FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
OR
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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)
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WISCONSIN
(State or other jurisdiction of
incorporation or organization)
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39-1486475
(I.R.S. Employer Identification No.) |
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MGIC PLAZA, 250 EAST KILBOURN AVENUE,
MILWAUKEE, WISCONSIN
(Address of principal executive
offices)
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53202
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(414) 347-6480
(Registrants telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of Each Class:
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Common Stock, Par Value $1 Per Share
Common Share Purchase Rights |
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Name of Each Exchange on Which
Registered:
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New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
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 Registrants 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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). o Yes þ No
State the aggregate market value of the voting common stock held by non-affiliates of the
Registrant as of June 30, 2009: Approximately $535 million*
* 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 Registrants classes of common stock as of
February 24, 2010: 125,563,583
The following documents have been incorporated by reference in this Form 10-K, as indicated:
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Document
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Part and Item Number of Form 10-K Into
Which Incorporated* |
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Proxy Statement for the 2010 Annual
Meeting of Shareholders
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Items 10 through 14 of Part III |
* In each case, to the extent provided in the Items listed.
TABLE OF CONTENTS
PART I
Item 1. Business.
A. General
We are a holding company and through wholly owned subsidiaries we are the leading provider of
private mortgage insurance in the United States. In 2009, our net premiums written exceeded $1.2
billion and our new insurance written was $19.9 billion. As of December 31, 2009, our insurance in
force was $212.2 billion and our risk in force was $54.3 billion. For further information about
our results of operations, see our consolidated financial statements
in Item 8. As of December 31,
2009, our principal subsidiary, Mortgage Guaranty Insurance
Corporation (MGIC), was licensed in all 50 states of the United
States, the District of Columbia, Puerto Rico and Guam. Through December 31, 2009, MGIC wrote all
of our new insurance throughout the United States. However, in 2010 MGIC Indemnity Corporation
(MIC) is expected to begin writing new insurance in jurisdictions where MGIC does not meet
minimum capital requirements and does not obtain a waiver of those requirements. For more
information about the formation of MIC and our plans to utilize it to continue writing new
insurance throughout the United States, see Managements Discussion and Analysis of Financial
Condition and Results of Operations Overview
Capital in Item 7. In addition to mortgage
insurance on first liens, we, through our subsidiaries, provide lenders with various underwriting
and other services and products related to home mortgage lending.
Overview of the Private Mortgage Insurance Industry
The
private mortgage insurance industry was established in 1957 by MGIC to provide a private
market alternative to federal government insurance programs. Private mortgage insurance covers
losses from homeowner defaults on residential first mortgage loans, reducing and, in some
instances, eliminating the loss to the insured institution if the homeowner defaults. Private
mortgage insurance plays an important role in the housing finance system by expanding home
ownership opportunities through helping people purchase homes with less than 20% down payments,
especially first time homebuyers. In this annual report, we refer to loans with less than 20% down
payments as low down payment mortgages or loans. During
2008 and 2009, approximately $193 billion and $82 billion,
respectively, of
mortgages were insured by private mortgage insurance companies.
Private mortgage insurance facilitates the sale of low down payment mortgages in the
secondary mortgage market to the Federal National Mortgage Association, commonly known as Fannie
Mae, and the Federal Home Loan Mortgage Corporation, commonly known as Freddie Mac. In this annual
report, we refer to Fannie Mae and Freddie Mac collectively as the GSEs. The GSEs purchase
residential mortgages from mortgage lenders and investors as part of their governmental mandate to
provide liquidity in the secondary mortgage market and we believe that the GSEs purchased over 50%
of the mortgages underlying our flow new insurance written during the last five years. As a result,
the private mortgage insurance industry in the U.S. is defined in part by the requirements and
practices of the GSEs. These requirements and practices, as well as those of the federal regulators
that oversee the GSEs and lenders, impact the operating results and financial performance of
companies in the mortgage insurance industry. See the risk factor titled Changes in the business
practices of the GSEs, federal legislation that changes their charters or a restructuring of the
GSEs could reduce our revenues or increase our losses. in Item 1A. Private mortgage insurance also
reduces the regulatory capital that depository institutions are required to hold against low down
payment mortgages that they hold as assets.
The U.S. single-family residential mortgage market has historically experienced long-term
growth, including an increase in mortgage debt outstanding every year
between 1985, when MGIC began
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operations, and 2007. The rate of growth in U.S. residential mortgage debt was
particularly strong from 2001 through 2006. In 2007, this growth rate began slowing and, since
2007, U.S. residential mortgage debt has decreased. During the last several years of this period
of increased growth and continuing through 2007, the mortgage lending industry increasingly made
home loans at higher loan-to-value ratios, to individuals with higher risk credit profiles and
based on less documentation and verification of information regarding the borrower. Beginning in
2007, job creation slowed and the housing markets began slowing in certain areas, with declines in
certain other areas. In 2008 and 2009, payroll employment in the U.S. decreased substantially and
substantially all areas experienced home price declines. Together, these conditions resulted in
significant adverse developments for us and our industry. After earning an average of
approximately $580 million annually from 2004 through 2006 and
earnings of $169 million in the first half of 2007, we had net losses of $1.670 billion for
2007, $525.4 million for 2008 and $1.322 billion for 2009.
Beginning in 2008 and 2009, the insurer financial
strength rating of MGIC was downgraded a number of times by all three rating agencies. See the risk
factor titled MGIC may not continue to meet the GSEs mortgage insurer eligibility requirements
in Item 1A.
Beginning in late 2007, we implemented a series of changes to our underwriting guidelines that are
designed to improve the credit risk profile of our new insurance written. The changes primarily
affect borrowers who have multiple risk factors such as a high loan-to-value ratio, a lower FICO
score and limited documentation or are financing a home in a market we categorize as higher risk
and include the creation of two tiers of restricted
markets. Our underwriting criteria for
restricted markets do not allow insurance to be written on certain loans that could be insured if
the property were located in an unrestricted market. Beginning in September 2009, we removed
several markets from our restricted markets list and moved several other markets from our Tier Two
restricted market list (for which our underwriting guidelines are most limiting) to our Tier One
restricted market list.
Due to the changing environment, including that described above, at this time we are facing two particularly significant challenges:
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Whether we will have access to sufficient capital to continue to write new
business beyond 2011. For additional information about this challenge, see Managements Discussion
and Analysis of Financial Condition and Results of Operations Overview Capital in
Item 7. |
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Whether private mortgage insurance will remain a significant credit
enhancement alternative for low down payment single family mortgages. For additional
information about this challenge, see Managements Discussion and Analysis of Financial
Condition and Results of Operations Overview Fannie Mae and Freddie Mac in Item 7. |
General Information About Our Company
We are a Wisconsin corporation. Our principal office is located at MGIC Plaza, 250 East
Kilbourn Avenue, Milwaukee, Wisconsin 53202 (telephone number (414) 347-6480).
For
many years ending in 2008, we had significant investments in two less than majority
owned joint ventures, Credit-Based Asset Servicing and Securitization LLC, or C-BASS, and Sherman
Financial Group LLC, or Sherman. In 2007, joint venture
losses in our results of operations included an impairment charge
equal to our entire equity interest in C-BASS, as well as equity losses incurred by C-BASS in the
fourth quarter that reduced the carrying value of our $50 million note from C-BASS to zero. As a
result, beginning in 2008, our joint venture income principally consisted of income from Sherman.
In August 2008, we sold our entire interest in Sherman to Sherman. Beginning in the fourth quarter
of 2008, our results of operations are no longer affected by any joint venture results.
As used in this annual report, we, us and our refer to MGIC Investment
Corporations
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consolidated operations. Sherman, C-BASS and our other less than majority-owned
joint ventures and investments are not consolidated with us for financial reporting purposes, are
not our subsidiaries and are not included in the terms we, us and our. The description of
our business in this document generally does not apply to our Australian operations, which are
immaterial. For information about our Australian operations, see Managements Discussion and
Analysis of Financial Condition and Results of Operations
Overview Australia in Item 7.
Our revenues and losses may be materially affected by the risk factors applicable to us
that are included in Item 1A of this annual report. These risk factors are an integral part of
this annual report. These factors may also cause actual results to differ materially from the
results contemplated by forward looking statements that we may make. We are not undertaking any
obligation to update any forward looking statements or other statements we may make even though
these statements may be affected by events or circumstances occurring after the forward looking
statements or other statements were made. No reader of this annual report should rely on the fact
that such statements are current at any time other than the time at which this annual report was
filed with the Securities and Exchange Commission.
B. The MGIC Book
In our industry, a book is a group of loans that a mortgage insurer insures in a particular
period, normally a calendar year. We refer to the insurance that has been written by MGIC as the
MGIC Book.
Types of Product
In general, there are two principal types of private mortgage insurance: primary and pool.
We are currently not issuing new commitments for pool insurance and expect that the volume of any
future pool business will be insignificant to us.
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). For the effect of
bankruptcy cramdowns on the claim amount, see Exposure to Catastrophic Loss; Defaults; Claims;
Loss Mitigation Claims below. In addition to the loan principal, the claim amount is affected by
the mortgage note rate and the time necessary to complete the
foreclosure process, which can be lengthened due to foreclosure
moratoriums. 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. Primary insurance is
generally written on first mortgage loans secured by owner occupied single-family homes, which are
one-to-four family homes and condominiums. Primary insurance is also written on first liens
secured by non-owner occupied single-family homes, which are referred to in the home mortgage
lending industry as investor loans, and on vacation or second homes. 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 our 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 that is supplemental to
mortgage insurance written in connection with the origination of the loan or that reduces a
lenders credit risk to less than 51% of the value of the property. For more than the past five
years, reports by private mortgage insurers to the trade association for the private mortgage
insurance industry have classified mortgage insurance that is supplemental to other mortgage
insurance or that reduces a lenders credit risk to less than 51% of the value of the property as
pool insurance. The trade association classification is used by members of the private mortgage
insurance industry in reports to Inside Mortgage Finance, a mortgage industry
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publication that
computes and publishes primary market share information.
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 each loan in a
portfolio of loans is individually insured in a single, bulk transaction. New insurance written on
a flow basis was $19.9 billion in 2009 compared to $46.6 billion in 2008 and $69.0 billion in 2007.
No new insurance written for bulk transactions was written in 2009, compared to $1.6 billion for
2008 and $7.8 billion in 2007. As noted in - Bulk Transactions below, in the fourth quarter of
2007, we decided to stop writing the portion of our bulk business that insures mortgage loans
included in home equity (or private label) securitizations, which are the terms the market uses
to refer to securitizations sponsored by firms besides the GSEs or Ginnie Mae, such as Wall Street
investment banks. We refer to portfolios of loans we insured through the bulk channel that we knew
would serve as collateral in a home equity securitization as Wall Street bulk transactions.
While we will continue to insure loans on a bulk basis when we believe that the loans will be sold
to a GSE or retained by the lender, we expect the volume of any future business written through the
bulk channel will be insignificant to us.
The following table shows, on a direct basis, primary insurance in force (the unpaid
principal balance of insured loans as reflected in our records) and primary risk in force (the
coverage percentage applied to the unpaid principal balance) for the MGIC Book as of the dates
indicated:
Primary Insurance and Risk In Force
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December 31, |
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2009 |
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2008 |
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2007 |
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2006 |
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2005 |
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(In millions) |
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Direct Primary Insurance In Force |
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$ |
212,182 |
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$ |
226,955 |
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$ |
211,745 |
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$ |
176,531 |
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$ |
170,029 |
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Direct Primary Risk In Force |
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$ |
54,343 |
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$ |
58,981 |
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$ |
55,794 |
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$ |
47,079 |
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$ |
44,860 |
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For loans sold to Fannie Mae or Freddie Mac, the coverage percentage must comply
with the requirements established by the particular GSE to which the loan is delivered. For other
loans, the lender determines the coverage percentage we provide, from the coverage percentages that
we offer.
We charge higher premium rates for higher coverage percentages. Higher coverage
percentages generally result in increased severity, which is the amount paid on a claim, and lower
coverage percentages generally result in decreased severity. In accordance with GAAP for the
mortgage insurance industry, reserves for losses are only established for loans in default.
Because, historically, relatively few defaults typically occur in the early years of a book of
business, the higher premium revenue from deeper coverage has historically been generally
recognized before any significant higher losses resulting from that deeper coverage may be
incurred. See - Exposure to Catastrophic Loss; Defaults; Claims; Loss Mitigation -
Claims. Our 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 recent years the GSEs, with mortgage insurers, have offered programs under which, on
delivery of an insured loan to a GSE, the primary coverage was restructured to an initial shallow
tier of coverage followed by a second tier that was subject to an overall loss limit, and
compensation may have been 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 coverage percentages. We believe that the GSEs
ceased offering these programs in 2008, though we continue to insure loans subject to these
programs. See Sales and Marketing and Competition Competition below for a discussion of
Fannie Maes expansion of the types of loans
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eligible for charter coverage and its plans to
eliminate its reduced coverage program in the second quarter of 2010.
In general, mortgage insurance coverage cannot be terminated by the insurer. However, a
mortgage insurer may terminate or rescind coverage for, among other reasons, non-payment of premium
and in the case of certain material misrepresentations made in connection with the issuance of the
insurance policy. See Exposure to Catastrophic Loss; Defaults; Claims; Loss Mitigation Loss
Mitigation. Mortgage insurance coverage is renewable at the option of the insured lender, at the
renewal rate fixed when the loan was initially insured. Lenders may cancel insurance written on a
flow basis 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 borrowers request when the principal balance of the loan is 80% or less of the homes
current value.
Under the federal Homeowners Protection Act, or 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 borrowers primary residence when certain
loan-to-value ratio thresholds determined by the value of the home at loan origination and other
requirements are met. Generally, the loan-to-value ratios used in this annual report represent the
ratio, expressed as a percentage, of the dollar amount of the first mortgage loan to the value of
the property at the time the loan became insured and do not reflect subsequent housing price
appreciation or depreciation. In general, under the HPA a borrower may stop making mortgage
insurance payments when the loan-to-value ratio is scheduled to reach 80% (based on the loans
amortization schedule) or actually reaches 80% if the borrower so requests and if certain
requirements relating to the borrowers payment history, the absence of junior liens and a decline
in the propertys value since origination are satisfied. In addition, a borrowers obligation to
make payments for private mortgage insurance generally terminates regardless of whether a borrower
so requests when the loan-to-value ratio (based on the loans amortization schedule) reaches 78% of
the unpaid principal balance of the mortgage and the borrower is or later becomes current in his
mortgage payments. A borrowers 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 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 private
mortgage insurance automatically in certain circumstances.
Coverage tends to continue in areas experiencing economic contraction and housing price
depreciation. The persistency of coverage in these areas coupled with cancellation of coverage in
areas experiencing economic expansion and housing price appreciation can increase the percentage of
an insurers 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.
The percentage of primary risk written with respect to loans representing refinances was
36.0% in 2009 compared to 21.9% in 2008 and 23.2% in 2007. When a borrower refinances a mortgage
loan insured by us by paying it off in full with the proceeds of a new mortgage that is also
insured by us, the
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insurance on that existing mortgage is cancelled, and insurance on the new
mortgage is considered to be new primary insurance written. Therefore, continuation of our coverage
from a refinanced loan to a new loan results in both a cancellation of insurance and new insurance
written. When a lender and borrower modify a loan rather than replace it with a new one, or enter
into a new loan pursuant to a loan modification program, our insurance continues without being
cancelled, assuming that we consent to the modification or new loan. As a result, such
modifications or new loans, including those modified under the Home Affordable Refinance Program,
are not included in our new insurance written.
In addition to varying with the coverage percentage, our premium rates for insurance vary
depending upon the perceived risk of a claim on the insured loan and thus take into account, among
other things, the loan-to-value ratio, whether the loan is a fixed payment loan or a non-fixed
payment loan (a non-fixed payment loan is referred to in the home mortgage lending industry as an
adjustable rate mortgage), the mortgage term, whether the loan finances a home in a market we
categorize as higher risk and whether the property is the borrowers primary residence.
Historically, only our premium rates for A-, subprime loans and certain other loans varied based on
the location of the borrowers credit score within a range of credit scores. Subject to regulatory
approval, effective May 1, 2010, we will price our insurance after considering the borrowers
credit scores for all flow new insurance written. In general, in this annual report we classify as
A- loans that have FICO credit scores between 575 and 619 and we classify as subprime loans
that have FICO credit scores of less than 575. However, in this annual report we classify loans
without complete documentation as reduced documentation loans regardless of FICO credit score
rather than as prime, A- or subprime loans, although as discussed in footnote 4 to the table
titled Default Statistics for the MGIC Book in Exposure to Catastrophic Loss; Defaults;
Claims; Loss Mitigation Defaults below, certain doc waiver GSE loans are included as full
doc loans by us in accordance with industry practice. A FICO credit score is a score based on a
borrowers credit history generated by a model developed by Fair Isaac and Company.
Premium rates cannot be changed after the issuance of coverage. Because we believe that
over the long term each region of the United States is subject to similar factors affecting risk of
loss on insurance written, we generally utilize a nationally based, rather than a regional or
local, premium rate policy for insurance written through the flow channel. However, beginning in
2008, changes in our underwriting guidelines implemented more restrictive standards in markets and
for loan characteristics that we categorize as higher risk.
The borrowers mortgage loan instrument may require the borrower to pay the mortgage
insurance premium. Our industry refers to loans having this requirement as borrower paid. If
the borrower is not required to pay the premium, then the premium is paid by the lender, who may
recover the premium through an increase in the note rate on the mortgage or higher origination
fees. Our industry refers to loans in which the premium is paid by the lender as lender paid.
Most of our primary insurance in force and new insurance written, other than through bulk
transactions, is borrower paid mortgage insurance. New insurance written through bulk transactions
was generally paid by the securitization vehicles or investors that hold the mortgages, and the
mortgage note rate generally does not reflect the premium for the mortgage insurance. In February
2008, Freddie Mac and Fannie Mae informed us and the rest of our industry that they were reviewing
the appropriateness of all mortgage insurers lender-paid insurance premium rates. We are
uncertain of the status of these reviews.
Under the monthly premium plan, the borrower or lender pays us a monthly premium payment
to provide only one month of coverage, rather than one year of coverage provided by the annual
premium plan. Under the annual premium plan, the initial premium is paid to us in advance, and we
earn and recognize the premium 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
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renewal years, or with premium rates which are equal for the initial
year and subsequent renewal years. Under the single premium plan, the borrower or lender pays us a
single payment covering a specified term exceeding twelve months.
During each of the last three years, the monthly premium plan represented more than 85%
of our new insurance written. The annual and single premium plans represented 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. Pool insurance usually has a stated aggregate loss limit
and may also have a deductible under which no losses are paid by the insurer until losses exceed
the deductible.
We are currently not issuing new commitments for
pool insurance and expect that the volume of any future pool business will be insignificant to us.
New pool risk written was $4 million in 2009, $145 million in
2008 and $211 million in 2007. New pool risk
written during 2007 was primarily comprised of risk associated with loans delivered to the GSEs
(agency pool insurance), loans insured through private label securitizations, loans delivered to
the Federal Home Loan Banks under their mortgage purchase programs and loans made under state
housing finance programs. New pool risk written during 2008 was primarily comprised of risk
associated with agency pool insurance and loans made under state housing finance programs. Direct
pool risk in force at December 31, 2009 was $1.7 billion compared to $1.9 billion and $2.8 billion
at December 31, 2008 and 2007, respectively. The risk amounts referred to above represent pools of
loans with contractual aggregate loss limits and in some cases those without these limits. For
pools of loans without these limits, risk is estimated based on the amount that would credit
enhance these loans to a AA level based on a rating agency model. Under this model, at
December 31, 2009, 2008 and 2007 for $2.0 billion, $2.5 billion and $4.1 billion, respectively, of
risk without these limits, risk in force is calculated at $190 million, $150 million and
$475 million, respectively.
The settlement of a nationwide class action alleging that MGIC violated the Real Estate
Settlement Procedures Act, or RESPA, by providing agency pool insurance and entering into other
transactions with lenders that were not properly priced became final in October 2003. In a
February 1, 1999 circular addressed to all mortgage guaranty insurers licensed in New York, the New
York Department of Insurance advised that significantly underpriced 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. 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.
In February 2008, Freddie Mac and Fannie Mae informed us and the rest of our industry
that they were reviewing the appropriateness of all mortgage insurers criteria and underwriting
requirements for pool insurance on mortgages to the extent that they do not meet such insurers
published underwriting guidelines. We are uncertain of the status of these reviews.
Risk Sharing Arrangements.
We have participated in risk sharing arrangements with the GSEs and captive reinsurance
arrangements with subsidiaries of certain mortgage lenders that reinsure a portion of the risk on
loans
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originated or serviced by the lenders which have MGIC primary insurance.
In a February 1, 1999 circular addressed to all mortgage insurers licensed in New York,
the New York Department of Insurance said that it was in the process of developing guidelines that
would articulate the parameters under which captive mortgage reinsurance is permissible under New
York insurance law. These guidelines, which were to ensure that the reinsurance constituted a
legitimate transfer of risk and were fair and equitable to the parties, have not been issued. As
discussed under We are subject to the risk of private litigation and regulatory proceedings in
Item 1A, we provided information regarding captive mortgage reinsurance arrangements to the New
York Department of Insurance, the Minnesota Department of Commerce and the Department of Housing
and Urban Development, commonly referred to as HUD. The complaint in the RESPA litigation
described in - Pool Insurance alleged that MGIC pays inflated captive reinsurance
premiums in violation of RESPA. Since December 2006, class action litigation was separately
brought against a number of large lenders alleging that their captive mortgage reinsurance
arrangements violated RESPA. We are not a defendant in any of these cases and we believe no other
mortgage insurer is a defendant.
In addition, we periodically participate in risk sharing arrangements with persons
unrelated to our customers. When we reinsure a portion of our risk through such a reinsurer, we
make an upfront payment or cede a portion of our premiums in return for a reinsurer agreeing to
indemnify us for its share of losses incurred. Although reinsuring against possible loan losses
does not discharge us from liability to a policyholder, it can reduce the amount of capital we are
required to retain against potential future losses for rating agency and insurance regulatory
purposes.
For further information about risk sharing arrangements, see Managements Discussion and
AnalysisResults of Consolidated OperationsRisk Sharing
Arrangements in Item 7 and Note 9 to our
consolidated financial statements in Item 8.
Bulk Transactions. In bulk transactions, the individual loans in the insured portfolio
are generally insured to specified levels of coverage. The premium in a bulk transaction, which is
negotiated with the securitizer or other owner of the loans, is based on the mortgage insurers
evaluation of the overall risk of the insured loans included in the transaction and is often a
composite rate applied to all of the loans in the transaction.
In the fourth quarter of 2007, we decided to stop writing the portion of our bulk
business insuring loans included in Wall Street bulk transactions. These securitizations
represented approximately 41% and 66% of our new insurance written for bulk transactions during
2007 and 2006, respectively, and 9% of our risk in force, or 62% of our bulk risk in force, at
December 31, 2009. New insurance written for bulk transactions was $1.6 billion during 2008, all
of which were eligible for delivery to the GSEs, compared to $7.8 billion for 2007. We wrote no new
business through the bulk channel after the second quarter of 2008. We expect the volume of any
future business written through the bulk channel will be insignificant to us. In general, the
loans insured by us in Wall Street bulk transactions consisted of loans with reduced underwriting
documentation; cash out refinances that exceed the standard underwriting requirements of the GSEs;
A- loans; subprime loans; and jumbo loans. 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 was $417,000 for
2007 and early 2008; this amount was temporarily increased to up to $729,500 in the most costly
communities in early 2008 and remained at that amount throughout 2009. For additional information
about new insurance written through the bulk channel, see Managements Discussion and Analysis of
Financial Condition and Results of Operations Results of Consolidated Operations Bulk
Transactions in Item 7.
9
Customers
Originators of residential mortgage loans such as savings institutions, commercial banks,
mortgage brokers, credit unions, mortgage bankers and other lenders have historically determined
the placement of mortgage insurance written on a flow basis and as a result are our customers. To
obtain primary insurance from us written on a flow basis, a mortgage lender must first apply for
and receive a mortgage guaranty master policy from us. Our top 10 customers, none of whom
represented more than 10% of our consolidated revenues, generated 39.3% of our new insurance
written on a flow basis in 2009, compared to 40.3% in 2008 and 43.0% in 2007. In the fourth quarter
of 2009, Countrywide and an affiliate (Countrywide)
commenced litigation against us as a result of its dissatisfaction with our
rescissions practices shortly after
it ceased doing business with us. See the risk factor titled We are subject to the risk of private litigation and regulatory
proceedings in Item 1A as well as Item 3, Legal Proceedings, for more information about this
litigation and the arbitration case we filed against Countrywide regarding rescissions.
Countrywide and its Bank of America affiliates accounted for 12.0% of our flow new insurance
written in 2008 and 8.3% of our new insurance written in the first
three quarters of 2009. In addition, another customer with whom we
still do business accounted for almost 14% of our flow new insurance
written in 2009.
When writing insurance for Wall Street bulk transactions, we historically dealt primarily
with securitizers of the loans or other owners of the loans, who considered whether credit
enhancement provided through the structure of the securitization would eliminate or reduce the need
for mortgage insurance.
Sales and Marketing and Competition
Sales and Marketing. We sell our insurance products through our own employees, located
throughout all regions of the United States, Puerto Rico and Guam.
Competition. Our competition includes other mortgage insurers, governmental agencies and
products designed to eliminate the need to purchase private mortgage insurance. For flow business,
we and other private mortgage insurers compete directly with federal and state governmental and
quasi-governmental agencies, principally the Federal Housing Administration (FHA) and, to a
lesser degree, the Veterans Administration. These agencies sponsor government-backed mortgage
insurance programs, which during 2009 and 2008 accounted for approximately 84.6% and 60.4%,
respectively, of the total low down payment residential mortgages which were subject to
governmental or private mortgage insurance, a substantial increase from approximately 22.7% in
2007, according to statistics reported by Inside Mortgage Finance. We believe the FHA, which until
2008 was not viewed by us as a significant competitor, accounted for the overwhelming majority of
this increase in both 2008 and 2009.
Loans insured by the FHA cannot exceed maximum principal amounts which are determined by
a percentage of the conforming loan limit. For loans originated in the first half of 2007, the
maximum FHA loan amount for homes with one dwelling unit in high cost areas was as high as
$362,790; this amount was temporarily increased to up to $729,750 in the most costly areas for
loans originated in the second half of 2007 or during 2008. For loans originated in 2009 and 2010,
this limit was lowered to $721,050 in Alaska and Hawaii and $625,500 in other states. Loans
insured by the Veterans Administration do not have mandated maximum principal amounts but have
maximum limits on the amount of the guaranty provided by the Veterans Administration to the
lender. For loans closed on or after December 10, 2004, the maximum Veterans Administration
guaranty is $156,375 in Alaska and Hawaii and $104,250 in other states.
In addition to competition from the FHA and the Veterans Administration, we and other
private mortgage insurers face competition from state-supported mortgage insurance funds in several
states,
10
including California and New York. From time to time, other state legislatures and
agencies consider expanding the authority of their state governments to insure residential
mortgages.
Private mortgage insurers are also subject to competition from the GSEs to the extent
that they are compensated for assuming default risk that would otherwise be insured by the private
mortgage insurance industry. For a number of years, the GSEs have had programs under which on
certain loans lenders could choose a mortgage insurance coverage percentage that was only the
minimum required by their charters, with the GSEs paying a lower price for these loans (charter
coverage). The GSEs have also had programs under which on
certain loans they would accept a level of mortgage insurance above the requirements of their
charters but below their standard coverage without any decrease in the purchase price they would
pay for these loans (reduced coverage). Effective January 1, 2010, Fannie Mae broadly expanded
the types of loans eligible for charter coverage. Fannie Mae has also announced that it would eliminate
its reduced coverage program in the second quarter of 2010. In recent years, a majority of our
volume has been on loans with GSE standard coverage, a substantial portion of our volume has been
on loans with reduced coverage, and a minor portion of our volume has been on loans with charter
coverage. We charge higher premium rates for higher coverages. To the extent lenders selling loans
to Fannie Mae choose charter coverage for loans that we insure, our revenues would be reduced and we
could experience other adverse effects. See Managements Discussion and Analysis of Financial
Condition and Results of Operations Overview Fannie Mae and Freddie Mac for a discussion about
the risk that private mortgage insurance will not remain a significant credit enhancement for low
down payment single family mortgages and Changes in the business practices of the GSEs, federal
legislation that changes their charters or a restructuring of the GSEs could reduce our revenues or
increase our losses. in Item 1A for a discussion of how potential changes in the GSEs business
practices could affect us.
The capital markets and their participants have historically competed with mortgage
insurers by offering alternative products and services and may further develop as competitors to
private mortgage insurers in ways we cannot predict. Competition from such alternative products
and services was substantial prior to 2007 but declined materially in late 2007 and their presence
was insignificant in 2008 and 2009.
Prior to 2008, we and other mortgage insurers also competed with transactions structured
to avoid mortgage insurance on low down payment mortgage loans. These transactions include
self-insuring, and 80-10-10 and similar loans (generally referred to as piggyback loans), which
are loans comprised of both a first and a second mortgage (for example, an 80% loan-to-value ratio
first mortgage and a 10% loan-to-value ratio second mortgage), with the loan-to-value 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%
loan-to-value ratio mortgage). Competition from piggyback structures was substantial prior to 2007
but declined materially later in 2007 and declined further in 2008 and remained low in 2009.
The
U.S. private mortgage insurance industry currently consists of seven active mortgage
insurers and their affiliates and one new entrant that has said it
will begin to write new business in the second quarter of 2010. One
of the seven is a joint venture in which another mortgage
insurer participates, another is, according to filings with the Securities and Exchange
Commission as of February 20, 2010, our largest shareholder and
the new entrant reported that one of its investors is JPMorgan Chase, which
is one of our customers. The names of these mortgage insurers
can be found in Competition or changes in our relationships with our customers could reduce our
revenues or increase our losses in Item 1A. In 2008, a mortgage insurer ceased writing new
insurance and placed its existing book of business in run-off. According to Inside Mortgage
Finance, which obtains its data from reports provided by us 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 more than ten years, we have been the largest private mortgage
insurer based on new primary insurance written, with a market share of 26.0% in 2009, 24.5% in
2008, 21.3% in 2007, 21.6% in 2006 and 22.9% in 2005, and at December 31, 2009, we also
11
had the
largest book of direct primary insurance in force. For more than five years, these reports do not
include as primary mortgage insurance insurance on certain loans classified by us 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. We believe that we
currently compete with other private mortgage insurers based on customer relationships, name
recognition, reputation, the ancillary products and services provided to lenders (including
contract underwriting services), the strength of management teams and field organizations, the
depths of databases covering insured loans and the effective use of technology and innovation in
the delivery and servicing of insurance products. Our relationships with our customers could be
adversely affected by a variety of factors, including rescission of loans that affect the customer
and our decision to discontinue ceding new business under excess of loss captive reinsurance
programs. In the fourth quarter of 2009, Countrywide commenced
litigation against us as a result
of its dissatisfaction with our rescissions practices shortly after it ceased doing business
with us. See the risk factor titled We are subject to the risk of private litigation and regulatory
proceedings in Item 1A as well as Item 3, Legal Proceedings, for more information about this
litigation and the arbitration case we filed against Countrywide
regarding rescissions. Information about some of the other factors that can
affect a mortgage insurers relationship with its customers can be found at Competition or changes
in our relationships with our customers could reduce our revenues or increase our losses in Item
1A. Several private mortgage insurers compete based on the types of captive mortgage reinsurance
that they offer.
Historically, the industry has competed for business written through the flow channel
principally on the basis of programs involving captive mortgage reinsurance, agency pool insurance,
and other similar structures involving lenders; the provision of contract underwriting and related
fee-based services to lenders; financial strength as it is perceived by persons making or
influencing the selection of a mortgage insurer; the provision of other products and services that
meet lender needs for risk management, affordable housing, loss mitigation, capital markets and
training support; and the effective use of technology and innovation in the delivery and servicing
of insurance products. We believe competition for Wall Street bulk business was based principally
on the premium rate and the portion of loans submitted for insurance that the insurers were willing
to insure.
The complaint in the RESPA litigation described in - Pool Insurance alleged, among
other things, that captive mortgage reinsurance, agency pool insurance, and contract underwriting
we provided violated RESPA.
Certain private mortgage insurers compete for flow business by offering lower premium
rates than other companies, including us, either in general or with respect to particular customers
or classes of business. On a case-by-case basis, we 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.
The mortgage insurance industry historically viewed a financial strength rating of
Aa3/AA- as critical to writing new business. At the time that this annual report was finalized, the
financial strength of MGIC, our principal mortgage insurance subsidiary, was rated Ba3 by Moodys
Investors Service (the outlook for this rating is negative) and B+ by Standard & Poors Rating
Services (the outlook for this rating is negative). In January 2010, at our request, Fitch Ratings
withdrew its ratings of MGIC. MGIC could be further downgraded by
either or both of these rating
agencies. As a result of MGICs financial strength rating being below Aa3/AA-, it is operating
with each GSE as an eligible insurer under a remediation plan. For further information about the
importance of MGICs ratings, see our Risk Factor titled MGIC may not continue to meet the GSEs
mortgage insurer eligibility requirements in Item 1A. In assigning financial strength ratings, in
addition to considering the adequacy of the mortgage insurers capital to withstand very high claim
scenarios under assumptions determined by the rating agency, we believe
12
rating agencies review a
mortgage insurers historical and projected operating performance, franchise risk, business
outlook, competitive position, management, corporate strategy, and other factors. The rating
agency issuing the financial strength rating can withdraw or change its rating at any time.
Contract Underwriting and Related Services
We perform contract underwriting services for lenders in which we judge whether the data
relating to the borrower and the loan contained in the lenders mortgage loan application file
comply with the lenders loan underwriting guidelines. We also provide an interface to submit 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 our new insurance written through
the flow channel in recent years involved loans for which we provided contract underwriting
services. The complaint in the RESPA litigation described in - Pool Insurance alleged,
among other things, that the pricing of contract underwriting provided by us violated RESPA.
Under our contract underwriting agreements, we may be required to provide certain
remedies to our customers if certain standards relating to the quality of our underwriting work are
not met. The cost of remedies provided by us to customers for failing to meet these standards has
not been material to our financial position or results of operations for the years ended December
31, 2009, 2008 and 2007. However, a generally positive economic environment for residential real
estate that continued until approximately 2007 may have mitigated the effect of some of these
costs, and claims for remedies may be made a number of years after the underwriting work was
performed. A material portion of our new insurance written through the flow channel in recent years
involved loans for which we provided contract underwriting services. We believe the rescission of
mortgage insurance coverage on loans on which we also provided
contract underwriting services may make
a claim for a contract underwriting remedy more likely to occur. In the second half of 2009, we
experienced an increase in claims for contract underwriting remedies, which may continue. Hence,
there can be no assurance that contract underwriting remedies will not be material in the future.
In February 2008, Freddie Mac and Fannie Mae informed us and the rest of our industry
that they were reviewing all mortgage insurers business justifications for activities, such as
contract underwriting services, that have the potential for creating non-insurance related
contingent liabilities. We are uncertain of the status of these reviews.
Risk Management
We believe that mortgage credit risk is materially affected by:
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the borrowers credit strength, including the borrowers credit history,
debt-to-income ratios, and cash reserves and the willingness of a borrower with sufficient
resources to make mortgage payments to do so when the mortgage balance exceeds the value
of the home; |
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the loan product, which encompasses the loan-to-value ratio, the type of loan
instrument, including whether the instrument provides for fixed or variable payments and
the amortization schedule, the type of property and the purpose of the loan; |
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origination practices of lenders and the percentage of coverage on insured loans; |
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the size of loans insured; and |
13
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the condition of the economy, including housing values and employment, in the
area in which the property is located. |
We believe that, excluding other factors, claim incidence increases:
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for loans with lower FICO credit scores compared to loans with higher FICO
credit scores; |
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for loans with less than full underwriting documentation compared to loans
with full underwriting documentation; |
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during periods of economic contraction and housing price depreciation,
including when these conditions may not be nationwide, compared to periods of economic
expansion and housing price appreciation; |
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for loans with higher loan-to-value ratios compared to loans with lower
loan-to-value ratios; |
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for ARMs when the reset interest rate significantly exceeds the interest rate
of loan origination; |
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for loans that permit the deferral of principal amortization compared to
loans that require principal amortization with each monthly payment; |
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for loans in which the original loan amount exceeds the conforming loan limit
compared to loans below that limit; and |
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for cash out refinance loans compared to rate and term refinance loans. |
Other types of loan characteristics relating to the individual loan or borrower may also
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.
We charge higher premium rates to reflect the increased risk of claim incidence that we
perceive is associated with a loan, although not all higher risk characteristics are reflected in
the premium rate. There can be no assurance that our premium rates adequately reflect the
increased risk, particularly in a period of economic recession, slowing home price appreciation or
housing price declines. For additional information, see our risk factors in Item 1A, including the
one titled The premiums we charge may not be adequate to compensate us for our liabilities for
losses and as a result any inadequacy could materially affect our financial condition and results
of operations.
Beginning in late 2007, we implemented a series of changes to our underwriting guidelines that are
designed to improve the credit risk profile of our new insurance written. The changes primarily
affect borrowers who have multiple risk factors such as a high loan-to-value ratio, a lower FICO
score and limited documentation or are financing a home in a market we categorize as higher risk
and include the creation of two tiers of restricted markets. Our underwriting criteria for restricted markets do not allow insurance to be
written on certain loans that could be insured if the property were located in an unrestricted
market. Beginning in September 2009, we removed several markets from our restricted markets list
and moved several other markets from our Tier Two restricted market list (for which our
underwriting guidelines are most limiting) to our Tier One restricted market list. For information
about changes to our underwriting guidelines, see Managements Discussion and Analysis of Financial Condition and Results
of Operations Results of Consolidated Operations New
insurance written in Item 7.
Delegated Underwriting and GSE Automated Underwriting Approvals. Delegated underwriting
is a program under which approved lenders are allowed to commit us to insure loans originated
through the flow channel. Until January 2007, lenders were able to commit us to insure loans
utilizing only their own
14
underwriting guidelines and underwriting evaluation. In addition, from
2000 through January 2007, loans approved by the automated underwriting services of the GSEs were
automatically approved for MGIC mortgage insurance. As a result, during this period, a substantial
majority of the loans insured by us through the flow channel were approved as a result of loan
approvals by the automated underwriting services of the GSEs or through delegated underwriting
programs, including those utilizing lenders proprietary underwriting services. Beginning in 2007,
loans that did not meet our underwriting guidelines would not automatically be insured by us even
though the loans were approved by the underwriting services described above. As a result, our
delegated underwriting program began requiring lenders to commit us to insure only loans that
complied with our underwriting guidelines.
Exposure to Catastrophic Loss; Defaults; Claims; Loss Mitigation
Exposure to Catastrophic Loss. The private mortgage insurance industry has from time to
time experienced catastrophic loss similar to the losses currently being experienced. Prior to the
current cycle of such losses, the last time that private mortgage insurers experienced substantial
losses was 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 (1) severe
regional recessions and attendant declines in property values in the nations energy producing
states; (2) the lenders development of new mortgage products to defer the impact on home buyers of
double digit mortgage interest rates; and (3) changes in federal income tax incentives which
initially encouraged the growth of investment in non-owner occupied properties.
Defaults. The claim cycle on private mortgage insurance begins with the insurers
receipt of notification of a default on an insured loan from the lender. We define a default as an
insured loan with a mortgage payment that is 45 days or more past due. Lenders are required to
notify us 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, rates of
housing price appreciation or depreciation and general borrower creditworthiness. Defaults that
are not cured result in a claim to us. See - Claims. 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. In addition, when a policy is
rescinded or a claim is denied we remove the default from our default
inventory.
15
The following table shows the number of primary and pool loans insured in the MGIC Book,
including loans insured in bulk transactions and A- and subprime loans, the related number of loans
in default and the percentage of loans in default, or default rate, as of December 31, 2005-2009:
Default Statistics for the MGIC Book
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December 31, |
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2009 |
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2008 |
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2007 |
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2006 |
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2005 |
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PRIMARY INSURANCE |
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Insured loans in force |
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1,360,456 |
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1,472,757 |
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1,437,432 |
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1,283,174 |
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1,303,084 |
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Loans in default(1) |
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250,440 |
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182,188 |
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107,120 |
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78,628 |
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85,788 |
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Default rate all loans |
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18.41 |
% |
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12.37 |
% |
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7.45 |
% |
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6.13 |
% |
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6.58 |
% |
Flow loans in default |
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185,828 |
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122,693 |
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61,352 |
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42,438 |
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47,051 |
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Default rate flow loans |
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15.46 |
% |
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9.51 |
% |
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4.99 |
% |
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4.08 |
% |
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4.52 |
% |
Bulk loans in force |
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158,089 |
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182,268 |
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208,903 |
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243,395 |
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263,225 |
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Bulk loans in default(2) |
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64,612 |
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59,495 |
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45,768 |
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36,190 |
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38,737 |
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Default rate bulk loans |
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40.87 |
% |
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32.64 |
% |
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21.91 |
% |
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14.87 |
% |
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14.72 |
% |
Prime loans in default(3) |
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150,642 |
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95,672 |
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49,333 |
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36,727 |
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41,395 |
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Default rate prime loans |
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13.29 |
% |
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7.90 |
% |
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4.33 |
% |
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3.71 |
% |
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4.11 |
% |
A-minus loans in default(3) |
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37,711 |
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31,907 |
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22,863 |
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18,182 |
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20,358 |
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Default rate A-minus loans |
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40.66 |
% |
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30.19 |
% |
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19.20 |
% |
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16.81 |
% |
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17.21 |
% |
Subprime loans in default(3) |
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13,687 |
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13,300 |
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12,915 |
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12,227 |
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13,762 |
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Default rate subprime loans |
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50.72 |
% |
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43.30 |
% |
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34.08 |
% |
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26.79 |
% |
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25.20 |
% |
Reduced documentation loans delinquent(4) |
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48,400 |
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41,309 |
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22,009 |
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11,492 |
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10,273 |
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Default rate reduced doc loans |
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45.26 |
% |
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32.88 |
% |
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15.48 |
% |
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8.19 |
% |
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8.39 |
% |
POOL INSURANCE |
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Insured loans in force |
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526,559 |
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603,332 |
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757,114 |
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766,453 |
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767,920 |
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Loans in default |
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44,231 |
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33,884 |
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25,224 |
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20,458 |
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23,772 |
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Percentage of loans in default (default rate) |
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8.40 |
% |
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5.62 |
% |
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3.33 |
% |
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2.67 |
% |
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3.10 |
% |
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(1) |
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At December 31, 2009, 2008 and 2007, 45,907, 45,482 and 39,704 loans in default,
respectively, related to Wall Street bulk transactions and at December 31, 2009, 2008, 2007, 2006
and 2005, 16,389, 13,275, 5,055, 2,906 and 1,914 loans in default, respectively, were in our claims
received inventory. |
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(2) |
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Among other things, the default rate for bulk loans is influenced by our decision to
stop writing the portion of our bulk business that we refer to as Wall Street bulk transactions.
This decision increases the default rate because it results in a greater percentage of the bulk
business consisting of vintages that traditionally have higher default rates. |
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(3) |
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We define prime loans as those having FICO credit scores of 620 or greater, A-minus
loans as those having FICO credit scores of 575-619, and subprime credit loans as those having FICO
credit scores of less than 575, all as reported to MGIC at the time a commitment to insure is
issued. Most A-minus and subprime credit loans were written through
the bulk channel. However, in this annual report we classify loans without complete documentation as reduced documentation loans regardless
of FICO credit score rather than as prime, A- or subprime loans.
|
|
(4) |
|
In accordance with industry practice, loans approved by GSE and other automated
underwriting (AU) systems under doc waiver programs that do not require verification of borrower
income are classified by us as full documentation. Based in part on information provided by the
GSEs, we estimate full documentation loans of this type were approximately 4% of 2007 new insurance
written. Information for other periods is not available. We understand these AU systems grant such
doc waivers for loans they judge to have higher credit quality. We also understand that the GSEs
terminated their doc waiver programs in the second half of 2008. |
16
Different areas 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 loans we insured that were in default as of December 31, 2009, 2008 and 2007 for the 15 states
for which we paid the most losses during 2009:
State Default Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
|
2007 |
California |
|
|
34.21 |
% |
|
|
25.17 |
% |
|
|
13.60 |
% |
Florida |
|
|
42.61 |
|
|
|
29.46 |
|
|
|
12.30 |
|
Michigan |
|
|
19.25 |
|
|
|
13.61 |
|
|
|
9.78 |
|
Arizona |
|
|
33.55 |
|
|
|
21.54 |
|
|
|
7.48 |
|
Nevada |
|
|
42.01 |
|
|
|
25.10 |
|
|
|
8.73 |
|
Georgia |
|
|
22.38 |
|
|
|
14.36 |
|
|
|
8.79 |
|
Illinois |
|
|
21.70 |
|
|
|
13.28 |
|
|
|
7.73 |
|
Ohio |
|
|
13.96 |
|
|
|
9.93 |
|
|
|
8.01 |
|
Minnesota |
|
|
18.12 |
|
|
|
13.17 |
|
|
|
9.07 |
|
Texas |
|
|
12.11 |
|
|
|
8.68 |
|
|
|
6.27 |
|
Virginia |
|
|
16.90 |
|
|
|
11.99 |
|
|
|
6.62 |
|
Indiana |
|
|
14.22 |
|
|
|
10.07 |
|
|
|
6.77 |
|
Massachusetts |
|
|
15.22 |
|
|
|
10.86 |
|
|
|
7.42 |
|
Colorado |
|
|
14.58 |
|
|
|
9.02 |
|
|
|
6.27 |
|
Missouri |
|
|
13.18 |
|
|
|
9.19 |
|
|
|
6.04 |
|
All other states |
|
|
14.14 |
|
|
|
9.10 |
|
|
|
5.95 |
|
The default inventory for the 15 states for which we paid the most losses during
2009, at the dates indicated, appears in the table below.
Default Inventory by State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
California |
|
|
19,661 |
|
|
|
14,960 |
|
|
|
6,925 |
|
Florida |
|
|
38,924 |
|
|
|
29,384 |
|
|
|
12,548 |
|
Michigan |
|
|
12,759 |
|
|
|
9,853 |
|
|
|
7,304 |
|
Arizona |
|
|
8,791 |
|
|
|
6,338 |
|
|
|
2,169 |
|
Nevada |
|
|
5,803 |
|
|
|
3,916 |
|
|
|
1,337 |
|
Georgia |
|
|
10,905 |
|
|
|
7,622 |
|
|
|
4,623 |
|
Illinois |
|
|
13,722 |
|
|
|
9,130 |
|
|
|
5,435 |
|
Ohio |
|
|
11,071 |
|
|
|
8,555 |
|
|
|
6,901 |
|
Minnesota |
|
|
4,674 |
|
|
|
3,642 |
|
|
|
2,478 |
|
Texas |
|
|
13,668 |
|
|
|
10,540 |
|
|
|
7,103 |
|
Virginia |
|
|
4,464 |
|
|
|
3,360 |
|
|
|
1,761 |
|
Indiana |
|
|
7,005 |
|
|
|
5,497 |
|
|
|
3,763 |
|
Massachusetts |
|
|
3,661 |
|
|
|
2,634 |
|
|
|
1,596 |
|
Colorado |
|
|
3,451 |
|
|
|
2,328 |
|
|
|
1,534 |
|
Missouri |
|
|
4,195 |
|
|
|
3,263 |
|
|
|
2,149 |
|
All other states |
|
|
87,686 |
|
|
|
61,166 |
|
|
|
39,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,440 |
|
|
|
182,188 |
|
|
|
107,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Claims. Claims result from defaults which are not cured. Whether a claim results
from an uncured default depends, in large part, on the borrowers equity in the home at the time of
default, the borrowers or the lenders ability to sell the home for an amount sufficient to
satisfy all amounts due under the mortgage and the willingness and ability of the borrower and
lender to enter into a loan modification that provides for a cure of the default. Various factors
affect the frequency and amount of claims, including local housing prices and employment levels,
and interest rates.
Under the terms of our master policy, the lender is required to file a claim for primary
insurance with us within 60 days after it has acquired title to the underlying property (typically
through foreclosure). Depending on the applicable state foreclosure law, generally at least twelve
months pass from the date of default to payment of a claim on an uncured default. The rate at
which claims are received and paid has slowed recently due to various state and lender foreclosure
moratoriums, servicing delays including as a result of attempts to modify loans, fraud
investigations by us, our pursuit of mitigation opportunities and a lack of capacity in the court
systems.
Within 60 days after a claim has been filed and all documents required to be submitted to
us have been delivered, we have the option of either (1) 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 (2) paying 100% of the claim amount in exchange
for the lenders conveyance of good and marketable title to the property to us. After we receive
title to properties, we sell them for our 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 typically received during the first two years
following issuance of coverage on a loan. This is typically followed by a period of rising claims
which, based on industry experience, has historically reached its highest level in the third and
fourth years after the year of loan origination. Thereafter, the number of claims typically
received has historically declined at a gradual rate, although the rate of decline can be affected
by conditions in the economy, including slowing home price appreciation or housing price
depreciation. Due in part to the subprime component of loans insured in Wall Street bulk
transactions, the peak claim period for bulk loans has generally occurred 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. Persistency, the condition of the economy, including
unemployment, and other factors can affect the pattern of claim activity. For example, a weak
economy can lead to claims from older books increasing, continuing at stable levels or experiencing
a lower rate of decline. We are currently seeing such performance as it relates to delinquencies
from our older books and all of our books are being affected by the condition of the economy and
housing price depreciation. As of December 31, 2009, 54% of the MGIC Book of primary insurance in
force had been written on or after January 1, 2007, although a portion of that insurance arose from
the refinancing of earlier originations. See - Insurance In Force by Policy Year.
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, the coverage percentage on the loan and local market
conditions. The average claim severity on the MGIC Book of primary insurance was $52,627 for 2009,
compared to $52,239 for 2008, and $37,165 in 2007. The continued increase in average claim
severity in 2009 was primarily a result of the default inventory containing higher loan exposures
with expected higher average claim payments.
18
Information about net claims we paid during 2007 through 2009 appears in the table below.
Net paid claims ($ millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Prime (FICO 620 & >) |
|
$ |
831 |
|
|
$ |
547 |
|
|
$ |
332 |
|
A-Minus (FICO 575-619) |
|
|
231 |
|
|
|
250 |
|
|
|
161 |
|
Subprime (FICO < 575) |
|
|
95 |
|
|
|
132 |
|
|
|
101 |
|
Reduced doc (All FICOs) |
|
|
388 |
|
|
|
395 |
|
|
|
190 |
|
Other |
|
|
104 |
|
|
|
48 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
Direct losses paid |
|
|
1,649 |
|
|
|
1,372 |
|
|
|
829 |
|
|
|
|
|
|
|
|
|
|
|
Reinsurance |
|
|
(41 |
) |
|
|
(19 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
Net losses paid |
|
$ |
1,608 |
|
|
$ |
1,353 |
|
|
$ |
817 |
|
|
|
|
|
|
|
|
|
|
|
LAE |
|
|
60 |
|
|
|
48 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
Net losses and LAE
before terminations |
|
|
1,668 |
|
|
|
1,401 |
|
|
|
870 |
|
|
|
|
|
|
|
|
|
|
|
Reinsurance terminations |
|
|
(119 |
) |
|
|
(265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and LAE paid |
|
$ |
1,549 |
|
|
$ |
1,136 |
|
|
$ |
870 |
|
|
|
|
|
|
|
|
|
|
|
Information regarding the 15 states for which we paid the most primary losses during
2009 appears in the table below.
Primary paid claims by state ($ millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
California |
|
$ |
253 |
|
|
$ |
316 |
|
|
$ |
82 |
|
Florida |
|
|
195 |
|
|
|
129 |
|
|
|
38 |
|
Michigan |
|
|
111 |
|
|
|
99 |
|
|
|
98 |
|
Arizona |
|
|
110 |
|
|
|
61 |
|
|
|
10 |
|
Nevada |
|
|
75 |
|
|
|
45 |
|
|
|
12 |
|
Georgia |
|
|
62 |
|
|
|
50 |
|
|
|
35 |
|
Illinois |
|
|
59 |
|
|
|
52 |
|
|
|
35 |
|
Ohio |
|
|
54 |
|
|
|
58 |
|
|
|
73 |
|
Minnesota |
|
|
52 |
|
|
|
43 |
|
|
|
34 |
|
Texas |
|
|
51 |
|
|
|
48 |
|
|
|
51 |
|
Virginia |
|
|
48 |
|
|
|
32 |
|
|
|
13 |
|
Indiana |
|
|
32 |
|
|
|
26 |
|
|
|
33 |
|
Massachusetts |
|
|
27 |
|
|
|
29 |
|
|
|
24 |
|
Colorado |
|
|
27 |
|
|
|
33 |
|
|
|
32 |
|
Missouri |
|
|
26 |
|
|
|
22 |
|
|
|
17 |
|
All other states |
|
|
363 |
|
|
|
281 |
|
|
|
197 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,545 |
|
|
|
1,324 |
|
|
|
784 |
|
Other |
|
|
4 |
|
|
|
(188 |
) |
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
Net paid claims |
|
$ |
1,549 |
|
|
$ |
1,136 |
|
|
$ |
870 |
|
|
|
|
|
|
|
|
|
|
|
From time to time, proposals to give bankruptcy judges the authority to reduce
mortgage balances in bankruptcy cases have been made. Such reductions are sometimes referred to as
bankruptcy cramdowns. A bankruptcy cramdown is not an event that entitles an insured party to make
a claim under our insurance policy. If a borrower ultimately satisfies his or her mortgage after a
bankruptcy cramdown, then our insurance policies provide that we would not be required to pay any
claim. Under our insurance policies, however, if a borrower re-defaults on a mortgage after a
bankruptcy cramdown, the claim we would be required to pay would be based upon the original,
unreduced loan balance. We are not aware of any bankruptcy cramdown proposals that would change
these provisions of our insurance policies.
19
Loss Mitigation. Before paying a claim, we can review the loan file to determine whether
we are required, under the applicable insurance policy, to pay the claim or whether we are entitled
to reduce the amount of the claim. For example, all of our insurance policies provide that we can
reduce or deny a claim if the servicer did not comply with its obligation to mitigate our loss by
performing reasonable loss mitigation efforts or diligently pursuing a foreclosure or bankruptcy
relief in a timely manner. We also do not cover losses resulting from property damage that has not
been repaired. We are currently reviewing the loan files for the majority of the claims submitted
to us.
In addition, subject to rescission caps in certain of our Wall Street bulk transactions,
all of our insurance policies allow us to rescind coverage under certain circumstances. Because we
review the loan origination documents and information as part of our normal processing when a claim
is submitted to us, rescissions occur most often after we have received a claim. Historically,
policy rescissions and claim denials, which we collectively refer to as rescissions and
variations of this term, were not a material portion of our claims resolved during a year. However,
beginning in 2008 rescissions have materially mitigated our paid and incurred losses. For further
information about our recent rescission rates, See Managements Discussion and Analysis of
Financial Condition and Results of Operations Losses
Losses Incurred in Item 7. While we have
a substantial pipeline of claims investigations that we expect will eventually result in
rescissions during 2010, we can give no assurance that rescissions will continue to mitigate paid
and incurred losses at the same level we have recently experienced. For further information, see
We may not continue to realize benefits from rescissions at the levels we have recently
experienced and we may not prevail in proceedings challenging whether our rescissions were proper
in Item 1A.
When we rescind coverage, we return all premiums previously paid to us under the policy
and are relieved of our obligation to pay a claim under the policy, although if the insured
disputes our right to rescind coverage, whether the requirements to rescind are met ultimately
would be determined by legal proceedings. Objections to rescission may be made
several years after we have rescinded an insurance policy. Countrywide has filed a lawsuit against
MGIC alleging that MGIC has denied, and continues to deny, valid mortgage insurance claims. We have
filed an arbitration case against Countrywide regarding rescissions. For more information about this lawsuit and
arbitration case, see the risk factor titled, We are subject to the risk of private litigation and
regulatory proceedings in Item 1A as well as Item 3,
Legal Proceedings. In addition, we continue to have discussions with other lenders
regarding their objections to rescissions that in the aggregate are material and are involved in
other arbitration proceedings with respect to an amount of
rescissions that are not material.
Most of our rescissions involve material misrepresentations made, or fraud committed, in connection
with the origination of a loan regarding information we received and relied upon when the loan was
insured. In general, our insurance policies allow us to rescind coverage if a material
misrepresentation is made and if the lender or related parties such as the originator and the
mortgage loan broker were aware of such misrepresentation. Ultimately, our ability to rescind
coverage for material misrepresentation requires a thorough investigation of the facts surrounding
the origination of the insured mortgage loan and the discovery of sufficient evidence regarding a
misrepresentation and the materiality of the misrepresentation. These types of investigations are
very fact-intensive, can be more difficult in reduced documentation and no documentation loan
scenarios and often depend on factors outside our control, including whether the borrower
cooperates with our investigation.
One of the loss mitigation techniques available to us is obtaining a deficiency judgment
against the borrower and attempting to recover some or all of the paid claim from the borrower.
However, eleven states, including Arizona, Illinois, Ohio, Texas and Virginia, prohibit mortgage
guaranty insurance companies from obtaining deficiency judgments if the applicable property is a
single-family home that the borrower lived in. In six other states, including California,
deficiency judgments are effectively
20
prohibited. Finally, some states, including, Florida, Indiana, Illinois and Ohio (when, in the
latter two states, there is a non-owner occupied property), have a judicial foreclosure process in
which a deficiency judgment is obtained. In our experience, the increased time and costs associated
with separate actions to obtain a deficiency judgment usually outweigh the potential benefits of
collecting the deficiency judgment. In recent years, recoveries on deficiency judgments have been
less than 1% of our paid claims. The recent increase in our paid claims has not been accompanied by
a similar increase in recoveries on deficiency judgments. This has occurred because the number of
borrowers against whom we are seeking deficiency judgments has not increased. This in turn is due
to our view that the number of borrowers whose credit quality would warrant our seeking deficiency
judgments has remained essentially unchanged despite the substantial increase in the number of
potential deficiency candidates.
Loss Reserves and Premium Deficiency Reserves
A significant period of time typically elapses between the time when a borrower defaults
on a mortgage payment, which is the event triggering a potential future claim payment by us, the
reporting of the default to us and the eventual payment of the claim related to the uncured default
or a rescission. To recognize the liability for unpaid losses related to outstanding reported
defaults, or default inventory, we establish loss reserves, representing the estimated percentage
of defaults which will ultimately result in a claim, which is known as the claim rate, and the
estimated severity of the claims which will arise from the defaults included in the default
inventory. Our loss reserve estimates are established based upon historical experience, including
rescission activity. In accordance with GAAP for the mortgage insurance industry, we generally do
not establish loss reserves for future claims on insured loans which are not currently in default.
We also establish reserves to provide for the estimated costs of settling claims, general
expenses of administering the claims settlement process, legal fees and other fees (loss
adjustment expenses), and for losses and loss adjustment expenses from defaults which have
occurred, but which have not yet been reported to us.
Our reserving process bases our estimates of future events on our past experience.
However, estimation of loss reserves is inherently judgmental and 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 further
information, see our risk factors in Item 1A, including the ones titled
Because we establish loss reserves only upon a loan default rather than based on estimates of our
ultimate losses, losses may have a disproportionate adverse effect on our earnings in certain
periods and Because loss reserve estimates are subject to uncertainties and are based on
assumptions that are currently very volatile, paid claims may be substantially different than our
loss reserves and We may not continue to realize benefits from rescissions at the levels we have
recently experienced and we may not prevail in proceedings challenging whether our rescissions were
proper.
After our reserves are initially established, we perform premium deficiency tests using
best estimate assumptions as of the testing date. We establish premium deficiency reserves, if
necessary, when the present value of expected future losses and expenses exceeds the present value
of expected future premium and already established reserves. In the fourth quarter of 2007, we
recorded premium deficiency reserves of $1,211 million relating to Wall Street bulk transactions
remaining in our insurance in force. As of December 31, 2009, this premium deficiency reserve was
$193 million. A premium deficiency reserve represents the present value of expected future losses
and expenses that exceeded the present value of expected future premium and already established
loss reserves on the applicable loans.
For further information about loss reserves, see Managements Discussion and
AnalysisResults of Consolidated OperationsLosses in
Item 7 and Note 8 to our consolidated
financial statements in Item 8.
21
Geographic Dispersion
The following table reflects the percentage of primary risk in force in the top 10 states
and top 10 core-based statistical areas for the MGIC Book at December 31, 2009:
Dispersion of Primary Risk in Force
Top 10 States
|
|
|
|
|
1. Florida |
|
|
8.0 |
% |
2. California |
|
|
7.6 |
|
3. Texas |
|
|
7.0 |
|
4. Illinois |
|
|
4.5 |
|
5. Pennsylvania |
|
|
4.4 |
|
6. Ohio |
|
|
4.3 |
|
7. Michigan |
|
|
3.8 |
|
8. Georgia |
|
|
3.5 |
|
9. New York |
|
|
3.4 |
|
10. Wisconsin |
|
|
2.7 |
|
|
|
|
|
Total |
|
|
49.2 |
% |
|
|
|
|
Top 10 Core-based statistical areas
|
|
|
|
|
1. Chicago-Naperville-Joliet |
|
|
3.1 |
% |
2. Atlanta-Sandy Springs-Marietta |
|
|
2.4 |
|
3. Houston-Baytown-Sugarland |
|
|
2.2 |
|
4. Washington-Arlington-Alexandria |
|
|
1.9 |
|
5. Phoenix-Mesa-Scottsdale |
|
|
1.7 |
|
6. Los Angeles-Long Beach-Glendale |
|
|
1.7 |
|
7. San Juan-Caguas-Guaynabo |
|
|
1.6 |
|
8. Riverside-San Bernardino-Ontario |
|
|
1.6 |
|
9. Philadelphia |
|
|
1.5 |
|
10. Dallas-Plano-Irving |
|
|
1.4 |
|
|
|
|
|
Total |
|
|
19.1 |
% |
|
|
|
|
The percentages shown above for various core-based statistical areas can be affected
by changes, from time to time, in the federal governments definition of a core-based statistical
area.
22
Insurance In Force by Policy Year
The following table sets forth for the MGIC Book the dispersion of our primary insurance
in force as of December 31, 2009, by year(s) of policy origination since we began operations in
1985:
Primary Insurance In Force by Policy Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy Year |
|
Flow |
|
|
Bulk |
|
|
Total |
|
|
Percent of Total |
|
|
(In millions of dollars) |
1985-2002 |
|
$ |
11,906 |
|
|
$ |
2,118 |
|
|
$ |
14,024 |
|
|
|
6.6 |
% |
2003 |
|
|
10,486 |
|
|
|
1,839 |
|
|
|
12,325 |
|
|
|
5.8 |
|
2004 |
|
|
11,816 |
|
|
|
1,976 |
|
|
|
13,792 |
|
|
|
6.5 |
|
2005 |
|
|
18,368 |
|
|
|
4,747 |
|
|
|
23,115 |
|
|
|
10.9 |
|
2006 |
|
|
23,704 |
|
|
|
9,688 |
|
|
|
33,392 |
|
|
|
15.7 |
|
2007 |
|
|
54,201 |
|
|
|
6,165 |
|
|
|
60,366 |
|
|
|
28.5 |
|
2008 |
|
|
36,071 |
|
|
|
614 |
|
|
|
36,685 |
|
|
|
17.3 |
|
2009 |
|
|
18,483 |
|
|
|
|
|
|
|
18,483 |
|
|
|
8.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
185,035 |
|
|
$ |
27,147 |
|
|
$ |
212,182 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk In Force and Product Characteristics of Risk in Force
At both December 31, 2009 and 2008, 97% of our risk in force was primary insurance and
the remaining risk in force was pool insurance. The following table sets forth for the MGIC Book
the dispersion of our primary risk in force as of December 31, 2009, by year(s) of policy
origination since we began operations in 1985:
Primary Risk In Force by Policy Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy Year |
|
Flow |
|
|
Bulk |
|
|
Total |
|
|
Percent of Total |
|
|
(In millions of dollars) |
1985-2002 |
|
$ |
3,058 |
|
|
$ |
579 |
|
|
$ |
3,637 |
|
|
|
6.7 |
% |
2003 |
|
|
2,810 |
|
|
|
546 |
|
|
|
3,356 |
|
|
|
6.2 |
|
2004 |
|
|
3,216 |
|
|
|
555 |
|
|
|
3,771 |
|
|
|
6.9 |
|
2005 |
|
|
4,886 |
|
|
|
1,456 |
|
|
|
6,342 |
|
|
|
11.7 |
|
2006 |
|
|
6,103 |
|
|
|
2,952 |
|
|
|
9,055 |
|
|
|
16.6 |
|
2007 |
|
|
13,889 |
|
|
|
1,499 |
|
|
|
15,388 |
|
|
|
28.3 |
|
2008 |
|
|
8,812 |
|
|
|
140 |
|
|
|
8,952 |
|
|
|
16.5 |
|
2009 |
|
|
3,842 |
|
|
|
|
|
|
|
3,842 |
|
|
|
7.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
46,616 |
|
|
$ |
7,727 |
|
|
$ |
54,343 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
23
The following table reflects at the dates indicated the (1) total dollar amount of
primary risk in force for the MGIC Book and (2) percentage of that primary risk in force, as
determined on the basis of information available on the date of mortgage origination, by the
categories indicated.
Characteristics of Primary Risk in Force
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Direct Risk in Force (In Millions): |
|
$ |
54,343 |
|
|
$ |
58,981 |
|
|
|
|
|
|
|
|
|
|
Loan-to-value ratios:(1) |
|
|
|
|
|
|
|
|
100s |
|
|
28.2 |
% |
|
|
29.6 |
% |
95s |
|
|
29.5 |
|
|
|
29.1 |
|
90s(2) |
|
|
37.0 |
|
|
|
35.6 |
|
80s |
|
|
5.3 |
|
|
|
5.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
Loan Type: |
|
|
|
|
|
|
|
|
Fixed(3) |
|
|
90.5 |
% |
|
|
89.3 |
% |
Adjustable rate mortgages (ARMs)(4) |
|
|
9.5 |
|
|
|
10.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
Original Insured Loan Amount:(5) |
|
|
|
|
|
|
|
|
Conforming loan limit and below |
|
|
94.7 |
% |
|
|
94.3 |
% |
Non-conforming |
|
|
5.3 |
|
|
|
5.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
Mortgage Term: |
|
|
|
|
|
|
|
|
15-years and under |
|
|
1.2 |
% |
|
|
1.1 |
% |
Over 15 years |
|
|
98.8 |
|
|
|
98.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Type: |
|
|
|
|
|
|
|
|
Single-family(6) |
|
|
89.3 |
% |
|
|
89.7 |
% |
Condominium |
|
|
9.6 |
|
|
|
9.3 |
|
Other(7) |
|
|
1.1 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
Occupancy Status: |
|
|
|
|
|
|
|
|
Primary residence |
|
|
93.5 |
% |
|
|
93.1 |
% |
Second home |
|
|
3.4 |
|
|
|
3.5 |
|
Non-owner occupied |
|
|
3.1 |
|
|
|
3.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
Documentation: |
|
|
|
|
|
|
|
|
Reduced documentation(8) |
|
|
10.8 |
% |
|
|
12.0 |
% |
Full documentation |
|
|
89.2 |
|
|
|
88.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
FICO Score:(9) |
|
|
|
|
|
|
|
|
Prime (FICO 620 and above) |
|
|
91.4 |
% |
|
|
90.7 |
% |
A Minus (FICO 575 619) |
|
|
6.7 |
|
|
|
7.2 |
|
Subprime (FICO below 575) |
|
|
1.9 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
(1) |
|
Loan-to-value ratio represents the ratio (expressed as a percentage) of the dollar amount of the first mortgage loan to
the value of the property at the time the loan became insured and does not reflect subsequent housing price
appreciation or depreciation. Subordinate mortgages may also be present. For purposes of the table, loan-to-value
ratios are classified as in excess of 95% ( 100s, a classification that includes 97% to 103% loan-to-value ratio
loans); in excess of 90% loan-to-value ratio and up to 95% loan-to-value ratio (95s); in excess of 80% loan-to-value
ratio and up to 90% loan-to-value ratio (90s); and equal to or less than 80% loan-to-value ratio (80s). |
24
|
|
|
(2) |
|
We include in our 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, 2009 and 2008, 1.3% and
1.2%, 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), ARMs in which the initial interest
rate is fixed for at least five years and balloon payment mortgages (a loan with a maturity, typically five to seven
years, that is shorter than the loans amortization period). |
|
(4) |
|
Includes ARMs where payments adjust fully with interest rate adjustments. Also includes pay option ARMs and other ARMs
with negative amortization features, which collectively at December 31, 2009, 2008 and 2007, represented 3.5%, 3.8% and
4.5%, respectively, of primary risk in force. As indicated in note (3), does not include ARMs in which the initial
interest rate is fixed for at least five years. As of December 31, 2009, 2008 and 2007, ARMs with loan-to-value ratios
in excess of 90% represented 2.3%, 2.7% and 4.0%, respectively, of primary risk in force. |
|
(5) |
|
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
adjustment and was $417,000 for 2007 and early 2008; this amount was temporarily increased to up to $729,500 in the
most costly communities in early 2008 and remained at such level throughout 2009. Non-conforming loans are loans with
an original principal balance above the conforming loan limit. |
|
(6) |
|
Includes townhouse-style attached housing with fee simple ownership. |
|
(7) |
|
Includes cooperatives and manufactured homes deemed to be real estate. |
|
(8) |
|
Reduced documentation loans, many of which are commonly referred to as Alt-A loans, are originated under programs in
which there is a reduced level of verification or disclosure compared to traditional mortgage loan underwriting,
including programs in which the borrowers income and/or assets are disclosed in the loan application but there is no
verification of those disclosures and programs in which there is no disclosure of income or assets in the loan
application. At December 31, 2009, 2008 and 2007, reduced documentation loans represented 6.1%, 6.8% and 8.2%,
respectively, of risk in force written through the flow channel and 38.9%, 40.3% and 41.2%, respectively of risk in
force written through the bulk channel. In accordance with industry practice, loans approved by GSE and other
automated underwriting (AU) systems under doc waiver programs that do not require verification of borrower income are
classified by us as full documentation. Based in part on information provided by the GSEs, we estimate full
documentation loans of this type were approximately 4% of 2007 new insurance written. Information for other periods is
not available. We understand these AU systems grant such doc waivers for loans they judge to have higher credit
quality. We also understand that the GSEs terminated their doc waiver programs in the second half of 2008. |
|
(9) |
|
Represents the FICO score at loan origination. The weighted average FICO score at loan origination for new insurance
written in 2009, 2008 and 2007 was 760, 733 and 691, respectively. |
C. Other Business and Joint Ventures
We provide various mortgage services for the mortgage finance industry, such as portfolio
retention and secondary marketing of mortgage-related assets. Our eMagic.com LLC subsidiary
provides an Internet portal through which mortgage industry participants can access products and
services of wholesalers, investors and vendors necessary to make a home mortgage loan. Using the
trade name Myers Internet, eMagic.com also provides website hosting, design and marketing solutions
for mortgage originators and real estate agents.
For information about our Australian operations, see Managements Discussion and
Analysis of Financial Condition and Results of Operations
Overview Australia in Item 7.
At December 31, 2009, we owned approximately 45.5% of the equity interest in C-BASS,
which prior
25
to 2008 was one of our principal joint ventures included in the Income from joint
ventures, net of tax
line in our Consolidated Statement of Operations. A third party has an option that expires in
December 2014 to purchase 22.5% of C-BASS equity from us for an exercise price of $2.5 million.
C-BASS is a joint venture with its senior management and Radian Group Inc. that was formerly
engaged principally in the business of investing in the credit risk of subprime single-family
residential mortgages. In 2007, C-BASS ceased its operations and is managing its portfolio pursuant
to a consensual, non-bankruptcy restructuring, under which its assets are to be paid out over time
to its secured and unsecured creditors. For further information about C-BASS, see Managements
Discussion and AnalysisResults of Consolidated Operations
in Item 7 and Note 10 to our
consolidated financial statements in Item 8.
Until August 2008, when we sold our entire interest in Sherman to Sherman, Sherman was a
joint venture with its senior management and Radian Group Inc. Our interest sold represented
approximately 24.25% of Shermans equity. In September 2007, we sold certain interests in Sherman
for approximately $240.8 million. For further information about Sherman, which during 2008 was our
principal joint venture included in the Income from joint ventures, net of tax line in our
Consolidated Statement of Operations, see Managements Discussion and AnalysisResults of
Consolidated Operations in Item 7 and Note 10 to our
consolidated financial statements in Item 8.
D. Investment Portfolio
Policy and Strategy
At December 31, 2009, the fair value of our investment portfolio and cash and cash
equivalents was approximately $8.4 billion. As of December 31, 2009, approximately $84 million of
our portfolio was held at the parent company level and the remainder of our portfolio was held by
our subsidiaries, primarily MGIC. The portion of our portfolio that is held at the parent company
level is held in cash or cash equivalents. The remainder of the discussion of our investment
portfolio refers to our investment portfolio only and not to cash and cash equivalents.
Approximately 59% of our investment portfolio is managed by either BlackRock, Inc. or
Wellington Management Company, LLP, although we maintain overall control of investment policy and
strategy. We maintain direct management of the remainder of our investment portfolio.
26
Our current policies emphasize preservation of capital, as well as total return.
Therefore, our investment portfolio consists almost entirely of high-quality, fixed-income
investments. We seek liquidity through diversification and investment in publicly traded
securities. We attempt to maintain a level of liquidity commensurate with our perceived business
outlook and the expected timing, direction and degree of changes in interest rates. During 2009, we
reduced the proportion of our investment portfolio in tax exempt municipal securities while
increasing the proportion of taxable securities principally since the tax benefits of holding tax
exempt municipal securities are no longer available based on our current net loss position. Our
investment policies in effect at December 31, 2009 limited investments in the securities of a
single issuer, other than the U.S. government, and generally limit the purchase of fixed income
securities to those that are rated investment grade by at least one rating agency. At that date,
the maximum aggregate book value of the holdings of a single obligor or non-government money market
mutual fund was:
|
|
|
U.S. government securities
|
|
No limit |
Pre-refunded municipals escrowed in Treasury securities
|
|
No limit(1) |
U.S. government agencies (in total)(2)
|
|
15% of portfolio market value |
Securities rated AA or AAA
|
|
3% of portfolio market value |
Securities rated Baa or A
|
|
2% of portfolio market value |
|
|
|
|
|
(1) |
|
No limit subject to liquidity considerations. |
|
(2) |
|
As used with respect to our investment portfolio, U.S.
government agencies include GSEs (which, in the sector
table below are included as part of U.S. Treasuries),
Federal Home Loan Banks and the Tennessee Valley
Authority. |
At December 31, 2009, based on amortized cost, approximately 94% of our total fixed
income investment portfolio was invested in securities rated A or better, with 47% rated AAA
and 30% rated AA, in each case by at least one nationally recognized securities rating
organization. For information related to the portion of our investment portfolio that is insured
by financial guarantors, see Managements Discussion and Analysis of Financial Condition and
Results of Operations Financial Condition in Item 7.
Our investment policies and strategies are subject to change depending upon regulatory,
economic and market conditions and our existing or anticipated financial condition and operating
requirements, including our tax position.
Investment Operations
At December 31, 2009, tax exempt and taxable municipal securities represented 63.7% of
the fair value of our total investment portfolio and derivative financial instruments in our
investment portfolio were immaterial. During 2009 we began shifting
our portfolio to a
higher concentration of taxable securities, as reflected in the table below. Securities due within
one year, within one to five years, within five to ten years, and after ten years, represented
2.6%, 35.0%, 20.5% and 33.7%, respectively, of the total fair value of our investment in debt
securities. Auction rate and mortgage-backed securities represented 6.8% and 1.4%, respectively, of
the total fair value of our investment in debt securities. Our pre-tax yield for 2009 was 3.6%,
compared to pre-tax yields of 3.9% and 4.7% in 2008 and 2007, respectively.
27
Our ten largest holdings at December 31, 2009 appear in the table below:
|
|
|
|
|
|
|
Fair Value |
|
|
|
(in thousands |
|
|
|
of dollars) |
|
1. New York, NY |
|
$ |
80,846 |
|
2. Sales Tax Asset Receivable |
|
|
60,254 |
|
3. Montana State Higher Student Assist |
|
|
58,766 |
|
4. Penn State Higher Educ Asst |
|
|
48,493 |
|
5 North Carolina Municipal Power |
|
|
48,190 |
|
6. San Joaquin Hills California |
|
|
47,983 |
|
7. Brazos Texas Higher Education |
|
|
46,656 |
|
8. Bank of America Corp |
|
|
45,658 |
|
9. New York
City Water Fin Authority |
|
|
40,219 |
|
10. Florida St. Brd Ed Lottery Rev |
|
|
39,578 |
|
|
|
|
|
|
|
$ |
516,643 |
|
|
|
|
|
|
|
|
|
|
Note: This table excludes securities issued by U.S. government,
U.S. government agencies, GSEs, Federal Home Loan Banks and the
Tennessee Valley Authority. |
The sectors of our investment portfolio at December 31, 2009 appear in the table below:
|
|
|
|
|
|
|
Percentage of |
|
|
|
Portfolios |
|
|
|
Fair Value |
|
1. Municipal |
|
|
55.8 |
% |
2. Corporate |
|
|
18.4 |
|
3. U.S. Treasuries |
|
|
12.2 |
|
4. Taxable Municipals |
|
|
7.9 |
|
5. Asset Backed |
|
|
3.9 |
|
6. Foreign |
|
|
1.6 |
|
7. Other Taxable |
|
|
0.2 |
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
For further information concerning investment operations, see Note 4 to our
consolidated financial statements in Item 8.
E. Regulation
Direct Regulation
We are subject to comprehensive, detailed regulation by state insurance departments. These
regulations are principally designed for the protection of our insured policyholders, rather than
for the benefit of investors. Although their scope varies, state insurance laws generally grant
broad supervisory powers to agencies or officials to examine insurance companies and enforce rules
or exercise discretion affecting almost every significant aspect of the insurance business. Given
the recent significant losses incurred by us and many other insurers in the mortgage and financial guaranty
industries, our insurance subsidiaries have been subject to heightened scrutiny by insurance
regulators. State insurance regulatory authorities could take actions, including changes in capital
requirements or termination of waivers of capital requirements, that could have a material adverse
effect on us.
In general, regulation of our subsidiaries business relates to:
|
|
licenses to transact business;
|
|
|
|
policy forms; |
28
|
|
premium rates; |
|
|
|
insurable loans; |
|
|
|
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 New York
Insurance Department and a January 31, 2000 letter from the Illinois Department of Insurance, see
The MGIC BookTypes of ProductPool Insurance and We are subject to the risk of private
litigation and regulatory proceedings in Item 1A. For a description of limits on dividends
payable, see Managements Discussion and
AnalysisLiquidity and Capital Resources in Item 7 and
Note 13 to our consolidated financial statements in Item 8.
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 insurers loss experience, expenses and future trend
analysis. The general mortgage default experience may also be considered. Premium rates are subject
to review and challenge by state regulators. See Managements Discussion and Analysis
Liquidity and Capital Resources Capital in Item 7 for information about regulations governing
our capital adequacy, information about our current capital and our expectations regarding our
future capital position.
We are required to establish statutory accounting contingency loss reserves in an amount equal
to 50% of net earned premiums. These amounts cannot be withdrawn for a period of 10 years, except
as permitted by insurance regulations. With regulatory approval a mortgage guaranty insurance
company may make early withdrawals from the contingency reserve when incurred losses exceed 35% of
net premiums earned in a calendar year. For further information, see Note 13 to our
consolidated financial statements in Item 8.
Mortgage insurers are generally single-line companies, restricted to writing residential
mortgage insurance business only. Although we, as an insurance holding company, are prohibited from
engaging in certain transactions with MGIC, MIC or our other insurance subsidiaries without
submission to and, in some instances, prior approval of applicable insurance departments, we are
not subject to insurance
29
company regulation on our non-insurance businesses.
Wisconsins insurance regulations generally provide that no person may acquire control of us
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. In
addition, the insurance regulations of other states in which MGIC and/or MIC are licensed insurers
require notification to the states insurance department a specified time before a person acquires
control of us. If regulators in these states disapprove the change of control, our licenses to
conduct business in the disapproving states could be terminated. For further information about
regulatory proceedings applicable to us and our industry, see We are subject to the risk of
private litigation and regulatory proceedings in Item 1A.
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 them to be eligible to insure loans sold to the GSEs. These
requirements are subject to change from time to time. Currently, both MGIC and MIC are approved
mortgage insurers for both Freddie Mac and Fannie Mae but their longer term eligibility could be
negatively affected as discussed, under While our plan to write
new insurance in MGIC Indemnity Corporation (MIC) has received Wisconsin
OCI and GSE approval, we cannot guarantee that its implementation will allow us to continue to
write new insurance on an uninterrupted basis throughout the United States in the future and MGIC may not continue to meet the
GSEs mortgage insurer eligibility requirements in Item 1A. In September 2008, the FHFA was
appointed as the conservator of both of the GSEs. The Obama administration and certain members of
Congress have publicly stated that they are considering proposing significant changes to domestic
housing policies and regulations including those applicable to the GSEs. As a result, it is
uncertain what role that the GSEs will play in the domestic
residential housing finance system in the future.
For additional information about the potential impact that any such changes in the GSEs roles may
have on us, see the risk factor titled Changes in the business practices of the GSEs, federal
legislation that changes their charters or a restructuring of the GSEs could reduce our revenues or
increase our losses in Item 1A and Managements Discussion and Analysis of Financial Condition
and Results of Operations Overview Fannie Mae and
Freddie Mac in Item 7.
The GSEs have approved the terms of our master policy. Any new master policy, or material
changes to our existing master policy, would be subject to approval by the GSEs.
Indirect Regulation
We 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 the Veterans Administration, and lenders. See Changes in the
business practices of the GSEs, federal legislation that changes their charters or a restructuring
of the GSEs could reduce our revenues or increase our losses in Item 1A for a discussion of how
potential changes in the GSEs business practices could affect us. 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. 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
We are subject to the risk of private litigation and regulatory proceedings in Item 1A.
30
The Office of Thrift Supervision, the Office of the Comptroller of the Currency, 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 a loan-to-value ratio 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 these 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 risk factor
titled Changes in the business practices of the GSEs, federal legislation that changes their
charters or a restructuring of the GSEs could reduce our revenues or increase our losses. in Item
1A.
F. Employees
At December 31, 2009, we had approximately 1,020 full- and part-time employees, of whom
approximately 27% were assigned to our 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. In recent years, the number of
on-call employees has ranged from fewer than 125 to more than 350.
G. Website Access
We make available, free of charge, through our Internet website our Annual Reports 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 we electronically file these materials with the Securities and
Exchange Commission. The address of our website is http://mtg.mgic.com, and such reports and
amendments are accessible through the Investor Information and Stockholder Information links at
such address.
Item 1A. Risk Factors.
Forward-Looking Statements and Risk Factors
Our revenues and losses may be affected by the risk factors discussed below. These risk
factors are an integral part of this annual report.
These factors may also cause actual results to differ materially from the results contemplated
by forward looking statements that we may make. Forward looking statements consist of statements
which relate to matters other than historical fact, including matters that inherently refer to
future events. Among others, statements that include words such as we believe, anticipate, or
expect, or words of similar import, are forward looking statements. We are not undertaking any
obligation to update any forward looking statements or other statements we may make even though
these statements may be affected by events or circumstances occurring after the forward looking
statements or other statements were made. No reader of this annual report should rely on the fact
that such statements are current at any time other than the time at which this annual report was
filed with the Securities and Exchange Commission.
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While
our plan to write new insurance in MGIC Indemnity Corporation (MIC) has received Wisconsin
OCI and GSE approval, we cannot guarantee that its implementation will allow us to continue to
write new insurance on an uninterrupted basis throughout the United States in the future.
For some time, we have been working to implement a plan to write new mortgage insurance in
MIC, which is driven by our belief that in the future MGIC will not meet minimum regulatory capital
requirements to write new business and may not be able to obtain appropriate waivers of these
requirements in all jurisdictions in which they are present. Absent the waiver granted by the
Office of the Commissioner of Insurance for the State of Wisconsin (OCI) referred to below, a
failure to meet Wisconsins minimum capital requirements would have prevented MGIC from writing new
business anywhere. Also, absent a waiver in a particular jurisdiction, failure of MGIC to meet
minimum capital requirements of that jurisdiction would prevent MGIC from writing business there.
In addition to Wisconsin, these minimum capital requirements are present in 16 jurisdictions while
the remaining jurisdictions in which MGIC does business do not have specific capital requirements
applicable to mortgage insurers. Before MIC can begin writing new business, it must obtain or
update licenses in the jurisdictions where it will transact business.
In October 2009, we, MGIC and MIC entered into an agreement with Fannie Mae (the Fannie Mae
Agreement) under which MGIC agreed to contribute $200 million to MIC (which MGIC has done) and
Fannie Mae approved MIC as an eligible mortgage insurer through December 31, 2011 subject to the
terms of the Fannie Mae Agreement. Under the Fannie Mae Agreement, MIC will be eligible to write
mortgage insurance only in those 16 other jurisdictions in which MGIC cannot write new insurance
due to MGICs failure to meet regulatory capital requirements applicable to mortgage insurers and
if MGIC fails to obtain relief from those requirements or a specified waiver of them. The Fannie
Mae Agreement, including certain restrictions imposed on us, MGIC and MIC, is summarized more fully
in, and included as an exhibit to, our Form 8-K filed with the Securities and Exchange Commission
on October 16, 2009.
On February 11, 2010, Freddie Mac notified (the Freddie Mac Notification) MGIC that we may
utilize MIC to write new business in states in which MGIC does not meet minimum regulatory capital
requirements to write new business and does not obtain appropriate waivers of those requirements.
This conditional approval to use MIC as a Limited Insurer will expire December 31, 2012, includes
terms substantially similar to those in the Fannie Mae Agreement and is summarized more fully in
our Form 8-K filed with the Securities and Exchange Commission on February 16, 2010.
In December 2009, the OCI issued an order waiving, until December 31, 2011, the requirement
that MGIC maintain a specific level of minimum policyholders position to write new business. The
waiver may be modified, terminated or extended by the OCI in its sole discretion. In December
2009, the OCI
also approved a transaction under which MIC will be eligible to write new mortgage guaranty
insurance policies only in jurisdictions where MGIC does not meet minimum capital requirements
similar to those waived by the OCI and does not obtain a waiver of those requirements from that
jurisdictions regulatory authority. MGIC has applied for waivers in all jurisdictions that have
the regulatory capital requirements. MGIC has received similar waivers from some of these states.
These waivers expire at various times, with the earliest expiration being December 31, 2010. Some
jurisdictions have denied the request because a waiver is not authorized under the jurisdictions
statutes or regulations and others may deny the request on other grounds. There can be no
assurances that MIC will receive the necessary approvals from any or all of the jurisdictions in
which MGIC would be prohibited from continuing to write new business due to MGICs failure to meet
applicable regulatory capital requirements or obtain waivers of those requirements.
32
Under the Fannie Mae Agreement, MIC has been approved as an eligible mortgage insurer only
through December 31, 2011 and Freddie Mac has approved MIC as a Limited Insurer only through
December 31, 2012. Whether MIC will continue as an eligible mortgage insurer after these dates will
be determined by the applicable GSEs mortgage insurer eligibility requirements then in effect.
Further, under the Fannie Mae Agreement and the Freddie Mac Notification, MGIC cannot capitalize
MIC with more than the $200 million contribution without prior approval from each GSE, which limits
the amount of business MIC can write. We believe that the amount of capital that MGIC has
contributed to MIC will be sufficient to write business for the term of the Fannie Mae Agreement in
the jurisdictions in which MIC is eligible to do so. Depending on the level of losses that MGIC
experiences in the future, however, it is possible that regulatory action by one or more
jurisdictions, including those that do not have specific regulatory capital requirements applicable
to mortgage insurers, may prevent MGIC from continuing to write new insurance in some or all of the
jurisdictions in which MIC is not eligible to write business.
A failure to meet the specific minimum regulatory capital requirements to insure new business
does not mean that MGIC does not have sufficient resources to pay claims on its insurance. Even in
scenarios in which losses materially exceed those that would result in not meeting such
requirements, we believe that we have claims paying resources at MGIC that exceed our claim
obligations on our insurance in force. Our estimates of our claims paying resources and claim
obligations are based on various assumptions. These assumptions include our anticipated rescission
activity, future housing values and future unemployment rates. These assumptions are subject to
inherent uncertainty and require judgment by management. Current conditions in the domestic economy
make the assumptions about housing values and unemployment more volatile than they would otherwise
be. Our anticipated rescission activity is also subject to volatility.
We may not continue to realize benefits from rescissions at the levels we have recently experienced
and we may not prevail in proceedings challenging whether our rescissions were proper.
Historically, claims submitted to us on policies we rescinded were not a material portion of
our claims resolved during a year. However, beginning in 2008 rescissions have materially mitigated
our paid losses. In 2009, rescissions mitigated our paid losses by $1.2 billion, which includes
amounts that would have resulted in either a claim payment or been charged to a deductible under a
bulk or pool policy, and may have been charged to a captive reinsurer. While we have a substantial
pipeline of claims investigations that we expect will eventually result in future rescissions, we
can give no assurance that rescissions will continue to mitigate paid losses at the same level we
have recently experienced.
In addition, if the insured disputes our right to rescind coverage, whether the requirements
to rescind are met ultimately would be determined by legal proceedings.
Objections to rescission may be made several years after we have
rescinded an insurance policy. Countrywide and an affiliate
(Countrywide) have filed a lawsuit against MGIC alleging that MGIC has denied, and continues to deny, valid
mortgage insurance claims. We have filed an arbitration case against
Countrywide regarding rescissions. For more
information about this lawsuit and arbitration case, see the risk factor titled, We are subject to
the risk of private litigation and regulatory proceedings as
well as Item 3, Legal Proceedings. In addition, we continue to have
discussions with other lenders regarding their objections to rescissions that in the aggregate are
material and are involved in other arbitration proceedings with
33
respect to
an amount of rescissions that are not material.
In
addition, our loss reserving methodology incorporates the effects
rescission activity is expected to have on the losses we will pay on our delinquent inventory. A variance between ultimate
actual rescission rates and these estimates could materially affect our losses. See the risk factor
titled, Because loss reserve estimates are subject to uncertainties and are based on assumptions
that are currently very volatile, paid claims may be substantially different than our loss
reserves.
Changes in the business practices of the GSEs, federal legislation that changes their charters or a
restructuring of the GSEs could reduce our revenues or increase our losses.
The majority of our insurance written is for loans sold to Fannie Mae and Freddie Mac. As a
result, the business practices of the GSEs affect the entire relationship between them and mortgage
insurers and include:
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the level of private mortgage insurance coverage, subject to the
limitations of the GSEs charters (which may be changed by federal
legislation) when private mortgage insurance is used as the required
credit enhancement on low down payment mortgages, |
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the amount of loan level delivery fees (which result in higher costs
to borrowers) that the GSEs assess on loans that require mortgage
insurance, |
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whether the GSEs influence the mortgage lenders selection of the
mortgage insurer providing coverage and, if so, any transactions that
are related to that selection, |
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the underwriting standards that determine what loans are eligible for
purchase by the GSEs, which can affect the quality of the risk insured
by the mortgage insurer and the availability of mortgage loans, |
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the terms on which mortgage insurance coverage can be canceled before
reaching the cancellation thresholds established by law, and |
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the programs established by the GSEs intended to avoid or mitigate
loss on insured mortgages and the circumstances in which mortgage
servicers must implement such programs. |
In September 2008, the Federal Housing Finance Agency (FHFA) was appointed as the
conservator of the GSEs. As their conservator, FHFA controls and directs the operations of the
GSEs. The appointment of FHFA as conservator, the increasing role that the federal government has
assumed in the residential mortgage market, our industrys inability, due to capital constraints,
to write sufficient business to meet the needs of the GSEs or other factors may increase the
likelihood that the business practices of the GSEs change in ways that may have a material adverse
effect on us. In addition, these factors may increase the likelihood that the charters of the GSEs
are changed by new federal legislation. Such changes may allow the GSEs to reduce or eliminate the
level of private mortgage insurance coverage that they use as credit enhancement. The Obama
administration and certain members of Congress have publicly stated that that they are considering
proposing significant changes to the GSEs. As a result, it is uncertain what role that the GSEs
will play in the domestic residential housing finance system in the future.
For a number of years, the GSEs have had programs under which on certain loans lenders could
choose a mortgage insurance coverage percentage that was only the minimum required by their
charters, with the GSEs paying a lower price for these loans (charter coverage). The GSEs have
also had
34
programs under which on certain loans they would accept a level of mortgage insurance
above the requirements of their charters but below their standard coverage without any decrease in
the purchase price they would pay for these loans (reduced coverage). Effective January 1, 2010,
Fannie Mae broadly expanded the types of loans eligible for charter coverage. Fannie Mae has also
announced that it would eliminate its reduced coverage program in the
second quarter of 2010. In recent years, a majority of our volume was on loans with GSE standard coverage, a
substantial portion of our volume has been on loans with reduced coverage, and a minor portion of
our volume has been on loans with charter coverage. We charge higher premium rates for higher
coverages. To the extent lenders selling loans to Fannie Mae choose charter coverage for loans that
we insure, our revenues would be reduced and we could experience other adverse effects.
Both of the GSEs have policies which provide guidelines on terms under which they can conduct
business with mortgage insurers with financial strength ratings below Aa3/AA-. For information
about how these policies could affect us, see the risk factor titled MGIC may not continue to meet
the GSEs mortgage insurer eligibility requirements.
Downturns in the domestic economy or declines in the value of borrowers homes from their value at
the time their loans closed may result in more homeowners defaulting and our losses increasing.
Losses result from events that reduce a borrowers ability to continue to make mortgage
payments, such as unemployment, and whether the home of a borrower who defaults on his mortgage can
be sold for an amount that will cover unpaid principal and interest and the expenses of the sale.
In general, favorable economic conditions reduce the likelihood that borrowers will lack sufficient
income to pay their mortgages and also favorably affect the value of homes, thereby reducing and in
some cases even eliminating a loss from a mortgage default. A deterioration in economic conditions,
including unemployment, generally increases the likelihood that borrowers will not have sufficient
income to pay their mortgages and can also adversely affect housing values, which in turn can
influence the willingness of borrowers with sufficient resources to make mortgage payments to do so
when the mortgage balance exceeds the value of the home. Housing values may decline even absent a
deterioration in economic conditions due to declines in demand for homes, which in turn may result
from changes in buyers perceptions of the potential for future appreciation, restrictions on
mortgage credit due to more stringent underwriting standards, liquidity issues affecting lenders or
other factors. The residential mortgage market in the United States has for some time experienced a
variety of worsening economic conditions, including a material decline in housing values that has
been nationwide, with declines continuing in a number of areas. The recession that began in
December 2007 may result in further deterioration in home values and employment. In addition, even
were this recession to end formally, home values may continue to deteriorate and unemployment
levels may continue to increase or remain elevated.
The mix of business we write also affects the likelihood of losses occurring.
Even when housing values are stable or rising, certain types of mortgages have higher
probabilities of claims. These segments include loans with loan-to-value ratios over 95% (including
loans with 100% loan-to-value ratios or in certain markets that have experienced declining housing
values, over 90%), FICO credit scores below 620, limited underwriting, including limited borrower
documentation, or total debt-to-income ratios of 38% or higher, as well as loans having
combinations of higher risk factors. As of December 31, 2009, approximately 60% of our primary risk
in force consisted of loans with loan-to-value ratios equal to or greater than 95%, 8.6% had FICO
credit scores below 620, and 10.8% had limited underwriting, including limited borrower
documentation. A material portion of these loans were written in 2005 2007 and through the first
quarter of 2008. (In accordance with industry practice, loans approved by GSEs and other automated
underwriting systems under doc waiver programs that do not require verification of borrower
income are classified by us as full documentation. For additional
35
information about such loans, see footnote (4) to the table titled Default Statistics for the MGIC Book in Item 1.
Beginning in the fourth quarter of 2007 we made a series of changes to our underwriting
guidelines in an effort to improve the risk profile of our new business. Requirements imposed by
new guidelines, however, only affect business written under commitments to insure loans that are issued after
those guidelines become effective. Business for which commitments are issued after new guidelines
are announced and before they become effective is insured by us in accordance with the guidelines
in effect at time of the commitment even if that business would not meet the new guidelines. For
commitments we issue for loans that close and are insured by us, a period longer than a calendar
quarter can elapse between the time we issue a commitment to insure a loan and the time we receive
the payment of the first premium and report the loan in our risk in force, although this period is
generally shorter.
The changes to our underwriting guidelines since the fourth quarter of 2007 include the
creation of two tiers of restricted markets. Our underwriting criteria for restricted markets do
not allow insurance to be written on certain loans that could be insured if the property were
located in an unrestricted market. Beginning in September 2009, we removed several markets from our
restricted markets list and moved several other markets from our Tier Two restricted market list
(for which our underwriting guidelines are most limiting) to our Tier One restricted market list.
As of December 31, 2009, approximately 3.6% of our primary risk in force written through the
flow channel, and 42.2% of our primary risk in force written through the bulk channel, consisted of
adjustable rate mortgages in which the initial interest rate may be adjusted during the five years
after the mortgage closing (ARMs). We classify as fixed rate loans adjustable rate mortgages in
which the initial interest rate is fixed during the five years after the mortgage closing. We
believe that when the reset interest rate significantly exceeds the interest rate at loan
origination, claims on ARMs would be substantially higher than for fixed rate loans. Moreover, even
if interest rates remain unchanged, claims on ARMs with a teaser rate (an initial interest rate
that does not fully reflect the index which determines subsequent rates) may also be substantially
higher because of the increase in the mortgage payment that will occur when the fully indexed rate
becomes effective. In addition, we have insured interest-only loans, which may also be ARMs, and
loans with negative amortization features, such as pay option ARMs. We believe claim rates on these
loans will be substantially higher than on loans without scheduled payment increases that are made
to borrowers of comparable credit quality.
Although we attempt to incorporate these higher expected claim rates into our underwriting and
pricing models, there can be no assurance that the premiums earned and the associated investment
income will prove adequate to compensate for actual losses even under our current underwriting
guidelines. We do, however, believe that given the various changes in our underwriting guidelines
that were effective beginning in the first quarter of 2008, our insurance written beginning in the
second quarter of 2008 will generate underwriting profits.
Because we establish loss reserves only upon a loan default rather than based on estimates of our
ultimate losses, losses may have a disproportionate adverse effect on our earnings in certain
periods.
In accordance with GAAP for the mortgage insurance industry, we establish loss reserves only
for loans in default. Reserves are established for reported insurance losses and loss adjustment
expenses based on when notices of default on insured mortgage loans are received. Reserves are also
established for estimated losses incurred on notices of default that have not yet been reported to
us by the servicers (this is what is referred to as IBNR in the mortgage insurance industry). We
establish reserves using estimated claims rates and claims amounts in estimating the ultimate loss.
Because our reserving method does not take account of the impact of future losses that could occur
from loans that are not delinquent,
36
our obligation for ultimate losses that we expect to occur under our policies in force at any period end is not reflected in our financial statements, except
in the case where a premium deficiency exists. As a result, future losses may have a material
impact on future results as losses emerge.
Because loss reserve estimates are subject to uncertainties and are based on assumptions that are
currently very volatile, paid claims may be substantially different than our loss reserves.
We establish reserves using estimated claim rates and claim amounts in estimating the ultimate
loss on delinquent loans. The estimated claim rates and claim amounts represent what we believe
best reflect the estimate of what will actually be paid on the loans in default as of the reserve
date and incorporates anticipated mitigation from rescissions.
The establishment of loss reserves is subject to inherent uncertainty and requires judgment by
management. Current conditions in the housing and mortgage industries make the assumptions that we
use to establish loss reserves more volatile than they would otherwise be. The actual amount of the
claim payments may be substantially different than our loss reserve estimates. Our estimates could
be adversely affected by several factors, including a deterioration of regional or national
economic conditions, including unemployment, leading to a reduction in borrowers income and thus
their ability to make mortgage payments, a drop in housing values that could materially reduce our
ability to mitigate potential loss through property acquisition and resale or expose us to greater
loss on resale of properties obtained through the claim settlement process and mitigation from
rescissions being materially less than assumed. Changes to our estimates could result in material
impact to our results of operations, even in a stable economic environment, and there can be no
assurance that actual claims paid by us will not be substantially different than our loss reserves.
The premiums we charge may not be adequate to compensate us for our liabilities for losses and as a
result any inadequacy could materially affect our financial condition and results of operations.
We set premiums at the time a policy is issued based on our expectations regarding likely
performance over the long-term. Our premiums are subject to approval by state regulatory agencies,
which can delay or limit our ability to increase our premiums. Generally, we cannot cancel the
mortgage insurance coverage or adjust renewal premiums during the life of a mortgage insurance
policy. As a result, higher than anticipated claims generally cannot be offset by premium increases
on policies in force or mitigated by our non-renewal or cancellation of insurance coverage. The
premiums we charge, and the associated investment income, may not be adequate to compensate us for
the risks and costs associated with the insurance coverage provided to customers. An increase in
the number or size of claims, compared to what we anticipate, could adversely affect our results of
operations or financial condition.
In January 2008, we announced that we had decided to stop writing the portion of our bulk
business that insures loans which are included in Wall Street securitizations because the
performance of loans included in such securitizations deteriorated materially in the fourth quarter
of 2007 and this deterioration was materially worse than we experienced for loans insured through
the flow channel or loans insured through the remainder of our bulk channel. As of December 31,
2007 we established a premium deficiency reserve of approximately $1.2 billion. As of December 31,
2009, the premium deficiency reserve was $193 million. At each date, the premium deficiency reserve
is the present value of expected future losses and expenses that exceeded the present value of
expected future premium and already established loss reserves on these bulk transactions.
The mortgage insurance industry is experiencing material losses, especially on the 2006 and
2007 books. The ultimate amount of these losses will depend in part on general economic conditions,
including unemployment, and the direction of home prices, which in turn will be influenced by
general economic
37
conditions and other factors. Because we cannot predict future home prices or
general economic conditions with confidence, there is significant uncertainty surrounding what our
ultimate losses will be on our 2006 and 2007 books. Our current expectation, however, is that these
books will continue to generate material incurred and paid losses for a number of years. There can
be no assurance that additional premium deficiency reserves on Wall Street Bulk or on other
portions of our insurance portfolio will not be required.
We may not be able to repay the amounts that we owe under our Senior Notes due in September 2011.
As of December 31, 2009, we had a total of approximately $84 million in short-term investments
available at our holding company. These investments are virtually all of our holding companys
liquid assets. As of January 18, 2010, our holding company had approximately $78.4 million of
Senior Notes due in September 2011 (during 2009, our holding company purchased $121.6 million
principal amount of these Notes) and $300 million of Senior Notes due in November 2015 outstanding.
On an annual basis as of December 31, 2009, our holding companys current use of funds for interest
payments on its Senior Notes approximates $21 million.
While under the Fannie Mae Agreement and the Freddie Mac Notification (see the risk factor
titled While our plan to write new insurance in MGIC Indemnity
Corporation (MIC) has received Wisconsin
OCI and GSE approval, we cannot guarantee that its implementation will allow us to continue to
write new insurance on an uninterrupted basis throughout the United
States in the future) MGIC may not pay dividends to our holding company without the GSEs
consent, the GSEs have consented to dividends of not more than $100 million in the aggregate to
purchase existing debt obligations of our holding company or to pay such obligations at maturity.
Any dividends from MGIC to our holding company would require the approval of the OCI, and may
require other approvals.
Covenants in the Senior Notes include the requirement that there be no liens on the stock of
the designated subsidiaries unless the Senior Notes are equally and ratably secured; that there be
no disposition of the stock of designated subsidiaries unless all of the stock is disposed of for
consideration equal to the fair market value of the stock; and that we and the designated
subsidiaries preserve our corporate existence, rights and franchises unless we or such subsidiary
determines that such preservation is no longer necessary in the conduct of its business and that
the loss thereof is not disadvantageous to the Senior Notes. A designated subsidiary is any of our
consolidated subsidiaries which has shareholders equity of at least 15% of our consolidated
shareholders equity.
See
Notes 6 and 7 to our consolidated financial statements in Item 8 of this Annual Report on
Form 10-K for more information regarding our holding companys assets and liabilities as of that
date, including information about its junior convertible debentures and its election to defer
payment of interest on them.
MGIC may not continue to meet the GSEs mortgage insurer eligibility requirements.
The majority of our insurance written is for loans sold to Fannie Mae and Freddie Mac, each of
which has mortgage insurer eligibility requirements. As a result of MGICs financial strength
rating being below Aa3/AA-, it is operating with each GSE as an eligible insurer under a
remediation plan. We believe that the GSEs view remediation plans as a continuing process of
interaction between a mortgage insurer and the GSE that continues until the mortgage insurer under
the remediation plan once again has a rating of at least Aa3/AA-. There can be no assurance that
MGIC will be able to continue to operate as an eligible mortgage insurer under a remediation plan.
If MGIC ceases being eligible to insure loans purchased by one or both of the GSEs, it would
significantly reduce the volume of our new business writings.
38
Loan modification and other similar programs may not provide material benefits to us and may
increase our losses.
Beginning in the fourth quarter of 2008, the federal government, including through the FDIC
and the GSEs, and several lenders have adopted programs to modify loans to make them more
affordable to borrowers with the goal of reducing the number of foreclosures. For the quarter
ending December 31, 2009, we were notified of modifications involving loans with risk in force of
approximately $263 million.
One such program is the Home Affordable Modification Program (HAMP), which was announced by
the US Treasury in early 2009. Some of HAMPs eligibility criteria require current information
about borrowers, such as his or her current income and non-mortgage debt payments. Because the GSEs
and servicers do not share such information with us, we cannot determine with certainty the number
of loans in our delinquent inventory that are eligible to participate in HAMP. We believe that it
could take several months from the time a borrower has made all of the payments during HAMPs three
month trial modification period for the loan to be reported to us as a cured delinquency. We are
aware of approximately 29,700 loans in our delinquent inventory at December 31, 2009 for which the
HAMP trial period has begun and approximately 2,400 delinquent loans have cured their delinquency
after entering HAMP. We rely on information provided to us by the GSEs and servicers. We do not
receive all of the information from such sources that is required to determine with certainty the
number of loans that are participating in, or have successfully completed, HAMP.
Under HAMP, a net present value test (the NPV Test) is used to determine if loan
modifications will be offered. For loans owned or guaranteed by the GSEs, servicers may, depending
on the results of the NPV Test and other factors, be required to offer loan modifications, as
defined by HAMP, to borrowers. As of December 1, 2009, the GSEs changed how the NPV Test is used.
These changes made it more difficult for some loans to be modified under HAMP. While we lack
sufficient data to determine the impact of these changes, we believe that they may materially
decrease the number of our loans that will participate in HAMP. In January 2010 the United States
Treasury department has further modified the HAMP eligibility requirements. Effective June 1, 2010
a servicer may evaluate and initiate a HAMP trial modification for a borrower only after the
servicer receives certain documents that allow the servicer to verify the borrowers income and the
cause of the borrowers financial hardship. Previously, these documents were not required to be
submitted until after the successful completion of HAMPs trial modification period. We believe
that this will decrease the number of new HAMP trial modifications.
Even if a loan is modified, the effect on us of loan modifications depends on how many
modified loans subsequently re-default, which in turn can be affected by changes in housing values.
Re-defaults can result in losses for us that could be greater than we would have paid had the loan
not been modified. At this point, we cannot predict with a high degree of confidence what the
ultimate re-default rate will be, and therefore we cannot ascertain with confidence whether these
programs will provide material benefits to us. In addition, because we do not have information in
our database for all of the parameters used to determine which loans are eligible for modification
programs, our estimates of the number of loans qualifying for modification programs are inherently
uncertain. If legislation is enacted to permit a mortgage balance to be reduced in bankruptcy, we
would still be responsible to pay the original balance if the borrower re-defaulted on that
mortgage after its balance had been reduced. Various government entities and private parties have
enacted foreclosure moratoriums. A moratorium does not affect the accrual of interest and other
expenses on a loan. Unless a loan is modified during a moratorium to cure the default, at the
expiration of the moratorium additional interest and expenses would be due which could result in
our losses on loans subject to the moratorium being higher than if there had been no moratorium.
39
If interest rates decline, house prices appreciate or mortgage insurance cancellation requirements
change, the length of time that our policies remain in force could decline and result in declines
in our revenue.
In each year, most of our premiums are from insurance that has been written in prior years. As
a result, the length of time insurance remains in force, which is also generally referred to as
persistency, is a significant determinant of our revenues. The factors affecting the length of time
our insurance remains in force include:
|
|
|
the level of current mortgage interest rates compared to the mortgage
coupon rates on the insurance in force, which affects the
vulnerability of the insurance in force to refinancings, and |
|
|
|
|
mortgage insurance cancellation policies of mortgage investors along
with the current value of the homes underlying the mortgages in the
insurance in force. |
During the 1990s, our year-end persistency ranged from a high of 87.4% at December 31, 1990 to
a low of 68.1% at December 31, 1998. Since 2000, our year-end persistency ranged from a high of
84.7% at December 31, 2009 to a low of 47.1% at December 31, 2003.
The amount of insurance we write could be adversely affected if lenders and investors select
alternatives to private mortgage insurance.
These alternatives to private mortgage insurance include:
|
|
|
lenders using government mortgage insurance programs, including those
of the Federal Housing Administration, or FHA, and the Veterans
Administration, |
|
|
|
|
lenders and other investors holding mortgages in portfolio and self-insuring, |
|
|
|
|
investors using credit enhancements other than private mortgage
insurance, using other credit enhancements in conjunction with reduced
levels of private mortgage insurance coverage, or accepting credit
risk without credit enhancement, and |
|
|
|
|
lenders originating mortgages using piggyback structures to avoid
private mortgage insurance, such as a first mortgage with an 80%
loan-to-value ratio and a second mortgage with a 10%, 15% or 20%
loan-to-value ratio (referred to as 80-10-10, 80-15-5 or 80-20 loans,
respectively) rather than a first mortgage with a 90%, 95% or 100%
loan-to-value ratio that has private mortgage insurance. |
The FHA, which until 2008 was not viewed by us as a significant competitor, substantially
increased its market share beginning in 2008. We believe that the FHAs market share increased, in
part, because mortgage insurers have tightened their underwriting guidelines (which has led to
increased utilization of the FHAs programs) and because of increases in the amount of loan level
delivery fees that the GSEs assess on loans (which result in higher costs to borrowers). Recent
federal legislation and programs have also provided the FHA with greater flexibility in
establishing new products and have increased the FHAs competitive position against private
mortgage insurers.
Competition or changes in our relationships with our customers could reduce our revenues or
increase our losses.
In recent years, the level of competition within the private mortgage insurance industry has
been
40
intense as many large mortgage lenders reduced the number of private mortgage insurers with
whom they do business. At the same time, consolidation among mortgage lenders has increased the
share of the mortgage lending market held by large lenders. Our private mortgage insurance
competitors include:
|
|
|
PMI Mortgage Insurance Company, |
|
|
|
|
Genworth Mortgage Insurance Corporation, |
|
|
|
|
United Guaranty Residential Insurance Company, |
|
|
|
|
Radian Guaranty Inc., |
|
|
|
|
Republic Mortgage Insurance Company, whose parent, based on
information filed with the SEC through January 14, 2010, is our
largest shareholder, and |
|
|
|
|
CMG Mortgage Insurance Company. |
Our relationships with our customers could be adversely affected by a variety of factors,
including continued tightening of and adherence to our underwriting guidelines, which have resulted
in our declining to insure some of the loans originated by our customers, rescission of loans that
affect the customer and our decision to discontinue ceding new business under excess of loss
captive reinsurance programs. In the fourth quarter of 2009,
Countrywide commenced litigation against us as a result of its dissatisfaction with our
rescissions practices shortly after Countrywide ceased doing business
with us. See the risk factor titled We are subject to the risk of private litigation and regulatory
proceedings in Item 1A as well as Item 3, Legal Proceedings, for more information about this litigation and
the arbitration case we filed against Countrywide regarding
rescissions. Countrywide and its Bank of America affiliates accounted for 12.0% of our flow new insurance written in 2008 and 8.3% of
our new insurance written in the first three quarters of 2009. The FHA, which in recent years was
not viewed by us as a significant competitor, substantially increased its market share beginning in
2008.
Until recently, the mortgage insurance industry had not had new entrants in many years.
Recently, Essent Guaranty, Inc. announced that it would begin writing
new mortgage insurance. Essent has publicly reported that one of its
investors is JPMorgan Chase which is one of our customers. The
perceived increase in credit quality of loans that are being insured today combined with the
deterioration of the financial strength ratings of the existing mortgage insurance companies could
encourage new entrants. We understand that one potential new entrant has advertised for employees.
We believe some lenders assess a mortgage insurers financial strength rating as
an important element of the process through which they select mortgage insurers. As a
result of MGICs less than investment grade financial strength rating, MGIC may be
competitively disadvantaged with these lenders.
Your ownership in our company may be diluted by additional capital that we raise or if the holders
of our convertible debentures convert their debentures into shares of our common stock.
We have filed, and the SEC has declared effective, a shelf registration statement that would
allow us to sell up to $850 million of common stock, preferred stock, debt and other types of
securities. While we have no current plans to sell any securities under this registration
statement, any capital that we do raise through the sale of common stock or equity or equity-linked
securities senior to our common stock or convertible into our common stock will dilute your
ownership percentage in our company and may decrease the market price of our common shares.
Furthermore, the securities may have rights, preferences and privileges that are senior or
otherwise superior to those of our common shares.
We have approximately $390 million principal amount of 9% Convertible Junior Subordinated
Debentures outstanding. The principal amount of the debentures is currently convertible, at the
holders option, at an initial conversion rate, which is subject to adjustment, of 74.0741 common
shares per $1,000
41
principal amount of debentures. This represents an initial conversion price of
approximately $13.50 per share. We have elected to defer the payment of a total of approximately
$35 million of interest on these debentures. We may also defer additional interest in the future.
If a holder elects to convert its debentures, the interest that has been deferred on the debentures
being converted is also converted into shares of our common stock. The conversion rate for such
deferred interest is based on the average price that our shares traded at during a 5-day period
immediately prior to the election to convert the associated debentures.
Our common stock could be delisted from the NYSE.
The listing of our common stock on the New York Stock Exchange, or NYSE, is subject to
compliance with NYSEs continued listing standards, including that the average closing price of our
common stock during any 30 trading day period equal or exceed $1.00 and that our average
market capitalization for any such period equal or exceed $15 million. The NYSE can also, in its
discretion, discontinue listing a companys common stock if the company discontinues a substantial
portion of its operations. If we do not satisfy any of NYSEs continued listing standards or if we
cease writing new insurance, our common stock could be delisted from the NYSE unless we cure the
deficiency during the time provided by the NYSE. If the NYSE were to delist our common stock, it
likely would result in a significant decline in the trading price, trading volume and liquidity of
our common stock. We also expect that the suspension and delisting of our common stock would lead
to decreases in analyst coverage and market-making activity relating to our common stock, as well
as reduced information about trading prices and volume. As a result, it could become significantly
more difficult for our shareholders to sell their shares of our common stock at prices comparable
to those in effect prior to delisting or at all.
If the volume of low down payment home mortgage originations declines, the amount of insurance that
we write could decline, which would reduce our revenues.
The factors that affect the volume of low-down-payment mortgage originations include:
|
|
|
restrictions on mortgage credit due to more stringent underwriting
standards and liquidity issues affecting lenders, |
|
|
|
|
the level of home mortgage interest rates, |
|
|
|
|
the health of the domestic economy as well as conditions in regional and local economies, |
|
|
|
|
housing affordability, |
|
|
|
|
population trends, including the rate of household formation, |
|
|
|
|
the rate of home price appreciation, which in times of heavy
refinancing can affect whether refinance loans have loan-to-value
ratios that require private mortgage insurance, and |
|
|
|
|
government housing policy encouraging loans to first-time homebuyers. |
A decline in the volume of low down payment home mortgage originations could decrease demand
for mortgage insurance, decrease our new insurance written and reduce our revenues.
We are subject to the risk of private litigation and regulatory proceedings.
Consumers are bringing a growing number of lawsuits against home mortgage lenders and
settlement service providers. Seven mortgage insurers, including MGIC, have been involved in
litigation alleging
42
violations of the anti-referral fee provisions of the Real Estate Settlement
Procedures Act, which is commonly known as RESPA, and the notice provisions of the Fair Credit
Reporting Act, which is commonly known as FCRA. MGICs settlement of class action litigation
against it under RESPA became final in October 2003. MGIC settled the named plaintiffs claims in
litigation against it under FCRA in late December 2004 following denial of class certification in
June 2004. Since December 2006, class action litigation was separately brought against a number of
large lenders alleging that their captive mortgage reinsurance arrangements violated RESPA. While
we are not a defendant in any of these cases, there can be no assurance that we will not be subject
to future litigation under RESPA or FCRA or that the outcome of any such litigation would not have
a material adverse effect on us.
We are subject to comprehensive, detailed regulation by state insurance departments. These
regulations are principally designed for the protection of our insured policyholders, rather than
for the benefit of investors. Although their scope varies, state insurance laws generally grant broad
supervisory powers to agencies or officials to examine insurance companies and enforce rules or
exercise discretion affecting almost every significant aspect of the insurance business. Given the
recent significant losses incurred by many insurers in the mortgage and financial guaranty
industries, our insurance subsidiaries have been subject to heightened scrutiny by insurance
regulators. State insurance regulatory authorities could take actions, including changes in capital
requirements or termination of waivers of capital requirements, that could have a material adverse
effect on us.
In June 2005, in response to a letter from the New York Insurance Department, we provided
information regarding captive mortgage reinsurance arrangements and other types of arrangements in
which lenders receive compensation. In February 2006, the New York Insurance Department requested
MGIC to review its premium rates in New York and to file adjusted rates based on recent years
experience or to explain why such experience would not alter rates. In March 2006, MGIC advised the
New York Insurance Department that it believes its premium rates are reasonable and that, given the
nature of mortgage insurance risk, premium rates should not be determined only by the experience of
recent years. In February 2006, in response to an administrative subpoena from the Minnesota
Department of Commerce, which regulates insurance, we provided the Department with information
about captive mortgage reinsurance and certain other matters. We subsequently provided additional
information to the Minnesota Department of Commerce, and beginning in March 2008 that Department
has sought additional information as well as answers to questions regarding captive mortgage
reinsurance on several occasions. In June 2008, we received a subpoena from the Department of
Housing and Urban Development, commonly referred to as HUD, seeking information about captive
mortgage reinsurance similar to that requested by the Minnesota Department of Commerce, but not
limited in scope to the state of Minnesota. Other insurance departments or other officials,
including attorneys general, may also seek information about or investigate captive mortgage
reinsurance.
The anti-referral fee provisions of RESPA provide that HUD as well as the insurance
commissioner or attorney general of any state may bring an action to enjoin violations of these
provisions of RESPA. The insurance law provisions of many states prohibit paying for the referral
of insurance business and provide various mechanisms to enforce this prohibition. While we believe
our captive reinsurance arrangements are in conformity with applicable laws and regulations, it is
not possible to predict the outcome of any such reviews or investigations nor is it possible to
predict their effect on us or the mortgage insurance industry.
In October 2007, the Division of Enforcement of the Securities and Exchange Commission
requested that we voluntarily furnish documents and information primarily relating to C-BASS, the
now-terminated merger with Radian and the subprime mortgage assets in the Companys various lines
of business. We have provided responsive documents and/or other information to the Securities and
Exchange Commission and understand this matter is ongoing.
43
Five previously-filed purported class action complaints filed against us and several of our
executive officers were consolidated in March 2009 in the United States District Court for the
Eastern District of Wisconsin and Fulton County Employees Retirement System was appointed as the
lead plaintiff. The lead plaintiff filed a Consolidated Class Action Complaint (the Complaint) on
June 22, 2009. Due in part to its length and structure, it is difficult to summarize briefly the
allegations in the Complaint but it appears the allegations are that we and our officers named in
the Complaint violated the federal securities laws by misrepresenting or failing to disclose
material information about (i) loss development in our insurance in force, and (ii) C-BASS,
including its liquidity. The Complaint also names two officers of C-BASS with respect to the
Complaints allegations regarding C-BASS. The purported class period covered by the Complaint
begins on October 12, 2006 and ends on February 12, 2008. The Complaint seeks damages based on
purchases of our stock during this time period at prices that were allegedly inflated as a result
of the purported misstatements and omissions. With limited exceptions, our bylaws provide that our
officers are entitled to indemnification from us for claims against them of the type alleged
in the Complaint. Our motion to dismiss the Complaint was granted on
February 18, 2010. Under the Courts order, the
plaintiff may, on or before March 18, 2010, move for leave to file an amended complaint. We are
unable to predict the outcome of these consolidated cases or estimate our associated expenses or
possible losses. Other lawsuits alleging violations of the securities laws could be brought against
us.
Several law firms have issued press releases to the effect that they are investigating us,
including whether the fiduciaries of our 401(k) plan breached their fiduciary duties regarding the
plans investment in or holding of our common stock or whether we breached other legal or fiduciary
obligations to our shareholders. With limited exceptions, our bylaws provide that our officers and
401(k) plan fiduciaries are entitled to indemnification from us for claims against them. We intend
to defend vigorously any proceedings that may result from these investigations.
As we previously disclosed, for some time we have had discussions with lenders regarding their
objections to rescissions that in the aggregate are material. On December 17, 2009 Countrywide filed a complaint for declaratory relief in the Superior Court of the State of
California in San Francisco against MGIC. This complaint alleges that MGIC has denied, and
continues to deny, valid mortgage insurance claims submitted by
Countrywide and says it seeks
declaratory relief regarding the proper interpretation of the flow insurance policies at issue. On
January 19, 2010, we removed this case to the United States District Court for the Northern
District of California. For additional information about this case, see Item 3 of this Form 10-K.
We intend to defend MGIC against the allegations in
Countrywides complaint, and pursue the arbitration, vigorously. However, we are
unable to predict the outcome of these proceedings or their effect on us. During 2008 and 2009, rescissions
of Countrywide-related flow loans mitigated our paid losses by approximately $100 million. In
addition, we have a substantial pipeline of claims investigations (including investigations
involving loans related to Countrywide) that we expect will eventually result in future
rescissions. For additional information about rescissions, see the risk factor titled We may not
continue to realize benefits from rescissions at the levels we have recently experienced and we may
not prevail in proceedings challenging whether our rescissions were proper.
The Internal Revenue Service has proposed significant adjustments to our taxable income for 2000
through 2007.
The Internal Revenue Service (IRS) has completed separate examinations of our federal income tax returns for the years
2000 through 2004 and 2005 through 2007 and has issued assessments for unpaid taxes, interest and penalties. The primary
adjustment in both examinations relates to our treatment of the flow through income and loss from an investment in a portfolio
of residual interests of Real Estate Mortgage Investment Conduits (REMICS). This portfolio has been managed and
maintained during years prior to, during and subsequent to the examination period. The IRS has indicated that it does not
believe that, for various reasons, we have established sufficient tax basis in the REMIC residual interests to deduct the losses
from taxable income. We disagree with this conclusion and believe that the flow through income and loss from these
investments was properly reported on our federal income tax returns in accordance with applicable tax laws and regulations in
effect during the periods involved and have appealed these adjustments.
44
The appeals process is ongoing and may last for an
extended period of time, although it is reasonably possible that a final resolution may be reached during 2010. The assessment
for unpaid taxes related to the REMIC issue for these years is $197.1 million in taxes and accuracy-related penalties, plus
applicable interest. Other adjustments during taxable years 2000 through 2007 are not material, and have been agreed to with
the IRS. On July 2, 2007, we made a payment on account of $65.2 million with the United States Department of the Treasury
to eliminate the further accrual of interest. We believe, after discussions with outside counsel about the issues raised in the
examinations and the procedures for resolution of the disputed adjustments, that an adequate provision for income taxes has
been made for potential liabilities that may result from these assessments. If the outcome of this matter differs materially from
our estimates, it could have a material impact on our effective tax rate, results of operations and cash flows.
We could be adversely affected if personal information on consumers that we maintain is improperly
disclosed.
As part of our business, we maintain large amounts of personal information on consumers. While
we believe we have appropriate information security policies and systems to prevent unauthorized
disclosure, there can be no assurance that unauthorized disclosure, either through the actions of
third parties or employees, will not occur. Unauthorized disclosure could adversely affect our
reputation and expose us to material claims for damages.
The implementation of the Basel II capital accord, or other changes to our customers capital
requirements, may discourage the use of mortgage insurance.
In 1988, the Basel Committee on Banking Supervision developed the Basel Capital Accord (Basel
I), which set out international benchmarks for assessing banks capital adequacy requirements. In
June 2005, the Basel Committee issued an update to Basel I (as revised in November 2005, Basel II).
Basel II was implemented by many banks in the United States and many other countries in 2009 and
may be implemented by the remaining banks in the United States and many other countries in 2010.
Basel II affects the capital treatment provided to mortgage insurance by domestic and international
banks in both their origination and securitization activities.
The Basel II provisions related to residential mortgages and mortgage insurance, or other
changes to our customers capital requirements, may provide incentives to certain of our bank
customers not to insure mortgages having a lower risk of claim and to insure mortgages having a
higher risk of claim. The Basel II provisions may also alter the competitive positions and
financial performance of mortgage insurers in other ways.
We may not be able to recover the capital we invested in our Australian operations for many years
and may not recover all of such capital.
We have committed significant resources to begin international operations, primarily in
Australia, where we started to write business in June 2007. In view of our need to dedicate capital
to our domestic mortgage insurance operations, we have reduced our Australian headcount and are no
longer writing new business in Australia. In addition to the general economic and insurance
business-related factors discussed above, we are subject to a number of other risks from having
deployed capital in Australia,
45
including foreign currency exchange rate fluctuations and
interest-rate volatility particular to Australia.
We are susceptible to disruptions in the servicing of mortgage loans that we insure.
We depend on reliable, consistent third-party servicing of the loans that we insure. A recent
trend in the mortgage lending and mortgage loan servicing industry has been towards consolidation
of loan servicers. This reduction in the number of servicers could lead to disruptions in the
servicing of mortgage loans covered by our insurance policies. In addition, current housing market
trends have led to significant increases in the number of delinquent mortgage loans requiring
servicing. These increases have strained the resources of servicers, reducing their ability to
undertake mitigation efforts that could help limit our losses. Future housing market conditions
could lead to additional such increases. Managing a substantially higher volume of non-performing
loans could lead to disruptions in the servicing of mortgage
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
At December 31, 2009, we leased office space in various cities throughout the United States
under leases expiring between 2010 and 2015 and which required annual rental payments of $2.1
million in 2009.
We own our 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.
On
December 17, 2009, Countrywide Home Loans, Inc. and BAC Home
Loans Servicing, LP (collectively, Countrywide) filed a
complaint for declaratory relief in the Superior Court of the State of California
in San Francisco against Mortgage Guaranty Insurance Corporation (MGIC), our principal mortgage
insurance subsidiary. This complaint alleges that MGIC has denied, and continues to deny, valid
mortgage insurance claims submitted by Countrywide and says it seeks declaratory relief
regarding the proper interpretation of the flow insurance policies at issue. On January 19, 2010,
we removed this case to the United States District Court for the Northern District of California.
On February 18, 2010, Countrywide filed a motion to have the case remanded to the Superior Court of
the State of California in San Francisco. On February 24, 2010, we commenced an arbitration action
against Countrywide seeking a determination that MGIC was entitled to deny and/or rescind coverage on
the loans involved in the arbitration demand, which numbered more
than 1,400 loans as of the filing of the demand. On February 25, 2010,
we filed a motion to stay
proceedings in the Northern District of California in view of, among other
things, the parties arbitration agreement and the pending arbitration. We intend to defend MGIC against the allegations
in Countrywides complaint, and to pursue the arbitration,
vigorously. However, we are unable to predict the outcome of these
proceedings or their effect on us.
Five previously-filed purported class action complaints filed against us and several of our
executive officers were consolidated in March 2009 in the United States District Court for the
Eastern District of Wisconsin and Fulton County Employees Retirement System was appointed as the
lead plaintiff. The lead plaintiff filed a Consolidated Class Action Complaint (the Complaint) on
June 22, 2009. Due in part to its length and structure, it is difficult to summarize briefly the
allegations in the Complaint but it appears the allegations are that we and our officers named in
the Complaint violated the federal securities laws by misrepresenting or failing to disclose
material information about (i) loss development in our insurance in force, and (ii) C-BASS,
including its liquidity. The Complaint also names two officers of C-BASS with respect to the
Complaints allegations regarding C-BASS. The purported class period covered
46
by the Complaint begins on October 12, 2006 and ends on February 12, 2008. The Complaint seeks damages based on
purchases of our stock during this time period at prices that were allegedly inflated as a result
of the purported misstatements and omissions. With limited exceptions, our bylaws provide that our
officers are entitled to indemnification from us for claims against them of the type alleged in the
Complaint. Our motion to dismiss the Complaint was granted on
February 18, 2010. Under the Courts order, the plaintiffs
may, on or before March 18, 2010, move for leave to file an amended complaint. Other lawsuits alleging
violations of the securities laws could be brought against us.
In addition, we are involved in other 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 our financial position or results of operations.
For information about the risk of certain legal proceedings, see the text under We are
subject to the risk of private litigation and regulatory proceedings under Risk Factors in Item
1A, which is incorporated by reference.
Item 4. [Reserved]
Executive Officers
Certain information with respect to our executive officers as of March 1, 2010 is set forth
below:
|
|
|
Name and Age |
|
Title |
Curt S. Culver, 57
|
|
Chairman of the Board and Chief Executive Officer
of MGIC Investment Corporation and MGIC; Director
of MGIC Investment Corporation and MGIC |
|
Patrick Sinks, 53
|
|
President and Chief Operating Officer of MGIC
Investment Corporation and MGIC |
|
J. Michael Lauer, 65
|
|
Executive Vice President and Chief Financial
Officer of MGIC Investment Corporation and MGIC |
|
Lawrence J. Pierzchalski, 57
|
|
Executive Vice President Risk Management of MGIC |
|
Jeffrey H. Lane, 60
|
|
Executive Vice President, General Counsel and
Secretary of MGIC Investment Corporation and MGIC |
|
James A. Karpowicz, 62
|
|
Senior Vice PresidentChief Investment Officer
and Treasurer of MGIC Investment Corporation and
MGIC |
|
Michael G. Meade, 60
|
|
Senior Vice PresidentInformation Services and
Chief Information Officer of MGIC |
Mr. Culver has served as our Chief Executive Officer since January 2000 and as our Chairman of
the Board since January 2005. He was our President from January 1999 to January 2006 and was
President of MGIC from May 1996 to January 2006. 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. Sinks became our and MGICs President and Chief Operating Officer in January 2006. He was
Executive Vice President-Field Operations of MGIC from January 2004 to January 2006 and was Senior
47
Vice President-Field Operations of MGIC from July 2002 to January 2004. From March 1985 to July
2002, he held various positions within MGICs finance and accounting organization, the last of
which was Senior Vice President, Controller and Chief Accounting Officer.
Mr. Lauer has served as our and MGICs Executive Vice President and Chief Financial Officer
since March 1989.
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 to May 1996. 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 our and MGICs Executive Vice President, General Counsel and Secretary
since January 2008 and prior thereto as our Senior Vice President, General Counsel and Secretary
from August 1996 to January 2008. For more than five years prior to his joining us, Mr. Lane was a
partner of Foley & Lardner, a law firm headquartered in Milwaukee, Wisconsin.
Mr. Karpowicz has served as our and MGICs Senior Vice PresidentChief Investment Officer and
Treasurer since January 2005 and has been Treasurer since 1998. From 1986 to January, 2005, he held
various positions within MGICs investment operations organization, the last of which was Vice
President.
Mr. Meade has served as MGICs Senior Vice PresidentInformation Services and Chief
Information Officer since February 1992. From 1985 to 1992 he held various positions within MGICs
information services organization, the last of which was Vice PresidentInformation Services.
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
(a) Our Common Stock is listed on the New York Stock Exchange under the symbol MTG. The
following table sets forth for 2008 and 2009 by calendar quarter the high and low sales prices of
our Common Stock on the New York Stock Exchange.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2009 |
|
Quarter |
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
First |
|
$ |
22.72 |
|
|
$ |
9.60 |
|
|
$ |
4.45 |
|
|
$ |
0.70 |
|
Second |
|
|
14.14 |
|
|
|
5.41 |
|
|
|
5.90 |
|
|
|
1.32 |
|
Third |
|
|
12.50 |
|
|
|
3.51 |
|
|
|
9.94 |
|
|
|
3.27 |
|
Fourth |
|
|
8.91 |
|
|
|
1.58 |
|
|
|
7.56 |
|
|
|
3.72 |
|
In 2008, we declared and paid the following cash dividends on our Common Stock
|
|
|
|
|
Quarter |
|
|
2008 |
|
First |
|
$ |
.025 |
|
Second |
|
|
.025 |
|
Third |
|
|
.025 |
|
Fourth |
|
|
|
|
|
|
$ |
0.075 |
|
In October 2008, the Board discontinued payment of our cash dividend. Accordingly,
no cash dividends were paid in 2009. The payment of future dividends is subject to the discretion
of our Board
48
and will depend on many factors, including our operating results, financial condition
and capital position. We are a holding company and the payment of dividends from our insurance
subsidiaries is restricted by insurance regulation. For a discussion of these restrictions, see
Managements Discussion and Analysis Liquidity and
Capital Resources in Item 7 of this annual
report and Note 13 to our consolidated financial statements in
Item 8, which are incorporated by
reference.
As
of February 15, 2010, the number of shareholders of record was
138. In addition, we estimate
there are approximately 17,000 beneficial owners of shares held by brokers and fiduciaries.
Information
regarding equity compensation plans is contained in Item 12.
(b) |
|
Not applicable. |
|
(c) |
|
We did not repurchase any shares of Common Stock during the fourth quarter of 2009. |
49
|
|
|
Item 6. |
|
Selected Financial Data. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(In thousands of dollars, except per share data) |
|
|
|
|
|
Summary of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written |
|
$ |
1,243,027 |
|
|
|
1,466,047 |
|
|
$ |
1,345,794 |
|
|
$ |
1,217,236 |
|
|
$ |
1,252,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
1,302,341 |
|
|
|
1,393,180 |
|
|
$ |
1,262,390 |
|
|
$ |
1,187,409 |
|
|
$ |
1,238,692 |
|
Investment income, net |
|
|
304,678 |
|
|
|
308,517 |
|
|
|
259,828 |
|
|
|
240,621 |
|
|
|
228,854 |
|
Realized investment gains (losses), net, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
including net impairment losses |
|
|
51,934 |
|
|
|
(12,486 |
) |
|
|
142,195 |
|
|
|
(4,264 |
) |
|
|
14,857 |
|
Other revenue |
|
|
49,573 |
|
|
|
32,315 |
|
|
|
28,793 |
|
|
|
45,403 |
|
|
|
44,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,708,526 |
|
|
|
1,721,526 |
|
|
|
1,693,206 |
|
|
|
1,469,169 |
|
|
|
1,526,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses incurred, net |
|
|
3,379,444 |
|
|
|
3,071,501 |
|
|
|
2,365,423 |
|
|
|
613,635 |
|
|
|
553,530 |
|
Change in premium deficiency reserves |
|
|
(261,150 |
) |
|
|
(756,505 |
) |
|
|
1,210,841 |
|
|
|
|
|
|
|
|
|
Underwriting and other expenses |
|
|
239,612 |
|
|
|
271,314 |
|
|
|
309,610 |
|
|
|
290,858 |
|
|
|
275,416 |
|
Reinsurance fee |
|
|
26,407 |
|
|
|
1,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
89,266 |
|
|
|
81,074 |
|
|
|
41,986 |
|
|
|
39,348 |
|
|
|
41,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses |
|
|
3,473,579 |
|
|
|
2,669,165 |
|
|
|
3,927,860 |
|
|
|
943,841 |
|
|
|
870,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before tax and joint ventures |
|
|
(1,765,053 |
) |
|
|
(947,639 |
) |
|
|
(2,234,654 |
) |
|
|
525,328 |
|
|
|
656,493 |
|
(Benefit) provision for income tax |
|
|
(442,776 |
) |
|
|
(397,798 |
) |
|
|
(833,977 |
) |
|
|
130,097 |
|
|
|
176,932 |
|
Income (loss) from joint ventures, net of tax |
|
|
|
|
|
|
24,486 |
|
|
|
(269,341 |
) |
|
|
169,508 |
|
|
|
147,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(1,322,277 |
) |
|
|
(525,355 |
) |
|
$ |
(1,670,018 |
) |
|
$ |
564,739 |
|
|
$ |
626,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
(in thousands) |
|
|
124,209 |
|
|
|
113,962 |
|
|
|
81,294 |
|
|
|
84,950 |
|
|
|
92,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share |
|
$ |
(10.65 |
) |
|
|
(4.61 |
) |
|
$ |
(20.54 |
) |
|
$ |
6.65 |
|
|
$ |
6.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
|
|
|
|
0.075 |
|
|
$ |
0.775 |
|
|
$ |
1.00 |
|
|
$ |
0.525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
7,254,465 |
|
|
|
7,045,536 |
|
|
$ |
5,896,233 |
|
|
$ |
5,252,422 |
|
|
$ |
5,295,430 |
|
Cash and cash equivalents |
|
|
1,185,739 |
|
|
|
1,097,334 |
|
|
|
288,933 |
|
|
|
293,738 |
|
|
|
195,256 |
|
Total assets |
|
|
9,404,419 |
|
|
|
9,146,734 |
|
|
|
7,716,361 |
|
|
|
6,621,671 |
|
|
|
6,357,569 |
|
Loss reserves |
|
|
6,704,990 |
|
|
|
4,775,552 |
|
|
|
2,642,479 |
|
|
|
1,125,715 |
|
|
|
1,124,454 |
|
Premium deficiency reserves |
|
|
193,186 |
|
|
|
454,336 |
|
|
|
1,210,841 |
|
|
|
|
|
|
|
|
|
Short- and long-term debt |
|
|
377,098 |
|
|
|
698,446 |
|
|
|
798,250 |
|
|
|
781,277 |
|
|
|
685,163 |
|
Convertible debentures |
|
|
291,785 |
|
|
|
272,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
1,302,581 |
|
|
|
2,434,233 |
|
|
|
2,594,343 |
|
|
|
4,295,877 |
|
|
|
4,165,055 |
|
Book value per share |
|
|
10.41 |
|
|
|
19.46 |
|
|
|
31.72 |
|
|
|
51.88 |
|
|
|
47.31 |
|
|
|
|
Note: |
|
Certain amounts in the 2008 column have been retrospectively
adjusted to reflect the adoption of a new accounting standard
regarding convertible debt. See Note 2 to our Consolidated Financial
Statements in Item 8. |
|
|
|
During 2008 we adopted new accounting standards regarding the
recognition and presentation of other-than-temporary impairments. See
Note 2 to our Consolidated Financial Statements in Item 8. |
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
New primary insurance written ($ millions) |
|
$ |
19,942 |
|
|
$ |
48,230 |
|
|
$ |
76,806 |
|
|
$ |
58,242 |
|
|
$ |
61,503 |
|
New primary risk written ($ millions) |
|
|
4,149 |
|
|
|
11,669 |
|
|
|
19,632 |
|
|
|
15,937 |
|
|
|
16,836 |
|
New pool risk written ($ millions)(1) |
|
|
4 |
|
|
|
145 |
|
|
|
211 |
|
|
|
240 |
|
|
|
358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance in force (at year-end) ($ millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct primary insurance |
|
|
212,182 |
|
|
|
226,955 |
|
|
|
211,745 |
|
|
|
176,531 |
|
|
|
170,029 |
|
Direct primary risk |
|
|
54,343 |
|
|
|
58,981 |
|
|
|
55,794 |
|
|
|
47,079 |
|
|
|
44,860 |
|
Direct pool risk(1) |
|
|
1,668 |
|
|
|
1,902 |
|
|
|
2,800 |
|
|
|
3,063 |
|
|
|
2,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary loans in default ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policies in force |
|
|
1,360,456 |
|
|
|
1,472,757 |
|
|
|
1,437,432 |
|
|
|
1,283,174 |
|
|
|
1,303,084 |
|
Loans in default |
|
|
250,440 |
|
|
|
182,188 |
|
|
|
107,120 |
|
|
|
78,628 |
|
|
|
85,788 |
|
Percentage of loans in default |
|
|
18.41 |
% |
|
|
12.37 |
% |
|
|
7.45 |
% |
|
|
6.13 |
% |
|
|
6.58 |
% |
Percentage of loans in default bulk |
|
|
40.87 |
% |
|
|
32.64 |
% |
|
|
21.91 |
% |
|
|
14.87 |
% |
|
|
14.72 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance operating ratios (GAAP) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio |
|
|
259.5 |
% |
|
|
220.4 |
% |
|
|
187.3 |
% |
|
|
51.7 |
% |
|
|
44.7 |
% |
Expense ratio(2) |
|
|
15.1 |
% |
|
|
14.2 |
% |
|
|
15.8 |
% |
|
|
17.0 |
% |
|
|
15.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
274.6 |
% |
|
|
234.6 |
% |
|
|
203.1 |
% |
|
|
68.7 |
% |
|
|
60.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-to-capital ratio (statutory) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Guaranty Insurance Corporation |
|
|
19.4:1 |
|
|
|
12.9:1 |
|
|
|
10.3:1 |
|
|
|
6.4:1 |
|
|
|
6.3:1 |
|
Combined insurance companies |
|
|
22.1:1 |
|
|
|
14.7:1 |
|
|
|
11.9:1 |
|
|
|
7.5:1 |
|
|
|
7.4:1 |
|
|
|
|
(1) |
|
Represents contractual aggregate loss limits and, for the
years ended December 31, 2009, 2008, 2007, 2006 and 2005,
for $2.0 billion, $2.5 billion, $4.1 billion, $4.4
billion and $5.0 billion, respectively, of risk without
such limits, risk is calculated at $0 million, $1
million, $2 million, $4 million and $51 million,
respectively, for new risk written and $190 million, $150
million, $475 million, $473 million and $469 million,
respectively, for risk in force, the estimated amount
that would credit enhance these loans to a AA level
based on a rating agency model. |
|
(2) |
|
The loss ratio is the ratio, expressed as a percentage,
of the sum of incurred losses and loss adjustment
expenses to net premiums earned. The expense ratio is the
ratio, expressed as a percentage, of the combined
insurance operations underwriting expenses to net
premiums written. |
51
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
Through our subsidiary MGIC, we are the leading provider of private mortgage insurance in the
United States to the home mortgage lending industry.
As used below, we and our refer to MGIC Investment Corporations consolidated operations.
In the discussion below, we classify loans, in accordance with industry practice, as full
documentation loans if they are approved by GSE and other automated underwriting systems under
doc waiver programs that do not require verification of borrower income. For additional
information about such loans, see footnote (3) to the delinquency table under Results of
Consolidated Operations-Losses-Losses Incurred. The discussion of our business in this document
generally does not apply to our international operations which are immaterial. The results of our
operations in Australia are included in the consolidated results disclosed. For additional
information about our Australian operations, see OverviewAustralia below.
Forward Looking Statements
As discussed under Forward Looking Statements and Risk Factors in Item 1A of Part 1 of this
Report, actual results may differ materially from the results contemplated by forward looking
statements. We are not undertaking any obligation to update any forward looking statements or other
statements we may make in the following discussion or elsewhere in this document even though these
statements may be affected by events or circumstances occurring after the forward looking
statements or other statements were made. Therefore no reader of this document should rely on these
statements being accurate as of any time other than the time at which this document was filed with
the Securities and Exchange Commission.
Outlook
At this time, we are facing two particularly significant
challenges:
|
|
|
Whether we will have access to sufficient capital to continue
to write new business beyond 2011.
This challenge is discussed under Capital below. |
|
|
|
|
Whether private mortgage insurance will remain a significant credit enhancement
alternative for low down payment single family mortgages. This challenge is discussed
under Fannie Mae and Freddie Mac below. |
Capital
At December 31, 2009, MGICs policyholders position exceeded the required regulatory minimum
by approximately $213 million, and we exceeded the required minimum by
approximately $300 million on a combined statutory basis. (The combined figures give effect to
reinsurance with subsidiaries of our holding company.) At December 31, 2009 MGICs risk-
52
to-capital
was 19.4:1 and was 22.1:1 on a combined statutory basis. Beginning with our June 30, 2009
risk-to-capital calculations we have deducted risk in force on policies currently in default and
for which loss reserves have been established. For additional information about how we calculate
risk-to-capital, see Liquidity and Capital Resources Risk to Capital below.
For some time, we have been working to implement a plan to write new mortgage insurance in
MIC, which is driven by our belief that in the future MGIC will not meet minimum regulatory capital
requirements to write new business and may not be able to obtain appropriate waivers of these
requirements in all jurisdictions in which they are present. Absent the waiver granted by the
Office of the Commissioner of Insurance for the State of Wisconsin (OCI) referred to below, a
failure to meet Wisconsins minimum capital requirements would have prevented MGIC from writing new
business anywhere. Also, absent a waiver in a particular jurisdiction, failure of MGIC to meet
minimum capital requirements of that jurisdiction would prevent MGIC from writing business there.
In addition to Wisconsin, these minimum capital requirements are present in 16 jurisdictions while
the remaining jurisdictions in which MGIC does business do not have specific capital requirements
applicable to mortgage insurers. Before MIC can begin writing new business, it must obtain or
update licenses in the
jurisdictions where it will transact business.
In October 2009, we, MGIC and MIC entered into an agreement with Fannie Mae (the Fannie Mae
Agreement) under which MGIC agreed to contribute $200 million to MIC (which MGIC has done) and
Fannie Mae approved MIC as an eligible mortgage insurer through December 31, 2011 subject to the
terms of the Fannie Mae Agreement. Under the Fannie Mae Agreement, MIC will be eligible to write
mortgage insurance only in those 16 other jurisdictions in which MGIC cannot write new insurance
due to MGICs failure to meet regulatory capital requirements applicable to mortgage insurers and
if MGIC fails to obtain relief from those requirements or a specified waiver of them. The Fannie
Mae Agreement, including certain restrictions imposed on us, MGIC and MIC, is summarized more fully
in, and included as an exhibit to, our Form 8-K filed with the Securities and Exchange Commission
on October 16, 2009.
On February 11, 2010, Freddie Mac notified (the Freddie Mac Notification) MGIC that we may
utilize MIC to write new business in states in which MGIC does not meet minimum regulatory capital
requirements to write new business and does not obtain appropriate waivers of those requirements.
This conditional approval to use MIC as a Limited Insurer will expire December 31, 2012, includes
terms substantially similar to those in the Fannie Mae Agreement and is summarized more fully in
our Form 8-K filed with the Securities and Exchange Commission on February 16, 2010.
53
In December 2009, the OCI issued an order waiving, until December 31, 2011, the requirement
that MGIC maintain a specific level of minimum policyholders position to write new business. The
waiver may be modified, terminated or extended by the OCI in its sole discretion. In December
2009, the OCI also approved a transaction under which MIC will be eligible to write new mortgage
guaranty insurance policies only in jurisdictions where MGIC does not meet minimum capital
requirements similar to those waived by the OCI and does not obtain a waiver of those requirements
from that jurisdictions regulatory authority. MGIC has applied for waivers in all jurisdictions
that have the regulatory capital requirements. MGIC has received similar waivers from some of these
states. These waivers expire at various times, with the earliest expiration being December 31,
2010. Some jurisdictions have denied the request because a waiver is not authorized under the
jurisdictions statutes or regulations and others may deny the request on other grounds. There can
be no assurances that MIC will receive the necessary approvals from any or all of the jurisdictions
in which MGIC would be prohibited from continuing to write new business due to MGICs failure to
meet applicable regulatory capital requirements or obtain waivers of those requirements.
Under the Fannie Mae Agreement, MIC has been approved as an eligible mortgage insurer only
through December 31, 2011 and Freddie Mac has approved MIC as a Limited Insurer only through
December 31, 2012. Whether MIC will continue as an eligible mortgage insurer after these dates will
be determined by the particular GSEs mortgage insurer eligibility requirements then in effect.
Further, under the Fannie Mae Agreement and the Freddie Mac Notification, MGIC cannot capitalize
MIC with more than the $200 million contribution without prior approval from the applicable GSE,
which limits the amount of business MIC can write. We believe that the amount of capital that MGIC
has contributed to MIC will be sufficient to write business for the term of the Fannie Mae
Agreement in the jurisdictions in which MIC is eligible to do so. Depending on the level of losses
that MGIC experiences in the future, however, it is possible that regulatory action by one or more
jurisdictions, including those that do not have specific regulatory capital requirements applicable
to mortgage insurers, may prevent MGIC from continuing to write new insurance in some or all of the
jurisdictions in which MIC is not eligible to write business.
A failure to meet the specific minimum regulatory capital requirements to insure new business
does
not mean that MGIC does not have sufficient resources to pay claims on its insurance. Even in
scenarios in which losses materially exceed those that would result in not meeting such
requirements, we believe that we have claims paying resources at MGIC that exceed our claim
obligations on our insurance in force. Our estimates of our claims paying resources and claim
obligations are based on various assumptions. These assumptions include our anticipated rescission
activity, future housing values and future unemployment rates. These assumptions are subject to
inherent uncertainty and require judgment by management. Current conditions in the domestic economy
make the assumptions about housing values and unemployment more volatile than they would otherwise
be. Our anticipated rescission activity is also subject to volatility.
Our senior management believes that our capital plans described above will be feasible and
that we will be able to continue to write new business through the end of 2010. We can, however,
give no assurance in this regard and higher losses, adverse changes in our relationship with the
GSEs, or reduced benefit from rescission activity, among other factors, could result in senior
managements belief not being realized.
54
Fannie Mae and Freddie Mac
In September 2008, the Federal Housing Finance Agency (FHFA) was appointed as the
conservator of the GSEs. As their conservator, FHFA controls and directs the operations of the
GSEs. The appointment of FHFA as conservator, the increasing role that the federal government has
assumed in the residential mortgage market, our industrys inability, due to capital constraints,
to write sufficient business to meet the needs of the GSEs or other factors may increase the
likelihood that the business practices of the GSEs change in ways that may have a material adverse
effect on us. In addition, these factors may increase the likelihood that the charters of the GSEs
are changed by new federal legislation. Such changes may allow the GSEs to reduce or eliminate the
level of private mortgage insurance coverage that they use as credit enhancement. The Obama
administration and certain members of Congress have publicly stated that they are considering
proposing significant changes to domestic housing policies and regulations including those
applicable to the GSEs.
For a number of years, the GSEs have had programs under which on certain loans lenders could
choose a mortgage insurance coverage percentage that was only the minimum required by their
charters, with the GSEs paying a lower price for these loans (charter coverage). The GSEs have
also had programs under which on certain loans they would accept a level of mortgage insurance
above the requirements of their charters but below their standard coverage without any decrease in
the purchase price they would pay for these loans (reduced coverage). Effective January 1, 2010,
Fannie Mae broadly expanded the types of loans eligible for charter coverage. Fannie Mae has also
announced that it would eliminate its reduced coverage program in the second quarter of 2010. In
recent years, a majority of our volume was on loans with GSE standard coverage, a substantial
portion of our volume has been on loans with reduced coverage, and a minor portion of our volume
has been on loans with charter coverage. We charge higher premium rates for higher coverages. To
the extent lenders selling loans to Fannie Mae choose charter coverage for loans that we insure,
our revenues would be reduced and we could experience other adverse effects.
Both of the GSEs have policies which provide guidelines on terms under which they can conduct
business with mortgage insurers with financial strength ratings below Aa3/AA-. For information
about how these policies could affect us, see the risk factor titled MGIC may not continue to meet
the GSEs mortgage insurer eligibility requirements.
Debt at our Holding Company and Holding Company Capital Resources
At December 31, 2009, we had approximately $84 million in short-term investments at our
holding company. These investments are virtually all of our holding companys liquid assets. As of
December 31, 2009, our holding companys obligations included $78.4 million of debt which is
scheduled to mature in September 2011 and $300 million of Senior Notes due in November 2015, both
of which must be serviced pending scheduled maturity. On an annual basis, as of December 31, 2009
our use of funds at the holding company for interest payments on our Senior Notes approximated $21
million. See Note 7 to our consolidated financial statements
contained in Item 8 for a discussion
of our election to defer payment of interest on our $389.5 million in junior convertible debentures
due in 2063. The annual interest payments on these debentures approximate $35 million, excluding
interest on the interest payments that have been deferred. See Notes 6 and 7 to our consolidated
financial statements contained in Item 8 for additional information about this indebtedness.
Historically, dividends from MGIC have been the principal source of our holding companys cash
inflow. The last such dividend was paid in the third quarter of 2008. In 2010 and 2011, MGIC cannot
pay any dividends to our
55
holding company without approval from the OCI. There can be no assurances that such
approvals can be obtained in order to service the debt at our holding company. In addition, under the terms of the Fannie Mae Agreement and Freddie Mac Notification, MGIC may not pay dividends
to our holding company without each GSEs consent; however each
GSE has consented to dividends of not more than $100 million in the aggregate to purchase existing debt obligations of our
holding company or to pay such obligations at maturity.
Loan Modification and Other Similar Programs
Beginning in the fourth quarter of 2008, the federal government, including through the FDIC
and the GSEs, and several lenders have adopted programs to modify loans to make them more
affordable to borrowers with the goal of reducing the number of foreclosures. For the year ended
December 31, 2009, we were notified of modifications involving loans with risk in force of
approximately $931 million.
One such program is the Home Affordable Modification Program (HAMP), which was announced by
the US Treasury in early 2009. Some of HAMPs eligibility criteria require current information
about borrowers, such as his or her current income and non-mortgage debt payments. Because the GSEs
and servicers do not share such information with us, we cannot determine with certainty the number
of loans in our delinquent inventory that are eligible to participate in HAMP. We believe that it
could take several months from the time a borrower has made all of the payments during HAMPs three
month trial modification period for the loan to be reported to us as a cured delinquency. We are
aware of approximately 29,700 loans in our delinquent inventory at December 31, 2009 for which the
HAMP trial period had begun and approximately 2,400 delinquent loans had cured their delinquency
after entering HAMP. We rely on information provided to us by the GSEs and servicers. We do not
receive all of the information from such sources that is required to determine with certainty the
number of loans that are participating in, or have successfully completed, HAMP.
Under HAMP, a net present value test (the NPV Test) is used to determine if loan
modifications will be offered. For loans owned or guaranteed by the GSEs, servicers may, depending
on the results of the NPV Test and other factors, be required to offer loan modifications, as
defined by HAMP, to borrowers. Effective December 1, 2009, the GSEs changed how the NPV Test is
used. These changes made it more difficult for some loans to be modified under HAMP. While, for the
reasons noted above, we lack sufficient data to determine the impact of these changes, we believe
that they may materially decrease the number of our loans that will participate in HAMP. In January
2010 the United States Treasury department has further modified the HAMP eligibility requirements.
Effective June 1, 2010 a servicer may evaluate and initiate a HAMP trial modification for a
borrower only after the servicer receives certain documents that allow the servicer to verify the
borrowers income and the cause of the borrowers financial hardship. Previously, these documents
were not required to be submitted until after the successful completion of HAMPs trial
modification period. We believe that this will decrease the number of new HAMP trial
modifications.
Even if a loan is modified, the effect on us of loan modifications depends on how many
modified loans subsequently re-default, which in turn can be affected by changes in housing values.
Re-defaults can result in losses for us that could be greater than we would have paid had the
loan not been modified. At this point, we cannot predict with a high degree of confidence what the
ultimate re-default rate will be, and therefore we cannot ascertain with confidence whether these
programs will provide material benefits to us. In addition, because we do not have current
information in our database for all of the parameters used to determine which loans are eligible
for modification programs, our estimates of the number of loans qualifying for modification
programs are inherently uncertain. If legislation is enacted to permit a mortgage balance to be reduced in bankruptcy, we would still be responsible to pay
56
the
original balance if the borrower re-defaulted on that mortgage after its balance had been reduced.
Various government entities and private parties have enacted foreclosure moratoriums. A moratorium
does not affect the accrual of interest and other expenses on a loan. Unless a loan is modified
during a moratorium to cure the default, at the expiration of the moratorium additional interest
and expenses would be due which could result in our losses on loans subject to the moratorium being
higher than if there had been no moratorium.
Factors Affecting Our Results
Our results of operations are affected by:
|
|
|
Premiums written and earned |
|
|
|
|
Premiums written and earned in a year are influenced by: |
|
|
|
New insurance written, which increases insurance in force and, is the aggregate
principal amount of the mortgages that are insured during a period. Many factors affect
new insurance written, including the volume of low down payment home mortgage
originations and competition to provide credit enhancement on those mortgages,
including competition from the FHA, other mortgage insurers, GSE programs that may
reduce or eliminate the demand for mortgage insurance and other alternatives to
mortgage insurance. New insurance written does not include loans previously insured by
us which are modified, such as loans modified under the Home Affordable Refinance
Program. |
|
|
|
Cancellations, which reduce insurance in force. Cancellations due to refinancings
are affected by the level of current mortgage interest rates compared to the mortgage
coupon rates throughout the in force book. Refinancings are also affected by current
home values compared to values when the loans in the in force book became insured and
the terms on which mortgage credit is available. Cancellations also include
rescissions, which require us to return any premiums received related to the rescinded
policy, and policies canceled due to claim payment. Finally, cancellations are affected
by home price appreciation, which can give homeowners the right to cancel the mortgage
insurance on their loans. |
|
|
|
Premium rates, which are affected by the risk characteristics of the loans insured
and the percentage of coverage on the loans. See our discussion of premium rate changes
on new insurance written beginning May 1, 2010 under Results of Consolidated
OperationsNew insurance written. |
|
|
|
|
Premiums ceded to reinsurance subsidiaries of certain mortgage lenders (captives)
and risk sharing arrangements with the GSEs. |
Premiums are generated by the insurance that is in force during all or a portion of the
period. Hence, changes in the average insurance in force in the current period compared to an
earlier period is a factor that will increase (when the average in force is higher) or reduce (when
it is lower) premiums written and earned in the current period, although this effect may be enhanced (or mitigated) by differences in the average premium rate between the two
57
periods
as well as by premiums that are returned or expected to be returned in connection with rescissions
and premiums ceded to captives or the GSEs. Also, new insurance written and cancellations during a
period will generally have a greater effect on premiums written and earned in subsequent periods
than in the period in which these events occur.
Our investment portfolio is comprised almost entirely of fixed income securities rated A or
higher. The principal factors that influence investment income are the size of the portfolio and
its yield. As measured by amortized cost (which excludes changes in fair market value, such as from
changes in interest rates), the size of the investment portfolio is mainly a function of cash
generated from (or used in) operations, such as net premiums received, investment earnings, net
claim payments and expenses, less cash provided by (or used for) non-operating activities, such as
debt or stock issuances or repurchases or dividend payments. Realized gains and losses are a
function of the difference between the amount received on sale of a security and the securitys
amortized cost, as well as any other than temporary impairments recognized in earnings. The
amount received on sale of fixed income securities is affected by the coupon rate of the security
compared to the yield of comparable securities at the time of sale.
Losses incurred are the current expense that reflects estimated payments that will ultimately
be made as a result of delinquencies on insured loans. As explained under Critical Accounting
Policies, except in the case of premium deficiency reserves, we recognize an estimate of this
expense only for delinquent loans. Losses incurred are generally affected by:
|
|
|
The state of the economy, including unemployment, and housing values, each of which
affects the likelihood that loans will become delinquent and whether loans that are
delinquent cure their delinquency. The level of new delinquencies has historically
followed a seasonal pattern, with new delinquencies in the first part of the year lower
than new delinquencies in the latter part of the year, though this pattern can be
affected by the state of the economy and the strength of local housing markets. |
|
|
|
|
The product mix of the in force book, with loans having higher risk characteristics
generally resulting in higher delinquencies and claims. |
|
|
|
|
The size of loans insured, with higher average loan amounts tending to increase
losses incurred. |
|
|
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|
The percentage of coverage on insured loans, with deeper average coverage tending to
increase incurred losses. |
|
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|
|
Changes in housing values, which affect our ability to mitigate our losses through
sales of properties with delinquent mortgages as well as borrower willingness to
continue to make mortgage payments when the value of the home is below the mortgage
balance. |
58
|
|
|
The rates at which we rescind policies. Our estimated loss reserves reflect
mitigation from rescissions of policies and denials of claims, using the rate at which
we have rescinded claims during recent periods. We collectively refer to such
rescissions and denials as rescissions and variations of this term. |
|
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|
The distribution of claims over the life of a book. Historically, the first two
years after loans are originated are a period of relatively low claims, with claims
increasing substantially for several years subsequent and then declining, although
persistency, the condition of the economy, including unemployment and housing prices,
and other factors can affect this pattern. For example, a weak economy or housing price
declines can lead to claims from older books increasing, continuing at stable levels or
experiencing a lower rate of decline. We are currently seeing such performance as it
relates to delinquencies from our older books. See Mortgage Insurance Earnings and
Cash Flow Cycle and Losses Incurred below. |
|
|
|
Changes in premium deficiency reserves |
Each quarter, we re-estimate the premium deficiency reserve on the remaining Wall Street bulk
insurance in force. The premium deficiency reserve primarily changes from quarter to quarter as a
result of two factors. First, it changes as the actual premiums, losses and expenses that were
previously estimated are recognized. Each period such items are reflected in our financial
statements as earned premium, losses incurred and expenses. The difference between the amount and
timing of actual earned premiums, losses incurred and expenses and our previous estimates used to
establish the premium deficiency reserves has an effect (either positive or negative) on that
periods results. Second, the premium deficiency reserve changes as our assumptions relating to the
present value of expected future premiums, losses and expenses on the remaining Wall Street bulk
insurance in force change. Changes to these assumptions also have an effect on that periods
results.
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Underwriting and other expenses |
The majority of our operating expenses are fixed, with some variability due to contract
underwriting volume. Contract underwriting generates fee income included in Other revenue.
Interest
expense reflects the interest associated with our outstanding debt
obligations. The principal amount of our
long-term debt obligations at December 31, 2009 is comprised of approximately $78.4 million of 5.625%
Senior Notes due in September 2011, $300 million of 5.375% Senior Notes due in November 2015, and
$389.5 million in convertible debentures due in 2063 (interest on these debentures accrues and
compounds even if we defer the payment of interest), as discussed in Notes 6 and 7 to our
consolidated financial statements contained in Item 8 and under Liquidity and Capital Resources
below. Also as discussed in Note 2 to our consolidated financial statements contained in Item 8, we
adopted, on a retrospective basis, new guidance regarding the accounting for convertible debt instruments that may be settled
in cash upon conversion (including partial cash settlement), on a retrospective basis, and our
interest expense now reflects our non-convertible debt borrowing rate on the convertible debentures
of approximately 19% at the time of issuance. At December 31, 2009, the convertible debentures are
reflected as a liability on our consolidated balance sheet at the current amortized value of $291.8 million, with the
unamortized discount reflected in equity.
59
|
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Income from joint ventures |
During the period in which we held an equity interest in Sherman Financial Group, Sherman was
principally engaged in purchasing and collecting for its own account delinquent consumer
receivables, which are primarily unsecured, and in originating and servicing subprime credit card
receivables. The factors that affected Shermans consolidated results of operations during this
period are discussed in our Quarterly Report on Form 10-Q for the Quarter Ended June 30, 2008, to
which you should refer.
Beginning in the first quarter of 2008, our joint venture income principally consisted of
income from Sherman. In the third quarter of 2008, we sold our entire interest in Sherman to
Sherman. As a result, beginning in the fourth quarter of 2008, our results of operations are no
longer affected by any joint venture results. See Results of Consolidated Operations Joint
Ventures Sherman for discussion of our sale of interest in Sherman and related note receivable.
Mortgage Insurance Earnings and Cash Flow Cycle
In our industry, a book is the group of loans insured in a particular calendar year. In
general, the majority of any underwriting profit (premium revenue minus losses) that a book
generates occurs in the early years of the book, with the largest portion of any underwriting
profit realized in the first year. Subsequent years of a book generally result in modest
underwriting profit or underwriting losses. This pattern of results typically occurs because
relatively few of the claims that a book will ultimately experience typically occur in the first
few years of the book, when premium revenue is highest, while subsequent years are affected by
declining premium revenues, as the number of insured loans decreases (primarily due to loan
prepayments), and increasing losses.
Australia
In 2007, we began providing mortgage insurance to lenders in Australia. At December 31, 2009
the equity value of our Australian operations was approximately $115 million and our risk in force
in Australia was approximately $1.1 billion. In Australia, mortgage insurance is a single premium
product that covers the entire loan balance. As a result, our Australian risk in force represents
the entire amount of the loans that we have insured. However, the mortgage insurance we provide
only covers the unpaid loan balance after the sale of the underlying property. In view of our need
to dedicate capital to our domestic mortgage insurance operations, we have reduced our Australian headcount and are no longer writing new business in
Australia.
Summary of 2009 Results
Our results of operations for 2009 were principally affected by:
60
|
|
Net premiums written and earned |
Net premiums written and earned during 2009 decreased when compared to 2008 due to a lower
average insurance in force, due to reduced levels of new insurance written, and lower average
premium yields which are a result of the shift in the mix of newer writings to loans with lower
loan-to-value ratios, higher FICO scores and full documentation, which carry lower premium rates,
offset by lower ceded premiums due to captive terminations and run-offs. Our net premiums written
and earned during 2009 were also negatively impacted as a result of higher levels of rescissions as
well as increases in our estimates for expected premium refunds due to increases in our expected
rescission levels.
Investment income in 2009 was lower when compared to 2008 due to a decrease in the pre-tax
yield, offset by an increase in the average amortized cost of invested assets.
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|
Realized gains (losses) and other-than-temporary impairments |
Realized gains for 2009 included $92.9 million in net realized gains on the sale of fixed
income investments. Realized gains for 2008 included $62.8 million from the sale of our interest in
Sherman, which was offset by net realized losses on sales of investments of $9.9 million. Net
impairment losses recognized in earnings were $40.9 million in 2009 compared to $65.4 million in
2008.
Losses incurred for 2009 increased compared to 2008 primarily due to increases in the
estimated claim rate and a smaller benefit from captive arrangements, offset by a decrease in the estimated severity. The estimated claim rate increased in 2009 compared to a slight decrease in
2008. The smaller benefit from captive arrangements was due to
captive terminations in late 2008 and 2009. The estimated severity decreased in 2009, compared to an increase in 2008. Our
losses incurred in both 2008 and 2009 were materially mitigated by rescissions.
During 2009 the premium deficiency reserve on Wall Street bulk transactions declined by $261
million from $454 million, as of December 31, 2008, to $193 million as of December 31, 2009. The
decrease in the premium deficiency represents the net result of actual premiums, losses and
expenses as well as a net change in assumptions primarily related to lower estimated premiums. The
$193 million premium deficiency reserve as of December 31, 2009 reflects the present value of
expected future losses and expenses that exceeded the present value of expected future premium and
already established loss reserves.
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Underwriting and other expenses |
Underwriting and other expenses for 2009 decreased when compared to 2008. The decrease
reflects our lower contract underwriting volume as well as a reduction in headcount and a focus on
expenses in difficult market conditions.
61
Interest expense for 2009 increased when compared to 2008. The increase is due to interest on
our convertible debentures issued in March and April of 2008 (interest on these debentures accrues
even if we defer the payment of interest). As discussed in Note 2 to our consolidated financial
statements contained in Item 8, we adopted new guidance regarding accounting for convertible debt
instruments, on a retrospective basis, and our interest expense now reflects our non-convertible
debt borrowing rate on the convertible debentures of approximately 19%. The increase in interest
on the convertible debentures is somewhat offset by repaying the $200 million credit facility in
the second quarter of 2009 as well as the repurchase, during 2009, of approximately $121.6 million
of our Senior Notes due in September 2011.
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Income from joint ventures |
We had no income from joint ventures in 2009. Income from joint ventures, net of tax, was
$24.5 million in 2008. The income from joint ventures in 2008 was related to our interest in
Sherman that was sold in the third quarter of 2008.
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Benefit from income taxes |
The effective tax rate benefit on our pre-tax loss was (25.1%) in 2009, compared to (42.0%) in
2008. During those periods, the rate reflected the benefits recognized from tax-preferenced
investments. Our tax-preferenced investments that impact the effective tax rate consist almost
entirely of tax-exempt bonds. The difference in the rate was primarily the result of the
establishment of a valuation allowance, which reduced the amount of tax benefits recognized during
2009.
62
Results of Consolidated Operations
New insurance written
The amount of our primary new insurance written during the years ended December 31, 2009, 2008
and 2007 was as follows:
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2009 |
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|
2008 |
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2007 |
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($ billions) |
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|
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|
|
NIW Flow Channel |
|
$ |
19.9 |
|
|
$ |
46.6 |
|
|
$ |
69.0 |
|
NIW Bulk Channel |
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|
|
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|
|
1.6 |
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|
7.8 |
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|
|
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|
|
Total Primary NIW |
|
$ |
19.9 |
|
|
$ |
48.2 |
|
|
$ |
76.8 |
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Refinance volume as a % of primary
flow NIW |
|
|
40 |
% |
|
|
26 |
% |
|
|
24 |
% |
The decrease in new insurance written on a flow basis in 2009, compared to 2008 and 2007,
was primarily due to changes in our underwriting guidelines as well as premium rate increases
discussed below. We believe our changes in guidelines, as well as changes in guidelines made by
other private mortgage insurers, and premium rate changes have led to greater usage of FHA
insurance programs as an alternative to private mortgage insurance. Additionally, both GSEs have
implemented adverse market charges on all loans and credit risk-based loan level price adjustments
on loans with certain risk characteristics which include loans that qualify for private mortgage
insurance. The application of these loan level price adjustments results in a materially higher
monthly payment for the borrower, which we also believe has lead to greater usage of FHA insurance
programs as an alternative to private mortgage insurance. For a discussion of new insurance written
through the bulk channel, see Bulk transactions below.
We
anticipate our new insurance written for 2010 will be lower than the level written in 2009 due to the
reasons noted in the preceding paragraph, as well as an expected decrease in the total origination
market.
Our January 2010 new insurance written was $0.6 billion compared to $1.6
billion in January 2009.
Our level of new insurance written could also be affected by other items, including those
noted in our Risk Factors in Item 1A.
Beginning in late 2007, we implemented a series of changes to our underwriting guidelines that
are designed to improve the credit risk profile of our new insurance written. The changes primarily
affect borrowers who have multiple risk factors such as a high loan-to-value ratio, a lower FICO
score and limited documentation or are financing a home in a market we categorize as higher risk
and include the creation of two tiers of restricted markets. Our underwriting criteria for
restricted markets do not allow insurance to be written on certain loans that could be insured if
the property were located in an unrestricted market. Beginning in September 2009, we removed
several markets from our restricted markets list and moved several other markets from our Tier Two
restricted market list (for which our underwriting
63
guidelines are most limiting) to our Tier One restricted market list. We also implemented
premium rate increases during 2008.
In 2009, 93% of our new insurance written had FICO scores of 700 or greater. As shown in the
table below, the percentage of our volume written on a flow basis that includes certain segments
that we view as having a higher probability of claim declined significantly in 2008 and 2009 as a
result of the changes we made in our underwriting guidelines.
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Year ended December 31, |
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|
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2009 |
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|
2008 |
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|
2007 |
|
Product mix as a % of flow NIW
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|
> 95% LTVs |
|
|
1 |
% |
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|
18 |
% |
|
|
42 |
% |
ARMs (1) |
|
|
1 |
% |
|
|
1 |
% |
|
|
3 |
% |
FICO < 620 |
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|
0 |
% |
|
|
2 |
% |
|
|
8 |
% |
Reduced documentation (2) |
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|
0 |
% |
|
|
2 |
% |
|
|
10 |
% |
|
|
|
(1) |
|
Consists of adjustable rate mortgages in which the initial interest rate may be adjusted during
the five years after the mortgage closing (ARMs). |
|
(2) |
|
In accordance with industry practice, loans approved by GSE and other automated
underwriting (AU) systems under doc waiver programs that do not require verification of borrower
income are classified by us as full documentation. Based in part on information provided by the
GSEs, we estimate full documentation loans of this type were approximately 4% of 2007 new insurance
written. Information for other periods is not available. We understand these AU systems grant such
doc waivers for loans they judge to have higher credit quality. We also understand that the GSEs
terminated their doc waiver programs, with respect to new commitments, in the second half of
2008. |
We believe that given the various changes in our underwriting guidelines noted above, our
business written beginning in the second quarter of 2008 will generate underwriting profit. Subject
to regulatory approval, effective May 1, 2010, we will price our new insurance written after
considering, among other things, the borrowers credit score. Our pricing changes create three new
tiers of pricing for full documentation loans for which the applicable borrower has a credit score
of 620 or higher. The three new tiers will predominantly result in,
|
|
|
lower rates for borrowers with credit scores of 720 and greater, |
|
|
|
|
higher rates for borrowers with credit scores between 620 679, and |
|
|
|
|
no change in rates for borrowers with credit scores between 680 719. |
Had these rate changes been in place with respect to new insurance written in the second half
of 2009 and the first two months of 2010, the rate changes would have resulted in lower premiums
being charged by MGIC for a substantial majority of such new insurance written.
Given the premium rate increases previously announced by the FHA, which will be effective in
the near future, we intend that these price changes will position us to be price competitive with
the FHA for loans to borrowers with credit scores of 720 and greater. However, there may be
advantages to lenders to insure loans through the FHA, including higher servicing fees than on
conventional loans. Although we are not eliminating our previous rates, we expect that lenders will
generally begin utilizing our lowered rates as soon as they are able to.
64
Cancellations and insurance in force
New insurance written and cancellations of primary insurance in force during the years ended
December 31, 2009, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
($ billions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NIW |
|
$ |
19.9 |
|
|
$ |
48.2 |
|
|
$ |
76.8 |
|
Cancellations |
|
|
(34.7 |
) |
|
|
(32.9 |
) |
|
|
(41.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in primary insurance
in force |
|
$ |
(14.8 |
) |
|
$ |
15.3 |
|
|
$ |
35.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct primary insurance in force
as of December 31, |
|
$ |
212.2 |
|
|
$ |
227.0 |
|
|
$ |
211.7 |
|
|
|
|
|
|
|
|
|
|
|
Cancellation activity has historically been affected by the level of mortgage interest
rates and the level of home price appreciation. Cancellations generally move inversely to the
change in the direction of interest rates, although they generally lag a change in direction.
Cancellations also include rescissions and policies cancelled due to claim payment.
Our persistency rate (percentage of insurance remaining in force from one year prior) was
84.7% at December 31, 2009, an increase from 84.4% at December 31, 2008 and 76.4% at December 31,
2007. These persistency rate improvements in 2008 and 2009 reflect the more restrictive credit
policies of lenders (which make it more difficult for homeowners to refinance loans), as well as
declines in housing values.
Bulk transactions
We ceased writing Wall Street bulk business in the fourth quarter of 2007. In addition, we
wrote no new business through the bulk channel since the second quarter of 2008. We expect the
volume of any future business written through the bulk channel will be insignificant. Wall Street
bulk transactions, as of December 31, 2009, included approximately 100,000 loans with insurance in
force of approximately $16.4 billion and risk in force of approximately $4.8 billion, which is
approximately 71% of our bulk risk in force.
Pool insurance
We are currently not issuing new commitments for pool insurance and expect that the volume of
any future pool business will be insignificant.
Our direct pool risk in force was $1.7 billion, $1.9 billion and $2.8 billion at December 31,
2009, 2008 and 2007, respectively. These risk amounts represent pools of loans with contractual
aggregate loss limits and in some cases those without these limits. For pools of
65
loans without these limits, risk is estimated based on the amount that would credit enhance
the loans in the pool to a AA level based on a rating agency model. Under this model, at December
31, 2009, 2008 and 2007, for $2.0 billion, $2.5 billion and $4.1 billion, respectively, risk in
force is calculated at $190 million, $150 million and $475 million, respectively.
Net premiums written and earned
Net premiums written during 2009 decreased when compared to 2008 due to the following reasons:
|
o |
|
lower average insurance in force, due to reduced levels of new insurance
written, |
|
|
o |
|
lower average premium yields which are a result of the shift in the mix of
newer writings to loans with lower loan-to-value ratios, higher FICO scores and full
documentation, which carry lower premium rates, and |
|
|
o |
|
higher levels of rescissions and expected rescissions, which result in a return
of premium. |
|
|
These were offset by the following: |
|
o |
|
increases, in 2008, of our premium rates, and |
|
|
o |
|
lower ceded premiums due to captive terminations and run-offs. In a captive
termination, the arrangement is cancelled, with no future premium ceded and funds for
any incurred but unpaid losses transferred to us. In a run-off, no new loans are
reinsured by the captive but loans previously reinsured continue to be covered, with
premium and losses continuing to be ceded on those loans. |
We expect our average insurance in force in 2010 to continue to decline. We expect our premium
yields (net premiums written or earned, expressed on an annual basis, divided by the average
insurance in force) in 2010 to continue at approximately the level experienced during 2009.
Net premiums written and earned during 2008 increased compared to 2007. The average insurance
in force continued to increase; however the effect of the higher in force was somewhat offset by
lower average premium yields due to a shift in the mix of new writings to loans with lower
loan-to-value ratios, higher FICO scores and full documentation, which carry lower premium rates
Risk sharing arrangements
For the year ended December 31, 2009, approximately 5% of our flow new insurance written was
subject to arrangements with captives or risk sharing arrangements with the GSEs compared to 34%
for the year ended December 31, 2008 and 48% for the year ended December 31, 2007. We expect the
percentage of new insurance written subject to risk sharing arrangements to approximate 5% in 2010
for the reasons discussed below.
Effective January 1, 2009, we are no longer ceding new business under excess of loss
reinsurance treaties with lender captive reinsurers. Loans reinsured through December 31, 2008
under excess of loss agreements will run off pursuant to the terms of the particular captive
arrangement. New business will continue to be ceded under quota share reinsurance
66
arrangements, limited to a 25% cede rate. Beginning in 2008, many of our captive arrangements
have either been terminated or placed into run-off.
We anticipate that our ceded premiums related to risk sharing agreements will continue to
decline in 2010 for the reasons discussed above.
See discussion under -Losses regarding losses assumed by captives.
In June 2008 we entered into a reinsurance agreement that was effective on the risk associated
with up to $50 billion of qualifying new insurance written each calendar year. The term of the
reinsurance agreement began on April 1, 2008 and was scheduled to end on December 31, 2010, subject
to two one-year extensions that could have been exercised by the reinsurer. Due to our rating
agency downgrades in the first quarter of 2009, under the terms of the reinsurance agreement we
ceased being entitled to a profit commission, making the agreement less favorable to us. Effective
March 20, 2009, we terminated this reinsurance agreement. The termination resulted in a reinsurance
fee of $26.4 million as reflected in our results of operations for the year ended December 31,
2009. There are no further obligations under this reinsurance agreement.
Investment income
Investment income for 2009 decreased when compared to 2008 due to a decrease in the average
investment yield, offset by an increase in the average amortized cost of invested assets. The
decrease in the average investment yield was caused both by decreases in prevailing interest rates
and a decrease in the average maturity of our investments. The portfolios average pre-tax
investment yield was 3.61% at December 31, 2009 and 3.87% at December 31, 2008. We expect a
decline in investment income in 2010 as the average amortized cost of invested assets decreases due
to claim payments exceeding premiums received in future periods. See further discussion under
Liquidity and Capital Resources below.
Investment income for 2008 increased when compared to 2007 due to an increase in the average
amortized cost of invested assets, offset by a decrease in the average investment yield. The
portfolios average pre-tax investment yield was 4.69% at December 31, 2007.
Realized gains and other-than-temporary impairments
We had net realized investment gains of $92.9 million in 2009, compared to $52.9 million in
2008. The net realized gains on investments in 2009 are primarily the result of the sale of fixed
income securities. We are in the process of reducing the proportion of our investment portfolio in
tax exempt municipal securities and increasing the proportion of corporate securities. We are
shifting the portfolio to taxable securities because the tax benefits of holding tax exempt
municipal securities are no longer available based on our current net loss position. Realized gains
for 2008 included $62.8 million from the sale of our interest in Sherman, which was offset by
realized losses on sales of investments of $9.9 million.
Net impairment losses recognized in earnings were $40.9 million in 2009 compared to $65.4
million in 2008. The impairment losses in 2009 related to our fixed income investments,
67
including credit losses related to collateralized debt obligations, debt instruments issued by
health facilities, and mortgage backed bonds. The impairment losses in 2008 related to fixed income
investments including debt instruments issued by Fannie Mae, Freddie Mac, Lehman Brothers and AIG.
Realized gains in 2007 included a $162.9 million gain from the sale of a portion our interest
in Sherman, offset by realized losses on the sale of fixed income securities. There were no
impairment losses in 2007.
Other revenue
Other revenue for 2009 increased, when compared to 2008, due to gains of $27.2 million
recognized from the repurchase of $121.6 million in par value of our September 2011 Senior Notes,
somewhat offset by decreases in contract underwriting revenues.
Other revenue for 2008 increased when compared to 2007. The increase in other revenue was
primarily the result of other non-insurance operations.
Losses
As discussed in Critical Accounting Policies, and consistent with industry practices, we
establish loss reserves for future claims only for loans that are currently delinquent. The terms
delinquent and default are used interchangeably by us and are defined as an insured loan with a
mortgage payment that is 45 days or more past due. Loss reserves are established based on our
estimate of the number of loans in our default inventory that will result in a claim payment, which
is referred to as the claim rate, and further estimating the amount of the claim payment, which is
referred to as claim severity. Historically, a substantial majority of borrowers have eventually
cured their delinquent loans by making their overdue payments, but this percentage has decreased
significantly in recent years.
Estimation of losses that we will pay in the future is inherently judgmental. The conditions
that affect the claim rate and claim severity include the current and future state of the economy,
including unemployment, and the current and future strength of local housing markets. Current
conditions in the housing and mortgage industries make these assumptions more volatile than they
would otherwise be. The actual amount of the claim payments may be substantially different than our
loss reserve estimates. Our estimates could be adversely affected by several factors, including a
further deterioration of regional or national economic conditions, including unemployment, leading
to a reduction in borrowers income and thus their ability to make mortgage payments, and a further
drop in housing values, which expose us to greater losses on resale of properties obtained through
the claim settlement process and may affect borrower willingness to continue to make mortgage
payments when the value of the home is below the mortgage balance. Changes to our estimates could
result in a material impact to our results of operations, even in a stable economic environment.
In
addition, our loss reserving methodology incorporates the effects
rescission activity is
expected to have on the losses we will pay on our delinquent inventory. A variance between ultimate
actual rescission rates and these estimates could materially affect our losses. See our risk factor
titled We may not continue to realize benefits from rescissions at the levels we
68
have recently experienced and we may not prevail in proceedings challenging whether our
rescissions were proper. in Item 1A.
Our estimates could also be positively affected by government efforts to assist current
borrowers in refinancing to new loans, assisting delinquent borrowers and lenders in reducing their
mortgage payments, and forestalling foreclosures. In addition, private company efforts may have a
positive impact on our loss development. See discussion of HAMP program under Overview Loan
Modification and Other Similar Programs.
Losses incurred
In 2009, net losses incurred were $3,379 million, of which $2,913 million related to current
year loss development and $466 million related to unfavorable prior years loss development. In
2008, net losses incurred were $3,071 million, of which $2,684 million related to current year loss
development and $387 million related to unfavorable prior years loss development. See Note 8 of
our Notes to Consolidated Financial Statements in Item 8.
Current year losses incurred increased in 2009 compared to 2008 primarily due to an increase
in estimated claim rates and a smaller benefit from captive arrangements, offset by a decrease in
estimated severity. The increase in claim rates experienced during 2009 was likely due to general
economic conditions, including the unemployment rate, as well as further decreases in home values
which can affect borrower willingness to continue to make mortgage payments when the value of the
home is below the mortgage balance. The increase in 2009 claim rates was significantly offset by an
increase in expected rescission levels. The smaller benefit from captive arrangements was due to
captive terminations in late 2008 and 2009. The decrease in severity, compared to an increase in
2008, was primarily due to an increase in expected rescission levels. The average exposure on
policies rescinded in 2009 was higher than the average exposure on claims paid. Current year losses
incurred significantly increased in 2008 compared to 2007 primarily due to significant increases in
the default inventory, offset by a smaller increase in estimated severity and a slight decrease in
the estimated claim rate, when each are compared to the same period in 2007.
The amount of losses incurred relating to prior year loss development represents actual claim
payments that were higher or lower than what was estimated by us at the end of the prior year as
well as a re-estimation of amounts to be ultimately paid on defaults remaining in our default
inventory from the end of the prior year. This re-estimation is the result of our review of current
trends in default inventory, such as defaults that have resulted in a claim, the amount of the
claim, the change in relative level of defaults by geography and the change in average loan
exposure. The $466 million addition to losses incurred relating to prior years in 2009 was
primarily related to more defaults remaining in inventory at December 31, 2009 from a prior year.
Historically, approximately 75% of our default inventory was resolved in one year, and therefore at
any point in time, approximately 25% of the default inventory was greater than one year old. Of the
182,188 primary defaults in our December 31, 2008 inventory,
91,668 primary defaults, approximately
50%, remained in our default inventory one year later at December 31, 2009. These defaults have a
higher estimated claim rate when compared to a year ago because our experience is that as a default
ages it become more likely to result in a claim payment. The $387 million increase in losses
incurred in 2008 related to prior years was also a result of more defaults remaining in inventory
at December 31, 2008 from a year prior.
69
Our loss estimates are established based upon historical experience. We continue to experience
increases in delinquencies in certain markets with higher than average loan balances, such as
Florida and California, however those increases were smaller in 2009 compared to 2008. In 2009 we
experienced an increase in delinquencies in California of 4,701, or 7% of our total increase in
delinquencies that year, compared to an increase of 8,035 in 2008, or 11% of our total increase in
delinquencies that year. In 2009 we experienced an increase in delinquencies in Florida of 9,540,
or 14% of our total increase in delinquencies that year, compared to an increase of 16,836 in 2008,
or 22% of our total increase in delinquencies that year. The average claim paid on California loans
in 2009 remained more than twice as high as the average claim paid for the remainder of the
country.
Before paying a claim, we can review the loan file to determine whether we are required, under
the applicable insurance policy, to pay the claim or whether we are entitled to reduce the amount
of the claim. For example, all of our insurance policies provide that we can reduce or deny a claim
if the servicer did not comply with its obligation to mitigate our loss by performing reasonable
loss mitigation efforts or diligently pursuing a foreclosure or bankruptcy relief in a timely
manner. We also do not cover losses resulting from property damage that has not been repaired. We
are currently reviewing the loan files for the majority of the claims submitted to us.
In addition, subject to rescission caps in certain of our Wall Street bulk transactions, all
of our insurance policies allow us to rescind coverage under certain circumstances. Most of our rescissions involve material misrepresentations made, or fraud committed, in connection
with the origination of a loan regarding information we received and relied upon when the loan was
insured.
Because we review the loan origination documents and information as part of our normal processing
when a claim is submitted to us, rescissions occur on a loan by loan basis most often after we have
received a claim. Historically, rescissions were not a material portion of our claims resolved
during a year. However, beginning in 2008 rescissions have materially mitigated our paid and
incurred losses. While we have a substantial pipeline of claims investigations that we expect will
eventually result in rescissions, we can give no assurance that rescissions will continue to
mitigate paid and incurred losses at the same level we have recently experienced. Rescissions
mitigated our paid losses by approximately $1.2 billion in 2009, compared to $0.2 billion in 2008.
These figures include amounts that would have resulted in either a claim payment or been charged to
a deductible under a bulk or pool policy, and may have been charged to a captive reinsurer. In
2009, $256 million, of the $1.2 billion mitigated, would have been applied to a deductible had the
policy not been rescinded.
In addition, our loss reserving methodology incorporates the effect that rescission activity
is expected to have on the losses we will pay on our delinquent inventory. We do not utilize an
explicit rescission rate in our reserving methodology, but rather our reserving methodology
incorporates the effects rescission activity has had on our historical claim rate and claim
severities. A variance between ultimate actual rescission rates and these estimates could
materially affect our losses incurred. Our estimation process does not include a direct
correlation between claim rates and severities to projected rescission activity or other economic
conditions such as changes in unemployment rates, interest rates or housing values. Our experience
is that analysis of that nature would not produce reliable results, as the change in one condition
cannot be isolated to determine its sole effect on our ultimate paid losses as our ultimate paid
losses are also influenced at the same time by other economic conditions. Based upon the increase
in rescission activity during 2008 and 2009, the effects rescissions have on our losses incurred
have become material. While we do not incorporate an explicit rescission rate into our reserving
methodology, we have estimated the effects
70
rescissions have had on our incurred losses based upon recent rescission history, as shown in
the table that follows labeled Ever to Date Rescission Rates on Claims Received. We estimate that
rescissions mitigated our incurred losses by approximately $2.5 billion in 2009, compared to $0.4
billion in 2008; both of these figures include the benefit of claims not paid as well as the impact on our loss
reserves. The liability associated with our estimate of premiums to be refunded on expected future
rescissions is accrued for separately. At December 31, 2009 the estimate of this liability totaled
$88.3 million. Separate components of this liability are included in Other liabilities and
Premium deficiency reserves on our consolidated balance sheet. At December 31, 2008 this
liability was not material to our financial statements. Changes in the liability affect premiums
written and earned.
If the insured disputes our right to rescind coverage, whether the requirements to rescind are
met ultimately would be determined by legal proceedings. Objections to rescission
may be made several years after we have rescinded an insurance policy. Countrywide and an affiliate (Countrywide) has filed a
lawsuit against MGIC alleging that MGIC has denied, and continues to deny, valid mortgage insurance
claims. We have filed an arbitration case against Countrywide. During 2008 and 2009, rescissions of
Countrywides flow loans mitigated our paid losses by approximately $100 million. In
addition, we have a substantial pipeline of claims investigations involving loans related to Countrywide that we expect will eventually result in future rescissions. For more information about this
lawsuit and arbitration case, see Note 15 to our consolidated financial statements in Item 8 and
the risk factor titled, We are subject to the risk of private litigation and regulatory
proceedings in Item 1A. In addition, we continue to have discussions with other lenders regarding
their objections to rescissions that in the aggregate are material and are involved in other
arbitration proceedings with respect to an amount of rescissions that are not material.
Information regarding the ever-to-date rescission rates by the quarter in which the claim was
received appears in the table below. No information is presented for claims received two quarters
or less before the end of our most recently completed quarter to allow sufficient time for a
substantial percentage of the claims received in those two quarters to reach resolution.
As of December 31, 2009
Ever-to-Date Rescission Rates on Claims Received
(based on count)
|
|
|
|
|
|
|
|
|
ETD Claims |
Quarter in Which the |
|
ETD Rescission |
|
Resolution |
Claim was Received |
|
Rate (1) |
|
Percentage (2) |
Q1 2008
|
|
12.6%
|
|
100.0% |
Q2 2008
|
|
16.0%
|
|
100.0% |
Q3 2008
|
|
21.3%
|
|
99.8% |
Q4 2008
|
|
24.9%
|
|
99.2% |
Q1 2009
|
|
28.0%
|
|
97.2% |
Q2 2009
|
|
22.2%
|
|
89.1% |
|
|
|
(1) |
|
This percentage is claims received during the quarter shown that have been rescinded as of
our most recently completed quarter divided by the total claims received during the quarter
shown. |
|
(2) |
|
This percentage is claims received during the quarter shown that have been resolved as of our
most recently completed quarter divided by the total claims received during the quarter shown.
Claims resolved principally consist of claims paid plus claims rescinded. |
71
We anticipate that the ever-to-date rescission rate in the more recent quarters will
increase as the ever-to-date resolution percentage approaches 100%.
As discussed under Risk Sharing Arrangements, a portion of our flow new insurance written
is subject to reinsurance arrangements with lender captives. The majority of these reinsurance
arrangements have, historically, been aggregate excess of loss reinsurance agreements, and the
remainder were quota share agreements. As discussed under Risk Sharing Arrangements effective
January 1, 2009 we are no longer ceding new business under excess of loss reinsurance treaties with
lender captives. Loans reinsured through December 31, 2008 under excess of loss agreements will run
off pursuant to the terms of the particular captive arrangement. Under the aggregate excess of
loss agreements, we are responsible for the first aggregate layer of loss, which is typically
between 4% and 5%, the captives are responsible for the second aggregate layer of loss, which is
typically 5% or 10%, and we are responsible for any remaining loss. The layers are typically
expressed as a percentage of the original risk on an annual book of business reinsured by the
captive. The premium cessions on these agreements typically ranged from 25% to 40% of the direct
premium. Under a quota share arrangement premiums and losses are shared on a pro-rata basis between
us and the captives, with the captives portion of both premiums and losses typically ranging from
25% to 50%. Beginning June 1, 2008 new loans insured through quota share captive arrangements are
limited to a 25% cede rate.
Under these agreements the captives are required to maintain a separate trust account, of
which we are the sole beneficiary. Premiums ceded to a captive are deposited into the applicable
trust account to support the captives layer of insured risk. These amounts are held in the trust
account and are available to pay reinsured losses. The captives ultimate liability is limited to
the assets in the trust account. When specific time periods are met and the individual trust
account balance has reached a required level, then the individual captive may make authorized
withdrawals from its applicable trust account. In most cases, the captives are also allowed to
withdraw funds from the trust account to pay verifiable federal income taxes and operational
expenses. Conversely, if the account balance falls below certain thresholds, the individual captive
may be required to contribute funds to the trust account. However, in most cases, our sole remedy
if a captive does not contribute such funds is to put the captive into run-off, in which case no
new business would be ceded to the captive. In the event that the captives incurred but unpaid
losses exceed the funds in the trust account, and the captive does not deposit adequate funds, we
may also be allowed to terminate the captive agreement, assume the captives obligations, transfer
the assets in the trust accounts to us, and retain all future premium payments. We intend to
exercise this additional remedy when it is available to us. However, if the captive would challenge
our right to do so, the matter would be determined by arbitration. The reinsurance recoverable on
loss reserves related to captive agreements was approximately $297 million at December 31, 2009.
The total fair value of the trust fund assets under these agreements at December 31, 2009 was
approximately $547 million. During 2009, $119 million of trust fund assets were transferred to us.
The transferred funds resulted in an increase in our investment portfolio (including cash and cash
equivalents) and there was a corresponding decrease in our reinsurance recoverable on loss
reserves, which is offset by a decrease in our net losses paid. During 2008, $265 million of trust
fund assets were transferred to us as a result of captive terminations.
In 2009 the captive arrangements reduced our losses incurred by approximately $234 million,
compared to a $476 million captive reduction in 2008. We anticipate that the reduction
in losses
72
incurred will be lower in 2010, compared to 2009, as some of our captive
arrangements were terminated in 2009.
A rollforward of our primary insurance default inventory for the years ended December 31,
2009, 2008 and 2007 appears in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Default inventory at beginning of year |
|
|
182,188 |
|
|
|
107,120 |
|
|
|
78,628 |
|
Plus: New Notices |
|
|
259,876 |
|
|
|
263,603 |
|
|
|
195,407 |
|
Less: Cures |
|
|
(149,251 |
) |
|
|
(161,069 |
) |
|
|
(145,198 |
) |
Less: Paids (including those charged to a
deductible or captive) |
|
|
(29,732 |
) |
|
|
(25,318 |
) |
|
|
(21,113 |
) |
Less: Rescissions and denials |
|
|
(12,641 |
) |
|
|
(2,148 |
) |
|
|
(604 |
) |
|
|
|
|
|
|
|
|
|
|
Default inventory at end of year |
|
|
250,440 |
|
|
|
182,188 |
|
|
|
107,120 |
|
|
|
|
|
|
|
|
|
|
|
Information about the composition of the primary insurance default inventory at December
31, 2009, 2008 and 2007 appears in the table below. Within the tables below, reduced documentation
loans only appear in the reduced documentation category and do not appear in any of the other
categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Total loans delinquent (1) |
|
|
250,440 |
|
|
|
182,188 |
|
|
|
107,120 |
|
Percentage of loans delinquent (default rate) |
|
|
18.41 |
% |
|
|
12.37 |
% |
|
|
7.45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime loans delinquent (2) |
|
|
150,642 |
|
|
|
95,672 |
|
|
|
49,333 |
|
Percentage of prime loans delinquent (default rate) |
|
|
13.29 |
% |
|
|
7.90 |
% |
|
|
4.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
A-minus loans delinquent (2) |
|
|
37,711 |
|
|
|
31,907 |
|
|
|
22,863 |
|
Percentage of A-minus loans delinquent (default rate) |
|
|
40.66 |
% |
|
|
30.19 |
% |
|
|
19.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime credit loans delinquent (2) |
|
|
13,687 |
|
|
|
13,300 |
|
|
|
12,915 |
|
Percentage of subprime credit loans delinquent
(default rate) |
|
|
50.72 |
% |
|
|
43.30 |
% |
|
|
34.08 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduced documentation loans delinquent (3) |
|
|
48,400 |
|
|
|
41,309 |
|
|
|
22,009 |
|
Percentage of reduced doc loans delinquent (default
rate) |
|
|
45.26 |
% |
|
|
32.88 |
% |
|
|
15.48 |
% |
|
|
|
(1) |
|
At December 31, 2009, 2008 and 2007, 45,907, 45,482 and 39,704 loans in default,
respectively, related to Wall Street bulk transactions and 16,389, 13,275 and 5,055 loans in
default, respectively, were in our claims received inventory. |
|
(2) |
|
We define prime loans as those having FICO credit scores of 620 or greater, A-minus loans as
those having FICO credit scores of 575-619, and subprime credit loans as those having FICO credit
scores of less than 575,
all as reported to us at the time a commitment to insure is issued. Most A-minus and subprime
credit loans were written through the bulk channel. However, we
classify all loans without complete documentation as "reduced
documentation'' loans regardless of FICO score rather than as a
prime, "A-minus'' or "subprime'' loan. |
73
|
|
|
(3) |
|
In accordance with industry practice, loans approved by GSE and other automated
underwriting (AU) systems under doc waiver programs that do not require verification of borrower
income are classified by us as full documentation. Based in part on information provided by the
GSEs, we estimate full documentation loans of this type were approximately 4% of 2007 new insurance
written. Information for other periods is not available. We understand these AU systems grant such
doc waivers for loans they judge to have higher credit quality. We also understand that the GSEs
terminated their doc waiver programs, with respect to new commitments, in the second half of
2008. |
The pool notice inventory increased from 33,884 at December 31, 2008 to 44,231 at
December 31, 2009; the pool notice inventory was 25,224 at December 31, 2007.
The average primary claim paid for 2009 was $52,627, compared to $52,239 for 2008. The
average claim paid can vary materially from period to period based upon a variety of factors, on
both a national and state basis, including the geographic mix, average loan amount and average
coverage percentage of loans for which claims are paid.
The average claim paid for the top 5 states (based on 2009 paid claims) for the
years ended December 31, 2009, 2008 and 2007 appears in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
Average claim paid |
|
2009 |
|
|
2008 |
|
|
2007 |
|
California |
|
$ |
105,552 |
|
|
$ |
115,409 |
|
|
$ |
96,196 |
|
Florida |
|
|
66,059 |
|
|
|
69,061 |
|
|
|
56,846 |
|
Michigan |
|
|
38,341 |
|
|
|
37,020 |
|
|
|
35,607 |
|
Arizona |
|
|
61,929 |
|
|
|
67,058 |
|
|
|
58,211 |
|
Nevada |
|
|
74,601 |
|
|
|
82,528 |
|
|
|
73,905 |
|
All other states |
|
|
43,682 |
|
|
|
40,571 |
|
|
|
32,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All states |
|
$ |
52,627 |
|
|
$ |
52,239 |
|
|
$ |
37,165 |
|
The average loan size of our insurance in force at December 31, 2009, 2008 and 2007
appears in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loan size |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Total insurance in force |
|
$ |
155,960 |
|
|
$ |
154,100 |
|
|
$ |
147,308 |
|
Prime (FICO 620 & >) |
|
|
154,480 |
|
|
|
151,240 |
|
|
|
141,690 |
|
A-Minus (FICO 575-619) |
|
|
130,410 |
|
|
|
132,380 |
|
|
|
133,460 |
|
Subprime (FICO < 575) |
|
|
118,440 |
|
|
|
121,230 |
|
|
|
124,530 |
|
Reduced doc (All FICOs) |
|
|
203,340 |
|
|
|
208,020 |
|
|
|
209,990 |
|
The average loan size of our insurance in force at December 31, 2009, 2008 and 2007 for
the top 5 states (based on 2009 paid claims) appears in the table below.
74
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loan size |
|
2009 |
|
|
2008 |
|
|
2007 |
|
California |
|
$ |
288,650 |
|
|
$ |
293,442 |
|
|
$ |
291,578 |
|
Florida |
|
|
178,262 |
|
|
|
180,261 |
|
|
|
178,063 |
|
Michigan |
|
|
121,431 |
|
|
|
121,001 |
|
|
|
119,428 |
|
Arizona |
|
|
188,614 |
|
|
|
190,339 |
|
|
|
185,518 |
|
Nevada |
|
|
220,506 |
|
|
|
223,861 |
|
|
|
222,707 |
|
All other states |
|
|
147,713 |
|
|
|
145,201 |
|
|
|
138,155 |
|
Information about net paid claims during the years ended December 31, 2009, 2008 and 2007
appears in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
Net paid claims ($ millions) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Prime (FICO 620 & >) |
|
$ |
831 |
|
|
$ |
547 |
|
|
$ |
332 |
|
A-Minus (FICO 575-619) |
|
|
231 |
|
|
|
250 |
|
|
|
161 |
|
Subprime (FICO < 575) |
|
|
95 |
|
|
|
132 |
|
|
|
101 |
|
Reduced doc (All FICOs) |
|
|
388 |
|
|
|
395 |
|
|
|
190 |
|
Other |
|
|
104 |
|
|
|
48 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
Direct losses paid |
|
|
1,649 |
|
|
|
1,372 |
|
|
|
829 |
|
Reinsurance |
|
|
(41 |
) |
|
|
(19 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
Net losses paid |
|
|
1,608 |
|
|
|
1,353 |
|
|
|
817 |
|
LAE |
|
|
60 |
|
|
|
48 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
Net losses and LAE paid before terminations |
|
|
1,668 |
|
|
|
1,401 |
|
|
|
870 |
|
Reinsurance terminations |
|
|
(119 |
) |
|
|
(265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and LAE paid |
|
$ |
1,549 |
|
|
$ |
1,136 |
|
|
$ |
870 |
|
|
|
|
|
|
|
|
|
|
|
Primary claims paid for the top 15 states (based on 2009 paid claims) and all other
states for the years ended December 31, 2009, 2008 and 2007 appears in the table below.
75
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid Claims by state ($ millions) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
California |
|
$ |
253 |
|
|
$ |
316 |
|
|
$ |
82 |
|
Florida |
|
|
195 |
|
|
|
129 |
|
|
|
38 |
|
Michigan |
|
|
111 |
|
|
|
99 |
|
|
|
98 |
|
Arizona |
|
|
110 |
|
|
|
61 |
|
|
|
10 |
|
Nevada |
|
|
75 |
|
|
|
45 |
|
|
|
12 |
|
Georgia |
|
|
62 |
|
|
|
50 |
|
|
|
35 |
|
Illinois |
|
|
59 |
|
|
|
52 |
|
|
|
35 |
|
Ohio |
|
|
54 |
|
|
|
58 |
|
|
|
73 |
|
Minnesota |
|
|
52 |
|
|
|
43 |
|
|
|
34 |
|
Texas |
|
|
51 |
|
|
|
48 |
|
|
|
51 |
|
Virginia |
|
|
48 |
|
|
|
32 |
|
|
|
13 |
|
Indiana |
|
|
32 |
|
|
|
26 |
|
|
|
33 |
|
Massachusetts |
|
|
27 |
|
|
|
29 |
|
|
|
24 |
|
Colorado |
|
|
27 |
|
|
|
33 |
|
|
|
32 |
|
Missouri |
|
|
26 |
|
|
|
22 |
|
|
|
17 |
|
All other states |
|
|
363 |
|
|
|
281 |
|
|
|
197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,545 |
|
|
|
1,324 |
|
|
|
784 |
|
Other (Pool, LAE, Reinsurance) |
|
|
4 |
|
|
|
(188 |
) |
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,549 |
|
|
$ |
1,136 |
|
|
$ |
870 |
|
|
|
|
|
|
|
|
|
|
|
76
The default inventory in those same states at December 31, 2009, 2008 and 2007 appears in the
table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
Default inventory by state |
|
2009 |
|
|
2008 |
|
|
2007 |
|
California |
|
|
19,661 |
|
|
|
14,960 |
|
|
|
6,925 |
|
Florida |
|
|
38,924 |
|
|
|
29,384 |
|
|
|
12,548 |
|
Michigan |
|
|
12,759 |
|
|
|
9,853 |
|
|
|
7,304 |
|
Arizona |
|
|
8,791 |
|
|
|
6,338 |
|
|
|
2,169 |
|
Nevada |
|
|
5,803 |
|
|
|
3,916 |
|
|
|
1,337 |
|
Georgia |
|
|
10,905 |
|
|
|
7,622 |
|
|
|
4,623 |
|
Illinois |
|
|
13,722 |
|
|
|
9,130 |
|
|
|
5,435 |
|
Ohio |
|
|
11,071 |
|
|
|
8,555 |
|
|
|
6,901 |
|
Minnesota |
|
|
4,674 |
|
|
|
3,642 |
|
|
|
2,478 |
|
Texas |
|
|
13,668 |
|
|
|
10,540 |
|
|
|
7,103 |
|
Virginia |
|
|
4,464 |
|
|
|
3,360 |
|
|
|
1,761 |
|
Indiana |
|
|
7,005 |
|
|
|
5,497 |
|
|
|
3,763 |
|
Massachusetts |
|
|
3,661 |
|
|
|
2,634 |
|
|
|
1,596 |
|
Colorado |
|
|
3,451 |
|
|
|
2,328 |
|
|
|
1,534 |
|
Missouri |
|
|
4,195 |
|
|
|
3,263 |
|
|
|
2,149 |
|
All other states |
|
|
87,686 |
|
|
|
61,166 |
|
|
|
39,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,440 |
|
|
|
182,188 |
|
|
|
107,120 |
|
|
|
|
|
|
|
|
|
|
|
The default inventory at December 31, 2009, 2008 and 2007 separated between our flow and
bulk business appears in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
Default inventory |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Flow |
|
|
185,828 |
|
|
|
122,693 |
|
|
|
61,352 |
|
Bulk |
|
|
64,612 |
|
|
|
59,495 |
|
|
|
45,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,440 |
|
|
|
182,188 |
|
|
|
107,120 |
|
|
|
|
|
|
|
|
|
|
|
The flow default inventory by policy year at December 31, 2009, 2008 and 2007 appears in
the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
Flow Default inventory by Policy Year |
|
|
|
|
|
|
|
|
|
Policy year: |
|
2009 |
|
|
2008 |
|
|
2007 |
|
2003 and prior |
|
|
28,242 |
|
|
|
24,042 |
|
|
|
21,886 |
|
2004 |
|
|
13,869 |
|
|
|
10,266 |
|
|
|
7,905 |
|
2005 |
|
|
21,354 |
|
|
|
15,462 |
|
|
|
9,909 |
|
2006 |
|
|
33,373 |
|
|
|
24,315 |
|
|
|
12,637 |
|
2007 |
|
|
73,304 |
|
|
|
43,211 |
|
|
|
9,015 |
|
2008 |
|
|
15,524 |
|
|
|
5,397 |
|
|
|
|
|
2009 |
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
185,828 |
|
|
|
122,693 |
|
|
|
61,352 |
|
|
|
|
|
|
|
|
|
|
|
Beginning in 2008, the rate at which claims are received and paid slowed for a
combination of reasons, including foreclosure moratoriums, servicing delays, court delays, loan
77
modifications and our claims investigations. Although these factors continue to affect our paid
claims, we believe that paid claims in 2010 will exceed the $1.7 billion paid in 2009.
As of December 31, 2009, 54% of our primary insurance in force was written subsequent to
December 31, 2006. On our flow business, the highest claim frequency years have typically been the
third and fourth year after the year of loan origination. On our bulk business, the period of
highest claims frequency has generally occurred earlier than in the historical pattern on our flow
business. However, the pattern of claims frequency can be affected by many factors, including
persistency and deteriorating economic conditions. Low persistency can have the effect of
accelerating the period in the life of a book during which the highest claim frequency occurs.
Deteriorating economic conditions can result in increasing claims following a period of declining
claims. We are currently experiencing such performance as it relates to delinquencies from our
older books.
Premium deficiency
During 2009, the premium deficiency reserve on Wall Street bulk transactions declined by $261
million from $454 million, as of December 31, 2008, to $193 million as of December 31, 2009. The
$193 million premium deficiency reserve as of December 31, 2009 reflects the present value of
expected future losses and expenses that exceeded the present value of expected future premium and
already established loss reserves. The discount rate used in the calculation of the premium
deficiency reserve at December 31, 2009 was 3.6%. During 2008 the premium deficiency reserve on
Wall Street bulk transactions declined by $757 million from $1,211 million, as of December 31,
2007, to $454 million as of December 31, 2008. The discount rate used in the calculation of the
premium deficiency reserve at December 31, 2008 was 4.0%.
The components of the premium deficiency reserve at December 31, 2009, 2008 and 2007 appear in
the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
($ |
millions) |
|
|
|
|
Present value of expected future premium |
|
$ |
427 |
|
|
$ |
712 |
|
|
$ |
901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of expected future paid losses
and expenses |
|
|
(2,157 |
) |
|
|
(3,063 |
) |
|
|
(3,561 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net present value of future cash flows |
|
|
(1,730 |
) |
|
|
(2,351 |
) |
|
|
(2,660 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Established loss reserves |
|
|
1,537 |
|
|
|
1,897 |
|
|
|
1,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deficiency |
|
$ |
(193 |
) |
|
$ |
(454 |
) |
|
$ |
(1,211 |
) |
|
|
|
|
|
|
|
|
|
|
Each quarter, we re-estimate the premium deficiency reserve on the remaining Wall Street
bulk insurance in force. The premium deficiency reserve primarily changes from quarter to quarter
as a result of two factors. First, it changes as the actual premiums, losses and
78
expenses that
were previously estimated are recognized. Each period such items are reflected in our financial
statements as earned premium, losses incurred and expenses. The difference between the amount and
timing of actual earned premiums, losses incurred and expenses and our previous estimates used to
establish the premium deficiency reserves has an effect (either positive or negative) on that
periods results. Second, the premium deficiency reserve changes as our assumptions relating to
the present value of expected future premiums, losses and expenses on the remaining Wall Street
bulk insurance in force change. Changes to these assumptions also have an effect on that periods
results.
The decrease in the premium deficiency reserve for the years ended December 31, 2009 and 2008
was $261 million and $757 million, respectively, as shown in the charts below, which represents the
net result of actual premiums, losses and expenses as well as a net change in assumptions for these
periods. The change in assumptions for 2009 is primarily related to lower estimated ultimate
losses, offset by lower estimated ultimate premiums. The lower estimated ultimate losses and lower
estimated ultimate premiums were primarily due to higher expected rates of rescissions. The change
in assumption for 2008 primarily related to higher estimated ultimate losses.
79
|
|
|
|
|
|
|
|
|
|
|
($ millions) |
|
Premium Deficiency Reserve at December 31, 2008 |
|
|
|
|
|
$ |
(454 |
) |
|
Paid claims and LAE |
|
|
584 |
|
|
|
|
|
Increase (decrease) in loss reserves |
|
|
(360 |
) |
|
|
|
|
Premium earned |
|
|
(156 |
) |
|
|
|
|
Effects of present valuing on future premiums, losses and expenses |
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in premium deficiency reserve to reflect
actual premium, losses and expenses recognized |
|
|
|
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
Change in premium deficiency reserve to reflect change in
assumptions relating to future premiums, losses and expenses and discount rate (1) |
|
|
|
|
|
|
172 |
|
|
|
|
|
|
|
|
|
|
Premium Deficiency Reserve at December 31, 2009 |
|
|
|
|
|
$ |
(193 |
) |
|
|
|
|
|
|
|
|
|
|
(1) |
|
A positive number for changes in assumptions relating to premiums, losses, expenses and discount rate
indicates a redundancy of prior premium deficiency reserves. |
|
|
|
|
|
|
|
|
|
|
|
($ millions) |
|
Premium Deficiency Reserve at December 31, 2007 |
|
|
|
|
|
$ |
(1,211 |
) |
|
|
|
|
|
|
|
|
|
Paid claims and LAE |
|
|
770 |
|
|
|
|
|
Increase (decrease) in loss reserves |
|
|
448 |
|
|
|
|
|
Premium earned |
|
|
(234 |
) |
|
|
|
|
Effects of present valuing on future premiums, losses and expenses |
|
|
(93 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in premium deficiency reserve to reflect
actual premium, losses and expenses recognized |
|
|
|
|
|
|
891 |
|
|
|
|
|
|
|
|
|
|
Change in premium deficiency reserve to reflect change in
assumptions relating to future premiums, losses and expenses and discount rate (2) |
|
|
|
|
|
|
(134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium Deficiency Reserve at December 31, 2008 |
|
|
|
|
|
$ |
(454 |
) |
|
|
|
|
|
|
|
|
|
|
(2) |
|
A negative number for changes in assumptions relating to premiums, losses, expenses and discount rate
indicates a deficiency of prior premium deficiency reserves. |
At the end of 2009, and the end of each quarter, we performed a premium deficiency
analysis on the portion of our book of business not covered by the premium deficiency described
above. That analysis concluded that, as of December 31, 2009, there was no premium deficiency on
such portion of our book of business. For the reasons discussed below, our analysis of any
potential deficiency reserve is subject to inherent uncertainty and requires significant judgment
by management. To the extent, in a future period, expected losses are higher or expected premiums
are lower than the assumptions we used in our analysis, we could be required to record a premium
deficiency reserve on this portion of our book of business in such period.
80
The calculation of premium deficiency reserves requires the use of significant judgments and
estimates to determine the present value of future premium and present value of expected losses and
expenses on our business. The present value of future premium relies on, among other things,
assumptions about persistency and repayment patterns on underlying loans. The present value of
expected losses and expenses depends on assumptions relating to severity of claims and claim rates
on current defaults, and expected defaults in future periods. These assumptions also include an
estimate of expected rescission activity. Similar to our loss reserve estimates, our estimates for
premium deficiency reserves could be adversely affected by several factors, including a
deterioration of regional or economic conditions leading to a reduction in borrowers income and
thus their ability to make mortgage payments, and a drop in housing values that could expose us to
greater losses. Assumptions used in calculating the deficiency reserves can also be affected by
volatility in the current housing and mortgage lending industries. To the extent premium patterns
and actual loss experience differ from the assumptions used in calculating the premium deficiency
reserves, the differences between the actual results and our estimates will affect future period
earnings and could be material.
Underwriting and other expenses
Underwriting and other expenses for 2009 decreased when compared to 2008. The decrease
reflects our lower contract underwriting volume as well as reductions in headcount and a focus on
expenses in difficult market conditions.
Underwriting and other expenses for 2008 decreased when compared to 2007. The decrease
reflects our lower volumes of new insurance written as well as a focus on expenses in difficult
market conditions. Also, 2007 included $12.3 million in one-time expenses associated with a
terminated merger.
Ratios
The table below presents our loss, expense and combined ratios for our combined insurance
operations for the years ended December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Loss ratio |
|
|
259.5 |
% |
|
|
220.4 |
% |
|
|
187.3 |
% |
Expense ratio |
|
|
15.1 |
% |
|
|
14.2 |
% |
|
|
15.8 |
% |
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
274.6 |
% |
|
|
234.6 |
% |
|
|
203.1 |
% |
|
|
|
|
|
|
|
|
|
|
The loss ratio is the ratio, expressed as a percentage, of the sum of incurred losses and
loss adjustment expenses to net premiums earned. The loss ratio does not reflect any effects due to
premium deficiency. The increase in the loss ratio in 2009, compared to 2008, was due to an
increase in losses incurred, as well a decrease in premium earned. The expense ratio is the ratio,
expressed as a percentage, of underwriting expenses to net premiums written. The increase in the
expense ratio in 2009, compared to 2008, was due to a decrease in premiums
81
written, which was partially offset by a decrease in underwriting and other expenses.
The combined ratio is the sum of the loss ratio and the expense ratio.
The increase in the loss ratio in 2008, compared to 2007, was due to an increase in losses
incurred, partially offset by an increase in premiums earned. The decrease in the expense ratio in
2008, compared to 2007, was due to a decrease in underwriting and other expenses as well as an
increase in premiums written.
Interest expense
Interest expense for 2009 increased when compared to 2008. The increase was primarily due to
an increase in interest on our convertible debentures (interest on these debentures accrues even if
we defer the payment of interest). As discussed in Note 1 to our consolidated financial statements
contained in Item 8, we adopted new guidance regarding accounting for convertible debt instruments,
on a retrospective basis, and our interest expense now reflects our non-convertible debt borrowing
rate on the convertible debentures of approximately 19%. This increase was partially offset by
repaying the $200 million credit facility in the second quarter of 2009 as well as the repurchase,
in 2009, of approximately $121.6 million of our Senior Notes due in September 2011.
Interest expense for 2008 increased compared to 2007. The increase primarily reflected the
issuance of the $390 million of convertible debentures in March and April of 2008.
Income taxes
The effective tax rate benefit on our pre-tax loss was (25.1%) in 2009, compared to (42.0%) in
2008. During those periods, the rate reflected the benefits recognized from tax-preferenced
investments. Our tax-preferenced investments that impact the effective tax rate consist almost
entirely of tax-exempt bonds. The difference in the rate was primarily the result of the
establishment of a valuation allowance, which reduced the amount of tax benefits recognized during
2009. The effective tax rate benefit on our pre-tax loss was (37.3%) in 2007.
We review the need to establish a deferred tax asset valuation allowance on a quarterly basis.
We include an analysis of several factors, among which are the severity and frequency of operating
losses, our capacity for the carryback or carryforward of any losses, the expected occurrence of
future income or loss and available tax planning alternatives. As discussed below, we established a valuation allowance during 2009.
In periods prior to 2008, we deducted significant amounts of statutory contingency reserves on
our federal income tax returns. The reserves were deducted to the extent we purchased tax and loss
bonds in an amount equal to the tax benefit of the deduction. The reserves are included in taxable
income in future years when they are released for statutory accounting purposes (see Managements
Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital
Resources Risk-to-Capital) or when the taxpayer elects to redeem the tax and loss bonds that
were purchased in connection with the deduction for the reserves. Since the tax effect on these
reserves exceeded the gross deferred tax assets less deferred tax liabilities, we believe that all
gross deferred tax assets recorded in
82
periods prior to the quarter ended March 31, 2009 were fully realizable.
Therefore, we established no valuation reserve.
In the first quarter of 2009, we redeemed the remaining balance of our tax and loss bonds of
$431.5 million. Therefore, the remaining contingency reserves were released and are no longer
available to support any net deferred tax assets. Beginning with the first quarter of 2009, any
benefit from income taxes, relating to operating losses, has been reduced or eliminated by the
establishment of a valuation allowance. The valuation allowance, established during 2009, reduced
our benefit from income taxes by $238.5 million. During 2009, our deferred tax asset valuation
allowance was reduced by the deferred tax liability related to $159.5 million of unrealized gains
on investments that were recorded to equity. In the event of future operating losses, it is likely
that a tax provision (benefit) will be recorded as an offset to any taxes recorded to equity for
changes in unrealized gains or other items in other comprehensive income.
Recently enacted legislation expanded the carryback period for certain net operating losses
from 2 years to 5 years. A total benefit for income taxes of $282.0 million has been recorded in
the Consolidated Statement of Operations in 2009 for the carryback of current year losses. Since
the carryback period includes years where we have not reached final agreements on the amount of
taxes due with the IRS, the receipt of any taxes recoverable may be delayed and subject to any
final settlement.
Giving full effect to the carryback of net operating losses for federal income tax purposes,
we have approximately $856 million of net operating loss carryforwards on a regular tax basis and
$130 million of net operating loss carryforwards for computing the alternative minimum tax as of
December 31, 2009. Any unutilized carryforwards are scheduled to expire at the end of tax year
2029.
Joint ventures
Our equity in the earnings from Sherman and C-BASS and certain other joint ventures and
investments, accounted for in accordance with the equity method of accounting, is shown separately,
net of tax, on our consolidated statement of operations. Income from joint ventures, net of tax,
was $24.5 million in 2008 compared to a loss from joint ventures, net of tax, of $269.3 million for
2007. The loss from joint venture in 2007 was due primarily to the impairment of our investment in
C-BASS, which is discussed below. In the third quarter of 2008, we sold our remaining interest in
Sherman to Sherman. As a result, beginning in the fourth quarter of 2008, we no longer have income
or loss from joint ventures.
C-BASS
Beginning in February 2007 and continuing through approximately the end of March 2007, the
subprime mortgage market experienced significant turmoil. After a period of relative stability that
persisted during April, May and through approximately late June, market dislocations recurred and
then accelerated to unprecedented levels beginning in approximately mid-July 2007. As described in
Note 10 of our Notes to Consolidated Financial Statements in Item 8, in the third quarter of 2007,
we concluded that our total equity interest in C-BASS was impaired. In addition, during the fourth
quarter of 2007 due to additional losses incurred by C-BASS, we reduced the carrying value of our
$50 million note from C-BASS to zero under equity method accounting.
83
Sherman
Our interest in Sherman sold in the third quarter of 2008 represented approximately 24.25% of
Shermans equity. The sale price was paid $124.5 million in cash and by delivery of Shermans
unsecured promissory note in the principal amount of $85 million (the Note). The scheduled
maturity of the Note is February 13, 2011 and it bears interest, payable monthly, at the annual
rate equal to three-month LIBOR plus 500 basis points. The Note is issued under a Credit
Agreement, dated August 13, 2008, between Sherman and MGIC. For additional information regarding
the sale of our interest please refer to our Current Report on Form 8-K filed with the Securities
and Exchange Commission on August 14, 2008. We recorded a $62.8
million pre-tax gain on this sale, which is reflected in our results
of operations for the year ended December 31, 2008 as a realized gain.
A summary Sherman income statement for the periods indicated appears below. Prior to the sale
of our interest, we did not consolidate Sherman with us for financial reporting purposes, and we
did not control Sherman. Shermans internal controls over its financial reporting were not part of
our internal controls over our financial reporting. However, our internal controls over our
financial reporting included processes to assess the effectiveness of our financial reporting as it
pertains to Sherman. We believe those processes were effective in the context of our overall
internal controls.
Sherman Summary Income Statement:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008* |
|
|
2007 |
|
|
|
(unaudited) |
|
|
(audited) |
|
|
|
(In millions of dollars) |
|
Revenues from receivable portfolios |
|
$ |
660.3 |
|
|
$ |
994.3 |
|
Portfolio amortization |
|
|
264.8 |
|
|
|
488.1 |
|
|
|
|
|
|
|
|
Revenues, net of amortization |
|
|
395.5 |
|
|
|
506.2 |
|
|
|
|
|
|
|
|
|
|
Credit card interest income and fees |
|
|
475.6 |
|
|
|
692.9 |
|
Other revenue |
|
|
35.3 |
|
|
|
60.8 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
906.4 |
|
|
|
1,259.9 |
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
740.1 |
|
|
|
991.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax |
|
$ |
166.3 |
|
|
$ |
268.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys income from Sherman |
|
$ |
35.6 |
|
|
$ |
81.6 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
The year ended December 31, 2008 only reflects Shermans results and our income from Sherman
through July 31, 2008 as a result of the sale of our remaining interest in August 2008. |
The Companys income from Sherman line item in the table above includes $3.6 million
and $15.6 million of additional amortization expense in 2008 and 2007, respectively, above
Shermans actual amortization expense, related to additional interests in Sherman that we purchased
during the third quarter of 2006 at a price in excess of book value.
In September 2007, we sold a portion of our interest in Sherman to an entity owned by
Shermans senior management. The interest sold by us represented approximately 16% of Shermans
equity. We received a cash payment of $240.8 million in the sale. We recorded a
84
$162.9 million
pre-tax gain on this sale, which is reflected in our results of operations for the year ended
December 31, 2007 as a realized gain.
Financial Condition
At December 31, 2009, based on fair value, approximately 94% of our fixed income securities
were invested in A rated and above, readily marketable securities, concentrated in maturities of
less than 15 years. The composition of ratings at December 31, 2009 and 2008 are shown in the table
below. While the percentage of our investment portfolio rated A or better has not changed
materially since December 31, 2008, the percentage of our investment portfolio rated AAA has
declined and the percentage rated AA and A has increased. Contributing to the changes in
ratings is an increase in corporate bond investments (we expect such increases to continue and to
lead to the percentage of the investment portfolio rated AAA to decline), and
downgrades of municipal investments. The municipal downgrades can be attributed to downgrades of
the financial guaranty insurers and downgrades to the underlying credit.
Investment Portfolio Ratings
|
|
|
|
|
|
|
|
|
|
|
At |
|
|
At |
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
AAA |
|
|
47 |
% |
|
|
58 |
% |
AA |
|
|
30 |
% |
|
|
24 |
% |
A |
|
|
17 |
% |
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A or better |
|
|
94 |
% |
|
|
95 |
% |
|
|
|
|
|
|
|
|
|
BBB and below |
|
|
6 |
% |
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
Approximately 21% of our investment portfolio is guaranteed by the financial guaranty
industry. We evaluate the credit risk of securities through analysis of the underlying
fundamentals. The extent of our analysis depends on a variety of factors, including the issuers
sector, scale, profitability, debt cover, ratings and the tenor of the investment. A breakdown of
the portion of our investment portfolio covered by the financial guaranty industry by credit
rating, including the rating without the guarantee is shown below. The ratings are provided by one
or more of the following major rating agencies: Moodys, Standard & Poors and Fitch Ratings.
85
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor Rating |
|
Underlying Rating |
|
AA |
|
|
AA- |
|
|
Baa1 |
|
|
CC |
|
|
R |
|
|
NR |
|
|
All |
|
|
|
|
|
|
|
($ millions) |
|
AAA |
|
$ |
2 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
19 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
21 |
|
AA |
|
|
192 |
|
|
|
12 |
|
|
|
360 |
|
|
|
180 |
|
|
|
2 |
|
|
|
|
|
|
|
746 |
|
A |
|
|
105 |
|
|
|
28 |
|
|
|
341 |
|
|
|
185 |
|
|
|
15 |
|
|
|
|
|
|
|
674 |
|
BBB |
|
|
9 |
|
|
|
|
|
|
|
34 |
|
|
|
29 |
|
|
|
|
|
|
|
15 |
|
|
|
87 |
|
BB |
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
$ |
308 |
|
|
$ |
40 |
|
|
$ |
741 |
|
|
$ |
413 |
|
|
$ |
17 |
|
|
$ |
15 |
|
|
$ |
1,534 |
|
At December 31, 2009, based on fair value, $9 million of fixed income securities are
relying on financial guaranty insurance to elevate their rating to A and above. Any future
downgrades of these financial guarantor ratings would leave the percentage of fixed income
securities A and above effectively unchanged.
We primarily place our investments in instruments that meet high credit quality standards, as
specified in our investment policy guidelines. The policy guidelines also limit the amount of our
credit exposure to any one issue, issuer and type of instrument. At December 31, 2009, the modified
duration of our fixed income investment portfolio was 3.7 years, which means that an instantaneous
parallel shift in the yield curve of 100 basis points would result in a change of 3.7% in the fair
value of our fixed income portfolio. For an upward shift in the yield curve, the fair value of our
portfolio would decrease and for a downward shift in the yield curve, the fair value would
increase.
We held approximately $490 million in auction rate securities (ARS) backed by student loans
at December 31, 2009. ARS are intended to behave like short-term debt instruments because their
interest rates are reset periodically through an auction process, most commonly at intervals of 7,
28 and 35 days. The same auction process has historically provided a means by which we may rollover
the investment or sell these securities at par in order to provide us with liquidity as needed. In
mid-February 2008, auctions began to fail due to insufficient buyers, as the amount of securities
submitted for sale in auctions exceeded the aggregate amount of the bids. For each failed auction,
the interest rate on the security moves to a maximum rate specified for each security, and
generally resets at a level higher than specified short-term interest rate benchmarks. At December
31, 2009, our entire ARS portfolio, consisting of 47 investments, was subject to failed auctions;
however, we received calls at par for $26.4 million in ARS from the period when the auctions began
to fail through the end of 2009. To date, we have collected all interest due on our ARS and expect
to continue to do so in the future.
The ARS we hold are collateralized by portfolios of student loans, all of which are ultimately
97% guaranteed by the United States Department of Education. At December 31, 2009, approximately
90% of our ARS portfolio was AAA/Aaa-rated by one or more of the following major rating agencies:
Moodys, Standard & Poors and Fitch Ratings. See additional discussion of auction rate securities
backed by student loans in Notes 4 and 5 to our consolidated financial statements contained in Item
8.
At December 31, 2009, our total assets included $1.2 billion of cash and cash equivalents as
shown on our consolidated balance sheet. In addition, included in Other assets is $78.1
86
million of principal and interest receivable related to the sale of our remaining interest in
Sherman.
At December 31, 2009, we had $78.4 million, 5.625% Senior Notes due in September 2011 and $300
million, 5.375% Senior Notes due in November 2015, with a combined fair value of $293.2 million,
outstanding. At December 31, 2009, we also had $389.5 million principal amount of 9% Convertible
Junior Subordinated Debentures due in 2063 outstanding, which at December 31, 2009 are reflected as
a liability on our consolidated balance sheet at the current amortized value of $291.8 million,
with the unamortized discount reflected in equity. The fair value of the convertible debentures was
approximately $254.3 million at December 31, 2009. At December 31, 2009 we also had $35.8 million
of deferred interest outstanding on the convertible debentures which is included in other
liabilities on the consolidated balance sheet.
The Internal Revenue Service (IRS) has completed separate examinations of our federal income
tax returns for the years 2000 through 2004 and 2005 through 2007 and has issued assessments for
unpaid taxes, interest and penalties. The primary adjustment in both examinations relates to our
treatment of the flow through income and loss from an investment in a portfolio of residual
interests of Real Estate Mortgage Investment Conduits (REMICS). The IRS has indicated that it
does not believe that, for various reasons, we have established sufficient tax basis in the REMIC
residual interests to deduct the losses from taxable income. We disagree with this conclusion and
believe that the flow through income and loss from these investments was properly reported on our
federal income tax returns in accordance with applicable tax laws and regulations in effect during
the periods involved and have appealed these adjustments. The appeals process is ongoing and may
last for an extended period of time, although it is possible that a final resolution may be reached
during 2010. The assessment for unpaid taxes related to the REMIC issue for these years is $197.1
million in taxes and accuracy-related penalties, plus applicable interest. Other adjustments
during taxable years 2000 through 2007 are not material, and have been agreed to with the IRS. On
July 2, 2007, we made a payment of $65.2 million with the United States Department of the Treasury
to eliminate the further accrual of interest. Although the resolution of this issue is uncertain,
we believe that sufficient provisions for income taxes have been made for potential liabilities
that may result. If the resolution of this matter differs materially from our estimates, it could
have a material impact on our effective tax rate, results of operations and cash flows.
The total amount of unrecognized tax benefits as of December 31, 2009 is $91.1 million. All of
the unrecognized tax benefits would affect our effective tax rate. We recognize interest accrued
and penalties related to unrecognized tax benefits in income taxes. We have accrued $22.6 million
for the payment of interest as of December 31, 2009. The establishment of this liability required
estimates of potential outcomes of various issues and required significant judgment. Although the
resolutions of these issues are uncertain, we believe that sufficient provisions for income taxes
have been made for potential liabilities that may result. If the resolutions of these matters
differ materially from these estimates, it could have a material impact on our effective tax rate,
results of operations and cash flows.
Our principal exposure to loss is our obligation to pay claims under MGICs mortgage guaranty
insurance policies. At December 31, 2009, MGICs direct (before any reinsurance) primary and pool
risk in force, which is the unpaid principal balance of insured loans as reflected in our records
multiplied by the coverage percentage, and taking account of any loss limit, was approximately
$57.8 billion. In addition, as part of our contract underwriting activities, we are responsible for
the quality of our underwriting decisions in accordance with
87
the terms of the contract underwriting agreements with customers. We may be required to
provide certain remedies to our customers if certain standards relating to the quality of our
underwriting work are not met, and we have an established reserve for such obligations. Through
December 31, 2009, the cost of remedies provided by us to customers for failing to meet the
standards of the contracts has not been material. However, a generally positive economic
environment for residential real estate that continued until approximately 2007 may have mitigated
the effect of some of these costs, and claims for remedies may be made a number of years after the
underwriting work was performed. A material portion of our new insurance written through the flow
channel, including for 2006 and 2007, has involved loans for which we provided contract underwriting services. We
believe the rescission of mortgage insurance coverage on loans on which we also provided contract
underwriting services may make a claim for a contract underwriting remedy more likely to occur. In
the second half of 2009, we experienced an increase in claims for contract underwriting remedies,
which may continue. Hence, there can be no assurance that contract underwriting remedies will not
be material in the future.
Liquidity and Capital Resources
Overview
Our sources of funds consist primarily of:
|
|
|
our investment portfolio (which is discussed in Financial Condition above), and
interest income on the portfolio, |
|
|
|
|
net premiums that we will receive from our existing insurance in force as well as
policies that we write in the future and |
|
|
|
|
amounts that we expect to recover from captives (which is discussed in Results of
Consolidated Operations Risk-Sharing Arrangements and Results of Consolidated
Operations Losses Losses Incurred above). |
Our obligations at December 31, 2009 consist primarily of:
|
|
|
claim payments under MGICs mortgage guaranty insurance policies, |
|
|
|
|
$78.4 million of 5.625% Senior Notes due in September 2011, |
|
|
|
|
$300 million of 5.375% Senior Notes due in November 2015, |
|
|
|
|
$389.5 million of convertible debentures due in 2063, |
|
|
|
|
interest on the foregoing debt instruments, including $35.8 million of deferred
interest on our convertible debentures and |
|
|
|
|
the other costs and operating expenses of our business. |
For the first time in many years, in 2009, claim payments exceeded premiums received. We
expect that this trend will continue. As discussed under Results of Consolidated
88
Operations Losses Losses incurred above, due to the uncertainty regarding how certain
factors, such as foreclosure moratoriums, servicing and court delays, loan modifications, claims
investigations and rescissions, will affect our future paid claims it has become even more
difficult to estimate the amount and timing of future claim payments. When we experience cash
shortfalls, we can fund them through sales of short-term investments and other investment portfolio
securities, subject to insurance regulatory requirements regarding the payment of dividends to the
extent funds were required by an entity other than the seller. Substantially all of the investment
portfolio securities are held by our insurance subsidiaries.
During the first quarter of 2009, we redeemed in exchange for cash from the US Treasury
approximately $432 million of tax and loss bonds. We no longer hold any tax and loss bonds. Tax
and loss bonds that we purchased were not assets on our balance sheet but were recorded as payments
of current federal taxes. For further information about tax and loss bonds, see Note 12, Income
taxes, to our consolidated financial statements in Item 8.
We anticipate that any taxes recovered due to the change in the net operating loss carryback
period, as discussed under Income Taxes above, will primarily be credited to our operating
subsidiaries.
Debt at Our Holding Company and Holding Company Capital Resources
For information about debt at our holding company, see Notes 6 and 7 to our consolidated
financial statements contained in Item 8.
The senior notes and convertible debentures are obligations of MGIC Investment Corporation and
not of its subsidiaries. We are a holding company and the payment of dividends from our insurance
subsidiaries, which historically has been the principal source of our holding company cash inflow,
is restricted by insurance regulation. MGIC is the principal source of dividend-paying capacity.
During 2008, MGIC paid dividends of $45 million to our
holding company, which increased its cash resources. In 2009, MGIC did
not pay any dividends to our holding company which had this effect.
In 2008, other dividends that were immediately contributed to other
insurance company subsidiaries were also paid by MGIC to our holding
company. In 2010 and 2011, MGIC
cannot pay any dividends to our holding company without approval from the OCI. In addition, under
the terms of the Fannie Mae Agreement and Freddie Mac Notification, discussed under Overview,
MGIC may not pay dividends to our holding company without the
GSEs consent; however each GSE has
consented to dividends of not more than $100 million in the aggregate to purchase existing debt
obligations of our holding company or to pay such obligations at maturity.
As of December 31, 2009, we had a total of approximately $84 million in short-term investments
at our holding company. These investments are virtually all of our holding companys liquid assets.
As of December 31, 2009, our holding companys obligations included $78.4 million of debt which is
scheduled to mature before the end of 2011 and must be serviced pending scheduled maturity and $300
million of Senior Notes due in November 2015. On an annual basis, as of December 31, 2009 our use
of funds at the holding company for interest payments on our Senior Notes approximated $21 million.
See Note 7 to our consolidated financial statements contained in Item 8 for a discussion of our
election to defer payment of interest on our junior convertible debentures. The annual interest
payments on these debentures approximate $35 million, excluding interest on the interest payments
that have been deferred.
In 2009, we repurchased for cash approximately $121.6 million in par value of our 5.625%
Senior Notes due in September 2011. We recognized a gain on the repurchases of
89
approximately $27.2
million, which is included in other revenue on our consolidated statement of operations for the
year ended December 31, 2009. We may from time to time continue to seek to acquire our debt
obligations through cash purchases and/or exchanges for other securities. We may do this in open
market purchases, privately negotiated acquisitions or other transactions. The amounts involved
may be material.
Risk-to-Capital
Our risk-to-capital ratio is computed on a statutory basis for our combined insurance
operations and is our net risk in force divided by our policyholders position. Our net risk in
force includes both primary and pool risk in force, and excludes risk on policies that are
currently in default and for which loss reserves have been established. The risk amount represents
pools of loans or bulk deals with contractual aggregate loss limits and in some cases without these
limits. For pools of loans without such limits, risk is estimated based on the amount that would
credit enhance the loans in the pool to a AA level based on a rating agency model. Policyholders
position consists primarily of statutory policyholders surplus (which increases as a result of
statutory net income and decreases as a result of statutory net loss and dividends paid), plus the
statutory contingency reserve. The statutory contingency reserve is reported as a liability on the
statutory balance sheet. A mortgage insurance company is required to make annual contributions to
the contingency reserve of approximately 50% of net earned premiums. These contributions must
generally be maintained for a period of ten years. However, with regulatory approval a mortgage
insurance company may make early withdrawals from the contingency reserve when incurred losses
exceed 35% of net earned premium in a calendar year.
The premium deficiency reserve discussed under Results of Consolidated Operations Losses
Premium deficiency above is not recorded as a liability on the statutory balance sheet and is
not a component of statutory net income. The present value of expected future premiums and already
established loss reserves and statutory contingency reserves, exceeds the present value of expected
future losses and expenses, so no deficiency is recorded on a statutory basis.
Our combined insurance companies risk-to-capital calculation appears in the table below.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
($ in millions) |
|
Risk in force net (1) |
|
$ |
41,136 |
|
|
$ |
54,496 |
|
|
|
|
|
|
|
|
|
|
Statutory policyholders surplus |
|
$ |
1,443 |
|
|
$ |
1,613 |
|
Statutory contingency reserve |
|
|
417 |
|
|
|
2,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory policyholders position |
|
$ |
1,860 |
|
|
$ |
3,699 |
|
|
|
|
|
|
|
|
|
|
Risk-to-capital: |
|
|
22.1:1 |
|
|
|
14.7:1 |
|
|
|
|
(1) |
|
Risk in force net, as shown in the table above, for December 31, 2009 is net of
reinsurance and exposure on policies currently in default ($13.3 billion) and for which
loss reserves have been |
90
established. Risk in force net for December 31, 2008 is net of reinsurance and
established loss reserves.
MGICs separate company risk-to-capital calculation appears in the table below.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
($ in millions) |
|
Risk in force net (1) |
|
$ |
35,663 |
|
|
$ |
46,378 |
|
|
|
|
|
|
|
|
|
|
Statutory policyholders surplus |
|
$ |
1,429 |
|
|
$ |
1,529 |
|
Statutory contingency reserve |
|
|
406 |
|
|
|
2,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory policyholders position |
|
$ |
1,835 |
|
|
$ |
3,589 |
|
|
|
|
|
|
|
|
|
|
Risk-to-capital: |
|
|
19.4:1 |
|
|
|
12.9:1 |
|
|
|
|
(1) |
|
Risk in force net, as shown in the table above, for December 31, 2009 is net of
reinsurance and exposure on policies currently in default and for which loss reserves
have been established. Risk in force net for December 31, 2008 is net of reinsurance
and established loss reserves. |
State insurance regulators have clarified that a mortgage insurers risk outstanding does
not include the companys risk on policies that are currently in default and for which loss
reserves have been established. Beginning with our June 30, 2009 risk-to-capital calculations we
have deducted risk in force on policies currently in default and for which loss reserves have been
established. The risk-to-capital calculation for December 31, 2008 includes a reduction to risk in
force for established reserves only and not the full exposure of loans in default.
Statutory policyholders position decreased in 2009, primarily due to losses incurred. If our
statutory policyholders position decreases at a greater rate than our risk in force, then our
risk-to-capital ratio will continue to increase.
For additional information regarding regulatory capital see Overview-Capital above as well
as our Risk Factor titled While our plan to write new insurance
in MGIC Indemnity Corporation (MIC) has received Wisconsin
OCI and GSE approval, we cannot guarantee that its implementation will allow us to continue to
write new insurance on an uninterrupted basis throughout the United States in the future.
Financial Strength Ratings
The financial strength of MGIC, our principal mortgage insurance subsidiary, is rated Ba3 by
Moodys Investors Service with a negative outlook. Standard & Poors Rating Services insurer
financial strength rating of MGIC is B+ and the outlook for this rating is negative. In January
2010, at our request, Fitch withdrew its financial strength ratings of MGIC.
For further information about the importance of MGICs ratings, see our Risk Factor titled
MGIC may not continue to meet the GSEs mortgage insurer eligibility requirements.
91
Contractual Obligations
At December 31, 2009, the approximate future payments under our contractual obligations of the
type described in the table below are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
Contractual Obligations ($ millions): |
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
3-5 years |
|
|
5 years |
|
Long-term debt obligations |
|
$ |
2,797 |
|
|
$ |
56 |
|
|
$ |
183 |
|
|
$ |
102 |
|
|
$ |
2,456 |
|
Operating lease obligations |
|
|
11 |
|
|
|
5 |
|
|
|
5 |
|
|
|
1 |
|
|
|
|
|
Purchase obligations |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension, SERP and other post-retirement
benefit plans |
|
|
154 |
|
|
|
9 |
|
|
|
22 |
|
|
|
29 |
|
|
|
94 |
|
Other long-term liabilities |
|
|
6,705 |
|
|
|
2,413 |
|
|
|
3,353 |
|
|
|
939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,668 |
|
|
$ |
2,484 |
|
|
$ |
3,563 |
|
|
$ |
1,071 |
|
|
$ |
2,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our long-term debt obligations at December 31, 2009 include our approximately $78.4
million of 5.625% Senior Notes due in September 2011, $300 million of 5.375% Senior Notes due in
November 2015 and $389.5 million in convertible debentures due in 2063, including related interest,
as discussed in Notes 6 and 7 to our consolidated financial statements contained in Item 8 and
under Liquidity and Capital Resources above. Interest on our convertible debentures that would
have been payable on the scheduled interest payment dates, but which we elected to defer for 10
years as discussed in Note 7 to our consolidated financial statements, is included in the More
than 5 years column in the table above. Our operating lease obligations include operating leases
on certain office space, data processing equipment and autos, as discussed in Note 14 to our
consolidated financial statements contained in Item 8. Purchase obligations consist primarily of
agreements to purchase data processing hardware or services made in the normal course of business.
See Note 11 to our consolidated financial statements contained in Item 8 for discussion of expected
benefit payments under our benefit plans.
Our other long-term liabilities represent the loss reserves established to recognize the
liability for losses and loss adjustment expenses related to defaults on insured mortgage loans.
The timing of the future claim payments associated with the established loss reserves was
determined primarily based on two key assumptions: the length of time it takes for a notice of
default to develop into a received claim and the length of time it takes for a received claim to be
ultimately paid. The future claim payment periods are estimated based on historical experience, and
could emerge significantly different than this estimate. As discussed under Losses incurred
above, due to the uncertainty regarding how certain factors, such as foreclosure moratoriums,
servicing and court delays, loan modifications, claims investigations and claim rescissions, will
affect our future paid claims it has become even more difficult to estimate the amount and timing
of future claim payments. Current conditions in the housing and mortgage industries make all of the
assumptions discussed in this paragraph more volatile than they would otherwise be. See Note 8 to
our consolidated
92
financial statements contained in Item 8 and -Critical Accounting Policies. In accordance with
GAAP for the mortgage insurance industry, we establish loss reserves only for loans in default.
Because our reserving method does not take account of the impact of future losses
that could occur from loans that are not delinquent, our obligation for ultimate losses that we
expect to occur under our policies in force at any period end is not reflected in our financial
statements or in the table above.
The table above does not reflect the liability for unrecognized tax benefits due to
uncertainties in the timing of the effective settlement of tax positions. We cannot make a
reasonably reliable estimate of the timing of payment for the liability for unrecognized tax
benefits, net of payments on account, of $22.9 million. See Note 12 to our consolidated financial
statements contained in Item 8 for additional discussion on unrecognized tax benefits and open IRS
examinations.
Critical Accounting Policies
We believe that the accounting policies described below involved significant judgments and
estimates used in the preparation of our consolidated financial statements.
Loss reserves and premium deficiency reserves
Loss reserves
Reserves are established for reported insurance losses and loss adjustment expenses based on
when notices of default on insured mortgage loans are received. A default is defined as an insured
loan with a mortgage payment that is 45 days or more past due. Reserves are also established for
estimated losses incurred on notices of default not yet reported. In accordance with GAAP for the
mortgage insurance industry, we do not establish loss reserves for future claims on insured loans
which are not currently in default.
We establish reserves using estimated claims rates and claims amounts in estimating the
ultimate loss. Amounts for salvage recoverable are considered in the determination of the reserve
estimates. The liability for reinsurance assumed is based on information provided by the ceding
companies.
The incurred but not reported, or IBNR, reserves referred to above result from defaults
occurring prior to the close of an accounting period, but which have not been reported to us.
Consistent with reserves for reported defaults, IBNR reserves are established using estimated
claims rates and claims amounts for the estimated number of defaults not reported. As of December
31, 2009 and 2008, we had IBNR reserves of $472 million and $480 million, respectively.
Reserves also provide for the estimated costs of settling claims, including legal and other
expenses and general expenses of administering the claims settlement process.
The estimated claims rates and claims amounts represent what we believe best reflect the
estimate of what will actually be paid on the loans in default as of the reserve date. The estimate
of claims rates and claims amounts are based on our review of recent trends in the default
inventory. We review recent trends in the rate at which defaults resulted in a claim, or the claim
rate, the amount of the claim, or severity, the change in the level of defaults by
93
geography and the change in average loan exposure. As a result, the process to determine reserves does not
include quantitative ranges of outcomes that are reasonably likely to occur.
The claims rate and claim amounts are likely to be affected by external events, including
actual economic conditions such as changes in unemployment rate, interest rate or housing value.
Our estimation process does not include a correlation between claims rate and claims amounts to
projected economic conditions such as changes in unemployment rate, interest rate or housing value.
Our experience is that analysis of that nature would not produce reliable results. The results
would not be reliable as the change in one economic condition cannot be isolated to determine its
sole effect on our ultimate paid losses as our ultimate paid losses are also influenced at the same
time by other economic conditions. Additionally, the changes and interaction of these economic
conditions are not likely homogeneous throughout the regions in which we conduct business. Each
economic environment influences our ultimate paid losses differently, even if apparently similar in
nature. Furthermore, changes in economic conditions may not necessarily be reflected in our loss
development in the quarter or year in which the changes occur. Typically, actual claim results
often lag changes in economic conditions by at least nine to twelve months.
In considering the potential sensitivity of the factors underlying our best estimate of loss
reserves, it is possible that even a relatively small change in estimated claim rate or a
relatively small percentage change in estimated claim amount could have a significant impact on
reserves and, correspondingly, on results of operations. For example, a $1,000 change in the
average severity reserve factor combined with a 1% change in the average claim rate reserve factor
would change the reserve amount by approximately $282 million as of December 31, 2009.
Historically, it has not been uncommon for us to experience variability in the development of the
loss reserves through the end of the following year at this level or higher, as shown by the
historical development of our loss reserves in the table below:
|
|
|
|
|
|
|
|
|
|
|
Losses incurred |
|
|
Reserve at |
|
|
|
related to |
|
|
end of |
|
|
|
prior years (1) |
|
|
prior year |
|
2009 |
|
$ |
(466,765 |
) |
|
$ |
4,775,552 |
|
2008 |
|
|
(387,104 |
) |
|
|
2,642,479 |
|
2007 |
|
|
(518,950 |
) |
|
|
1,125,715 |
|
2006 |
|
|
90,079 |
|
|
|
1,124,454 |
|
2005 |
|
|
126,167 |
|
|
|
1,185,594 |
|
|
|
|
(1) |
|
A positive number for a prior year indicates a redundancy of loss reserves,
and a negative number for a prior year indicates a deficiency of loss reserves. |
Estimation of losses that we will pay in the future is inherently judgmental. The
conditions that affect the claim rate and claim severity include the current and future state of
the domestic economy and the current and future strength of local housing markets. Current
conditions in the housing and mortgage industries make these assumptions more volatile than they
would otherwise be. The actual amount of the claim payments may be substantially different than our
loss reserve estimates. Our estimates could be adversely affected by several factors, including a
deterioration of regional or national economic conditions leading to a reduction in borrowers
income and thus their ability to make mortgage payments, and a drop in housing values that could
materially reduce our ability to mitigate potential losses
94
through property acquisition and resale or expose us to greater losses on resale of properties
obtained through the claim settlement process. Changes to our estimates could result in a material
impact to our results of operations, even in a stable economic environment.
In
addition, our loss reserving methodology incorporates the effects
rescission activity is expected to have on the losses we will pay on our delinquent inventory. We do not utilize an
explicit rescission rate in our reserving methodology, but rather our reserving methodology
incorporates the effects rescission activity has had on our historical claim rate and claim
severities. A variance between ultimate actual rescission rates and these estimates could
materially affect our losses. Based upon the increase in rescission activity during 2008 and 2009,
the effects rescissions have on our losses incurred have become material. While we do not
incorporate an explicit rescission rate into our reserving methodology, we have estimated the
effects rescissions have had on our incurred losses based upon recent rescission history. We
estimate that rescissions mitigated our incurred losses by approximately $2.5 billion in 2009,
compared to $0.4 million in 2008; both of these figures include the benefit of claims not paid as well as the
impact on our loss reserves.
If the insured disputes our right to rescind coverage, whether the requirements to rescind are
met ultimately would be determined by legal proceedings. Objections to rescission
may be made several years after we have rescinded an insurance policy. Countrywide has filed a
lawsuit against MGIC alleging that MGIC has denied, and continues to deny, valid mortgage insurance
claims. We have filed an arbitration case against Countrywide regarding rescissions. For more information
about this lawsuit and arbitration case, see Note 15 to our consolidated financial statements in
Item 8 and the risk factor titled, We are subject to the risk of private litigation and regulatory
proceedings in Item 1A. In addition, we continue to have discussions with other
lenders regarding their objections to rescissions that in the aggregate are material and are
involved in arbitration proceedings with respect to an amount of rescissions that are not material.
Information regarding the ever-to-date rescission rates by the quarter in which the claim was
received appears in the table below. No information is presented for claims received two quarters
or less before the end of our most recently completed quarter to allow sufficient time for a
substantial percentage of the claims received in those two quarters to reach resolution.
As of December 31, 2009
Ever-to-Date Rescission Rates on Claims Received
(based on count)
|
|
|
|
|
Quarter in Which the |
|
ETD Rescission |
|
ETD Claims Resolution |
Claim was Received |
|
Rate (1) |
|
Percentage (2) |
Q1 2008 |
|
12.6% |
|
100.0% |
Q2 2008 |
|
16.0% |
|
100.0% |
Q3 2008 |
|
21.3% |
|
99.8% |
Q4 2008 |
|
24.9% |
|
99.2% |
Q1 2009 |
|
28.0% |
|
97.2% |
Q2 2009 |
|
22.2% |
|
89.1% |
|
|
|
(1) |
|
This percentage is claims received during the quarter shown that have been rescinded as of
our most recently completed quarter divided by the total claims received during the quarter
shown. |
|
(2) |
|
This percentage is claims received during the quarter shown that have been resolved as of our
most recently completed quarter divided by the total claims received during the quarter shown.
Claims resolved principally consist of claims paid plus claims rescinded. |
95
We anticipate that the ever-to-date rescission rate in the more recent quarters will
increase as the ever-to-date resolution percentage approaches 100%.
Our estimates could also be positively affected by government efforts to assist current
borrowers in refinancing to new loans, assisting delinquent borrowers and lenders in reducing their
mortgage payments, and forestalling foreclosures.
One such program is the Home Affordable Modification Program (HAMP), which was announced by
the US Treasury in early 2009. Some of HAMPs eligibility criteria require current information
about borrowers, such as his or her current income and non-mortgage debt payments. Because the GSEs
and servicers do not share such information with us, we cannot determine with certainty the number
of loans in our delinquent inventory that are eligible to participate in HAMP. We believe that it
could take several months from the time a borrower has made all of the payments during HAMPs three
month trial modification period for the loan to be reported to us as a cured delinquency. We are
aware of approximately 29,700 loans in our delinquent inventory at December 31, 2009 for which the
HAMP trial period has begun and approximately 2,400 delinquent loans have cured their delinquency
after entering HAMP. We rely on information provided to us by the GSEs and servicers. We do not
receive all of the information from such sources that is required to determine with certainty the
number of loans that are participating in, or have successfully completed, HAMP.
In addition, private company efforts may have a positive impact on our loss development. All
of the programs, including HAMP, are in their early stages and therefore we are unsure of their
magnitude or the benefit to us or our industry, and as a result are not factored into our current
reserving.
Loss reserves in the most recent years contain a greater degree of uncertainty, even though
the estimates are based on the best available data.
Premium deficiency reserve
After our reserves are established, we perform premium deficiency calculations using best
estimate assumptions as of the testing date. The calculation of premium deficiency reserves
requires the use of significant judgments and estimates to determine the present value of future
premium and present value of expected losses and expenses on our business. The present value of
future premium relies on, among other things, assumptions about persistency and repayment patterns
on underlying loans. The present value of expected losses and expenses depends on assumptions
relating to severity of claims and claim rates on current defaults, and expected defaults in future
periods. These assumptions also include an estimate of expected rescission activity. Assumptions
used in calculating the deficiency reserves can be affected by volatility in the current housing
and mortgage lending industries. To the extent premium patterns and actual loss experience differ
from the assumptions used in calculating the premium deficiency reserves, the differences between
the actual results and our estimate will affect future period earnings.
The establishment of premium deficiency reserves is subject to inherent uncertainty and
requires judgment by management. The actual amount of claim payments and premium collections may
vary significantly from the premium deficiency reserve estimates. Similar to
96
our loss reserve estimates, our estimates for premium deficiency reserves could be adversely affected by several
factors, including a deterioration of regional or economic conditions
leading to a reduction in borrowers income and thus their ability to make mortgage payments,
and a drop in housing values that could expose us to greater losses. Changes to our estimates
could result in material changes in our operations, even in a stable economic environment.
Adjustments to premium deficiency reserves estimates are reflected in the financial statements in
the years in which the adjustments are made.
As is the case with our loss reserves, as discussed above, the severity of claims and claim
rates, as well as persistency for the premium deficiency calculation, are likely to be affected by
external events, including actual economic conditions, as well as future rescission activity.
However, our estimation process does not include a correlation between these economic conditions
and our assumptions because it is our experience that an analysis of that nature would not produce
reliable results. In considering the potential sensitivity of the factors underlying managements
best estimate of premium deficiency reserves, it is possible that even a relatively small change in
estimated claim rate or a relatively small percentage change in estimated claim amount could have a
significant impact on the premium deficiency reserve and, correspondingly, on our results of
operations. For example, a $1,000 change in the average severity combined with a 1% change in the
average claim rate could change the Wall Street bulk premium deficiency reserve amount by
approximately $97 million. Additionally, a 5% change in the persistency of the underlying loans
could change the Wall Street bulk premium deficiency reserve amount by approximately $13 million.
We do not anticipate changes in the discount rate will be significant enough as to result in
material changes in the calculation.
Revenue recognition
When a policy term ends, the primary mortgage insurance written by us is renewable at the
insureds option through continued payment of the premium in accordance with the schedule
established at the inception of the policy term. We have no ability to reunderwrite or reprice
these policies after issuance. Premiums written under policies having single and annual premium
payments are initially deferred as unearned premium reserve and earned over the policy term.
Premiums written on policies covering more than one year are amortized over the policy life in
accordance with the expiration of risk which is the anticipated claim payment pattern based on
historical experience. Premiums written on annual policies are earned on a monthly pro rata basis.
Premiums written on monthly policies are earned as the monthly coverage is provided. When a policy
is cancelled, all premium that is non-refundable is immediately earned. Any refundable premium is
returned to the lender and will have no effect on earned premium. Policy cancellations also lower
the persistency rate which is a variable used in calculating the rate of amortization of deferred
policy acquisition costs discussed below. When a policy is rescinded,
all previously collected premium is returned to
the lender. The liability associated with our estimate of premium to be returned on expected future
rescissions is accrued for separately and separate components of this
liability are included in Other liabilities and
Premium deficiency reserves on our consolidated
balance sheet. Changes in this liability effect premiums written and earned.
Fee income of our non-insurance subsidiaries is earned and recognized as the services are
provided and the customer is obligated to pay.
Deferred insurance policy acquisition costs
97
Costs associated with the acquisition of mortgage insurance policies, consisting of employee
compensation and other policy issuance and underwriting expenses, are initially deferred and
reported as deferred insurance policy acquisition costs. Deferred insurance policy acquisition
costs arising from each book of business is charged against revenue in the same proportion that the
underwriting profit for the period of the charge bears to the total underwriting profit over the
life of the policies. The underwriting profit and the life of the policies are estimated and are
reviewed quarterly and updated when necessary to reflect actual experience and any changes to key
variables such as persistency or loss development. Interest is accrued on the unamortized balance
of deferred insurance policy acquisition costs.
Because our insurance premiums are earned over time, changes in persistency result in deferred
insurance policy acquisition costs being amortized against revenue over a comparable period of
time. At December 31, 2009, the persistency rate of our primary mortgage insurance was 84.7%,
compared to 84.4% at December 31, 2008. This change did not significantly affect the amortization
of deferred insurance policy acquisition costs for the period ended December 31, 2009. A 10%
change in persistency would not have a material effect on the amortization of deferred insurance
policy acquisition costs in the subsequent year.
If a premium deficiency exists, we reduce the related deferred insurance policy acquisition
costs by the amount of the deficiency or to zero through a charge to current period earnings. If
the deficiency is more than the deferred insurance policy acquisition costs balance, we then
establish a premium deficiency reserve equal to the excess, by means of a charge to current period
earnings.
Fair Value Measurements
We adopted fair value accounting guidance that became effective January 1, 2008. This
guidance addresses aspects of the expanding application of fair-value accounting. The guidance
defines fair value, establishes a consistent framework for measuring fair value and expands
disclosure requirements regarding fair-value measurements and provides companies with an option to
report selected financial assets and liabilities at fair value with changes in fair value reported
in earnings. The option to account for selected financial assets and liabilities at fair value is
made on an instrument-by-instrument basis at the time of acquisition. For the years ended December
31, 2009 and 2008, we did not elect the fair value option for any financial instruments acquired
for which the primary basis of accounting is not fair value.
In accordance with fair value guidance, we applied the following fair value hierarchy in order
to measure fair value for assets and liabilities:
Level 1 Quoted prices for identical instruments in active markets that we have the ability
to access. Financial assets utilizing Level 1 inputs include certain U.S. Treasury securities and
obligations of the U.S. government.
Level 2 Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and inputs, other than quoted
prices, that are observable in the marketplace for the financial instrument. The observable inputs
are used in valuation models to calculate the fair value of the financial instruments. Financial
assets utilizing Level 2 inputs include certain municipal and corporate bonds.
98
Level 3 Valuations derived from valuation techniques in which one or more significant
inputs or value drivers are unobservable. Level 3 inputs reflect our own assumptions about the
assumptions a market participant would use in pricing an asset or liability. Financial assets
utilizing Level 3 inputs include certain state, corporate, auction rate (backed by student loans)
and mortgage-backed securities. Non-financial assets which utilize Level 3 inputs include real
estate acquired through claim settlement. Additionally, financial liabilities utilizing Level 3
inputs consisted of derivative financial instruments.
To determine the fair value of securities available-for-sale in Level 1 and Level 2 of the
fair value hierarchy, independent pricing sources have been utilized. One price is provided per
security based on observable market data. To ensure securities are appropriately classified in the
fair value hierarchy, we review the pricing techniques and methodologies of the independent pricing
sources and believe that their policies adequately consider market activity, either based on
specific transactions for the issue valued or based on modeling of securities with similar credit
quality, duration, yield and structure that were recently traded. A variety of inputs are utilized
including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two sided
markets, benchmark securities, bids, offers and reference data including market research
publications. Inputs may be weighted differently for any security, and not all inputs are used for
each security evaluation. Market indicators, industry and economic events are also considered. This
information is evaluated using a multidimensional pricing model. Quality controls are performed
throughout this process which includes reviewing tolerance reports, trading information and data
changes, and directional moves compared to market moves. This model combines all inputs to arrive
at a value assigned to each security. On a quarterly basis, we perform quality controls over
values received from the pricing sources which include reviewing tolerance reports, trading
information and data changes, and directional moves compared to market moves. We have not made any
adjustments to the prices obtained from the independent pricing sources.
Assets and liabilities classified as Level 3 are as follows:
Securities available-for-sale classified in Level 3 are not readily marketable and are
valued using internally developed models based on the present value of expected cash flows. Our
Level 3 securities primarily consist of auction rate securities as observable inputs or value
drivers are unavailable due to events described in Note 4. Due to limited market information, we
utilized a discounted cash flow (DCF) model to derive an estimate of fair value of these assets
at December 31, 2009 and 2008. The assumptions used in preparing the DCF model included estimates
with respect to the amount and timing of future interest and principal payments, the probability of
full repayment of the principal considering the credit quality and guarantees in place, and the
rate of return required by investors to own such securities given the current liquidity risk
associated with them. The DCF model is based on the following key assumptions.
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|
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Nominal credit risk as securities are ultimately guaranteed by the United States
Department of Education; |
|
|
|
|
Liquidity by December 31, 2011 through December 31, 2014; |
|
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|
|
Continued receipt of contractual interest; and |
|
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|
Discount rates ranging from 2.23% to 3.23%, which include a spread for liquidity risk. |
99
A 1.00% change in the discount rate would change the value of our ARS by approximately $13.7
million. A two year change to the years to liquidity assumption would change the value of our ARS
by approximately $18.5 million.
Real estate acquired through claim settlement is fair valued at the lower of our
acquisition cost or a percentage of appraised value. The percentage applied to appraised value is
based upon our historical sales experience adjusted for current trends.
Investment Portfolio
We categorize our investment portfolio according to our ability and intent to hold the
investments to maturity. Investments which we do not have the ability and intent to hold to
maturity are considered to be available-for-sale and are reported at fair value and the related
unrealized gains or losses are, after considering the related tax expense or benefit, recognized as
a component of accumulated other comprehensive income in shareholders equity. Our entire
investment portfolio is classified as available-for-sale. Realized investment gains and losses are
reported in income based upon specific identification of securities sold. (See note 4.)
In April 2009, new accounting guidance regarding the recognition and presentation of
other-than-temporary impairments were issued. The new guidance require us to separate an
other-than-temporary impairment (OTTI) of a debt security into two components when there are
credit related losses associated with the impaired debt security for which we assert that we do not
have the intent to sell the security, and it is more likely than not that we will not be required
to sell the security before recovery of our cost basis. Under this guidance the amount of the OTTI
related to a credit loss is recognized in earnings, and the amount of the OTTI related to other
factors (such as changes in interest rates or market conditions) is recorded as a component of
other comprehensive income (loss). In instances where no credit loss exists but it is more likely
than not that we will have to sell the debt security prior to the anticipated recovery, the decline
in fair value below amortized cost is recognized as an OTTI in earnings. In periods after
recognition of an OTTI on debt securities, we account for such securities as if they had been
purchased on the measurement date of the OTTI at an amortized cost basis equal to the previous
amortized cost basis less the OTTI recognized in earnings. For debt securities for which OTTI were
recognized in earnings, the difference between the new amortized cost basis and the cash flows
expected to be collected will be accreted or amortized into net investment income. This guidance
was effective beginning with the quarter ending June 30, 2009.
Each quarter we perform reviews of our investments in order to determine whether declines in
fair value below amortized cost were considered other-than-temporary in accordance with applicable
guidance. In evaluating whether a decline in fair value is other-than-temporary, we consider
several factors including, but not limited to:
|
|
|
our intent to sell the security or whether it is more likely than not that we will be
required to sell the security before recovery; |
|
|
|
|
extent and duration of the decline; |
|
|
|
|
failure of the issuer to make scheduled interest or principal payments; |
|
|
|
|
change in rating below investment grade; and |
|
|
|
|
adverse conditions specifically related to the security, an industry, or a geographic
area. |
100
Under the current guidance a debt security impairment is deemed other than temporary if we
either intend to sell the security, or it is more likely than not that we will be required to sell
the security before recovery or we do not expect to collect cash flows sufficient to recover
the amortized cost basis of the security. During 2009 we recognized OTTI in earnings of $40.9
million and an additional $1.8 million of OTTI in other comprehensive income. During 2008 we
recognized OTTI in earnings of approximately $65.4 million. There were no OTTI impairment charges
on our investment portfolio during 2007.
101
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
At December 31, 2009, the derivative financial instruments in our investment portfolio were
immaterial. We place our investments in instruments that meet high credit quality standards, as
specified in our investment policy guidelines; the policy also limits the amount of credit exposure
to any one issue, issuer and type of instrument. At December 31, 2009, the modified duration of our
fixed income investment portfolio was 3.7 years, which means that an instantaneous parallel shift
in the yield curve of 100 basis points would result in a change of 3.7% in the market value of our
fixed income portfolio. For an upward shift in the yield curve, the market value of our portfolio
would decrease and for a downward shift in the yield curve, the market value would increase.
102
Item 8. Financial Statements and Supplementary Data.
The following consolidated financial statements are filed pursuant to this Item 8:
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Page No. |
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104 |
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105 |
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106 |
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107 |
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108 |
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177 |
|
103
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2009, 2008 and 2007
(Audited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted |
|
|
|
|
|
|
|
|
|
|
(note 2) |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands of dollars, except per share data) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written: |
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
1,346,191 |
|
|
$ |
1,661,544 |
|
|
$ |
1,513,395 |
|
Assumed |
|
|
3,947 |
|
|
|
12,221 |
|
|
|
3,288 |
|
Ceded (note 9) |
|
|
(107,111 |
) |
|
|
(207,718 |
) |
|
|
(170,889 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written |
|
|
1,243,027 |
|
|
|
1,466,047 |
|
|
|
1,345,794 |
|
Decrease (increase) in unearned premiums |
|
|
59,314 |
|
|
|
(72,867 |
) |
|
|
(83,404 |
) |
|
|
|
|
|
|
|
|
|
|
Net premiums earned (note 9) |
|
|
1,302,341 |
|
|
|
1,393,180 |
|
|
|
1,262,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of expenses (note 4) |
|
|
304,678 |
|
|
|
308,517 |
|
|
|
259,828 |
|
Realized investment gains, net (note 4) |
|
|
92,874 |
|
|
|
52,889 |
|
|
|
142,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment losses |
|
|
(42,704 |
) |
|
|
(65,375 |
) |
|
|
|
|
Portion of losses recognized in other comprehensive
income (loss), before taxes (note 2) |
|
|
1,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings |
|
|
(40,940 |
) |
|
|
(65,375 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenue |
|
|
49,573 |
|
|
|
32,315 |
|
|
|
28,793 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,708,526 |
|
|
|
1,721,526 |
|
|
|
1,693,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses incurred, net (notes 8 and 9) |
|
|
3,379,444 |
|
|
|
3,071,501 |
|
|
|
2,365,423 |
|
Change in premium deficiency reserves (note 8) |
|
|
(261,150 |
) |
|
|
(756,505 |
) |
|
|
1,210,841 |
|
Underwriting and other expenses |
|
|
239,612 |
|
|
|
271,314 |
|
|
|
309,610 |
|
Reinsurance fee (note 9) |
|
|
26,407 |
|
|
|
1,781 |
|
|
|
|
|
Interest expense (notes 6 and 7) |
|
|
89,266 |
|
|
|
81,074 |
|
|
|
41,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses |
|
|
3,473,579 |
|
|
|
2,669,165 |
|
|
|
3,927,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax and joint ventures |
|
|
(1,765,053 |
) |
|
|
(947,639 |
) |
|
|
(2,234,654 |
) |
Benefit from income taxes (note 12) |
|
|
(442,776 |
) |
|
|
(397,798 |
) |
|
|
(833,977 |
) |
Income (loss) from joint ventures, net of tax
(note 10) |
|
|
|
|
|
|
24,486 |
|
|
|
(269,341 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,322,277 |
) |
|
$ |
(525,355 |
) |
|
$ |
(1,670,018 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share (note 13): |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(10.65 |
) |
|
$ |
(4.61 |
) |
|
$ |
(20.54 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(10.65 |
) |
|
$ |
(4.61 |
) |
|
$ |
(20.54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
- basic (shares in thousands, note 2) |
|
|
124,209 |
|
|
|
113,962 |
|
|
|
81,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
- diluted (shares in thousands, note 2) |
|
|
124,209 |
|
|
|
113,962 |
|
|
|
81,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
|
|
|
$ |
0.075 |
|
|
$ |
0.775 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
104
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008
(Audited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted |
|
|
|
|
|
|
|
(note 2) |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands of dollars) |
|
ASSETS |
|
|
|
|
|
|
|
|
Investment portfolio (note 4): |
|
|
|
|
|
|
|
|
Securities, available-for-sale, at fair value: |
|
|
|
|
|
|
|
|
Fixed maturities (amortized cost, 2009-$7,091,840; 2008-$7,120,690) |
|
$ |
7,251,574 |
|
|
$ |
7,042,903 |
|
Equity securities (cost, 2009-$2,892; 2008-$2,778) |
|
|
2,891 |
|
|
|
2,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio |
|
|
7,254,465 |
|
|
|
7,045,536 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
1,185,739 |
|
|
|
1,097,334 |
|
Accrued investment income |
|
|
79,828 |
|
|
|
90,856 |
|
Reinsurance recoverable on loss reserves (note 9) |
|
|
332,227 |
|
|
|
232,988 |
|
Prepaid reinsurance premiums (note 9) |
|
|
3,554 |
|
|
|
4,416 |
|
Premiums receivable |
|
|
90,139 |
|
|
|
97,601 |
|
Home office and equipment, net |
|
|
29,556 |
|
|
|
32,255 |
|
Deferred insurance policy acquisition costs |
|
|
9,022 |
|
|
|
11,504 |
|
Income taxes recoverable (note 12) |
|
|
275,187 |
|
|
|
370,473 |
|
Other assets |
|
|
144,702 |
|
|
|
163,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
9,404,419 |
|
|
$ |
9,146,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Loss reserves (notes 8 and 9) |
|
$ |
6,704,990 |
|
|
$ |
4,775,552 |
|
Premium deficiency reserves (note 8) |
|
|
193,186 |
|
|
|
454,336 |
|
Unearned premiums (note 9) |
|
|
280,738 |
|
|
|
336,098 |
|
Short- and long-term debt (note 6) |
|
|
377,098 |
|
|
|
698,446 |
|
Convertible debentures (note 7) |
|
|
291,785 |
|
|
|
272,465 |
|
Other liabilities |
|
|
254,041 |
|
|
|
175,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
8,101,838 |
|
|
|
6,712,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingencies (note 15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity (note 13): |
|
|
|
|
|
|
|
|
Common stock, $1 par value, shares authorized
460,000,000; shares issued 2009 - 130,163,060; 2008 - 130,118,744;
outstanding 2009 - 125,101,057; 2008 - 125,068,350 |
|
|
130,163 |
|
|
|
130,119 |
|
Paid-in capital |
|
|
443,294 |
|
|
|
440,542 |
|
Treasury
stock (shares at cost 2009 - 5,062,003; 2008 - 5,050,394) |
|
|
(269,738 |
) |
|
|
(276,873 |
) |
Accumulated other comprehensive income (loss), net of tax (note 2) |
|
|
74,155 |
|
|
|
(106,789 |
) |
Retained earnings |
|
|
924,707 |
|
|
|
2,247,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
1,302,581 |
|
|
|
2,434,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
9,404,419 |
|
|
$ |
9,146,734 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
105
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years Ended December 31, 2007, 2008 and 2009
(Audited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other |
|
|
|
|
|
|
|
|
|
Common |
|
|
Paid-in |
|
|
Treasury |
|
|
comprehensive |
|
|
Retained |
|
|
Comprehensive |
|
|
|
stock |
|
|
capital |
|
|
stock |
|
|
income (loss) (note 2) |
|
|
earnings |
|
|
loss |
|
|
|
|
|
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
$ |
123,029 |
|
|
$ |
310,394 |
|
|
$ |
(2,201,966 |
) |
|
$ |
65,789 |
|
|
$ |
5,998,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,670,018 |
) |
|
$ |
(1,670,018 |
) |
Change in unrealized investment gains and losses, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,767 |
) |
|
|
|
|
|
|
(17,767 |
) |
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63,819 |
) |
|
|
|
|
Common stock shares issued |
|
|
38 |
|
|
|
2,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of outstanding common shares |
|
|
|
|
|
|
|
|
|
|
(75,659 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Reissuance of treasury stock |
|
|
|
|
|
|
(14,187 |
) |
|
|
11,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation |
|
|
|
|
|
|
18,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit plan adjustments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,561 |
|
|
|
|
|
|
|
14,561 |
|
Change in the liability for unrecognized tax benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,522 |
|
|
|
|
|
Unrealized foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,456 |
|
|
|
|
|
|
|
8,456 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(364 |
) |
|
|
|
|
|
|
(364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,665,132 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
$ |
123,067 |
|
|
$ |
316,649 |
|
|
$ |
(2,266,364 |
) |
|
$ |
70,675 |
|
|
$ |
4,350,316 |
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(518,914 |
) |
|
|
(518,914 |
) |
Change in unrealized investment gains and losses, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(116,939 |
) |
|
|
|
|
|
|
(116,939 |
) |
Dividends declared (note 13) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,159 |
) |
|
|
|
|
Common stock shares issued (note 13) |
|
|
7,052 |
|
|
|
68,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reissuance of treasury stock |
|
|
|
|
|
|
(41,686 |
) |
|
|
1,989,491 |
|
|
|
|
|
|
|
(1,569,567 |
) |
|
|
|
|
Equity compensation |
|
|
|
|
|
|
20,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit plan adjustments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,649 |
) |
|
|
|
|
|
|
(44,649 |
) |
Unrealized foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,354 |
) |
|
|
|
|
|
|
(16,354 |
) |
Other |
|
|
|
|
|
|
2,836 |
|
|
|
|
|
|
|
478 |
|
|
|
|
|
|
|
478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(696,378 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 (as originally reported) |
|
$ |
130,119 |
|
|
$ |
367,067 |
|
|
$ |
(276,873 |
) |
|
$ |
(106,789 |
) |
|
$ |
2,253,676 |
|
|
|
|
|
Cumulative effect of accounting change (convertible debt) |
|
|
|
|
|
|
73,475 |
|
|
|
|
|
|
|
|
|
|
|
(6,442 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 (as adjusted) |
|
$ |
130,119 |
|
|
$ |
440,542 |
|
|
$ |
(276,873 |
) |
|
$ |
(106,789 |
) |
|
$ |
2,247,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,322,277 |
) |
|
|
(1,322,277 |
) |
Change in unrealized investment gains and losses, net (note 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154,358 |
|
|
|
|
|
|
|
154,358 |
|
Noncredit component of impairment losses, net (note 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,764 |
) |
|
|
|
|
|
|
(1,764 |
) |
Common stock shares issued upon debt conversion (note 7) |
|
|
44 |
|
|
|
263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reissuance of treasury stock (13) |
|
|
|
|
|
|
(11,613 |
) |
|
|
7,135 |
|
|
|
|
|
|
|
(545 |
) |
|
|
|
|
Equity compensation (note 13) |
|
|
|
|
|
|
14,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit plan adjustments, net (note 11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,704 |
|
|
|
|
|
|
|
10,704 |
|
Unrealized foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,646 |
|
|
|
|
|
|
|
17,646 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,141,333 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
$ |
130,163 |
|
|
$ |
443,294 |
|
|
$ |
(269,738 |
) |
|
$ |
74,155 |
|
|
$ |
924,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
106
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2009, 2008 and 2007
(Audited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands of dollars) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,322,277 |
) |
|
$ |
(525,355 |
) |
|
$ |
(1,670,018 |
) |
Adjustments to reconcile net loss to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred insurance policy
acquisition costs |
|
|
8,204 |
|
|
|
10,024 |
|
|
|
12,922 |
|
Capitalized deferred insurance policy
acquisition costs |
|
|
(5,722 |
) |
|
|
(10,360 |
) |
|
|
(11,321 |
) |
Depreciation and other amortization |
|
|
60,349 |
|
|
|
33,688 |
|
|
|
24,695 |
|
Decrease (increase) in accrued investment income |
|
|
11,028 |
|
|
|
(18,027 |
) |
|
|
(8,183 |
) |
Increase in reinsurance recoverable
on loss reserves |
|
|
(99,239 |
) |
|
|
(197,744 |
) |
|
|
(21,827 |
) |
Decrease in prepaid reinsurance premiums |
|
|
862 |
|
|
|
4,299 |
|
|
|
905 |
|
Decrease (increase) in premium receivable |
|
|
7,462 |
|
|
|
9,732 |
|
|
|
(19,262 |
) |
Decrease (increase) in real estate acquired |
|
|
29,028 |
|
|
|
112,340 |
|
|
|
(25,992 |
) |
Increase in loss reserves |
|
|
1,929,438 |
|
|
|
2,133,073 |
|
|
|
1,516,764 |
|
(Decrease) increase in premium deficiency reserve |
|
|
(261,150 |
) |
|
|
(756,505 |
) |
|
|
1,210,841 |
|
(Decrease) increase in unearned premiums |
|
|
(55,360 |
) |
|
|
63,865 |
|
|
|
82,572 |
|
Deferred tax provision (benefit) |
|
|
176,279 |
|
|
|
411,683 |
|
|
|
(515,291 |
) |
(Increase) decrease in income taxes recoverable (current) |
|
|
(179,006 |
) |
|
|
140,460 |
|
|
|
(302,099 |
) |
Equity (earnings) losses from joint ventures |
|
|
|
|
|
|
(33,794 |
) |
|
|
424,346 |
|
Distributions from joint ventures |
|
|
|
|
|
|
22,195 |
|
|
|
51,512 |
|
Realized investment gains,
excluding other-than-temporary impairments |
|
|
(92,874 |
) |
|
|
(52,889 |
) |
|
|
(142,195 |
) |
Net investment impairment losses |
|
|
40,940 |
|
|
|
65,375 |
|
|
|
|
|
Other |
|
|
81,992 |
|
|
|
(47,152 |
) |
|
|
23,602 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
329,954 |
|
|
|
1,364,908 |
|
|
|
631,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equity securities |
|
|
(1,387 |
) |
|
|
(89 |
) |
|
|
(95 |
) |
Purchase of fixed maturities |
|
|
(4,147,412 |
) |
|
|
(3,592,600 |
) |
|
|
(2,721,294 |
) |
Additional investment in joint ventures |
|
|
|
|
|
|
(546 |
) |
|
|
(3,903 |
) |
Proceeds from sale of investment in joint ventures |
|
|
|
|
|
|
150,316 |
|
|
|
240,800 |
|
Proceeds from sale of equity securities |
|
|
1,273 |
|
|
|
|
|
|
|
|
|
Note receivable from joint ventures |
|
|
|
|
|
|
|
|
|
|
(50,000 |
) |
Proceeds from sale of fixed maturities |
|
|
3,663,239 |
|
|
|
1,724,780 |
|
|
|
1,690,557 |
|
Proceeds from maturity of fixed maturities |
|
|
554,980 |
|
|
|
413,328 |
|
|
|
331,427 |
|
Net
(decrease) increase in payable for securities |
|
|
(17,890 |
) |
|
|
19,547 |
|
|
|
(1,262 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
52,803 |
|
|
|
(1,285,264 |
) |
|
|
(513,770 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid to shareholders |
|
|
|
|
|
|
(8,159 |
) |
|
|
(63,819 |
) |
(Repayment of) proceeds from note payable |
|
|
(200,000 |
) |
|
|
(100,000 |
) |
|
|
300,000 |
|
Repayment of long-term debt |
|
|
(94,352 |
) |
|
|
|
|
|
|
(200,000 |
) |
Repayment of short-term debt |
|
|
|
|
|
|
|
|
|
|
(87,110 |
) |
Net proceeds from convertible debentures |
|
|
|
|
|
|
377,199 |
|
|
|
|
|
Proceeds from reissuance of treasury stock |
|
|
|
|
|
|
383,959 |
|
|
|
1,484 |
|
Payments for repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
(75,659 |
) |
Common stock shares issued |
|
|
|
|
|
|
75,758 |
|
|
|
2,098 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(294,352 |
) |
|
|
728,757 |
|
|
|
(123,006 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
88,405 |
|
|
|
808,401 |
|
|
|
(4,805 |
) |
Cash and cash equivalents at beginning of year |
|
|
1,097,334 |
|
|
|
288,933 |
|
|
|
293,738 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
1,185,739 |
|
|
$ |
1,097,334 |
|
|
$ |
288,933 |
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
107
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
MGIC Investment Corporation is a holding company which, through Mortgage Guaranty Insurance
Corporation (MGIC) and several other subsidiaries, is principally engaged in the mortgage
insurance business. We provide mortgage insurance to lenders throughout the United States
and to government sponsored entities (GSEs) to protect against loss from defaults on low
down payment residential mortgage loans. In 2007, we began providing mortgage insurance to
lenders in Australia. In view of our need to dedicate capital to our domestic mortgage
insurance operations, we have reduced our Australian headcount and are no longer writing new
business in Australia. Our Australian operations are included in our consolidated financial
statements; however they are not material to our consolidated results. Through certain other
non-insurance subsidiaries, we also provide various services for the mortgage finance
industry, such as contract underwriting and portfolio analysis and retention. Our principal
product is primary mortgage insurance. Primary mortgage insurance may be written through the
flow market channel, in which loans are insured in individual, loan-by-loan transactions.
Primary mortgage insurance may also be written through the bulk market channel, in which
portfolios of loans are individually insured in single, bulk transactions. Prior to 2008, we
wrote significant volume through the bulk channel, substantially all of which was Wall
Street bulk business, which we discontinued writing in 2007. We did not write any business
through the bulk channel during 2009. Prior to 2009, we also wrote pool mortgage insurance.
We wrote an insignificant amount of pool business during 2009.
At December 31, 2009, our direct domestic primary insurance in force (representing the
principal balance in our records of all mortgage loans that we insure) and direct domestic
primary risk in force (representing the insurance in force multiplied by the insurance
coverage percentage) was approximately $212.2 billion and $54.3 billion, respectively. Our
direct pool risk in force at December 31, 2009 was approximately $1.7 billion. Our risk in
force in Australia at December 31, 2009 was approximately $1.1 billion which represents the
risk associated with 100% coverage on the insurance in force. However the mortgage insurance
we provided in Australia only covers the unpaid loan balance after the sale of the
underlying property.
We have considered subsequent events through the date of this filing.
Capital
At December 31, 2009, MGICs policyholders position exceeded the required regulatory minimum
by approximately $213 million, and we exceeded the required minimum by approximately $300
million on a combined statutory basis. (The
108
combined figures give effect to reinsurance with subsidiaries of our holding company.) At
December 31, 2009 MGICs risk-to-capital was 19.4:1 and was 22.1:1 on a combined statutory
basis.
For some time, we have been working to implement a plan to write new mortgage insurance in
MGIC Indemnity Corporation ("MIC"), a wholly owned subsidiary of MGIC, which is driven by our belief that in the future MGIC will not meet minimum regulatory capital
requirements to write new business and may not be able to obtain appropriate waivers of these
requirements in all jurisdictions in which they are present. Absent the waiver granted by the
Office of the Commissioner of Insurance for the State of Wisconsin (OCI) referred to below, a
failure to meet Wisconsins minimum capital requirements would have prevented MGIC from writing new
business anywhere. Also, absent a waiver in a particular jurisdiction, failure of MGIC to meet
minimum capital requirements of that jurisdiction would prevent MGIC from writing business there.
In addition to Wisconsin, these minimum capital requirements are present in 16 jurisdictions while
the remaining jurisdictions in which MGIC does business do not have specific capital requirements
applicable to mortgage insurers. Before MIC can begin writing new business, it must obtain or
update licenses in the jurisdictions where it will transact business.
In October 2009, we, MGIC and MIC entered into an agreement with Fannie Mae (the Fannie Mae
Agreement) under which MGIC agreed to contribute $200 million to MIC (which MGIC has done) and
Fannie Mae approved MIC as an eligible mortgage insurer through December 31, 2011 subject to the
terms of the Fannie Mae Agreement. Under the Fannie Mae Agreement, MIC will be eligible to write
mortgage insurance only in those 16 other jurisdictions in which MGIC cannot write new insurance
due to MGICs failure to meet regulatory capital requirements applicable to mortgage insurers and
if MGIC fails to obtain relief from those requirements or a specified waiver of them.
On February 11, 2010, Freddie Mac notified (the Freddie Mac Notification) MGIC that we may
utilize MIC to write new business in states in which MGIC does not meet minimum regulatory capital
requirements to write new business and does not obtain appropriate waivers of those requirements.
This conditional approval to use MIC as a Limited Insurer
will expire December 31, 2012 and includes
terms substantially similar to those in the Fannie Mae Agreement.
109
In December 2009, the OCI issued an order waiving, until December 31, 2011, the requirement
that MGIC maintain a specific level of minimum policyholders position to write new business. The
waiver may be modified, terminated or extended by the OCI in its sole discretion. In December
2009, the OCI also approved a transaction under which MIC will be eligible to write new mortgage
guaranty insurance policies only in jurisdictions where MGIC does not meet minimum capital
requirements similar to those waived by the OCI and does not obtain a waiver of those requirements
from that jurisdictions regulatory
authority. MGIC has applied for waivers in all jurisdictions that have the regulatory capital
requirements. MGIC has received similar waivers from some of these states. These waivers expire at
various times, with the earliest expiration being December 31, 2010. Some jurisdictions have denied
the request because a waiver is not authorized under the jurisdictions statutes or regulations and
others may deny the request on other grounds. There can be no assurances that MIC will receive the
necessary approvals from any or all of the jurisdictions in which MGIC would be prohibited from
continuing to write new business due to MGICs failure to meet applicable regulatory capital
requirements or obtain waivers of those requirements.
Under the Fannie Mae Agreement, MIC has been approved as an eligible mortgage insurer only
through December 31, 2011 and Freddie Mac has approved MIC as a Limited Insurer only through
December 31, 2012. Whether MIC will continue as an eligible mortgage insurer after these dates will
be determined by the applicable GSEs mortgage insurer eligibility requirements then in effect.
Further, under the Fannie Mae Agreement and the Freddie Mac Notification, MGIC cannot capitalize
MIC with more than the $200 million contribution without prior approval from each GSE, which limits
the amount of business MIC can write. Depending on the level of losses that MGIC
experiences in the future, however, it is possible that regulatory action by one or more
jurisdictions, including those that do not have specific regulatory capital requirements applicable
to mortgage insurers, may prevent MGIC from continuing to write new insurance in some or all of the
jurisdictions in which MIC is not eligible to write business.
A failure to meet the specific minimum regulatory capital requirements to insure new business
does not mean that MGIC does not have sufficient resources to pay claims on its insurance. Even in
scenarios in which losses materially exceed those that would result in not meeting such
requirements, we believe that we have claims paying resources at MGIC that exceed our claim
obligations on our insurance in force. Our estimates of our claims paying resources and claim
obligations are based on various assumptions. These assumptions include our anticipated rescission
activity, future housing values and future unemployment rates. These assumptions are subject to
inherent uncertainty and require judgment by management. Current conditions in the domestic economy
make the assumptions about housing values and unemployment more volatile than they would otherwise
be. Our anticipated rescission activity is also subject to volatility.
Historically, claims submitted to us on policies we rescinded were not a material portion of
our claims resolved during a year. However, beginning in 2008 rescissions have materially
mitigated our paid and incurred losses. In 2009, rescissions mitigated
110
our paid losses by $1.2 billion, which includes amounts that would have resulted in either a
claim payment or been charged to a deductible under a bulk or pool policy, and may have been
charged to a captive reinsurer. Our loss reserving methodology incorporates the effects
rescission activity is expected to have on the losses we will pay on our delinquent
inventory. A variance between ultimate actual rescission rates and these estimates could
materially affect our losses. In addition, if the insured disputes our right to rescind
coverage, whether the requirements to rescind are met ultimately would be determined by
legal proceedings. Objections to rescission may be made several years
after we have rescinded an insurance policy. Countrywide and an affiliate (Countrywide) has filed a lawsuit against MGIC
alleging that MGIC has denied, and continues to deny, valid mortgage
insurance claims. We have filed an arbitration case against Countrywide regarding rescissions.
For more information about this lawsuit and arbitration case, see Note 15. In
addition, we continue to have discussions with other lenders regarding their objections to
rescissions that in the aggregate are material and are involved in arbitration proceedings
with respect to an amount of rescissions that is not material.
Our senior management believes that our capital plans described above will be feasible and
that we will be able to continue to write new business through the end of 2010. We can,
however, give no assurance in this regard and higher losses, adverse changes in our
relationship with the GSEs, or reduced benefit from rescission activity, among other
factors, could result in senior managements belief not being realized.
See additional disclosure regarding statutory capital in Note 13 Shareholders equity,
dividend restrictions and statutory capital.
Holding company liquidity
At December 31, 2009, we had approximately $84 million in short-term investments at our
holding company. These investments are virtually all of our holding companys liquid
assets. As of December 31, 2009, our holding companys obligations included $78.4 million of
debt which is scheduled to mature in September 2011 and $300 million of Senior Notes due in
November 2015, both of which must be serviced pending scheduled maturity. On an annual
basis, as of December 31, 2009 our use of funds at the holding company for interest payments
on our Senior Notes approximated $21 million. See Note 7 for a discussion of our election to
defer payment of interest on our $389.5 million in junior convertible debentures due in
2063.
The senior notes and convertible debentures, discussed in Notes 6 and 7, are obligations of
our holding company, and not of its subsidiaries. Payment of dividends from our insurance
subsidiaries, which historically has been the principal source of our holding company cash
inflow, is restricted by insurance regulation. MGIC is the principal source of
dividend-paying capacity. During the first three quarters of 2008, MGIC paid three
quarterly dividends of $15 million each to our holding company, which increased the cash
resources of our holding company. MGIC paid no such dividends in 2009. In 2010 and 2011, MGIC
cannot pay any dividends to our holding company without approval from the OCI. There can be
no assurances that such approvals can be obtained in order to service the debt at our
holding company. In addition, under the terms of the Fannie Mae Agreement and the Freddie
Mac Notification, MGIC may not pay dividends to our holding company without the GSEs approval, however the GSEs
111
have
consented to dividends of not more than $100 million in the aggregate to purchase existing
debt obligations of our holding company or to pay such obligations at maturity.
2. |
|
Basis of presentation and summary of significant accounting policies |
The accompanying financial statements have been prepared on the basis of accounting
principles generally accepted in the United States of America (GAAP). In accordance with
GAAP, we are required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Principles of consolidation
The consolidated financial statements include the accounts of MGIC Investment Corporation
and its majority-owned subsidiaries. All intercompany transactions have been eliminated.
Historically, our investments in joint ventures and related loss or income from joint
ventures principally consisted of our investment and related earnings in two less than
majority owned joint ventures, Credit-Based Asset Servicing and Securitization LLC (C-BASS),
and Sherman Financial Group LLC (Sherman). In 2007, joint venture losses included an
impairment charge equal to our entire equity interest in C-BASS, as well as equity losses
incurred by C-BASS in the fourth quarter that reduced the carrying value of our $50 million
note from C-BASS to zero. As a result, beginning in 2008, our joint venture income
principally consisted of income from Sherman. In August of 2008, we sold our entire interest
in Sherman to Sherman. Our equity in the earnings of joint ventures is shown separately, net
of tax, on the statement of operations. (See note 10.)
Fair Value Measurements
We adopted fair value accounting guidance that became effective January 1, 2008. This
guidance addresses aspects of the expanding application of fair-value accounting. The
guidance defines fair value, establishes a consistent framework for measuring fair value and
expands disclosure requirements regarding fair-value measurements and provides companies
with an option to report selected financial assets and liabilities at fair value with
changes in fair value reported in earnings. The option to account for selected financial
assets and liabilities at fair value is made on an instrument-by-instrument basis at the
time of acquisition. For the years ended December 31, 2009 and 2008, we did not elect the
fair value option for any financial instruments acquired for which the primary basis of
accounting is not fair value.
In accordance with fair value guidance, we applied the following fair value hierarchy in
order to measure fair value for assets and liabilities:
Level 1 Quoted prices for identical instruments in active markets that we have the
ability to access. Financial assets utilizing Level 1 inputs include certain U.S. Treasury
securities and obligations of the U.S. government.
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Level 2 Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and inputs, other than
quoted prices, that are observable in the marketplace for the financial instrument. The
observable inputs are used in valuation models to calculate the fair value of the financial
instruments. Financial assets utilizing Level 2 inputs include certain municipal and
corporate bonds.
Level 3 Valuations derived from valuation techniques in which one or more significant
inputs or value drivers are unobservable. Level 3 inputs reflect our own assumptions about
the assumptions a market participant would use in pricing an asset or liability. Financial
assets utilizing Level 3 inputs include certain state, corporate, auction rate (backed by
student loans) and mortgage-backed securities. Non-financial assets which utilize Level 3
inputs include real estate acquired through claim settlement. Additionally, financial
liabilities utilizing Level 3 inputs consisted of derivative financial instruments.
To determine the fair value of securities available-for-sale in Level 1 and Level 2 of the
fair value hierarchy, independent pricing sources have been utilized. One price is provided
per security based on observable market data. To ensure securities are appropriately
classified in the fair value hierarchy, we review the pricing techniques and methodologies
of the independent pricing sources and believe that their policies adequately consider
market activity, either based on specific transactions for the issue valued or based on
modeling of securities with similar credit quality, duration, yield and structure that were
recently traded. A variety of inputs are utilized including benchmark yields, reported
trades, non-binding broker/dealer quotes, issuer spreads, two sided markets, benchmark
securities, bids, offers and reference data including market research publications. Inputs
may be weighted differently for any security, and not all inputs are used for each security
evaluation. Market indicators, industry and economic events are also considered. This
information is evaluated using a multidimensional pricing model. Quality controls are
performed throughout this process which include reviewing tolerance reports, trading
information and data changes, and directional moves compared to market moves. This model
combines all inputs to arrive at a value assigned to each security. In addition, on a
quarterly basis, we perform quality controls over values received from the pricing sources
which include reviewing tolerance reports, trading information and data changes, and
directional moves compared to market moves. We have not made any adjustments to the prices
obtained from the independent pricing sources.
Assets and liabilities classified as Level 3 are as follows:
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Securities available-for-sale classified in Level 3 are not readily marketable and are
valued using internally developed models based on the present value of expected cash flows.
Our Level 3 securities primarily consist of auction rate securities
as observable inputs or
value drivers are unavailable due to events described in Note 4 Investments. Due to limited market information, we utilized a discounted cash flow (DCF)
model to derive an estimate of fair value of these assets at December 31, |
113
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2009 and 2008. The assumptions used in preparing the DCF model included estimates with respect to the amount
and timing of future interest and principal payments, the probability of full repayment of
the principal considering the credit quality and guarantees in place, and the rate of return
required by investors to own such securities given the current liquidity risk associated
with them. The DCF model is based on the following key assumptions. |
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§ |
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Nominal credit risk as securities are ultimately guaranteed by the United
States Department of Education; |
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§ |
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Liquidity by December 31, 2011 through December 31, 2014; |
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§ |
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Continued receipt of contractual interest; and |
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§ |
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Discount rates ranging from 2.23% to 3.23%, which include a spread for
liquidity risk. |
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Real estate acquired through claim settlement is fair valued at the lower of our
acquisition cost or a percentage of appraised value. The percentage applied to appraised
value is based upon our historical sales experience adjusted for current trends. |
Investments
We categorize our investment portfolio according to our ability and intent to hold the
investments to maturity. Investments which we do not have the ability and intent to hold to
maturity are considered to be available-for-sale and are reported at fair value and the
related unrealized gains or losses are, after considering the related tax expense or
benefit, recognized as a component of accumulated other comprehensive income in
shareholders equity. Our entire investment portfolio is classified as available-for-sale.
Realized investment gains and losses are reported in income based upon specific
identification of securities sold. (See note 4.)
In April 2009, new accounting guidance regarding the recognition and presentation of
other-than-temporary impairments was issued. This guidance was effective beginning with the
quarter ending June 30, 2009. The new guidance requires us to separate an
other-than-temporary impairment (OTTI) of a debt security into two components when there
are credit related losses associated with the impaired debt security for which we assert
that we do not have the intent to sell the security, and it is more likely than not that we
will not be required to sell the security before recovery of our cost basis. Under this
guidance the amount of the OTTI related to a credit loss is recognized in earnings, and the
amount of the OTTI related to other factors (such as changes in interest rates or market
conditions) is recorded as a component of other comprehensive income (loss). In instances
where no credit loss exists but it is more likely than not that we will have to sell the
debt security prior to the anticipated recovery, the decline in fair value below amortized
cost is recognized as an OTTI in earnings. In periods after recognition of an OTTI on debt
securities, we account for such securities as if they had been purchased on the measurement date of the OTTI at an
amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in
earnings. For debt securities for which OTTI were recognized in
114
earnings, the difference between the new amortized cost basis and the cash flows expected to be collected will be
accreted into net investment income. Each quarter we perform reviews of our investments in order to determine whether declines in
fair value below amortized cost were considered other-than-temporary in accordance with
applicable guidance. In evaluating whether a decline in fair value is other-than-temporary,
we consider several factors including, but not limited to:
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§ |
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our intent to sell the security or whether it is more likely than not that we
will be required to sell the security before recovery; |
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§ |
|
extent and duration of the decline; |
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§ |
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failure of the issuer to make scheduled interest or principal payments; |
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§ |
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change in rating below investment grade; and |
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§ |
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adverse conditions specifically related to the security, an industry, or a
geographic area. |
Under the current guidance a debt security impairment is deemed other than temporary if (1)
we either intend to sell the security, or it is more likely than not that we will be
required to sell the security before recovery or (2) we do not expect to collect cash flows
sufficient to recover the amortized cost basis of the security.
Home office and equipment
Home office and equipment is carried at cost net of depreciation. For financial statement
reporting purposes, depreciation is determined on a straight-line basis for the home office,
equipment and data processing hardware over estimated lives of 45, 5 and 3 years,
respectively. For income tax purposes, we use accelerated depreciation methods.
Home office and equipment is shown net of accumulated depreciation of $60.1 million, $56.3
million and $51.7 million at December 31, 2009, 2008 and 2007, respectively. Depreciation
expense for the years ended December 31, 2009, 2008 and 2007 was $4.3 million, $4.5 million
and $4.4 million, respectively.
Deferred insurance policy acquisition costs
Costs associated with the acquisition of mortgage insurance business, consisting of employee
compensation and other policy issuance and underwriting expenses, are initially deferred and
reported as deferred insurance policy acquisition costs (DAC). For each underwriting year
book of business, these costs are amortized to income in proportion to estimated gross
profits over the estimated life of the policies. We utilize anticipated investment income
in our calculation. This includes accruing interest on the unamortized balance of DAC. The
estimates for each underwriting year are reviewed quarterly and updated when necessary to
reflect actual experience and any changes to key variables such as persistency or loss
development. If a premium deficiency exists, we reduce the related DAC by the amount of the
deficiency or to zero through a charge to current period earnings. If the deficiency is more than the related DAC balance,
we then establish a premium deficiency reserve equal to the excess, by means of a charge to
current period earnings.
115
During 2009, 2008 and 2007, we amortized $8.2 million, $10.0 million and $12.9 million,
respectively, of deferred insurance policy acquisition costs.
Loss reserves
Reserves are established for reported insurance losses and loss adjustment expenses based on
when we receive notices of default on insured mortgage loans. A default is defined as an
insured loan with a mortgage payment that is 45 days or more past due. Reserves are also
established for estimated losses incurred on notices of default not yet reported to us. In
accordance with GAAP for the mortgage insurance industry, we do not establish loss reserves
for future claims on insured loans which are not currently in default. Loss reserves are
established by our estimate of the number of loans in our inventory of delinquent loans that
will result in a claim payment, which is referred to as the claim rate, and further
estimating the amount of the claim payment, which is referred to as claim severity. Our loss
estimates are established based upon historical experience, including rescission activity.
Amounts for salvage recoverable are considered in the determination of the reserve
estimates. Adjustments to reserve estimates are reflected in the financial statements in the
years in which the adjustments are made. The liability for reinsurance assumed is based on
information provided by the ceding companies.
The incurred but not reported (IBNR) reserves result from defaults occurring prior to the
close of an accounting period, but which have not been reported to us. Consistent with
reserves for reported defaults, IBNR reserves are established using estimated claims rate
and claim amounts for the estimated number of defaults not reported.
Reserves also provide for the estimated costs of settling claims, including legal and other
expenses and general expenses of administering the claims settlement process. (See note 8.)
Premium deficiency reserves
After our loss reserves are initially established, we perform premium deficiency tests using
our best estimate assumptions as of the testing date. Premium deficiency reserves are
established, if necessary, when the present value of expected future losses and expenses
exceeds the present value of expected future premium and already established reserves. The
discount rate used in the calculation of the premium deficiency reserve was based upon our
pre-tax investment yield at December 31, 2009 and 2008, respectively. Products are grouped
for premium deficiency purposes based on similarities in the way the products are acquired,
serviced and measured for profitability.
Calculations of premium deficiency reserves requires the use of significant judgments and
estimates to determine the present value of future premium and present value of expected losses and expenses on our business. The present value of future
premium relies on, among other factors, assumptions about persistency and repayment patterns
on underlying loans. The present value of expected losses and
116
expenses depends on assumptions relating to severity of claims and claim rates on current defaults, and expected
defaults in future periods. These assumptions also include an estimate of expected
rescission activity. Assumptions used in calculating the deficiency reserves can be affected
by volatility in the current housing and mortgage lending industries and these affects could
be material. To the extent premium patterns and actual loss experience differ from the
assumptions used in calculating the premium deficiency reserves, the differences between the
actual results and our estimate will affect future period earnings. (See note 8.)
Revenue recognition
Our insurance subsidiaries write policies which are guaranteed renewable contracts at the
insureds option on a single, annual or monthly premium basis. The insurance subsidiaries
have no ability to reunderwrite or reprice these contracts. Premiums written on a single
premium basis and an annual premium basis are initially deferred as unearned premium reserve
and earned over the policy term. Premiums written on policies covering more than one year
are amortized over the policy life in accordance with the expiration of risk which is the
anticipated claim payment pattern based on historical experience. Premiums written on
annual policies are earned on a monthly pro rata basis. Premiums written on monthly
policies are earned as coverage is provided. When a policy is cancelled, all premium that
is non-refundable is immediately earned. Any refundable premium is returned to the lender
and will have no effect on earned premium. Policy cancellations also lower the persistency
rate which is a variable used in calculating the rate of amortization of deferred insurance
policy acquisition costs. When a policy is rescinded, all previously collected premium is
returned to the lender. The liability associated with our estimate of premium to be returned
on expected future rescissions is accrued for separately and separate
components of this liability are included in Other
liabilities and Premium deficiency reserves
on our consolidated balance sheet. Changes in this liability affect premiums written and
earned.
Fee income of our non-insurance subsidiaries is earned and recognized as the services are
provided and the customer is obligated to pay. Fee income consists primarily of contract
underwriting and related fee-based services provided to lenders and is included in Other
revenue on the statement of operations.
Income taxes
We file a consolidated federal income tax return with our domestic subsidiaries. Our foreign
subsidiaries file separate tax returns in their respective jurisdictions. A formal tax
sharing agreement exists between us and our domestic subsidiaries. Each subsidiary
determines income taxes based upon the utilization of all tax deferral elections available.
This assumes tax and loss bonds are purchased and held to the extent they would have been
purchased and held on a separate company basis since the tax sharing agreement provides that
the redemption or non-purchase of such bonds shall not increase such members separate taxable income and tax liability on a separate
company basis.
117
Federal tax law permits mortgage guaranty insurance companies to deduct from taxable income,
subject to certain limitations, the amounts added to contingency loss reserves, which are
recorded for regulatory purposes. Generally, the amounts so deducted must be included in
taxable income in the tenth subsequent year. However, to the extent incurred losses exceed
35% of net premiums earned in a calendar year, early withdrawals may be made from the
contingency reserves with regulatory approval, which would lead to amounts being included in
taxable income earlier than the tenth year. The deduction is allowed only to the extent that
U.S. government non-interest bearing tax and loss bonds are purchased and held in an amount
equal to the tax benefit attributable to such deduction. We account for these purchases as
a payment of current federal income taxes.
Deferred income taxes are provided under the liability method, which recognizes the future
tax effects of temporary differences between amounts reported in the financial statements
and the tax bases of these items. The expected tax effects are computed at the current
federal tax rate. We review the need to establish a deferred tax asset valuation allowance
on a quarterly basis. We include an analysis of several factors, among which are the
severity and frequency of operating losses, our capacity for the carryback or carryforward
of any losses, the expected occurrence of future income or loss and available tax planning
alternatives. As discussed in Note 12 Income Taxes, we have reduced our benefit from
income tax by establishing a valuation allowance during 2009.
We provide for uncertain tax positions and the related interest and penalties based on our
assessment of whether a tax benefit is more likely than not to be sustained under any
examination by taxing authorities. (See note 12.)
Benefit plans
We have a non-contributory defined benefit pension plan covering substantially all domestic
employees, as well as a supplemental executive retirement plan. Retirement benefits are
based on compensation and years of service. We recognize these retirement benefit costs
over the period during which employees render the service that qualifies them for benefits.
Our policy is to fund pension cost as required under the Employee Retirement Income Security
Act of 1974.
We offer both medical and dental benefits for retired domestic employees, their spouses and
eligible dependents. Under the plan retirees pay a premium for these benefits. In October
2008 we amended our postretirement benefit plan. The amendment, which was effective January
1, 2009, terminates the benefits provided to retirees once they reach the age of 65. This
amendment reduced our accumulated postretirement benefit obligation as of December 31, 2008.
The amendment also reduced our net periodic benefit cost in 2009 and will reduce our net
periodic benefit costs in future periods. We accrue the estimated costs of retiree medical
and life benefits over the period during which employees render the service that qualifies
them for benefits. Historically benefits were generally funded as they were due. The cost to us has
not been significant. In 2009, approximately $0.5 million in benefits were paid from the fund,
and approximately $0.7 million were funded by us. (See note 11.)
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Reinsurance
Loss reserves and unearned premiums are reported before taking credit for amounts ceded
under reinsurance treaties. Ceded loss reserves are reflected as Reinsurance recoverable
on loss reserves. Ceded unearned premiums are reflected as Prepaid reinsurance premiums.
We remain liable for all reinsurance ceded. (See note 9.)
Foreign Currency Translation
Assets and liabilities denominated in a foreign currency are translated at the year-end
exchange rates. Operating results are translated at average rates of exchange prevailing
during the year. Unrealized gains and losses, net of deferred taxes, resulting from
translation are included in accumulated other comprehensive income in stockholders equity.
Gains and losses resulting from transactions in a foreign currency are recorded in current
period net income at the rate on the transaction date.
Share-Based Compensation
We have certain share-based compensation plans. Under the fair value method, compensation
cost is measured at the grant date based on the fair value of the award and is recognized
over the service period which generally corresponds to the vesting period. Awards under our
plans generally vest over periods ranging from one to five years. (See note 13.)
Earnings per share
Our basic EPS is based on the weighted average number of common shares outstanding, which
excludes participating securities with non-forfeitable rights to dividends of 1.9 million,
1.5 million and 1.2 million, respectively, for the years ended December 31, 2009, 2008 and
2007 because they were anti-dilutive due to our reported net loss. Typically, diluted EPS
is based on the weighted average number of common shares outstanding plus common stock
equivalents which include certain stock awards, stock options and the dilutive effect of our
convertible debentures (issued in March 2008). In accordance with accounting guidance, if we
report a net loss from continuing operations then our diluted EPS is computed in the same
manner as the basic EPS. The following is a reconciliation of the weighted average number of
shares; however for the years ended December 31, 2009, 2008 and 2007, common stock
equivalents of 37.6 million, 22.8 million and 34 thousand, respectively, were not included
because they were anti-dilutive. (See note 13.)
119
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Years Ended December 31, |
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2009 |
|
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2008 |
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2007 |
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(shares in thousands) |
|
Weighted-average shares -
Basic |
|
|
124,209 |
|
|
|
113,962 |
|
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|
81,294 |
|
Common stock equivalents |
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Weighted-average shares -
Diluted |
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|
124,209 |
|
|
|
113,962 |
|
|
|
81,294 |
|
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|
|
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|
Other comprehensive income
Our total other comprehensive income was as follows:
|
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Years Ended December 31, |
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2009 |
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2008 |
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2007 |
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|
|
(In thousands of dollars) |
|
Net loss |
|
$ |
(1,322,277 |
) |
|
$ |
(525,355 |
) |
|
$ |
(1,670,018 |
) |
Other comprehensive income (loss) |
|
|
180,944 |
|
|
|
(177,464 |
) |
|
|
4,886 |
|
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Total other comprehensive loss |
|
$ |
(1,141,333 |
) |
|
$ |
(702,819 |
) |
|
$ |
(1,665,132 |
) |
|
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|
|
|
|
|
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Other comprehensive income (loss) (net of tax): |
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains and losses on investments |
|
$ |
154,358 |
|
|
$ |
(116,939 |
) |
|
$ |
(17,767 |
) |
Noncredit component of impairment loss |
|
|
(1,764 |
) |
|
|
|
|
|
|
|
|
Amortization related to benefit plans |
|
|
10,704 |
|
|
|
(44,649 |
) |
|
|
14,561 |
|
Unrealized foreign currency translation adjustment |
|
|
17,646 |
|
|
|
(16,354 |
) |
|
|
8,456 |
|
Other |
|
|
|
|
|
|
478 |
|
|
|
(364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
$ |
180,944 |
|
|
$ |
(177,464 |
) |
|
$ |
4,886 |
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, accumulated other comprehensive income of $74.2 million
included $101.6 million of net unrealized gains on investments, ($37.2) million
relating to defined benefit plans and $9.8 million related to foreign currency
translation adjustment. At December 31, 2008, accumulated other comprehensive loss of
($106.8) million included ($51.0) million of net unrealized losses on investments,
($47.9) million relating to defined benefit plans and ($7.9) million related to foreign
currency translation adjustment. (See notes 4 and 11.)
New accounting guidance
Our financial statement disclosures have been modified to eliminate references to legacy
accounting pronouncements in accordance with the Codification of accounting standards issued
by the Financial Accounting Standards Board (FASB). The Codification, which is effective for
financial statements issued for interim and annual
120
|
|
periods ending after September 15, 2009,
is now the source of authoritative U.S. generally accepted accounting principles (GAAP)
recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the SEC under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. |
|
|
|
In January 2010 new accounting guidance was issued that expands the current disclosures on
fair value measurements. The guidance will require the disclosure of transfers in and out of
levels 1 and 2 of the fair value hierarchy and the reasons for those transfers and separate
presentation of purchases, sales, issuances and settlements for level 3 securities, on a
gross basis rather than as one net number. The new guidance also clarifies the level of
disaggregation required to be disclosed for each class of assets and liabilities and
provides clarification on the appropriate disclosures of inputs and valuation techniques
used to measure fair value for both recurring and non recurring measurements in levels 2 and
3. This guidance is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuances, and
settlements for the level 3 securities. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those fiscal years. We are
currently evaluating the provisions of this guidance and the impact on our financial
statements disclosures. |
|
|
|
In June 2009 new accounting guidance intended to improve financial reporting by companies
involved with variable interest entities was issued. The guidance is effective for annual
reporting periods beginning after November 15, 2009. We are currently evaluating the
provisions of this guidance and the impact, if any, on our financial statements and
disclosures. |
|
|
|
In May 2009 new accounting guidance regarding subsequent events was issued. The objective of
the guidance is to establish general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are issued. We have
applied these requirements beginning with the quarter ended June 30, 2009. |
|
|
|
Effective January 1, 2009 we adopted new accounting guidance regarding accounting for
convertible debt instruments that may be settled in cash upon conversion, including partial
cash settlement. The guidance requires the issuer of certain convertible debt instruments
that may be settled in cash (or other assets) on conversion to separately account for the
liability (debt) and equity (conversion option) components of the instrument in a manner
that reflects the issuers non-convertible debt borrowing rate. The guidance requires
retrospective application. As such, amounts relating to 2008 have been retrospectively
adjusted to reflect our adoption of this guidance. |
|
|
|
The following tables show the impact of our adoption of this guidance on our 2008 financial
results: |
121
CONSOLIDATED BALANCE SHEET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As originally |
|
|
As adjusted |
|
reported |
|
|
December 31, |
|
December 31, |
|
|
2008 |
|
2008 |
|
|
(in thousand of dollars) |
Income taxes recoverable |
|
$ |
370,473 |
|
|
$ |
406,568 |
|
Convertible debentures |
|
|
272,465 |
|
|
|
375,593 |
|
Shareholders equity |
|
|
2,434,233 |
|
|
|
2,367,200 |
|
CONSOLIDATED STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
|
|
|
As originally |
|
|
As adjusted |
|
reported |
|
|
2008 |
|
2008 |
|
|
(in thousands of dollars, except per share) |
Interest expense |
|
$ |
81,074 |
|
|
$ |
71,164 |
|
Benefit from income taxes |
|
|
(397,798 |
) |
|
|
(394,329 |
) |
Net loss |
|
|
(525,355 |
) |
|
|
(518,914 |
) |
Diluted loss per share |
|
|
(4.61 |
) |
|
|
(4.55 |
) |
In addition the adoption of this guidance has resulted in an increase to interest expense of
$16.3 million in 2009 and will result in an increase to interest expense of $20.4 million
for 2010, $25.5 million for 2011, $31.7 million for 2012 and $9.0 million for 2013. These
increases, and those shown in the tables above, result from our Convertible Junior
Subordinated Debentures issued in 2008 and discussed in Note 7 Convertible debentures and
related derivatives.
Effective January 1, 2009 we adopted new accounting guidance regarding participating
securities. The standard clarifies that share-based payment awards that entitle holders to
receive nonforfeitable dividends before vesting should be considered participating
securities. As participating securities, these instruments should be included in the
calculation of basic earnings per share. The guidance is effective for financial statements
issued for fiscal years beginning after December 15, 2008, interim periods within those
years, and on a retrospective basis for all historical periods presented. The adoption of
this guidance did not have an impact on our calculations of basic and diluted earnings per
share due to our current net loss position.
122
|
|
During the second quarter of 2009, we adopted new accounting guidance regarding the
recognition and presentation of other-than-temporary impairments. The new guidance revises
the recognition and reporting requirements for other-than-temporary impairments on our fixed
income securities. In the second quarter of 2009, we also adopted additional application
guidance on measuring fair value in less active markets. The adoption of this guidance did
not have a material impact on our financial condition or results of operations. (See Note
4.) |
|
|
|
In December 2008, new guidance that provided additional information on an employers
disclosures about plan assets of a defined benefit pension or other postretirement plan was
issued. The guidance is effective for fiscal years ending after December 15, 2009. We have
adopted these disclosures beginning with this annual filing. (See note 11.) |
|
|
|
Cash and cash equivalents |
|
|
|
We consider cash equivalents to be money market funds and investments with original
maturities of three months or less. |
|
|
|
Reclassifications |
|
|
|
Certain reclassifications have been made in the accompanying financial statements to 2008
and 2007 amounts to allow for consistent financial reporting. |
|
3. |
|
Related party transactions |
|
|
|
We provided certain services to C-BASS and Sherman in 2007 in exchange for fees. In
addition, C-BASS provided certain services to us during 2009, 2008 and 2007 in exchange for
fees. The net impact of these transactions was not material to us. |
123
|
|
The amortized cost, gross unrealized gains and losses and fair value of the investment
portfolio at December 31, 2009 and 2008 are shown below. Debt securities consist of fixed
maturities and short-term investments. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
December 31, 2009: |
|
Cost |
|
|
Gains |
|
|
Losses (1) |
|
|
Value |
|
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
|
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies |
|
$ |
736,668 |
|
|
$ |
4,877 |
|
|
$ |
(6,357 |
) |
|
$ |
735,188 |
|
Obligations of U.S. states and
political subdivisions |
|
|
4,607,936 |
|
|
|
187,540 |
|
|
|
(59,875 |
) |
|
|
4,735,601 |
|
Corporate debt securities |
|
|
1,532,571 |
|
|
|
40,328 |
|
|
|
(9,158 |
) |
|
|
1,563,741 |
|
Residential mortgage-backed
securities |
|
|
102,062 |
|
|
|
3,976 |
|
|
|
(1,986 |
) |
|
|
104,052 |
|
Debt securities issued
by foreign sovereign
governments |
|
|
112,603 |
|
|
|
1,447 |
|
|
|
(1,058 |
) |
|
|
112,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
7,091,840 |
|
|
|
238,168 |
|
|
|
(78,434 |
) |
|
|
7,251,574 |
|
Equity securities |
|
|
2,892 |
|
|
|
3 |
|
|
|
(4 |
) |
|
|
2,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio |
|
$ |
7,094,732 |
|
|
$ |
238,171 |
|
|
$ |
(78,438 |
) |
|
$ |
7,254,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Gross unrealized losses for residential mortgage-backed securities include $1.8
million in other-than-temporary impairment losses recorded in other comprehensive income,
since the adoption of new guidance on other-than-temporary impairments. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
December 31, 2008: |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
|
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies |
|
$ |
168,917 |
|
|
$ |
21,297 |
|
|
$ |
(405 |
) |
|
$ |
189,809 |
|
Obligations of U.S. states and
political subdivisions |
|
|
6,401,903 |
|
|
|
141,612 |
|
|
|
(237,575 |
) |
|
|
6,305,940 |
|
Corporate debt securities |
|
|
314,648 |
|
|
|
6,278 |
|
|
|
(4,253 |
) |
|
|
316,673 |
|
Residential mortgage-backed
securities |
|
|
151,774 |
|
|
|
3,307 |
|
|
|
(14,251 |
) |
|
|
140,830 |
|
Debt securities issued
by foreign sovereign
governments |
|
|
83,448 |
|
|
|
6,203 |
|
|
|
|
|
|
|
89,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
7,120,690 |
|
|
|
178,697 |
|
|
|
(256,484 |
) |
|
|
7,042,903 |
|
Equity securities |
|
|
2,778 |
|
|
|
|
|
|
|
(145 |
) |
|
|
2,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio |
|
$ |
7,123,468 |
|
|
$ |
178,697 |
|
|
$ |
(256,629 |
) |
|
$ |
7,045,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124
The amortized cost and fair values of debt securities at December 31, 2009, by
contractual maturity, are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties. Because most auction rate and mortgage-backed
securities provide for periodic payments throughout their lives, they are listed below in
separate categories.
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
December 31, 2009 |
|
Cost |
|
|
Value |
|
|
|
(In thousands of dollars) |
|
Due in one year or less |
|
$ |
184,474 |
|
|
$ |
187,165 |
|
Due after one year through
five years |
|
|
2,470,415 |
|
|
|
2,539,556 |
|
Due after five years through
ten years |
|
|
1,441,803 |
|
|
|
1,483,574 |
|
Due after ten years |
|
|
2,378,886 |
|
|
|
2,447,177 |
|
|
|
|
|
|
|
|
|
|
|
6,475,578 |
|
|
|
6,657,472 |
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities |
|
|
102,062 |
|
|
|
104,052 |
|
Auction rate securities (1) |
|
|
514,200 |
|
|
|
490,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at December 31, 2009 |
|
$ |
7,091,840 |
|
|
$ |
7,251,574 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At December 31, 2009, 98% of auction rate securities had a contractual maturity greater
than 10 years. |
125
At December 31, 2009 and 2008, the investment portfolio had gross unrealized losses of
$78.4 million and $256.6 million, respectively. For those securities in an unrealized loss
position, the length of time the securities were in such a position, as measured by their
month-end fair values, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
December 31, 2009 |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
|