EXHIBIT 13
MGIC INVESTMENT CORPORATION & SUBSIDIARIES - YEARS ENDED DECEMBER 31, 1998, 1997, 1996, 1995 AND 1994
FIVE-YEAR SUMMARY OF FINANCIAL INFORMATION
1998 1997 1996 1995 1994
-------------- ------------- ------------- -------------- --------------
(In thousands of dollars, except per share data)
Summary of Operations
Revenues:
Net premiums written...................... $ 749,161 $ 690,248 $ 588,927 $ 480,312 $ 410,296
============== ============= ============= ============== ==============
Net premiums earned....................... 763,284 708,744 617,043 506,500 403,990
Investment income, net.................... 143,019 123,602 105,355 87,543 75,233
Realized investment gains, net............ 18,288 3,261 1,220 1,496 336
Other revenue............................. 47,075 32,665 22,013 22,347 22,667
-------------- ------------- ------------- -------------- --------------
Total revenues.......................... 971,666 868,272 745,631 617,886 502,226
-------------- ------------- ------------- -------------- --------------
Losses and expenses:
Losses incurred, net...................... 211,354 242,362 234,350 189,982 153,081
Underwriting and other expenses........... 190,031 157,194 146,483 137,559 136,027
Interest expense.......................... 18,624 6,399 3,793 3,821 3,856
Ceding commission......................... (2,928) (3,056) (4,023) (4,885) (7,821)
-------------- ------------- ------------- -------------- --------------
Total losses and expenses............... 417,081 402,899 380,603 326,477 285,143
-------------- ------------- ------------- -------------- --------------
Income before tax............................ 554,585 465,373 365,028 291,409 217,083
Provision for income tax..................... 169,120 141,623 107,037 83,844 57,565
-------------- ------------- ------------- -------------- --------------
Net income................................... $ 385,465 $ 323,750 $ 257,991 $ 207,565 $ 159,518
============== ============= ============= ============== ==============
Weighted average common shares
outstanding (in thousands) (1)............ 113,582 117,924 119,046 118,567 117,955
============== ============= ============= ============== ==============
Diluted earnings per share (1)............... $ 3.39 $ 2.75 $ 2.17 $ 1.75 $ 1.35
============== ============= ============= ============== ==============
Dividends per share (1)...................... $ .10 $ .095 $ .08 $ .08 $ .08
============== ============= ============= ============== ==============
Balance sheet data
Total investments......................... $ 2,779,706 $ 2,416,740 $ 2,036,234 $ 1,687,221 $ 1,292,960
Total assets.............................. 3,050,541 2,617,687 2,222,315 1,874,719 1,476,266
Loss reserves............................. 681,274 598,683 514,042 371,032 274,469
Long-term notes payable................... 442,000 237,500 - 35,799 36,147
Shareholders' equity...................... 1,640,591 1,486,782 1,366,115 1,121,392 838,074
Book value per share...................... 15.05 13.07 11.59 9.56 7.18
(1) In May 1997, the Company declared a two-for-one stock split of the common stock in the form of a 100% stock dividend. The
additional shares were issued on June 2, 1997. Prior year shares, dividends per share and earnings per share have been
restated to reflect the split.
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A brief description of the Company's business is contained in Note 1 to the Consolidated Financial Statements of the Company, page
eighteen.
Two
MGIC INVESTMENT CORPORATION & SUBSIDIARIES - YEARS ENDED DECEMBER 31, 1998, 1997, 1996, 1995 AND 1994
FIVE-YEAR SUMMARY OF FINANCIAL INFORMATION
1998* 1997 1996 1995 1994
-------------- ------------- ------------- -------------- --------------
New primary insurance written ($ millions)... $ 43,697 $ 32,250 $ 32,756 $ 30,277 $ 34,419
New primary risk written ($ millions)........ 10,850 8,305 8,305 7,599 7,042
New pool risk written ($ millions)........... 618 394 2 1 27
Insurance in force (at year-end) ($ millions)
Direct primary insurance.................. 137,990 138,497 131,397 120,341 104,416
Direct primary risk....................... 32,891 32,175 29,308 25,502 20,756
Direct pool risk.......................... 1,133 590 232 254 295
Primary loans in default ratios
Policies in force......................... 1,320,994 1,342,976 1,299,038 1,219,304 1,080,882
Loans in default.......................... 29,253 28,493 25,034 19,980 15,439
Percentage of loans in default............ 2.21% 2.12% 1.93% 1.64% 1.43%
Insurance operating ratios (GAAP)
Loss ratio................................ 27.7% 34.2% 38.0% 37.5% 37.9%
Expense ratio............................. 19.6% 18.4% 21.6% 24.6% 28.1%
-------------- ------------- ------------- -------------- --------------
Combined ratio............................ 47.3% 52.6% 59.6% 62.1% 66.0%
============== ============= ============= ============== ==============
Risk-to-capital ratios (statutory)
Combined insurance subsidiaries........... 13.6:1 16.4:1 18.8:1 19.9:1 20.6:1
MGIC...................................... 12.9:1 15.7:1 18.1:1 19.1:1 19.6:1
* The above information for 1998 and the 1998 information under "Financial Highlights" excludes the activity of Wisconsin
Mortgage Assurance Corporation ("WMAC") acquired on December 31, 1998. For further description of WMAC, see Note 1 to the
Consolidated Financial Statements of the Company, page eighteen.
Three
Management's Discussion and Analysis
Results of Consolidated Operations
1998 Compared with 1997
Net income for 1998 was $385.5 million, compared with $323.8 million in 1997, an
increase of 19%. Diluted earnings per share for 1998 was $3.39, compared with
$2.75 in 1997, an increase of 23%. The percentage increase in diluted earnings
per share was favorably affected by the lower adjusted shares outstanding in
1998 as a result of common stock repurchased by the Company in the second half
of 1997 and during 1998.
The amount of new primary insurance written by Mortgage Guaranty Insurance
Corporation ("MGIC") during 1998 was $43.7 billion, compared with $32.2 billion
in 1997. Reflecting the favorable mortgage interest rate environment that
prevailed throughout 1998, refinancing activity accounted for 31% of new primary
insurance written in 1998, compared to 15% in 1997.
The $43.7 billion of new primary insurance written during 1998 was offset by the
cancellation of $44.2 billion of insurance in force, and resulted in a net
decrease of $0.5 billion in primary insurance in force, compared to new primary
insurance written of $32.2 billion, cancellation of $25.1 billion, and a net
increase of $7.1 billion in insurance in force during 1997. Direct primary
insurance in force was $138.0 billion at December 31, 1998, compared to $138.5
billion at December 31, 1997. In addition to providing direct primary insurance
coverage, the Company also insures pools of mortgage loans. New pool risk
written during 1998 and 1997, which was virtually all agency pool insurance, was
$618.1 million and $394.4 million, respectively.
The Company's direct pool risk in force at December 31, 1998 was $1.1 billion
compared to $590.3 million at December 31, 1997 and is expected to increase in
1999 as a result of outstanding commitments to write additional agency pool
insurance.
Cancellation activity has historically been affected by the level of mortgage
interest rates and increased during 1998 due to favorable mortgage interest
rates which resulted in a decrease in the MGIC persistency rate (percentage of
insurance remaining in force from one year prior) to 68.1% at December 31, 1998,
from 80.9% at December 31, 1997. Future cancellation activity could also be
affected as a result of legislation that will go into effect in July 1999
regarding cancellation of mortgage insurance.
Net premiums written increased 9% to $749.2 million in 1998, from $690.2 million
in 1997. Net premiums earned increased 8% to $763.3 million in 1998, from $708.7
million in 1997. The increases were primarily a result of a higher percentage of
renewal premiums on mortgage loans with deeper coverages.
Effective March 1, 1999, Fannie Mae changed its mortgage insurance requirements
for certain fixed-rate mortgages approved by Fannie Mae's automated underwriting
service. The changes permit lower coverage percentages on these loans than the
deeper coverage percentages that went into effect in 1995. In March 1999,
Freddie Mac announced that it was implementing similar changes. MGIC's premium
rates vary with the depth of coverage. While lower coverage percentages result
in lower premium revenue, lower coverage percentages should also result in lower
incurred losses at the same level of claim
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incidence. MGIC's premium revenues could also be affected to the extent Fannie
Mae and Freddie Mac are compensated for assuming default risk that would
otherwise be insured by the private mortgage insurance industry. These
Government Sponsored Enterprises (GSEs) introduced programs in 1998 and 1999
under which a delivery fee could be paid to them, with mortgage insurance
coverage reduced below the coverage that would be required in the absence of the
delivery fee.
Approximately 16% of MGIC's new insurance written in 1998 was subject to captive
mortgage reinsurance and similar arrangements. The percentage of new insurance
written subject to captive mortgage reinsurance arrangements is expected to
increase in 1999 as new transactions are consummated. In a February 1999
circular letter, the New York Department of Insurance said it was in the process
of developing guidelines that would articulate the parameters under which
captive mortgage reinsurance is permissible under New York insurance law.
Investment income for 1998 was $143.0 million, an increase of 16% over the
$123.6 million in 1997. This increase was primarily the result of an increase in
the amortized cost of average investment assets to $2.5 billion for 1998, from
$2.1 billion for 1997, an increase of 16%. The increase was partially offset by
a decrease in the portfolio's average pre-tax investment yield to 5.6% in 1998
from 5.8% in 1997. The portfolio's average after-tax investment yield was 4.9%
for 1998 compared to 5.0% for 1997. The Company realized gains of $18.3 million
during 1998 compared to $3.3 million in 1997. The increase is primarily the
result of the sale of equity securities in 1998.
Other revenue was $47.1 million in 1998, compared with $32.7 million in 1997.
The increase is primarily the result of an increase in contract underwriting
revenue of $11.8 million and an increase of $5.3 million in equity earnings from
Credit-Based Asset Servicing and Securitization LLC and Litton Loan Servicing LP
(collectively, "C-BASS"), a joint venture with Enhance Financial Services Group
Inc., offset by a $2.7 million reduction in fee-based services under government
contracts. In accordance with generally accepted accounting principles, C-BASS
is required to mark to market its mortgage-related assets which, including open
trades, were $550 million at December 31, 1998 and are expected to increase in
the future. Market valuation adjustments could impact the Company's share of
C-BASS's results of operations.
Net losses incurred decreased 13% to $211.4 million in 1998, from $242.4 million
in 1997. Such decrease was primarily attributable to an increase in the
redundancy in prior year loss reserves, generally favorable economic conditions
throughout the country and only a moderate increase in the primary notice
inventory from 28,493 at December 31, 1997 to 29,253 at December 31, 1998. The
redundancy results from actual claim rates and actual claim amounts being lower
than those estimated by the Company when originally establishing the reserve at
December 31, 1997. The pool notice inventory increased from 2,098 at December
31, 1997 to 6,524 at December 31, 1998, attributable to defaults on new agency
pool insurance written during 1997 and 1998. At December 31, 1998, 60% of the
primary insurance in force was written during the last three years, compared to
57% at December 31, 1997. The highest claim frequency years have typically been
the third through fifth years after the year of loan origination. However, the
pattern
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of claims frequency for refinance loans may be different from the historical
pattern of other loans.
Underwriting and other expenses increased 21% in 1998 to $190.0 million from
$157.2 million in 1997. This increase was primarily due to increases associated
with contract and field office underwriting expenses and an increase in premium
tax due to higher premiums written.
Interest expense in 1998 increased to $18.6 million from $6.4 million in 1997
due to higher outstanding notes payable, the proceeds of which were used to
repurchase common stock.
The Company entered into financial derivative transactions in 1998, consisting
of interest rate swaps and put-swaptions to reduce and manage interest rate risk
on its notes payable. In 1998, earnings on an interest rate swap and premium
income on three put-swaptions aggregating approximately $0.5 million for all
such transactions were netted against interest expense.
The consolidated insurance operations loss ratio was 27.7% for 1998 compared to
34.2% for 1997. The consolidated insurance operations expense and combined
ratios were 19.6% and 47.3%, respectively, for 1998 compared to 18.4% and 52.6%,
respectively, for 1997.
The effective tax rate was 30.5% in 1998, compared with 30.4% in 1997. During
both years, the effective tax rate was below the statutory rate of 35%,
reflecting the benefits of tax-preferenced investment income. The higher
effective tax rate in 1998 resulted from a lower percentage of total income
before tax being generated from tax-preferenced investments in 1998.
1997 Compared with 1996
Net income for 1997 was $323.8 million, compared with $258.0 million in 1996, an
increase of 25%. After giving effect to the Company's two-for-one stock split,
effective June 2, 1997, diluted earnings per share for 1997 was $2.75, compared
with $2.17 in 1996, an increase of 27%.
The amount of new primary insurance written by MGIC during 1997 was $32.2
billion compared with $32.8 billion in 1996. Refinancing activity accounted for
15% of new primary insurance written in 1997 compared to 17% in 1996.
The $32.2 billion of new primary insurance written during 1997 was offset by the
cancellation of $25.1 billion of insurance in force and resulted in a net
increase of $7.1 billion in primary insurance in force, compared to new primary
insurance written of $32.8 billion, cancellation of $21.7 billion, and a net
increase of $11.1 billion in insurance in force during 1996. Direct primary
insurance in force was $138.5 billion at December 31, 1997, compared to $131.4
billion at December 31, 1996. In addition to providing direct primary insurance
coverage, the Company also insures pools of mortgage loans. New pool risk
written during 1997, which was virtually all agency pool insurance, and 1996 was
$394.4 million and $1.5 million, respectively. The Company's direct pool risk in
force at December 31, 1997 was $590.3 million compared to $232.3 million at
December 31, 1996.
Cancellation activity increased during 1997 due to favorable mortgage interest
rates which resulted in a decrease in the MGIC persistency rate to 80.9% at
December 31, 1997, from 82.0% at December 31, 1996.
Six
Net premiums written increased 17% to $690.2 million in 1997, from $588.9
million in 1996. Net premiums earned increased 15% to $708.7 million in 1997,
from $617.0 million in 1996. The increases were primarily a result of a higher
percentage of renewal premiums on mortgage loans with deeper coverages and the
growth in insurance in force.
Investment income for 1997 was $123.6 million, an increase of 17% over the
$105.4 million in 1996. This increase was primarily the result of an increase in
the amortized cost of average investment assets to $2.1 billion for 1997, from
$1.8 billion for 1996, an increase of 19%. The increase was partially offset by
a decrease in the portfolio's average pre-tax investment yield to 5.8% in 1997
from 5.9% in 1996. The portfolio's average after-tax investment yield was 5.0%
for 1997 compared to 5.1% for 1996.
Other revenue was $32.7 million in 1997, compared with $22.0 million in 1996.
The increase is primarily the result of $7.1 million of equity earnings from
C-BASS and an increase in contract underwriting revenue.
Ceding commission for 1997 was $3.1 million, compared to $4.0 million in 1996, a
decrease of 23%. The decrease was primarily attributable to reductions in
premiums ceded under quota share reinsurance agreements.
Net losses incurred increased 3% to $242.4 million in 1997, from $234.4 million
in 1996. Such increase was primarily due to an increase in the primary insurance
notice inventory from 25,034 at December 31, 1996 to 28,493 at December 31,
1997, resulting from higher delinquency levels on insurance written in 1994
through 1996, the continued higher level of loss activity in certain high-cost
geographic regions, a higher level of defaults which resulted from a higher
percentage of the Company's insurance in force reaching its peak claim paying
years and an increase in the number of defaults with deeper coverages.
Offsetting this increase were favorable developments in prior-year loss reserves
resulting from actual claim rates and actual claim amounts being lower than
those estimated by the Company when originally establishing the reserve at
December 31, 1996. At December 31, 1997, 57% of the primary insurance in force
was written during the last three years, compared to 61% at December 31, 1996.
The highest claim frequency years have typically been the third through fifth
years after the year of loan origination. However, the pattern of claims
frequency for refinance loans may be different from the historical pattern of
other loans. A substantial portion of the insurance written in 1992 and 1993
represented insurance on the refinance of mortgage loans originated in earlier
years.
Underwriting and other expenses increased 7% in 1997 to $157.2 million from
$146.5 million in 1996. This increase in expenses was primarily due to an
increase in expenses associated with the fee-based services for underwriting and
an increase in premium tax due to higher premiums written.
The consolidated insurance operations loss ratio was 34.2% for 1997 compared to
38.0% for 1996. The consolidated insurance operations expense and combined
ratios were 18.4% and 52.6%, respectively, for 1997 compared to 21.6% and 59.6%,
respectively, for 1996.
The effective tax rate was 30.4% in 1997, compared with 29.3% in 1996. During
both years, the effective tax rate was below the statutory rate of 35%,
reflecting the benefits of tax-preferenced investment income. The higher
effective tax rate in 1997 resulted from a lower percentage of total
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income before tax being generated from tax-preferenced investments in 1997.
Financial Condition
Consolidated total investments were $2.8 billion at December 31, 1998, compared
with $2.4 billion at December 31, 1997, an increase of 15%. The increase
includes an increase of $16.3 million in unrealized gains on securities marked
to market. The Company generated consolidated cash flows from operating
activities of $420.9 million during 1998, compared to $371.9 million generated
during 1997. The increase in operating cash flows during 1998 is due primarily
to an increase in renewal premiums and investment income offset by an increase
in underwriting expenses. As of December 31, 1998, the Company had $172.2
million of short-term investments with maturities of 90 days or less, and 76% of
the portfolio was invested in tax-preferenced securities. In addition, at
December 31, 1998, based on book value, the Company's fixed income securities
were approximately 99% invested in "A" rated and above, readily marketable
securities, concentrated in maturities of less than 15 years. At December 31,
1998 the Company had $4.6 million of investments in equity securities compared
to $116.1 million at December 31, 1997.
At December 31, 1998, the Company had no derivative financial instruments in its
investment portfolio. The Company places its investments in instruments that
meet high credit quality standards, as specified in the Company's investment
policy guidelines; the policy also limits the amount of credit exposure to any
one issue, issuer and type of instrument. At December 31, 1998, the average
duration of the Company's investment portfolio was 5.8 years. The effect of a 1%
increase/ decrease in market interest rates would result in a 5.8%
decrease/increase in the value of the Company's fixed income portfolio.
The Company's investments in joint ventures increased $45.9 million from $29.4
million at December 31, 1997 to $75.3 million at December 31, 1998 as a result
of additional investments of $33.5 million and equity earnings of $12.4 million.
Consolidated loss reserves increased 14% to $681.3 million at December 31, 1998
from $598.7 million at December 31, 1997, reflecting an increase in the number
of both primary and pool loans in default. The Company's loss reserves at
December 31, 1998 reflect credit quality concerns on defaults from insurance
written in 1994 through 1996, an increase in the number of defaults with deeper
coverages and the growth in pool insurance. Consistent with industry practices,
the Company does not establish loss reserves for future claims on insured loans
which are not currently in default. Reinsurance recoverable on loss reserves
increased to $45.5 million at December 31, 1998 from $26.4 million at December
31, 1997 as a result of third-party reinsurance on the insurance in force
written by Wisconsin Mortgage Assurance Corporation, which was acquired by the
Company on December 31, 1998.
Consolidated unearned premiums decreased $14.6 million from $198.3 million at
December 31, 1997, to $183.7 million at December 31, 1998, reflecting the high
level of monthly premium policies written in 1998, for which there is no
unearned premium.
Consolidated shareholders' equity increased to $1.6 billion at December 31,
1998, from $1.5 billion at December 31, 1997, an increase of 10%. This increase
consisted of $385.5 million of
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net income during 1998, $15.8 million from the reissuance of treasury stock, and
an increase in net unrealized gains on investments, net of tax, of $10.6
million, offset by the repurchase of $246.8 million of outstanding common shares
and dividends declared of $11.2 million.
Liquidity and Capital Resources
The Company's consolidated sources of funds consist primarily of premiums
written and investment income. Funds are applied primarily to the payment of
claims and expenses. Approximately 74% of underwriting expenses are
personnel-related costs, most of which are considered by the Company to be fixed
costs over the short term. Approximately 6% of operating expenses relate to
occupancy costs, which are fixed costs. Substantially all of the remaining
operating expenses are considered by the Company to be variable in nature, with
data processing costs and taxes, licenses and fees representing approximately 3%
and 9%, respectively, of total operating expenses. The Company generated
positive cash flows of approximately $420.9 million, $371.9 million and $386.1
million in 1998, 1997 and 1996, respectively, as shown on the Consolidated
Statement of Cash Flows. Positive cash flows are invested pending future
payments of claims and other expenses. Cash-flow shortfalls, if any, could be
funded through sales of short-term investments and other investment portfolio
securities.
During 1997 and 1998, the Company repurchased approximately 4.7 million and 5.3
million shares, respectively, of its outstanding common stock at a cost of
approximately $248 and $247 million, respectively. Funds to repurchase the
shares were primarily provided by borrowings under credit facilities evidenced
by notes payable.
The 1997 and 1998 credit facilities provide up to $225 million and $250 million,
respectively, of availability at December 31, 1998. The 1997 credit facility
will decrease by $25 million each year through June 20, 2001. Any outstanding
borrowings under this facility mature on June 20, 2002. The 1998 credit facility
decreases by $25 million each year beginning June 9, 1999 through June 9, 2002.
Any outstanding borrowings under this facility mature on June 9, 2003. The
Company has the option, on notice to lenders, to prepay any borrowings under the
facilities subject to certain provisions.
In January 1997, the Company repaid mortgages payable of $35.4 million, which
were secured by the home office and substantially all of the furniture and
fixtures of the Company.
The Company has a 48% investment in C-BASS and is guaranteeing one-half of a $50
million credit facility as part of C-BASS's funding arrangements. The facility
matures in July 1999.
MGIC is the principal insurance subsidiary of the Company. MGIC's
risk-to-capital ratio was 12.9:1 at December 31, 1998 compared to 15.7:1 at
December 31, 1997. The decrease was due to MGIC's increased policyholders'
reserves, partially offset by the net additional risk in force of $349.2
million, net of reinsurance, during 1998.
The Company's combined insurance risk-to-capital ratio was 13.6:1 at December
31, 1998, compared to 16.4:1 at December 31, 1997. The decrease was due to the
same reasons as described above.
The risk-to-capital ratios set forth above have been computed on a statutory
basis. However, the methodology used by the rating agencies to assign
claims-paying ability ratings permits less leverage than under statutory
requirements. As a result,
Nine
the amount of capital required under statutory regulations may be lower than the
capital required for rating agency purposes. In addition to capital adequacy,
the rating agencies consider other factors in determining a mortgage insurer's
claims-paying rating, including its competitive position, business outlook,
management, corporate strategy, and historical and projected operating
performance.
For certain material risks of the Company's business, see "Risk Factors" below.
Risk Factors
The Company and its business may be materially affected by the factors discussed
below. These factors may also cause actual results to differ materially from the
results contemplated by forward looking statements that the Company may make.
Reductions in the volume of low down payment home mortgage originations may
adversely affect the amount of private mortgage insurance (PMI) written by the
PMI industry. The factors that affect the volume of low down payment mortgage
originations include:
o the level of home mortgage interest rates,
o the health of the domestic economy as well as conditions in regional and
local economies,
o housing affordability,
o population trends, including the rate of household formation,
o the rate of home price appreciation, which in times of heavy refinancing
affects whether refinance loans have loan-to-value ratios that require PMI,
and
o government housing policy encouraging loans to first-time homebuyers.
By selecting alternatives to PMI, lenders and investors may adversely affect the
amount of PMI written by the PMI industry. These alternatives include:
o government mortgage insurance programs, including those of the Federal
Housing Administration and the Veterans Administration,
o holding mortgages in portfolio and self-insuring,
o use of credit enhancements by investors, including Fannie Mae and Freddie
Mac, other than PMI or using other credit enhancements in conjunction with
reduced levels of PMI coverage, and
o mortgage originations structured to avoid PMI, such as a first mortgage
with an 80% loan-to-value ratio and a second mortgage with a 10%
loan-to-value ratio (referred to as an 80-10-10 loan) rather than a first
mortgage with a 90% loan-to-value ratio.
Fannie Mae and Freddie Mac have a material impact on the PMI industry. Because
Fannie Mae and Freddie Mac are the largest purchasers of low down payment
conventional mortgages, the business practices of these GSEs have a direct
effect on private mortgage insurers. These practices affect the entire
relationship between the GSEs and mortgage insurers and include:
Ten
o the level of PMI coverage, subject to the limitations of the GSE's charters
when PMI is used as the required credit enhancement on low down payment
mortgages,
o whether the mortgage lender or the GSE chooses the mortgage insurer
providing coverage,
o the underwriting standards that determine what loans are eligible for
purchase by the GSEs, which thereby affect the quality of the risk insured
by the mortgage insurer, as well as the availability of mortgage loans,
o the terms on which mortgage insurance coverage can be canceled before
reaching the cancellation thresholds established by law, and
o the circumstances in which mortgage servicers must perform activities
intended to avoid or mitigate loss on insured mortgages that are
delinquent.
The Company expects the level of competition within the PMI industry to remain
intense. Competition for PMI premiums occurs not only among private mortgage
insurers but increasingly with mortgage lenders through captive mortgage
reinsurance transactions in which a lender's affiliate reinsures a portion of
the insurance written by a private mortgage insurer on mortgages originated by
the lender. The level of competition within the PMI industry has also increased
as many large mortgage lenders have reduced the number of private mortgage
insurers with whom they do business at the same time as consolidation among
mortgage lenders has increased the share of the mortgage lending market held by
large lenders. Changes in interest rates, house prices and cancellation policies
may materially affect persistency. In each year, most of MGIC's premiums are
from insurance that has been written in prior years. As a result, the length of
time insurance remains in force is an important determinant of revenues. The
factors affecting persistency of the insurance in force include:
o the level of current mortgage interest rates compared to the mortgage
coupon rates on the insurance in force, which affects the vulnerability of
the insurance in force to refinancings, and
o mortgage insurance cancellation policies of mortgage investors along with
the rate of home price appreciation experienced by the homes underlying the
mortgages in the insurance in force.
The strong economic climate that has existed throughout the United States for
some time has favorably impacted losses and encouraged competition to assume
default risk. Losses result from events that adversely affect a borrower's
ability to continue to make mortgage payments, such as unemployment, and whether
the home of a borrower who defaults on his mortgage can be sold for an amount
that will cover unpaid principal and interest and the expenses of the sale.
Favorable economic conditions generally reduce the likelihood that borrowers
will lack sufficient income to pay their mortgages and also favorably affect the
value of homes, thereby reducing and in some cases even eliminating a loss from
a mortgage default. A significant deterioration in economic conditions would
adversely affect MGIC's losses. The low level of losses that has recently
prevailed in the private mortgage insurance industry has encouraged competition
to assume default risk through captive reinsurance arrangements, self-insurance,
80-10-10 loans and other means.
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Litigation against mortgage lenders and settlement service providers has been
increasing. In recent years, consumers have brought a growing number of lawsuits
against home mortgage lenders and settlement service providers seeking monetary
damages. The Real Estate Settlement Procedures Act gives home mortgage borrowers
the right to bring lawsuits seeking damages of three times the amount of the
charge paid for a settlement service involved in a violation of this law. Under
rules adopted by the United States Department of Housing and Urban Development,
"settlement services" are services provided in connection with settlement of a
mortgage loan, including services involving mortgage insurance.
The pace of change in the home mortgage lending and mortgage insurance
industries will likely accelerate. The Company expects the processes involved in
home mortgage lending will continue to evolve through greater use of technology.
This evolution could effect fundamental changes in the way home mortgages are
distributed. Lenders who are regulated depositary institutions could gain
expanded insurance powers if financial modernization proposals become law. The
capital markets are beginning to emerge as providers of insurance in competition
with traditional insurance companies. These trends and others increase the level
of uncertainty attendant to the PMI business, demand rapid response to change
and place a premium on innovation.
Year 2000 Compliance
Almost all of the Company's information technology systems ("IT Systems"),
including all of its "business critical" IT Systems, either have been originally
developed to be Year 2000 compliant or have been reprogrammed. The Company plans
to reprogram the remaining IT Systems (the "Remaining Systems") and to complete
internal testing of all IT Systems for Year 2000 compliance by the end of the
second quarter of 1999. In general, the Remaining Systems have either been
developed and maintained by the Company's Information Technology Department or
use off-the-shelf software from national software vendors such as Microsoft and
IBM who have publicly announced that their software is Year 2000 compliant. All
of the IT Systems developed and maintained by the Information Technology
Department have already been internally tested for Year 2000 compliance and all
IT Systems using off-the-shelf software have been assessed. If the Company is
unable to complete any required reprogramming of the Remaining Systems on a
timely basis, the efficiency of certain of the Company's business processes will
likely decline but this consequence is not expected to be material to the
Company.
Some of the Company's "business critical" IT Systems interface with computer
systems of third parties. The Company, Fannie Mae, Freddie Mac and many of these
third parties are participating in the Mortgage Bankers Association Year 2000
Inter-Industry Work Group (the "MBA Work Group"). The MBA Work Group has
scheduled compliance testing among participants for the first and second
quarters of 1999 and is continuing efforts to attract additional participants
for compliance testing. The Company and one national service bureau have already
conducted certain successful Year 2000 compliance testing and it is possible the
Company will conduct additional Year 2000 compliance testing with individual
companies in advance of the MBA Work Group testing. However, the Company
understands it is the position of a number of larger companies in the MBA Work
Group not to engage in any testing with third parties in advance of the testing
sponsored by the MBA Work Group. Not all companies with which the Company's IT
Systems interface will be participating in the MBA Work Group testing.
Twelve
The Company is contacting the larger companies not participating in the MBA Work
Group testing to determine interest in one-on-one testing.
All costs incurred through December 1998 for IT Systems for Year 2000 compliance
have been expensed and were immaterial. The costs of the remaining reprogramming
and testing are expected to be immaterial.
Telecommunications services and electricity are essential to the Company's
ability to conduct business. The Company's long-distance voice and data
telecommunications suppliers and the local telephone company serving the
Company's owned headquarters and warehouse facilities have written to the
Company to the effect that their respective systems will be Year 2000 compliant.
The electric company serving these facilities has given the Company oral
assurance that it will also be Year 2000 compliant. In addition, the Company is
planning to acquire back-up power for its headquarters. The Company has received
written assurance regarding Year 2000 compliance from landlords of the Company's
underwriting service centers and local telephone companies.
The Company has long practiced contingency planning to address business
disruption risks and has procedures for planning and executing contingency
measures to provide for business continuity in the event of any circumstance
that results in disruption to the Company's headquarters, warehouse facilities
and leased workplace environments, including lack of utility services,
transportation disruptions, and service provider failures. The Company is
developing additional plans for the "special case" of business disruption due to
Year 2000 compliance issues. These plans, which are scheduled to be ready by the
end of the first quarter of 1999, will address continuity measures in five
areas: physical building environment, including conducting operations at
off-site facilities; business operations units, as discussed below; external
factors over which the Company does not have control but can implement measures
to minimize adverse impact on the Company's business; application system
restoration priorities for the Company's computer systems; and contingencies
specifically targeted towards monitoring Company facilities and systems at
year-end 1999.
The business unit recovery plans address resumption of business in the worst
case scenario of a total loss to a Company facility, including the inability to
utilize computerized systems.
In view of the timing and scope of the MBA Work Group and other testing, the
Company's contingency planning does not currently include developing special
procedures with individual third parties if they are not themselves Year 2000
compliant. If the Company is unable to do business with such third parties
electronically, it would seek to do business with them on a paper basis. Without
knowing the identity of non-compliant third parties and the amount of
transactions occurring between the Company and them, the Company cannot evaluate
the effects on its business if it were necessary to substitute paper business
processes for electronic business processes with such third parties. Among other
effects, Year 2000 non-compliance by such third parties could delay receipt of
renewal premiums by the Company or the reporting to the Company of mortgage loan
delinquencies and could also affect the amount of the Company's new insurance
written.
Thirteen
MGIC INVESTMENT CORPORATION & SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Consolidated Statement of Operations
1998 1997 1996
-------------- --------------- ---------------
REVENUES: (In thousands of dollars, except per share data)
Premiums written:
Direct.................................................... $ 755,620 $ 692,134 $ 587,626
Assumed................................................... 8,352 11,597 16,912
Ceded (note 7)............................................ (14,811) (13,483) (15,611)
-------------- --------------- ---------------
Net premiums written........................................ 749,161 690,248 588,927
Decrease in unearned premiums............................... 14,123 18,496 28,116
-------------- --------------- ---------------
Net premiums earned (note 7)................................ 763,284 708,744 617,043
Investment income, net of expenses (note 4)................. 143,019 123,602 105,355
Realized investment gains, net (note 4)..................... 18,288 3,261 1,220
Other revenue............................................... 47,075 32,665 22,013
-------------- --------------- ---------------
Total revenues............................................ 971,666 868,272 745,631
-------------- --------------- ---------------
LOSSES AND EXPENSES:
Losses incurred, net (notes 6 and 7)........................ 211,354 242,362 234,350
Underwriting and other expenses............................. 190,031 157,194 146,483
Interest expense............................................ 18,624 6,399 3,793
Ceding commission (note 7).................................. (2,928) (3,056) (4,023)
-------------- --------------- ---------------
Total losses and expenses................................. 417,081 402,899 380,603
-------------- --------------- ---------------
Income before tax.............................................. 554,585 465,373 365,028
Provision for income tax (note 10)............................. 169,120 141,623 107,037
-------------- --------------- ---------------
Net income..................................................... $ 385,465 $ 323,750 $ 257,991
============== =============== ===============
Earnings per share (note 11):
Basic....................................................... $ 3.44 $ 2.78 $ 2.19
============== =============== ===============
Diluted..................................................... $ 3.39 $ 2.75 $ 2.17
============== =============== ===============
See accompanying notes to consolidated financial statements.
Fourteen
MGIC INVESTMENT CORPORATION & SUBSIDIARIES
DECEMBER 31, 1998 AND 1997
Consolidated Balance Sheet
1998 1997
---------------- -----------------
(In thousands of dollars)
ASSETS
Investment portfolio (note 4):
Securities, available-for-sale, at market value:
Fixed maturities........................................................ $ 2,602,870 $ 2,185,954
Equity securities....................................................... 4,627 116,053
Short-term investments.................................................. 172,209 114,733
---------------- -----------------
Total investment portfolio............................................ 2,779,706 2,416,740
Cash ........................................................................ 4,650 4,893
Accrued investment income.................................................... 41,477 35,485
Reinsurance recoverable on loss reserves (note 7)............................ 45,527 26,415
Reinsurance recoverable on unearned premiums (note 7)........................ 8,756 9,239
Home office and equipment, net............................................... 32,400 33,784
Deferred insurance policy acquisition costs.................................. 24,065 27,156
Investments in joint ventures (note 8)....................................... 75,246 29,400
Other assets................................................................. 38,714 34,575
---------------- -----------------
Total assets.......................................................... $ 3,050,541 $ 2,617,687
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Loss reserves (notes 6 and 7)............................................. $ 681,274 $ 598,683
Unearned premiums (note 7)................................................ 183,739 198,305
Notes payable (note 5).................................................... 442,000 237,500
Income taxes payable (note 10)............................................ 31,032 27,717
Other liabilities......................................................... 71,905 68,700
---------------- -----------------
Total liabilities..................................................... 1,409,950 1,130,905
---------------- -----------------
Contingencies (note 13)
Shareholders' equity (note 11):
Common stock, $1 par value, shares authorized 300,000,000;
shares issued 121,110,800; outstanding 1998 - 109,003,032;
1997 - 113,791,593.......................................................
121,111 121,111
Paid-in surplus........................................................... 217,022 218,499
Treasury stock (shares at cost 1998 - 12,107,768;
1997 - 7,319,207)....................................................... (482,465) (252,942)
Accumulated other comprehensive income - unrealized
appreciation in investments, net of tax (note 2)........................ 94,572 83,985
Retained earnings (note 11)............................................... 1,690,351 1,316,129
---------------- -----------------
Total shareholders' equity.............................................. 1,640,591 1,486,782
---------------- -----------------
Total liabilities and shareholders' equity.............................. $ 3,050,541 $ 2,617,687
================ =================
See accompanying notes to consolidated financial statements.
Fifteen
MGIC INVESTMENT CORPORATION & SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Consolidated Statement of Shareholders' Equity
Accumulated
other
Common Paid-in Treasury comprehensive Retained Comprehensive
stock surplus stock income(note 2) earnings income
------------ ------------ ------------ -------------- ------------ -------------
(In thousands of dollars)
Balance, December 31, 1995......... $ 121,111 $ 198,874 $ (8,172) $ 54,737 $ 754,842
Net income......................... - - - - 257,991 $ 257,991
Unrealized investment losses, net.. - - - (14,052) - (14,052)
-------------
Comprehensive income............... - - - - - $ 243,939
=============
Dividends declared................. - - - - (9,425)
Reissuance of treasury stock....... - 9,110 1,099 - -
------------ ------------ ------------ -------------- ------------
Balance, December 31, 1996......... 121,111 207,984 (7,073) 40,685 1,003,408
Net income......................... - - - - 323,750 $ 323,750
Unrealized investment gains, net... - - - 43,300 - 43,300
-------------
Comprehensive income............... - - - - - $ 367,050
=============
Dividends declared................. - - - - (11,029)
Repurchase of outstanding
common shares.................... - - (248,426) - -
Reissuance of treasury stock....... - 10,515 2,557 - -
------------ ------------ ------------ -------------- ------------
Balance, December 31, 1997......... 121,111 218,499 (252,942) 83,985 1,316,129
Net income......................... - - - - 385,465 $ 385,465
Unrealized investment gains, net... - - - 10,587 - 10,587
-------------
Comprehensive income............... - - - - - $ 396,052
=============
Dividends declared................. - - - - (11,243)
Repurchase of outstanding
common shares.................... - - (246,840) - -
Reissuance of treasury stock....... - (1,477) 17,317 - -
------------ ------------ ------------ -------------- ------------
Balance, December 31, 1998......... $ 121,111 $ 217,022 $ (482,465) $ 94,572 $ 1,690,351
============ ============ ============ ============== ============
See accompanying notes to consolidated financial statements.
Sixteen
MGIC INVESTMENT CORPORATION & SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Consolidated Statement of Cash Flows
1998 1997 1996
---------------- ---------------- ----------------
(In thousands of dollars)
Cash flows from operating activities:
Net income....................................................... $ 385,465 $ 323,750 $ 257,991
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred insurance policy
acquisition costs.......................................... 20,717 21,373 26,772
Increase in deferred insurance policy acquisition costs...... (17,626) (16,573) (20,772)
Depreciation and other amortization.......................... 7,742 8,187 8,969
Increase in accrued investment income........................ (5,992) (2,122) (4,150)
(Increase) decrease in reinsurance recoverable on
loss reserves.............................................. (19,112) 3,412 4,029
Decrease in reinsurance recoverable on unearned premiums..... 483 2,506 3,740
Increase in loss reserves.................................... 82,591 84,641 143,010
Decrease in unearned premiums................................ (14,566) (21,002) (31,856)
Equity (earnings) loss in joint ventures..................... (12,420) (7,100) 800
Other........................................................ (6,336) (25,186) (2,478)
---------------- ---------------- ----------------
Net cash provided by operating activities........................... 420,946 371,886 386,055
---------------- ---------------- ----------------
Cash flows from investing activities:
Purchase of equity securities.................................... (3,886) (112,780) -
Purchase of fixed maturities..................................... (916,129) (685,217) (1,095,559)
Investments in joint ventures.................................... (33,426) (7,350) (15,750)
Proceeds from sale of equity securities.......................... 116,164 9,971 -
Proceeds from sale or maturity of fixed maturities............... 529,358 447,284 782,349
---------------- ---------------- ----------------
Net cash used in investing activities............................... (307,919) (348,092) (328,960)
---------------- ---------------- ----------------
Cash flows from financing activities:
Dividends paid to shareholders................................... (11,243) (11,029) (9,425)
Net increase in notes payable.................................... 204,500 202,076 (375)
Interest payments on notes payable............................... (17,665) (3,836) (3,793)
Reissuance of treasury stock..................................... 15,454 13,072 10,209
Repurchase of common stock....................................... (246,840) (248,426) -
---------------- ---------------- ----------------
Net cash used in financing activities............................... (55,794) (48,143) (3,384)
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents................ 57,233 (24,349) 53,711
Cash and cash equivalents at beginning of year...................... 119,626 143,975 90,264
---------------- ---------------- ----------------
Cash and cash equivalents at end of year............................ $ 176,859 $ 119,626 $ 143,975
================ ================ ================
See accompanying notes to consolidated financial statements.
Seventeen
MGIC INVESTMENT CORPORATION & SUBSIDIARIES -- DECEMBER 31, 1998, 1997 AND 1996
Notes to Consolidated Financial Statements
1. Nature of business
MGIC Investment Corporation ("Company") is a holding company which, through
Mortgage Guaranty Insurance Corporation ("MGIC") and several other subsidiaries,
is principally engaged in the mortgage insurance business. The Company provides
mortgage insurance to lenders throughout the United States to protect against
loss from defaults on low down payment residential mortgage loans. Through
certain other non-insurance subsidiaries, the Company also provides various
services for the mortgage finance industry, such as contract underwriting,
premium reconciliation and portfolio analysis.
At December 31, 1998, the Company's direct primary insurance in force
(representing the current principal balance of all mortgage loans that are
currently insured) and direct primary risk in force, excluding Wisconsin
Mortgage Assurance Corporation ("WMAC"), was approximately $138.0 billion and
$32.9 billion, respectively. In addition to providing direct primary insurance
coverage, the Company also insures pools of mortgage loans. The Company's direct
pool risk in force at December 31, 1998 was approximately $1.1 billion.
On December 31, 1998, the Company purchased WMAC from a third party for $2
million. MGIC contributed an additional $13 million of capital to WMAC to comply
with minimum regulatory capital requirements. WMAC wrote mortgage insurance on
first mortgages collateralized by one-to-four-family residences until February
28, 1985 at which time it ceased writing new business. The acquisition had no
impact on the Company's earnings during 1998. WMAC's direct primary insurance in
force, direct primary risk in force and direct pool risk in force was
approximately $3.5 billion, $.9 billion and $.4 billion, respectively, at
December 31, 1998. (See note 7.)
The Company's largest shareholder, The Northwestern Mutual Life Insurance
Company ("NML"), held approximately 11% of the common stock of the Company at
December 31, 1998.
2. Basis of presentation and summary of significant accounting policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of consolidation
The consolidated financial statements include the accounts of MGIC
Investment Corporation and its wholly-owned subsidiaries. All intercompany
transactions have been eliminated. The Company's 48% investments in Credit-Based
Asset Servicing and Securitization LLC and Litton Loan Servicing LP
(collectively, "C-BASS"), joint ventures with Enhance Financial Services Group
Inc., are accounted for on the equity method and recorded on the balance sheet
as investment in joint ventures. The Company's equity earnings from C-BASS are
included in other revenue. (See note 8.)
Investments
The Company categorizes its investment portfolio according to its ability
and intent to hold the investments to maturity. Investments which the Company
does not have the ability and intent to hold to maturity are considered to be
available-for-sale and must be recorded at market and the unrealized gains or
losses recognized as an increase or decrease to shareholders' equity. During
1996, 1997 and 1998, the Company's entire investment portfolio was classified as
available-for-sale. Realized investment gains and losses are reported in income
based upon specific identification of securities sold. (See note 4.)
Home office and equipment
Home office and equipment is carried at cost net of depreciation. For
financial statement reporting purposes, depreciation is determined on a
straight-line basis for the home office, equipment and data processing hardware
over estimated lives of 45, 5 and 3 years, respectively. For income tax
purposes, the Company uses accelerated depreciation methods.
Home office and equipment is shown net of accumulated depreciation of $45.2
million and $40.9 million at December 31, 1998 and 1997, respectively.
Eighteen
Deferred insurance policy acquisition costs
The cost of acquiring insurance policies, including compensation, premium
taxes and other underwriting expenses, is deferred, to the extent recoverable,
and amortized as the related premiums are earned. No expenses are deferred on
monthly premium policies.
Loss reserves
Reserves are established for reported insurance losses and loss adjustment
expenses based on when notices of default on insured mortgage loans are
received. Reserves are also established for estimated losses incurred on notices
of default not yet reported by the lender. Consistent with industry practices,
the Company does not establish loss reserves for future claims on insured loans
which are not currently in default. Reserves are established by management using
estimated claims rates and claims amounts in estimating the ultimate loss.
Amounts for salvage recoverable are considered in the determination of the
reserve estimates. Adjustments to reserve estimates are reflected in the
financial statements in the years in which the adjustments are made. The
liability for reinsurance assumed is based on information provided by the ceding
companies. (See note 6.)
Income recognition
The insurance subsidiaries write policies which are guaranteed renewable
contracts at the insured's option on a single, annual or monthly premium basis.
The insurance subsidiaries have no ability to reunderwrite or reprice these
contracts. Premiums written on a single premium basis and an annual premium
basis are initially deferred as unearned premium reserve and earned over the
policy term. Premiums written on policies covering more than one year are
amortized over the policy life in accordance with the expiration of risk.
Premiums written on annual policies are earned on a monthly pro rata basis.
Premiums written on monthly policies are earned as the premiums are due.
Fee income of the non-insurance subsidiaries is earned as the services are
provided.
Income taxes
The Company and its subsidiaries file a consolidated federal income tax
return. A formal tax sharing agreement exists between the Company and its
subsidiaries. Each subsidiary determines income taxes based upon the utilization
of all tax deferral elections available. This assumes Tax and Loss Bonds are
purchased and held to the extent they would have been purchased and held on a
separate company basis since the tax sharing agreement provides that the
redemption or non-purchase of such bonds shall not increase such member's
separate taxable income and tax liability on a separate company basis.
Federal tax law permits mortgage guaranty insurance companies to deduct from
taxable income, subject to certain limitations, the amounts added to contingency
loss reserves. Generally, the amounts so deducted must be included in taxable
income in the tenth subsequent year. The deduction is allowed only to the extent
that U.S. government non-interest bearing Tax and Loss Bonds are purchased and
held in an amount equal to the tax benefit attributable to such deduction. The
Company accounts for these purchases as a payment of current federal income
taxes.
Deferred income taxes are provided under the liability method which
recognizes the future tax effects of temporary differences between amounts
reported in the financial statements and the tax bases of these items. The
expected tax effects are computed at the current federal tax rate. (See note
10.)
Benefit plans
The Company has a non-contributory defined benefit pension plan covering
substantially all employees. Retirement benefits are based on compensation and
years of service. The Company's policy is to fund pension cost as required under
the Employee Retirement Income Security Act of 1974. (See note 9.)
The Company accrues the estimated costs of retiree medical and life benefits
over the period during which employees render the service that qualifies them
for benefits. The Company offers both medical and dental benefits for retired
employees and their spouses. Benefits are generally funded on a pay-as-you-go
basis. (See note 9.)
Reinsurance
Loss reserves and unearned premiums are reported before taking credit for
amounts ceded under reinsurance treaties. Ceded loss reserves are reflected as
"Reinsurance recoverable on loss reserves". Ceded unearned premiums are
reflected as "Reinsurance recoverable on unearned premiums". The Company remains
contingently liable for all reinsurance ceded. (See note 7.)
Nineteen
Earnings per share
The Company's basic and diluted earnings per share ("EPS") have been
calculated in accordance with Statement of Financial Accounting Standards No.
128, Earnings Per Share ("SFAS 128"). The Company's net income is the same for
both basic and diluted EPS. Basic EPS is based on the weighted-average number of
common shares outstanding. Diluted EPS is based on the weighted-average number
of common shares outstanding and common stock equivalents which would arise from
the exercise of stock options. The following is a reconciliation of the
weighted-average number of shares used for basic EPS and diluted EPS. (See note
11.)
Years Ended December 31,
---------------------------------
1998 1997 1996
---- ---- ----
(shares in thousands)
Weighted-average shares -
Basic EPS 112,135 116,332 117,787
Common stock equivalents 1,447 1,592 1,259
---------- --------- ----------
Weighted-average shares -
Diluted EPS 113,582 117,924 119,046
========== ========= ==========
Earnings per share for 1996 has been restated to reflect the provisions of
SFAS 128. Previously reported EPS for 1996, after adjustment for the stock split
(see note 11), equaled diluted EPS under SFAS 128.
Statement of cash flows
For purposes of the consolidated statement of cash flows, the Company
considers short-term investments to be cash equivalents, as short-term
investments have original maturities of three months or less.
Recent accounting pronouncements
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). The
statement establishes standards for the reporting and display of comprehensive
income and its components in annual financial statements. The Company's other
comprehensive income consists of the change in unrealized appreciation on
investments, net of tax, and as permitted under the provisions of SFAS 130, is
presented in the Consolidated Statement of Shareholders' Equity. The adoption of
SFAS 130 had no impact on total shareholders' equity. Realized investment gains
of $18.3 million in 1998 include sales of securities which had unrealized
appreciation of $19.0 million at December 31, 1997.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits ("SFAS 132"). The statement provides new employer
disclosure requirements regarding pension plans and other postretirement plans
and does not address the measurement or recognition of such benefits. (See note
9.)
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"), which will be effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. The statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. Management does not anticipate adoption of SFAS 133 will
have a significant effect on the Company's results of operations or its
financial position due to its limited use of derivative instruments. (See notes
4 and 5.)
Reclassifications
Certain reclassifications have been made in the accompanying financial
statements to 1997 and 1996 amounts to allow for consistent financial reporting.
3. Related party transactions
The Company contracts with Northwestern Mutual Investment Services, Inc., a
subsidiary of NML, for investment portfolio management and accounting services.
The Company incurred expense of $1.0 million, $1.1 million and $.9 million for
these services in 1998, 1997 and 1996, respectively.
The Company provided certain services to C-BASS in exchange for an
immaterial amount of fees during 1998, 1997 and 1996.
Twenty
4. Investments
The following table summarizes the Company's investments at December 31,
1998 and 1997:
Financial
Amortized Market Statement
Cost Value Value
--------------- --------------- ---------------
(In thousands of dollars)
At December 31, 1998:
Securities, available-for-sale:
Fixed maturities............................................. $ 2,460,418 $ 2,602,870 $ 2,602,870
Equity securities............................................ 1,583 4,627 4,627
Short-term investments....................................... 172,209 172,209 172,209
--------------- --------------- --------------
Total investment portfolio..................................... $ 2,634,210 $ 2,779,706 $ 2,779,706
=============== =============== ==============
At December 31, 1997:
Securities, available-for-sale:
Fixed maturities............................................. $ 2,069,133 $ 2,185,954 $ 2,185,954
Equity securities............................................ 103,670 116,053 116,053
Short-term investments....................................... 114,733 114,733 114,733
--------------- --------------- --------------
Total investment portfolio..................................... $ 2,287,536 $ 2,416,740 $ 2,416,740
=============== =============== ===============
The amortized cost and market value of investments at December 31, 1998 are
as follows:
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1998: Cost Gains Losses Value
- ------------------ --------------- --------------- --------------- ---------------
(In thousands of dollars)
U.S. Treasury securities and obligations of U.S. government
corporations and agencies.................................. $ 65,811 $ 5,746 $ (141) $ 71,416
Obligations of states and political subdivisions.............. 2,030,847 120,033 (1,290) 2,149,590
Corporate securities.......................................... 518,965 16,819 (100) 535,684
Mortgage-backed securities.................................... 1,120 16 (3) 1,133
Debt securities issued by foreign sovereign governments....... 15,884 1,372 - 17,256
--------------- --------------- --------------- ---------------
Total debt securities...................................... 2,632,627 143,986 (1,534) 2,775,079
Equity securities............................................. 1,583 3,044 - 4,627
--------------- --------------- --------------- ---------------
Total investment portfolio................................. $ 2,634,210 $ 147,030 $ (1,534) $ 2,779,706
=============== =============== =============== ===============
The amortized cost and market value of investments at December 31, 1997 are as
follows:
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1997: Cost Gains Losses Value
--------------- --------------- --------------- ---------------
(In thousands of dollars)
U.S. Treasury securities and obligations of U.S. government
corporations and agencies.................................. $ 60,972 $ 3,573 $ (2) $ 64,543
Obligations of states and political subdivisions.............. 1,620,660 102,915 (555) 1,723,020
Corporate securities.......................................... 487,711 9,984 (42) 497,653
Mortgage-backed securities.................................... 437 32 - 469
Debt securities issued by foreign sovereign governments....... 14,086 916 - 15,002
--------------- --------------- --------------- ---------------
Total debt securities...................................... 2,183,866 117,420 (599) 2,300,687
Equity securities............................................. 103,670 14,582 (2,199) 116,053
--------------- --------------- --------------- ---------------
Total investment portfolio................................. $ 2,287,536 $ 132,002 $ (2,798) $ 2,416,740
=============== =============== =============== ===============
Twenty-one
The amortized cost and market values of debt securities at December 31,
1998, by contractual maturity, are shown below. Debt securities consist of fixed
maturities and short-term investments. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Market
Cost Value
------------- ------------
(In thousands of dollars)
Due in one year or less........ $ 175,430 $ 175,572
Due after one year through
five years................... 298,734 311,433
Due after five years through
ten years.................... 1,000,720 1,066,596
Due after ten years............ 1,156,623 1,220,345
------------- ------------
2,631,507 2,773,946
Mortgage-backed securities..... 1,120 1,133
------------- ------------
Total at December 31, 1998..... $ 2,632,627 $ 2,775,079
============= ============
Net investment income is comprised of the following:
1998 1997 1996
----------- ----------- ----------
(In thousands of dollars)
Fixed maturities....... $ 133,307 $ 117,448 $ 99,832
Equity securities...... 1,133 485 240
Short-term investments. 9,603 6,813 6,223
Other ................. 79 65 82
----------- ----------- ----------
Investment income...... 144,122 124,811 106,377
Investment expenses.... (1,103) (1,209) (1,022)
----------- ----------- ----------
Net investment income.. $ 143,019 $ 123,602 $ 105,355
=========== =========== ==========
The net realized investment gains (losses) and change in net unrealized
appreciation (depreciation) of investments are as follows:
1998 1997 1996
---------- ---------- ---------
(In thousands of dollars
Net realized investment gains
(losses) on sale of
investments:
Fixed maturities........ $ 8,349 $ 3,734 $ 1,252
Equity securities....... 9,941 (472) (30)
Short-term investments.. (2) (1) (2)
---------- ---------- ---------
18,288 3,261 1,220
---------- ---------- ---------
Change in net unrealized
appreciation (depreciation):
Fixed maturities........ 25,631 56,934 (22,064)
Equity securities....... (9,339) 9,677 233
Short-term investments.. - - -
---------- ---------- ---------
16,292 66,611 (21,831)
---------- ---------- ---------
Net realized investment
gains (losses) and change
in net unrealized
appreciation (depreciation) $ 34,580 $ 69,872 $ (20,611)
========== ========== =========
The gross realized gains and the gross realized losses on sales of
available-for-sale securities were $22.7 million and $4.4 million, respectively
in 1998 and $5.7 million and $2.4 million, respectively in 1997.
The tax expense (benefit) of the changes in net unrealized appreciation
(depreciation) was $5.7 million, $23.3 million and ($7.6) million for 1998, 1997
and 1996, respectively.
5. Notes payable
During 1997 and 1998, the Company repurchased approximately 4.7 million and
5.3 million shares, respectively, of its outstanding common stock at a cost of
approximately $248 and $247 million, respectively. Funds to repurchase the
shares were primarily provided by borrowings under credit facilities evidenced
by notes payable.
The 1997 and 1998 credit facilities provide up to $225 million and $250
million, respectively, of availability at December 31, 1998. The 1997 credit
facility will decrease by $25 million each year through June 20, 2001. Any
outstanding borrowings under this facility mature on June 20, 2002. The 1998
credit facility decreases by $25 million each year beginning June 9, 1999
through June 9, 2002. Any outstanding borrowings under this facility mature on
June 9, 2003. The Company has the option on notice to lenders, to prepay any
borrowings under the agreements subject to certain provisions.
At December 31, 1998, the Company's outstanding balance of the notes payable
on the 1997 and 1998 credit facilities were $210 million and $232 million,
respectively, which approximated market value. The interest rate on the notes
payable varies based on LIBOR and at December 31, 1998 and December 31, 1997 the
rate was 5.80% and 6.01%, respectively. The weighted average interest rate on
the notes payable for borrowings under the 1997 and 1998 credit agreements was
5.86% per annum for the year ended December 31, 1998.
Under the terms of the credit facilities, the Company must maintain
shareholders' equity of at least $1 billion and MGIC must maintain a claims
paying ability rating of AA- or better with Standard & Poor's Corporation
("S&P"). At December 31, 1998, the Company had shareholders' equity of $1,641
million and MGIC had a claims paying ability rating of AA+ from S&P.
twenty-two
In January 1997, the Company repaid mortgages payable of $35.4 million,
which were secured by the home office and substantially all of the furniture and
fixtures of the Company.
The Company entered into financial derivative transactions, consisting of
interest rate swaps and put-swaptions to reduce and manage interest rate risk.
With respect to all such transactions, a notional amount of $100 million
represents the stated principal balance used as a basis for calculating
payments.
During the fourth quarter of 1998, the Company entered into a $100 million
interest rate swap to convert a portion of the variable rate debt under the
credit facilities to fixed rate. On the swap, the Company receives a floating
rate based on LIBOR and pays a fixed rate of 4.67%. The swap expires October 6,
2001. In addition, during the fourth quarter of 1998, the Company sold three
successive $100 million put-swaptions for investment purposes. All three
put-swaptions expired unexercised, the last expiring on January 6, 1999.
Earnings in 1998 on the swap of approximately $.2 million and premium income on
the put-swaptions of approximately $.3 million are netted against interest
expense in the Consolidated Statement of Operations.
6. Loss reserves
Loss reserve activity was as follows:
1998 1997 1996
------------ ------------ ------------
(In thousands of dollars)
Reserve at beginning
of year............. $ 598,683 $ 514,042 $ 371,032
Less reinsurance
recoverable......... 26,415 29,827 33,856
------------ ------------ ------------
Net reserve at
beginning of year... 572,268 484,215 337,176
Reserve transfer (1).. 538 537 35,657
------------ ------------ ------------
Adjusted reserve at
beginning of year... 572,806 484,752 372,833
Losses incurred:
Losses and LAE
incurred in
respect of default
notices received
in:
Current year.... 377,786 360,623 312,630
Prior years (2). (166,432) (118,261) (78,280)
------------ ------------ ------------
Subtotal...... 211,354 242,362 234,350
------------ ------------ ------------
Losses paid:
Losses and LAE paid
in respect of
default notices
received in:
Current year.... 8,752 15,257 16,872
Prior years..... 139,661 139,589 106,096
------------ ------------ ------------
Subtotal...... 148,413 154,846 122,968
------------ ------------ ------------
Net reserve at end of
year.................. 635,747 572,268 484,215
Plus reinsurance
recoverables........ 45,527 26,415 29,827
------------ ------------ ------------
Reserve at end of year $ 681,274 $ 598,683 $ 514,042
============ ============ ============
(1) Received in conjunction with the cancellation of certain reinsurance
treaties. (See note 7.)
(2) A negative number for a prior year indicates a redundancy of loss reserves,
and a positive number for a prior year indicates a deficiency of loss
reserves.
The top portion of the table above shows losses incurred on default notices
received in the current year and in prior years, respectively. The amount of
losses incurred relating to default notices received in the current year
represents the estimated amount to be ultimately paid on such default notices.
The amount of losses incurred relating to default notices received in prior
years represents an adjustment made in the current year for defaults which were
included in the loss reserve at the end of the prior year.
twenty-three
Current year losses incurred increased from 1997 to 1998 due to an increase
in the primary insurance notice inventory from 28,493 at December 31, 1997 to
29,253 at December 31, 1998 and an increase in the pool insurance notice
inventory from 2,098 at December 31, 1997 to 6,524 at December 31, 1998. The
Company's loss reserves at December 31, 1998 reflect credit quality concerns on
defaults from insurance written in 1994 through 1996, an increase in the number
of defaults with deeper coverages and the growth in pool insurance. Offsetting
this increase were favorable developments in prior years' loss reserves, with
the net effect of total losses incurred decreasing from $242.4 million in 1997
to $211.4 million in 1998.
The favorable development of the reserves in 1998, 1997 and 1996 is
reflected in the prior year line, and results from the actual claim rates and
actual claim amounts being lower than those estimated by the Company when
originally establishing the reserve at December 31, 1997, 1996 and 1995,
respectively.
The lower portion of the table above shows the breakdown between claims paid
on default notices received in the current year and default notices received in
prior years. Since it takes, on average, about twelve months for a default which
is not cured to develop into a paid claim, most losses paid relate to default
notices received in prior years.
7. Reinsurance
The Company cedes a portion of its business to reinsurers and records assets
for reinsurance recoverable on estimated reserves for unpaid losses and unearned
premiums. Business written between 1985 and 1993 is ceded under various quota
share reinsurance agreements with several reinsurers. The Company receives a
ceding commission in connection with this reinsurance. There is no quota share
reinsurance on business written subsequent to December 31, 1993.
In September 1996, the Company signed an agreement with WMAC and a WMAC
reinsurer to assume all of the reinsurer's interest in WMAC mortgage insurance
writings, which had been previously ceded to that reinsurer. As a result, the
portion of WMAC's insurance in force reinsured by the Company increased from
approximately 21 percent to approximately 65 percent. The Company received
approximately $40 million as payment for its assumption of existing loss and
unearned premium reserves related to the insurance in force being assumed from
WMAC. In 1997 and 1998, the Company signed similar agreements with WMAC and
other WMAC reinsurers resulting in an increase in the portion of WMAC's
insurance in force reinsured by the Company to approximately 66 percent and 67
percent, respectively. (See note 1.)
As a result of the purchase of WMAC on December 31, 1998, reinsurance
recoverable on loss reserves as shown in the Consolidated Balance Sheet includes
approximately $26 million of reinsured loss reserves.
The effect of reinsurance on premiums earned and losses incurred is as
follows:
1998 1997 1996
------------ ------------ ------------
(In thousands of dollars)
Premiums earned:
Direct................. $ 770,775 $ 712,069 $ 623,148
Assumed................ 9,670 12,665 13,245
Ceded ................. (17,161) (15,990) (19,350)
------------ ------------ ------------
Net premiums earned.... $ 763,284 $ 708,744 $ 617,043
============ ============ ============
Losses incurred:
Direct................. $ 216,340 $ 247,137 $ 226,702
Assumed................ (3,234) 3,683 17,073
Ceded ................. (1,752) (8,458) (9,425)
------------ ------------ ------------
Net losses incurred.... $ 211,354 $ 242,362 $ 234,350
============ ============ ============
8. Investment in C-BASS
C-BASS engages in the acquisition and resolution of delinquent single-family
residential mortgage loans ("mortgage loans"). C-BASS also purchases and sells
mortgage-backed securities ("mortgage securities"), interests in real estate
mortgage investment conduit residuals and performs mortgage loan servicing. In
addition, C-BASS issues mortgage-backed debt securities collateralized by
mortgage loans and mortgage securities. All such mortgage-related assets are
recorded at fair value and as a result are exposed to market valuation
adjustments which could impact the Company's share of C-BASS's results of
operations.
twenty-four
At December 31, 1998 the Company had contributed approximately $56 million
of capital to C-BASS. Total combined assets of C-BASS at December 31, 1998 were
approximately $623 million, of which approximately $550 million were
mortgage-related assets, including open trades. Total liabilities were
approximately $468 million, of which approximately $459 million were funding
arrangements, including accrued interest. For the year ended December 31, 1998,
revenues of approximately $70 million and expenses of approximately $44 million
resulted in income before tax of approximately $26 million.
The Company is guaranteeing one half of a $50 million credit facility as
part of C-BASS's funding arrangements. The facility matures in July 1999.
9. Benefit plans
The following tables provide reconciliations of the changes in the benefit
obligation, fair value of plan assets and funded status of the pension and other
postretirement benefit plans:
Other Postretirement
Pension Benefits Benefits
-------------------------- --------------------------
1998 1997 1998 1997
------------ ----------- ------------ ------------
(In thousands of dollars)
Reconciliation of benefit obligation:
Benefit obligation at beginning of year...................... $ 51,190 $ 42,844 $ 19,364 $ 17,815
Service cost.............................................. 4,064 3,569 1,612 1,379
Interest cost............................................. 3,959 3,169 1,357 1,267
Amendments................................................ - 3,447 - -
Actuarial loss (gain)..................................... 7,908 (1,181) 883 (872)
Benefits paid............................................. (841) (658) (206) (225)
------------ ----------- ------------ ------------
Benefit obligation at end of year............................ $ 66,280 $ 51,190 $ 23,010 $ 19,364
============ =========== ============ ============
Reconciliation of fair value of plan assets:
Fair value of plan assets at beginning of year............... $ 57,578 $ 46,256 $ 8,632 $ 6,248
Actual return on plan assets.............................. 9,895 8,864 1,141 1,270
Employer contributions.................................... 7,190 3,116 1,272 1,114
Benefits paid............................................. (841) (658) - -
------------ ----------- ------------ ------------
Fair value of plan assets at end of year..................... $ 73,822 $ 57,578 $ 11,045 $ 8,632
============ =========== ============ ============
Reconciliation of funded status:
Benefit obligation at end of year............................ $ (66,280) $ (51,190) $ (23,010) $ (19,364)
Fair value of plan assets at end of year..................... 73,822 57,578 11,045 8,632
------------ ----------- ------------ ------------
Funded status at end of year................................. 7,542 6,388 (11,965) (10,732)
Unrecognized net actuarial gain........................... (4,741) (7,485) (3,145) (3,753)
Unrecognized net transition obligation.................... 63 95 7,419 7,949
Unrecognized prior service cost........................... 2,542 2,725 - -
------------ ----------- ------------ ------------
Prepaid (accrued) benefit cost............................... $ 5,406 $ 1,723 $ (7,691) $ (6,536)
============ =========== ============ ============
twenty-five
The following table provides the components of net periodic benefit cost for
the pension and other postretirement benefit plans:
Other Postretirement
Pension Benefits Benefits
----------------------------------------- -----------------------------------------
1998 1997 1996 1998 1997 1996
------------ ------------ ------------ ------------ ------------ ------------
(In thousands of dollars)
Service cost................................. $ 4,064 $ 3,569 $ 3,378 $ 1,612 $ 1,379 $ 1,208
Interest cost................................ 3,959 3,169 2,777 1,357 1,267 1,171
Expected return on plan assets............... (4,674) (3,521) (3,026) (696) (506) (388)
Recognized net actuarial gain................ - - - (170) (67) -
Amortization of transition obligation........ 32 32 32 530 530 530
Amortization of prior service cost........... 183 (20) (62) - - -
------------ ------------ ------------ ------------ ------------ ------------
Net periodic benefit cost.................... $ 3,564 $ 3,229 $ 3,099 $ 2,633 $ 2,603 $ 2,521
============ ============ ============ ============ ============ ============
The assumptions used in the measurement of the Company's pension and other
postretirement benefit obligations are shown in the following table:
Other Postretirement
Pension Benefits Benefits
----------------------------------------- ---------------------------------------
1998 1997 1996 1998 1997 1996
------------ ------------ ------------- ------------ ------------ ----------
Weighted-average interest rate assumptions
as of December 31:
Discount rate............................. 7.0% 7.5% 7.5% 7.0% 7.5% 7.5%
Expected return on plan assets............ 7.5% 7.5% 7.5% 7.5% 7.5% 7.5%
Rate of compensation increase............. 6.0% 6.0% 6.0% N/A N/A N/A
Plan assets consist of fixed maturities and equity securities. The Company
is amortizing the unrecognized transition obligation for postretirement benefits
over 20 years. The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation is 7.5% decreasing to 6% for 2000
and remaining level thereafter. A 1% change in the health care trend rate
assumption would have the following effects:
1-Percentage 1-Percentage
Point Point
Increase Decrease
-------------- ---------------
(In thousands of dollars)
Effect on total service and
interest cost components...... $ 678 $ (562)
Effect on postretirement
benefit obligation............ 4,912 (4,082)
The Company has a profit sharing and 401(k) savings plan for employees. At
the discretion of the Board of Directors, the Company may make a profit sharing
contribution of up to 5% of each participant's compensation. The Company
provides a matching 401(k) savings contribution on employees' before-tax
contributions at a rate of 80% of the first $1,000 contributed and 40% of the
next $2,000 contributed. Profit sharing costs and the Company's matching
contributions to the 401(k) savings plan were $5.0 million, $3.8 million and
$3.6 million in 1998, 1997 and 1996, respectively.
10. Income taxes
The components of the net deferred tax liability as of December 31, 1998 and
1997 are as follows:
1998 1997
---------- ----------
(In thousands of dollars)
Unearned premium reserves.............. $ (16,897) $ (18,337)
Deferred policy acquisition costs...... 8,423 9,504
Loss reserves.......................... (11,688) (6,622)
Unrealized appreciation in
investments.......................... 50,923 45,221
Other ................................. (2,227) (3,957)
------------ ----------
Net deferred tax liability............. $ 28,534 $ 25,809
============ ==========
At December 31, 1998, gross deferred tax assets and liabilities amounted to
$60.4 million and $88.9 million, respectively. Management believes that all
gross deferred tax assets at December 31, 1998 are fully realizable and no
valuation reserve has been established.
twenty-six
The following summarizes the components of the provision for income tax:
1998 1997 1996
----------- ---------- -----------
(In thousands of dollars)
Federal:
Current................ $ 171,244 $ 147,983 $ 116,160
Deferred............... (4,198) (7,833) (10,325)
State ................. 2,074 1,473 1,202
----------- ---------- -----------
Provision for income tax $ 169,120 $ 141,623 $ 107,037
=========== ========== ===========
The Company paid $160.6 million, $151.1 million and $103.9 million in
federal income tax in 1998, 1997 and 1996, respectively.
The reconciliation of the tax provision computed at the federal tax rate of
35% to the reported provision for income tax is as follows:
1998 1997 1996
----------- ----------- -----------
(In thousands of dollars)
Tax provision computed
at federal tax rate....... $ 194,105 $ 162,881 $ 127,760
(Decrease) increase in tax
provision resulting from:
Tax exempt municipal bond
interest................. (28,973) (24,926) (22,114)
Other, net......... 3,988 3,668 1,391
----------- ----------- -----------
Provision for income tax $ 169,120 $ 141,623 $ 107,037
=========== =========== ===========
The Internal Revenue Service has completed examining the Company's income
tax returns through 1994. The results of these examinations had no material
effect on the financial statements.
11. Shareholders' equity and dividend restrictions
The Company's insurance subsidiaries are subject to statutory regulations as
to maintenance of policyholders' surplus and payment of dividends. The maximum
amount of dividends that the insurance subsidiaries may pay in any twelve-month
period without regulatory approval by the Office of the Commissioner of
Insurance of the State of Wisconsin ("OCI") is the lesser of adjusted statutory
net income or 10% of statutory policyholders' surplus as of the preceding
calendar year end. Adjusted statutory net income is defined for this purpose to
be the greater of statutory net income, net of realized investment gains, for
the calendar year preceding the date of the dividend or statutory net income,
net of realized investment gains, for the three calendar years preceding the
date of the dividend less dividends paid within the first two of the preceding
three calendar years. In 1999, MGIC can pay $49.4 million of dividends and the
other insurance subsidiaries of the Company can pay $4.5 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 1998, 1997 and 1996, the Company paid dividends of $11.2 million, $11.0
million and $9.4 million, respectively or $.10 per share in 1998, $.095 per
share in 1997 and $.08 per share in 1996.
The principles used in determining statutory financial amounts differ from
generally accepted accounting principles ("GAAP"), primarily for the following
reasons:
Under statutory accounting practices, mortgage guaranty insurance companies
are required to maintain contingency loss reserves equal to 50% of premiums
earned. Such amounts cannot be withdrawn for a period of ten years except as
permitted by insurance regulations. Contingency loss reserves are not
reflected as liabilities under GAAP.
Under statutory accounting practices, insurance policy acquisition costs are
charged against operations in the year incurred. Under GAAP, these costs are
deferred and amortized as the related premiums are earned commensurate with
the expiration of risk.
Statutory financial statements only include a provision for current income
taxes due, and purchases of Tax and Loss Bonds are accounted for as
investments. GAAP financial statements provide for deferred income taxes,
and purchases of Tax and Loss Bonds are recorded as payments of current
income taxes.
Under statutory accounting practices, fixed maturity investments are valued
at amortized cost. Under GAAP, those investments which the Company does not
have the ability and intent to hold to maturity are considered to be
available for sale and are recorded at market, with the unrealized gain or
loss recognized, net of tax, as an increase or decrease to shareholders'
equity.
twenty-seven
The statutory net income, equity and the contingency reserve liability of
the insurance subsidiaries (excluding the non-insurance companies) are as
follows:
Year Ended Net Contingency
December 31, Income Equity Reserves
- -------------- ----------- ------------ ------------
(In thousands of dollars)
1998 $ 187,535 $ 585,280 $ 1,939,626
1997 144,963 394,274 1,625,810
1996 67,094 274,118 1,317,438
The differences between the statutory net income and equity presented above
for the insurance subsidiaries and the consolidated net income and equity
presented on a GAAP basis primarily represent the differences between GAAP and
statutory accounting practices, and the effect of the treasury shares on
consolidated equity.
The Company has two stock option plans which permit certain officers and
employees to purchase common stock at specified prices. A summary of activity in
the stock option plans during 1996, 1997 and 1998 is as follows:
Average Shares
Exercise Subject to
Price Option
---------- -----------
Outstanding, December 31, 1995... $ 9.15 3,312,566
Granted....................... 30.57 61,334
Exercised..................... 4.80 (636,654)
Canceled...................... 15.41 (132,620)
---------- -----------
Outstanding, December 31, 1996... 10.40 2,604,626
Granted....................... 37.04 1,592,000
Exercised..................... 9.08 (532,332)
Canceled...................... 31.19 (29,420)
---------- -----------
Outstanding, December 31, 1997... 22.09 3,634,874
Granted....................... 62.28 109,500
Exercised..................... 10.99 (478,848)
Canceled...................... 33.99 (70,002)
---------- -----------
Outstanding, December 31, 1998... $ 24.87 3,195,524
========== ===========
The exercise price of the options granted in 1996, 1997 and 1998 was equal
to the market value of the stock on the date of grant. The options are
exercisable between one and ten years after the date of grant. At December 31,
1998, 3,678,915 shares were available for future grant under the stock option
plans.
The Company adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123"). Had compensation cost for the Company's stock option plans been
determined based on the fair value method described by SFAS 123, the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below (in thousands, except per share data):
Year Ended December 31,
--------------------------------------
1998 1997 1996
----------- ---------- -----------
Net income $ 381,689 $ 320,416 $ 257,807
Earnings per share:
Basic $ 3.40 $ 2.75 $ 2.19
Diluted $ 3.36 $ 2.72 $ 2.17
The fair value of these options was estimated at grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions for each year:
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
Risk free interest rate 6.37% 6.44% 6.73%
Expected life.......... 6.82 years 6.88 years 5.63 years
Expected volatility.... 27.98% 28.07% 28.60%
Expected dividend yield 0.17% 0.16% 0.21%
The following is a summary of stock options outstanding at December 31,
1998:
Options Outstanding Options
Exercisable
----------------------------- ---------------------
Remaining Average Average
Exercise Average Exercise Exercise
Price Range Shares Life (yrs.) Price Shares Price
- --------------- --------- ---------- -------- --------- ---------
$2.50-$3.45 621,200 1.8 $3.27 621,200 $ 3.27
$9.63-$20.88 936,714 4.9 15.33 876,876 15.28
$26.69-$41.00 1,512,110 8.0 36.29 253,649 35.92
$60.25-$68.63 125,500 9.7 65.36 - -
--------- --------- -------- --------- ---------
Total 3,195,524 6.0 $24.87 1,751,725 $ 14.01
========= ========= ======== ========= =========
At December 31, 1997 and 1996, option shares of 1,540,076 and 1,683,700 were
exercisable at an average exercise price of $8.56 and $7.12, respectively. The
Company also granted an immaterial amount of equity instruments other than
options during 1997 and 1998.
twenty-eight
On June 2, 1997 the Company effected a two-for-one stock split of the
Company's common stock in the form of a 100% stock dividend. Per share and
certain equity amounts set forth in the accompanying financial statements and
notes have been adjusted to take into account the stock split.
12. Leases
The Company leases certain office space as well as data processing equipment
and autos under operating leases that expire during the next eight years.
Generally, all rental payments are fixed.
Total rental expense under operating leases was $5.4 million, $5.3 million
and $5.1 million in 1998, 1997 and 1996, respectively.
At December 31, 1998, minimum future operating lease payments are as follows
(in thousands of dollars):
1999........................... $ 4,312
2000........................... 2,897
2001........................... 1,818
2002........................... 1,180
2003........................... 579
2004 and thereafter............ 418
-------------
Total....................... $ 11,204
=============
13. Contingencies
The Company is involved in litigation in the ordinary course of business. In
the opinion of management, the ultimate disposition of the pending litigation
will not have a material adverse effect on the financial position of the
Company.
twenty-nine
Report of Independent Accountants
To the Board of Directors & Shareholders of MGIC Investment Corporation
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
MGIC Investment Corporation and Subsidiaries (the "Company") at December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/
Milwaukee, Wisconsin
January 6, 1999
thirty
Unaudited Quarterly Financial Data
Quarter
--------------------------------------------------------------- 1998
1998 First Second Third Fourth Year
- ---------------------------------------- ------------- ------------- ------------- ------------- -------------
(In thousands of dollars, except per share data)
Net premiums written..................... $ 176,487 $ 186,663 $ 190,567 $ 195,444 $ 749,161
Net premiums earned...................... 189,821 189,248 191,066 193,149 763,284
Investment income, net of expenses....... 34,389 35,325 36,461 36,844 143,019
Losses incurred, net..................... 59,438 52,514 51,487 47,915 211,354
Underwriting and other expenses.......... 45,158 45,532 46,498 52,843 190,031
Net income............................... 94,047 95,212 96,492 99,714 385,465
Earnings per share (a):
Basic................................. .83 .83 .87 .91 3.44
Diluted............................... .81 .82 .86 .91 3.39
Quarter
--------------------------------------------------------------- 1997
1997 First Second Third Fourth Year
- ---------------------------------------- ------------- ------------- ------------- ------------- -------------
(In thousands of dollars, except per share data)
Net premiums written..................... $ 155,606 $ 170,916 $ 184,003 $ 179,723 $ 690,248
Net premiums earned...................... 170,292 173,479 180,542 184,431 708,744
Investment income, net of expenses....... 29,508 30,372 31,548 32,174 123,602
Losses incurred, net..................... 63,194 58,251 60,785 60,132 242,362
Underwriting and other expenses.......... 38,213 37,920 39,907 41,154 157,194
Net income............................... 72,436 80,615 84,175 86,524 323,750
Earnings per share (a), (b):
Basic................................. .61 .68 .73 .76 2.78
Diluted............................... .61 .67 .72 .75 2.75
(a) Due to the use of weighted average shares outstanding when calculating
earnings per share, the sum of the quarterly per share data may not equal
the per share data for the year.
(b) Amounts have been restated to reflect the provisions of SFAS 128.
thirty-one
MGIC Stock
- ----------
MGIC Investment Corporation Common Stock is listed on the New York Stock
Exchange under the symbol MTG. At December 31, 1998, 109,003,032 shares were
outstanding. The following table sets forth for 1997 and 1998 by quarter the
high and low sales prices of the Company's common stock on the New York Stock
Exchange Composite Tape.
1997 1998
------------------------- ------------------------
Quarters High Low High Low
1st $ 40.7500 $ 35.3750 $ 74.5000 $ 62.0000
2nd 50.2500 35.2500 69.0000 55.3750
3rd 59.7500 46.1250 65.4375 36.8750
4th 66.9375 55.6250 48.2500 24.2500
In 1997 and 1998 the Company declared and paid the following cash dividends:
Quarters 1997 1998
----------------- ------------------
1st $ .020 $ .025
2nd .025 .025
3rd .025 .025
4th .025 .025
------------- ------------
$ .095 $ .100
============= ============
Dividend and stock price per data have been restated where applicable to reflect
the June 1997 two-for-one stock split.
See Note 11 to the Consolidated Financial Statements for information relating to
restrictions on the payment of cash dividends. As of January 31, 1999, the
number of shareholders of record was 364. In addition, there were approximately
29,000 beneficial owners of shares held by brokers and fiduciaries.