 ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Short- and long-term debt $ 676,663 $ 472,102 Accounts payable - affiliates 19 21 Other liabilities 27,666 25,002 ------------- ------------ Total liabilities 704,348 497,125 ------------- ------------ Shareholders' equity (note B): Common stock, $1 par value, shares authorized 300,000,000; shares issued 2002 - 121,418,637; 2001 - 121,110,800; outstanding 2002 - 100,251,444; 2001 - 106,086,594 121,419 121,111 Paid-in surplus 232,950 214,040 Members' equity 380 - Treasury stock (shares at cost, 2002 - 21,167,193; 2001 - 15,024,206) (1,035,858) (671,168) Accumulated other comprehensive income, net of tax 147,908 46,644 Retained earnings 3,928,393 3,309,560 ------------- ------------ Total shareholders' equity 3,395,192 3,020,187 ------------- ------------ Total liabilities and shareholders' equity $ 4,099,540 $ 3,517,312 ============= ============ See accompanying supplementary notes to Parent Company condensed financial statements. 43 MGIC INVESTMENT CORPORATION SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENT OF OPERATIONS PARENT COMPANY ONLY Years Ended December 31, 2002, 2001 and 2000 2002 2001 2000 ---------- ---------- ---------- (In thousands of dollars) Revenue: Equity in undistributed net income of subsidiaries $ 487,660 $ 644,714 $ 550,014 Dividends received from subsidiaries 164,653 12,751 11,091 Investment income, net 2,338 746 800 Realized investment gains (losses), net 42 29 (659) ---------- ---------- ---------- Total revenue 654,693 658,240 561,246 ---------- ---------- ---------- Expenses: Operating expenses 1,313 926 735 Interest expense 36,640 30,623 28,759 ---------- ---------- ---------- Total expenses 37,953 31,549 29,494 ---------- ---------- ---------- Income before tax 616,740 626,691 531,752 Credit for income tax (12,451) (12,446) (10,247) ---------- ---------- ---------- Net income 629,191 639,137 541,999 ---------- ---------- ---------- Other comprehensive income, net 101,264 (29,170) 116,549 ---------- ---------- ---------- Comprehensive income $ 730,455 $ 609,967 $ 658,548 ========== ========== ========== See accompanying supplementary notes to Parent Company condensed financial statements. 44 MGIC INVESTMENT CORPORATION SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENT OF CASH FLOWS PARENT COMPANY ONLY Years Ended December 31, 2002, 2001 and 2000 2002 2001 2000 ----------- ----------- ----------- (In thousands of dollars) Cash flows from operating activities: Net income $ 629,191 $ 639,137 $ 541,999 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries (487,660) (644,714) (550,014) (Increase) decrease in income taxes receivable (177) (2,897) 4,518 Decrease (increase) in accrued investment income 80 (68) 190 Increase in other liabilities 2,664 11,777 10,559 (Increase) decrease in other assets (1,072) 5,990 (10,303) Other 12,190 7,576 29,005 ----------- ----------- ----------- Net cash provided by operating activities 155,216 16,801 25,954 ----------- ----------- ----------- Cash flows from investing activities: Transactions with subsidiaries (12,160) (8,657) (5,050) Purchase of fixed maturities (99,604) (500) (10,500) Sale of fixed maturities 100,291 164 21,920 ----------- ----------- ----------- Net cash (used in) provided by investing activities (11,473) (8,993) 6,370 ----------- ----------- ----------- Cash flows from financing activities: Dividends paid to shareholders (10,358) (10,685) (10,618) Proceeds from issuance of short- and long-term debt 202,087 205,521 309,079 Repayment of short- and long-term debt - (133,384) (336,751) Common stock shares issued 10,825 - - Reissuance of treasury stock 6,179 16,830 18,699 Repurchase of common stock (373,070) (73,488) (6,224) ----------- ----------- ----------- Net cash used in financing activities (164,337) 4,794 (25,815) ----------- ----------- ----------- Net (decrease) increase in cash and short-term investments (20,594) 12,602 6,509 Cash and short-term investments at beginning of year 20,774 8,172 1,663 ----------- ----------- ----------- Cash and short-term investments at end of year $ 180 $ 20,774 $ 8,172 =========== =========== =========== See accompanying notes to Parent Company condensed financial statements. 45 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 in Exhibit 13 of this Annual Report on Form 10-K. 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. As a result of an extraordinary dividend paid by MGIC in February, 2002, MGIC cannot pay any dividends without regulatory approal until February 16, 2003. Thereafter, MGIC can pay $154.8 million of dividends. The other insurance subsidiaries of the Company can pay $8.7 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 2002, 2001 and 2000, the Company paid dividends of $10.4 million, $10.7 million and $10.6 million, respectively, or $0.10 per share. 46 MGIC INVESTMENT CORPORATION SCHEDULE IV - REINSURANCE MORTGAGE INSURANCE PREMIUMS EARNED Years Ended December 31, 2002, 2001 and 2000 Percentage Ceded to Assumed of Amount Gross Other From Other Assumed Gross Amount Companies Companies Net Amount to Net ------------ ---------- ---------- ------------ ---------- (In thousands of dollars) Year ended December 31, 2002 $ 1,296,548 $ 114,898 $ 448 $ 1,182,098 0.0% ============ ========== ======= ============ 2001 $ 1,107,168 $ 65,587 $ 686 $ 1,042,267 0.1% ============ ========== ======= ============ 2000 $ 939,981 $ 50,889 $ 999 $ 890,091 0.1% ============ ========== ======= ============ 47 INDEX TO EXHIBITS [Item 15(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) 4.3.1 First Amendment to Rights Agreement, dated as of October 28, 2002, between the Company and U.S. Bank National Association.(4) 4.3.2 Second Amendment to Rights Agreement, dated as of October 28, 2002, between the Company and Wells Fargo Bank Minnesota, National Association (as successor Rights Agent to U.S. Bank National Association).(5) 4.4 Indenture, dated as of October 15, 2000, between the Company and Bank One Trust Company, National Association, as Trustee(6) [The Company is a party to various other agreements with respect to its long-term debt. These 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 agreements to the Commission upon its request.] 10.1 Form of Stock Option Agreement under 2002 Stock Incentive Plan 10.1.1 Form of Incorporated Terms to Stock Option Agreement under 2002 Stock Incentive Plan 10.2 Form of Restricted Stock Agreement under 2002 Stock Incentive Plan 10.2.1 Form of Incorporated Terms to Restricted Stock Agreement under 2002 Stock Incentive Plan 10.3 MGIC Investment Corporation 1991 Stock Incentive Plan(7) 48 10.3.1 MGIC Investment Corporation 2002 Stock Incentive Plan(8) 10.4 Two Forms of Stock Option Agreement under 1991 Stock Incentive Plan.(9) 10.4.1 Form of Stock Option Agreement under 1991 Stock Incentive Plan(10) 10.4.2 Form of Incorporated Terms to Stock Option Agreement under 1991 Stock Incentive Plan(11) 10.5 Two Forms of Restricted Stock Award Agreement under 1991 Stock Incentive Plan.(12) 10.5.1 Form of Restricted Stock Agreement under 1991 Stock Incentive Plan(13) 10.5.2 Form of Incorporated Terms to Restricted Stock Agreement under 1991 Stock Incentive Plan(14) 10.6 Executive Bonus Plan 10.7 Supplemental Executive Retirement Plan (15) 10.8 MGIC Investment Corporation Deferred Compensation Plan for Non-Employee Directors.(16) 10.9 MGIC Investment Corporation 1993 Restricted Stock Plan for Non-Employee Directors.(17) 10.10 Two Forms of Award Agreement under MGIC Investment Corporation 1993 Restricted Stock Plan for Non-Employee Directors.(18) 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.(19) 10.12 Form of Key Executive Employment and Severance Agreement.(20) 10.13 Non-Competition, Confidentiality and Severance Agreement, dated February 25, 2002, between the Company and John D. Fisk(21) 11 Statement re: computation of per share earnings 13 Information from the 2002 Annual Report of the Company to Shareholders which is incorporated by reference in this Annual Report on Form 10-K. 21 Direct and Indirect Subsidiaries and Joint Ventures 49 23 Consent of Independent Accountants 99.1 Certification of CEO under Section 906 of Sarbanes-Oxley Act of 2002 (as indicated in Item 15(a), this Exhibit is not being "filed") 99.2 Certification of CFO under Section 906 of Sarbanes-Oxley Act of 2002 (as indicated in Item 15(a), this Exhibit is not being "filed") Supplementary List of the above Exhibits which relate to management contracts or compensatory plans or arrangements: 10.1 Form of Stock Option Agreement under 2002 Stock Incentive Plan 10.1.1 Form of Incorporated Terms to Stock Option Agreement under 2002 Stock Incentive Plan 10.2 Form of Restricted Stock Agreement under 2002 Stock Incentive Plan 10.2.1 Form of Incorporated Terms to Restricted Stock Agreement under 2002 Stock Incentive Plan 10.3 MGIC Investment Corporation 1991 Stock Incentive Plan. 10.3.1 MGIC Investment Corporation 2002 Stock Incentive Plan 10.4 Two Forms of Stock Option Agreement under 1991 Stock Incentive Plan. 10.4.1 Form of Stock Option Agreement under 1991 Stock Incentive Plan 10.4.2 Form of Incorporated Terms to Stock Option Agreement under 1991 Stock Incentive Plan 10.5 Two Forms of Restricted Stock Award Agreement under 1991 Stock Incentive Plan. 10.5.1 Form of Restricted Stock Agreement under 1991 Stock Incentive Plan 10.5.2 Form of Incorporated Terms to Restricted Stock 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. 50 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 10.13 Non-Competition, Confidentiality and Severance Agreement, dated February 25, 2002, between the Company and John D. Fisk 51 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, 1999 or 2001 (the "1993 10-K," "1994 10-K," "1997 10-K," "1999 10-K" and "2001 10-K," respectively); to the Company's Quarterly Reports on Form 10-Q for the Quarters ended June 30, 1994, 1998, or 2000 or September 30, 2002 (the "June 30, 1994 10-Q," "June 30, 1998 10-Q," "June 30, 2000 10-Q" and "September 30, 2002 10-Q," respectively); to the Company's registration Statement Form 8-A filed July 27, 1999 (the "8-A"), as amended by Amendment No. 1 filed October 29, 2002 (the "8-A/A"); to the Company's Current Report on form 8-K dated October 17, 2000 (the "8-K"); or to the Company's Proxy Statement for its 2002 Annual Meeting of Shareholders (the "2002 Proxy Statement"). 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 4.2 to the 8-A/A. (5) Exhibit 4.3 to the 8-A/A. (6) Exhibit 4.1 to the 8-K. (7) Exhibit 10.7 to the 1999 10-K. (8) Exhibit A to the 2002 Proxy Statement. (9) Exhibit 10.9 to the 1999 10-K. (10) Exhibit 10.4.1 to the 2001 10-K. (11) Exhibit 10.4.2 to the 2001 10-K. (12) Exhibit 10.10 to the 1999 10-K. (13) Exhibit 10.5.1 to the 2001 10-K. (14) Exhibit 10.5.2 to the 2001 10-K. (15) Exhibit 10 to the June 30, 2000 10-Q. (16) Exhibit 10 to the September 30, 2002 10-Q. (17) Exhibit 10.24 to the 1993 10-K. (18) Exhibits 10.27 and 10.28 to the June 30, 1994 10-Q. (19) Exhibit 10.26 to the 1994 10-K. (20) Exhibit 10.17 to the 1999 10-K. (21) Exhibit 10.13 to the 2001 10-K. 52