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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, 2000
[ ] 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 4/30/00 105,845,068
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, 2000 (Unaudited) and December 31, 1999 3
Consolidated Statement of Operations for the Three
Months Ended March 31, 2000 and 1999 (Unaudited) 4
Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 2000 and 1999 (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 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
INDEX TO EXHIBITS 20
PAGE 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2000 (Unaudited) and December 31, 1999
March 31, December 31,
2000 1999
------------ -----------
ASSETS (In thousands of dollars)
- ------
Investment portfolio:
Securities, available-for-sale, at market value:
Fixed maturities $2,770,266 $2,666,562
Equity securities 15,580 15,426
Short-term investments 203,156 107,746
---------- ----------
Total investment portfolio 2,989,002 2,789,734
Cash 8,451 2,322
Accrued investment income 41,274 46,713
Reinsurance recoverable on loss reserves 36,180 35,821
Reinsurance recoverable on unearned premiums 7,368 6,630
Home office and equipment, net 32,458 32,880
Deferred insurance policy acquisition costs 22,020 22,350
Investments in joint ventures 109,592 101,545
Other assets 46,590 66,398
---------- ----------
Total assets $3,292,935 $3,104,393
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Loss reserves $ 631,900 $ 641,978
Unearned premiums 171,331 181,378
Notes payable (note 2) 425,000 425,000
Other liabilities 134,068 80,048
---------- ----------
Total liabilities 1,362,299 1,328,404
---------- ----------
Contingencies (note 3)
Shareholders' equity:
Common stock, $1 par value, shares authorized
300,000,000; shares issued 121,110,800;
shares outstanding, 3/31/00 - 105,841,201;
1999 - 105,798,034 121,111 121,111
Paid-in surplus 209,652 211,593
Treasury stock (shares at cost, 3/31/00 - 15,269,599
1999 - 15,312,766) (663,838) (665,707)
Accumulated other comprehensive income - unrealized
depreciation in investments, net of tax (10,590) (40,735)
Retained earnings 2,274,301 2,149,727
---------- ----------
Total shareholders' equity 1,930,636 1,775,989
---------- ----------
Total liabilities and shareholders' equity $3,292,935 $3,104,393
========== ==========
See accompanying notes to consolidated financial statements.
PAGE 3
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended March 31, 2000 and 1999
(Unaudited)
Three Months Ended
March 31,
--------------------
2000 1999
---- ----
(In thousands of dollars,
except per share data)
Revenues:
Premiums written:
Direct $208,726 $188,346
Assumed 226 438
Ceded (9,632) (4,773)
-------- --------
Net premiums written 199,320 184,011
Decrease in unearned premiums 10,784 9,970
-------- --------
Net premiums earned 210,104 193,981
Investment income, net of expenses 40,609 36,915
Realized investment gains, net 4 2,141
Other revenue 10,456 13,630
-------- --------
Total revenues 261,173 246,667
Losses and expenses:
Losses incurred, net 22,615 44,232
Underwriting and other expenses 47,633 53,233
Interest expense 6,621 5,398
Ceding commission (625) (361)
-------- --------
Total losses and expenses 76,244 102,502
-------- --------
Income before tax 184,929 144,165
Provision for income tax 57,709 43,747
-------- --------
Net income $127,220 $100,418
======== ========
Earnings per share (note 4):
Basic $ 1.20 $ 0.92
======== ========
Diluted $ 1.19 $ 0.91
======== ========
Weighted average common shares
outstanding - diluted (shares in
thousands, note 4) 106,860 109,918
======== ========
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, 2000 and 1999
(Unaudited)
Three Months Ended
March 31,
---------------------
2000 1999
---- ----
(In thousands of dollars)
Cash flows from operating activities:
Net income $127,220 $100,418
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred insurance policy
acquisition costs 2,668 3,210
Increase in deferred insurance policy
acquisition costs (2,338) (2,730)
Depreciation and amortization 1,912 2,151
Decrease in accrued investment income 5,439 3,261
(Increase) decrease in reinsurance recoverable
on loss reserves (359) 2,185
(Increase) decrease in reinsurance recoverable
on unearned premiums (738) 1,055
(Decrease) increase in loss reserves (10,078) 9,034
Decrease in unearned premiums (10,047) (11,024)
Equity earnings in joint ventures (5,802) (3,050)
Other 64,412 22,183
-------- --------
Net cash provided by operating activities 172,289 126,693
-------- --------
Cash flows from investing activities:
Purchase of equity securities (14,177) -
Purchase of fixed maturities (441,393) (397,698)
Additional investment in joint venture (2,245) (11,860)
Proceeds from sale of equity securities 14,280 -
Proceeds from sale or maturity of fixed maturities 380,594 290,312
-------- --------
Net cash used in investing activities (62,941) (119,246)
-------- --------
Cash flows from financing activities:
Dividends paid to shareholders (2,646) (2,725)
Reissuance of treasury stock 1,061 294
Repurchase of common stock (6,224) -
-------- --------
Net cash used in financing activities (7,809) (2,431)
-------- --------
Net increase in cash and short-term investments 101,539 5,016
Cash and short-term investments at beginning of period 110,068 176,859
-------- --------
Cash and short-term investments at end of period $ 211,607 $181,875
======== ========
See accompanying notes to consolidated financial statements.
PAGE 5
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(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, 1999
included in the Company's Annual Report on Form 10-K for that
year.
The accompanying consolidated financial statements have
not been audited by independent accountants in accordance with
generally accepted auditing standards, but in the opinion of
management such financial statements include all adjustments,
consisting only of normal recurring accruals, necessary to
summarize fairly the Company's financial position and results
of operations. The results of operations for the three months
ended March 31, 2000 may not be indicative of the results that
may be expected for the year ending December 31, 2000.
Note 2 - Notes payable
At March 31, 2000, the Company's outstanding balance of
the notes payable on the 1997 and 1998 credit facilities were
$200 million and $225 million, respectively, which
approximated market value. The interest rate on the notes
payable varies based on LIBOR and at March 31, 2000 and
December 31, 1999 the rate was 6.23% and 6.17%, respectively.
The weighted-average-interest rate on the notes payable for
borrowings under the 1997 and 1998 credit agreements was 6.27%
per annum for the three months ended March 31, 2000.
Currently, there are no outstanding borrowings under the 1999
credit facility.
During the three months ended March 2000, the Company
utilized three interest rate swaps each with a notional amount
of $100 million to reduce and manage interest rate risk on a
portion of the variable rate debt under the credit facilities.
With respect to all such transactions, the notional amount of
$100 million represents the stated principal balance used as a
basis for calculating payments. On the swaps, the Company
receives and pays amounts based on rates that can be fixed or
variable depending on the terms negotiated. Two of the swaps
renew monthly and one expires in October 2000. Earnings during
the three months ended March 2000 on the swaps of
approximately $0.2 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 resolution of this pending litigation will not have a
material adverse effect on the financial position of the
Company.
In addition, on December 17, 1999, a complaint seeking
class action status on behalf of a nationwide class of home
mortgage borrowers was filed against Mortgage Guaranty
Insurance Corporation ("MGIC") in Federal District court in
Augusta, Georgia (the "RESPA Litigation"). The complaint in
the RESPA Litigation alleged that MGIC violated the Real
Estate Settlement Procedures Act ("RESPA") by providing agency
pool insurance and entering into other transactions with
lenders that were not properly priced, in return for the
referral of mortgage insurance. The complaint sought damages
of three times the amount of the mortgage insurance premiums
that have been paid and that will be paid for the mortgage
insurance found to be involved in a violation of RESPA. On May
4, 2000, the Court granted MGIC's motion for summary judgment.
See Item I - Legal Proceedings in Part II of this quarterly
report on 10Q.
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,
--------------------
2000 1999
---- ----
(Shares in thousands)
Weighted-average shares - Basic EPS 105,851 109,003
Common stock equivalents 1,009 915
-------- --------
Weighted-average shares - Diluted EPS 106,860 109,918
======== ========
PAGE 7
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,
--------------------
2000 1999
---- ----
(In thousands of dollars)
Net income $127,220 $100,418
Other comprehensive gain (loss) 30,145 (17,216)
-------- --------
Total comprehensive income $157,365 $ 83,202
======== ========
The difference between the Company's net income and total
comprehensive income for the three months ended March 31, 2000
and 1999 is due to the change in unrealized
appreciation/depreciation on investments, net of tax.
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, 2000. The
statement establishes accounting and reporting standards for
derivative instruments and for hedging activities.
Management does not anticipate the adoption of SFAS 133 will
have a significant effect on the Company's results of
operations or its financial position due to its limited use of
derivative instruments. (See note 2.)
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, 2000 Compared With Three Months
Ended March 31, 1999
Net income for the three months ended March 31, 2000 was
$127.2 million, compared to $100.4 million for the same period
of 1999, an increase of 27%. Diluted earnings per share for
the three months ended March 31, 2000 was $1.19 compared with
$0.91 in the same period last year, an increase of 31%. The
1999 first quarter diluted earnings per share included $0.01
for realized gains. The percentage increase in diluted
earnings per share was favorably affected by the lower
adjusted shares outstanding at March 31, 2000 as a result of
common stock repurchased by the Company during the third
quarter of 1999. See note 4 to the consolidated financial
statements. As used in this report, the term "Company" means
the Company and its consolidated subsidiaries which do not
include joint ventures in which the Company has an equity
interest.
The amount of new primary insurance written by MGIC during
the three months ended March 31, 2000 was $7.4 billion,
compared to $12.0 billion in the same period of 1999. The
decline in new primary insurance written principally reflected
the decline in refinancing activity, which accounted for 15%
of new primary insurance written in the first quarter of 2000,
compared to 40% in the first quarter of 1999.
The $7.4 billion of new primary insurance written during
the first quarter of 2000 was offset by the cancellation of
$6.5 billion of insurance in force, and resulted in a net
increase of $0.9 billion in primary insurance in force,
compared to new primary insurance written of $12.0 billion,
the cancellation of $11.8 billion and a net increase of $0.2
billion in primary insurance in force during the first quarter
of 1999. Direct primary insurance in force was $148.5 billion
at March 31, 2000 compared to $147.6 billion at December 31,
1999 and $138.2 billion at March 31, 1999. In addition to
providing direct primary insurance coverage, the Company also
insures pools of mortgage loans. New pool risk written during
the three months ended March 31, 2000 and March 31, 1999,
which was virtually all agency pool insurance, was $86 million
and $197 million, respectively. The Company's direct pool risk
in force at March 31, 2000 and December 31, 1999 was $1.6
billion.
Cancellation activity has historically been affected by
the level of mortgage interest rates, with cancellations
generally moving inversely to the change in the direction of
interest rates. Cancellations continued to decrease during
the first quarter of 2000 compared to the cancellation levels
of 1999 due to the higher mortgage interest rate environment
which resulted in an increase in the MGIC persistency rate
(percentage of insurance remaining in force from one year
prior) to 76.8% at March 31, 2000 from 72.9% at December 31,
1999 and 65.8% at March 31, 1999. Future cancellation
activity could be somewhat higher than it otherwise would have
been as a result of legislation that went into effect in July
1999 regarding cancellation of mortgage insurance.
PAGE 9
Cancellation activity could also increase as more of the
Company's insurance in force is represented by subprime loans,
which the Company anticipates will have materially lower
persistency than the Company's prime business.
New insurance written for adjustable rate mortgages
("ARMs") increased to 11% of new insurance written during the
first quarter of 2000 from 4% of new insurance written during
the same period in 1999 as a result of higher mortgage
interest rates on fixed rate mortgage loans. New insurance
written for mortgages with loan-to-value ("LTV") ratios in
excess of 90% but not more than 95% ("95s") were 41% of new
insurance written during the first quarter of 2000 compared to
33% in the first quarter a year ago, as a result of declining
refinancing activity during the first quarter of 2000.
Principally as a result of changes in coverage
requirements by Fannie Mae and Freddie Mac ("GSEs") (described
below), new insurance written for mortgages with reduced
coverage (coverage of 17% for 90s (mortgages with LTV ratios
in excess of 85% but not more than 90%) and coverage of 25%
for 95s) increased to 12% of new insurance written in the
first quarter of 2000 compared to 2% a year ago. New
insurance written for mortgages with deep coverage (coverage
of 25% for 90s and coverage of 30% for 95s) declined to 64% of
new insurance written in the first quarter of 2000 compared to
69% a year ago.
New insurance written for subprime mortgages (in general,
mortgages that would not meet the standard underwriting
guidelines of the GSEs for prime mortgages due to credit
quality, documentation, or other factors, such as in a
refinance transaction exceeding a specified increase in the
amount of the mortgage debt due to cash being paid to the
borrower) was 6% of new insurance written during the first
quarter of 2000 compared to 3% for the same period a year ago
and is expected to increase in the second quarter. The Company
expects that subprime loans will have delinquency and default
rates in excess of those on the Company's prime business.
While the Company believes it has priced its subprime business
to generate acceptable returns, there can be no assurance that
the assumptions underlying the premium rates adequately
address the risk of this business. During the second quarter,
the Company announced that it would begin to insure mortgages
with LTVs of up to 100%.
Net premiums written increased 8% to $199.3 million during
the first quarter of 2000, from $184.0 million during the
first quarter of 1999. Net premiums earned increased 8% to
$210.1 million for the first quarter of 2000 from $194.0
million for the same period in 1999. The increases were
primarily a result of the growth in insurance in force and a
higher percentage of renewal premiums on mortgage loans with
deeper coverages offset by an increase in ceded premiums to
$9.6 million in the first quarter of 2000 compared to $4.8
million during the same period a year ago, primarily due to an
increase in captive mortgage reinsurance.
During the first quarter of 1999, the GSEs changed their
mortgage insurance requirements for certain mortgages approved
by their automated underwriting services. The changes permit
lower coverage percentages on these loans than the deeper
coverage percentages that went into effect in 1995. MGIC's
premium rates vary with the depth of coverage. While lower
coverage percentages result in lower premium revenue, lower
PAGE 10
coverage percentages should also result in lower incurred
losses at the same level of claim incidence. MGIC's results
could also be affected to the extent the GSEs are compensated
for assuming default risk that would otherwise be insured by
the private mortgage insurance industry. The GSEs have
programs under which a delivery fee is paid to them, with
mortgage insurance coverage reduced below the coverage that
would be required in the absence of the delivery fee.
In partnership with mortgage insurers, the GSEs are also
beginning to offer programs under which, on delivery of an
insured loan to a GSE, the primary coverage is restructured to
an initial shallow tier of coverage followed by a second tier
that is subject to an overall loss limit and, depending on the
program, some compensation may be paid to the GSE for
services. Because lenders receive guaranty fee relief from
the GSE's on mortgages delivered with these restructured
coverages, participation in these programs is competitively
significant to mortgage insurers.
In March 1999, the Office of Federal Housing Enterprise
Oversight ("OFHEO") released a proposed risk-based capital
stress test for 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, if adopted as proposed, 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 and is not expected to
become final for some time. If the stress test ultimately
gives the GSE's an incentive to use 'AAA' mortgage insurance,
MGIC may need 'AAA' capacity, which in turn would entail using
capital to support such a facility as well as additional
expenses. The Company cannot predict whether the portion of
the stress test discussed above will be adopted in its present
form.
Mortgages (newly insured during the three months ended
March 31, 2000 or in previous periods) equal to approximately
34% of MGIC's new insurance written during the first quarter
of 2000 were subject to captive mortgage reinsurance and
similar arrangements compared to 31% during the same period in
1999. Such arrangements entered into during a reporting
period customarily include loans newly insured in a prior
reporting period. As a result, the percentages cited above
would be lower if only the current reporting period's newly
insured mortgages subject to such arrangements were included.
At March 31, 2000, approximately 16% of MGIC's risk in force
was subject to captive reinsurance and similar arrangements
compared to 15% at December 31, 1999. In a February 1999
circular letter, the New York Department of Insurance said it
was in the process of developing guidelines that would
articulate the parameters under which captive mortgage
reinsurance is permissible under New York insurance law. The
PAGE 11
complaint in the RESPA Litigation alleged that MGIC pays
"inflated" captive mortgage reinsurance premiums in violation
of RESPA. See note 3 of the notes to the consolidated
financial statements and Item 1 of Part II of this quarterly
report on 10Q.
Investment income for the first quarter of 2000 was $40.6
million, an increase of 10% over the $36.9 million in the
first quarter of 1999. This increase was primarily the result
of an increase in the amortized cost of average invested
assets to $2.9 billion for the first quarter of 2000 from $2.7
billion for the first quarter of 1999, an increase of 9%. The
portfolio's average pre-tax investment yield was 5.8% for the
first quarter of 2000 and 5.5% for the same period in 1999.
The portfolio's average after-tax investment yield was 4.9%
for the first quarter of 2000 and 4.7% for the same period in
1999. The Company's net realized gains were immaterial during
the three months ended March 31, 2000 compared to net realized
gains of $2.1 million during the same period in 1999 resulting
primarily from the sale of fixed maturities.
Other revenue, which is composed of various components,
was $10.5 million for the first quarter of 2000, compared with
$13.6 million for the same period in 1999. The decrease is
primarily the result of a decrease in contract underwriting
revenue, the expiration in December 1999 of a contract with a
government agency for premium reconciliation services and
equity losses from Customers Forever LLC ("Customers
Forever"), a joint venture with Marshall & Ilsley Corporation
consummated in the third quarter of 1999, partially offset by
an increase in equity earnings from Credit-Based Asset
Servicing and Securitization LLC ("C-BASS") and a decrease in
equity losses from Sherman Financial Group LLC ("Sherman"),
both joint ventures with Enhance Financial Services Group Inc.
("Enhance").
In accordance with generally accepted accounting
principles, each quarter C-BASS is required to estimate the
value of its mortgage-related assets and recognize in earnings
the resulting net unrealized gains and losses. Including open
trades, C-BASS's mortgage-related assets were $913 million at
March 31, 2000 and are expected to increase in the future.
Substantially all of C-BASS's mortgage-related assets do not
have readily ascertainable market values and, as a result,
their value for financial statement purposes is estimated by
the management of C-BASS. Market value adjustments could
impact the Company's share of C-BASS's results of operations.
A substantial portion of Sherman's consolidated assets are
investments in receivable portfolios that do not have readily
ascertainable market values and, as a result, their value for
financial statements purposes is estimated by the management
of Sherman. Market value adjustments could impact the
Company's share of Sherman's results of operations.
Net losses incurred decreased 49% to $22.6 million during
the first quarter of 2000 from $44.2 million during the same
period in 1999. The decline from a year ago was primarily due
to generally strong economic conditions, continued improvement
in the California real estate market and the Company's claims
mitigation efforts. The primary notice inventory decreased
from 29,761 at December 31, 1999 to 28,250 at March 31, 2000.
The pool notice inventory increased from 11,638 at December
31, 1999 to 12,047 at March 31, 2000.
PAGE 12
At March 31, 2000, 68% of MGIC's insurance in force was
written during the preceding thirteen quarters, compared to
64% at March 31, 1999. The highest claim frequency years have
typically been the third through fifth year after the year of
loan origination. However, the pattern of claims frequency for
refinance loans may be different from the historical pattern
of other loans.
Underwriting and other expenses decreased to $47.6 million
in the first quarter of 2000 from $53.2 million in the same
period of 1999, a decrease of 11%. This decrease was primarily
due to decreases in contract underwriting and the expiration
of the government agency contract for premium reconciliation
services previously discussed.
Interest expense increased to $6.6 million in the first
quarter of 2000 from $5.4 million during the same period in
1999 primarily due to a higher weighted-average-interest rate
on the notes payable balance and lower earnings on interest
rate swap transactions (discussed below) during the three
months ended March 31, 2000 compared to the comparable period
in 1999.
The Company utilized financial derivative transactions
during the first quarter of 2000 and 1999 consisting of
interest rate swaps to reduce and manage interest rate risk on
its notes payable. During the first quarter of 2000, earnings
on such transactions aggregated approximately $0.2 million
compared to $0.6 million a year ago and were netted against
interest expense. See note 2 to the consolidated financial
statements.
The consolidated insurance operations loss ratio was 10.8%
for the first quarter of 2000 compared to 22.8% for the first
quarter of 1999. The consolidated insurance operations expense
and combined ratios were 20.3% and 31.1%, respectively, for
the first quarter of 2000 compared to 22.9% and 45.7% for the
first quarter of 1999.
The effective tax rate was 31.2% in the first quarter of
2000, compared to 30.3% in the first quarter of 1999. During
both periods, the effective tax rate was below the statutory
rate of 35%, reflecting the benefits of tax-preferenced
investment income. The higher effective tax rate in 2000
resulted from a lower percentage of total income before tax
being generated from the tax-preferenced investments.
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 $172.3 million for the three months ended March
31, 2000, 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 $3.0 billion at March
31, 2000, compared to $2.8 billion at December 31, 1999, an
increase of 7%. The investment portfolio includes unrealized
PAGE 13
losses on securities marked to market of $17.5 million and
$62.7 million at March 31, 2000 and December 31, 1999,
respectively. As of March 31, 2000, the Company had $203.2
million of short-term investments with maturities of 90 days
or less. In addition, at March 31, 2000, based on amortized
cost, the Company's fixed income securities, were
approximately 99% invested in "A" rated and above, readily
marketable securities, concentrated in maturities of less than
15 years. At March 31, 2000, the Company's investment in
preferred stock, which is classified as fixed maturities, was
$45.2 million compared to $0 at December 31, 1999.
The Company's investments in C-BASS, Sherman and Customers
Forever ("joint ventures") increased $8.1 million from $101.5
million at December 31, 1999 to $109.6 million at March 31,
2000 as a result of additional investments of $2.3 million and
equity earnings of $5.8 million. On April 28, 2000, the
Company invested an additional $11.3 million in Sherman. MGIC
is guaranteeing one half of a $50 million credit facility for
Sherman that is scheduled to expire in December 2000. The
Company expects that it will provide additional funding to the
joint ventures.
Consolidated loss reserves decreased to $631.9 million at
March 31, 2000 from $642.0 million at December 31, 1999
reflecting a decrease in the primary insurance notice
inventory partially offset by an increase in the pool
insurance notice inventory which were discussed earlier.
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 $10.1 million
from $181.4 million at December 31, 1999 to $171.3 million at
March 31, 2000, primarily reflecting the continued high level
of monthly premium policies written (for which there is no
unearned premium). Reinsurance recoverable on unearned
premiums increased $0.8 million to $7.4 million at March 31,
2000 from $6.6 million at December 31, 1999, primarily
reflecting the increase in captive mortgage reinsurance
partially offset by the reduction in unearned premiums.
Consolidated shareholders' equity increased to $1.9
billion at March 31, 2000, from $1.8 billion at December 31,
1999, an increase of 9%. This increase consisted of $127.2
million of net income during the first three months of 2000,
net unrealized gains on investments of $30.1 million, net of
tax, and $6.1 million from the reissuance of treasury stock
offset by approximately $6.2 million for the repurchase of the
Company's outstanding common stock and dividends declared of
$2.6 million.
During the first quarter of 2000, the Company repurchased
approximately 143,000 shares of its outstanding common stock
at a total cost of approximately $6.2 million. Funds to
repurchase the shares were primarily provided by cash flow and
bank borrowings. The Company cannot predict whether it will
repurchase additional shares in 2000.
MGIC is the principal insurance subsidiary of the Company.
MGIC's risk-to-capital ratio was 11.4:1 at March 31, 2000
compared to 11.9:1 at December 31, 1999. The decrease was due
to MGIC's increased policyholders' reserves, partially offset
PAGE 14
by the net additional risk in force of $0.5 billion, net of
reinsurance, during the first three months of 2000.
The Company's combined insurance risk-to-capital ratio was
12.3:1 at March 31, 2000, compared to 12.9:1 at December 31,
1999. The decrease was due to the same reasons as described
above.
The risk-to-capital ratios set forth above have been
computed on a statutory basis. However, the methodology used
by the rating agencies to assign claims-paying ability ratings
permits less leverage than under statutory requirements. As a
result, the amount of capital required under statutory
regulations may be lower than the capital required for rating
agency purposes. In addition to capital adequacy, the rating
agencies consider other factors in determining a mortgage
insurer's claims-paying rating, including its competitive
position, business outlook, management, corporate strategy,
and historical and projected operating performance.
For certain material risks of the Company's business, see
"Risk Factors" below.
Risk Factors
The Company and its business may be materially affected by
the factors discussed below. These factors may also cause
actual results to differ materially from the results
contemplated by forward looking statements that the Company
may make.
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,
PAGE 15
- 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.
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 GSEs'charters when PMI is used as the required
credit enhancement on low down payment mortgages,
- whether the GSE influences the mortgage lender's selection
of the mortgage insurer providing coverage and, if so, any
transactions that are related to that selection,
- 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
PAGE 16
at the same time as consolidation among mortgage lenders has
increased the share of the mortgage lending market held by
large lenders.
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. In particular, MGIC is a defendant in a
lawsuit filed in December 1999 alleging violations of the Real
Estate Settlement Procedures Act ("RESPA").The lawsuit seeks
damages of three times the amount of the mortgage insurance
premiums that have been paid and that will be paid for the
mortgage insurance that is found to be involved in a violation
of RESPA. There can be no assurance that the lawsuit against
MGIC will not have a material adverse effect on the Company.
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. Affiliates of
lenders who are regulated depositary institutions gained
expanded insurance powers under financial modernization and
the capital markets may emerge as providers of insurance in
competition with traditional insurance companies. These
PAGE 17
trends and others increase the level of uncertainty attendant
to the PMI business, demand rapid response to change and place
a premium on innovation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
At March 31, 2000, the Company's derivative financial
instruments in its investment portfolio were immaterial. The
Company places its investments in instruments that meet high
credit quality standards, as specified in the Company's
investment policy guidelines; the policy also limits the
amount of credit exposure to any one issue, issuer and type of
instrument. At March 31, 2000, the effective duration of the
Company's investment portfolio was 6.6 years. The effect of a
1% increase/decrease in market interest rates would result in
a 6.6% 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 1. LEGAL PROCEEDINGS
On May 4, 2000, the Court (1) granted MGIC's Motion for
Summary Judgment in Lambert v. MGIC on the basis that the
---------------
named plaintiffs had no private right of action because their
loan did not have mortgage insurance, and (2) denied a motion
to amend the complaint to substitute another named plaintiff
for the Lamberts and a motion to intervene by the proposed
substitute plaintiff. There can be no assurance that another
similar action brought by a plaintiff with mortgage insurance
provided by MGIC will not be filed in the future.
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, 2000.
PAGE 18
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 10, 2000.
MGIC INVESTMENT CORPORATION
\s\ J. Michael Lauer
---------------------------------
J. Michael Lauer
Executive Vice President and
Chief Financial Officer
\s\ Patrick Sinks
---------------------------------
Patrick Sinks
Senior Vice President, Controller
and Chief Accounting Officer
PAGE 19
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 20
EXHIBIT 11.1
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF NET INCOME PER SHARE
Three Months Ended March 31, 2000 and 1999
(Unaudited)
Three Months Ended
March 31,
--------------------
2000 1999
---- ----
(In thousands of dollars,
except per share data)
BASIC EARNINGS PER SHARE
Average common shares outstanding 105,851 109,003
======== ========
Net income $127,220 $100,418
======== ========
Basic earnings per share $ 1.20 $ 0.92
======== ========
DILUTED EARNINGS PER SHARE
Adjusted shares outstanding:
Average common shares outstanding 105,851 109,003
Net shares to be issued upon exercise of
dilutive stock options after applying
treasury stock method 1,009 915
-------- --------
Adjusted shares outstanding 106,860 109,918
======== ========
Net income $127,220 $100,418
======== ========
Diluted earnings per share $ 1.19 $ 0.91
======== ========
7 1,000 3-MOS DEC-31-2000 MAR-31-2000 2,770,266 0 0 15,580 0 0 2,989,002 211,607 0 22,020 3,292,935 631,900 171,331 0 0 425,000 0 0 121,111 1,809,525 3,292,935 210,104 40,609 4 10,456 22,615 330 47,303 184,929 57,709 127,220 0 0 0 127,220 1.20 1.19 0 0 0 0 0 0 0