FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
Commission file number 1-10816
MGIC Investment Corporation
(Exact name of registrant as specified in its charter)
Wisconsin 39-1486475
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
MGIC Plaza, 250 East Kilbourn Avenue, Milwaukee, Wisconsin 53202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (414) 347-6480
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class: Common Stock, Par Value $1 Per Share
Common Share Purchase Rights
Name of Each Exchange
on Which Registered: New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Class: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
State the aggregate market value of the voting stock held
by non-affiliates of the Registrant as of June 30, 2002: $7.0 billion*
* Solely for purposes of computing such value and without thereby admitting that
such persons are affiliates of the Registrant, shares held by directors and
executive officers of the Registrant are deemed to be held by affiliates of the
Registrant. Shares held are those shares beneficially owned for purposes of Rule
13d-3 under the Securities Exchange Act of 1934 but excluding shares subject to
stock options.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of February 15, 2003: 99,243,731.
The following documents have been incorporated by reference in this Form 10-K,
as indicated:
Part and Item Number
of Form 10-K Into
Document Which Incorporated*
- -------- --------------------
1. Information from 2002 Annual Report to Item 1 of Part I
Shareholders (for Fiscal Year Ended Items 5 through 8 of Part II
December 31, 2002)
2. Proxy Statement for the 2003 Annual Item 5 of Part II
Meeting of Shareholders Items 10 through 13 of Part III
*In each case, to the extent provided in the Items listed
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Part I
Item 1. Business.
A. General
MGIC Investment Corporation (the "Company") is a holding company which,
through its wholly owned subsidiary Mortgage Guaranty Insurance Corporation
("MGIC"), is the leading provider of private mortgage insurance coverage in the
United States to the home mortgage lending industry. Private mortgage insurance
covers residential first mortgage loans and expands home ownership opportunities
by enabling people to purchase homes with less than 20% down payments. If the
homeowner defaults, private mortgage insurance reduces and, in some instances,
eliminates the loss to the insured institution. Private mortgage insurance also
facilitates the sale of low down payment mortgage loans in the secondary
mortgage market, principally to the Federal National Mortgage Association
("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac")
(Fannie Mae and Freddie Mac are collectively referred to as the "GSEs"). In
addition to mortgage insurance on first liens, the Company, through other
subsidiaries, provides lenders with various underwriting and other services and
products related to home mortgage lending.
MGIC is licensed in all 50 states of the United States, the District of
Columbia and Puerto Rico. The Company is a Wisconsin corporation. Its principal
office is located at MGIC Plaza, 250 East Kilbourn Avenue, Milwaukee, Wisconsin
53202 (telephone number (414) 347-6480).
The Company and its business may be materially affected by the factors
discussed in "Management's Discussion and Analysis -- Risk Factors" in Exhibit
13 to this Annual Report on Form 10-K. These factors may also cause actual
results to differ materially from the results contemplated by forward looking
statements that the Company may make.
B. The MGIC Book
Types of Product
In general, there are two principal types of private mortgage insurance:
"primary" and "pool."
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Primary Insurance. Primary insurance provides mortgage default protection
on individual loans and covers unpaid loan principal, delinquent interest and
certain expenses associated with the default and subsequent foreclosure
(collectively, the "claim amount"). The insurer generally pays the coverage
percentage of the claim amount specified in the primary policy, but has the
option to pay 100% of the claim amount and acquire title to the property. The
claim amount averages about 115% of the unpaid principal balance of the loan.
Primary insurance generally applies to owner occupied, first mortgage loans on
one-to-four family homes, including condominiums. Primary coverage can be used
on any type of residential mortgage loan instrument approved by the mortgage
insurer. References in this document to amounts of insurance written or in
force, risk written or in force and other historical data related to MGIC's
insurance refer only to direct (before giving effect to reinsurance) primary
insurance, unless otherwise indicated. References in this document to "primary
insurance" include insurance written in bulk transactions (see "Bulk
Transactions" below) that is supplemental to mortgage insurance written in
connection with the origination of the loan. Effective with the third quarter of
2001, in reports by private mortgage insurers to the trade association for the
private mortgage insurance industry, mortgage insurance that is supplemental to
other mortgage insurance is classified as pool insurance. The trade association
classification is used by members of the private mortgage insurance industry in
reports to a mortgage industry publication that computes and publishes primary
market share information.
The following table shows, on a direct basis, primary insurance in force
(the unpaid principal balance of insured loans as reflected in MGIC's records)
and primary risk in force (the coverage percentage applied to the unpaid
principal balance and for risk in force as of December 31, 2000 - 2002, taking
into account any loss limit that is applicable to a portfolio or group of
insured loans), for insurance that has been written by MGIC (the "MGIC Book") as
of the dates indicated:
Primary Insurance and Risk In Force
December 31,
------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(In millions of dollars)
Direct Primary
Insurance In Force......... $196,988 $183,904 $160,192 $147,607 $137,990
Direct Primary
Risk In Force(1)........... $ 47,623 $ 42,678 $ 39,090 $ 35,623 $ 32,891
(1) Net of aggregate loss limits for 2002, 2001 and 2000. Aggregate loss limits
for years prior to 2000 are immaterial and are not reflected.
The coverage percentage provided by MGIC is determined by the lender. For
loans sold by lenders to Fannie Mae or Freddie Mac, the coverage percentage must
comply with the
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requirements established by the particular GSE to which the loan is delivered.
Effective in the first quarter of 1995, Freddie Mac and Fannie Mae increased
their coverage requirements for, among other loan types, 30-year fixed rate
mortgages with loan-to-value ratios, determined at loan origination ("LTVs"), of
90.01-95.00% ("95s") from 25% coverage to 30% coverage and for such mortgages
with LTVs of 85.01-90.00% ("90s") from 17% to 25%. During the first quarter of
1999, the GSEs changed their mortgage insurance requirements for fixed rate and
certain other mortgages on owner occupied properties having terms greater than
20 years when the loan is approved by their automated underwriting services.
Lenders may deliver these loans to the GSEs with the prior coverage requirements
(30% for a 95 and 25% for a 90), or in the case of 95s, with either (i) 25%
coverage or (ii) 18% coverage and the payment of a delivery fee to the GSE, and
in the case of 90s, with either (i) 17% coverage or (ii) 12% coverage and the
payment of a delivery fee to the GSE.
The following table shows new insurance written during the last five years
for 95s with 30% coverage and for 90s with 25% coverage:
Coverage Categories as a Percentage of New Insurance Written
Year Ended December 31,
-------------------------------------------------
LTV/
Coverage 2002 2001 2000 1999 1998
-------- ---- ---- ---- ---- ----
95 / 30% 23.9% 26.5% 32.2% 32.0% 33.9%
90 / 25% 29.0% 29.7% 29.6% 34.7% 38.6%
---- ---- ---- ---- ----
Total 52.9% 56.2% 61.8% 66.7% 72.5%
The Company expects the aggregate percentage of its new insurance written with
95/30% and 90/25% coverage will continue to decline in response to the GSEs
changed mortgage insurance requirements. The amount of 90s and 95s that MGIC
insures as a percentage of its new insurance written is also affected by
refinance activity, which generally involves loans with lower LTVs. Refinance
activity was a higher percentage of new insurance written in 1998, 2001 and 2002
than in the other years shown in the table. The amount of 90s and 95s written
through the bulk channel is substantially lower than insurance written through
the flow channel. (MGIC's bulk business prior to 2000 was not significant.)
MGIC charges higher premium rates for higher coverages, and the deeper
coverage requirements imposed by the GSEs beginning in 1995 have resulted in
higher earned premiums for loans with the same characteristics (such as LTV and
loan type). MGIC believes depth of coverage requirements have no significant
impact on frequency of default. Higher coverage percentages generally result in
increased severity (which is the amount paid on a claim), and lower coverage
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percentages generally result in decreased severity. In accordance with industry
accounting practice, reserves for losses are only established for loans in
default. Because relatively few defaults occur in the early years of a book of
business (see "Past Industry Losses; Defaults; and Claims--Claims" below),
the higher premium revenue from deeper coverage is recognized before any higher
losses resulting from that deeper coverage may be incurred. On the other hand,
while a decline in coverage percentage will result in lower premium revenue, it
should also result in lower incurred (and paid) losses at the same level of
claim incidence. However, given the historical pattern of claims, the decline in
revenue will precede the benefits of reduced severity. MGIC's premium pricing
methodology generally targets substantially similar returns on capital
regardless of the depth of coverage. However, there can be no assurance that
changes in the level of premium rates adequately reflect the risks associated
with changes in the depth of coverage.
In partnership with mortgage insurers, the GSEs are also offering programs
under which, on delivery of an insured loan to a GSE, the primary coverage is
restructured to an initial shallow tier of coverage followed by a second tier
that is subject to an overall loss limit and, depending on the program,
compensation may be paid to the GSE reflecting services or other benefits
realized by the mortgage insurer from the coverage conversion. Lenders receive
guaranty fee relief from the GSEs on mortgages delivered with these restructured
coverages.
Mortgage insurance coverage cannot be terminated by the insurer, except for
non-payment of premium, and remains renewable at the option of the insured
lender, generally at the renewal rate fixed when the loan was initially insured.
Lenders may cancel insurance at any time at their option or because of mortgage
repayment, which may be accelerated because of the refinancing of mortgages. In
the case of a loan purchased by Freddie Mac or Fannie Mae, a borrower meeting
certain conditions may require the mortgage servicer to cancel insurance upon
the borrower's request when the principal balance of the loan is 80% or less of
the home's current value.
Under the federal Homeowners Protection Act (the "HPA") a borrower has the
right to stop paying premiums for private mortgage insurance on loans closed
after July 28, 1999 secured by a property comprised of one dwelling unit that is
the borrower's primary residence when certain LTV ratio thresholds determined by
the value of the home at loan origination and other requirements are met. In
general, a borrower may stop making mortgage insurance payments when the LTV
ratio is scheduled to reach 80% (based on the loan's amortization schedule
established at loan origination) if the borrower so requests and if certain
requirements relating to the borrower's payment history and the absence of
junior liens and a decline in the property's value since origination are
satisfied. In addition, a borrower's obligation to make payments for private
mortgage insurance generally terminates regardless of whether a borrower so
requests when the LTV ratio reaches 78% of the unpaid principal balance of the
mortgage and the borrower is (or thereafter becomes) current in his mortgage
payments. A borrower's right to stop paying for private mortgage insurance
applies only to borrower paid mortgage insurance. The HPA requires that lenders
give borrowers certain notices with regard to the cancellation of private
mortgage insurance.
In addition, some states require that mortgage servicers periodically
notify borrowers of the circumstances in which they may request a mortgage
servicer to cancel private mortgage insurance
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and some states allow the borrower to require the mortgage servicer to cancel
private mortgage insurance under certain circumstances or require the mortgage
servicer to cancel such insurance automatically in certain circumstances.
Coverage tends to continue in areas experiencing economic contraction and
housing price depreciation. The persistency of coverage in such areas coupled
with cancellation of coverage in areas experiencing economic expansion and
housing price appreciation can increase the percentage of the insurer's
portfolio comprised of loans in economically weak areas. This development can
also occur during periods of heavy mortgage refinancing because refinanced loans
in areas of economic expansion experiencing property value appreciation are less
likely to require mortgage insurance at the time of refinancing, while
refinanced loans in economically weak areas not experiencing property value
appreciation are more likely to require mortgage insurance at the time of
refinancing or not qualify for refinancing at all and, thus, remain subject to
the mortgage insurance coverage.
When a borrower refinances an MGIC-insured mortgage loan by paying it off
in full with the proceeds of a new mortgage, the insurance on that existing
mortgage is cancelled, and insurance on the new mortgage is considered to be new
primary insurance written. Therefore, continuation of MGIC's coverage from a
refinanced loan to a new loan results in both a cancellation of insurance and
new insurance written. The percentage of primary risk written with respect to
loans representing refinances was 43.8% in 2002 compared to 43.7% in 2001 and
18.0% in 2000.
In addition to varying with the coverage percentage, MGIC's premium rates
vary depending upon the perceived risk of a claim on the insured loan and, thus,
take into account the LTV, the loan type (fixed payment versus non-fixed
payment) and mortgage term and, for A- and subprime loans, the location of the
borrower's credit score within a range of credit scores. In general, A- loans
have FICO scores between 575 and 619 and subprime loans have FICO credit scores
of less than 575.
Premium rates cannot be changed after the issuance of coverage. Because the
Company believes that over the long term each region of the United States is
subject to similar factors affecting risk of loss on insurance written, MGIC
generally utilizes a nationally based, rather than a regional or local, premium
rate policy.
The borrower's mortgage loan instrument may require the borrower to pay the
mortgage insurance premium ("borrower paid mortgage insurance") or there may be
no such requirement imposed on the borrower, in which case the premium is paid
by the lender, who may recover the premium through an increase in the note rate
on the mortgage ("lender paid mortgage insurance"). Almost all of MGIC's primary
insurance in force and new insurance written, other than through bulk
transactions, is borrower paid mortgage insurance. New insurance written through
bulk transactions is generally paid by the securitization vehicles that hold the
mortgages; the mortgage note rate generally does not reflect the premium for the
mortgage insurance.
Under the monthly premium plan, a monthly premium payment is made to MGIC
to provide only one month of coverage, rather than one year of coverage provided
by the annual premium
5
plan. Under the annual premium plan, the initial premium is paid to MGIC in
advance, and earned over the next twelve months of coverage, with annual renewal
premiums paid in advance thereafter and earned over the subsequent twelve months
of coverage. The annual premiums can be paid with either a higher premium rate
for the initial year of coverage and lower premium rates for the renewal years,
or with premium rates which are equal (level) for the initial year and
subsequent renewal years. Under the single premium plan, a single payment is
made to MGIC, covering a specified term exceeding 12 months.
During each of the last three years, the monthly premium plan represented
more than 90% of MGIC's new insurance written. The annual premium plan
represented substantially all of the remaining new insurance written.
Pool Insurance. Pool insurance is generally used as an additional "credit
enhancement" for certain secondary market mortgage transactions. Pool insurance
generally covers the loss on a defaulted mortgage loan which exceeds the claim
payment under the primary coverage, if primary insurance is required on that
mortgage loan, as well as the total loss on a defaulted mortgage loan which did
not require primary insurance, in each case up to a stated aggregate loss limit.
During the first quarter of 1997, the Company began writing pool insurance
generally covering fixed-rate, 30-year mortgage loans delivered to Freddie Mac
and Fannie Mae ("agency pool insurance"). The aggregate loss limit on agency
pool insurance generally does not exceed 1% of the aggregate original principal
balance of the mortgage loans in the pool. New pool risk written during 2002 was
$674 million and was $412 million in 2001. New pool risk written during these
years was comprised of agency pool insurance, risk associated with loans
delivered to the Federal Home Loan Banks under their mortgage purchase programs
and risk associated with loans made under state housing finance programs. Net
(giving effect to external reinsurance) MGIC Book pool risk in force at December
31, 2002 was $2.4 billion compared to $1.8 billion and $1.5 billion at December
31, 2001 and 2000, respectively. The risk amounts referred to above are
contractual aggregate loss limits and, for the year ended December 31, 2002, for
$3.0 billion of risk without such limits, risk calculated at $276 million for
new risk written and $274 million for risk in force, representing the estimated
amount that would credit enhance these loans to a 'AA' level.
For a discussion of litigation brought as a nationwide class action
alleging that MGIC violated the Real Estate Settlement Procedures Act ("RESPA")
by providing agency pool insurance and entering into other transactions with
lenders that were not properly priced (the "RESPA Litigation"), see Item 3
"Legal Proceedings." The settlement of the RESPA Litigation, which was approved
by the District Court in June 2001 but which has been challenged through an
appeal of a related order, includes an injunction that specifies the basis on
which agency pool insurance may be provided in compliance with RESPA. There can
be no assurance that the standards established by the injunction will be
determinative of compliance with RESPA were additional litigation to be brought
in the future.
In a February 1, 1999 circular addressed to all mortgage guaranty insurers
licensed in New York, the New York Department of Insurance ("NYID") advised that
"significantly underpriced"
6
agency pool insurance would violate the provisions of New York insurance law
that prohibit mortgage guaranty insurers from providing lenders with inducements
to obtain mortgage guaranty business. The NYID circular does not provide
standards under which the NYID will evaluate whether agency pool insurance is
"significantly underpriced." In response to subsequent inquiries from the NYID,
MGIC provided various information about agency pool insurance to the NYID. In a
January 31, 2000 letter addressed to all mortgage guaranty insurers licensed in
Illinois, the Illinois Department of Insurance advised that providing pool
insurance at a "discounted or below market premium" in return for the referral
of primary mortgage insurance would violate Illinois law.
Risk Sharing Arrangements. MGIC's products include risk sharing
arrangements with the GSEs and captive mortgage reinsurance in which an
affiliate of a lender reinsures a portion of the risk on loans originated or
purchased by the lender which have MGIC primary insurance. During the nine
months ended September 30, 2002, about 53% of MGIC's new insurance written on a
flow basis was subject to risk sharing arrangements compared to 50% for the year
ended December 31, 2001. (New insurance written through the bulk channel is not
subject to such arrangements.) The percentage of new insurance written during a
quarter covered by such arrangements normally increases after the end of the
quarter because, among other reasons, the transfer of a loan in the secondary
market can result in a mortgage insured during a quarter becoming part of such
an arrangement in a subsequent quarter. Therefore, the percentage of new
insurance written covered by such arrangements is shown only for the nine months
ended September 30, 2002. The complaint in the RESPA Litigation alleges that
MGIC pays "inflated" captive mortgage reinsurance premiums in violation of
RESPA. The settlement includes an injunction that specifies the basis on which
captive mortgage reinsurance may be provided in compliance with RESPA. There can
be no assurance that the standards established by the injunction will be
determinative of compliance with RESPA were additional litigation to be brought
in the future.
A substantial portion of the Company's captive mortgage reinsurance
arrangements are structured on an excess of loss basis. The Company has decided
that, effective March 31, 2003, it will not participate in excess of loss risk
sharing arrangements with net premium cessions in excess of 25% on terms which
are generally present in the market. The captive mortgage reinsurance programs
of larger lenders generally are not consistent with the Company's position.
Hence, the Company expects its position with respect to such risk sharing
arrangements will result in a reduction in business from some of these lenders.
See "The MGIC Book-Customers."
External Reinsurance. At December 31, 2002, disregarding reinsurance under
captive structures, less than 3% of MGIC's insurance in force was externally
reinsured. Reinsuring against possible loan losses does not discharge MGIC from
liability to a policyholder; however, the reinsurer agrees to indemnify MGIC for
the reinsurer's share of losses incurred.
Bulk Transactions. Primary insurance may be written on a flow basis, in
which loans are insured in individual, loan-by-loan transactions, or may be
written on a bulk basis, in which a portfolio of loans is insured in a single,
bulk transaction. Generally, in bulk transactions, the individual loans in the
insured portfolio are insured to specified levels of coverage and there may be
an aggregate loss limit applicable to all of the insured loans. The premium in a
bulk
7
transaction is based on the mortgage insurer's evaluation of the overall risk of
the insured loans included in the transaction and is negotiated with the
securitizer or other owner of the loans.
In general, the loans insured by MGIC in bulk transactions consist of Alt A
loans; jumbo loans with FICO credit scores of at least 700; A- loans; and
subprime loans. Alt A loans meet the conforming loan limit referred to below and
have FICO credit scores of at least 620, which is viewed as the cut-off for
prime quality loans, but do not meet the standard underwriting requirements of
the GSEs because of reduced documentation or other factors, such as in a
refinance transaction exceeding a specified increase in the amount of the
mortgage debt due to cash being paid to the borrower. A jumbo loan has an unpaid
principal balance that exceeds the conforming loan limit. The conforming loan
limit is the maximum unpaid principal amount of a mortgage loan that can be
purchased by the GSEs. The conforming loan limit is subject to annual
adjustment, and for mortgages covering a home with one dwelling unit is $322,700
for 2003 and was $300,700 in 2002 and $275,000 in 2001. A- loans have FICO
scores between 575 and 619 and subprime loans have FICO credit scores of less
than 575.
Approximately 55% of MGIC's bulk loan risk in force at December 31, 2002
had FICO credit scores of at least 620. Approximately 27% of MGIC's bulk loan
risk in force at December 31, 2002 had A- FICO credit scores, and approximately
18% had subprime credit scores. Most of the subprime loans insured by MGIC in
2002 were insured in bulk transactions. More than half of MGIC's bulk loan risk
in force at December 31, 2002 had LTV ratios of 80% and below.
New insurance written for bulk transactions was $22.5 billion during 2002
compared to $25.7 billion for 2001 and $7.0 billion for 2000. The Company's
writings of bulk insurance are in part sensitive to the volume of securitization
transactions involving non-conforming loans. A securitization involves the sale
of whole loans held by the securitizer. The Company believes that the relatively
high historical spread between the cost of funding mortgages and mortgage coupon
rates during portions of the second half of 2002 resulted in increased prices
for whole loans which had the effect of reducing the supply of mortgages
available for current securitization. The Company's writings of bulk insurance
are also sensitive to competition from other methods of providing credit
enhancement in a securitization, including the willingness of investors to
purchase tranches of the securitization with a higher degree of credit risk.
Customers
Originators of residential mortgage loans such as mortgage bankers, savings
institutions, commercial banks, mortgage brokers, credit unions and other
lenders have historically determined the placement of mortgage insurance written
on flow basis and as a result are the customers of MGIC. To obtain primary
insurance from MGIC written on flow basis, a mortgage lender must first apply
for and receive a mortgage guaranty master policy ("Master Policy") from MGIC.
MGIC had approximately 12,900 master policyholders at December 31, 2002 (not
including policies issued to branches and affiliates of large lenders). In 2002,
MGIC issued coverage on mortgage loans for approximately 4,800 of its master
policyholders. MGIC's top 10 customers generated 39.5% of its new insurance
written on a flow basis in 2002, compared to 38.4% in 2001, 36.2% in 2000 and
20.0% in 1996.
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Sales and Marketing and Competition
Sales and Marketing. MGIC sells its insurance products through its own
employees, located throughout the United States. At December 31, 2002, MGIC had
30 underwriting centers located in 21 states and in Puerto Rico.
Competition. For flow business, MGIC and other private mortgage insurers
compete directly with federal and state governmental and quasi-governmental
agencies, principally the FHA and, to a lesser degree, the Veterans
Administration ("VA"). These agencies sponsor government-backed mortgage
insurance programs, which during 2002 accounted for approximately 36% (compared
to approximately 37% during 2001) of the total low down payment residential
mortgages which were subject to governmental or private mortgage insurance. See
"Regulation, Indirect Regulation" below. Loans insured by the FHA cannot exceed
maximum principal amounts which are determined by a percentage of the conforming
loan limit. For 2003, the maximum FHA loan amount for homes with one dwelling
unit in "high cost" areas is as high as $280,749 and was as high as $261,609 in
2002 and $239,250 in 2001. Loans insured by the VA do not have mandated maximum
principal amounts but have maximum limits on the amount of the guaranty provided
by the VA to the lender. For loans closed after December 27, 2001 the maximum VA
guarantee is $60,000.
In addition to competition from the FHA and the VA, MGIC and other private
mortgage insurers face competition from state-supported mortgage insurance funds
in several states, including California, Illinois and New York. From time to
time, other state legislatures and agencies consider expansions of the authority
of their state governments to insure residential mortgages.
Private mortgage insurers may also be subject to competition from Fannie
Mae and Freddie Mac to the extent the GSEs are compensated for assuming default
risk that would otherwise be insured by the private mortgage insurance industry.
Fannie Mae and Freddie Mac each have programs under which an up-front delivery
fee can be paid to the GSE and primary mortgage insurance coverage is
substantially reduced compared to the coverage requirements that would apply in
the absence of the program. See "Types of Product--Primary Insurance" above. In
October 1998, Freddie Mac's charter was amended (and the amendment immediately
repealed) to give Freddie Mac flexibility to use protection against default in
addition to private mortgage insurance and the two other types of credit
enhancement required by the charter for low down payment mortgages purchased by
Freddie Mac. In addition, to the extent up-front delivery fees are not retained
by the GSEs to compensate for their assumption of default risk, and are used
instead to purchase supplemental coverage from mortgage insurers, the resulting
concentration of purchasing power in the hands of the GSEs could increase
competition among insurers to provide such coverage.
The capital markets may also develop as competitors to private mortgage
insurers. During 1998, a newly-organized off-shore company funded by the sale of
notes to institutional
9
investors provided "reinsurance" to Freddie Mac against default on a specified
pool of mortgages owned by Freddie Mac.
MGIC and other mortgage insurers also compete with transactions structured
to avoid mortgage insurance on low down payment mortgage loans. Such
transactions include self-insuring, and "80-10-10" loans, which are loans
comprised of both a first and a second mortgage (for example, an 80% LTV first
mortgage and a 10% LTV second mortgage), with the LTV ratio of the first
mortgage below what investors require for mortgage insurance, compared to a loan
in which the first mortgage covers the entire borrowed amount (which in the
preceding example would be a 90% LTV mortgage). Captive mortgage reinsurance and
similar transactions also result in mortgage originators receiving a portion of
the premium and the risk.
The private mortgage insurance industry currently consists of eight active
mortgage insurers and their affiliates; one of the eight is a joint venture in
which a mortgage insurer is one of the joint venturers. The names of these
mortgage insurers are listed in "Management's Discussion and Analysis--Risk
Factors" in Exhibit 13 to this Annual Report on Form 10-K. According to Inside
Mortgage Finance, a mortgage industry publication, which obtains its data from
reports to it by MGIC and other mortgage insurers that are to be prepared on the
same basis as the reports by insurers to the trade association for the private
mortgage insurance industry, for 1995 and subsequent years, MGIC has been the
largest private mortgage insurer based on new primary insurance written (with a
market share of 24.8% in 2002, 25.0% in 2001 and 24.5% in 2000) and at December
31, 2001, MGIC also had the largest book of direct primary insurance in force.
Effective with the third quarter of 2001, these reports do not include as
"primary mortgage insurance" insurance on certain loans classified by MGIC as
primary insurance, such as loans insured through bulk transactions that already
had mortgage insurance placed on the loans at origination.
The private mortgage insurance industry is highly competitive. The Company
believes it competes with other private mortgage insurers for flow business
principally on the basis of programs involving captive mortgage reinsurance (as
discussed under "Risk Sharing Arrangements" above, effective March 31, 2003,
MGIC will not participate in excess of loss risk sharing arrangements with net
premium cessions in excess of 25% on terms which are generally present in the
market), agency pool insurance, and other similar structures involving lenders;
the provision of contract underwriting and related fee-based services to
lenders; the provision of other products and services that meet lender needs for
underwriting risk management, affordable housing, loss mitigation, capital
markets and training support; the strength of MGIC's management team and field
organization; and the effective use of technology and innovation in the delivery
and servicing of MGIC's insurance products. The Company believes MGIC's
additional competitive strengths, compared to other private insurers, are its
customer relationships, name recognition, reputation and the depth of its
database covering loans it has insured. The Company believes it competes for
bulk business principally on the basis of the premium rate and the portion of
loans submitted for insurance that the Company is willing to insure.
The complaint in the RESPA Litigation alleges, among other things, that
captive mortgage reinsurance, agency pool insurance, and contract underwriting
as provided by the Company violate
10
RESPA. The settlement includes an injunction that specifies the basis on which
these products and services may be provided in compliance with RESPA. There can
be no assurance that the standards established by the injunction will be
determinative of compliance with RESPA were additional litigation to be brought
in the future.
Certain private mortgage insurers compete for flow business by offering
lower premium rates than other companies, including MGIC, either in general or
with respect to particular classes of business. MGIC on a case-by-case basis
will adjust premium rates, generally depending on the risk characteristics, loss
performance or class of business of the loans to be insured, or the costs
associated with doing such business.
In the third quarter of 2001, the Office of Federal Housing Enterprise
Oversight ("OFHEO") adopted a risk-based capital stress test for the GSEs, which
was amended in February 2002. One of the elements of the stress test is that
future claim payments made by a private mortgage insurer on GSE loans are
reduced below the amount provided by the mortgage insurance policy to reflect
the risk that the insurer will fail to pay. Claim payments from an insurer whose
claims-paying ability rating is 'AAA' are subject to a 3.5% reduction over the
10-year period of the stress test, while claim payments from a 'AA' rated
insurer, such as MGIC, are subject to a 8.75% reduction. The effect of the
differentiation among insurers is to require the GSEs to have additional capital
for coverage on loans provided by a private mortgage insurer whose claims-paying
rating is less than 'AAA.' As a result, there is an incentive for the GSEs to
use private mortgage insurance provided by a 'AAA' rated insurer.
Contract Underwriting and Related Services
The Company performs contract underwriting services for lenders in which
the Company judges whether the data relating to the borrower and the loan
contained in the lender's mortgage loan application file comply with the
lender's loan underwriting guidelines. The Company also provides an interface to
submit such data to the automated underwriting systems of the GSEs, which
independently judge the data. These services are provided for loans that require
private mortgage insurance as well as for loans that do not require private
mortgage insurance. A material portion of the Company's new insurance written in
recent years involved loans for which the Company provided contract underwriting
services. The complaint in the RESPA Litigation alleges, among other things,
that the pricing of contract underwriting provided by the Company violates
RESPA. The settlement specifies the basis on which contract underwriting may be
provided in compliance with RESPA. There can be no assurance that the standards
established by the injunction will be determinative of compliance with RESPA
were additional litigation to be brought in the future.
Risk Management
Risk Management Philosophy. MGIC's risk management philosophy has
traditionally focused on evaluating four major elements of risk:
11
o Individual Loan and Borrower. Except to the extent its delegated
underwriting program is being utilized or for loans approved by the
automated underwriting services of the GSEs (see "Delegated
Underwriting and GSE Automated Underwriting Approvals" below), MGIC
evaluates insurance applications based on its analysis of the
borrower's ability to repay the mortgage loan and the characteristics
and value of the property. The analysis of the borrower includes
reviewing the borrower's FICO credit score, as reported by credit
reporting agencies, as well as the borrower's housing and total debt
ratios. In the case of delegated underwriting, compliance with program
parameters is monitored by periodic audits of delegated business.
o Geographic Market. MGIC places significant emphasis on the condition
of the housing markets around the nation in determining its
underwriting policies.
o Product. The type of mortgage instrument that the borrower selects and
the purpose of the loan are important factors in MGIC's analysis of
mortgage default risk. MGIC analyzes four general characteristics of
the product to quantify this risk evaluation: (i) LTV ratio; (ii) type
of loan instrument; (iii) type of property; and (iv) purpose of the
loan. In addition to its underwriting guidelines (as referred to
below), pricing is MGIC's principal method used to manage these risks.
Loans with higher LTV ratios generally have a higher premium, as do
instruments such as ARMs with an initial interest period of less than
five years and loans with a maturity longer than fifteen years.
o Mortgage Lender. MGIC evaluates from time to time its major customers
and the performance of their business which MGIC has insured.
The Company believes that, excluding other factors, the claim incidence for
95s is substantially higher than for 90s or loans with lower LTV ratios; for
loans with LTVs greater than 95 (which include loans with LTVs of up to 103) is
substantially higher than for 95s; for ARMs during a prolonged period of rising
interest rates would be substantially higher than for fixed rate loans; for
loans in which the original loan amount exceeds the conforming loan limit is
higher than for loans where such amount is below the conforming loan limit; and
for loans with lower FICO credit scores (which include subprime loans) is higher
than for loans with higher FICO credit scores. MGIC charges higher premium rates
to reflect the increased risk of claim incidence that it perceives is associated
with a loan. However, there can be no assurance that MGIC's premium rates
adequately reflect the increased risk, particularly in a period of economic
recession.
12
There are also other types of loan characteristics relating to the
individual loan or borrower which affect the risk potential for a loan. The
presence of a number of higher-risk characteristics in a loan materially
increases the likelihood of a claim on such a loan unless there are other
characteristics to lower the risk.
As discussed under "GSE Automated Underwriting Approvals" below, a
substantial percentage of the loans insured by MGIC through the flow channel are
approved for mortgage insurance as a result of the approval of such loans by the
automated underwriting services of the GSEs.
Underwriting Process. To obtain primary insurance on a specific mortgage
loan for which delegated underwriting is not being used, a master policyholder
typically submits an application to MGIC, supported by various documents, if
required by MGIC. MGIC utilizes national underwriting guidelines to evaluate the
potential risk of default on mortgage loans submitted for insurance coverage.
These guidelines generally are consistent with Fannie Mae and Freddie Mac
underwriting guidelines and take into account the applicable premium rates
charged by MGIC and the loss experience of the private mortgage insurance
industry, as well as the initiatives to expand home ownership opportunities
undertaken by Fannie Mae and Freddie Mac. MGIC's underwriters have discretionary
authority to insure loans which deviate in one or more respects from MGIC's
underwriting guidelines. In most such cases, offsetting underwriting strengths
must be identified.
In order to react to local or regional economic conditions, MGIC has also
developed for use by its underwriting staff certain modified guidelines which
attempt to address particular regional or local market developments. These
"special market underwriting guidelines" are updated from time to time and
deviate in varying degrees from MGIC's national guidelines based on MGIC's
analysis of area housing markets and related economic indicators and conditions.
The special market underwriting guidelines are more liberal than the published
national guidelines in some markets, but in other markets are more restrictive.
To assist its staff of underwriters, MGIC utilizes a computer-assisted
underwriting system which analyzes and approves certain mortgage insurance
applications based on MGIC's underwriting standards, but without personal
underwriter intervention, thereby allowing MGIC's underwriting staff to devote
additional attention to evaluating more difficult underwriting decisions. MGIC
audits a representative sample of applications approved by the system.
Delegated Underwriting. Delegated underwriting is a program whereby
approved lenders are allowed to commit MGIC to insure loans utilizing their
MGIC-approved underwriting guidelines and underwriting evaluation. For delegated
loans insured on a flow basis, while MGIC does not underwrite on a loan-by-loan
basis the credit of the borrower, the value of the property, or other factors
which it normally considers in its underwriting decision, it does audit on a
regular basis a sample of the loans insured. Loans insured in bulk transactions
are categorized as delegated underwritten loans. For these loans, the audit is
conducted prior to the commitment for the insurance and includes other
procedures for certain loans that are not audited.
13
At December 31, 2002, MGIC's delegated underwriting program involved
approximately 519 lenders, including all of MGIC's top twenty customers. Loans
insured under MGIC's delegated underwriting program accounted for approximately
47.8% of MGIC's total risk in force at December 31, 2002. The percentage of new
risk written by delegated underwriters increased to 54.9% in 2002 from 53.1% in
2001 (this increase is principally due to loans insured in bulk transactions)
and was 46.8% in 2000.
Loans covered under agency pool insurance are not underwritten by MGIC on a
loan-by-loan basis. If the loan has primary insurance provided by MGIC,
delegated underwriting is used, and if the loan has primary insurance provided
by another mortgage insurer or has no primary insurance, the lender underwrites
the loan to standards set forth in the agency pool insurance agreement with the
lender.
MGIC also has a reduced document submission program under which it approves
a loan for insurance if the borrower satisfies certain minimum criteria for
credit scores and debt ratios.
GSE Automated Underwriting Approvals. Since 2000, loans approved by the
automated underwriting services of the GSEs have been automatically approved for
MGIC mortgage insurance and were generally insured at premium rates applicable
to prime quality loans. MGIC observed that some of the loans approved by these
services had higher risk than prime quality loans, and effective August 1, 2002,
MGIC began charging A- minus premium rates for such loans with such risk
characteristics. During 2002, approximately 60% of the loans insured by MGIC
through the flow channel were approved as a result of loan approvals by the
automated underwriting services of the GSEs. The loan approval criteria of those
services are within the risk management discretion and control of the GSEs. As a
result of accepting the loan approval decisions of these services, MGIC does not
have the ability to control in advance the risk characteristics of such loans.
Past Industry Losses; Defaults; and Claims
Past Industry Losses. The private mortgage insurance industry experienced
substantial unanticipated incurred losses in the mid-to-late 1980s. From the
1970s until 1981, rising home prices in the United States generally led to
profitable insurance underwriting results for the industry and caused private
mortgage insurers to emphasize market share. To maximize market share, until the
mid-1980s, private mortgage insurers employed liberal underwriting practices,
and charged premium rates which, in retrospect, generally did not adequately
reflect the risk assumed (particularly on pool insurance). These industry
practices compounded the losses which resulted from changing economic and market
conditions which occurred during the early and mid-1980s, including (i) severe
regional recessions and attendant declines in property values in the nation's
energy producing states; (ii) the development by lenders of new mortgage
products to defer the impact on home buyers of double digit mortgage interest
rates; and (iii) changes in federal income tax incentives which initially
encouraged the growth of investment in non-owner occupied properties.
14
Defaults. The claim cycle on private mortgage insurance begins with the
insurer's receipt of notification of a default on an insured loan from the
lender. Lenders are required to notify MGIC of defaults within 130 days after
the initial default, although most lenders do so earlier. The incidence of
default is affected by a variety of factors, including the level of borrower
income growth, unemployment, divorce and illness, the level of interest rates
and general borrower creditworthiness. Defaults that are not cured result in a
claim to MGIC. Defaults may be cured by the borrower bringing current the
delinquent loan payments or by a sale of the property and the satisfaction of
all amounts due under the mortgage.
The following table shows the number of primary and pool loans insured in
the MGIC Book (including at December 31, 1999 - 2002, loans insured in bulk
transactions and A- and subprime loans), the related number of loans in default
and the percentage of loans in default (default rate) as of those dates:
15
Default Statistics for the MGIC Book
December 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998(1)
PRIMARY INSURANCE
Insured loans in force ....... 1,655,887 1,580,283 1,448,348 1,370,020 1,320,994
Loans in default ............. 73,648 54,653 37,422 29,761 29,253
Percentage of loans in
default (default rate) ...... 4.45% 3.46% 2.58% 2.17% 2.21%
Flow loans in default ........ 43,196 36,193 29,889 27,062 -
Percentage of flow loans
in default (default rate) ... 3.19% 2.65% 2.19% 2.02% -
Bulk loans in force .......... 301,859 214,917 83,513 33,569 -
Bulk loans in default ........ 30,452 18,460 7,533 2,699 -
Percentage of bulk loans
in default (default rate) ... 10.09% 8.59% 9.02% 8.04% -
A-minus and subprime
loans in force(2) ........... 201,195 134,888 64,086 36,599 -
A-minus and subprime
loans in default(2) ......... 25,504 15,649 6,126 2,706 -
Percentage of A-minus
and subprime loans in
default (default rate) ...... 12.68% 11.60% 9.34% 7.39% -
POOL INSURANCE
Insured loans in force ....... 1,208,157 1,351,266 1,360,059 1,181,512 899,063
Loans in default ............. 26,676 23,623 18,209 11,638 6,524
Percentage of loans in
default(default rate) ....... 2.21% 1.75% 1.34% 0.99% 0.73%
(1) The information not separately presented at December 31, 1998 is not material.
(2) A portion of A-minus and subprime loans is included in the data for flow loans and the
remainder is included in the data for bulk loans. Most A-minus and subprime credit loans are
written through the bulk channel.
The default rate for flow loans has generally increased due to an increase
in the risk profile of loans insured since 1998 and the continued maturation of
MGIC's insurance in force. The default rate for bulk loans reflects the higher
default rate associated with such loans. The default rate for bulk loans is
expected to continue to increase. The number of pool insurance loans in force
increased at December 31, 1998-2002 as a result of agency pool insurance
writings, and the number of pool insurance loans in default at those dates
increased due to the increase in pool insurance in force and the aging of the
loans in the pools.
16
Regions of the United States may experience different default rates due to
varying localized economic conditions from year to year. The following table
shows the percentage of the MGIC Book's primary loans in default by MGIC region
at the dates indicated:
Default Rates for Primary Insurance By Region*
Dec. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
MGIC REGION:
New England............ 2.91% 2.27% 1.84% 1.60% 1.78%
Northeast.............. 4.74 3.90 3.15 3.02 3.05
Mid-Atlantic........... 4.05 3.27 2.69 2.19 2.28
Southeast.............. 4.87 3.65 2.72 2.24 2.23
Great Lakes............ 5.17 3.74 2.68 2.09 1.89
North Central.......... 4.22 3.21 2.22 1.85 1.91
South Central.......... 4.65 3.56 2.56 2.00 2.00
Plains................. 3.41 2.76 1.98 1.40 1.40
Pacific................ 3.73 3.38 2.63 2.42 2.73
National............ 4.45% 3.46% 2.58% 2.17% 2.21%
____________________
* The default rate is affected by both the number of loans in default at any
given date as well as the number of insured loans in force at such date.
Claims. Claims result from defaults which are not cured. Whether a claim
results from an uncured default principally depends on the borrower's equity in
the home at the time of default and the borrower's (or the lender's) ability to
sell the home for an amount sufficient to satisfy all amounts due under the
mortgage. Claims are affected by various factors, including local housing prices
and employment levels, and interest rates.
Under the terms of the Master Policy, the lender is required to file a
claim for primary insurance with MGIC within 60 days after it has acquired good
and marketable title to the underlying property through foreclosure. Depending
on the applicable state foreclosure law, an average of about 12 months
transpires from the date of default to payment of a claim on an uncured default.
The claim amount generally averages about 115% of the unpaid principal amount of
the loan.
17
Within 60 days after the claim has been filed, MGIC has the option of
either (i) paying the coverage percentage specified for that loan, with the
insured retaining title to the underlying property and receiving all proceeds
from the eventual sale of the property or (ii) paying 100% of the claim amount
in exchange for the lender's conveyance of good and marketable title to the
property to MGIC, with MGIC then selling the property for its own account.
Claim activity is not evenly spread throughout the coverage period of a
book of primary business. For prime loans, relatively few claims are received
during the first two years following issuance of coverage on a loan. This is
followed by a period of rising claims which, based on industry experience, has
historically reached its highest level in the third through fifth years after
the year of loan origination. Thereafter, the number of claims received has
historically declined at a gradual rate, although the rate of decline can be
affected by conditions in the economy, including lower housing price
appreciation. There can be no assurance that this historical pattern of claims
will continue in the future and due in part to the subprime component of loans
insured in bulk transactions, MGIC expects that the peak claim period for bulk
loans will occur earlier than for prime loans. Moreover, when a loan is
refinanced, because the new loan replaces, and is a continuation of, an earlier
loan, the pattern of claims frequency for that new loan may be different from
the historical pattern of other loans. As of December 31, 2002, 82.4% of the
MGIC Book primary insurance in force had been written during 1999 - 2002,
although a portion of such insurance arose from the refinancing of earlier
originations.
In addition to the increasing level of claim activity arising from the
maturing of the MGIC Book, another important factor affecting MGIC Book losses
is the amount of the average claim paid, which is generally referred to as claim
severity. The main determinants of claim severity are the amount of the mortgage
loan and coverage percentage on the loan. The average claim severity on the MGIC
Book primary insurance was $20,115 for 2002 as compared to $18,607 in 2001.
Loss Reserves
A significant period of time may elapse between the occurrence of the
borrower's default on a mortgage payment (the event triggering a potential
future claim payment by MGIC), the reporting of such default to MGIC and the
eventual payment of the claim related to such uncured default. To recognize the
liability for unpaid losses related to outstanding reported defaults (known as
the default inventory), the Company (similar to other private mortgage insurers)
establishes loss reserves, representing the estimated percentage of defaults
which will ultimately result in a claim (known as the claim rate), and estimates
of the severity of each claim which will arise from the defaults included in the
default inventory. In accordance with industry accounting practices, the Company
does not establish loss reserves for future claims on insured loans which are
not currently in default.
18
The Company also establishes reserves to provide for the estimated costs of
settling claims, including legal and other fees, and general expenses of
administering the claims settlement process ("loss adjustment expenses"), and
for losses and loss adjustment expenses from defaults which have occurred, but
which have not yet been reported to the insurer.
The Company's reserving process is based upon the assumption that past
experience, adjusted for the anticipated effect of current economic conditions
and projected future economic trends, provides a reasonable basis for estimating
future events. However, estimation of loss reserves is inherently judgmental.
Economic conditions that have affected the development of the loss reserves in
the past may not necessarily affect development patterns in the future, in
either a similar manner or degree.
For a further information about loss reserves, see "Management's Discussion
and Analysis-Results of Consolidated Operations-2002 Compared with 2001" and
Note 6 to the consolidated financial statements of the Company, both of which
are included in Exhibit 13 to this Annual Report on Form 10-K.
Geographic Dispersion
The following table reflects the percentage of primary risk in force in the
top 10 states and top 10 metropolitan statistical areas ("MSAs") for the MGIC
Book at December 31, 2001:
Dispersion of Primary Risk in Force
Top 10 States Top 10 MSAs
- ---------------------------- -----------------------------------------
1. California 12.0% 1. Chicago 3.8%
2. Florida 6.7 2. Los Angeles 3.4
3. Texas 6.1 3. Atlanta 2.4
4. Michigan 5.2 4. Detroit 2.3
5. Illinois 5.1 5. Phoenix 2.2
6. Ohio 4.7 6. Washington, D.C. 2.1
7. New York 4.1 7. Boston 1.8
8. Pennsylvania 3.8 8. Riverside-San Bernardino 1.8
9. Georgia 3.2 9. Houston 1.7
10. Arizona 2.8 10. New York 1.5
---- ----
Total 53.7% Total 23.1%
==== ====
The percentages shown above for various MSAs can be affected by changes,
from time to time, in the federal government's definition of an MSA.
19
Insurance in Force by Policy Year
The following table sets forth the dispersion of MGIC's primary insurance
in force as of December 31, 2002, by year(s) of policy origination since MGIC
began operations in 1985:
Primary Insurance In Force by Policy Year
Primary Insurance Percent
Policy Year in Force of Total
------------------------------------------------------------------
(In millions of dollars)
1985-1996 $ 16,526 8.4%
1997 4,830 2.4
1998 13,360 6.8
1999 14,159 7.2
2000 12,907 6.6
2001 57,528 29.2
2002 77,678 39.4
-------- -----
Total $196,988 100.0%
======== =====
Product Characteristics of Risk in Force
At December 31, 2002 and 2001, 94.9% and 95.6%, respectively, of MGIC's
risk in force was primary insurance and the remaining risk in force was pool
insurance. The following table reflects at the dates indicated the (i) total
dollar amount of primary risk in force for the MGIC Book and (ii) percentage of
such primary risk in force (as determined on the basis of information available
on the date of mortgage origination) by the categories indicated.
20
Characteristics of Primary Risk in Force
December 31, December 31,
2002 2001
------------- ------------
Direct Risk in Force (Dollars in Millions):..... $47,623 $42,678
Lender Concentration:
Top 10 lenders................................ 28.0% 29.5%
Top 20 lenders................................ 37.8% 39.7%
LTV: (1)
100s.......................................... 8.5% 6.4%
95s........................................... 36.9 40.6
90s(2)........................................ 45.4 46.2
80s........................................... 9.2 6.8
Total..................................... 100.0% 100.0%
Loan Type:
Fixed(3)...................................... 81.5% 85.3%
Adjustable rate mortgages ("ARMs")(4)......... 17.8 13.9
Balloon(5).................................... 0.7 0.8
Total..................................... 100.0% 100.0%
Original Insured Loan Amount(6):
Conforming loan limit and below............... 92.5% 91.0%
Non-conforming................................ 7.5 9.0
Total..................................... 100.0% 100.0%
Mortgage Term:
15-years and under............................ 4.7% 3.9%
Over 15 years................................. 95.3 96.1
Total..................................... 100.0% 100.0%
Property Type:
Single-family(7).............................. 93.8% 93.8%
Condominium................................... 6.0 5.9
Other(8)...................................... 0.2 0.3
Total..................................... 100.0% 100.0%
Occupancy Status:
Primary residence............................. 95.1% 96.2%
Second home................................... 1.7 1.7
Non-owner occupied............................ 3.2 2.1
Total..................................... 100.0% 100.0%
__________________
21
(1) Loan-to-value represents the ratio (expressed as a percentage) of the
dollar amount of the mortgage loan to the value of the property at the time
the loan became insured. For purposes of the table, LTV ratios are
classified as in excess of 95% ("100s", a classification that includes 97%
to 103% LTV loans); in excess of 90% LTV and up to 95% LTV ("95s"); in
excess of 80% LTV and up to 90% LTV ("90s"); and equal to or less than 80%
LTV ("80s").
(2) MGIC includes in its classification of 90s, loans where the borrower makes
a down payment of 10% and finances the associated mortgage insurance
premium payment as part of the mortgage loan. At December 31, 2002 and
2001, 2.0% and 2.4%, respectively, of the primary risk in force consisted
of these types of loans.
(3) Includes fixed rate mortgages with temporary buydowns (where in effect, the
applicable interest rate is typically reduced by one or two percentage
points during the first two years of the loan) and ARMs in which the
initial interest rate is fixed for at least five years.
(4) Includes ARMs where payments adjust fully with interest rate adjustments.
Also includes ARMs with negative amortization, which at December 31, 2002
and 2001, represented 0.7% and 0.9%, respectively, of primary risk in
force. Does not include ARMs in which the initial interest rate is fixed
for at least five years. As of December 31, 2002 and 2001, ARMs with LTVs
in excess of 90% represented 3.3% and 2.5%, respectively, of primary risk
in force.
(5) Balloon payment mortgages are loans with a maturity, typically five to
seven years, that is shorter than the loans' amortization period.
(6) Loans within the conforming loan limit have an original principal balance
that does not exceed the maximum original principal balance of loans that
the GSEs are eligible to purchase. The conforming loan limit is subject to
annual upward adjustment and was $300,700 for 2002 and $275,000 for 2001.
Non-conforming loans are loans with an original principal balance above the
conforming loan limit.
(7) Includes townhouse-style attached housing with fee simple ownership.
(8) Includes cooperatives and manufactured homes deemed to be real estate.
C. Other Business and Joint Ventures
The Company, through subsidiaries, provides various mortgage services for
the mortgage finance industry, such as contract underwriting, portfolio
retention, secondary marketing of mortgage-related assets and, through its
majority-owned Equix Financial Services LLC subsidiary, mortgage loan
origination and fulfillment services. The Company's eMagic.com LLC subsidiary
provides an Internet portal through which mortgage originators can access
products and services of wholesalers, investors, and vendors necessary to make a
home mortgage loan.
At December 31, 2002, the Company also owned approximately 46% of
Credit-Based Asset Servicing and Securitization LLC ("C-BASS") and approximately
46% of Sherman Financial Group LLC, joint ventures with senior management of the
joint ventures and Radian Group Inc. Effective January 1, 2003, the Company and
Radian Group Inc. each sold 4 percentage points of their respective interest in
Sherman to Sherman's management for cash. For further information about the
C-BASS and Sherman joint ventures, see "Management's Discussion and
Analysis--Results of Consolidated Operations--2002 Compared to 2001" and Note 8
to the
22
consolidated financial statements of the Company, both of which are included in
Exhibit 13 to this Annual Report on Form 10-K.
The revenues recognized from these mortgage services operations, other
non-insurance services and the joint ventures represented 9.4% and 5.4% of the
Company's consolidated revenues in 2002 and 2001, respectively.
In 1997, the Company, through subsidiaries, began insuring second
mortgages, including home equity loans. New insurance written on second
mortgages in 2002, 2001 and 2000 was approximately $37.2 million, $1.3 billion
and $1.1 billion. The Company discontinued writing new second mortgage risk for
loans closing after December 31, 2001.
D. Investment Portfolio
Policy and Strategy
Cash flow from the Company's investment portfolio represented approximately
38% of its total cash flow from operations during 2002. Approximately 79% of the
Company's long-term investment portfolio is managed by a subsidiary of The
Northwestern Mutual Life Insurance Company, although the Company maintains
overall control of investment policy and strategy. The Company maintains direct
management of the remainder of its investment portfolio.
The Company's current policies emphasize preservation of capital, as well
as total return. Therefore, the Company's investment portfolio consists almost
entirely of high-quality, fixed-income investments. Liquidity is sought through
diversification and investment in publicly traded securities. The Company
attempts to maintain a level of liquidity commensurate with its perceived
business outlook and the expected timing, direction and degree of changes in
interest rates. The Company's investment policies in effect at December 31, 2002
limited investments in the securities of a single issuer (other than the U.S.
government and its agencies) and generally did not permit purchasing fixed
income securities rated below 'A'.
At December 31, 2002, based on amortized cost, approximately 98.5% of the
Company's total fixed income investment portfolio was invested in securities
rated 'A' or better, with 78.7% which were rated 'AAA' and 17.7% which were
rated 'AA', in each case by at least one nationally recognized securities rating
organization.
The Company's investment policies and strategies are subject to change
depending upon regulatory, economic and market conditions and the existing or
anticipated financial condition and operating requirements, including the tax
position, of the Company.
23
Investment Operations
At December 31, 2002, the market value of the Company's investment
portfolio was approximately $4.7 billion. At December 31, 2002, municipal
securities represented 83.7% of the market value of the total investment
portfolio. Securities due within one year, within one to five years, within five
to ten years, and after ten years, represented 3.7%, 16.4%, 23.5% and 56.4%,
respectively, of the total book value of the Company's investment in debt
securities. The Company's net pre-tax investment income was $207.5 million for
the year ended December 31, 2002. The Company's after-tax yield for 2002 was
4.2%, which was lower than the after-tax yield in 2001 of 4.6%.
For further information concerning investment operations, see Note 4 to the
consolidated financial statements of the Company, included in Exhibit 13 to this
Annual Report on Form 10-K.
E. Regulation
Direct Regulation
The Company and its insurance subsidiaries, including MGIC, are subject to
regulation, principally for the protection of policyholders, by the insurance
departments of the various states in which each is licensed to do business. The
nature and extent of such regulation varies, but generally depends on statutes
which delegate regulatory, supervisory and administrative powers to state
insurance commissioners.
In general, such regulation relates, among other things, to licenses to
transact business; policy forms; premium rates; annual and other reports on
financial condition; the basis upon which assets and liabilities must be stated;
requirements regarding contingency reserves equal to 50% of premiums earned;
minimum capital levels and adequacy ratios; reinsurance requirements;
limitations on the types of investment instruments which may be held in an
investment portfolio; the size of risks and limits on coverage of individual
risks which may be insured; deposits of securities; limits on dividends payable;
and claims handling. Most states also regulate transactions between insurance
companies and their parents or affiliates and have restrictions on transactions
that have the effect of inducing lenders to place business with the insurer. For
a discussion of a February 1, 1999 circular letter from the NYID and a January
31, 2000 letter from the Illinois Department of Insurance, see "The MGIC
Book--Types of Product--Pool Insurance" and "--Captive Mortgage Reinsurance."
For a description of limits on dividends payable, see "Management's Discussion
and Analysis-Liquidity and Capital Resources" and Note 11 to the consolidated
financial statements of the Company, both of which are included in Exhibit 13 to
this Annual Report on Form 10-K.
Mortgage insurance premium rates are also subject to state regulation to
protect policyholders against the adverse effects of excessive, inadequate or
unfairly discriminatory rates and to encourage competition in the insurance
marketplace. Any increase in premium rates must be justified, generally on the
basis of the insurer's loss experience, expenses and future trend analysis.
24
The general mortgage default experience may also be considered. Premium rates
are subject to review and challenge by state regulators.
A number of states generally limit the amount of insurance risk which may
be written by a private mortgage insurer to 25 times the insurer's total
policyholders' reserves, commonly known as the "risk-to-capital" requirement.
MGIC is required to establish a contingency loss reserve in an amount equal
to 50% of earned premiums. Such amounts cannot be withdrawn for a period of 10
years, except under certain circumstances.
Mortgage insurers are generally single-line companies, restricted to
writing residential mortgage insurance business only. Although the Company, as
an insurance holding company, is prohibited from engaging in certain
transactions with MGIC without submission to and, in some instances, prior
approval of applicable insurance departments, the Company is not subject to
insurance company regulation on its non-insurance businesses.
Wisconsin's insurance regulations generally provide that no person may
acquire control of the Company unless the transaction in which control is
acquired has been approved by the Office of the Commissioner of Insurance of
Wisconsin. The regulations provide for a rebuttable presumption of control when
a person owns or has the right to vote more than 10% of the voting securities.
As the most significant purchasers and sellers of conventional mortgage
loans and beneficiaries of private mortgage insurance, Freddie Mac and Fannie
Mae impose requirements on private mortgage insurers in order for such insurers
to be eligible to insure loans sold to such agencies. These requirements of
Freddie Mac and Fannie Mae are subject to change from time to time. Currently,
MGIC is an approved mortgage insurer for both Freddie Mac and Fannie Mae. In
addition, to the extent Fannie Mae or Freddie Mac assumes default risk for
itself that would otherwise be insured, changes current guarantee fee
arrangements (including as a result of primary mortgage insurance coverage being
restructured as described under "The MGIC Book--Types of Product--Primary
Insurance"), allows alternative credit enhancement, alters or liberalizes
underwriting guidelines on low down payment mortgages they purchase, or
otherwise changes its business practices or processes with respect to such
mortgages, private mortgage insurers may be affected.
Fannie Mae has issued primary mortgage insurance master policy guidelines
applicable to MGIC and all other Fannie Mae-approved private mortgage insurers,
establishing certain minimum terms of coverage necessary in order for an insurer
to be eligible to insure loans purchased by Fannie Mae. The terms of MGIC's
Master Policy comply with these guidelines.
MGIC's claims-paying ability is rated "AA+" by Standard & Poor's
Corporation and "Aa2" by Moody's Investors Service, Inc. Maintenance of a
claims-paying ability rating of at least AA-/Aa3 is critical to a mortgage
insurer's ability to continue to write new business. In assigning claims-paying
ability ratings, rating agencies review a mortgage insurer's competitive
position and business, management, corporate strategy, historical and projected
operating and underwriting
25
performance, adequacy of capital to withstand extreme loss scenarios under
assumptions determined by the rating agency, as well as other factors. The
rating agency issuing the claims-paying ability rating can withdraw or change
its rating at any time.
Indirect Regulation
The Company and MGIC are also indirectly, but significantly, impacted by
regulations affecting purchasers of mortgage loans, such as Freddie Mac and
Fannie Mae, and regulations affecting governmental insurers, such as the FHA and
VA, and lenders. Private mortgage insurers, including MGIC, are highly dependent
upon federal housing legislation and other laws and regulations to the extent
they affect the demand for private mortgage insurance and the housing market
generally. From time to time, those laws and regulations have been amended to
affect competition from government agencies. See "The MGIC Book - Sales and
Marketing and Competition - Competition." Proposals are discussed from time to
time by Congress and certain federal agencies to reform or modify the FHA and
the Government National Mortgage Association, which securitizes mortgages
insured by the FHA.
Subject to certain exceptions, in general, RESPA prohibits any person from
giving or receiving any "thing of value" pursuant to an agreement or
understanding to refer settlement services. See "Item 3--Legal Proceedings."
The OTS, the OCC, the Federal Reserve Board, and the Federal Deposit
Insurance Corporation have uniform guidelines on real estate lending by insured
lending institutions under their supervision. The guidelines specify that a
residential mortgage loan originated with an LTV of 90% or greater should have
appropriate credit enhancement in the form of mortgage insurance or readily
marketable collateral, although no depth of coverage percentage is specified in
the guidelines.
Lenders are subject to various laws, including the Home Mortgage Disclosure
Act, the Community Reinvestment Act and the Fair Housing Act, and Fannie Mae and
Freddie Mac are subject to various laws, including laws relating to government
sponsored enterprises, which may impose obligations or create incentives for
increased lending to low and moderate income persons, or in targeted areas.
There can be no assurance that other federal laws and regulations affecting
such institutions and entities will not change, or that new legislation or
regulations will not be adopted which will adversely affect the private mortgage
insurance industry. In this regard, see the penultimate risk factor under
"Management's Discussion and Analysis - Risk Factors" which is included in
Exhibit 13 to this Annual Report on Form 10-K.
26
F. Employees
At December 31, 2002, the Company and its consolidated subsidiaries had
approximately 1,300 full- and part-time employees, of whom approximately 38%
were assigned to MGIC's field offices. The number of employees given above does
not include "on-call" employees. The number of "on-call" employees can vary
substantially, primarily as a result of changes in demand for contract
underwriting services.
G. Website Access
The Company makes available free of charge through its Internet website its
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably
practicable after the Company electronically files such material with the SEC.
The address of the Company's website is www.mgic.com and such reports may be
accessed through the "Investor-News and Financials-Filings With SEC" portion of
the website.
Item 2. Properties.
At December 31, 2002, the Company leased office space in various cities
throughout the United States under leases expiring between 2003 and 2006 and
which required annual rentals of $4.7 million in 2002.
The Company owns its headquarters facility and an additional
office/warehouse facility, both located in Milwaukee, Wisconsin, which contain
an aggregate of approximately 310,000 square feet of space.
Item 3. Legal Proceedings.
The Company is involved in litigation in the ordinary course of business.
In the opinion of management, the ultimate resolution of this pending litigation
will not have a material adverse effect on the financial position or results of
operations of the Company.
In addition, MGIC is a defendant in Downey et. al. v. MGIC, filed in
Federal District Court for the Southern District of Georgia in May 2000
following the dismissal of a similar case filed in December, 1999. The Downey
case sought certification as nationwide class action. Equivalent actions seeking
nationwide class action certification were filed in December 1999 against three
other mortgage insurers (PMI, Republic and United Guaranty) . In August 2000,
the Federal District Court dismissed the cases against PMI, Republic and United
Guaranty on the ground that the Federal McCarran-Ferguson Act barred the RESPA
claims brought by the individual plaintiffs in those cases. Because the pending
case against MGIC dated only from May 2000, the time for MGIC to file a motion
to dismiss the case against it under the motion schedule established by the
Court had not yet occurred.
27
In December 2000 MGIC, PMI and United Guaranty entered into a settlement
agreement with the plaintiffs. In the fourth quarter of 2000, the Company
recorded a $23.2 million charge to cover the estimated costs of the settlement,
including payments to borrowers. In June 2001, the Federal District Court issued
a final order approving the December 2000 settlement agreement and certified a
nationwide class of borrowers. Due to appeals of related orders denying certain
class members the right to intervene to challenge certain aspects of the
settlement in Downey and the PMI and United Guaranty cases, payments to
borrowers in the settlement are delayed pending the outcome of the appeals. The
settlement includes an injunction that prohibits certain practices and specifies
the basis on which agency pool insurance, captive mortgage reinsurance, contract
underwriting and other products may be provided in compliance with the Real
Estate Settlement Procedures Act. There can be no assurance that the standards
established by the injunction will be determinative of compliance with RESPA
were additional litigation to be brought in the future.
The complaint in the case alleges that MGIC violated the Real Estate
Settlement Procedures Act by providing agency pool insurance, captive mortgage
reinsurance, contract underwriting and other products that were not properly
priced, in return for the referral of mortgage insurance. The complaint seeks
damages of three times the amount of the mortgage insurance premiums that have
been paid and that will be paid at the time of judgment for the mortgage
insurance found to be involved in a violation of the Real Estate Settlement
Procedures Act. The complaint also seeks injunctive relief, including
prohibiting MGIC from receiving future premium payments. If the settlement is
not fully implemented, the litigation will continue. In these circumstances,
there can be no assurance that the ultimate outcome of the litigation will not
materially affect the Company's financial position or results of operations.
28
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Executive Officers
Certain information with respect to the Company's executive officers as of
March 1, 2003 is set forth below:
Name and Age Title
- ------------ -----
Curt S. Culver, 50................ President and Chief Executive Officer of
the Company and MGIC; Director of the
Company and MGIC
John D. Fisk, 46.................. Executive Vice President--Strategic Planning
of the Company and MGIC
J. Michael Lauer, 58.............. Executive Vice President and Chief Financial
Officer of the Company and MGIC
James S. MacLeod, 55.............. Executive Vice President--Field Operations
of MGIC
Lawrence J. Pierzchalski, 50...... Executive Vice President--Risk Management of
MGIC
Jeffrey H. Lane, 53............... Senior Vice President, General Counsel and
Secretary of the Company and MGIC
Mr. Culver has served as President of the Company since January 1999 and as
Chief Executive Officer since January 2000. He has been President of MGIC since
May 1996 and was Chief Operating Officer of MGIC from May 1996 until he became
Chief Executive Officer in January 1999. Mr. Culver has been a senior officer of
MGIC since 1988 having responsibility at various times during his career with
MGIC for field operations, marketing and corporate development. From March 1985
to 1988, he held various management positions with MGIC in the areas of
marketing and sales.
Mr. Fisk joined the Company in February 2002. From January 2000 to May 2001
he was Chief Executive Officer of LoanChannel.com, an internet small business
lending portal. For more than 17 years before then, he held various positions
with Freddie Mac, including Senior Vice President--Investor & Dealer Services
from May 1993 to September 1997 and Executive Vice President--Single Family
Securitization Group from September 1997 to January 2000 when he left to found
LoanChannel.com.
29
Mr. Lauer has served as Executive Vice President and Chief Financial
Officer of the Company and MGIC since March 1989.
Mr. MacLeod has served as Executive Vice President-Field Operations of MGIC
since January 1998 and was Senior Vice President-Field Operations of MGIC from
May 1996 to January 1998. Mr. MacLeod has been a senior officer of MGIC since
1987 having responsibility at various times during his career with MGIC for
sales, business development and marketing. From March 1985 to 1987, he held
various management positions with MGIC in the areas of underwriting and risk
management.
Mr. Pierzchalski has served as Executive Vice President-Risk Management of
MGIC since May 1996 and prior thereto as Senior Vice President-Risk Management
or Vice President-Risk Management of MGIC from April 1990. From March 1985 to
April 1990, he held various management positions with MGIC in the areas of
market research, corporate planning and risk management.
Mr. Lane has served as Senior Vice President, General Counsel and Secretary
of the Company and MGIC since August 1996. For more than five years prior to his
joining the Company, Mr. Lane was a partner of Foley & Lardner, a law firm
headquartered in Milwaukee, Wisconsin.
30
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The information set forth under the caption "MGIC Stock" in Exhibit 13
to this Annual Report on Form 10-K is incorporated herein by
reference. To the extent required by Instruction 1 to Item 10(c) of
Schedule 14A or other rules of the Securities and Exchange Commission,
the information set forth under "Item 2 -Approval of Performance Goals
for Restricted Stock and Restricted Stock Units Awarded Under 2002
Stock Incentive Plan - Securities Authorized for Issuance Under Equity
Compensation Plans" in the Company's Proxy Statement for the 2003
Annual Meeting of Shareholders is incorporated herein by reference.
Item 6. Selected Financial Data.
The information set forth in the tables under the caption "Five-Year
Summary of Financial Information" in Exhibit 13 to this Annual Report
on Form 10-K is hereby incorporated by reference in answer to this
Item.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information set forth under the caption "Management's Discussion
and Analysis" in Exhibit 13 to this Annual Report on Form 10-K is
hereby incorporated by reference in answer to this Item.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information set forth in the third paragraph under the caption
"Management's Discussion and Analysis - Financial Condition," and in
the eight and ninth paragraphs under the caption "Management's
Discussion and Analysis - Liquidity and Capital Resources," all in
Exhibit 13 to this Annual Report on Form 10-K, is hereby incorporated
by reference in answer to this Item.
31
Item 8. Financial Statements and Supplementary Data.
The consolidated statements of operations, of shareholders' equity and
of cash flows for each of the years in the three-year period ended
December 31, 2002, and the related consolidated balance sheet of the
Company as of December 31, 2002 and 2001, together with the related
notes thereto and the report of independent accountants, as well as
the unaudited quarterly financial data, all set forth in Exhibit 13 to
this Annual Report on Form 10-K, are hereby incorporated by reference
in answer to this Item.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
32
PART III
Item 10. Directors and Executive Officers of the Registrant.
This information (other than on the executive officers) is included in
the Company's Proxy Statement for the 2003 Annual Meeting of
Shareholders, and is hereby incorporated by reference. The information
on the executive officers appears at the end of Part I of this Form
10-K.
Item 11. Executive Compensation.
This information is included in the Company's Proxy Statement for the
2003 Annual Meeting of Shareholders and, other than information
covered by Instruction (9) to Item 402 (a) of Regulation S-K of the
Securities and Exchange Commission, is hereby incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
This information is included in the Company's Proxy Statement for the
2003 Annual Meeting of Shareholders, and is hereby incorporated by
reference.
Item 13. Certain Relationships and Related Transactions.
This information is included in the Company's Proxy Statement for the
2003 Annual Meeting of Shareholders, and is hereby incorporated by
reference.
Item 14. Controls and Procedures.
The Company's principal executive officer and principal financial
officer have each concluded that, based on his evaluation of the
Company's disclosure controls and procedures (as defined in Rule
13a-14(c) under the Securities Exchange Act of 1934, as amended), as
of a date within 90 days prior to the filing of this Annual Report on
Form 10-K, such controls and procedures were effective to ensure that
material information relating to the Company and its consolidated
subsidiaries would be made known to them by others within those
entities. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
33
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial statements. The financial statements listed in the
accompanying Index to Consolidated Financial Statements and
Financial Statement Schedules are filed as part of this Form
10-K.
2. Financial statement schedules. The financial statement schedules
listed in the accompanying Index to Consolidated Financial
Statements and Financial Statement Schedules are filed as part of
this Form 10-K.
3. Exhibits. The accompanying Index to Exhibits is incorporated by
reference in answer to this portion of this Item and, except as
otherwise indicated in the next sentence, the Exhibits listed in
such Index are filed as part of this Form 10-K. Exhibits 99.1 and
99.2 are not filed as part of this Form 10-K but accompany this
Form 10-K.
(b) Reports on Form 8-K
A report on Form 8-K dated October 23, 2002 was filed under Item 9. A
report on Form 8-K dated October 28, 2002 was filed under Items 7 and
9.
34
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
[Item 15(a) 1 and 2]
Consolidated Financial Statements (all contained in Exhibit 13 to this Annual
Report on Form 10-K):
Consolidated statement of operations for each of the three years in the period
ended December 31, 2002
Consolidated balance sheet at December 31, 2002 and 2001
Consolidated statement of shareholders' equity for each of the three years in
the period ended December 31, 2002
Consolidated statement of cash flows for each of the three years in the period
ended December 31, 2002
Notes to consolidated financial statements
Report of independent accountants
Financial Statement Schedules (all contained immediately following the signature
page to this Annual Report on Form 10-K):
Report of independent accountants on financial statement schedules
Schedules at and for the specified years in the three-year period ended December
31, 2002:
Schedule I - Summary of investments , other than investments in related
parties
Schedule II - Condensed financial information of Registrant
Schedule IV - Reinsurance
All other schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedules, or
because the information required is included in the consolidated financial
statements and notes thereto.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 28, 2003.
MGIC INVESTMENT CORPORATION
By /s/ Curt S. Culver
-------------------------------------
Curt S. Culver
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below as of the date set forth above by the following persons on
behalf of the registrant and in the capacities indicated.
Name and Title
/s/ Curt S. Culver /s/ David S. Engelman
- ---------------------------------- ----------------------------------
Curt S. Culver David S. Engelman, Director
President, Chief Executive
Officer and Director /s/ Thomas M. Hagerty
----------------------------------
/s/ J. Michael Lauer Thomas M. Hagerty, Director
- ----------------------------------
J. Michael Lauer /s/ Kenneth M. Jastrow, II
Executive Vice President and ----------------------------------
Chief Financial Officer Kenneth M. Jastrow, II, Director
(Principal Financial Officer)
/s/ Daniel P. Kearney
/s/ Joseph J. Komanecki ----------------------------------
- ---------------------------------- Daniel P. Kearney, Director
Joseph J. Komanecki
Senior Vice President, Controller /s/ Michael E. Lehman
and Chief Accounting Officer ----------------------------------
(Principal Accounting Officer) Michael E. Lehman, Director
/s/ James A. Abbott /s/ Sheldon B. Lubar
- ---------------------------------- ----------------------------------
James A. Abbott, Director Sheldon B. Lubar, Director
/s/ Mary K. Bush /s/ William A. McIntosh
- ---------------------------------- ----------------------------------
Mary K. Bush, Director William A. McIntosh, Director
/s/ Karl E. Case /s/ Leslie M. Muma
- ---------------------------------- ----------------------------------
Karl E. Case, Director Leslie M. Muma, Director
36
I, Curt S. Culver, certify that:
1. I have reviewed this annual report on Form 10-K of MGIC Investment
Corporation ("the registrant").
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d -14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared; b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior
to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
37
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003
\s\ Curt S. Culver
-----------------------------------
Curt S. Culver
Chief Executive Officer
38
I, J. Michael Lauer, certify that:
1. I have reviewed this annual report on Form 10-K of MGIC Investment
Corporation ("the registrant").
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d -14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
39
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003
\s\ J. Michael Lauer
-----------------------------------
J. Michael Lauer
Chief Financial Office
40
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors
of MGIC Investment Corporation:
Our audits of the consolidated financial statements referred to in our report
dated January 8, 2003 appearing in the 2002 Annual Report to Shareholders of
MGIC Investment Corporation (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedules listed in Item
14(a)(2) of this Form 10-K. In our opinion, these financial statement
schedules present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
January 8, 2003
41
MGIC INVESTMENT CORPORATION
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2002
Amount at which
Amortized shown in the
Type of Investment Cost Fair Value balance sheet
------------------ ----------- ----------- ---------------
(In thousands of dollars)
Fixed maturities:
Bonds:
United States Government
and government agencies
and authorities $ 392,346 $ 404,272 $ 404,272
States, municipalities and
political subdivisions 3,725,062 3,956,282 3,956,282
Foreign governments 14,014 15,704 15,704
Public utilities 30,054 32,896 32,896
All other corporate bonds 191,698 204,308 204,308
----------- ----------- -----------
Total fixed maturities 4,353,174 4,613,462 4,613,462
Equity securities:
Common stocks:
Industrial, miscellaneous
and all other 10,779 10,780 10,780
----------- ------------ -----------
Total equity securities 10,779 10,780 10,780
----------- ----------- -----------
Short-term investments 102,230 102,230 102,230
----------- ----------- -----------
Total investments $ 4,466,183 $ 4,726,472 $ 4,726,472
=========== =========== ===========
42
MGIC INVESTMENT CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
PARENT COMPANY ONLY
December 31, 2002 and 2001
2002 2001
------------- ------------
(In thousands of dollars)
ASSETS
Investment portfolio, at market value:
Fixed maturities $ 1,418 $ 1,709
Short-term investments 180 20,774
------------- ------------
Total investment portfolio 1,598 22,483
Investment in subsidiaries, at equity in net assets 4,088,518 3,486,574
Income taxes receivable - affiliates 3,074 2,897
Accrued investment income 7 87
Other assets 6,343 5,271
------------- ------------
Total assets $ 4,099,540 $ 3,517,312
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Short- and long-term debt $ 676,663 $ 472,102
Accounts payable - affiliates 19 21
Other liabilities 27,666 25,002
------------- ------------
Total liabilities 704,348 497,125
------------- ------------
Shareholders' equity (note B):
Common stock, $1 par value, shares authorized
300,000,000; shares issued 2002 - 121,418,637;
2001 - 121,110,800; outstanding 2002 - 100,251,444;
2001 - 106,086,594 121,419 121,111
Paid-in surplus 232,950 214,040
Members' equity 380 -
Treasury stock (shares at cost, 2002 - 21,167,193;
2001 - 15,024,206) (1,035,858) (671,168)
Accumulated other comprehensive income, net of tax 147,908 46,644
Retained earnings 3,928,393 3,309,560
------------- ------------
Total shareholders' equity 3,395,192 3,020,187
------------- ------------
Total liabilities and shareholders' equity $ 4,099,540 $ 3,517,312
============= ============
See accompanying supplementary notes to Parent Company condensed financial statements.
43
MGIC INVESTMENT CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF OPERATIONS
PARENT COMPANY ONLY
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
---------- ---------- ----------
(In thousands of dollars)
Revenue:
Equity in undistributed net income
of subsidiaries $ 487,660 $ 644,714 $ 550,014
Dividends received from subsidiaries 164,653 12,751 11,091
Investment income, net 2,338 746 800
Realized investment gains (losses),
net 42 29 (659)
---------- ---------- ----------
Total revenue 654,693 658,240 561,246
---------- ---------- ----------
Expenses:
Operating expenses 1,313 926 735
Interest expense 36,640 30,623 28,759
---------- ---------- ----------
Total expenses 37,953 31,549 29,494
---------- ---------- ----------
Income before tax 616,740 626,691 531,752
Credit for income tax (12,451) (12,446) (10,247)
---------- ---------- ----------
Net income 629,191 639,137 541,999
---------- ---------- ----------
Other comprehensive income, net 101,264 (29,170) 116,549
---------- ---------- ----------
Comprehensive income $ 730,455 $ 609,967 $ 658,548
========== ========== ==========
See accompanying supplementary notes to
Parent Company condensed financial statements.
44
MGIC INVESTMENT CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF CASH FLOWS
PARENT COMPANY ONLY
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
----------- ----------- -----------
(In thousands of dollars)
Cash flows from operating activities:
Net income $ 629,191 $ 639,137 $ 541,999
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of subsidiaries (487,660) (644,714) (550,014)
(Increase) decrease in income taxes receivable (177) (2,897) 4,518
Decrease (increase) in accrued investment income 80 (68) 190
Increase in other liabilities 2,664 11,777 10,559
(Increase) decrease in other assets (1,072) 5,990 (10,303)
Other 12,190 7,576 29,005
----------- ----------- -----------
Net cash provided by operating activities 155,216 16,801 25,954
----------- ----------- -----------
Cash flows from investing activities:
Transactions with subsidiaries (12,160) (8,657) (5,050)
Purchase of fixed maturities (99,604) (500) (10,500)
Sale of fixed maturities 100,291 164 21,920
----------- ----------- -----------
Net cash (used in) provided by investing activities (11,473) (8,993) 6,370
----------- ----------- -----------
Cash flows from financing activities:
Dividends paid to shareholders (10,358) (10,685) (10,618)
Proceeds from issuance of short- and long-term debt 202,087 205,521 309,079
Repayment of short- and long-term debt - (133,384) (336,751)
Common stock shares issued 10,825 - -
Reissuance of treasury stock 6,179 16,830 18,699
Repurchase of common stock (373,070) (73,488) (6,224)
----------- ----------- -----------
Net cash used in financing activities (164,337) 4,794 (25,815)
----------- ----------- -----------
Net (decrease) increase in cash and short-term investments (20,594) 12,602 6,509
Cash and short-term investments at beginning of year 20,774 8,172 1,663
----------- ----------- -----------
Cash and short-term investments at end of year $ 180 $ 20,774 $ 8,172
=========== =========== ===========
See accompanying notes to Parent Company condensed financial statements.
45
MGIC INVESTMENT CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
SUPPLEMENTARY NOTES
Note A
The accompanying Parent Company financial statements should be read in
conjunction with the Consolidated Financial Statements and Notes to Consolidated
Financial Statements appearing in Exhibit 13 of this Annual Report on Form 10-K.
Note B
The Company's insurance subsidiaries are subject to statutory regulations
as to maintenance of policyholders' surplus and payment of dividends. The
maximum amount of dividends that the insurance subsidiaries may pay in any
twelve-month period without regulatory approval by the Office of the
Commissioner of Insurance of the State of Wisconsin is the lesser of adjusted
statutory net income or 10% of statutory policyholders' surplus as of the
preceding calendar year end. Adjusted statutory net income is defined for this
purpose to be the greater of statutory net income, net of realized investment
gains, for the calendar year preceding the date of the dividend or statutory net
income, net of realized investment gains, for the three calendar years preceding
the date of the dividend less dividends paid within the first two of the
preceding three calendar years. As a result of an extraordinary dividend paid by
MGIC in February, 2002, MGIC cannot pay any dividends without regulatory approal
until February 16, 2003. Thereafter, MGIC can pay $154.8 million of dividends.
The other insurance subsidiaries of the Company can pay $8.7 million of
dividends without such regulatory approval.
Certain of the Company's non-insurance subsidiaries also have requirements
as to maintenance of net worth. These restrictions could also affect the
Company's ability to pay dividends.
In 2002, 2001 and 2000, the Company paid dividends of $10.4 million, $10.7
million and $10.6 million, respectively, or $0.10 per share.
46
MGIC INVESTMENT CORPORATION
SCHEDULE IV - REINSURANCE
MORTGAGE INSURANCE PREMIUMS EARNED
Years Ended December 31, 2002, 2001 and 2000
Percentage
Ceded to Assumed of Amount
Gross Other From Other Assumed
Gross Amount Companies Companies Net Amount to Net
------------ ---------- ---------- ------------ ----------
(In thousands of dollars)
Year ended
December 31,
2002 $ 1,296,548 $ 114,898 $ 448 $ 1,182,098 0.0%
============ ========== ======= ============
2001 $ 1,107,168 $ 65,587 $ 686 $ 1,042,267 0.1%
============ ========== ======= ============
2000 $ 939,981 $ 50,889 $ 999 $ 890,091 0.1%
============ ========== ======= ============
47
INDEX TO EXHIBITS
[Item 15(a)3]
Exhibit
Numbers Description of Exhibits
- ------- -----------------------
3.1 Articles of Incorporation, as amended.(1)
3.2 Amended and Restated Bylaws. (2)
4.1 Article 6 of the Articles of Incorporation (included within
Exhibit 3.1)
4.2 Amended and Restated Bylaws (included as Exhibit 3.2)
4.3 Rights Agreement, dated as of July 22, 1999, between MGIC
Investment Corporation and Firstar Bank Milwaukee, N.A., which
includes as Exhibit A thereto the Form of Right Certificate and
as Exhibit B thereto the Summary of Rights to Purchase Common
shares(3)
4.3.1 First Amendment to Rights Agreement, dated as of October 28,
2002, between the Company and U.S. Bank National Association.(4)
4.3.2 Second Amendment to Rights Agreement, dated as of October 28,
2002, between the Company and Wells Fargo Bank Minnesota,
National Association (as successor Rights Agent to U.S. Bank
National Association).(5)
4.4 Indenture, dated as of October 15, 2000, between the Company and
Bank One Trust Company, National Association, as Trustee(6) [The
Company is a party to various other agreements with respect to
its long-term debt. These agreements are not being filed pursuant
to Reg. S-K Item 602(b) (4) (iii) (A). The Company hereby agrees
to furnish a copy of such agreements to the Commission upon its
request.]
10.1 Form of Stock Option Agreement under 2002 Stock Incentive Plan
10.1.1 Form of Incorporated Terms to Stock Option Agreement under 2002
Stock Incentive Plan
10.2 Form of Restricted Stock Agreement under 2002 Stock Incentive
Plan
10.2.1 Form of Incorporated Terms to Restricted Stock Agreement under
2002 Stock Incentive Plan
10.3 MGIC Investment Corporation 1991 Stock Incentive Plan(7)
48
10.3.1 MGIC Investment Corporation 2002 Stock Incentive Plan(8)
10.4 Two Forms of Stock Option Agreement under 1991 Stock Incentive
Plan.(9)
10.4.1 Form of Stock Option Agreement under 1991 Stock Incentive
Plan(10)
10.4.2 Form of Incorporated Terms to Stock Option Agreement under 1991
Stock Incentive Plan(11)
10.5 Two Forms of Restricted Stock Award Agreement under 1991 Stock
Incentive Plan.(12)
10.5.1 Form of Restricted Stock Agreement under 1991 Stock Incentive
Plan(13)
10.5.2 Form of Incorporated Terms to Restricted Stock Agreement under
1991 Stock Incentive Plan(14)
10.6 Executive Bonus Plan
10.7 Supplemental Executive Retirement Plan (15)
10.8 MGIC Investment Corporation Deferred Compensation Plan for
Non-Employee Directors.(16)
10.9 MGIC Investment Corporation 1993 Restricted Stock Plan for
Non-Employee Directors.(17)
10.10 Two Forms of Award Agreement under MGIC Investment Corporation
1993 Restricted Stock Plan for Non-Employee Directors.(18)
10.11 Form of MGIC Mortgage Guaranty Master Policy, in effect generally
for insurance commitments issued beginning March 1, 1995,
including the Master Policy Program Endorsement relating to
delegated underwriting.(19)
10.12 Form of Key Executive Employment and Severance Agreement.(20)
10.13 Non-Competition, Confidentiality and Severance Agreement, dated
February 25, 2002, between the Company and John D. Fisk(21)
11 Statement re: computation of per share earnings
13 Information from the 2002 Annual Report of the Company to
Shareholders which is incorporated by reference in this Annual
Report on Form 10-K.
21 Direct and Indirect Subsidiaries and Joint Ventures
49
23 Consent of Independent Accountants
99.1 Certification of CEO under Section 906 of Sarbanes-Oxley Act of
2002 (as indicated in Item 15(a), this Exhibit is not being
"filed")
99.2 Certification of CFO under Section 906 of Sarbanes-Oxley Act of
2002 (as indicated in Item 15(a), this Exhibit is not being
"filed")
Supplementary List of the above Exhibits which relate to management
contracts or compensatory plans or arrangements:
10.1 Form of Stock Option Agreement under 2002 Stock Incentive Plan
10.1.1 Form of Incorporated Terms to Stock Option Agreement under 2002
Stock Incentive Plan
10.2 Form of Restricted Stock Agreement under 2002 Stock Incentive
Plan
10.2.1 Form of Incorporated Terms to Restricted Stock Agreement under
2002 Stock Incentive Plan
10.3 MGIC Investment Corporation 1991 Stock Incentive Plan.
10.3.1 MGIC Investment Corporation 2002 Stock Incentive Plan
10.4 Two Forms of Stock Option Agreement under 1991 Stock Incentive
Plan.
10.4.1 Form of Stock Option Agreement under 1991 Stock Incentive Plan
10.4.2 Form of Incorporated Terms to Stock Option Agreement under 1991
Stock Incentive Plan
10.5 Two Forms of Restricted Stock Award Agreement under 1991 Stock
Incentive Plan.
10.5.1 Form of Restricted Stock Agreement under 1991 Stock Incentive
Plan
10.5.2 Form of Incorporated Terms to Restricted Stock Agreement under
1991 Stock Incentive Plan
10.6 Executive Bonus Plan
10.7 Supplemental Executive Retirement Plan.
10.8 MGIC Investment Corporation Deferred Compensation Plan for
Non-Employee Directors.
50
10.9 MGIC Investment Corporation 1993 Restricted Stock Plan for
Non-Employee Directors.
10.10 Two Forms of Award Agreement under MGIC Investment Corporation
1993 Restricted Stock Plan for Non-Employee Directors.
10.12 Form of Key Executive Employment and Severance Agreement
10.13 Non-Competition, Confidentiality and Severance Agreement, dated
February 25, 2002, between the Company and John D. Fisk
51
The following documents, identified in the footnote references above, are
incorporated by reference, as indicated, to: the Company's Annual Reports on
Form 10-K for the years ended December 31, 1993, 1994, 1997, 1999 or 2001 (the
"1993 10-K," "1994 10-K," "1997 10-K," "1999 10-K" and "2001 10-K,"
respectively); to the Company's Quarterly Reports on Form 10-Q for the Quarters
ended June 30, 1994, 1998, or 2000 or September 30, 2002 (the "June 30, 1994
10-Q," "June 30, 1998 10-Q," "June 30, 2000 10-Q" and "September 30, 2002 10-Q,"
respectively); to the Company's registration Statement Form 8-A filed July 27,
1999 (the "8-A"), as amended by Amendment No. 1 filed October 29, 2002 (the
"8-A/A"); to the Company's Current Report on form 8-K dated October 17, 2000
(the "8-K"); or to the Company's Proxy Statement for its 2002 Annual Meeting of
Shareholders (the "2002 Proxy Statement"). The documents are further identified
by cross-reference to the Exhibits in the respective documents where they were
originally filed:
(1) Exhibit 3 to the June 30, 1998 10-Q.
(2) Exhibit 3.2 to the 1999 10-K.
(3) Exhibit 4.1 to the 8-A.
(4) Exhibit 4.2 to the 8-A/A.
(5) Exhibit 4.3 to the 8-A/A.
(6) Exhibit 4.1 to the 8-K.
(7) Exhibit 10.7 to the 1999 10-K.
(8) Exhibit A to the 2002 Proxy Statement.
(9) Exhibit 10.9 to the 1999 10-K.
(10) Exhibit 10.4.1 to the 2001 10-K.
(11) Exhibit 10.4.2 to the 2001 10-K.
(12) Exhibit 10.10 to the 1999 10-K.
(13) Exhibit 10.5.1 to the 2001 10-K.
(14) Exhibit 10.5.2 to the 2001 10-K.
(15) Exhibit 10 to the June 30, 2000 10-Q.
(16) Exhibit 10 to the September 30, 2002 10-Q.
(17) Exhibit 10.24 to the 1993 10-K.
(18) Exhibits 10.27 and 10.28 to the June 30, 1994 10-Q.
(19) Exhibit 10.26 to the 1994 10-K.
(20) Exhibit 10.17 to the 1999 10-K.
(21) Exhibit 10.13 to the 2001 10-K.
52