FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to ________________
Commission file number 1-10816
MGIC Investment Corporation
(Exact name of registrant as specified in its charter)
Wisconsin 39-1486475
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
MGIC Plaza, 250 East Kilbourn Avenue, Milwaukee, Wisconsin 53202
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code (414) 347-6480
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class: Common Stock, Par Value $1 Per Share
Name of Each Exchange
on Which Registered: New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Class: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
State the aggregate market value of the voting stock held by non-
affiliates of the Registrant as of January 31, 1997: $3,563,865,205.*
* Solely for purposes of computing such value and without thereby
admitting that such persons are affiliates of the Registrant, shares held
by directors and executive officers of the Registrant are deemed to be
held by affiliates of the Registrant.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock as of January 31, 1997: 59,029,444.
The following documents have been incorporated by reference in this
Form 10-K, as indicated:
Part and Item Number of
Form 10-K Into Which
Document Incorporated
1. Information from 1996 Annual Items 1 and 3 of Part I
Report to Shareholders (for Items 5 through 8 of Part II
Fiscal Year Ended
December 31, 1996)
2. Proxy Statement for the 1997 Item 10 through 13 of Part III
Annual Meeting of Shareholders
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
Part I
Item 1. Business.
A. General
MGIC Investment Corporation (the "Company") is a holding company
which, through its indirect wholly owned subsidiary, Mortgage Guaranty
Insurance Corporation ("MGIC"), is the leading provider of private
mortgage insurance coverage in the United States to mortgage bankers,
savings institutions, commercial banks, mortgage brokers, credit unions
and other lenders. Private mortgage insurance covers residential first
mortgage loans and expands home ownership opportunities by enabling people
to purchase homes with less than 20% down payments. If the home owner
defaults, private mortgage insurance reduces and, in some instances,
eliminates the loss to the insured institution. Private mortgage
insurance also facilitates the sale of low down payment mortgage loans in
the secondary mortgage market, principally to the Federal Home Loan
Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage
Association ("Fannie Mae"). In addition to mortgage insurance, the
Company, through other subsidiaries, provides various underwriting and
contract services related to home mortgage lending.
MGIC is licensed in all 50 states of the United States, the District
of Columbia and Puerto Rico. MGIC's claims-paying ability is rated "AA+"
by Standard & Poor's Corporation ("S&P") and "Aa2" by Moody's Investors
Service, Inc. ("Moody's").
The MGIC name has been associated with private mortgage insurance
since 1957. The Company was formed in 1984 by members of the management
of Wisconsin Mortgage Assurance Corporation ("WMAC"). WMAC's parent
("WMAC Investment," then known as MGIC Investment Corporation) and its
predecessors were publicly traded from 1961 until 1982. WMAC, then known
as Mortgage Guaranty Insurance Corporation, was the largest private
insurer of residential first mortgages in the United States.
On February 28, 1985, the Company acquired certain assets and
businesses of WMAC Investment and WMAC, including the MGIC name and
offices of WMAC, and hired substantially all of WMAC's employees
("Acquisition"). WMAC retained substantially all of its insurance in
force, net of domestic reinsurance (the "WMAC Book" and sometimes in other
documents referred to as the "Old Book"). On March 1, 1985, MGIC
commenced writing new insurance (the "MGIC Book" and sometimes in other
documents referred to as the "New Book"). Effective as of the time of the
Acquisition, WMAC generally ceased writing new insurance and reinsured
100% of the WMAC Book with several international reinsurers. One of the
reinsurers of the WMAC Book retroceded a 20% quota share of the WMAC Book
to a subsidiary of the Company. Subsequently, MGIC assumed a portion of
such reinsurance and at December 31, 1996, MGIC reinsured approximately
65% of the WMAC Book. See "The WMAC Book" below.
The Company is a Wisconsin corporation. Its principal office is
located at MGIC Plaza, 250 East Kilbourn Avenue, Milwaukee, Wisconsin
53202 (telephone number (414) 347-6480).
The following is a "Safe Harbor" Statement under the Private
Securities Litigation Reform Act of 1995, which applies to all statements
in this Form 10-K, including its Exhibits, which are not historical facts
and to all oral statements that the Company may make from time to time
which are not historical facts (such written and oral statements are
herein referred to as "forward looking statements"):
Actual results may differ materially from those contemplated by
the forward looking statements. These forward looking statements involve
risks and uncertainties, including but not limited to, the following
risks:
- that interest rates may increase rather than remain stable or
decrease; that demand for housing generally or in MGIC's market
segment may grow less than projected or may decrease for any
number of reasons including changes in interest rates, adverse
economic conditions, or other reasons;
- that government housing policy may change, including changes in
Federal Housing Administration ("FHA") loan limits, and changes
in the statutory charters and coverage requirements of Freddie
Mac and Fannie Mae;
- that MGIC's market share of new insurance written or the
amount of new insurance written may grow less than
projected or may decrease as a result of factors affecting
housing demand, government housing policy and Freddie Mac
and Fannie Mae discussed above or as a result of
underwriting changes by the Company, or actions taken by
the Company's competitors, including their underwriting
criteria, pricing or products offered, or for other
reasons;
- that cancellations may be higher than projected and
persistency may be lower than projected due to
refinancings, changes in Freddie Mac or Fannie Mae
cancellation policies or legislation or other factors; and
- that delinquencies, incurred losses or paid losses may
increase faster than projected as a result of adverse
changes in regional or national economies which affect
borrowers' incomes or housing values.
Investors are also directed to other risks discussed in documents filed by
the Company with the Securities and Exchange Commission.
B. The MGIC Book
Types of Product
There are two principal types of private mortgage insurance:
"primary" and "pool."
Primary Insurance. Primary insurance provides mortgage default
protection on individual loans and covers unpaid loan principal,
delinquent interest and certain expenses associated with the default and
subsequent foreclosure (collectively, the "claim amount"). The insurer
generally pays the coverage percentage of the claim amount specified in
the primary policy, but has the option to pay 100% of the claim amount and
acquire title to the property. The claim amount averages about 115% of
the unpaid principal balance of the loan. Primary insurance generally
applies to owner occupied, first mortgage loans on one-to-four family
homes, including condominiums. Primary coverage can be used on any type
of residential mortgage loan instrument approved by the mortgage insurer.
References in this document to amounts of insurance written or in force,
risk written or in force and other historical data related to MGIC's
insurance refer only to direct (before giving effect to reinsurance)
primary insurance, unless otherwise indicated.
The following table shows direct primary insurance in force and net
primary risk in force (the risk, determined by the coverage percentage,
which is retained after giving effect to reinsurance) for the MGIC Book as
of the dates indicated:
<TABLE>
<CAPTION>
Primary Insurance and Risk In Force
December 31,
1996 1995 1994 1993 1992
(In millions of dollars)
<S> <C> <C> <C> <C> <C>
Direct Primary
Insurance In Force . . . . . . . $131,397 $120,341 $104,416 $85,848 $71,246
Net Primary
Risk In Force . . . . . . . . . . 28,565 24,593 19,664* 13,971 10,638
____________________
* Reflects the reassumption in 1994 of mortgage insurance previously
reinsured. See "Reinsurance" below.
</TABLE>
The coverage percentage provided by MGIC is determined by the lender,
usually in order to comply with Freddie Mac and Fannie Mae requirements to
reduce loss exposure on loans purchased by them to a designated percentage
of the home's value. Until 1995, Freddie Mac and Fannie Mae had generally
required that loss exposure be reduced to 75% of the home's value.
Effective in the first quarter of 1995, Freddie Mac and Fannie Mae changed
their coverage requirements for most new loans as follows:
<TABLE>
Freddie Mac and Fannie Mae Coverages
<CAPTION>
Thirty Year and Certain Fixed Rate, Fully Amortizing Mortgage Loans with
Other Mortgage Loans Term of 20 years or less
Loan-to-Value New Previous Loan-to-Value New Previous
Ratio: Coverage Coverage Ratio: Coverage Coverage
<S> <C> <C> <C> <C> <C>
90.01 + 95.00% 30% 25%* 90.01 + 95.00% 25% 25%*
(up to 97% for Fannie Mae)
85.01 + 90.00% 25% 17% 85.01 + 90.00% 12% 17%
80.01 + 85.00% 12% 12% 80.01 + 85.00% 6% 12%
____________________
* Prior to 1995, Freddie Mac and Fannie Mae had increased coverage from
22% to 25%.
</TABLE>
As a result of these deeper coverage requirements, coverage
percentages on new insurance written in 1995 and 1996 were higher than
coverages on loans insured in 1994 and prior years. The following table
shows, by loan-to-value ("LTV") and coverage categories, new insurance
written during the periods indicated:
Coverage Categories as a Percentage of New Insurance Written
Year Ended December 31,
LTV and 1996 1995 1994
Coverage
95% LTV/ 38.4% 34.1% 1.5%
30% Coverage
90% LTV/ 38.9% 33.0% 3.5%
25% Coverage
MGIC charges higher premium rates for higher coverages, and the
deeper Freddie Mac and Fannie Mae coverage requirements have resulted in
higher premiums charged on similar types of loans with the same
characteristics (such as LTV and loan type) affecting the premium rate.
MGIC expects that these deeper coverage requirements will cause its
average claim amount to increase, with no significant impact on
underwriting expenses or frequency of default. Because reserves for
losses are only established by MGIC for loans in default, MGIC receives
increased premium from deeper coverage before any higher losses may be
incurred resulting from that deeper coverage. MGIC uses a pricing
methodology for these coverages similar to other types of coverage.
However, there can be no assurance that the higher premium rates
adequately reflect the risks associated with increased coverages. In
addition, such higher premium rates may make government insurance
programs, particularly programs of the FHA, more competitive. See "Sales
and Marketing and Competition,Competition" and "Regulation,Indirect
Regulation" below. There can be no assurance that the deeper coverage
requirements of Freddie Mac and Fannie Mae will remain in effect.
Mortgage insurance coverage cannot be terminated by the insurer,
except for non-payment of premium, and remains renewable at the option of
the insured lender, generally at the renewal rate fixed when the loan was
initially insured. Lenders may cancel insurance at any time at their
option or because of mortgage repayment, which may be accelerated because
of the refinancing of mortgages. In the case of a loan purchased by
Freddie Mac or Fannie Mae, a borrower meeting certain conditions may
require the mortgage servicer to cancel insurance upon the borrower's
request when the principal balance of the loan is 80% or less of the
home's current value and in certain circumstances when such principal
balance is 80% or less of the home's original value.
The Company understands that Fannie Mae is considering making changes
in its cancellation policy. These changes would, among other things,
generally provide for automatic cancellation of mortgage insurance,
including existing insurance in force, when the loan reaches one-half of
its amortization period and certain requirements relating to timeliness of
borrower mortgage payments are met. The Company does not believe that
adoption of this automatic cancellation policy by Fannie Mae would have a
material adverse effect on its business.
Some states require that mortgage servicers periodically notify
borrowers of the circumstances in which they may request a mortgage
servicer to cancel insurance and some states allow the borrower to require
the mortgage servicer to cancel insurance under certain circumstances.
Bills have been introduced and are pending in a number of other states for
such purposes. The Company understands that Fannie Mae's draft policy
also requires that mortgage servicers give notice to borrowers that
insurance may be cancelled under Fannie Mae's policy in certain
circumstances. In February, 1997, a bill was introduced in the United
States Senate that would require, for loans originated 90 days or more
after the enactment of the bill, automatic cancellation of private
mortgage insurance if the principal balance of the loan is 80% or less of
the home's original value. Among other things, the bill also would require
the servicer to advise the borrower, in writing at origination, with each
periodic statement of account and for loans outstanding on the date the
bill is enacted, not later than 180 days after enactment, of the
circumstances in which mortgage insurance may be cancelled. Earlier in
1997, a bill was introduced in the United States House of Representatives
that would require the servicer to advise the borrower in writing of the
circumstances in which mortgage insurance may be cancelled.
Coverage tends to continue in areas experiencing economic contraction
and housing price depreciation. The persistency of coverage in such areas
coupled with cancellation of coverage in areas experiencing economic
expansion and housing price appreciation can increase the percentage of
the insurer's portfolio comprised of loans in economically weak areas.
This development can also occur during periods of heavy mortgage
refinancing, such as occurred during 1993 and early 1994, because
refinanced loans in areas of economic expansion experiencing property
value appreciation are less likely to require mortgage insurance at the
time of refinancing, while refinanced loans in economically weak areas not
experiencing property value appreciation are more likely to require
mortgage insurance at the time of refinancing or not qualify for
refinancing at all and, thus, remain subject to the mortgage insurance
coverage.
When a borrower refinances an MGIC-insured mortgage loan by paying it
off in full with the proceeds of a new mortgage, the insurance on that
existing mortgage is cancelled, and insurance on the new mortgage is
considered to be new primary insurance written. Therefore, continuation
of MGIC's coverage from a refinanced loan to a new loan results in both a
cancellation of insurance and new insurance written. The percentage of
primary risk written with respect to loans representing refinances was
13.7% in 1996, as compared to 9.3% in 1995. Refinance loans represented
23.5%, 15.4%, 7.7% and 9.5% of primary risk written during the successive
quarters of 1996.
In addition to varying with the coverage percentage, MGIC's premium
rates vary depending upon the perceived risk of a claim on the insured
loan and, thus, take into account the LTV, the loan type (fixed payment
versus non-fixed payment), mortgage term and coverage percentage. Premium
rates cannot be changed after the issuance of coverage. Because the
Company believes that over the long term each region of the United States
is subject to similar factors affecting risk of loss on insurance written,
MGIC generally utilizes a nationally based, rather than a regional or
local, premium rate policy.
Mortgage lenders usually require mortgage borrowers to fund the
mortgage insurance premiums, which the lenders pay to the mortgage
insurer. MGIC has three basic types of premium payment plans: monthly,
annual and single premium plans.During 1996 and 1995, these premium plans
represented the following dollar amounts and percentages of new insurance
written:
Premium Plans as Percentages of
New Insurance Written
1996 1995
(In millions of dollars)
Monthly premium plan $29,138 88.9% $25,198 83.2%
Annual premium plan 3,333 10.2 4,726 15.6
Single premium plan 285 0.9 353 1.2
------- ------ ------- ------
Total $32,756 100.0% $30,277 100.0%
======= ====== ======= ======
Under the monthly premium plan, a monthly premium payment is made to
MGIC to provide only one month of coverage, rather than one year of
coverage provided by the annual premium plan. To offset the reduced
initial cash flow, the annualized premium rates for the monthly premium
plan are higher than the premium rates for the annual plan for comparable
loans.
Under the annual premium plan, the initial premium is paid to MGIC in
advance, and earned over the next twelve months of coverage, with annual
renewal premiums paid in advance thereafter and earned over the subsequent
twelve months of coverage. The annual premiums can be paid with either a
higher premium rate for the initial year of coverage and lower premium
rates for the renewal years, or with premium rates which are equal (level)
for the initial year and subsequent renewal years.
Under the single premium plan, a single payment is made to MGIC,
covering a specified term exceeding 12 months, which can be either non-
refundable or refundable if the coverage is cancelled by the insured
lender.
Pool Insurance. Pool insurance is generally used as an additional
"credit enhancement" for certain secondary market mortgage transactions.
Pool insurance generally covers the loss on a defaulted mortgage loan
which exceeds the claim payment under the primary coverage, if primary
insurance is required on that mortgage loan, as well as the total loss on
a defaulted mortgage loan which did not require primary insurance, in each
case up to a stated aggregate loss limit. At December 31, 1996, net MGIC
Book pool insurance in force was $740 million, representing $181 million
of net risk in force. Virtually all of such net risk in force was written
or committed to prior to 1989.
In 1996, MGIC began to offer pool insurance generally covering fixed
rate, 30-year mortgage loans delivered to Freddie Mac and Fannie Mae
("agency pool insurance"). The aggregate loss limit on agency pool
insurance does not exceed 1% of the aggregate original principal balance
of the mortgage loans in the pool. New risk written in 1996 under agency
pool insurance was minimal, and the Company does not anticipate that new
risk written in 1997 under agency pool insurance will be material to its
total risk in force.
Customers
Originators of residential mortgage loans such as mortgage bankers,
savings institutions, commercial banks, mortgage brokers, credit unions
and other lenders (e.g., financial, insurance and service companies) are
the customers of MGIC and in 1996 accounted for 38.2%, 26.5%, 21.6%,
11.2%, 2.0%, and 0.5%, respectively, of MGIC's new insurance written.
To obtain primary insurance from MGIC, a mortgage lender must first
apply for and receive a mortgage guaranty master policy ("Master Policy")
from MGIC. MGIC had approximately 8,600 master policyholders at
December 31, 1996 (not including policies issued to branches and
affiliates of large lenders). In 1996, MGIC issued coverage on mortgage
loans for approximately 59% of its master policyholders.
MGIC's top 10 customers generated 20.0% of its new insurance written
in 1996, compared to 20.7% in 1995. The largest single customer of MGIC
(including branches and affiliates), measured by new insurance written,
accounted for 3.0% of new insurance written during both 1996 and 1995.
MGIC's single largest customer, measured by insurance in force as of
December 31, 1996, represented 3.5% of such insurance in force.
Sales and Marketing and Competition
Sales and Marketing. MGIC sells its insurance products through its
own employees, located throughout the United States. At December 31,
1996, MGIC had 25 underwriting service centers located in 19 states and in
Puerto Rico.
Competition. MGIC and other private mortgage insurers compete
directly with federal and state governmental and quasi-governmental
agencies, principally the FHA and, to a lesser degree, the Veterans
Administration ("VA"). These agencies sponsor government-backed mortgage
insurance programs, which during 1996 accounted for approximately 45%
(compared to approximately 39% during 1995) of the total low down payment
residential mortgages which were subject to governmental or private
mortgage insurance. See "Regulation , Indirect Regulation" below.
In addition to competition from federal agencies, MGIC and other
private mortgage insurers face competition from state-supported mortgage
insurance funds in several states, including California, Illinois and New
York. From time to time, other state legislatures and agencies consider
expansions of the authority of their state governments to insure
residential mortgages.
MGIC and other private mortgage insurers also compete with mortgage
lenders which self-insure against the risk of loss from defaults on all or
a portion of their low down payment mortgage loans.
The private mortgage insurance industry consists of nine active
mortgage insurers (including a joint venture in which a mortgage insurer
is one of the joint venturers). During 1995 and 1996, MGIC was the
largest private mortgage insurer based on new primary insurance written
and at December 31, 1996, MGIC also had the largest book of direct primary
insurance in force.
The Company believes MGIC competes with other private mortgage
insurers principally on the basis of the strength of its management team
and field organization; its ability to meet lender needs by providing
underwriting risk management, affordable housing, loss mitigation, capital
markets and training support; effective use of technology and innovation
in the delivery and servicing of MGIC's insurance products; and structured
programs involving agency pool insurance, captive reinsurance and other
programs in which insurance is offered on special terms for certain loans
or groups of loans. The Company believes MGIC's additional competitive
strengths, compared to other private insurers, are its customer
relationships, name recognition and reputation.
Certain private mortgage insurers compete by offering lower premium
rates than other companies, including MGIC, either in general or with
respect to particular classes of business. MGIC on a case-by-case basis
will adjust premium rates, generally depending on the risk
characteristics, loss performance or class of business of the loans to be
insured, or the costs associated with doing such business.
Two other mortgage insurers, General Electric Mortgage Insurance
Corporation ("GEMIC") and United Guaranty Residential Insurance Company,
an affiliate of American International Group, Inc., have higher claims-
paying ability ratings from S&P and Moody's than MGIC, principally based
on having definitive capital support agreements from affiliated companies.
Risk Management
Risk Management Approach. MGIC evaluates four major elements of risk:
- Individual Loan and Borrower. Except to the extent its delegated
underwriting program is being utilized as described below, MGIC
evaluates insurance applications based on its analysis of the
borrower's ability to repay the mortgage loan and the
characteristics and value of the property. The analysis of the
borrower includes reviewing the borrower's housing and total debt
ratios as well as the borrower's FICO credit score, as reported by
credit reporting agencies. In the case of delegated underwriting,
compliance with program parameters is monitored by periodic audits
of delegated business.
- Geographic Market. MGIC places significant emphasis on the
condition of the housing markets around the nation in determining
its underwriting policies.
- Product. The type of mortgage instrument that the borrower selects
and the purpose of the loan are important factors in MGIC's
analysis of mortgage default risk. MGIC analyzes four general
characteristics of the product to quantify this risk evaluation:
(i) LTV ratio; (ii) type of loan instrument; (iii) type of
property; and (iv) purpose of the loan. In addition to its
underwriting guidelines (as referred to below), pricing is MGIC's
principal method used to manage these risks. Loans with higher LTV
ratios generally have a higher premium, as do instruments such as
adjustable rate mortgage loans ("ARMs") and loans with a maturity
longer than fifteen years.
- Mortgage Lender. MGIC evaluates from time to time its major
customers and the performance of their business which MGIC has
insured.
Based on historical performance, the Company believes that the claim
incidence for loans with LTVs in excess of 90% but not more than 95% ("95%
LTV loans") is substantially higher than for loans with LTV ratios of 90%
or less; for ARMs during a prolonged period of rising interest rates would
be substantially higher than for fixed rate loans; for loans in which the
original loan amount exceeds $200,000 is higher than for loans where such
amount is $200,000 or less; and for loans with FICO credit scores below
620 is higher than for loans with FICO credit scores of 620 and above.
While there is no meaningful data on claim incidence for loans with LTVs
in excess of 95% ("97% LTV loans") because this product has only been
recently offered by the industry, the Company anticipates that claim
incidence on 97% LTV loans will be higher than on 95% LTV loans. MGIC
charges higher premium rates for insuring 95% and 97% LTV loans and ARMs.
However, there can be no assurance that such higher rates adequately
reflect the increased risk associated with those types of loans,
particularly in a period of economic recession.
There are also other types of loan characteristics relating to the
individual loan or borrower which affect the risk potential for a loan.
The presence of a number of higher-risk characteristics in a loan
materially increases the likelihood of a claim on such a loan unless there
are other characteristics to lower the risk.
Underwriting Process. To obtain primary insurance on a specific
mortgage loan, a master policyholder typically submits an application to
an MGIC underwriting service center, supported by various documents, if
required by MGIC. MGIC utilizes national underwriting guidelines to
evaluate the potential risk of default on mortgage loans submitted for
insurance coverage. These guidelines generally are consistent with
Fannie Mae and Freddie Mac underwriting guidelines and take into account
the applicable premium rates charged by MGIC and the loss experience of
the private mortgage insurance industry, as well as the initiatives to
expand home ownership opportunities undertaken by Fannie Mae and
Freddie Mac. MGIC's underwriters have discretionary authority to insure
loans which deviate in one or more respects from MGIC's underwriting
guidelines. In most such cases, offsetting underwriting strengths must be
identified.
In order to react to local or regional economic conditions, MGIC has
also developed for use by its underwriting staff certain modified
guidelines which attempt to address particular regional or local market
developments. These "special market underwriting guidelines" are updated
from time to time and deviate in varying degrees from MGIC's national
guidelines based on MGIC's analysis of area housing markets and related
economic indicators and conditions. The special market underwriting
guidelines are more liberal than the published national guidelines in some
markets, but in other markets are more restrictive.
To assist its staff of underwriters, MGIC utilizes a computer-
assisted underwriting system which analyzes and approves certain mortgage
insurance applications based on MGIC's underwriting standards, but without
personal underwriter intervention, thereby allowing MGIC's underwriting
staff to devote additional attention to evaluating more difficult
underwriting decisions. MGIC audits a representative sample of
applications approved by the system.
Delegated Underwriting. Delegated underwriting is a program whereby
approved lenders are allowed to commit MGIC to insure loans utilizing
their MGIC-approved underwriting guidelines and underwriting evaluation.
While MGIC does not underwrite on a case-by-case basis the credit of the
borrower, the value of the property, or other factors which it normally
considers in its underwriting decision, it does audit on a regular basis a
sample of the loans insured.
At December 31, 1996, MGIC's delegated underwriting program involved
662 lenders, including all of MGIC's top twenty customers. Loans insured
under MGIC's delegated underwriting program accounted for approximately
30.7% of MGIC's total risk in force at December 31, 1996. The percentage
of new risk written by delegated underwriters increased to 41.0% in 1996
from 38.2% in 1995, and 28.6% in 1994. In mid-1996, MGIC introduced a
program under which MGIC approves a loan for insurance if the borrower
satisfies certain minimum criteria for credit scores and debt ratios. As
a result of this new program, which represented approximately 3.8% of new
risk written in 1996, MGIC anticipates that the percentage of new risk
written under the delegated underwriting program will decline in 1997.
The performance of loans insured under the delegated underwriting program
has been comparable to MGIC's non-delegated business, although performance
of that program has not yet been tested in a period of severe economic
stress.
Affordable Housing. In recent years, MGIC has increased its
insurance of residential mortgages identified by its customers as loans
secured by properties owned and occupied by low- and moderate-income
borrowers, or by borrowers who reside in areas targeted for community
reinvestment or redevelopment ("affordable housing" loans). The
percentage of affordable housing loans designated as such by lenders was
2.3% of new risk written in 1996, as compared to 4.9% in 1995. The
Company believes that affordable housing loans have higher risks than its
other insured business. Therefore, MGIC has instituted various programs
seeking to mitigate the higher risk characteristics of such loans.
However, while early in the life of such lender-designated loans, on the
basis of the limited information available, the Company believes that the
default rate and claims rate on such loans will be higher than the average
default rate and claims rate on the MGIC Book.
Reinsurance
General. In each year from 1985 through 1993, MGIC had ceded certain
percentages of its new insurance written under quota share reinsurance
agreements with several international reinsurers. Effective January 1,
1994, MGIC reassumed from its principal reinsurer, European Reinsurance
Company of Zurich ("European Re"), MGIC's mortgage insurance written in
1985 through 1993, which had been ceded to European Re and discontinued
quota share reinsurance for new insurance written. At December 31, 1996,
approximately 3% of MGIC's insurance in force was reinsured. Reinsuring
against possible loan losses does not discharge MGIC from liability to a
policyholder; however, the reinsurer agrees to indemnify MGIC for the
reinsurer's share of losses incurred.
Captive Mortgage Reinsurance. MGIC will reinsure with a mortgage
reinsurance affiliate of a lender a portion of the risk on loans
originated or purchased by the lender which have MGIC primary insurance.
The amount of captive reinsurance ceded by MGIC to date has not been
material. In the fourth quarter of 1996, the Office of the Comptroller of
the Currency ("OCC"), which regulates national banks and their
subsidiaries, and the Office of Thrift Supervision ("OTS"), which
regulates federally chartered savings institutions, separately announced
that captive mortgage reinsurance was a permissible activity that could be
conducted in operating subsidiaries after approval of an application made
to those agencies. As a result of the announcements by the OCC and the
OTS, MGIC expects that it will enter into additional captive reinsurance
arrangements. The Company understands that the Department of Housing and
Urban Development ("HUD") is considering whether captive mortgage
reinsurance programs comply with the Real Estate Settlement Procedures Act
of 1974, as amended, and the regulations thereunder ("RESPA"). There can
be no assurance that HUD will not challenge captive mortgage reinsurance
under RESPA or that captive mortgage reinsurance complies with RESPA.
Past Industry Losses; Defaults; and Claims
Past Industry Losses. The private mortgage insurance industry,
including the WMAC Book, experienced substantial unanticipated incurred
losses in the mid-to-late 1980s. From the 1970s until 1981, rising home
prices in the United States generally led to profitable insurance
underwriting results for the industry and caused private mortgage insurers
to emphasize market share. To maximize market share, until the mid-1980s,
private mortgage insurers employed liberal underwriting practices, and
charged premium rates which, in retrospect, generally did not adequately
reflect the risk assumed (particularly on pool insurance). These industry
practices compounded the losses which resulted from changing economic and
market conditions which occurred during the early and mid-1980s, including
(i) severe regional recessions and attendant declines in property values
in the nation's energy producing states; (ii) the development by lenders
of new mortgage products to defer the impact on home buyers of double
digit mortgage interest rates; and (iii) changes in federal income tax
incentives which initially encouraged the growth of investment in non-
owner occupied properties.
Defaults. The claim cycle on private mortgage insurance begins with
the insurer's receipt of notification of a default on an insured loan from
the lender. Lenders are required to notify MGIC of defaults within 130
days after the initial default, although most lenders do so earlier. The
incidence of default is affected by a variety of factors, including the
level of borrower income growth, unemployment, divorce and illness, the
level of interest rates and general borrower creditworthiness. Defaults
that are not cured result in a claim to MGIC. Defaults may be cured by
the borrower bringing current the delinquent loan payments or by a sale of
the property and the satisfaction of all amounts due under the mortgage.
The following table shows the number of primary and pool loans
insured in the MGIC Book, the related number of loans in default and the
percentage of loans in default (default rate) as of the dates indicated:
<TABLE>
Default Statistics for the MGIC Book
<CAPTION>
December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
PRIMARY INSURANCE
Insured loans in force . . 1,299,038 1,219,304 1,080,882 921,259 806,958
Loans in default . . . . . 25,034 19,980 15,439 13,658 13,082
Percentage of loans in
default (default rate) . 1.93% 1.64% 1.43% 1.48% 1.62%
POOL INSURANCE
Insured loans in force . . 19,123 20,427 23,242 30,890 42,359
Loans in default . . . . . 855 1,053 1,097 1,419 1,225
Percentage of loans in
default (default rate) . 4.47% 5.15% 4.72% 4.59% 2.89%
</TABLE>
Although the number of primary loans in default increased from 1992
through 1996 as a result of the continued growth and maturity of the MGIC
Book, the default rate for primary loans declined during 1993 and 1994,
due to the significant increase in new insurance written in 1993 and 1994
and improved economic conditions in certain regions of the United States,
as indicated in the table below. The default rate for primary loans
increased from 1994 through 1996 due to an increase in the risk profile of
loans insured in late 1994 and the first half of 1995 and the continued
maturation of MGIC's insurance in force.
The percentage of pool insurance loans in default increased from 1992
to 1995, as a result of the significant reduction in insured loans in
force and continued economic difficulties in certain regions of the
country.
Regions of the United States may experience different default rates
due to varying localized economic conditions from year to year. The
following table shows the percentage of the MGIC Book's primary loans in
default by MGIC region at the dates indicated:
Default Rates for Primary Insurance By Region*
Dec. 31, Dec. 31, Dec. 31,
1996 1995 1994
MGIC REGION:
New England . . 2.09% 2.17% 2.32%
Northeast . . . 2.74 2.49 2.29
Mid-Atlantic . 1.96 1.64 1.45
Southeast . . . 1.83 1.46 1.25
Great Lakes . . 1.57 1.21 0.99
North Central . 1.49 1.21 1.02
South Central . 1.56 1.27 0.97
Plains . . . . 0.97 0.75 0.59
Pacific . . . . 2.70 2.43 2.10
National . . 1.93% 1.64% 1.43%
____________________
* The default rate is affected by both the number of loans in default at
any given date as well as the number of insured loans in force at such
date.
Claims. Claims result from defaults which are not cured. Whether a
claim results from an uncured default principally depends on the
borrower's equity in the home at the time of default and the borrower's
(or the lender's) ability to sell the home for an amount sufficient to
satisfy all amounts due under the mortgage. Claims are affected by
various factors, including local housing prices and employment levels, and
interest rates.
Under the terms of the Master Policy, the lender is required to file
a claim for primary insurance with MGIC within 60 days after it has
acquired good and marketable title to the underlying property through
foreclosure. Depending on the applicable state foreclosure law, an
average of about 12 months transpires from the date of default to payment
of a claim on an uncured default. The claim amount generally averages
about 115% of the unpaid principal amount of the loan.
Within 60 days after the claim has been filed, MGIC has the option of
either (i) paying the coverage percentage specified for that loan, with
the insured retaining title to the underlying property and receiving all
proceeds from the eventual sale of the property or (ii) paying 100% of the
claim amount in exchange for the lender's conveyance of good and
marketable title to the property to MGIC, with MGIC then selling the
property for its own account.
Claim activity is not evenly spread throughout the coverage period of
a book of primary business. Relatively few claims are received during the
first two years following issuance of coverage on a loan. This is
followed by a period of rising claims which, based on industry experience,
has historically reached its highest level in the third through fifth
years after the year of loan origination. Thereafter, the number of
claims received has historically declined at a gradual rate, although the
rate of decline can be affected by conditions in the economy, including
lower housing price appreciation. There can be no assurance that this
historical pattern of claims will continue in the future. Moreover, when
a loan is refinanced, because the new loan replaces, and is a continuation
of, an earlier loan, the pattern of claims frequency for that new loan may
be different from the historical pattern of other loans. As of
December 31, 1996, 60.9% of the MGIC Book primary insurance in force had
been written during 1994, 1995, and 1996, although a portion of such
insurance arose from the refinancing of earlier originations.
In addition to the increasing level of claim activity arising from
the maturing of the MGIC Book, another important factor affecting MGIC
Book losses is the amount of the average claim paid, which is generally
referred to as claim severity. The main determinants of claim severity
are the amount of the mortgage loan and coverage percentage on the loan.
The average claim severity on the MGIC Book primary insurance was $21,817
for 1996 as compared to $21,071 in 1995. Although prior to 1995 the
coverage percentage remained relatively constant on the MGIC Book, the
Company anticipates that MGIC Book claim severity will likely increase
over the long term due to the higher coverage percentages generally
written beginning in 1995 as required by Fannie Mae and Freddie Mac.
Loss Reserves
A significant period of time may elapse between the occurrence of the
borrower's default on a mortgage payment (the event triggering a potential
future claim payment by MGIC), the reporting of such default to MGIC and
the eventual payment of the claim related to such uncured default. To
recognize the liability for unpaid losses related to outstanding reported
defaults (known as the default inventory), the Company (similar to other
private mortgage insurers) establishes loss reserves, representing the
estimated percentage of defaults which will ultimately result in a claim
(known as the claim rate), and estimates of the severity of each claim
which will arise from the defaults included in the default inventory. In
accordance with industry accounting practices, the Company does not
establish loss reserves for future claims on insured loans which are not
currently in default.
The Company also establishes reserves to provide for the estimated
costs of settling claims, including legal and other fees, and general
expenses of administering the claims settlement process ("loss adjustment
expenses"), and for losses and loss adjustment expenses from defaults
which have occurred, but which have not yet been reported to the insurer.
The Company's reserving process is based upon the assumption that
past experience, adjusted for the anticipated effect of current economic
conditions and projected future economic trends, provides a reasonable
basis for estimating future events. However, estimation of loss reserves
is a difficult process, especially in light of the rapidly changing
economic conditions over the past few years in certain regions of the
United States. In addition, economic conditions that have affected the
development of the loss reserves in the past may not necessarily affect
development patterns in the future, in either a similar manner or degree.
For a further description of loss reserves, see Note 6 to the
consolidated financial statements of the Company, included in Exhibit 13
to this Annual Report on Form 10-K.
Geographic Dispersion
The following table reflects the percentage of primary risk in force
in the top 10 states and top 10 metropolitan statistical areas ("MSAs")
for the MGIC Book at December 31, 1996:
Dispersion of Primary Risk in Force
Top 10 States Top 10 MSAs
1. California 13.1% 1. Chicago 4.3%
2. Texas 6.8 2. Boston 3.7
3. Illinois 5.9 3. Los Angeles 3.3
4. Michigan 5.6 4. Washington, DC 3.1
5. Ohio 4.5 5. Detroit 2.3
6. New York 4.4 6. Atlanta 2.3
7. Florida 4.1 7. Philadelphia 2.1
8. Pennsylvania 4.0 8. Dallas 1.9
9. Massachusetts 3.8 9. Orange County 1.6
10. New Jersey 3.6 10. Houston 1.6
----- -----
Total 55.8% Total 26.2%
===== =====
The percentages shown above for various MSAs can be affected by
changes, from time to time, in the federal government's definition of an
MSA.
Insurance in Force by Policy Year
The following table sets forth the dispersion of MGIC's primary
insurance in force as of December 31, 1996, by year of policy origination
since MGIC began operations on March 1, 1985:
Primary Insurance In Force by Policy Year
Primary
Insurance in Percent of
Policy Year Force Total
(In millions of dollars)
1985-1990 $ 9,574 7.3%
1991 4,198 3.2
1992 12,790 9.7
1993 24,785 18.9
1994 24,249 18.5
1995 26,570 20.2
1996 29,231 22.2
Total $131,397 100.0%
Product Characteristics of Risk in Force
At December 31, 1996 and 1995, 99.2% and 99.0%, respectively, of
MGIC's risk in force was primary insurance and the remaining risk in force
was pool insurance. The following table reflects at the dates indicated
the (i) total dollar amount of primary risk in force for the MGIC Book and
(ii) percentage of such primary risk in force (as determined on the basis
of information available on the date of mortgage origination) by the
categories indicated.
Characteristics of Primary Risk in Force
December 31, December 31,
1996 1995
Direct Risk in Force
(Dollars in Millions) . . . . . $29,308 $25,502
Lender Concentration:
Top 10 lenders . . . . . . . . 17.9% 16.9%
Top 20 lenders . . . . . . . . 28.1% 25.6%
LTV:(1)
95s(2) . . . . . . . . . . . . 43.5% 39.6%
90s(3) . . . . . . . . . . . . 56.2 60.2
80s . . . . . . . . . . . . . . 0.3 0.2
------ ------
Total . . . . . . . . . . . . 100.0% 100.0%
====== ======
Loan Type:
Fixed(4) . . . . . . . . . . . 71.5% 70.5%
ARM(5) . . . . . . . . . . . . 25.0 26.0
Balloon(6) . . . . . . . . . . 3.4 3.4
Other(7) . . . . . . . . . . . 0.1 0.1
------ ------
Total . . . . . . . . . . . . 100.0% 100.0%
====== ======
Original Insured Loan Amount:
$200,000 and less . . . . . . 87.8% 89.1%
Over $200,000 . . . . . . . . . 12.2 10.9
------ ------
100.0% 100.0%
Mortgage Term:
15-years and under . . . . . . 5.3% 6.5%
Over 15 years . . . . . . . . . 94.7 93.5
------ ------
Total . . . . . . . . . . . . 100.0% 100.0%
====== ======
Property Type:
Single-family(8) . . . . . . . 93.4% 93.3%
Condominium . . . . . . . . . . 6.1 6.2
Other(9) . . . . . . . . . . . 0.5 0.5
------ ------
Total . . . . . . . . . . . . 100.0% 100.0%
====== ======
Occupancy Status:
Primary residence . . . . . . . 99.0% 99.3%
Second home . . . . . . . . . . 0.8 0.6
Non-owner occupied . . . . . . 0.2 0.1
------ ------
Total . . . . . . . . . . . . 100.0% 100.0%
====== ======
____________________
(1) Loan-to-value represents the ratio (expressed as a percentage) of the
dollar amount of the mortgage loan to the value of the property at
the time the loan became insured. They are identified as in excess
of 90% LTV ("95s"); in excess of 80% LTV and up to 90% LTV ("90s");
and equal to or less than 80% LTV ("80s").
(2) Includes 97% LTV loans, which were 1.7% and 1.0%, respectively, of
primary risk in force at December 31, 1996 and 1995.
(3) MGIC includes in its classification of 90s, loans where the borrower
makes a down payment of 10% and finances the associated mortgage
insurance premium payment as part of the mortgage loan. At
December 31, 1996 and 1995, 3.7% and 4.5%, respectively, of the
primary risk in force consisted of these types of loans.
(4) Includes fixed rate mortgages with temporary buydowns (where in
effect, the applicable interest rate is typically reduced by one or
two percentage points during the first two years of the loan).
(5) Includes ARMs where payments adjust fully with interest rate
adjustments. Also includes ARMs with negative amortization, which at
December 31, 1996 and 1995, represented 2.2% and 2.4%, respectively,
of primary risk in force. As of December 31, 1996 and 1995, ARMs
with LTVs in excess of 90% represented 9.2% and 8.4%, respectively,
of primary risk in force.
(6) Balloon payment mortgages are loans with a maturity, typically five
to seven years, that is shorter than the loans' amortization period.
(7) Primarily includes graduated payment mortgages (loans with scheduled
increases in monthly payments to shorten the loans' maturity).
(8) Includes townhouse-style attached housing with fee simple ownership.
(9) Includes cooperatives and manufactured homes deemed to be real
estate.
C. The WMAC Book
The WMAC Book is in a "run-off" status and no new insurance has been
written on the WMAC Book since February 28, 1985, other than pursuant to
then existing agreements. In connection with the Acquisition, 100% of the
WMAC Book was reinsured with several international reinsurers (the "WMAC
Reinsurers"), and one of the WMAC Reinsurers retroceded a 20% quota share
of the reinsurance on the WMAC Book to a subsidiary of the Company. In
September, 1996, MGIC assumed from one of the WMAC Reinsurers all of such
Reinsurer's reinsurance interest in the WMAC Book. As a result of these
transactions and another transaction with a WMAC Reinsurer, at
December 31, 1996, MGIC had an approximately 65% interest in renewal
premiums and losses from the WMAC Book and had approximately $1.3 billion
of risk in force from the WMAC Book. MGIC is administering the WMAC Book,
collecting renewal premiums, administering claims on behalf of WMAC and
advancing funds for the payment of claims on behalf of WMAC pursuant to a
management agreement with WMAC.
D. Other Business
The Company, through certain non-insurance subsidiaries, provides
various mortgage services for the mortgage finance industry, such as
contract underwriting, premium reconciliation and claims administration
for the Department of Housing and Urban Development and the Resolution
Trust Corporation, respectively, and secondary marketing of mortgage-
related assets. The Company owns approximately 48% of Credit-Based Asset
Servicing and Securitization LLC ("C-BASS"), which began operations in
mid-1996. C-BASS was formed to acquire, sell and service distressed and
other types of residential whole loan mortgage assets and to acquire and
sell certain classes of mortgage-backed securities. The revenues
recognized from these mortgage services operations, other non-insurance
services and C-BASS represented 3.0% and 3.6% of the Company's
consolidated revenues in 1996 and 1995, respectively.
E. Investment Portfolio
Policy and Strategy
Cash flow from the Company's investment portfolio represented
approximately 29% of its total cash flow from operations during 1996. The
Company's long-term investment portfolio is managed by a subsidiary of The
Northwestern Mutual Life Insurance Company, although the Company maintains
overall control of investment policy and strategy. The Company maintains
direct management of its short-term investment portfolio.
The Company's current policies emphasize preservation of capital, as
well as total return. Therefore, the Company's investment portfolio
consists of high-quality, fixed-income investments. Liquidity is sought
through diversification and investment in publicly traded securities. The
Company attempts to maintain a level of liquidity commensurate with its
perceived business outlook and the expected timing, direction and degree
of changes in interest rates. The Company's investment policies in effect
at December 31, 1996, limited investments in the securities of a single
issuer (other than the U.S. government and its agencies). The Company's
investment policies in effect at December 31, 1996, did not permit
purchasing securities rated below "A."
At December 31, 1996, based on amortized cost value, approximately
98.6% of the Company's total investment portfolio was invested in
securities rated "A" or better, with 53.1% which were rated "AAA" and
20.5% which were rated "AA," in each case by at least one nationally
recognized securities rating organization.
The Company's investment policies and strategies are subject to
change depending upon regulatory, economic and market conditions and the
existing or anticipated financial condition and operating requirements,
including the tax position, of the Company.
Investment Operations
At December 31, 1996, the consolidated book value (which is equal to
market value) of the Company's investment portfolio was $2.0 billion. At
December 31, 1996, municipal securities represented 70.0% of the book
value of the total investment portfolio. Securities due within one year,
within five to ten years, and after ten years, represented 8.8%, 42.8% and
38.2%, respectively, of such total book value.
The Company's net pre-tax investment income was $105.4 million for
the year ended December 31, 1996, representing an after-tax yield of 5.1%
for the year, a decline from 5.2% for 1995, resulting from a decline in
the average interest rate on investments in 1996 as compared to 1995.
For further information concerning investment operations, see Note 4
to the consolidated financial statements of the Company, included in
Exhibit 13 to this Annual Report on Form 10-K.
F. Regulation
Direct Regulation
The Company and its insurance subsidiaries, including MGIC, are
subject to regulation, principally for the protection of policyholders, by
the insurance departments of the various states in which each is licensed
to do business. The nature and extent of such regulation varies, but
generally depends on statutes which delegate regulatory, supervisory and
administrative powers to state insurance commissioners.
In general, such regulation relates, among other things, to licenses
to transact business; policy forms; premium rates; annual and other
reports on financial condition; the basis upon which assets and
liabilities must be stated; requirements regarding contingency reserves
equal to 50% of premiums earned; minimum capital levels and adequacy
ratios; reinsurance requirements; limitations on the types of investment
instruments which may be held in an investment portfolio; the size of
risks and limits on coverage of individual risks which may be insured;
deposits of securities; limits on dividends payable; and claims handling.
Most states also regulate transactions between insurance companies and
their parents or affiliates. For a description of limits on dividends
payable, see Note 10 to the consolidated financial statements of the
Company, included in Exhibit 13 to this Annual Report on Form 10-K.
Mortgage insurance premium rates are also subject to state regulation
to protect policyholders against the adverse effects of excessive,
inadequate or unfairly discriminatory rates and to encourage competition
in the insurance marketplace. Any increase in premium rates must be
justified, generally on the basis of the insurer's loss experience,
expenses and future trend analysis. The general mortgage default
experience may also be considered. Premium rates are subject to review
and challenge by state regulators. Legislatures and state insurance
departments generally allow private mortgage insurers to insure
residential loans with LTVs of up to 97%.
A number of states generally limit the amount of insurance risk which
may be written by a private mortgage insurer to 25 times the insurer's
total policyholders' reserves, commonly known as the "risk-to-capital"
requirement.
MGIC is required to contribute to a contingency loss reserve an
amount equal to 50% of earned premiums. Such amounts cannot be withdrawn
for a period of 10 years, except under certain circumstances.
Mortgage insurers are generally single-line companies, restricted to
writing residential mortgage insurance business only. This essentially
prohibits MGIC from using its capital resources in support of other types
of insurance or non-insurance business. Although the Company, as an
insurance holding company, is prohibited from engaging in certain
transactions with MGIC without submission to and, in some instances, prior
approval of applicable insurance departments, the Company is not subject
to insurance company regulation on its non-insurance businesses.
Regulation of reinsurance varies by state. Except for Wisconsin, New
York and California, most states have no special restrictions on
reinsurance that would apply to private mortgage insurers other than
standard reinsurance requirements applicable to property and casualty
insurance companies. Standard reinsurance requirements generally involve
the "admitting" or approving of reinsurers doing business in a particular
state. Special restrictions, including trust fund or letter of credit
requirements, may apply to reinsurance arrangements with reinsurers which
are foreign or not admitted.
As the most significant purchasers and sellers of conventional
mortgage loans and beneficiaries of private mortgage insurance, Freddie
Mac and Fannie Mae impose requirements on private mortgage insurers in
order for such insurers to be eligible to insure loans sold to such
agencies. These requirements of Freddie Mac and Fannie Mae are subject to
change from time to time. Currently, MGIC is an approved mortgage insurer
for both Freddie Mac and Fannie Mae. To the extent Fannie Mae or Freddie
Mac implements new eligibility requirements for mortgage insurers, changes
current guarantee fee arrangements, allows alternative credit enhancement,
or alters or liberalizes underwriting guidelines on low down payment
mortgages they purchase, private mortgage insurers, including MGIC, are
likely to respond to or comply with such actions in order to maintain
market share of new insurance written.
Fannie Mae has issued primary mortgage insurance master policy
guidelines applicable to MGIC and all other Fannie Mae-approved private
mortgage insurers, establishing certain minimum terms of coverage
necessary in order for an insurer to be eligible to insure loans purchased
by Fannie Mae. The terms of MGIC's Master Policy comply with these
guidelines.
Certain proposed legislation regarding cancellation of mortgage
insurance is discussed at "The MGIC Book - Types of Product - Primary
Insurance" above.
Indirect Regulation
The Company and MGIC are also indirectly, but significantly, impacted
by regulations affecting purchasers of mortgage loans, such as Freddie Mac
and Fannie Mae, and regulations affecting governmental insurers, such as
the FHA and VA, and lenders. Private mortgage insurers, including MGIC,
are highly dependent upon federal housing legislation and other laws and
regulations to the extent they affect the demand for private mortgage
insurance and the housing market generally. From time to time, those laws
and regulations have been amended so as to change competition from
government agencies, particularly FHA. Various proposals are discussed
from time to time by Congress and certain federal agencies to reform or
modify the FHA, but the scope and content of any such proposals, and
whether they will be enacted into law, and their effect on MGIC cannot be
predicted.
During 1995, Fannie Mae and Freddie Mac each introduced their own
automated underwriting systems which may be used by originators selling
loans to them. As a result of these new systems and for other reasons,
the process by which mortgage originators sell loans to Fannie Mae and
Freddie Mac is becoming increasingly automated, a trend MGIC expects to
continue. The selection of a private mortgage insurer is a decision that
has traditionally been made by the mortgage loan originator who, for loans
sold to Fannie Mae and Freddie Mac, may choose any insurer meeting their
eligibility requirements. As a result of continuing automation, Fannie
Mae and Freddie Mac could develop the capability to supplant the mortgage
originator as the person making the insurance purchasing decision,
although MGIC is not aware that either Fannie Mae or Freddie Mac has any
plans to do so. The concentration of purchasing power that would be
attendant if such development in fact occurred could adversely affect,
from the Company's perspective, the terms on which mortgage insurance is
written on loans sold to Fannie Mae and Freddie Mac.
RESPA applies to most residential mortgage loans insured by MGIC, and
regulations thereunder provide that mortgage insurance is a "settlement
service" for purposes of mortgage loans subject to RESPA. Subject to
certain exceptions, RESPA prohibits certain payments in money or other
forms by providers of settlement services to their customers, such as
mortgage lenders, in return for the referral of business to the provider.
The OTS, the OCC, the Federal Reserve Board, and the Federal Deposit
Insurance Corporation have uniform guidelines on real estate lending by
insured lending institutions under their supervision. The guidelines
specify that a residential mortgage loan originated with an LTV of 90% or
greater should have appropriate credit enhancement in the form of mortgage
insurance or readily marketable collateral, although no depth of coverage
percentage is specified in the guidelines.
Since 1989, OTS has had in effect its risk-based capital rules for
savings institutions which establish a lower capital requirement if a low
down payment loan is insured with private mortgage insurance, as opposed
to being self-insured. To the extent risk-based capital rules for savings
institutions are changed in the future, or if, as has been proposed by
some plans, the functions and authority of the OTS are transferred to, or
consolidated with, other federal banking agencies, and such actions do not
continue to provide for favorable capital treatment for privately insured
mortgage loans, some or all of the benefits of OTS' risk-based capital
rules to MGIC and the mortgage insurance industry may be curtailed or
eliminated.
Lenders are subject to various laws, including the Home Mortgage
Disclosure Act, the Community Reinvestment Act and the Fair Housing Act,
and Fannie Mae and Freddie Mac are subject to various laws, including laws
relating to government sponsored enterprises, which may impose obligations
or create incentives for increased lending to low and moderate income
persons, or in targeted areas.
There can be no assurance that other federal laws and regulations
affecting such institutions and entities will not change, or that new
legislation or regulations will not be adopted, which will adversely
affect the demand for private mortgage insurance.
Employees
At December 31, 1996, the Company had 1,026 full- and part-time
employees, of whom 660 were assigned to its Milwaukee headquarters and 366
were assigned to its field offices.
Item 2. Properties.
Properties
At December 31, 1996, the Company leased office space in various
cities throughout the United States comprising 122,000 square feet under
leases expiring between 1997 and 2002 and which require annual rentals of
$2.0 million in 1997.
The Company owns its headquarters facility in downtown Milwaukee,
Wisconsin which contains approximately 253,000 square feet of space. The
Company also owns a 90,000 square foot office/warehouse facility in
Milwaukee.
The Company maintains two mainframe computers at its corporate data
center located in its headquarters building to support its data processing
requirements for accounting, claims, marketing, risk management,
underwriting and non-insurance operations. The Company has in place back
up procedures in the event of emergency situations.
Item 3. Legal Proceedings.
Information concerning certain legal proceedings involving the
Company and its subsidiaries is included in Notes 9 and 12 to the
consolidated financial statements, included in Exhibit 13 to this Annual
Report on Form 10-K, which Notes are incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Executive Officers
Certain information with respect to the Company's executive officers
as of March 1, 1997 is set forth below:
Name and Age Title
William H. Lacy, 52 . . . . President and Chief Executive Officer of
the Company and Chairman of the Board and
Chief Executive Officer of MGIC; Director
of the Company and MGIC
Curt S. Culver, 44 . . . . President and Chief Operating Officer of
MGIC and Executive Vice President of the
Company
J. Michael Lauer, 52 . . . Executive Vice President and Chief
Financial Officer of the Company and MGIC
Lawrence J. Pierzchalski,
44 . . . . . . . . . . . Executive Vice President,Risk Management
of MGIC
Gordon H. Steinbach, 51 . . Executive Vice President,Credit Policy of
MGIC
Jeffrey H. Lane, 47 . . . . Senior Vice President, General Counsel and
Secretary of the Company and MGIC
James S. MacLeod, 49 . . . Senior Vice President,Field Operations of
MGIC
Mr. Lacy has served as President and Chief Executive Officer of the
Company since October 1987 and Chairman of the Board and Chief Executive
Officer of MGIC since May 1996. He was Executive Vice President and Chief
Operating Officer of the Company from March 1985 to October 1987. He was
President and Chief Executive Officer of MGIC from March 1985 to May 1996.
Mr. Culver has served as President and Chief Operating Officer of
MGIC and Executive Vice President of the Company since May 1996. Mr.
Culver served as Executive Vice President+Marketing and Field Operations
of MGIC from January 1995 to May 1996; was Executive Vice
President+Marketing of MGIC from May 1993 to January 1995; was Executive
Vice President-Corporate Development of MGIC from July 1992 to May 1993,
and was Senior Vice President-Office of the President of MGIC from January
1991 to July 1992. He was Senior Vice President-Marketing of MGIC from
April 1988 to January 1991 and held various management positions with MGIC
in the areas of marketing and sales from March 1985 to April 1988.
Mr. Lauer has served as Executive Vice President and Chief Financial
Officer of the Company and MGIC since March 1989.
Mr. Pierzchalski has served as Executive Vice President-Risk
Management of MGIC since May 1996. He served as Senior Vice President-
Risk Management of MGIC from July 1992 to May 1996. He was Vice
President-Risk Management from April 1990 to July 1992, and held various
management positions with MGIC in the areas of market research, corporate
planning and risk management from March 1985 to April 1990.
Mr. Steinbach has served as Executive Vice President-Credit Policy of
MGIC since October 1996. He served as the Executive Vice President-
Affordable Housing and Claims of MGIC from July, 1992 to October 1996 and
was Executive Vice President-Risk Management/Claims of MGIC from April
1991 to July, 1992. He was Executive Vice President-Risk Management of
MGIC from March 1988 to April 1991, Senior Vice President-Risk Management
of MGIC from May 1986 to March 1988 and Senior Vice President-Underwriting
from March 1985 to May 1986.
Mr. Lane has served as Senior Vice President, General Counsel and
Secretary of the Company and MGIC since August 1996. For more than five
years prior to his joining the Company, Mr. Lane was a partner of Foley &
Lardner, a law firm headquartered in Milwaukee, Wisconsin.
Mr. MacLeod was appointed Senior Vice President - Field Operations of
MGIC in May 1996 and was Senior Vice President - Sales of MGIC from
January 1995 to May 1996. He served as Senior Vice President - Business
Development Operations of MGIC from October 1994 to January 1995. Prior
thereto he was Senior Vice President - Office of the President of MGIC
from May 1993 to October 1994; was Senior Vice President - Marketing of
MGIC from January 1991 to May 1993; was Senior Vice President - Division
Manager of MGIC from July 1987 to January 1991 and had held various
management positions with MGIC in the areas of underwriting and risk
management from March 1985 to July 1987.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Market
The information set forth under the caption "MGIC Stock" in
Exhibit 13 to this Annual Report on Form 10-K is
incorporated herein by reference.
Item 6. Selected Financial Data.
The information set forth in the tables under the caption
"Five-Year Summary of Financial Information" in Exhibit 13
to this Annual Report on Form 10-K is hereby incorporated
by reference in answer to this Item.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information set forth under the caption "Management's
Discussion and Analysis" in Exhibit 13 to this Annual
Report on Form 10-K is hereby incorporated by reference in
answer to this Item.
Item 8. Financial Statements and Supplementary Data.
The consolidated statements of operations, of shareholders'
equity and of cash flows for each of the years in the
three-year period ended December 31, 1996, and the related
consolidated balance sheet of the Company as of
December 31, 1996 and 1995, together with the related notes
thereto and the report of independent accountants, as well
as the unaudited quarterly financial data, all set forth in
Exhibit 13 to this Annual Report on Form 10-K, are hereby
incorporated by reference in answer to this Item.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information on the Directors of the Registrant is
included in the Company's Proxy Statement for the 1997
Annual Meeting of Shareholders, and is hereby incorporated
by reference. The information on the Executive Officers of
the Registrant appears at the end of Part I of this
Form 10-K.
Item 11. Executive Compensation.
This information is included in the Company's Proxy
Statement for the 1997 Annual Meeting of Shareholders
(other than information covered by Instruction (9) to
Item 402(a) of Regulation S-K of the Securities and
Exchange Commission), and is hereby incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
This information is included in the Company's Proxy
Statement for the 1997 Annual Meeting of Shareholders, and
is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
This information is included in the Company's Proxy
Statement for the 1997 Annual Meeting of Shareholders, and
is hereby incorporated by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.
(a) 1. Financial statements , The financial statements listed in
the accompanying Index to Consolidated Financial Statements
and Financial Statement Schedules are filed as part of this
Form 10-K.
2. Financial statement schedules , The financial statement
schedules listed in the accompanying Index to Consolidated
Financial Statements and Financial Statement Schedules are
filed as part of this Form 10-K.
3. Exhibits , The accompanying Index to Exhibits is
incorporated by reference in answer to this portion of this
Item and the Exhibits listed in such Index are filed as
part of this Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1996.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
[Item 14(a) 1 and 2]
Consolidated Financial Statements (all contained in Exhibit 13 to this
Annual Report on Form 10-K)
Consolidated statement of operations for each of the three years in the
period ended December 31, 1996
Consolidated balance sheet at December 31, 1996 and 1995
Consolidated statement of shareholders' equity for each of the three years
in the period ended December 31, 1996
Consolidated statement of cash flows for each of the three years in the
period ended December 31, 1996
Notes to consolidated financial statements
Report of independent accountants
Financial Statement Schedules (all contained immediately following the
signature page to this Annual Report on Form 10-K)
Report of independent accountants on financial statement schedules
Schedules at and for the specified years in the three-year period ended
December 31, 1996:
Schedule I - Summary of investments - other than investments in
related parties
Schedule II - Condensed financial information of Registrant
Schedule IV - Reinsurance
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of
the schedules, or because the information required is included in the
consolidated financial statements and notes thereto.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on
March 14, 1997.
MGIC INVESTMENT CORPORATION
By /s/ William H. Lacy
William H. Lacy
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below as of the date set forth above by the
following persons on behalf of the registrant and in the capacities
indicated.
Name and Title
/s/ William H. Lacy
William H. Lacy
President, Chief Executive Officer and
Director
/s/ J. Michael Lauer
J. Michael Lauer
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ Patrick Sinks
Patrick Sinks
Vice President, Controller and
Chief Accounting Officer
(Principal Accounting Officer)
/s/ James A. Abbott
James A. Abbott
James A. Abbott, Director
/s/ Mary K. Bush
Mary K. Bush, Director
Karl E. Case, Director
/s/ David S. Engleman
David S. Engelman
David S. Engelman, Director
/s/ James D. Ericson
James D. Ericson, Director
/s/ Kenneth M. Jastrow, II
Kenneth M. Jastrow, II, Director
/s/ Sheldon B. Lubar
Sheldon B. Lubar, Director
/s/ William A. McIntosh
William A. McIntosh, Director
/s/ Leslie M. Muma
Leslie M. Muma, Director
/s/ Wayne J. Roper
Wayne J. Roper, Director
/s/ Peter J. Wallison
Peter J. Wallison, Director
/s/ Edward J. Zore
Edward J. Zore, Director
<PAGE>
100 East Wisconsin Avenue
Telephone 414 276 9500
Suite 1500
Milwaukee, WI 53202
PRICE WATERHOUSE LLP
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors
of MGIC Investment Corporation
Our audits of the consolidated financial statements referred to in our
report dated January 8, 1997 appearing on page 27 of the 1996 Annual
Report to Shareholders of MGIC Investment Corporation (which report and
consolidated financial statements are incorporated by reference in this
Annual Report on Form 10-K) also included audits of the Financial
Statement Schedules listed in Item 14(a) of this Form 10-K. In our
opinion, these Financial Statement Schedules present fairly, in all
material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
January 8, 1997
<PAGE>
MGIC INVESTMENT CORPORATION
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1996
Amount at
which shown in
Amortized Market the balance
Cost Value sheet
Type of Investment (In thousands of dollars)
Fixed maturities:
Bonds:
United States Government
and government agencies
and authorities $77,498 $78,636 $78,636
States, municipalities and
political subdivisions 1,364,790 1,420,727 1,420,727
Foreign governments 13,966 14,391 14,391
Public utilities 56,262 56,629 56,629
All other corporate bonds 312,355 314,083 314,083
Redeemable preferred stocks 7,322 7,615 7,615
--------- ---------- ---------
Total fixed maturities 1,832,193 1,892,081 1,892,081
Equity securities:
Common stocks:
Banks, trust and insurance
companies 1,333 4,039 4,039
--------- --------- ---------
Total equity securities 1,333 4,039 4,039
--------- --------- ---------
Short-term investments 140,114 140,114 140,114
--------- --------- ---------
Total investments $1,973,640 $2,036,234 $2,036,234
========== ========== ==========
<PAGE>
MGIC INVESTMENT CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
PARENT COMPANY ONLY
December 31, 1996 and 1995
1996 1995
(In thousands of dollars)
ASSETS
Investment portfolio, at
market value:
Fixed maturities $20,211 $ 17,798
Equity securities - 30
Short-term investments 4,683 4,120
---------- ----------
Total investment portfolio 24,894 21,948
Cash 7 9
Investment in subsidiaries,
at equity in net assets 1,341,206 1,104,455
Income taxes receivable -
affiliates 12,088 5,645
Accrued investment income 260 278
Other assets 16 -
---------- ----------
Total assets $1,378,471 $ 1,132,335
========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Liabilities:
Accounts payable -
affiliates $12,356 $10,943
---------- ----------
Shareholders' equity (note B):
Common stock, $1 par value,
shares authorized 150,000,000;
shares issued 60,555,400;
outstanding 1996 - 58,950,434;
1995 - 58,629,420 60,555 60,555
Paid-in surplus 268,540 259,430
Treasury stock (shares at cost,
1996 - 1,604,966; 1995 -
1,925,980) (7,073) (8,172)
Unrealized appreciation in
investment portfolio of
subsidiaries, net of tax 40,685 54,737
Retained earnings 1,003,408 754,842
---------- ----------
Total shareholders' equity 1,366,115 1,121,392
---------- ----------
Total liabilities and
shareholders' equity $1,378,471 $1,132,335
========== ==========
See accompanying supplementary notes to Parent Company condensed financial
statements.
<PAGE>
MGIC INVESTMENT CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF OPERATIONS
PARENT COMPANY ONLY
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
(In thousands of dollars)
Revenue:
Equity in undistributed
net income of subsidiaries $240,631 $186,184 $153,756
Dividends received from
subsidiaries 16,349 20,521 4,802
Investment income, net 1,256 902 1,048
Realized investment (losses)
gains, net (32) 42 -
Other income 3 - -
--------- -------- --------
Total revenue 258,207 207,649 159,606
--------- -------- --------
Expenses:
Operating expenses 216 84 93
--------- -------- --------
Total expenses 216 84 93
--------- -------- --------
Income before tax 257,991 207,565 159,513
Credit for income tax - - (5)
--------- -------- --------
Net income $ 257,991 $207,565 $ 159,518
========= ========= ========
See accompanying supplementary notes to Parent Company condensed financial
statements.
<PAGE>
MGIC INVESTMENT CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF CASH FLOWS
PARENT COMPANY ONLY
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
(In thousands of dollars)
Cash flows from operating
activities:
Net income $257,991 $207,565 $159,518
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in undistributed net
income of subsidiaries (240,631) (186,184) (153,756)
Increase in income taxes
receivable (6,443) (1,969) (1,267)
Decrease in accrued investment
income 18 31 40
Increase in accounts payable -
affiliates 1,413 1,704 3,484
Decrease in other liabilities - (226) (733)
Other (1) (233) 197
-------- -------- --------
Net cash provided by operating
activities 12,347 20,688 7,483
-------- -------- --------
Cash flows from investing activities:
Increase in investment in
subsidiaries (10,000) (15,000) -
Purchase of fixed maturities (7,232) (11,034) (355)
Sale of fixed maturities 4,632 9,205 1,970
Sale of equity securities 30 - -
-------- -------- --------
Net cash (used in) provided by
investing activities (12,570) (16,829) 1,615
-------- -------- --------
Cash flows from financing activities:
Dividends paid to shareholders (9,425) (9,371) (9,335)
Reissuance of treasury stock 10,209 6,079 2,151
-------- -------- --------
Net cash provided by (used in)
financing activities 784 (3,292) (7,184)
-------- -------- --------
Net increase in cash and short-term
investments 561 567 1,914
Cash and short-term investments at
beginning of year 4,129 3,562 1,648
-------- -------- --------
Cash and short-term investments
at end of year $4,690 $4,129 $3,562
======== ======== ========
See accompanying supplementary notes to Parent Company condensed
financial statements.
<PAGE>
MGIC INVESTMENT CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
SUPPLEMENTARY NOTES
Note A
The accompanying Parent Company financial statements should be read in
conjunction with the Consolidated Financial Statements and Notes to
Consolidated Financial Statements appearing on pages 14 through 27 of the
MGIC Investment Corporation 1996 Annual Report to Shareholders.
Note B
The Company's insurance subsidiaries are subject to statutory
regulations as to maintenance of policyholders' surplus and payment of
dividends. The maximum amount of dividends that the insurance
subsidiaries may pay in any twelve-month period without regulatory
approval by the Office of the Commissioner of Insurance of the State of
Wisconsin is the lesser of adjusted statutory net income or 10% of
statutory policyholders' surplus as of the preceding calendar year end.
Adjusted statutory net income is defined for this purpose to be the
greater of statutory net income, net of realized investment gains, for the
calendar year preceding the date of the dividend or statutory net income,
net of realized investment gains, for the three calendar years preceding
the date of the dividend less dividends paid within the first two of the
preceding three calendar years. In 1997, the Company's principal
insurance subsidiary, Mortgage Guaranty Insurance Corporation can pay
$25.2 million of dividends and the other insurance subsidiaries of the
Company can pay $3.0 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 1997, the Company
can pay dividends of $35.5 million from the Parent Company's funds and
funds available from the non-insurance subsidiaries. In 1996, 1995 and
1994, the Company paid dividends of $9.4 million, $9.4 million and $9.3
million, respectively or $.16 per share.
<PAGE>
MGIC INVESTMENT CORPORATION
SCHEDULE IV - REINSURANCE
MORTGAGE INSURANCE PREMIUMS EARNED
Years Ended December 31, 1996, 1995 and 1994
Assumed Percentage
Ceded to From of Amount
Gross Other Other Net Assumed to
Amount Companies Companies Amount Net
(In thousands of dollars)
Year ended
December 31,
1996 $623,148 $19,350 $13,245 $617,043 2.1%
========= ========= ========= =========
1995 $522,069 $23,760 $8,191 $506,500 1.6%
========= ========= ========= =========
1994 $425,277 $31,492 $10,205 $403,990 2.5%
========= ========= ========= =========
<PAGE>
INDEX TO EXHIBITS
[Item 14(a)3]
Exhibit
Numbers Description of Exhibits
3.1 Articles of Incorporation, as amended, including
Articles of Amendment effective May 23, 1994.(1)
3.2 Amended and Restated Bylaws.(2)
4.1 Article 6 of the Articles of Incorporation
(included within Exhibit 3.1)
4.2 Amended and Restated Bylaws (included as
Exhibit 3.2)
10.1 Common Stock Purchase Agreement between the Company
and The Northwestern Mutual Life Insurance Company
("NML"), dated November 30, 1984(3)
10.2 Reinsurance Management Agreement between WMAC and
MGIC, dated February 28, 1985(4)
10.3 Reinsurance Management Agreement between Mortgage
Guaranty Reinsurance Corporation ("MGRC") and MGIC,
effective September 30, 1985(5)
10.4 Tax Agreement between NML, the Company and certain
subsidiaries of the Company, dated January 1, 1986,
including amendment thereto dated as of August 2,
1991(6)
10.5 Tax Sharing Agreement between the Company, MGIC and
certain subsidiaries of MGIC, dated January 22,
1986(7)
10.6 Amendment to Tax Agreement, dated as of August 14,
1991, by and between NML, the Company, and its
subsidiaries(8)
10.7 Investment Advisory and Servicing Agreement between
the Company and NML Equity Services, Inc. (now known
as Northwestern Mutual Investment Services,Inc.),
dated December 29, 1989, as amended by Amendment
dated as of January 19, 1993(9)
10.8 Amendment to Investment Advisory and Servicing
Agreement described in Exhibit 10.9, dated as of
February 1, 1995.(10)
10.9 Amendment to Investment Advisory and Servicing
Agreement described in Exhibit 10.9, dated as of
January 26, 1996.(11)
10.10 MGIC Investment Corporation Amended and Restated
1989 Stock Option Plan (including forms of option
agreement).(12)
10.11 MGIC Investment Corporation 1991 Stock Incentive
Plan (formerly known as the 1991 Stock Option
Plan).(13)
10.12 Form of Stock Option Agreement under 1991 Stock
Option Plan (now known as the 1991 Stock Incentive
Plan).(14)
10.13 Two forms of Stock Option Agreements under 1991
Stock Incentive Plan (1994 Form 1 and 1994 Form
2).(15)
10.14 Form of Restricted Stock Award Agreement under 1991
Stock Incentive Plan.(16)
10.15 Executive Bonus Plan
10.16 Supplemental Executive Retirement Plan.
10.17 MGIC Investment Corporation Deferred Compensation
Plan for Non-Employee Directors.(17)
10.18 MGIC Investment Corporation 1993 Restricted Stock
Plan for Non-Employee Directors.(18)
10.19 Two forms of Award Agreement under MGIC Investment
Corporation 1993 Restricted Stock Plan for Non-
Employee Directors.(19)
10.20 Form of MGIC Mortgage Guaranty Master Policy, in
effect generally for insurance commitments issued
beginning March 1, 1995, including the Master Policy
Program Endorsement relating to delegated
underwriting.(20)
11 Statement re: computation of per share earnings
13 Information from the 1996 Annual Report of the
Company to Shareholders which is incorporated by
reference in this Annual Report on Form 10-K.
21 List of Subsidiaries
23 Consent of Price Waterhouse LLP
27 Financial Data Schedule
Supplementary List of the above Exhibits which relate to management
contracts or compensatory plans or arrangements.
10.10 MGIC Investment Corporation Amended and Restated
1989 Stock Option Plan (including forms of option
agreement).(12)
10.11 MGIC Investment Corporation 1991 Stock Incentive
Plan (formerly known as the 1991 Stock Option
Plan).(13)
10.12 Form of Stock Option Agreement under 1991 Stock
Option Plan (now known as the 1991 Stock Incentive
Plan).(14)
10.13 Two forms of Stock Option Agreements under 1991
Stock Incentive Plan (1994 Form 1 and 1994 Form
2).(15)
10.14 Form of Restricted Stock Award Agreement under 1991
Stock Incentive Plan.(16)
10.15 Executive Bonus Plan
10.16 Supplemental Executive Retirement Plan.
10.17 MGIC Investment Corporation Deferred Compensation
Plan for Non-Employee Directors.(17)
10.18 MGIC Investment Corporation 1993 Restricted Stock
Plan for Non-Employee Directors.(18)
10.19 Two forms of Award Agreement under MGIC Investment
Corporation 1993 Restricted Stock Plan for Non-
Employee Directors.(19)
The following documents, identified in the footnote references
above, are incorporated by reference, as indicated, to the Company's
Form S-1 Registration Statement (No. 33-41289), which became effective in
August 1991 (the "1991 S-1"), or to the Company's Form S-1 Registration
Statement (No. 33,47272) which became effective in June 1992 (the "1992 S-
1"); or to the Company's Annual Reports on Form 10-K for the years ended
December 31, 1991, 1992, 1993, 1994 or 1995 (the "1991 10-K," "1992 10-K,"
"1993 10-K," "1994 10-K," and "1995 10-K," respectively; or to the
Quarterly Report on Form 10-Q for the Quarter ended June 30, 1994 (the
"10-Q as of June 30, 1994"). The documents are further identified by
cross-reference to the Exhibits in the respective documents where they
were originally filed:
(1) Exhibit 3.3 to the 10-Q as of June 30, 1994.
(2) Exhibit 3.2 to the 1991 S-1 and the amendment thereto is
Exhibit 3.3 to the 1992 10-K.
(3) Exhibit 10.1 to the 1991 S-1.
(4) Exhibit 10.6 to the 1991 S-1.
(5) Exhibit 10.7 to the 1991 S-1.
(6) The Tax Agreement is Exhibit 10.8 to the 1991 S-1 and the
amendment thereto is Exhibit 10.21 to the 1991 S-1.
(7) Exhibit 10.9 to the 1991 S-1.
(8) Exhibit 10.10 to the 1991 10-K.
(9) Exhibit 10.12 to the 1991 S-1 and the amendment thereto is
Exhibit 10.15 to the 1992 10-K.
(10) Exhibit 10.11 to the 1994 10-K.
(11) Exhibit 10.11 to the 1995 10-K
(12) Exhibit 10.16 to the 1991 S-1.
(13) Exhibit 10.29 to the 10-Q as of June 30, 1994. (The 1991 Stock
Option Plan was contained in Exhibit 10.17 to the 1991 S-1.)
(14) Exhibit 10.19 to the 1991 10-K.
(15) Exhibits 10.30 and 10.31 to the 10-Q as of June 30, 1994.
(16) Exhibit 10.32 to the 10-Q as of June 30, 1994.
(17) Exhibit 10.23 to the 1993 10-K.
(18) Exhibit 10.24 to the 1993 10-K.
(19) Exhibits 10.27 and 10.28 to the 10-Q as of June 30, 1994.
(20) Exhibit 10.26 to the 1994 10-K.
Exhibit 10.15
EXECUTIVE BONUS PLAN OF
MGIC INVESTMENT CORPORATION
(the "Company")
The Executive Bonus Plan of the Company in effect for 1997 (which is not
contained in a formal plan document), applies to certain officers of the
Company, including the executive officers of the Company identified in the
Form 10-K for the year ended December 31, 1996. Under the Executive Bonus
Plan, if the Company achieves a minimum level of net income for 1997, an
executive officer will be eligible for a bonus, depending upon the
executive officer's performance with regard to the achievement of
individual goals, within various ranges of up to 80% or 100% of such
executive officer's base salary, depending on the range applicable to the
executive officer.
Exhibit 10.16
MGIC INVESTMENT CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
1. Purpose
The purposes of this MGIC Investment Corporation Supplemental
Executive Retirement Plan (hereinafter referred to as the "Plan") are to
restore retirement benefits to certain participants in the Company's
pension plan whose benefits under said Plan are or will be limited by
reason of Sections 401(a)(17) or 415 of the Internal Revenue Code of 1986,
as amended ("Code") and to provide certain other retirement benefits.
This Plan is completely separate from the tax-qualified Pension
Plan maintained by the Company and is not funded or qualified for special
tax treatment under the Code.
2. Effective Date
The Plan is effective as of July 31, 1990.
3. Definitions
The following terms as used herein shall have the meanings set
forth below:
"Company" means MGIC Investment Corporation, a Wisconsin
corporation.
"Employer" or "Employers" means the Company and any
subsidiary or affiliate thereof which is a "Participating Employer" under
the Pension Plan.
"Group Annuity Contract" means Group Annuity Contract
8474-0 issued by Metropolitan Life Insurance Company to provide for the
payment of benefits accrued under a terminated pension plan previously
maintained by the Company's predecessor.
"Participant" means an employee of the Employers who is a
participant in the Pension Plan and who is (or whose position is)
designated for participation herein by the board of directors of the
Company. As of the Effective Date, the following officers of Mortgage
Guaranty Insurance Corporation are designated as Participants:
Chief Executive Officer
Chief Operating Officer
All Executive Vice Presidents
All Senior Vice Presidents
"Pension Plan" means the defined benefit pension plan maintained
by the Company known as the MGIC Investment Corporation Pension Plan and
any successor to such plan maintained by the Company or any successor or
affiliate of the Company.
"Pension Plan Benefits" means the monthly benefits payable under
the terms of the Pension Plan and/or under the Group Annuity Contract.
4. Administration
The Plan shall be administered by the Administrator of the
Pension Plan ("Administrator"). Decisions and determinations by the
Administrator shall be final and binding on all parties, except when
manifestly contrary to the provisions of this Plan and except that no
presumption of validity shall be given to any such decision or
determination with respect to Section 5(d). The Administrator shall have
the authority to interpret the Plan, to promulgate and revise rules and
regulations relating to the Plan and to make any other determinations
which it deems necessary or advisable for the administration thereof.
5. Pension Plan Supplement
(a) Any Participant who, upon termination of employment with
the Employers after the Effective Date has a vested and nonforfeitable
right to a pension under the Pension Plan, or such Participant's spouse or
other beneficiary, shall be entitled to a benefit payable hereunder in
accordance with this Section 5, equal to the excess, if any, of
(i) the amount of such Participant's, surviving spouse's or
other beneficiary's Pension Plan Benefits computed under the
provisions of the Pension Plan and Group Annuity Contract, but
without regard to the limitations on benefits imposed by reason of
Section 415 of the Code or the limit on considered compensation under
Section 401(a)(17) of the Code; over
(ii) the amount of Pension Plan Benefits actually payable to
such Participant, surviving spouse or other beneficiary for each
month under the Pension Plan and Group Annuity Contract, as computed
under the provisions of such Plan and Contract.
The amount of Pension Plan Benefits in the computation under
clauses (i) and (ii) above shall exclude any Pension Plan Benefits earned
after a Participant no longer occupies any position designated for
participation in the Plan.
(b) Benefits under this Section 5 shall become payable when the
Participant or the Participant's spouse or other beneficiary begins to
receive Pension Plan benefits and shall be payable in the same manner, at
the same time and in the same form as the benefits actually paid to the
Participant, spouse or other beneficiary under the Pension Plan.
(c) Notwithstanding the foregoing, no benefits shall be payable
under this Plan to or on behalf of any Participant whose employment with
the Employers is terminated "for cause" or who engages in "prohibited
competition." For purposes of this Plan, the term "for cause" shall mean
fraud, dishonesty, theft, gross negligence, willful misconduct in the
performance of duties or other similar causes. The term "prohibited
competition" shall mean the rendering of services to any competitor of the
Employers (i) during the term of his employment by the Employers and (ii)
for a period of one year after any termination of the Participant's
employment in the geographic area or areas (localized or national, as the
case may be) in which he was employed, assigned or otherwise worked on
behalf of the Company, or a present or future parent, subsidiary or
affiliate of the Company, during the three years prior to the termination
of his employment. For purposes of this Plan, the term "competitor" means
any corporation, partnership, proprietorship or firm (i) engaged in the
business of mortgage guaranty in any geographic area in which the Company
or a present or future parent, subsidiary or affiliate of the Company is
so engaged or (ii) engaged in any other business in which the Company or
any subsidiary is engaged, in any geographic area in which the Company or
any subsidiary is so engaged, but only if such business accounted for at
least 10% of the revenues of the Company and its subsidiaries, on a
consolidated basis, during the twelve months preceding the month in which
the Participant's employment terminated.
(d) In the case of a Participant who first becomes a
Participant in 1996, the foregoing provisions of Section 5 shall be
modified to the extent provided below:
(i) For purposes of Section 5(a), such Participant
shall be deemed to have a vested and nonforfeitable right to a
pension under the Pension Plan.
(ii) For purposes of clause (i) of Section 5(a), such
Participant (A) shall be deemed to have a Past Service Benefit
under Section 5.01(a) of the Pension Plan equal to $2,833.33 per
month, and (B) shall be deemed to have a number of years of
Vesting Service under the Pension Plan sufficient to be eligible
for each benefit under the Pension Plan and a vested percentage
under the Pension Plan sufficient to avoid any reduction in the
amount of any such benefit.
(iii) Section 5(b) shall not apply and benefits under
this Section 5 shall become payable when such Participant or
such Participant's spouse or other beneficiary would have
received Pension Plan benefits assuming that such Participant's
deemed Vesting Service under clause (ii) of this Section 5(d)
was such Participant's actual Vesting Service under the Pension
Plan and giving effect to any election to commence receiving
benefits filed with the Administrator as contemplated below,
except that if such an election is made under this Plan and such
Participant is also eligible to elect to commence receiving
benefits under the Pension Plan, such Participant shall also
make such an election under the Pension Plan. Benefits under
this Plan shall be payable in the same manner and in the same
form as benefits would have been payable to the Participant,
spouse or other beneficiary under the Pension Plan in accordance
with the immediately preceding sentence if such benefits were
actually payable thereunder. Any election by such Participant
to commence receiving benefits or of the form of benefits under
this Plan shall be filed with the Administrator in accordance
with the same procedures as established under the Pension Plan,
and in the case of an election of the form of benefits, shall be
the same as any such election under the Pension Plan and shall
be subject to the same restrictions as under the Pension Plan.
(iv) Section 5(c) shall apply only to benefits under
this Plan which are attributable to the Annual Pension Credits
of such Participant. No benefits under this Plan which are
attributable to the Past Service Benefit referred to in clause
(ii) of this Section 5(d) shall be payable to or on behalf of
such Participant if (A) prior to the third anniversary of such
Participant's first day as an employee of an Employer, such
Participant quits (as such term is used in Section 2.01 (a)(i)
of the Pension Plan) as an employee of the Employers other than
as a result of a meaningful reduction in such Participant's job
status, responsibilities or compensation, or (B) such
Participant engages in "prohibited competition," as such term is
used in Section 5(c).
(v) Capitalized definitional terms used in this
Section 5(d) which are defined in the Pension Plan are used as
so defined."
6. Plan Reserve
(a) The Company shall establish a bookkeeping reserve with
respect to the benefits provided under this Plan. Such reserve shall serve
solely as a device for determining the amount of the Company's accrued
deferred liability for the benefits provided herein, and shall not
constitute or be treated as a trust fund of any kind, it being expressly
provided that the amounts credited to the reserve shall be and remain the
sole property of the Company, and that no Participant shall have any
proprietary rights of any nature whatsoever with respect thereto or with
respect to any investments the Company may make to aid it in meeting its
obligations hereunder.
(b) No funds or other assets of the Company shall be segregated
and attributable to the amounts that may from time to time be credited to
the reserve. Benefit payments under the Plan shall be made from the
general assets of the Company at the time any such payments becomes due
and payable. To the extent that any person acquires a right to receive
payments from the Company hereunder, such right shall be no greater than
the right of an unsecured creditor.
7. Inter-Employer Reimbursements
Although all benefit payments hereunder shall be made by the
Company, the Administrator shall determine whether any portion thereof is
allocable to any other Employer on account of its employment of one or
more Participants. In any such case, the Company shall be reimbursed by
such other Employer in the amount and manner determined by the
Administrator.
8. Non-Alienation of Payments
Benefits payable under the Plan shall not be subject in any
manner to alienation, sale, transfer, assignment, pledge, attachment,
garnishment or encumbrance of any kind, by will, or by inter vivos
instrument. Any attempt to alienate, sell, transfer, assign, pledge or
otherwise encumber any such benefit payment, whether currently or
thereafter payable, shall be void and shall not be recognized by the
Administrator or the Company.
9. Limitation of Rights Against the Employers
Participation in this Plan, or any modifications thereof, or the
payments of any benefits hereunder, shall not be construed as giving to
any person any right to be retained in the service of the Employers,
limiting in any way the right of the Employers to terminate such person's
employment at any time, or evidencing any agreement or understanding that
the Employers will employ such person in any particular position or at any
particular rate of compensation.
10. Applicable Laws
The Plan shall be construed, administered and governed in all
respects under and by the laws of the State of Wisconsin.
11. Liability
Neither the Company nor any shareholder, director, officer or
other employee of any Employer or any other person shall be liable for any
act or failure to act hereunder except for gross negligence or fraud.
12. Amendment or Termination
(a) The Company, by action of its board of directors, reserves
the right to amend or terminate this Plan at any time, provided that no
such amendment or modification shall adversely affect the rights of any
Participant, spouse or other beneficiary with respect to any benefits
under this Plan which have accrued to the effective date of such
amendment, termination or modification.
(b) It is understood that an individual's entitlement to benefits
under Section 5 of this Plan may be automatically reduced as the result of
an increase in his Pension Plan Benefits. Nothing herein shall be
construed in any way to limit the right of the Company to amend or modify
the Pension Plan.
EXHIBIT 11
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
For The Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
(In thousands, except per share data)
PRIMARY EARNINGS PER SHARE
Adjusted shares outstanding:
Average common shares
outstanding 58,894 58,542 58,355
Net shares to be issued upon
exercise of dilutive stock
options after applying
treasury stock method 629 742 622
-------- --------- ----------
Adjusted shares outstanding 59,523 59,284 58,977
======== ========= ==========
Net income $257,991 $207,565 $159,518
========= ========= =========
Net income per share $4.33 $3.50 $2.70
========= ========= =========
FULLY DILUTED EARNINGS PER SHARE
Adjusted shares outstanding:
Average common shares
outstanding 58,894 58,542 58,355
Net shares to be issued upon
exercise of dilutive stock
options after applying
treasury stock method 676 792 661
--------- --------- ---------
Adjusted shares outstanding 59,570 59,334 59,016
========= ========= =========
Net income $257,991 $207,565 $159,518
========= ========= =========
Net income per share $4.33 $3.50 $2.70
========= ========= =========
Exhibit 13
MGIC Investment Corporation and Subsidiaries - Years Ended December 31,
1996, 1995, 1994, 1993 and 1992
<TABLE>
Five-Year Summary of Financial Information
<CAPTION>
1996 1995 1994 1993 1992
(In thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C>
Summary of Operations
Premiums:
Net premiums written......... $ 588,927 $ 480,312 $ 410,296 $ 342,727 $ 266,699
=========== =========== =========== =========== ===========
Net premiums earned.......... $ 617,043 $ 506,500 $ 403,990 $ 299,342 $ 226,065
Investment income............ 105,355 87,543 75,233 64,689 58,261
Realized investment
gains, net................. 1,220 1,496 336 5,139 5,995
Other revenue................ 22,013 22,347 22,667 34,347 31,390
----------- ----------- ----------- ----------- -----------
Total revenues............. 745,631 617,886 502,226 403,517 321,711
----------- ----------- ----------- ----------- -----------
Losses and expenses:
Losses incurred, net......... 234,350 189,982 153,081 107,132 86,836
Underwriting and other
expenses................... 146,483 137,559 136,027 132,057 119,293
Interest expense............. 3,793 3,821 3,856 3,888 3,927
Ceding commission............ (4,023) (4,885) (7,821) (14,375) (29,993)
----------- ----------- ----------- ----------- -----------
Total losses and
expenses................. 380,603 326,477 285,143 228,702 180,063
----------- ----------- ----------- ----------- -----------
Income before income tax....... 365,028 291,409 217,083 174,815 141,648
Provision for income tax....... 107,037 83,844 57,565 47,546 39,386
----------- ----------- ----------- ----------- -----------
Net income..................... $ 257,991 $ 207,565 $ 159,518 $ 127,269 $ 102,262
=========== =========== =========== =========== ===========
Weighted average common
shares outstanding
(in thousands)............... 59,523 59,284 58,977 58,926 58,725
=========== =========== =========== =========== ===========
Net income per share........... $ 4.33 $ 3.50 $ 2.70 $ 2.16 $ 1.74
=========== =========== =========== =========== ===========
Dividends per share............ $ 0.16 $ 0.16 $ 0.16 $ 0.145 $ 0.14
=========== =========== =========== =========== ===========
Balance sheet data
Total investments............ $ 2,036,234 $1,687,221 $1,292,960 $1,099,643 $ 896,120
Total assets................. 2,222,315 1,874,719 1,476,266 1,343,205 1,133,537
Loss reserves................ 514,042 371,032 274,469 213,600 167,094
Shareholders' equity......... 1,366,115 1,121,392 838,074 712,070 592,199
Book value per share......... 23.17 19.13 14.35 12.22 10.17
New primary insurance written
($ millions) $ 32,756 $ 30,277 $ 34,419 $ 37,041 $ 27,421
Insurance in force (at year-end)
($ millions)
Direct primary insurance
New book*.................. $ 131,397 $ 120,341 $ 104,416 $ 85,848 $ 71,246
Old book*.................. 6,505 8,196 9,932 12,737 16,676
Direct primary risk
New book................... 29,308 25,502 20,756 16,810 14,097
Old book................... 1,637 2,055 2,481 3,180 4,193
Net primary risk
New book................... 28,565 24,593 19,664 13,971 10,638
Old book................... 1,006 390 471 604 791
Direct pool insurance
New book................... 1,001 1,074 1,235 1,710 2,431
Old book................... 1,446 1,731 2,041 2,983 4,394
Direct pool risk
New book................... 232 254 295 348 355
Old book................... 533 638 721 962 1,226
Net pool risk
New book................... 181 186 195 188 209
Old book................... 349 134 157 211 261
Primary loans in default ratios
Policies in force
New book................... 1,299,038 1,219,304 1,080,882 921,259 806,958
Old book................... 223,986 270,800 315,313 386,103 482,007
Loans in default
New book................... 25,034 19,980 15,439 13,658 13,082
Old book................... 10,072 12,354 14,516 16,757 20,247
Percentage of loans in default
New book................... 1.93% 1.64% 1.43% 1.48% 1.62%
Old book................... 4.50% 4.56% 4.60% 4.34% 4.20%
Insurance operating ratios (GAAP)
Loss ratio................... 38.0% 37.5% 37.9% 35.8% 38.4%
Expense ratio................ 21.6% 24.6% 28.1% 25.7% 24.6%
----------- ----------- ----------- ----------- -----------
Combined ratio............... 59.6% 62.1% 66.0% 61.5% 63.0%
=========== =========== =========== =========== ===========
Risk-to-capital ratios (statutory)
Combined insurance
subsidiaries............... 18.8:1 19.9:1 20.6:1 18.9:1 18.7:1
MGIC......................... 18.1:1 19.1:1 19.6:1 17.1:1 16.1:1
*The New book consists of insurance written by Mortgage Guaranty Insurance Corporation ("MGIC"), a subsidiary of MGIC
Investment Corporation, since March 1, 1985. The Old book consists of insurance written or committed to by Wisconsin Mortgage
Assurance Corporation ("WMAC") prior to March 1, 1985. MGIC and another subsidiary of MGIC Investment Corporation are
reinsurers of 64.8% of the Old book for 1996 and 20% of the Old book in prior years, and MGIC is the manager of the Old book
for WMAC. The Direct information shown above for the Old book represents 100% of the Old book.
</TABLE>
<PAGE>
1996
Management's Discussion and Analysis
Results of Consolidated Operations
1996 Compared with 1995
Net income for 1996 was $258.0 million, compared with $207.6 million in
1995, an increase of 24%. Net income per share for 1996 was $4.33,
compared with $3.50 in 1995, an increase of 24%.
The amount of new primary insurance written by Mortgage Guaranty Insurance
Corporation ("MGIC") during 1996 was $32.8 billion ($7.6 billion, $8.9
billion, $8.6 billion and $7.7 billion during the first through fourth
quarters, respectively), compared with $30.3 billion in 1995 ($6.1
billion, $7.0 billion, $9.0 billion and $8.2 billion during the first
through fourth quarters, respectively). Refinancing activity accounted for
19% of new primary insurance written in 1996 (29%, 19%, 10% and 18% of new
primary insurance written for the first through fourth quarters,
respectively), compared to 11% in 1995 (7%, 6%, 13% and 17% of new primary
insurance written for the first through fourth quarters, respectively).
The $32.8 billion of new primary insurance written during 1996 was offset
by the cancellation of $21.7 billion of insurance in force ($5.7 billion,
$6.1 billion, $5.0 billion and $4.9 billion during the first through
fourth quarters, respectively), and resulted in a net increase of $11.1
billion in primary insurance in force, compared to new primary insurance
written of $30.3 billion, cancellation of $14.4 billion, and a net
increase of $15.9 billion in insurance in force during 1995. Direct
primary insurance in force was $131.4 billion at December 31, 1996,
compared to $120.3 billion at December 31, 1995.
Cancellation activity increased during 1996 due to increased refinancing
activity which resulted in a decrease in the MGIC persistency rate
(percentage of insurance remaining in force from one year prior) to 82.0%
at December 31, 1996, from 86.3% at December 31, 1995. Cancellation
activity could increase in 1997 if proposed legislation regarding
cancellation of mortgage insurance is enacted.
New insurance written for 1996 reflected an increase in the usage of the
monthly premium product to 90% of new insurance written from 83% of new
insurance written in 1995. New insurance written for adjustable-rate
mortgages decreased to 26% of new insurance written in 1996 from 33% of
new insurance written in 1995.
Principally as a result of changes in coverage requirements by the Federal
Home Loan Mortgage Corporation and the Federal National Mortgage
Association which were effective in the first quarter of 1995, new
insurance written for mortgages with loan-to-value ("LTV") ratios in
excess of 85% but not more than 90% ("90%") and coverage of 25% was 39% of
new insurance written in 1996 compared to 33% in 1995. New insurance
written for mortgages with LTV ratios in excess of 90% but not more than
95% ("95%") and coverage of 30% was 38% of new insurance written in 1996
compared to 34% in 1995.
Net premiums written were $588.9 million in 1996, compared with $480.3
million in 1995, an increase of $108.6 million, or 23%. The increase was
primarily a result of the growth in insurance in force.
Net premiums earned were $617.0 million for 1996, compared to $506.5
million for 1995, an increase of $110.5 million, or 22%, primarily
reflecting the growth of insurance in force.
Investment income for 1996 was $105.4 million, an increase of 20% over the
$87.5 million in 1995. This increase was primarily the result of an
increase in the amortized cost of average investment assets to $1,788.3
million for 1996, from $1,466.7 million for 1995, an increase of 22%. The
increase was partially offset by a decrease in the portfolio's average
pre-tax investment yield to 5.9% in 1996 from 6.0% in 1995. The
portfolio's average after-tax investment yield was 5.1% for 1996 compared
to 5.2% for 1995.
Other revenue was $22.0 million in 1996, compared with $22.3 million in
1995. Other revenue represents activity of the Company's mortgage services
operations, primarily contracts with government agencies for premium
reconciliation and claim administration and fee-based services for
underwriting.
Ceding commission for 1996 was $4.0 million, compared to $4.9 million in
1995, a decrease of 18%. The decrease was primarily attributable to
reductions in premiums ceded under quota share reinsurance agreements.
Net losses incurred increased to $234.4 million in 1996, from $190.0
million in 1995, an increase of 23%. Such increase was primarily due to an
increase in the notice inventory from 19,980 at December 31, 1995 to
25,034 at December 31, 1996 resulting from an increasing percentage of the
Company's insurance in force reaching its peak claim paying years, concern
with early loss developments on insurance written in late 1994 and the
first half of 1995, the continued high level of loss activity in certain
high cost geographic regions and an increase in claim amounts on defaults
with deeper coverages. The increase was partially offset by a redundancy
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, 1995. The Company
expects that, in general, incurred losses will continue to rise as a
result of increased delinquency activity primarily related to the higher
risk profile on loans insured in late 1994 and the first half of 1995, and
the continued growth and maturing of its insurance in force as well as
anticipated higher severity resulting from higher coverages for business
written beginning in 1995. At December 31, 1996, 42% of the insurance in
force was written during the last two years, compared to 48% at December
31, 1995. 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 6% in 1996 to $146.5 million
from $137.6 million in 1995. 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 premium written.
The consolidated insurance operations loss ratio was 38.0% for 1996
compared to 37.5% for 1995. The consolidated insurance operations expense
and combined ratios were 21.6% and 59.6%, respectively, for 1996 compared
to 24.6% and 62.1%, respectively, for 1995.
The effective tax rate was 29.3% in 1996, compared with 28.8% in 1995.
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 1996 resulted from a lower percentage of
total income before tax being generated from tax-preferenced investments
in 1996.
1995 Compared with 1994
Net income for 1995 was $207.6 million, compared with $159.5 million in
1994, an increase of 30%. Net income per share for 1995 was $3.50,
compared with $2.70 in 1994, an increase of 30%.
The amount of new primary insurance written by MGIC during 1995 was $30.3
billion compared with $34.4 billion in 1994 ($8.7 billion, $9.1 billion,
$8.9 billion and $7.7 billion during the first through fourth quarters,
respectively). Refinancing activity accounted for 11% of new primary
insurance written in 1995 compared to 17% in 1994 (37%, 17%, 7% and 7% of
new primary insurance written for the first through fourth quarters,
respectively).
The $30.3 billion of new primary insurance written during 1995 was offset
by the cancellation of $14.4 billion of insurance in force and resulted in
a net increase of $15.9 billion in primary insurance in force, compared to
new primary insurance written of $34.4 billion, cancellation of $15.8
billion, and a net increase of $18.6 billion in insurance in force during
1994. Direct primary insurance in force was $120.3 billion at December 31,
1995, compared to $104.4 billion at December 31, 1994.
Cancellation activity decreased during 1995 due to the drop in refinancing
activity which resulted in an increase in the MGIC persistency rate
(percentage of insurance remaining in force from one year prior) to 86.3%
at December 31, 1995, from 81.5% at December 31, 1994.
Net premiums written were $480.3 million in 1995, compared with $410.3
million in 1994, an increase of $70.0 million, or 17%. The increase was
primarily a result of the growth in insurance in force and premiums
received on products for which the Company charges higher premium rates.
Net premiums written in 1994 included the receipt of $23.1 million of
unearned premium reserves in conjunction with the reassumption of business
previously ceded under certain reinsurance treaties.
Net new premiums written decreased 55% in 1995 to $52.8 million, from
$116.7 million during 1994, offset by a 46% increase in net renewal
premiums written to $427.5 million in 1995 from $293.6 million in 1994.
The decrease in net new premiums written during 1995 resulted primarily
from the increase in the usage of the monthly premium product to 83% of
new insurance written from 51% of new insurance written in 1994, and the
continued decline in single premium business from 2% of new insurance
written in 1994 to 1% of new insurance written in 1995.
These decreases in net new premiums written were partially offset by an
increase in new insurance written on products for which the Company
charges higher premium rates, principally mortgages with LTV ratios of 95%
and mortgages with coverages of 25% and 30%. New insurance written for
mortgages with LTV ratios of 95% increased to 43% of new insurance written
from 36% in 1994.
Principally as a result of changes in coverage requirements by the Federal
Home Loan Mortgage Corporation and the Federal National Mortgage
Association, new insurance written for mortgages with LTV ratios of 90%
and coverage of 25% was 33% of new insurance written in 1995 compared to
4% in 1994. New insurance written for mortgages with LTV ratios of 95% and
coverage of 30% was 34% of new insurance written in 1995 compared to 2% in
1994.
Net renewal premiums increased as a result of the growth of insurance in
force and the increased usage of monthly premiums. Monthly premiums
received after the initial payment are classified as renewal premiums.
Renewal premiums were reduced by cancellation activity resulting in $15.1
million of net premiums being refunded in 1995, compared to $20.5 million
in 1994 when there was higher cancellation activity. The net renewal
premiums for 1994 included the receipt of $23.1 million of unearned
premium reserves in conjunction with the reassumption of business
previously ceded under certain reinsurance treaties.
Net premiums earned were $506.5 million for 1995, compared to $404.0
million for 1994, an increase of $102.5 million, or 25%, primarily
reflecting the growth of insurance in force, the increase in persistency
and premiums earned on products for which the Company charges higher
premium rates.
Investment income for 1995 was $87.5 million, an increase of 16% over the
$75.2 million in 1994. This increase was primarily the result of an
increase in the amortized cost of average investment assets to $1,466.7
million for 1995, from $1,215.0 million for 1994, an increase of 21%. The
increase was partially offset by a decrease in the portfolio's average
pre-tax investment yield to 6.0% in 1995 from 6.2% in 1994. The
portfolio's average after-tax investment yield was 5.2% for 1995 compared
to 5.6% for 1994.
Other revenue was $22.3 million in 1995, compared with $22.7 million in
1994. Other revenue represents activity of the Company's mortgage services
operations, primarily contracts with government agencies for premium
reconciliation and claim administration and fee-based services for
underwriting.
Ceding commission for 1995 was $4.9 million, compared to $7.8 million in
1994, a decrease of 37%. The decrease was primarily attributable to
reductions in premiums ceded under quota share reinsurance agreements.
Net losses incurred increased to $190.0 million in 1995, from $153.1
million in 1994, an increase of 24%. Such increase was primarily a result
of higher reserve levels necessitated by increased notice of default
activity on loans insured in late 1994 and the first half of 1995 which
had a higher risk profile than the insurance in force as a whole, and the
continued growth and maturation of the insurance in force. The increase
was partially offset by a redundancy 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, 1994. At December 31, 1995, 48% of the insurance in force was
written during the last two years, compared to 62% at December 31, 1994.
The highest claim frequency years have typically been the third through
fifth years after the year of loan origination. However, a substantial
portion of the insurance written in 1992 and 1993 represented insurance on
the refinance of mortgage loans originated in earlier years. Because of
the earlier originations, the pattern of claims frequency for these
refinance loans may be different from the historical pattern of other
loans.
Underwriting and other expenses increased slightly in 1995 to $137.6
million from $136.0 million in 1994. Contributing to the increase in
expenses was a reduction in the amount of deferred insurance policy
acquisition costs due to the growth of the monthly premium product.
The consolidated insurance operations loss ratio was 37.5% for 1995
compared to 37.9% for 1994. The consolidated insurance operations expense
and combined ratios were 24.6% and 62.1%, respectively, for 1995 compared
to 28.1% and 66.0%, respectively, for 1994. The expense ratio for 1994
excludes the $23.1 million received as a result of the reassumption of
certain reinsurance treaties.
The effective tax rate was 28.8% in 1995, compared with 26.5% in 1994.
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 1995 resulted from a lower percentage of
total income before tax being generated from tax-preferenced investments
in 1995.
Financial Condition
Consolidated total investments were $2,036.2 million at December 31, 1996,
compared with $1,687.2 million at December 31, 1995, an increase of 21%.
Offsetting the increase was a decrease of $21.6 million in unrealized
gains on securities marked to market. The Company generated consolidated
cash flows from operating activities of $367.8 million during 1996,
compared to $286.5 million generated during 1995. The increase in
operating cash flows during 1996 is due primarily to an increase in
renewal premiums and the receipt of $40 million in connection with the
WMAC Transaction described below. As of December 31, 1996, the Company had
$140.1 million of short-term investments with maturities of 90 days or
less, and 70% of the portfolio was invested in tax-preferenced securities.
In addition, at December 31, 1996, based on book value, the Company's
total investments, which were virtually all comprised of fixed-income
securities, were approximately 99% invested in "A" rated and above,
readily marketable securities, concentrated in maturities of less than 15
years.
In September 1996, the Company signed an agreement with Wisconsin Mortgage
Assurance Corporation ("WMAC") and a WMAC reinsurer to assume all of the
reinsurer's interest in WMAC mortgage insurance writings, which had
previously been ceded to that reinsurer ("WMAC Transaction"). WMAC wrote
mortgage insurance on first mortgages collateralized by one-to-four-family
residences until February 28, 1985. Under the agreement, the Company
assumed reinsurance on approximately $4.2 billion of WMAC's insurance in
force (representing approximately $1.1 billion of risk in force) committed
to, or written, through February 28, 1985. As a result, the amount of
WMAC's insurance in force ceded to the Company increased to approximately
$6.2 billion (representing $1.6 billion of risk in force), with the
portion of WMAC's insurance in force reinsured by the Company increasing
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.
Consolidated loss reserves increased 39% to $514.0 million at December 31,
1996 from $371.0 million at December 31, 1995, reflecting the higher level
of defaults as described in the Results of Consolidated Operations (1996
Compared with 1995) and the increase in loss reserves assumed from the
WMAC Transaction. Consistent with industry practices, the Company does not
establish loss reserves for future claims on insured loans which are not
currently in default.
Consolidated unearned premiums decreased $31.9 million from $251.2 million
at December 31, 1995, to $219.3 million at December 31, 1996, reflecting
the high level of monthly premium policies written in 1996, for which
there is no unearned premium. Reinsurance recoverable on unearned premiums
decreased $3.8 million to $11.7 million at December 31, 1996 from $15.5
million at December 31, 1995, primarily reflecting the reduction in
unearned premiums.
Consolidated shareholders' equity increased to $1,366.1 million at
December 31, 1996, from $1,121.4 million at December 31, 1995, an increase
of 22%. This increase consisted of $258.0 million of net income during
1996 and $10.2 million from the reissuance of treasury stock, offset by a
decrease in net unrealized gains on investments, net of tax, of $14.1
million and dividends declared of $9.4 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 70% of underwriting expenses are
personnel-related costs, most of which are considered by the Company to be
fixed costs over the short term. Approximately 8% 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 4% and 9%, respectively, of total operating
expenses. The Company generated positive cash flows of approximately
$367.8 million, $286.5 million and $239.5 million in 1996, 1995 and 1994,
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.
In January 1997, the Company is obligated to repay mortgages payable of
$35.4 million, which is secured by the home office and substantially all
of the furniture and fixtures of the Company. The Company expects that it
will use internally generated funds to repay this debt. The Company does
not anticipate any significant capital expenditures during 1997.
MGIC is the principal insurance subsidiary of the Company. MGIC's risk-to-
capital ratio was 18.1:1 at December 31, 1996 compared to 19.1:1 at
December 31, 1995. The decrease was due to MGIC's increased policyholders'
reserves, partially offset by the additional risk in force of $4.3 billion
resulting from the $13.5 billion net addition to insurance in force during
1996. Part of the increase in risk in force and insurance in force was due
to the reinsurance assumed from the WMAC Transaction described above.
The Company's combined insurance risk-to-capital ratio was 18.8:1 at
December 31, 1996, compared to 19.9:1 at December 31, 1995. The decrease
was due to the same reasons as described above.
<PAGE>
MGIC Investment Corporation and Subsidiaries - Years Ended December 31,
1996, 1995 and 1994
Consolidated Statement of Operations
1996 1995 1994
(In thousands of dollars, except per share data)
REVENUES
Premiums written:
Direct......................... $ 587,626 $ 492,238 $ 400,043
Assumed........................ 16,912 8,043 9,737
Ceded (note 7)................. (15,611) (19,969) 516
--------- --------- ---------
Net premiums written............. 588,927 480,312 410,296
Decrease (increase) in
unearned premiums.............. 28,116 26,188 (6,306)
--------- --------- ---------
Net premiums earned
(note 7)....................... 617,043 506,500 403,990
Investment income, net of
expenses (note 4).............. 105,355 87,543 75,233
Realized investment gains,
net (note 4)................... 1,220 1,496 336
Other revenue.................... 22,013 22,347 22,667
-------- -------- --------
Total revenues............. 745,631 617,886 502,226
-------- -------- --------
LOSSES AND EXPENSES
Losses incurred, net
(note 7)..................... 234,350 189,982 153,081
Underwriting and other
expenses..................... 146,483 137,559 136,027
Interest expense............... 3,793 3,821 3,856
Ceding commission (note 7)..... (4,023) (4,885) (7,821)
--------- --------- ---------
Total losses and
expenses............... 380,603 326,477 285,143
--------- --------- ---------
Income before tax................ 365,028 291,409 217,083
Provision for income tax
(note 9)....................... 107,037 83,844 57,565
--------- --------- ---------
Net income....................... $ 257,991 $ 207,565 $ 159,518
========= ========= =========
Net income per share
(note 10)..................... $ 4.33 $ 3.50 $ 2.70
========= ========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
MGIC Investment Corporation and Subsidiaries - December 31, 1996 and 1995
Consolidated Balance Sheet
1996 1995
ASSETS (In thousands of dollars)
Investment portfolio (note 4):
Securities, available-for-sale,
at market value:
Fixed maturities................... $ 1,892,081 $1,602,806
Equity securities.................. 4,039 3,836
Short-term investments............. 140,114 80,579
------------ -----------
Total investment portfolio....... 2,036,234 1,687,221
Cash................................... 3,861 9,685
Accrued investment income.............. 33,363 29,213
Reinsurance recoverable on loss
reserves (note 7).................... 29,827 33,856
Reinsurance recoverable on unearned
premiums (note 7).................... 11,745 15,485
Home office and equipment, net
(note 5)............................. 35,050 38,782
Deferred insurance policy
acquisition costs.................... 31,956 37,956
Other assets........................... 40,279 22,521
----------- -----------
Total assets..................... $ 2,222,315 $1,874,719
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Loss reserves (notes 6 and 7)........ $ 514,042 $ 371,032
Unearned premiums (note 7)........... 219,307 251,163
Mortgages payable (note 5)........... 35,424 35,799
Income taxes payable (note 9)........ 23,111 33,686
Other liabilities.................... 64,316 61,647
----------- -----------
Total liabilities................. 856,200 753,327
----------- -----------
Contingencies (note 12)
Shareholders' equity (note 10):
Common stock, $1 par value,
shares authorized 150,000,000;
shares issued 60,555,400;
outstanding 1996 - 58,950,434;
1995 - 58,629,420.................. 60,555 60,555
Paid-in surplus...................... 268,540 259,430
Treasury stock (shares at cost
1996 - 1,604,966; 1995 -
1,925,980)......................... (7,073) (8,172)
Unrealized appreciation in
investments, net of tax............ 40,685 54,737
Retained earnings (note 10).......... 1,003,408 754,842
----------- -----------
Total shareholders' equity....... 1,366,115 1,121,392
----------- -----------
Total liabilities and
shareholders' equity........... $2,222,315 $1,874,719
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
MGIC Investment Corporation and Subsidiaries - Years Ended December 31, 1996
1995 and 1994
<TABLE>
Consolidated Statement of Shareholders' Equity
<CAPTION>
Unrealized
appreciation
Common Paid-in Treasury (depreciation) Retained
stock surplus stock in investments earnings
(In thousands of dollars)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993....... $ 60,555 $ 252,710 $ (9,682) $ 2,022 $ 406,465
Net income....................... - - - - 159,518
Unrealized investment losses,
net............................ - - - (26,330) -
Dividends declared............... - - - - (9,335)
Reissuance of treasury stock..... - 1,635 516 - -
--------- ----------- ----------- ----------- -----------
Balance, December 31, 1994....... 60,555 254,345 (9,166) (24,308) 556,648
Net income....................... - - - - 207,565
Unrealized investment gains,
net............................ - - - 79,045 -
Dividends declared............... - - - - (9,371)
Reissuance of treasury stock..... - 5,085 994 - -
--------- ----------- ----------- ----------- -----------
Balance, December 31, 1995....... 60,555 259,430 (8,172) 54,737 754,842
Net income....................... - - - - 257,991
Unrealized investment losses,
net............................ - - - (14,052) -
Dividends declared............... - - - - (9,425)
Reissuance of treasury stock..... - 9,110 1,099 - -
--------- ----------- ----------- ----------- -----------
Balance, December 31, 1996....... $ 60,555 $ 268,540 $ (7,073) $ 40,685 $1,003,408
========= =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
MGIC Investment Corporation and Subsidiaries - Years Ended December 31,
1996, 1995 and 1994
Consolidated Statement of Cash Flows
1996 1995 1994
(In thousands of dollars)
Cash flows from operating
activities:
Net income..................... $ 257,991 $ 207,565 $ 159,518
Adjustment to reconcile net
income to net cash provided
by operating activities:
Amortization of deferred
insurance policy
acquisition costs........ 26,772 29,693 30,849
Increase in deferred
insurance policy
acquisition costs........ (20,772) (24,748) (27,965)
Depreciation and other
amortization............. 8,969 8,613 2,644
Increase in accrued
investment
income................... (4,150) (4,876) (1,701)
Decrease (increase) in
reinsurance recoverable
on loss reserves......... 4,029 (194) 22,644
Decrease in reinsurance
recoverable on
unearned
premiums................. 3,740 3,791 32,010
Increase in loss reserves.. 143,010 96,563 60,869
Decrease in unearned
premiums................. (31,856) (29,980) (25,703)
Other...................... (19,971) 110 (13,712)
--------- --------- ---------
Net cash provided by operating
activities..................... 367,762 286,537 239,453
--------- --------- ---------
Cash flows from investing
activities:
Purchase of fixed maturities:
Available-for-sale
securities................ (1,095,559) (514,458) (188,762)
Held-to-maturity securities.. - (34,521) (53,885)
Proceeds from sale or maturity
of fixed maturities:
Available-for-sale
securities............... 781,099 166,442 79,853
Held-to-maturity
securities............... - 22,615 7,690
--------- --------- ---------
Net cash used in investing
activities.................... (314,460) (359,922) (155,104)
--------- --------- ---------
Cash flows from financing
activities:
Dividends paid to
shareholders................. (9,425) (9,371) (9,335)
Principal repayments on
mortgages payable............ (375) (348) (312)
Reissuance of treasury
stock........................ 10,209 6,079 2,151
--------- --------- ---------
Net cash provided by (used in)
financing activities........... 409 (3,640) (7,496)
--------- --------- ---------
Net increase (decrease) in cash
and cash equivalents............ 53,711 (77,025) 76,853
Cash and cash equivalents at
beginning of year.............. 90,264 167,289 90,436
---------- --------- ---------
Cash and cash equivalents at
end of year.................... $ 143,975 $ 90,264 $ 167,289
========== ========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
MGIC Investment Corporation and Subsidiaries - December 31, 1996, 1995
and 1994
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,
claim administration and portfolio analysis.
At December 31, 1996, 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 was approximately
$131.4 billion and $29.3 billion, respectively.
The Company's largest shareholder, The Northwestern Mutual Life Insurance
Company ("NML"), held approximately 18% of the common stock of the Company
at December 31, 1996.
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% investment in Credit-Based Asset Servicing and
Securitization, LLC ("C-BASS") is accounted for on the equity method.
Investments -- The Company categorizes its investment portfolio according
to its ability and intent to hold the investments to maturity. Fixed
maturities which are classified as held to maturity are stated at
amortized cost. 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. 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
and equipment over estimated lives of 45 years and 5 years, respectively.
For income tax purposes, the Company uses accelerated depreciation
methods. (See note 5.)
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. Prior to August 1991, the Company and its
subsidiaries filed a consolidated federal income tax return with NML and
its subsidiaries. (See note 9.)
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.
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 8.)
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 8.)
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.)
Net income per share -- Net income per share is based on the weighted
average number of common shares and common stock equivalents which would
arise from the exercise of stock options.
The weighted average number of shares used in the net income per share
computations were as follows (shares in thousands) (see note 10):
Year ended December 31, 1996 59,523
Year ended December 31, 1995 59,284
Year ended December 31, 1994 58,977
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. Interest paid during 1996, 1995 and 1994 approximates
interest expense.
Reclassifications -- Certain reclassifications have been made in the
accompanying financial statements to 1995 and 1994 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 $0.9 million, $0.9 million and
$1.0 million for these services in 1996, 1995 and 1994, respectively.
4. Investments
The following table summarizes the Company's investments at December 31, 1996
and 1995:
<TABLE>
<CAPTION>
Financial Financial
Amortized Market Statement Amortized Market Statement
Cost Value Value Cost Value Value
(In thousands of dollars) (In thousands of dollars)
<S> <C> <C> <C> <S> <C> <C> <C>
At December 31, 1996: At December 31, 1995:
Securities, available Securities, available
for sale: for sale:
Fixed maturities.... $1,832,193 $1,892,081 $1,892,081 Fixed maturities.... $1,520,854 $1,602,806 $1,602,806
Equity securities... 1,333 4,039 4,039 Equity securities... 1,363 3,836 3,836
Short-term Short-term
investments....... 140,114 140,114 140,114 investments....... 80,579 80,579 80,579
--------- --------- --------- --------- --------- ---------
Total investment Total investment
portfolio........... $1,973,640 $2,036,234 $2,036,234 portfolio........... $1,602,796 $1,687,221 $1,687,221
========= ========= ========= ========= ========= =========
</TABLE>
The amortized cost and market value of investments at December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1996: Cost Gains Losses Value
(In thousands of dollars)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government corporations
and agencies....................... $ 77,498 $ 1,483 $ (345) $ 78,636
Obligations of states and political
subdivisions....................... 1,364,790 57,374 (1,437) 1,420,727
Corporate securities................. 515,482 3,659 (1,304) 517,837
Mortgage-backed securities........... 571 33 - 604
Debt securities issued by foreign
sovereign governments.............. 13,966 425 - 14,391
----------- ----------- ----------- -----------
Total debt securities.......... 1,972,307 62,974 (3,086) 2,032,195
Equity securities.................... 1,333 2,706 - 4,039
----------- ----------- ----------- ----------
Total investment portfolio..... $1,973,640 $ 65,680 $ (3,086) $2,036,234
=========== =========== =========== ===========
December 31, 1995:
<C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government corporations
and agencies....................... $ 29,790 $ 1,744 $ - $ 31,534
Obligations of states and political
subdivisions....................... 1,251,284 72,615 (1,202) 1,322,697
Corporate securities................. 316,668 8,712 (1) 325,379
Mortgage-backed securities........... 3,491 84 - 3,575
Debt securities issued by foreign
sovereign governments.............. 200 - - 200
----------- ----------- ----------- -----------
Total debt securities.......... 1,601,433 83,155 (1,203) 1,683,385
Equity securities.................... 1,363 2,473 - 3,836
----------- ----------- ----------- -----------
Total investment portfolio.............
$1,602,796 $ 85,628$ (1,203) $1,687,221
=========== =========== =========== ===========
</TABLE>
<PAGE>
The amortized cost and market values of debt securities at December 31,
1996, 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................. $ 178,014 $ 178,367
Due after one year through five years.... 202,686 206,779
Due after five years through ten years... 836,337 869,736
Due after ten years...................... 754,699 776,709
----------- -----------
1,971,736 2,031,591
Mortgage-backed securities............... 571 604
----------- -----------
Total at December 31, 1996...............$ 1,972,307 $2,032,195
=========== ===========
Net investment income is comprised of the following:
1996 1995 1994
(In thousands of dollars)
Fixed maturities............... $ 99,832 $ 79,328 $ 70,501
Equity securities.............. 240 240 240
Short-term investments......... 6,223 8,498 5,114
Other.......................... 82 409 445
------------ ------------ -----------
Investment income.............. 106,377 88,475 76,300
Investment expenses............ (1,022) (932) (1,067)
------------ ------------ -----------
Net investment income.......... $ 105,355 $ 87,543 $ 75,233
============ ============ ===========
The net realized investment gains (losses) and change in net unrealized
(depreciation) appreciation of investments are as follows:
1996 1995 1994
(In thousands of dollars)
Net realized investment
gains (losses), on sale
of investments:
Fixed maturities........... $ 1,222 $ 1,502 $ 353
Short-term investments..... (2) (6) (17)
----------- ----------- -----------
1,220 1,496 336
----------- ----------- -----------
Change in net unrealized
(depreciation) appreciation:
Fixed maturities........... (22,064) 111,359 (109,720)
Equity securities............ 233 191 260
Short-term investments....... - 898 (419)
----------- ----------- ----------
(21,831) 112,448 (109,879)
----------- ----------- ----------
Net realized investment gains
(losses) and change in net
unrealized (depreciation)
appreciation................. $ (20,611) $ 113,944 $ (109,543)
=========== =========== ==========
At November 30, 1995, the Company transferred its entire held-to-maturity
portfolio with a book value of $557.1 million to the available-for-sale
portfolio. This transfer resulted in an increase to shareholders' equity
of $30.3 million, net of tax.
The gross realized gains and the gross realized losses on sales of
available-for-sale securities were $8.6 million and $7.4 million,
respectively in 1996 and $3.3 million and $1.8 million, respectively in
1995. There were no sales or transfers of held-to-maturity securities
during 1996 or 1995 other than the transfer on November 30, 1995 of the
entire held-to-maturity portfolio to available-for-sale.
5. Home office and equipment and mortgages payable
In 1989, a subsidiary of the Company borrowed $37.6 million secured by
the home office and substantially all the furniture and fixtures of the
Company. The loan bears interest at approximately 10.5% and is due in
January 1997. The outstanding balance of the loan at December 31, 1996
approximates market value.
Home office and equipment is shown net of accumulated depreciation of
$36.1 million and $30.4 million at December 31, 1996 and 1995,
respectively.
Under the terms of the loan agreement, MGIC must maintain a statutory
policyholders' surplus of at least $150 million and a claims paying
ability rating of AA or better with Moody's Investors Service, Inc. and
Standard & Poor's Corporation. At December 31, 1996, MGIC had statutory
policyholders' surplus of $252 million and a claims paying ability rating
of Aa2 and AA+ from the rating agencies, respectively.
6. Loss reserves
Loss reserve activity was as follows:
1996 1995 1994
(In thousands of dollars)
Reserve at beginning
of year......................... $ 371,032 $ 274,469 $ 213,600
Less reinsurance recoverable...... 33,856 33,662 56,306
--------- ----------- -----------
Net reserve at beginning
of year.......................... 337,176 240,807 157,294
Reserve transfer (1).............. 35,657 - 25,075
--------- ----------- -----------
Adjusted reserve at beginning
of year.......................... 372,833 240,807 182,369
Losses incurred:
Losses and LAE incurred in
respect of default notices
received in:
Current year.................. 312,630 226,439 168,554
Prior years (2)............... (78,280) (36,457) (15,473)
--------- ---------- -----------
Subtotal.................... 234,350 189,982 153,081
--------- ---------- -----------
Losses paid:
Losses and LAE paid in
respect of default notices
received in:
Current year.................. 16,872 14,115 12,293
Prior years................... 106,096 79,498 82,350
--------- ----------- -----------
Subtotal.................... 122,968 93,613 94,643
--------- ----------- -----------
Net reserve at end of year........ 484,215 337,176 240,807
Plus reinsurance recoverables..... 29,827 33,856 33,662
--------- ----------- -----------
Reserve at end of year............ $ 514,042 $ 371,032 $ 274,469
========= =========== ===========
(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 half of the table above shows losses incurred on default notices
received in the current year and in prior years, respectively. The amount
of losses incurred relating to default notices received in the current
year represents the estimated amount to be ultimately paid on such default
notices. The amount of losses incurred relating to default notices
received in prior years represents an adjustment made in the current year
for defaults which were included in the loss reserve at the end of the
prior year.
Current year losses incurred increased from 1995 to 1996 primarily due to
an increase in the notice inventory from 19,980 at December 31, 1995 to
25,034 at December 31, 1996 resulting from an increasing percentage of the
Company's insurance in force reaching its peak claim paying years, concern
with early loss developments on insurance written in 1994 through 1996,
the continued high level of loss activity in certain high cost geographic
regions and an increase in claim amounts on defaults with deeper
coverages. Offsetting this increase were favorable developments in prior
years loss reserves, with the net effect of total losses incurred
increasing from $190.0 million in 1995 to $234.4 million in 1996.
The favorable development of the reserves in 1996, 1995 and 1994 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, 1995, 1994 and
1993, respectively.
The lower half 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 Wisconsin Mortgage
Assurance Corporation ("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. WMAC wrote mortgage insurance on first
mortgages collateralized by one-to-four-family residences until February
28, 1985. Under the agreement, the Company assumed reinsurance on
approximately $4.2 billion of WMAC's insurance in force (representing
approximately $1.1 billion of risk in force) committed to, or written,
through February 28, 1985. As a result, the amount of WMAC's insurance in
force ceded to the Company increased to approximately $6.2 billion
(representing $1.6 billion of risk in force), with the portion of WMAC's
insurance in force reinsured by the Company increasing 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.
Effective January 1, 1994, the Company agreed with its lead reinsurer to
reassume its mortgage insurance writings for policy years 1985 through
1993 which had previously been ceded to the lead reinsurer.
The effect of reinsurance on premiums earned and losses incurred is as
follows:
1996 1995 1994
(In thousands of dollars)
Premiums earned:
Direct................ $ 623,148 $ 522,069 $ 425,277
Assumed............... 13,245 8,191 10,205
Ceded................. (19,350) (23,760) (31,492)
----------- ----------- -----------
Net premiums earned... $ 617,043 $ 506,500 $ 403,990
=========== =========== ===========
Losses incurred:
Direct................ $ 226,702 $ 197,490 $ 155,766
Assumed............... 17,073 7,108 14,898
Ceded................. (9,425) (14,616) (17,583)
----------- ----------- -----------
Net losses incurred... $ 234,350 $ 189,982 $ 153,081
=========== =========== ===========
8. Benefit plans
The components of the net periodic pension cost of the Company's defined
benefit pension plan are as follows:
1996 1995 1994
(In thousands of dollars)
Service cost........................$ 3,378 $ 3,118 $ 3,475
Interest on projected
benefit obligation................ 2,777 2,255 2,042
Actual return on plan assets......... (5,235) (7,532) 403
Net amortization and deferral........ 2,179 5,375 (2,211)
-------- --------- ---------
Net periodic pension cost...........
$ 3,099 $ 3,216 $ 3,709
========= ========== ==========
The following lists the funded status of the pension plan as of December
31, 1996 and 1995:
1996 1995
(In thousands of dollars)
Actuarial present value of
benefit obligations:
Vested........................ $ 31,654 $ 25,553
Non-vested.................... 1,266 1,515
---------- -----------
Accumulated benefit obligation.... $ 32,920 $ 27,068
========== ===========
Projected benefit obligation...... $ 42,845 $ 35,159
Net assets available for benefits. 46,256 37,632
--------- -----------
Projected benefit obligation less than
plan assets..................... 3,411 2,473
Unrecognized net obligation....... 1,583 1,576
--------- -----------
Pension asset..................... $ 1,828 $ 897
========= ===========
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.5% for 1996 and 1995. The discount
rate used in determining the pension expense was 7.5% for 1996 and 1995
and 7% for 1994. The expected long-term rate of return on plan assets was
7.5% for 1996, 1995 and 1994, and the assumed rate of compensation
increase was 6% for 1996, 1995 and 1994. Plan assets consist of fixed
maturities and equity securities.
The components of the net periodic postretirement benefit cost of the
Company's non-pension postretirement benefit plans are as follows:
1996 1995 1994
(In thousands of dollars)
Service cost........................ $ 1,208 $ 1,220 $ 1,252
Interest cost on projected
benefit obligation................ 1,171 1,019 1,014
Actual return on plan assets........ (791) (806) (1)
Net amortization and deferral....... 933 1,131 441
----------- ----------- -----------
Net periodic postretirement benefit
cost.............................. $ 2,521 $ 2,564 $ 2,706
=========== =========== ===========
The Company's liability for the unfunded accumulated postretirement
benefit obligation as of December 31, 1996 and 1995, is as follows:
1996 1995
(In thousands of dollars)
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees................................... $ 3,869 $ 2,347
Active employees eligible to retire........ 1,936 2,230
Active employees ineligible to retire...... 12,010 11,121
---------- -----------
Total accumulated postretirement
benefit obligation........................... 17,815 15,698
Fair value of assets........................... (6,248) (4,488)
Unrecognized transition obligation............. (8,479) (9,009)
Unrecognized net obligation
relating to plan and discount
rate changes................................. 2,185 1,653
---------- -----------
Accrued postretirement liability............... $ 5,273 $ 3,854
=========== ===========
The Company is amortizing the unrecognized transition obligation over 20
years. The discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% for 1996 and 1995. The
expected long-term rate of return on plan assets was 7.5% for 1996, 1995
and 1994. The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation is 9.5% reduced over a
period of 6 years to 6%. The effect of a 1% increase in the health care
trend rate assumption would result in an increase of 22% in the
accumulated postretirement benefit obligation from $17.8 million to
approximately $21.7 million.
9. Income taxes
The components of the net deferred tax liability as of December 31, 1996
and 1995 are as follows:
1996 1995
(In thousands of dollars)
Unearned premium reserves................... $ (19,571) $ (20,780)
Deferred policy acquisition costs........... 11,184 13,284
Loss reserves............................... 1,559 9,289
Unrealized appreciation in investments...... 21,908 29,474
Other....................................... (3,901) (2,197)
----------- ----------
Net deferred tax liability.................. $ 11,179 $ 29,070
=========== ==========
At December 31, 1996, gross deferred tax assets and liabilities amounted
to $29.9 million and $41.1 million, respectively. Management believes
that all gross deferred tax assets at December 31, 1996 are fully
realizable and no valuation reserve has been established.
The following summarizes the components of the provision for income tax:
1996 1995 1994
(In thousands of dollars)
Federal:
Current......................... $ 116,160 $ 87,627 $ 62,081
Deferred........................ (10,325) (5,117) (4,700)
State............................. 1,202 1,334 184
----------- ---------- ----------
Total provision................... $ 107,037 $ 83,844 $ 57,565
=========== ========== ==========
The Company purchased $93.6 million, $72.0 million and $53.0 million of
non-interest bearing U.S. Government Tax and Loss Bonds as a payment of
current taxes in 1996, 1995 and 1994, respectively. The Company also paid
$10.3 million, $8.5 million and $9.3 million in estimated federal income
taxes in 1996, 1995 and 1994, respectively.
The reconciliation of the provisions for income taxes computed at the
federal tax rate of 35% to the reported provision for income taxes is as
follows:
1996 1995 1994
(In thousands of dollars)
Tax provision computed at
federal tax rate............... $ 127,760 $ 101,993 $ 75,979
(Decrease) increase in tax
provision resulting from:
Tax exempt municipal
bond interest.............. (22,114) (18,955) (19,066)
Other, net................... 1,391 806 652
---------- ---------- ----------
Total income tax provision....... $ 107,037 $ 83,844 $ 57,565
========== ========== ==========
The Company and its subsidiaries have a continuing obligation to reimburse
NML for the tax effect of any changes in taxable income of the Company
relating to periods during which the Company and its subsidiaries were
members with NML and its subsidiaries of a consolidated return for federal
income tax purposes. At December 31, 1996, no amount was owed to NML.
The Internal Revenue Service ("IRS") is presently examining the Company's
income tax returns for 1991 and 1992. The Company has received proposed
tax assessments relating to 1989 and 1990. Management does not agree with
all of the findings of the IRS and has
appealed the proposed tax assessments.
In examinations through 1988 the IRS had proposed to delay the deduction
for loss reserves on mortgage loans in default until the lender takes
title to the mortgaged property. In August 1992, this issue was decided
in favor of another private mortgage insurer by the Court of Appeals for
the federal circuit applicable to the Company. However, the IRS has
continued to pursue this position with other private mortgage insurers in
other circuits.
Management believes that adequate provision has been made in the financial
statements for any amounts which may become due with respect to the open
years.
10. 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 1997, MGIC can pay $25.2 million of dividends and the
other insurance subsidiaries of the Company can pay $3.0 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 1996, 1995 and 1994, the Company
paid dividends of $9.4 million, $9.4 million and $9.3 million,
respectively or $0.16 per share. In 1997, the Company can pay dividends of
$35.5 million from its own funds and funds available from the non-
insurance subsidiaries.
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.
The statutory net income, equity and the contingency reserve liability of
the insurance subsidiaries (excluding the non-insurance companies) are as
follows:
Year Ended Net Contingency
December 31, Income Equity Reserve
(In thousands of dollars)
1996 $ 67,094 $ 274,118 $1,317,438
1995 38,975 229,305 1,030,232
1994 11,462 202,516 781,438
The differences between the statutory net income and equity presented
above for the insurance subsidiaries and the consolidated net income and
equity presented on a GAAP basis primarily represent the differences
between GAAP and statutory accounting practices.
The Company has two stock option plans which permit certain officers and
employees to purchase common stock at specified prices, not less than the
market price at the date the options were granted. A summary of activity
in the stock option plans during 1994, 1995 and 1996 is as follows:
Average Shares
Exercise Subject
Price to Option
Outstanding, December 31, 1993..........$ 8.36 1,275,800
Granted............................... 31.25 703,000
Exercised............................. 5.59 (84,200)
Canceled.............................. 15.44 (25,000)
------------ -----------
Outstanding, December 31, 1994.......... 17.00 1,869,600
Granted............................... 36.15 33,333
Exercised............................. 8.98 (225,390)
Canceled.............................. 30.62 (21,260)
----------- -----------
Outstanding, December 31, 1995.......... 18.30 1,656,283
Granted............................... 61.14 30,667
Exercised............................. 9.60 (318,327)
Canceled.............................. 30.81 (66,310)
----------- -----------
Outstanding, December 31, 1996.......... $ 20.80 1,302,313
=========== ===========
The exercise price of the options granted in 1995 and 1996 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, 1996, 1,146,042 shares were available for future grant under
the stock option plans.
The Company adopted the disclosure only option under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. If the accounting provisions of the new Statement had been
adopted as of the beginning of 1995, the effect on 1995 and 1996 net
income would have been immaterial.
The following is a summary of stock options outstanding at December 31,
1996:
Options Options
Outstanding Exercisable
_____________________________ __________________
Remaining Average Average
Exercise Average Exercise Exercise
Price Range Shares Life (yrs.) Price Shares Price
$5.00 - $6.89 551,100 3.8 $ 6.58 551,100 $ 6.58
$19.25 - $41.75 720,546 6.8 29.95 290,750 28.74
$53.375 - $64.375 30,667 9.2 61.14 - -
--------- ----- ------- ------- -------
Total 1,302,313 5.6 $ 20.80 841,850 $ 14.24
========= ===== ======= ======= =======
At December 31, 1995 and 1994, option shares of 837,372 and 772,560 were
exercisable at an average exercise price of $10.41 and $7.10,
respectively. The Company also granted an immaterial amount of equity
instruments other than options during 1995 and 1996.
11. Leases
The Company leases certain office space as well as data processing
equipment and autos under operating leases that expire during the next six
years. Generally, all rental payments are fixed.
Total rental expense under operating leases was $5.1 million, $4.5 million
and $5.8 million in 1996, 1995 and 1994, respectively.
At December 31, 1996, minimum future operating lease payments are as
follows (in thousands of dollars):
1997.............. $ 4,223
1998.............. 1,884
1999.............. 941
2000.............. 497
2001.............. 309
2002.............. 40
-----------
Total $ 7,894
===========
12. Contingencies
The Company is involved in litigation in the normal 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.
MGIC is a defendant in a lawsuit commenced by a borrower challenging the
necessity of maintaining mortgage insurance in certain circumstances,
primarily when the loan-to-value ratio is below 80%. The lawsuit purports
to be brought on behalf of a class of borrowers. This case appears to be
based to some degree upon guidelines issued by the Federal Home Loan
Mortgage Corporation or the Federal National Mortgage Association to their
respective mortgage servicers under which the mortgage servicers may be
required in certain circumstances to cancel borrower-purchased insurance
upon the borrower's request. The plaintiff alleges that MGIC has a common
law duty to inform a borrower that the insurance may be canceled in these
circumstances. The relief sought is equitable relief as well as the return
of premiums paid after the insurance was cancelable under the applicable
guidelines. The Company believes that MGIC has a meritorious defense to
this action in that, in the absence of a specific statute (no statutory
duty other than under a general consumer fraud statute is alleged), there
appears to be no legal authority requiring a mortgage insurer to inform a
borrower that insurance may be canceled. Summary judgment was granted to
MGIC in another case involving similar issues. Similar cases are pending
against other mortgage insurers, mortgage lenders and mortgage loan
servicers.
See note 9 for a description of federal income tax contingencies.
1996
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, 1996 and 1995, and the results of their operations and
their cash flows for each of the three years in the period ended December
31, 1996, 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.
PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
January 8, 1997
<PAGE>
<TABLE>
1996
Unaudited Quarterly Financial Data
<CAPTION>
Quarter 1996
1996 First Second Third Fourth Year
(In thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C>
Net premiums written..... $ 123,528 $ 141,584 $ 158,532 $ 165,283 $ 588,927
Net premiums earned ..... 144,640 150,727 156,779 164,897 617,043
Investment income,
net of expenses ....... 24,261 25,191 26,926 28,977 105,355
Losses incurred, net..... 56,837 56,889 60,247 60,377 234,350
Underwriting and other
expenses .............. 35,704 37,626 36,401 36,752 146,483
Net income .............. 58,460 62,650 65,785 71,096 257,991
Net income per share
(a) .................... 0.98 1.05 1.11 1.19 4.33
<CAPTION>
Quarter 1995
1995 First Second Third Fourth Year
(In thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C>
Net premiums written..... $ 97,914 $ 118,143 $ 127,710 $ 136,545 $ 480,312
Net premiums earned...... 114,415 122,358 130,611 139,116 506,500
Investment income,
net of expenses........ 20,295 21,205 22,339 23,704 87,543
Losses incurred, net..... 43,338 44,009 49,687 52,948 189,982
Underwriting and other
expenses .............. 34,317 35,105 33,892 34,245 137,559
Net income .............. 45,218 49,945 53,664 58,738 207,565
Net income per share
(a)..................... 0.76 0.84 0.90 0.99 3.50
(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.
</TABLE>
<PAGE>
MGIC Stock
MGIC Investment Corporation Common Stock is listed on the New York Stock
Exchange under the symbol MTG. At December 31, 1996, 58,950,434 shares
were outstanding. The following table sets forth for 1995 and 1996 by
quarter the high and low sales prices of the Company's common stock on the
New York Stock Exchange Composite Tape.
1995 1996
Quarters High Low High Low
1st $42.375 $32.75 $65.25 $50.50
2nd 52.25 40.375 61.50 51.625
3rd 58.375 46.125 69.50 53.50
4th 62.00 49.50 77.75 66.125
In 1995 and 1996 the Company declared and paid the following cash
dividends.
Quarters 1995 1996
1st $.04 $.04
2nd .04 .04
3rd .04 .04
4th .04 .04
------ ------
$.16 $.16
====== ======
See Note 10 to the Consolidated Financial Statements for information
relating to restrictions on the payment of cash dividends.
As of February 25, 1997, the number of shareholders of record was 366. In
addition, there were an estimated 33,000 beneficial owners of shares held
by brokers and fiduciaries.
EXHIBIT 21
MGIC INVESTMENT CORPORATION
DIRECT AND INDIRECT SUBSIDIARIES OF MGIC INVESTMENT CORPORATION
1. MGIC Assurance Corporation
2. MGIC Insurance Services Corporation
3. MGIC Investor Services Corporation
4. MGIC Mortgage Insurance Corporation
5. MGIC Mortgage Marketing Corporation
6. MGIC Mortgage Reinsurance Corporation
7. MGIC Mortgage Securities Corporation
8. MGIC Real Estate Servicing Corporation
9. MGIC Reinsurance Corporation
10. MGIC Reinsurance Corporation of Wisconsin
11. MGIC Residential Reinsurance Corporation
12. Mortgage Guaranty Insurance Corporation
13. Mortgage Guaranty Reinsurance Corporation
__________________________
1 As of March 1, 1997. All subsidiaries listed are 100% directly or
indirectly owned by the registrant and all are incorporated in
Wisconsin.
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements listed below of MGIC Investment Corporation of our report dated
January 8, 1997 appearing on page 27 of the 1996 Annual Report to
Shareholders which is incorporated in this Annual Report on Form 10-K. We
also consent to the incorporation by reference of our report on the
financial Statement Schedules, which appears on page 32 of this Form 10-K.
1. Registration Statement on Form S-8 (Registration No. 33-42120)
2. Registration Statement on Form S-8 (Registration No. 33-43543)
PRICE WATERHOUSE LLP
Milwaukee, Wisconsin
March 12, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 1,892,081
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 4,039
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,036,234
<CASH> 143,975
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 31,956
<TOTAL-ASSETS> 2,222,315
<POLICY-LOSSES> 514,042
<UNEARNED-PREMIUMS> 219,307
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 35,424
0
0
<COMMON> 60,555
<OTHER-SE> 1,305,560
<TOTAL-LIABILITY-AND-EQUITY> 2,222,315
617,043
<INVESTMENT-INCOME> 105,355
<INVESTMENT-GAINS> 1,220
<OTHER-INCOME> 22,013
<BENEFITS> 234,350
<UNDERWRITING-AMORTIZATION> 6,000
<UNDERWRITING-OTHER> 140,483
<INCOME-PRETAX> 365,028
<INCOME-TAX> 107,037
<INCOME-CONTINUING> 257,991
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 257,991
<EPS-PRIMARY> 4.33
<EPS-DILUTED> 4.33
<RESERVE-OPEN> 372,833
<PROVISION-CURRENT> 312,630
<PROVISION-PRIOR> (78,280)
<PAYMENTS-CURRENT> 16,872
<PAYMENTS-PRIOR> 106,096
<RESERVE-CLOSE> 484,215
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
