FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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.)
250 E. KILBOURN AVENUE 53202
MILWAUKEE, WISCONSIN (Zip Code)
(Address of principal executive offices)
(414) 347-6480
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---------- ----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OF STOCK PAR VALUE DATE NUMBER OF SHARES
-------------- --------- ---- ----------------
Common stock $1.00 7/31/00 106,329,158
<PAGE>
MGIC INVESTMENT CORPORATION
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of
June 30, 2000 (Unaudited) and December 31, 1999 3
Consolidated Statement of Operations for the Three and Six
Month Periods Ended June 30, 2000 and 1999 (Unaudited) 4
Consolidated Statement of Cash Flows for the Six Months
Ended June 30, 2000 and 1999 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23-24
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 24-25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
INDEX TO EXHIBITS 27
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2000 (Unaudited) and December 31, 1999
<CAPTION>
June 30, December 31,
2000 1999
----------------- ----------------
ASSETS (In thousands of dollars)
------
<S> <C> <C>
Investment portfolio:
Securities, available-for-sale, at market value:
Fixed maturities $ 2,901,720 $ 2,666,562
Equity securities 16,302 15,426
Short-term investments 142,947 107,746
----------------- ----------------
Total investment portfolio 3,060,969 2,789,734
Cash 6,133 2,322
Accrued investment income 47,423 46,713
Reinsurance recoverable on loss reserves 38,032 35,821
Reinsurance recoverable on unearned premiums 8,740 6,630
Home office and equipment, net 31,851 32,880
Deferred insurance policy acquisition costs 21,690 22,350
Investments in joint ventures 129,189 101,545
Other assets 53,267 66,398
----------------- ----------------
Total assets $ 3,397,294 $ 3,104,393
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Loss reserves $ 625,655 $ 641,978
Unearned premiums 175,084 181,378
Notes payable (note 2) 420,000 425,000
Other liabilities 104,570 80,048
----------------- ----------------
Total liabilities 1,325,309 1,328,404
----------------- ----------------
Contingencies (note 4)
Shareholders' equity:
Common stock, $1 par value, shares authorized
300,000,000; shares issued 121,110,800;
shares outstanding, 6/30/00 - 106,085,818
12/31/99 - 105,798,034 121,111 121,111
Paid-in surplus 206,840 211,593
Treasury stock (shares at cost, 6/30/00 - 15,024,982
12/31/99 - 15,312,766) (653,204) (665,707)
Accumulated other comprehensive income - unrealized
appreciation in investments, net of tax (10,522) (40,735)
Retained earnings 2,407,760 2,149,727
----------------- ----------------
Total shareholders' equity 2,071,985 1,775,989
----------------- ----------------
Total liabilities and shareholders' equity $ 3,397,294 $ 3,104,393
================= ================
</TABLE>
See accompanying notes to consolidated financial statements.
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<TABLE>
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three and Six Month Periods Ended June 30, 2000 and 1999
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- ---------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
Revenues:
Premiums written:
Direct $ 231,538 $ 200,989 $ 440,264 $ 389,335
Assumed 191 1,166 417 1,604
Ceded (10,915) (5,781) (20,547) (10,554)
------------- ------------- -------------- --------------
Net premiums written 220,814 196,374 420,134 380,385
(Increase) decrease in unearned premiums (2,380) (1,608) 8,404 8,362
------------- ------------- -------------- --------------
Net premiums earned 218,434 194,766 428,538 388,747
Investment income, net of expenses 42,731 38,627 83,340 75,542
Realized investment gains, net 159 1,212 163 3,353
Other revenue 12,840 15,326 23,296 28,956
------------- ------------- -------------- --------------
Total revenues 274,164 249,931 535,337 496,598
------------- ------------- -------------- --------------
Losses and expenses:
Losses incurred, net 22,540 30,941 45,155 75,173
Underwriting and other expenses 46,198 51,384 93,206 104,256
Interest expense 7,052 4,644 13,673 10,042
------------- ------------- -------------- --------------
Total losses and expenses 75,790 86,969 152,034 189,471
------------- ------------- -------------- --------------
Income before tax 198,374 162,962 383,303 307,127
Provision for income tax 62,271 50,028 119,980 93,775
------------- ------------- -------------- --------------
Net income $ 136,103 $ 112,934 $ 263,323 $ 213,352
============= ============= ============== ==============
Earnings per share (note 5):
Basic $ 1.28 $ 1.04 $ 2.49 $ 1.96
============= ============= ============== ==============
Diluted $ 1.27 $ 1.02 $ 2.46 $ 1.94
============= ============= ============== ==============
Weighted average common shares
outstanding - diluted (shares in
thousands, note 5) 106,845 110,254 106,874 110,129
============= ============= ============== ==============
Dividends per share $ 0.025 $ 0.025 $ 0.050 $ 0.050
============= ============= ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
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<TABLE>
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2000 and 1999
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
--------------------------------------
2000 1999
---- ----
(In thousands of dollars)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 263,323 $ 213,352
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred insurance policy
acquisition costs 7,514 8,180
Increase in deferred insurance policy
acquisition costs (6,854) (7,220)
Depreciation and amortization 3,671 4,723
Increase in accrued investment income (710) (1,963)
(Increase) decrease in reinsurance recoverable on loss reserves (2,211) 5,077
(Increase) decrease in reinsurance recoverable on unearned premiums (2,110) 1,877
(Decrease) increase in loss reserves (16,323) 5,360
Decrease in unearned premiums (6,294) (10,239)
Equity earnings in joint ventures (14,149) (9,150)
Other 29,481 (11,734)
----------------- ----------------
Net cash provided by operating activities 255,338 198,263
----------------- ----------------
Cash flows from investing activities:
Purchase of equity securities (14,629) (14,101)
Purchase of fixed maturities (773,734) (662,732)
Additional investment in joint ventures (13,495) (13,460)
Proceeds from sale of equity securities 14,285 -
Proceeds from sale or maturity of fixed maturities 584,247 490,989
----------------- ----------------
Net cash used in investing activities (203,326) (199,304)
----------------- ----------------
Cash flows from financing activities:
Dividends paid to shareholders (5,290) (5,453)
Net decrease in notes payable (5,000) (25,000)
Reissuance of treasury stock 3,514 1,494
Repurchase of common stock (6,224) -
----------------- ----------------
Net cash used in financing activities (13,000) (28,959)
----------------- ----------------
Net increase (decrease) in cash and short-term investments 39,012 (30,000)
Cash and short-term investments at beginning of period 110,068 176,859
----------------- ----------------
Cash and short-term investments at end of period $ 149,080 $ 146,859
================= ================
See accompanying notes to consolidated financial statements.
</TABLE>
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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
Note 1 - Basis of presentation and summary of certain significant accounting
policies
The accompanying unaudited consolidated financial statements of MGIC
Investment Corporation (the "Company") and its wholly-owned subsidiaries have
been prepared in accordance with the instructions to Form 10-Q and do not
include all of the other information and disclosures required by generally
accepted accounting principles. These statements should be read in conjunction
with the consolidated financial statements and notes thereto for the year ended
December 31, 1999 included in the Company's Annual Report on Form 10-K for that
year.
The accompanying consolidated financial statements have not been audited
by independent accountants in accordance with generally accepted auditing
standards, but in the opinion of management such financial statements include
all adjustments, consisting only of normal recurring accruals, necessary to
summarize fairly the Company's financial position and results of operations. The
results of operations for the six months ended June 30, 2000 may not be
indicative of the results that may be expected for the year ending December 31,
2000.
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. The Company amortized $5.0 million and
$4.8 million of deferred insurance policy acquisition costs during the three
months ended June 30, 1999 and 2000, respectively, and amortized $8.2 million
and $7.5 million during the six months ended June 30, 1999 and 2000,
respectively. During 1999, 1998 and 1997, the Company amortized $16.8 million,
$20.7 million and $21.4 million, respectively, of deferred insurance policy
acquisition costs.
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
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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.
The incurred but not reported ("IBNR") reserves result from defaults
occurring prior to the close of an accounting period, but which have not been
reported to the Company. Consistent with reserves for reported defaults, IBNR
reserves are established using estimated claims rates and claims amounts for the
estimated number of defaults not reported.
Reserves also provide for the estimated costs of settling claims,
including legal and other expenses and general expenses of administering the
claims settlement process.
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, which
is the anticipated claim payment pattern based on historical experience.
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 and recognized as
the services are provided and the customer is obligated to pay.
Note 2 - Notes payable
At June 30, 2000, the Company's outstanding balance of the notes payable
on the 1997, 1998 and 1999 credit facilities were $175 million, $200 million and
$45 million, respectively, which approximated market value. The interest rate on
the notes payable varies based on LIBOR and at June 30, 2000 and December 31,
1999 the weighted-average interest rate was 6.89% and 6.17%, respectively. The
weighted-average interest rate on the notes payable for borrowings under the
1997, 1998 and 1999 credit agreements was 6.50% per annum for the six months
ended June 30, 2000.
During the six months ended June 2000, the Company utilized three
interest rate swaps each with a notional amount of $100 million to reduce and
manage interest rate risk on a portion of the variable rate debt under the
credit facilities. With respect to all such transactions, the notional amount of
$100 million represents the stated principal balance used as a basis for
calculating payments. On the swaps, the Company receives
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and pays amounts based on rates that can be fixed or variable depending on the
terms negotiated. Two of the swaps renew monthly and one renews quarterly,
beginning in October 2000, unless in each case the counterparty elects not to
renew. Earnings during the six months ended June 2000 on the swaps of
approximately $0.4 million are netted against interest expense in the
Consolidated Statement of Operations.
Any gain or loss arising from termination of an interest rate swap would
be deferred and amortized over the remaining life of the hedged item. The
Company did not terminate any interest rate swaps in the six months ended June
30, 2000 or in 1999, 1998 or 1997.
In June 2000, the Company filed a registration statement with the
Securities and Exchange Commission covering $500 million of senior debt
securities to be offered from time to time. Unless otherwise specified for a
particular offering, the net proceeds from the sale of these securities would be
used for general corporate purposes, including repayment of a portion of the
notes payable. No senior debt securities have been offered and sold to date.
Note 3 - Reinsurance
The Company cedes a portion of its business to reinsurers and records
assets for reinsurance recoverable on estimated reserves for unpaid losses and
unearned premiums. Business written between 1985 and 1993 is ceded under various
quota share reinsurance agreements with several reinsurers. The Company receives
a ceding commission in connection with this reinsurance. Beginning in 1997, the
Company has ceded business to captive reinsurance subsidiaries of certain
mortgage lenders primarily under excess of loss reinsurance agreements.
The reinsurance recoverable on loss reserves and the reinsurance
recoverable on unearned premiums primarily represent amounts recoverable from
large international reinsurers. The Company monitors the financial strength of
its reinsurers including their claims paying ability rating and does not
currently anticipate any collection problems. Generally, reinsurance
recoverables on loss reserves and unearned premiums are backed by trust funds or
letters of credit. No reinsurer represents more than $10 million of the
aggregate amount recoverable.
Note 4 - Contingencies
The Company is involved in litigation in the ordinary course of
business. In the opinion of management, the ultimate resolution of this pending
litigation will not have a material adverse effect on the financial position or
results of operations of the Company.
In addition, the Company's Mortgage Guaranty Insurance Corporation
subsidiary ("MGIC") is a defendant in Downey et. al. v. MGIC, which is pending
in Federal District
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Court for the Southern District of Georgia and seeks class action status on
behalf of a nationwide class of home mortgage borrowers. The complaint alleges
that MGIC violated the Real Estate Settlement Procedures Act ("RESPA") by
providing agency pool insurance and entering into other transactions with
lenders (including captive mortgage reinsurance and contract underwriting) that
were not properly priced, in return for the referral of mortgage insurance. The
complaint seeks damages of three times the amount of the mortgage insurance
premiums that have been paid and that will be paid at the time of judgment for
the mortgage insurance found to be involved in a violation of RESPA. The
complaint also seeks injunctive relief, including prohibiting MGIC from
receiving future premium payments. MGIC has answered the complaint and denies
liability. There can be no assurance, however, that the ultimate outcome of the
litigation will not materially affect the Company's financial position or
results of operations.
Note 5 - Earnings per share
The Company's basic and diluted earnings per share ("EPS") have been
calculated in accordance with Statement of Financial Accounting Standards No.
128, Earnings Per Share ("SFAS 128"). The following is a reconciliation of the
weighted-average number of shares used for basic EPS and diluted EPS.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- ---------
2000 1999 2000 1999
---- ---- ---- ----
(Shares in thousands)
<S> <C> <C> <C> <C>
Weighted-average shares - Basic EPS 105,924 109,059 105,887 109,031
Common stock equivalents 921 1,195 987 1,098
--------- -------- --------- --------
Weighted-average shares - Diluted EPS 106,845 110,254 106,874 110,129
======= ======= ======= =======
</TABLE>
Note 6 - Comprehensive income
The Company's total comprehensive income, as calculated per Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income, was as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- ---------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands of dollars)
<S> <C> <C> <C> <C>
Net income $136,103 $112,934 $263,323 $213,352
Other comprehensive gain (loss) 68 (57,594) 30,213 (74,810)
-------- -------- -------- --------
Total comprehensive income $136,171 $ 55,340 $293,536 $138,542
======== ======== ======== ========
</TABLE>
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The difference between the Company's net income and total comprehensive
income for the three and six months ended June 30, 2000 and 1999 is due to the
change in unrealized appreciation/depreciation on investments, net of tax.
Note 7 - New accounting standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"), which will be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. Management does not anticipate the adoption of SFAS 133
will have a significant effect on the Company's results of operations or its
financial position due to its limited use of derivative instruments. (See note
2.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Consolidated Operations
Three Months Ended June 30, 2000 Compared With Three Months Ended June 30, 1999
Net income for the three months ended June 30, 2000 was $136.1 million,
compared to $112.9 million for the same period of 1999, an increase of 21%.
Diluted earnings per share for the three months ended June 30, 2000 was $1.27
compared with $1.02 in the same period last year, an increase of 25%. The 1999
second quarter diluted earnings per share included $0.01 for realized gains. The
percentage increase in diluted earnings per share was favorably affected by the
lower adjusted shares outstanding at June 30, 2000 as a result of common stock
repurchased by the Company during the third quarter of 1999. See note 5 to the
consolidated financial statements. As used in this report, the term "Company"
means the Company and its consolidated subsidiaries, which do not include joint
ventures in which the Company has an equity interest.
The amount of new primary insurance written by MGIC during the three
months ended June 30, 2000 was $10.6 billion, which included a $1.8 billion bulk
transaction referred to below, compared to $12.2 billion in the same period of
1999. The decline in new primary insurance written principally reflected the
decline in refinancing activity, which accounted for 12% of new primary
insurance written in the second quarter of 2000, compared to 27% in the second
quarter of 1999.
The $10.6 billion of new primary insurance written during the second
quarter of 2000 was offset by the cancellation of $7.2 billion of insurance in
force, and resulted in a net increase of $3.4 billion in primary insurance in
force, compared to new primary
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insurance written of $12.2 billion, the cancellation of $10.2 billion of
insurance in force and a net increase of $2.0 billion in primary insurance in
force during the second quarter of 1999. Direct primary insurance in force was
$151.9 billion at June 30, 2000 compared to $147.6 billion at December 31, 1999
and $140.2 billion at June 30, 1999. In addition to providing direct primary
insurance coverage, the Company also insures pools of mortgage loans. New pool
risk written during the three months ended June 30, 2000 and June 30, 1999,
which was virtually all agency pool insurance, was $97 million and $177 million,
respectively. The Company's direct pool risk in force was $1.7 billion at June
30, 2000 and $1.6 billion at December 31, 1999.
Cancellation activity has historically been affected by the level of
mortgage interest rates, with cancellations generally moving inversely to the
change in the direction of interest rates. Cancellations continued to decrease
during the second quarter of 2000 compared to the cancellation levels of 1999
due to the higher mortgage interest rate environment which resulted in an
increase in the MGIC persistency rate (percentage of insurance remaining in
force from one year prior) to 79.3% at June 30, 2000 from 72.9% at December 31,
1999 and 66.6% at June 30, 1999. Future cancellation activity could be somewhat
higher than it otherwise would have been as a result of legislation that went
into effect in July 1999 regarding cancellation of mortgage insurance.
Cancellation activity could also increase as more of the Company's insurance in
force is represented by subprime loans, which the Company anticipates will have
materially lower persistency than the Company's prime business.
New insurance written for adjustable rate mortgages ("ARMs") increased
to 12% of new insurance written during the second quarter of 2000 from 7% of new
insurance written during the same period in 1999 as a result of higher mortgage
interest rates on fixed rate mortgage loans. New insurance written for mortgages
with loan-to-value ("LTV") ratios in excess of 90% but not more than 95% ("95s")
were 41% of new insurance written during the second quarter of 2000 compared to
38% in the second quarter a year ago, as a result of declining refinancing
activity during the second quarter of 2000.
Principally as a result of changes in coverage requirements by Fannie
Mae and Freddie Mac (described below), new insurance written for mortgages with
reduced coverage (coverage of 17% for 90s (mortgages with LTV ratios in excess
of 85% but not more than 90%) and coverage of 25% for 95s) increased to 13% of
new insurance written in the second quarter of 2000 compared to 7% a year ago.
New insurance written for mortgages with deep coverage (coverage of 25% for 90s
and coverage of 30% for 95s) declined to 62% of new insurance written in the
second quarter of 2000 compared to 68% a year ago.
New insurance written for subprime mortgages (in general, mortgages that
would not meet the standard underwriting guidelines of Fannie Mae and Freddie
Mac for prime mortgages due to credit quality, documentation, or other factors,
such as in a refinance transaction exceeding a specified increase in the amount
of the mortgage debt due to
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cash being paid to the borrower) was 24% of new insurance written during the
second quarter of 2000 compared to 3% for the same period a year ago. The
subprime new insurance written for the second quarter of 2000 included a $1.8
billion bulk transaction. The Company expects that subprime loans will have
delinquency and default rates in excess of those on the Company's prime
business. While the Company believes it has priced its subprime business to
generate acceptable returns, there can be no assurance that the assumptions
underlying the premium rates adequately address the risk of this business.
During the second quarter of 2000, the Company began to insure mortgages
with LTVs of up to 100%.
Net premiums written increased 12% to $220.8 million during the second
quarter of 2000, from $196.4 million during the second quarter of 1999. Net
premiums earned increased 12% to $218.4 million for the second quarter of 2000
from $194.8 million for the same period in 1999. The increases were primarily a
result of the growth in insurance in force and a higher percentage of renewal
premiums on products with higher premium rates offset in part by an increase in
ceded premiums to $10.9 million in the second quarter of 2000 compared to $5.8
million during the same period a year ago, primarily due to an increase in
captive mortgage reinsurance.
During the first quarter of 1999, Fannie Mae and Freddie Mac changed
their mortgage insurance requirements for certain mortgages approved by their
automated underwriting services. The changes permit lower coverage percentages
on these loans than the deeper coverage percentages that went into effect in
1995. MGIC's premium rates vary with the depth of coverage. While lower coverage
percentages result in lower premium revenue, lower coverage percentages should
also result in lower incurred losses at the same level of claim incidence.
MGIC's results could also be affected to the extent Fannie Mae and Freddie Mac
are compensated for assuming default risk that would otherwise be insured by
MGIC. Fannie Mae and Freddie Mac have programs under which a delivery fee is
paid to them, with mortgage insurance coverage reduced below the coverage that
would be required in the absence of the delivery fee.
In partnership with mortgage insurers, Fannie Mae and Freddie Mac are
also beginning to offer programs under which, on delivery of an insured loan to
Fannie Mae or Freddie Mac, the primary coverage is restructured to an initial
shallow tier of coverage followed by a second tier that is subject to an overall
loss limit and, depending on the program, some compensation may be paid to
Fannie Mae or Freddie Mac for services. Because lenders receive guaranty fee
relief from Fannie Mae and Freddie Mac on mortgages delivered with these
restructured coverages, participation in these programs is competitively
significant to mortgage insurers.
In March 1999, the Office of Federal Housing Enterprise Oversight
("OFHEO") released a proposed risk-based capital stress test for Fannie Mae and
Freddie Mac. One of the elements of the proposed stress test is that future
claim payments made by
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a private mortgage insurer on Fannie Mae or Freddie Mac loans are reduced below
the amount provided by the mortgage insurance policy to reflect the risk that
the insurer will fail to pay. Claim payments from an insurer whose claims-paying
ability rating is "AAA" are subject to a 10% reduction over the 10-year period
of the stress test, while claim payments from a "AA" rated insurer, such as
MGIC, are subject to a 20% reduction. The effect of the differentiation among
insurers is to require Fannie Mae and Freddie Mac to have additional capital for
coverage on loans provided by a private mortgage insurer whose claims-paying
rating is less than "AAA." As a result, if adopted as proposed, there is an
incentive for Fannie Mae and Freddie Mac to use private mortgage insurance
provided by a "AAA" rated insurer. The Company does not believe there should be
a reduction in claim payments from private mortgage insurance nor should there
be a distinction between "AAA" and "AA" rated private mortgage insurers. The
proposed stress test covers many topics in addition to capital credit for
private mortgage insurance and is not expected to become final for some time. If
the stress test ultimately gives Fannie Mae and Freddie Mac an incentive to use
"AAA" mortgage insurance, MGIC may need "AAA" capacity, which in turn would
entail using capital to support such a facility as well as additional expenses.
The Company cannot predict whether the portion of the stress test discussed
above will be adopted in its present form.
Mortgages (newly insured during the six months ended June 30, 2000 or
in previous periods) equal to approximately 30% of MGIC's new insurance written
during the second quarter of 2000 were subject to captive mortgage reinsurance
and similar arrangements compared to 24% during the same period in 1999. Such
arrangements entered into during a reporting period customarily include loans
newly insured in a prior reporting period. As a result, the percentages cited
above would be lower if only the current reporting period's newly insured
mortgages subject to such arrangements were included. At June 30, 2000,
approximately 18% of MGIC's risk in force was subject to captive reinsurance and
similar arrangements compared to 15% at December 31, 1999. In a February 1999
circular letter, the New York Department of Insurance said it was in the process
of developing guidelines that would articulate the parameters under which
captive mortgage reinsurance is permissible under New York insurance law. The
complaint in the RESPA litigation referred to in note 4 of the notes to the
consolidated financial statements alleges that MGIC pays "inflated" captive
mortgage reinsurance premiums in violation of RESPA.
Investment income for the second quarter of 2000 was $42.7 million, an
increase of 11% over the $38.6 million in the second quarter of 1999. This
increase was primarily the result of an increase in the amortized cost of
average invested assets to $3.0 billion for the second quarter of 2000 from $2.8
billion for the second quarter of 1999, an increase of 10%. The portfolio's
average pre-tax investment yield was 5.8% for the second quarter of 2000 and
5.5% for the same period in 1999. The portfolio's average after-tax investment
yield was 4.9% for the second quarter of 2000 and 4.7% for the same period in
1999. The Company's net realized gains were $0.2 million for the three months
ended
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June 30, 2000 compared to net realized gains of $1.2 million during the same
period in 1999 resulting primarily from the sale of fixed maturities.
Other revenue, which is composed of various components, was $12.8
million for the second quarter of 2000, compared with $15.3 million for the same
period in 1999. The decrease is primarily the result of a decrease in contract
underwriting revenue, the expiration in December 1999 of a contract with a
government agency for premium reconciliation services and equity losses from
Customers Forever LLC ("Customers Forever"), a joint venture with Marshall &
Ilsley Corporation consummated in the third quarter of 1999, partially offset by
an increase in equity earnings from Credit-Based Asset Servicing and
Securitization LLC ("C-BASS") and a decrease in equity losses from Sherman
Financial Group LLC ("Sherman"), both joint ventures with Enhance Financial
Services Group Inc. ("Enhance").
In accordance with generally accepted accounting principles, each
quarter C-BASS is required to estimate the value of its mortgage-related assets
and recognize in earnings the resulting net unrealized gains and losses.
Including open trades, C-BASS's mortgage-related assets were $841 million at
June 30, 2000 and are expected to increase in the future. Substantially all of
C-BASS's mortgage-related assets do not have readily ascertainable market values
and, as a result, their value for financial statement purposes is estimated by
the management of C-BASS. Market value adjustments could impact the Company's
share of C-BASS's results of operations.
A substantial portion of Sherman's consolidated assets are investments
in receivable portfolios that do not have readily ascertainable market values
and, as a result, their value for financial statements purposes is estimated by
the management of Sherman. Market value adjustments could impact the Company's
share of Sherman's results of operations.
Net losses incurred decreased 27% to $22.5 million during the second
quarter of 2000 from $30.9 million during the same period in 1999. The decline
from a year ago was primarily attributable to an increase in the redundancy in
prior year loss reserves, generally strong economic conditions, continued
improvement in the California real estate market and the Company's claims
mitigation efforts. The primary notice inventory decreased from 29,761 at
December 31, 1999 to 28,120 at June 30, 2000. The pool notice inventory
increased from 11,638 at December 31, 1999 to 13,250 at June 30, 2000.
At June 30, 2000, 71% of MGIC's insurance in force was written during
the preceding fourteen quarters, compared to 68% at June 30, 1999. The highest
claim frequency years have typically been the third through fifth year after the
year of loan origination. However, the pattern of claims frequency for refinance
loans (which accounted for 25% and 31% of total new insurance written for the
years ended December 31, 1999 and 1998, respectively) may be different from the
historical pattern of other loans.
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<PAGE>
Underwriting and other expenses decreased to $46.2 million in the second
quarter of 2000 from $51.4 million in the same period of 1999, a decrease of
10%. This decrease was primarily due to decreases in contract underwriting.
Interest expense increased to $7.1 million in the second quarter of 2000
from $4.6 million during the same period in 1999 primarily due to a higher
weighted-average interest rate on the notes payable balance and lower earnings
on interest rate swap transactions (discussed below) during the three months
ended June 30, 2000 compared to the comparable period in 1999.
The Company utilized financial derivative transactions during the second
quarter of 2000 and 1999 consisting of interest rate swaps to reduce and manage
interest rate risk on its notes payable. During the second quarter of 2000,
earnings on such transactions aggregated approximately $0.2 million compared to
$1.2 million a year ago and were netted against interest expense. See note 2 to
the consolidated financial statements.
The consolidated insurance operations loss ratio was 10.3% for the
second quarter of 2000 compared to 15.9% for the second quarter of 1999. The
consolidated insurance operations expense and combined ratios were 17.5% and
27.8%, respectively, for the second quarter of 2000 compared to 20.4% and 36.3%
for the second quarter of 1999.
The effective tax rate was 31.4% in the second quarter of 2000, compared
to 30.7% in the second quarter of 1999. During both periods, 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 2000
resulted from a lower percentage of total income before tax being generated from
the tax-preferenced investments.
Six Months Ended June 30, 2000 Compared With Six Months Ended June 30, 1999
Net income for the six months ended June 30, 2000 was $263.3 million,
compared to $213.4 million for the same period of 1999, an increase of 23%.
Diluted earnings per share for the six months ended June 30, 2000 was $2.46
compared with $1.94 in the same period last year, an increase of 27%. The 1999
diluted earnings per share included $0.02 for realized gains. The percentage
increase in diluted earnings per share was favorably affected by the lower
adjusted shares outstanding at June 30, 2000 as a result of common stock
repurchased by the Company during the third quarter of 1999. See note 5 to the
consolidated financial statements.
The amount of new primary insurance written by MGIC during the six
months ended June 30, 2000 was $17.9 billion, which included a $1.8 billion bulk
transaction referred to below, compared to $24.2 billion in the same period in
1999. The decline in new primary insurance written principally reflected the
decline in refinancing activity, which accounted for 13% of new primary
insurance written in the first half of 2000, compared to 34% in the first half
of 1999.
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<PAGE>
The $17.9 billion of new primary insurance written during the first half
of 2000 was offset by the cancellation of $13.6 billion of insurance in force,
and resulted in a net increase of $4.3 billion in primary insurance in force,
compared to new primary insurance written of $24.2 billion, the cancellation of
$22.0 billion of insurance in force and a net increase of $2.2 billion in
primary insurance in force during the first half of 1999. Direct primary
insurance in force was $151.9 billion at June 30, 2000 compared to $147.6
billion at December 31, 1999 and $140.2 billion at June 30, 1999. In addition to
providing direct primary insurance coverage, the Company also insures pools of
mortgage loans. New pool risk written during the six months ended June 30, 2000
and June 30, 1999, which was virtually all agency pool insurance, was $183
million and $374 million, respectively. The Company's direct pool risk in force
was $1.7 billion at June 30, 2000 and $1.6 billion at December 31, 1999.
Cancellation activity has historically been affected by the level of
mortgage interest rates, with cancellations generally moving inversely to the
change in the direction of interest rates. Cancellations continued to decrease
during the second quarter of 2000 compared to the cancellation levels of 1999
due to the higher mortgage interest rate environment which resulted in an
increase in the MGIC persistency rate (percentage of insurance remaining in
force from one year prior) to 79.3% at June 30, 2000 from 72.9% at December 31,
1999 and 66.6% at June 30, 1999. Future cancellation activity could be somewhat
higher than it otherwise would have been as a result of legislation that went
into effect in July 1999 regarding cancellation of mortgage insurance.
Cancellation activity could also increase as more of the Company's insurance in
force is represented by subprime loans, which the Company anticipates will have
materially lower persistency than the Company's prime business.
New insurance written for ARMs increased to 12% of new insurance written
during the first half of 2000 from 5% of new insurance written during the same
period in 1999 as a result of higher mortgage interest rates on fixed rate
mortgage loans. New insurance written for mortgages with LTV ratios in excess of
90% but not more than 95% (95s) were 41% of new insurance written during the
first half of 2000 compared to 35% in the same period a year ago, as a result of
declining refinancing activity during 2000.
Principally as a result of changes in coverage requirements by Fannie
Mae and Freddie Mac new insurance written for mortgages with reduced coverage
(coverage of 17% for 90s (mortgages with LTV ratios in excess of 85% but not
more than 90%) and coverage of 25% for 95s) increased to 12% of new insurance
written in the first half of 2000 compared to 4% a year ago. New insurance
written for mortgages with deep coverage (coverage of 25% for 90s and coverage
of 30% for 95s) declined to 63% of new insurance written in the first half of
2000 compared to 68% a year ago.
New insurance written for subprime mortgages (in general, mortgages that
would not meet the standard underwriting guidelines of Fannie Mae and Freddie
Mac for prime mortgages due to credit quality, documentation, or other factors,
such as in a refinance
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<PAGE>
transaction exceeding a specified increase in the amount of the mortgage debt
due to cash being paid to the borrower) was 17% of new insurance written during
the first half of 2000 compared to 3% for the same period a year ago. The
subprime new insurance written through June included a $1.8 billion bulk
transaction. The Company expects that subprime loans will have delinquency and
default rates in excess of those on the Company's prime business. While the
Company believes it has priced its subprime business to generate acceptable
returns, there can be no assurance that the assumptions underlying the premium
rates adequately address the risk of this business.
During the second quarter of 2000, the Company began to insure mortgages
with LTVs of up to 100%.
New premiums written increased 10% to $420.1 million during the first
half of 2000, from $380.4 million during the first half of 1999. New premiums
earned increased 10% to $428.5 million for the first half of 2000 from $388.7
million for the same period in 1999. The increases were primarily a result of
the growth in insurance in force and a higher percentage of renewal premiums on
products with higher premium rates offset in part by an increase in ceded
premiums to $20.5 million in the first half of 2000 compared to $10.6 million
during the same period a year ago, primarily due to an increase in captive
mortgage reinsurance.
For a discussion of certain programs with Fannie Mae and Freddie Mac
regarding reduced mortgage insurance requirements and for a discussion of
proposed capital regulations for Fannie Mae and Freddie Mac, see second quarter
discussion.
Mortgages (newly insured during the six months ended June 30, 2000 or in
previous periods) equal to approximately 32% of MGIC's new insurance written
during the first half of 2000 were subject to captive mortgage reinsurance and
similar arrangements compared to 27% during the same period in 1999. Such
arrangements entered into during a reporting period customarily include loans
newly insured in a prior reporting period. As a result, the percentages cited
above would be lower if only the current reporting period's newly insured
mortgages subject to such arrangements were included. At June 30, 2000,
approximately 18% of MGIC's risk in force was subject to captive reinsurance and
similar arrangements compared to 15% at December 31, 1999. In a February 1999
circular letter, the New York Department of Insurance said it was in the process
of developing guidelines that would articulate the parameters under which
captive mortgage reinsurance is permissible under New York insurance law. The
complaint in the RESPA litigation referred to in note 4 of the notes to the
consolidated financial statements alleges that MGIC pays "inflated" captive
mortgage reinsurance premiums in violation of RESPA.
Investment income for the first half of 2000 was $83.3 million, an
increase of 10% over the $75.5 million in the first half of 1999. This increase
was primarily the result of an increase in the amortized cost of average
invested assets to $3.0 billion for the first half of 2000 from $2.7 billion for
the first half of 1999, an increase of 9%. The portfolio's average
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<PAGE>
pre-tax investment yield was 5.8% for the first half of 2000 and 5.5% for the
same period in 1999. The portfolio's average after-tax investment yield was 4.9%
for the first half of 2000 and 4.7% for the same period in 1999. The Company's
net realized gains were $0.2 million during the six months ended June 30, 2000
compared to net realized gains of $3.4 million during the same period in 1999
resulting primarily from the sale of fixed maturities.
Other revenue, which is composed of various components, was $23.3
million for the first half of 2000, compared with $29.0 million for the same
period in 1999. The decrease is primarily the result of a decrease in contract
underwriting revenue, the expiration in December 1999 of a contract with a
government agency for premium reconciliation services and equity losses from
Customers Forever, a joint venture with Marshall & Ilsley Corporation
consummated in the third quarter of 1999, partially offset by an increase in
equity earnings from C-BASS and a decrease in equity losses from Sherman, both
joint ventures with Enhance.
In accordance with generally accepted accounting principles, each
quarter C-BASS is required to estimate the value of its mortgage-related assets
and recognize in earnings the resulting net unrealized gains and losses.
Including open trades, C-BASS's mortgage-related assets were $841 million at
June 30, 2000 and are expected to increase in the future. Substantially all of
C-BASS's mortgage-related assets do not have readily ascertainable market values
and, as a result, their value for financial statement purposes is estimated by
the management of C-BASS. Market value adjustments could impact the Company's
share of C-BASS's results of operations.
A substantial portion of Sherman's consolidated assets are investments
in receivable portfolios that do not have readily ascertainable market values
and, as a result, their value for financial statements purposes is estimated by
the management of Sherman. Market value adjustments could impact the Company's
share of Sherman's results of operations.
Net losses incurred decreased 40% to $45.2 million during the first half
of 2000 from $75.2 million during the same period in 1999. The decline from a
year ago was primarily attributed to an increase in the redundancy in prior year
loss reserves, generally strong economic conditions, continued improvement in
the California real estate market and the Company's claims mitigation efforts.
The primary notice inventory decreased from 29,761 at December 31, 1999 to
28,120 at June 30, 2000. The pool notice inventory increase from 11,638 at
December 31, 1999 to 13,250 at June 30, 2000.
At June 30, 2000, 71% of MGIC's insurance in force was written during
the preceding fourteen quarters, compared to 68% at June 30, 1999. The highest
claim frequency years have typically been the third through fifth year after the
year of loan origination. However, the pattern of claims frequency for refinance
loans (which accounted for 25% and 31% of total new insurance written for the
years ended December 31,
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1999 and 1998, respectively) may be different from the historical pattern of
other loans.
Underwriting and other expenses decreased to $93.2 million in the first
half of 2000 from $104.3 million in the same period of 1999, a decrease of 11%.
This decrease was primarily due to decreases in contract underwriting.
Interest expense increased to $13.7 million in the first half of 2000
from $10.0 million during the same period in 1999 primarily due to a higher
weighted-average interest rate on the notes payable balance and lower earnings
on interest rate swap transactions (discussed below) during the six months ended
June 30, 2000 compared to the comparable period in 1999.
The Company utilized financial derivative transactions during the first
half of 2000 and 1999 consisting of interest rate swaps to reduce and manage
interest rate risk on its notes payable. During the first half of 2000, earnings
on such transactions aggregated approximately $0.4 million compared to $1.8
million a year ago and were netted against interest expense. See note 2 to the
consolidated financial statements.
The consolidated insurance operations loss ratio was 10.5% for the first
half of 2000 compared to 19.4% for the second quarter of 1999. The consolidated
insurance operations expense and combined ratios were 18.8% and 29.3%,
respectively, for the first half of 2000 compared to 21.6% and 41.0% for the
first half of 1999.
The effective tax rate was 31.3% in the first half of 2000, compared to
30.5% in the first half of 1999. During both periods, 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 2000 resulted from a lower
percentage of total income before tax being generated from the tax-preferenced
investments.
Liquidity and Capital Resources
The Company's consolidated sources of funds consist primarily of
premiums written and investment income. The Company generated positive cash
flows from operating activities of $255.3 million for the six months ended June
30, 2000. Funds are applied primarily to the payment of claims and expenses. The
Company's business does not require significant capital expenditures on an
ongoing basis. 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.
Consolidated total investments were $3.1 billion at June 30, 2000,
compared to $2.8 billion at December 31, 1999, an increase of 10%. The increase
was due to additional funds invested in the portfolio and an increase in market
values. The investment portfolio
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includes unrealized losses on securities marked to market of $16.2 million and
$62.7 million at June 30, 2000 and December 31, 1999, respectively. As of June
30, 2000, the Company had $142.9 million of short-term investments with
maturities of 90 days or less. In addition, at June 30, 2000, based on amortized
cost, the Company's fixed income securities, were approximately 99% invested in
"A" rated and above, readily marketable securities, concentrated in maturities
of less than 15 years. At June 30, 2000, the Company's investment in preferred
stock, which is classified as fixed maturities, was $44.6 million. The Company
had no preferred stock at December 31, 1999.
The Company's investments in C-BASS, Sherman and Customers Forever
("joint ventures") increased $27.7 million from $101.5 million at December 31,
1999 to $129.2 million at June 30, 2000 as a result of additional investments of
$13.5 million and equity earnings of $14.2 million. MGIC is guaranteeing one
half of a $50 million credit facility for Sherman that is scheduled to expire in
December 2000. The Company expects that it will provide additional funding to
the joint ventures.
Consolidated loss reserves decreased to $625.7 million at June 30, 2000
from $642.0 million at December 31, 1999 reflecting a decrease in the primary
insurance notice inventory partially offset by an increase in the pool insurance
notice inventory. 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 $6.3 million from $181.4
million at December 31, 1999 to $175.1 million at June 30, 2000, primarily
reflecting the continued high level of monthly premium policies written.
Reinsurance recoverable on unearned premiums increased $2.1 million to $8.7
million at June 30, 2000 from $6.6 million at December 31, 1999, primarily
reflecting the increase in captive mortgage reinsurance partially offset by the
reduction in unearned premiums.
Consolidated shareholders' equity increased to $2.1 billion at June 30,
2000, from $1.8 billion at December 31, 1999, an increase of 17%. This increase
consisted of $263.3 million of net income during the first six months of 2000,
net unrealized gains on investments of $30.2 million, net of tax, and $14.0
million from the reissuance of treasury stock offset in part by approximately
$6.2 million expended for the repurchase of the Company's common stock and
dividends declared of $5.3 million.
During the first quarter of 2000, the Company repurchased approximately
143,000 shares of its common stock at a total cost of approximately $6.2
million. Funds to repurchase the shares were primarily provided by cash flow and
bank borrowings. The Company cannot predict whether it will repurchase
additional shares in 2000.
MGIC is the principal insurance subsidiary of the Company. MGIC's
risk-to-capital ratio was 11.1:1 at June 30, 2000 compared to 11.9:1 at December
31, 1999. The decrease was due to MGIC's increased policyholders' reserves,
partially offset by the net
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additional risk in force of $1.3 billion, net of reinsurance, during the first
six months of 2000.
The Company's combined insurance risk-to-capital ratio was 11.9:1 at
June 30, 2000, compared to 12.9:1 at December 31, 1999. The decrease was due to
the same reasons as described above.
The risk-to-capital ratios set forth above have been computed on a
statutory basis. However, the methodology used by the rating agencies to assign
claims-paying ability ratings permits less leverage than under statutory
requirements. As a result, the amount of capital required under statutory
regulations may be lower than the capital required for rating agency purposes.
In addition to capital adequacy, the rating agencies consider other factors in
determining a mortgage insurer's claims-paying rating, including its competitive
position, business outlook, management, corporate strategy, and historical and
projected operating performance.
For certain material risks of the Company's business, see "Risk Factors"
below.
Risk Factors
The Company and its business may be materially affected by the factors
discussed below. These factors may also cause actual results to differ
materially from the results contemplated by forward looking statements that the
Company may make. Forward looking statements consist of statements which relate
to matters other than historical fact. Among others, statements that include
words such as the Company "believes", "anticipates" or "expects", or words of
similar import, are forward looking statements.
If the volume of low down payment home mortgage originations declines,
the amount of insurance that we write could also decline and result in declines
in our future revenues. The factors that affect the volume of low down payment
mortgage originations include:
- the level of home mortgage interest rates,
- the health of the domestic economy as well as conditions in regional
and local economies,
- housing affordability,
- population trends, including the rate of household formation,
- the rate of home price appreciation, which in times of heavy
refinancing affects whether refinance loans have loan-to-value ratios
that require private mortgage insurance, and
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- government housing policy encouraging loans to first-time homebuyers.
If lenders and investors select alternatives to private mortgage
insurance, the amount of insurance that we write could decline and result in
declines in our future revenues. These alternatives include:
- government mortgage insurance programs, including those of the Federal
Housing Administration and the Veterans Administration,
- holding mortgages in portfolio and self-insuring,
- use of credit enhancements by investors, including Fannie Mae and
Freddie Mac, other than private mortgage insurance or using other
credit enhancements in conjunction with reduced levels of private
mortgage insurance coverage, and
- mortgage originations structured to avoid private mortgage insurance,
such as a first mortgage with an 80% loan-to-value ratio and a second
mortgage with a 10% loan-to-value ratio (referred to as an 80-10-10
loan) rather than a first mortgage with a 90% loan- to-value ratio.
Because the business practices of Fannie Mae and Freddie Mac affect us,
our revenues and losses could be materially affected by changes in their
business practices. These practices affect the entire relationship between
Fannie Mae and Freddie Mac and mortgage insurers and include:
- the level of private mortgage insurance coverage, subject to the
limitations of Fannie Mae and Freddie Mac's charters when private
mortgage insurance is used as the required credit enhancement on low
down payment mortgages,
- whether Fannie Mae or Freddie Mac influence the mortgage lender's
selection of the mortgage insurer providing coverage and, if so, any
transactions that are related to that selection,
- whether Fannie Mae or Freddie Mac will give mortgage lenders an
incentive to select a mortgage insurer that has a "AAA" claims-paying
ability rating to benefit from the lower capital required of Fannie
Mae or Freddie Mac under the Office of Federal Housing Enterprise
Oversight's proposed stress test when a mortgage is insured by a "AAA"
company,
- the underwriting standards that determine what loans are eligible for
purchase by Fannie Mae or Freddie Mac, which thereby affect the
quality of the risk insured by the mortgage insurer, as well as the
availability of mortgage loans,
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<PAGE>
- the terms on which mortgage insurance coverage can be canceled before
reaching the cancellation thresholds established by law, and
- the circumstances in which mortgage servicers must perform activities
intended to avoid or mitigate loss on insured mortgages that are
delinquent.
Because we participate in an industry that is intensely competitive, our
revenues could be adversely affected by competition. Competition for private
mortgage insurance premiums occurs not only among private mortgage insurers but
increasingly with mortgage lenders through captive mortgage reinsurance
transactions in which a lender's affiliate reinsures a portion of the insurance
written by a private mortgage insurer on mortgages originated by the lender. The
level of competition within the private mortgage insurance industry has also
increased as many large mortgage lenders have reduced the number of private
mortgage insurers with whom they do business at the same time as consolidation
among mortgage lenders has increased the share of the mortgage lending market
held by large lenders.
If interest rates decline, house prices appreciate or mortgage insurance
cancellation requirements change, our persistency could be adversely affected
and result in declines in our revenue. In each year, most of MGIC's premiums are
from insurance that has been written in prior years. As a result, the length of
time insurance remains in force is an important determinant of revenues. The
factors affecting persistency of the insurance in force include:
- the level of current mortgage interest rates compared to the mortgage
coupon rates on the insurance in force, which affects the
vulnerability of the insurance in force to refinancings, and
- mortgage insurance cancellation policies of mortgage investors along
with the rate of home price appreciation experienced by the homes
underlying the mortgages in the insurance in force.
If the domestic economy deteriorates, more homeowners may default and
our losses may increase. Losses result from events that adversely affect a
borrower's ability to continue to make mortgage payments, such as unemployment,
and whether the home of a borrower who defaults on his mortgage can be sold for
an amount that will cover unpaid principal and interest and the expenses of the
sale. Favorable economic conditions generally reduce the likelihood that
borrowers will lack sufficient income to pay their mortgages and also favorably
affect the value of homes, thereby reducing and in some cases even eliminating a
loss from a mortgage default. A significant deterioration in economic conditions
would adversely affect MGIC's losses. The low level of losses that has recently
prevailed in the private mortgage insurance industry has encouraged competition
to assume default risk through captive reinsurance arrangements, self-insurance,
80-10-10 loans and other means.
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<PAGE>
We are subject to litigation that could materially affect us. Our MGIC
subsidiary is a defendant in a lawsuit alleging that MGIC violated the Real
Estate Settlement Procedures Act by entering into transactions with lenders that
were not properly priced, in return for the referral of mortgage insurance. The
complaint seeks damages of three times the amount of the mortgage insurance
premiums that have been paid and that will be paid at the time of judgment for
the mortgage insurance found to be involved in a violation of the Real Estate
Settlement Procedures Act. The complaint also seeks injunctive relief, including
prohibiting MGIC from receiving future premium payments. MGIC has answered the
complaint and denied liability. There can be no assurance, however, that the
ultimate outcome of the litigation will not materially affect us.
Because we expect the pace of change in our industry and in home
mortgage lending to remain high, we will be disadvantaged unless we are able to
respond to new ways of doing business. We expect the processes involved in home
mortgage lending will continue to evolve through greater use of technology. This
evolution could effect fundamental changes in the way home mortgages are
distributed. Affiliates of lenders who are regulated depositary institutions
gained expanded insurance powers under financial modernization legislation and
the capital markets may emerge as providers of insurance in competition with
traditional insurance companies. These trends and others increase the level of
uncertainty attendant to the private mortgage insurance business, demand rapid
response to change and place a premium on innovation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At June 30, 2000, the Company's derivative financial instruments in its
investment portfolio were immaterial. The Company places its investments in
instruments that meet high credit quality standards, as specified in the
Company's investment policy guidelines; the policy also limits the amount of
credit exposure to any one issue, issuer and type of instrument. At June 30,
2000, the effective duration of the Company's investment portfolio was 6.5
years. The effect of a 1% increase/decrease in market interest rates would
result in a 6.5% decrease/increase in the value of the Company's investment
portfolio.
The Company's borrowings under the credit facilities are subject to
interest rates that are variable. Changes in market interest rates would have
minimal impact on the value of the notes payable. See note 2 to the consolidated
financial statements.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of the Company was held on May 4,
2000.
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<PAGE>
(b) At the Annual Meeting, the following Directors were elected to the
Board of Directors, for a term expiring at the Annual Meeting of
Shareholders to be held in 2003 or until a successor is duly elected
and qualified:
Karl E. Case
Curt S. Culver
William A. McIntosh
Leslie M. Muma
Directors with continuing terms of office are:
Term expiring 2001:
James A. Abbott
James D. Ericson
Daniel Gross
Sheldon B. Lubar
Edward J. Zore
Term expiring 2002:
Mary K. Bush
David S. Engleman
Kenneth M. Jastrow, II
Daniel P. Kearney
(c) Matters voted upon at the Annual Meeting and the number of shares
voted for, against, withheld, abstaining from voting and broker
non-votes were as follows:
(1) Election of four Directors for a term expiring in 2003.
FOR WITHHELD
Karl E. Case 89,061,266 5,468,230
Curt S. Culver 89,061,470 5,468,026
William A. McIntosh 89,061,111 5,468,385
Leslie A. Muma 89,061,071 5,468,425
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<PAGE>
(2) Ratification of the appointment of PricewaterhouseCoopers LLP as
independent accountants for the Company for 2000.
For: 94,232,628
Against: 73,206
Abstaining from Voting: 223,662
There were no broker non-votes on any matter.
(d) Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The exhibits listed in the accompanying Index to Exhibits
are filed as part of this Form 10-Q.
(b) Reports on Form 8-K - During the quarter ended June 30, 2000, a
Current Report on Form 8-K, dated May 25, 2000, was filed to report
information under Item 5, Other Information.
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SIGNATURES
Pursuant to the requirements 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 August 11, 2000.
MGIC INVESTMENT CORPORATION
\s\ J. Michael Lauer
-------------------------------------
J. Michael Lauer
Executive Vice President and
Chief Financial Officer
\s\ Patrick Sinks
-------------------------------------
Patrick Sinks
Senior Vice President, Controller and
Chief Accounting Officer
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INDEX TO EXHIBITS
(Item 6)
Exhibit
Number Description of Exhibit
10 MGIC Investment Corporation Supplemental Executive Retirement Plan
11 Statement Re Computation of Net Income Per Share
27 Financial Data Schedule
Page 28
