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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-10816
MGIC INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1486475
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
250 E. KILBOURN AVENUE 53202
MILWAUKEE, WISCONSIN (Zip Code)
(Address of principal executive offices)
(414) 347-6480
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
-------- --------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OF STOCK PAR VALUE DATE NUMBER OF SHARES
- -------------- --------- ---- ----------------
Common stock $1.00 4/30/99 109,073,404
PAGE 1
MGIC INVESTMENT CORPORATION
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of
March 31, 1999 (Unaudited) and December 31, 1998 3
Consolidated Statement of Operations for the Three
Months Ended March 31, 1999 and 1998 (Unaudited) 4
Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
INDEX TO EXHIBITS 21
PAGE 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 1999 (Unaudited) and December 31, 1998
March 31, December 31,
1999 1998
--------- ------------
ASSETS (In thousands of dollars)
- ------
Investment portfolio:
Securities, available-for-sale, at market value:
Fixed maturities $2,684,875 $2,602,870
Equity securities 4,627 4,627
Short-term investments 175,215 172,209
---------- ----------
Total investment portfolio 2,864,717 2,779,706
Cash 6,660 4,650
Accrued investment income 38,216 41,477
Reinsurance recoverable on loss reserves 43,342 45,527
Reinsurance recoverable on unearned premiums 7,701 8,756
Home office and equipment, net 34,332 32,400
Deferred insurance policy acquisition costs 23,585 24,065
Investments in joint ventures 90,156 75,246
Other assets 40,628 38,714
---------- ----------
Total assets $3,149,337 $3,050,541
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Loss reserves $ 690,308 $ 681,274
Unearned premiums 172,715 183,739
Notes payable (note 2) 442,000 442,000
Income taxes payable 61,000 31,032
Other liabilities 61,622 71,905
---------- ----------
Total liabilities 1,427,645 1,409,950
---------- ----------
Contingencies (note 3)
Shareholders' equity:
Common stock, $1 par value, shares authorized
300,000,000; shares issued 121,110,800;
shares outstanding, 3/31/99 - 109,020,911;
1998 - 109,003,032 121,111 121,111
Paid-in surplus 216,930 217,022
Treasury stock (shares at cost, 3/31/99 - 12,089,889;
1998 - 12,107,768) (481,749) (482,465)
Accumulated other comprehensive income - unrealized
appreciation in investments, net of tax 77,356 94,572
Retained earnings 1,788,044 1,690,351
---------- ----------
Total shareholders' equity 1,721,692 1,640,591
---------- ----------
Total liabilities and shareholders' equity $3,149,337 $3,050,541
========== ==========
See accompanying notes to consolidated financial statements.
PAGE 3
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended March 31, 1999 and 1998
(Unaudited)
Three Months Ended
March 31,
------------------
1999 1998
---- ----
(In thousands of dollars,
except per share data)
Revenues:
Premiums written:
Direct $188,346 $177,797
Assumed 438 1,969
Ceded (4,773) (3,279)
-------- --------
Net premiums written 184,011 176,487
Decrease in unearned premiums 9,970 13,334
-------- --------
Net premiums earned 193,981 189,821
Investment income, net of expenses 36,915 34,389
Realized investment gains, net 2,141 10,295
Other revenue 13,630 9,461
-------- --------
Total revenues 246,667 243,966
-------- --------
Losses and expenses:
Losses incurred, net 44,232 59,438
Underwriting and other expenses 53,233 45,158
Interest expense 5,398 3,630
Ceding commission (361) (337)
-------- --------
Total losses and expenses 102,502 107,889
-------- --------
Income before tax 144,165 136,077
Provision for income tax 43,747 42,030
-------- --------
Net income $100,418 $ 94,047
======== ========
Earnings per share (note 4):
Basic $ 0.92 $ 0.83
======== ========
Diluted $ 0.91 $ 0.81
======== ========
Weighted average common shares
outstanding - diluted (shares in
thousands, note 4) 109,918 115,741
======== ========
Dividends per share $ 0.025 $ 0.025
======== ========
See accompanying notes to consolidated financial statements.
PAGE 4
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31, 1999 and 1998
(Unaudited)
Three Months Ended
March 31,
------------------
1999 1998
---- ----
(In thousands of dollars)
Cash flows from operating activities:
Net income $ 100,418 $ 94,047
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred insurance policy
acquisition costs 1,962 4,564
Increase in deferred insurance policy
acquisition costs (1,482) (3,619)
Depreciation and amortization 2,151 1,892
Decrease in accrued investment income 3,261 1,478
Decrease in reinsurance recoverable on loss
reserves 2,185 1,653
Decrease in reinsurance recoverable on unearned
premiums 1,055 1,305
Increase in loss reserves 9,034 19,051
Decrease in unearned premiums (11,024) (14,639)
Equity earnings in joint venture (3,050) (1,920)
Other 22,183 18,795
-------- --------
Net cash provided by operating activities 126,693 122,607
-------- --------
Cash flows from investing activities:
Purchase of equity securities - (3,886)
Purchase of fixed maturities (397,698) (242,572)
Additional investment in joint venture (11,860) -
Proceeds from sale of equity securities - 116,164
Proceeds from sale or maturity of fixed maturities 290,312 105,191
-------- --------
Net cash used in investing activities (119,246) (25,103)
-------- --------
Cash flows from financing activities:
Dividends paid to shareholders (2,725) (2,850)
Net increase in notes payable - 5,000
Reissuance of treasury stock 294 9,339
Repurchase of common stock - -
-------- --------
Net cash (used in) provided by financing activities (2,431) 11,489
-------- --------
Net increase in cash and short-term investments 5,016 108,993
Cash and short-term investments at beginning of period 176,859 119,626
-------- --------
Cash and short-term investments at end of period $181,875 $228,619
======== ========
See accompanying notes to consolidated financial statements.
Page 5
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
Note 1 - Basis of presentation
The accompanying unaudited consolidated financial
statements of MGIC Investment Corporation (the "Company") and
its wholly-owned subsidiaries have been prepared in accordance
with the instructions to Form 10-Q and do not include all of
the other information and disclosures required by generally
accepted accounting principles. These statements should be
read in conjunction with the consolidated financial statements
and notes thereto for the year ended December 31, 1998
included in the Company's Annual Report on Form 10-K for that
year.
The accompanying consolidated financial statements have
not been audited by independent accountants in accordance with
generally accepted auditing standards, but in the opinion of
management such financial statements include all adjustments,
consisting only of normal recurring accruals, necessary to
summarize fairly the Company's financial position and results
of operations. The results of operations for the three
months ended March 31, 1999 may not be indicative of the
results that may be expected for the year ending December 31,
1999.
Note 2 - Notes payable
At March 31, 1999, the Company's outstanding balance of
the notes payable on the 1997 and 1998 credit facilities were
$210 million and $232 million, respectively, which
approximated market value. The interest rate on the notes
payable varies based on LIBOR and at March 31, 1999 and
December 31, 1998 the rate was 5.17% and 5.80%, respectively.
The weighted average interest rate on the notes payable for
borrowings under the 1997 and 1998 credit agreements was 5.35%
per annum for the three months ended March 31, 1999.
During the first quarter of 1999, the Company utilized
three interest rate swaps each with a notional amount of $100
million to reduce and manage interest rate risk on a portion
of the variable rate debt under the credit facilities. With
respect to all such transactions, the notional amount of $100
million represents the stated principal balance used as a
basis for calculating payments. On the swaps, the Company
receives a floating rate based on various floating rate
indices and pays fixed rates ranging from 3.32% to 4.68%. Two
of the swaps renew monthly and one expires in October 2000.
Earnings in the first quarter of 1999 on the swaps of
approximately $0.6 million are netted against interest expense
in the Consolidated Statement of Operations.
PAGE 6
Note 3 - Contingencies
The Company is involved in litigation in the ordinary
course of business. In the opinion of management, the
ultimate disposition of the pending litigation will not have a
material adverse effect on the financial position of the
Company.
Note 4 - Earnings per share
The Company's basic and diluted earnings per share ("EPS")
have been calculated in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share ("SFAS 128").
The following is a reconciliation of the weighted-average
number of shares used for basic EPS and diluted EPS.
Three Months Ended
March 31,
------------------
1999 1998
---- ----
(Shares in thousands)
Weighted-average shares - Basic EPS 109,003 113,989
Common stock equivalents 915 1,752
------- -------
Weighted-average shares - Diluted EPS 109,918 115,741
======= =======
Note 5 - Comprehensive income
The Company's total comprehensive income, as calculated
per Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, was as follows:
Three Months Ended
March 31,
------------------
1999 1998
---- ----
(In thousands of dollars)
Net income $100,418 $ 94,047
Other comprehensive loss (17,216) (10,792)
-------- --------
Total comprehensive income $ 83,202 $ 83,255
======== ========
The difference between the Company's net income and total
comprehensive income for the three months ended March 31, 1999
and 1998 is due to the change in unrealized appreciation on
investments, net of tax.
PAGE 7
Note 6 - New accounting standards
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"), which will be effective for all fiscal quarters
of all fiscal years beginning after June 15, 1999. The
statement establishes accounting and reporting standards for
derivative instruments and for hedging activities.
Management does not anticipate the adoption of SFAS 133 will
have a significant effect on the Company's results of
operations or its financial position due to its limited use of
derivative instruments. (See note 2.)
PAGE 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Consolidated Operations
Three Months Ended March 31, 1999 Compared With Three Months
Ended March 31, 1998
Net income for the three months ended March 31, 1999 was
$100.4 million, compared to $94.0 million for the same period
of 1998, an increase of 7%. Diluted earnings per share for the
three months ended March 31, 1999 was $0.91 compared to $0.81
in the same period last year, an increase of 12%. The
percentage increase in diluted earnings per share was
favorably affected by the lower adjusted shares outstanding at
March 31, 1999 as a result of common stock repurchased by the
Company during the second half of 1998. See note 4 to the
consolidated financial statements.
The amount of new primary insurance written by Mortgage
Guaranty Insurance Corporation ("MGIC") during the three
months ended March 31, 1999 was $12.0 billion, compared to
$8.5 billion in the same period of 1998. Refinancing activity
accounted for 40% of new primary insurance written in the
first quarter of 1999, compared to 35% in the first quarter of
1998.
The $12.0 billion of new primary insurance written during
the first quarter of 1999 was offset by the cancellation of
$11.8 billion of insurance in force, and resulted in a net
increase of $0.2 billion in primary insurance in force,
compared to new primary insurance written of $8.5 billion, the
cancellation of $8.7 billion, and a net decrease of $0.2
billion in primary insurance in force during the first quarter
of 1998. Direct primary insurance in force was $138.2
billion at March 31, 1999 compared to $138.0 billion at
December 31, 1998 and $138.3 billion at March 31, 1998. In
addition to providing direct primary insurance coverage, the
Company also insures pools of mortgage loans. New pool risk
written during the three months ended March 31, 1999 and March
31, 1998, which was virtually all agency pool insurance, was
$197 million and $144 million, respectively. The Company's
direct pool risk in force at March 31, 1999 was $1.3 billion
compared to $1.1 billion at December 31, 1998 and is expected
to increase as a result of outstanding commitments to write
additional agency pool insurance.
Cancellation activity has historically been affected by
the level of mortgage interest rates and remained high during
the first quarter of 1999 due to favorable mortgage interest
rates which resulted in a decrease in the MGIC persistency
rate (percentage of insurance remaining in force from one
year prior) to 65.8% at March 31, 1999 from 78.4% at March
31, 1998. Future cancellation activity could also be affected
as a result of legislation that will go into effect in July
1999 regarding cancellation of mortgage insurance.
PAGE 9
Net premiums written were $184.0 million during the first
quarter of 1999, compared to $176.5 million during the first
quarter of 1998. Net premiums earned were $194.0 million for
the first quarter of 1999 compared to $189.8 million for the
same period in 1998. The increase was primarily a result of a
higher percentage of renewal premiums on mortgage loans with
deeper coverages.
Effective March 1, 1999, Fannie Mae changed its mortgage
insurance requirements for certain fixed-rate mortgages
approved by Fannie Mae's automated underwriting service. The
changes permit lower coverage percentages on these loans than
the deeper coverage percentages that went into effect in 1995.
In March 1999, Freddie Mac announced that it was implementing
similar changes. MGIC's premium rates vary with the depth of
coverage. While lower coverage percentages result in lower
premium revenue, lower coverage percentages should also result
in lower incurred losses at the same level of claim incidence.
MGIC's premium revenues could also be affected to the extent
Fannie Mae and Freddie Mac are compensated for assuming
default risk that would otherwise be insured by the private
mortgage insurance industry. These Government Sponsored
Enterprises (GSEs) introduced programs in 1998 and 1999 under
which a delivery fee could be paid to them, with mortgage
insurance coverage reduced below the coverage that would be
required in the absence of the delivery fee.
In March 1999, the Office of Federal Housing Enterprise
Oversight ("OFHEO") released a proposed risk-based capital
stress test for the GSEs. One of the elements of the proposed
stress test is that future claim payments made by a private
mortgage insurer on GSE loans are reduced below the amount
provided by the mortgage insurance policy to reflect the risk
that the insurer will fail to pay. Claim payments from an
insurer whose claims-paying ability rating is "AAA" are
subject to a 10% reduction over the 10-year period of the
stress test, while claim payments from a "AA" rated insurer,
such as MGIC, are subject to a 20% reduction. The effect of
the differentiation among insurers is to require the GSEs to
have additional capital for coverage on loans provided by a
private mortgage insurer whose claims-paying rating is less
than "AAA." As a result, there is an incentive for the GSEs to
use private mortgage insurance provided by a "AAA" rated
insurer. The Company does not believe there should be a
reduction in claim payments from private mortgage insurance
nor should there be a distinction between "AAA" and "AA" rated
private mortgage insurers. The proposed stress test covers
many topics in addition to capital credit for private mortgage
insurance. The stress test as a whole has been controversial
in the home mortgage finance industry and is not expected to
become final for some time. The Company cannot predict
whether the portion of the stress test discussed above will be
adopted in its present form.
PAGE 10
Mortgages (newly insured during the first quarter of 1999
or in previous quarters) equal to approximately 31% of MGIC's
new insurance written during the first quarter of 1999 were
subject to captive mortgage reinsurance and similar
arrangements compared to 19% during the same period in 1998.
Such arrangements entered into during a quarter customarily
include loans newly insured in a prior quarter. As a result,
the percentages cited above would be lower if only the current
quarter's newly insured mortgages subject to such arrangements
were included. The percentage of new insurance written subject
to captive mortgage reinsurance arrangements is expected to
increase during the remainder of 1999 as new transactions are
consummated. At March 31, 1999 approximately 9% of MGIC's risk
in force was subject to captive reinsurance and similar
arrangements compared to 7% at December 31, 1998. In a
February 1999 circular letter, the New York Department of
Insurance said it was in the process of developing guidelines
that would articulate the parameters under which captive
mortgage reinsurance is permissible under New York insurance
law.
Investment income for the first quarter of 1999 was $36.9
million, an increase of 7% over the $34.4 million in the first
quarter of 1998. This increase was primarily the result of an
increase in the amortized cost of average invested assets to
$2.7 billion for the first quarter of 1999 from $2.4 billion
for the first quarter of 1998, an increase of 14%. The
portfolio's average pre-tax investment yield was 5.5% for the
first quarter of 1999 and 5.8% for the same period in 1998.
The portfolio's average after-tax investment yield was 4.7%
for the first quarter of 1999 and 4.9% for the same period in
1998. The Company realized gains of $2.1 million during the
three months ended March 31, 1999 resulting primarily from the
sale of fixed maturities compared to realized gains of $10.3
million during the same period in 1998 resulting primarily
from the sale of equity securities.
Other revenue was $13.6 million for the first quarter of
1999, compared with $9.5 million for the same period in 1998.
The increase is primarily the result of an increase in
contract underwriting revenue and an increase in equity
earnings from Credit-Based Asset Servicing and
Securitization LLC and Litton Loan Servicing LP
(collectively, "C-BASS"), a joint venture with Enhance
Financial Services Group Inc. In accordance with generally
accepted accounting principles, C-BASS is required to mark to
market its mortgage-related assets which, including open
trades, were $619 million at March 31, 1999 and are expected
to increase in the future. Market valuation adjustments could
adversely impact C-BASS's results of operations.
Net losses incurred decreased 26% to $44.2 million during
the first quarter of 1999 from $59.4 million during the first
quarter of 1998. Such decrease was primarily attributed to a
decline in losses paid, continued improvement in California
and generally strong economic conditions throughout the
country. The primary notice inventory declined from 29,253 at
December 31, 1998 to 28,165 at March 31, 1999. The pool notice
inventory increased from 6,524 at December 31, 1998 to 7,382
at March 31, 1999, attributable to defaults on new agency pool
insurance written during 1997 and 1998. At March 31, 1999,
64% of MGIC's insurance in force was written during the
preceding thirteen quarters, compared to 59% at March 31,
1998. The highest claim frequency years have typically been
the third through fifth year after the year of loan
origination. However, the pattern of claims frequency for
refinance loans may be different from the historical pattern
of other loans.
PAGE 11
Underwriting and other expenses increased to $53.2
million in the first quarter of 1999 from $45.2 million in the
first quarter of 1998, an increase of 18%. This increase was
primarily due to increases associated with contract and field
office underwriting expenses.
Interest expense increased to $5.4 million in the first
quarter of 1999 from $3.6 million during the same period in
1998 due to higher outstanding notes payable, the proceeds of
which were used to repurchase common stock.
The Company utilized financial derivative transactions
during the first quarter of 1999 consisting of interest rate
swaps to reduce and manage interest rate risk on its notes
payable. During the first quarter of 1999, earnings on such
transactions aggregated approximately $0.6 million and were
netted against interest expense. See note 2 to the
consolidated financial statements.
The consolidated insurance operations loss ratio was 22.8%
for the first quarter of 1999 compared to 31.3% for the first
quarter of 1998. The consolidated insurance operations expense
and combined ratios were 22.9% and 45.7%, respectively, for
the first quarter of 1999 compared to 19.9% and 51.2% for the
first quarter of 1998.
The effective tax rate was 30.3% in the first quarter of
1999, compared to 30.9% in the first quarter of 1998. During
both periods, the effective tax rate was below the statutory
rate of 35%, reflecting the benefits of tax-preferenced
investment income. The lower effective tax rate in 1999
resulted from a higher percentage of total income before tax
being generated from tax-preferenced investments.
Liquidity and Capital Resources
The Company's consolidated sources of funds consist
primarily of premiums written and investment income. The
Company generated positive cash flows from operating
activities of $126.7 million for the three months ended March
31, 1999, as shown on the Consolidated Statement of Cash
Flows. Funds are applied primarily to the payment of claims
and expenses. The Company's business does not require
significant capital expenditures on an ongoing basis. Positive
cash flows are invested pending future payments of claims and
other expenses; cash flow shortfalls, if any, could be funded
through sales of short-term investments and other investment
portfolio securities.
Consolidated total investments were $2.9 billion at March
31, 1999, compared to $2.8 billion at December 31, 1998, an
increase of 3%. This increase is due primarily to positive
cash flow from operations. The investment portfolio includes
unrealized gains on securities marked to market at March 31,
1999 and December 31, 1998 of $119.0 million and $145.5
million, respectively. As of March 31, 1999, the Company had
$175.2 million of short-term investments with maturities of 90
days or less. In addition, at March 31, 1999, based on
amortized cost, the Company's total investments, which were
primarily comprised of fixed maturities, were approximately
99% invested in "A" rated and above, readily marketable
securities, concentrated in maturities of less than 15 years.
PAGE 12
The Company's investments in C-BASS and Sherman Financial
Group LLC ("joint ventures") were $90.2 million in aggregate
at March 31, 1999, which includes the Company's share of the
joint ventures' earnings since their inception. MGIC is
guaranteeing one half of a $50 million credit facility for C-
BASS. The facility matures in July 1999. Sherman Financial
Group LLC, a new joint venture with Enhance Financial Services
Group Inc., is engaged in the business of purchasing,
servicing and securitizing delinquent unsecured consumer
assets such as credit card loans, Chapter 13 bankruptcy debt,
telecommunications receivables, student loans and auto
deficiencies. The Company expects that it will provide
additional funding to the joint ventures.
Consolidated loss reserves increased slightly to $690.3
million at March 31, 1999 from $681.3 million at December 31,
1998 reflecting an increase in the estimated number of loans
in default. Consistent with industry practices, the Company
does not establish loss reserves for future claims on insured
loans which are not currently in default.
Consolidated unearned premiums decreased $11.0 million
from $183.7 million at December 31, 1998 to $172.7 million at
March 31, 1999, primarily reflecting the continued high level
of monthly premium policies written, for which there is no
unearned premium. Reinsurance recoverable on unearned
premiums decreased $1.1 million to $7.7 million at March 31,
1999 from $8.8 million at December 31, 1998, primarily
reflecting the reduction in unearned premiums.
Consolidated shareholders' equity increased to $1.7
billion at March 31, 1999, from $1.6 billion at December 31,
1998, an increase of 5%. This increase consisted of $100.4
million of net income during the first three months of 1999
and $0.6 million from the reissuance of treasury stock offset
by a decrease in net unrealized gains on investments of $17.2
million, net of tax, and dividends declared of $2.7 million.
MGIC is the principal insurance subsidiary of the Company.
MGIC's risk-to-capital ratio was 12.3:1 at March 31, 1999
compared to 12.9:1 at December 31, 1998. The decrease was due
to MGIC's increased policyholders' reserves, partially offset
by the net additional risk in force of $139.0 million, net of
reinsurance, during the first three months of 1999.
The Company's combined insurance risk-to-capital
ratio was 13.1:1 at March 31, 1999, compared to 13.6:1 at
December 31, 1998. The decrease was due to the same reasons
as described above.
The risk-to-capital ratios set forth above have been
computed on a statutory basis. However, the methodology used
by the rating agencies to assign claims-paying ability ratings
permits less leverage than under statutory requirements. As a
result, the amount of capital required under statutory
regulations may be lower than the capital required for rating
agency purposes. In addition to capital adequacy, the rating
agencies consider other factors in determining a mortgage
insurer's claims-paying rating, including its competitive
position, business outlook, management, corporate strategy,
and historical and projected operating performance.
For certain material risks of the Company's business, see
"Risk Factors" below.
PAGE 13
Risk Factors
The Company and its business may be materially affected by
the factors discussed below. These factors may also cause
actual results to differ materially from the results
contemplated by forward looking statements that the Company
may make.
Reductions in the volume of low down payment home mortgage
originations may adversely affect the amount of private
mortgage insurance (PMI) written by the PMI industry. The
factors that affect the volume of low down payment mortgage
originations include:
- the level of home mortgage interest rates,
- the health of the domestic economy as well as
conditions in regional and local economies,-housing
affordability,-population trends, including the rate of
household formation,
- the rate of home price appreciation, which in times of
heavy refinancing affects whether refinance loans have
loan-to-value ratios that require PMI, and
- government housing policy encouraging loans to first-
time homebuyers.
By selecting alternatives to PMI, lenders and investors
may adversely affect the amount of PMI written by the PMI
industry. These alternatives include:
- government mortgage insurance programs, including
those of the Federal Housing Administration and the
Veterans Administration,
- holding mortgages in portfolio and self-insuring,
- use of credit enhancements by investors, including
Fannie Mae and Freddie Mac, other than PMI or using
other credit enhancements in conjunction with reduced
levels of PMI coverage, and
- mortgage originations structured to avoid PMI, such as
a first mortgage with an 80% loan-to-value ratio and a
second mortgage with a 10% loan-to-value ratio (referred
to as an 80-10-10 loan) rather than a first mortgage
with a 90% loan-to-value ratio.
PAGE 14
Fannie Mae and Freddie Mac have a material impact on the
PMI industry. Because Fannie Mae and Freddie Mac are the
largest purchasers of low down payment conventional mortgages,
the business practices of these GSEs have a direct effect on
private mortgage insurers. These practices affect the entire
relationship between the GSEs and mortgage insurers and
include:
- the level of PMI coverage, subject to the limitations
of the GSE's charters when PMI is used as the required
credit enhancement on low down payment mortgages,
- whether the mortgage lender or the GSE chooses the
mortgage insurer providing coverage,
- whether a GSE will give mortgage lenders an incentive
to select a mortgage insurer which has a "AAA" claims-
paying ability rating to benefit from the lower capital
required of the GSE under OFHEO's proposed stress test
when a mortgage is insured by a "AAA" company,
- the underwriting standards that determine what loans
are eligible for purchase by the GSEs, which thereby
affect the quality of the risk insured by the mortgage
insurer, as well as the availability of mortgage loans,
- the terms on which mortgage insurance coverage can be
canceled before reaching the cancellation thresholds
established by law, and
- the circumstances in which mortgage servicers must
perform activities intended to avoid or mitigate loss on
insured mortgages that are delinquent.
The Company expects the level of competition within the
PMI industry to remain intense. Competition for PMI premiums
occurs not only among private mortgage insurers but
increasingly with mortgage lenders through captive mortgage
reinsurance transactions in which a lender's affiliate
reinsures a portion of the insurance written by a private
mortgage insurer on mortgages originated by the lender. The
level of competition within the PMI industry has also
increased as many large mortgage lenders have reduced the
number of private mortgage insurers with whom they do business
at the same time as consolidation among mortgage lenders has
increased the share of the mortgage lending market held by
large lenders.
PAGE 15
Changes in interest rates, house prices and cancellation
policies may materially affect persistency. In each year,
most of MGIC's premiums are from insurance that has been
written in prior years. As a result, the length of time
insurance remains in force is an important determinant of
revenues. The factors affecting persistency of the insurance
in force include:
- the level of current mortgage interest rates compared
to the mortgage coupon rates on the insurance in force,
which affects the vulnerability of the insurance in
force to refinancings, and
- mortgage insurance cancellation policies of mortgage
investors along with the rate of home price appreciation
experienced by the homes underlying the mortgages in the
insurance in force.
The strong economic climate that has existed throughout
the United States for some time has favorably impacted losses
and encouraged competition to assume default risk. Losses
result from events that adversely affect a borrower's ability
to continue to make mortgage payments, such as unemployment,
and whether the home of a borrower who defaults on his
mortgage can be sold for an amount that will cover unpaid
principal and interest and the expenses of the sale.
Favorable economic conditions generally reduce the likelihood
that borrowers will lack sufficient income to pay their
mortgages and also favorably affect the value of homes,
thereby reducing and in some cases even eliminating a loss
from a mortgage default. A significant deterioration in
economic conditions would adversely affect MGIC's losses. The
low level of losses that has recently prevailed in the private
mortgage insurance industry has encouraged competition to
assume default risk through captive reinsurance arrangements,
self-insurance, 80-10-10 loans and other means.
Litigation against mortgage lenders and settlement service
providers has been increasing. In recent years, consumers
have brought a growing number of lawsuits against home
mortgage lenders and settlement service providers seeking
monetary damages. The Real Estate Settlement Procedures Act
gives home mortgage borrowers the right to bring lawsuits
seeking damages of three times the amount of the charge paid
for a settlement service involved in a violation of this law.
Under rules adopted by the United States Department of Housing
and Urban Development, "settlement services" are services
provided in connection with settlement of a mortgage loan,
including services involving mortgage insurance.
PAGE 16
The pace of change in the home mortgage lending and
mortgage insurance industries will likely accelerate. The
Company expects the processes involved in home mortgage
lending will continue to evolve through greater use of
technology. This evolution could effect fundamental changes
in the way home mortgages are distributed. Lenders who are
regulated depositary institutions could gain expanded
insurance powers if financial modernization proposals become
law. The capital markets are beginning to emerge as providers
of insurance in competition with traditional insurance
companies. These trends and others increase the level of
uncertainty attendant to the PMI business, demand rapid
response to change and place a premium on innovation.
Year 2000 Compliance
Almost all of the Company's information technology systems
("IT Systems"), including all of its "business critical" IT
Systems, either have been originally developed to be Year 2000
compliant or have been reprogrammed. The Company plans to
reprogram the remaining IT Systems (the "Remaining Systems")
and to complete internal testing of all IT Systems for Year
2000 compliance by the end of the second quarter of 1999. In
general, the Remaining Systems have either been developed and
maintained by the Company's Information Technology Department
or use off-the-shelf software from national software vendors
such as Microsoft and IBM who have publicly announced that
their software is Year 2000 compliant. All of the IT Systems
developed and maintained by the Information Technology
Department have already been internally tested for Year 2000
compliance and all IT Systems using off-the-shelf software
have been assessed. If the Company is unable to complete any
required reprogramming of the Remaining Systems on a timely
basis, the efficiency of certain of the Company's business
processes will likely decline but this consequence is not
expected to be material to the Company.
Some of the Company's "business critical" IT Systems
interface with computer systems of third parties. The
Company, Fannie Mae, Freddie Mac and many of these third
parties are participating in the Mortgage Bankers Association
Year 2000 Readiness Test (the "MBA Test"). The MBA Test is
designed to help mortgage industry participants evaluate
interaction of their computer systems in a Year 2000
environment. The MBA has scheduled compliance testing among
participants through the second quarter of 1999. Through the
MBA Test and additional independent testing efforts, the
Company plans to complete the Year 2000 readiness evaluation
of its automated interfaces with customers representing more
than 90% of the Company's in-force policies by the end of the
second quarter of 1999.
All costs incurred through March 1999 for IT Systems for
Year 2000 compliance have been expensed and were immaterial.
The costs of the remaining reprogramming and testing are
expected to be immaterial.
PAGE 17
Telecommunications services and electricity are essential
to the Company's ability to conduct business. The Company's
long-distance voice and data telecommunications suppliers and
the local telephone company serving the Company's owned
headquarters and warehouse facilities have written to the
Company to the effect that their respective systems will be
Year 2000 compliant. The electric company serving these
facilities has given the Company assurance that it will also
be Year 2000 compliant. In addition, the Company has made
arrangements to acquire back-up power for its headquarters.
The Company has received written assurance regarding Year 2000
compliance from landlords of the Company's underwriting
service centers and local telephone companies.
The Company has long practiced contingency planning to
address business disruption risks and has procedures for
planning and executing contingency measures to provide for
business continuity in the event of any circumstance that
results in disruption to the Company's headquarters, warehouse
facilities and leased workplace environments, including lack
of utility services, transportation disruptions, and service
provider failures. The Company has developed additional plans
for the "special case" of business disruption due to Year 2000
compliance issues. These plans address continuity measures in
five areas: physical building environment, including
conducting operations at off-site facilities; business
operations units, as discussed below; external factors over
which the Company does not have control but can implement
measures to minimize adverse impact on the Company's business;
application system restoration priorities for the Company's
computer systems; and contingencies specifically targeted
towards monitoring Company facilities and systems at year-end
1999.
The business unit recovery plans address resumption of
business in the worst case scenario of a total loss to a
Company facility, including the inability to utilize
computerized systems.
In view of the timing and scope of the MBA Test and other
testing, the Company's contingency planning does not currently
include developing special procedures with individual third
parties if they are not themselves Year 2000 compliant. If
the Company is unable to do business with such third parties
electronically, it would seek to do business with them on a
paper basis. Without knowing the identity of non-compliant
third parties and the amount of transactions occurring between
the Company and them, the Company cannot evaluate the effects
on its business if it were necessary to substitute paper
business processes for electronic business processes with such
third parties. Among other effects, Year 2000 non-compliance
by such third parties could delay receipt of renewal premiums
by the Company or the reporting to the Company of mortgage
loan delinquencies and could also affect the amount of the
Company's new insurance written.
PAGE 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
At March 31, 1999, the Company had no derivative financial
instruments in its investment portfolio. The Company places
its investments in instruments that meet high credit quality
standards, as specified in the Company's investment policy
guidelines; the policy also limits the amount of credit
exposure to any one issue, issuer and type of instrument. At
March 31, 1999, the effective duration of the Company's
investment portfolio was 5.7 years. The effect of a 1%
increase/decrease in market interest rates would result in a
5.7% decrease/increase in the value of the Company's
investment portfolio.
The Company's borrowings under the credit facilities are
subject to interest rates that are variable. Changes in
market interest rates would have minimal impact on the value
of the notes payable. See note 2 to the consolidated
financial statements.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The exhibits listed in the
accompanying Index to Exhibits are filed as part
of this Form 10-Q.
(b) Reports on Form 8-K - No reports were filed on
Form 8-K during the quarter ended March 31, 1999.
PAGE 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized, on
May 13, 1999.
MGIC INVESTMENT CORPORATION
/s/ J. Michael Lauer
-------------------------------
J. Michael Lauer
Executive Vice President and
Chief Financial Officer
/s/ Patrick Sinks
-------------------------------
Patrick Sinks
Vice President, Controller and
Chief Accounting Officer
PAGE 20
INDEX TO EXHIBITS
(Item 6)
Exhibit
Number Description of Exhibit
- ------- ----------------------
11.1 Statement Re Computation of Net Income
Per Share
27 Financial Data Schedule
PAGE 21
EXHIBIT 11.1
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF NET INCOME PER SHARE
Three Months Ended March 31, 1999 and 1998
Three Months Ended
March 31,
------------------
1999 1998
---- ----
(In thousands of dollars,
except per share data)
BASIC EARNINGS PER SHARE
Average common shares outstanding 109,003 113,989
======== ========
Net income $100,418 $ 94,047
======== ========
Basic earnings per share $ 0.92 $ 0.83
======== ========
DILUTED EARNINGS PER SHARE
Adjusted shares outstanding:
Average common shares outstanding 109,003 113,989
Net shares to be issued upon exercise of
dilutive stock options after applying
treasury stock method 915 1,752
-------- --------
Adjusted shares outstanding 109,918 115,741
======== ========
Net income $100,418 $ 94,047
======== ========
Diluted earnings per share $ 0.91 $ 0.81
======== ========