FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
Commission file number 1-10816
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MGIC Investment Corporation
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1486475
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
MGIC Plaza, 250 East Kilbourn Avenue, Milwaukee, Wisconsin 53202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (414) 347-6480
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Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class: Common Stock, Par Value $1 Per Share
Common Share Purchase Rights
Name of Each Exchange
on Which Registered: New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Class: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant as of February 15, 2001: $6.9 billion*
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* Solely for purposes of computing such value and without thereby admitting that
such persons are affiliates of the Registrant, shares held by directors and
executive officers of the Registrant are deemed to be held by affiliates of the
Registrant. Shares held are those shares beneficially owned for purposes of Rule
13d-3 under the Securities Exchange Act of 1934 but excluding shares subject to
stock options.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of February 15, 2002: 106,278,860.
The following documents have been incorporated by reference in this Form 10-K,
as indicated:
Part and Item Number of
Form 10-K Into Which
Document Incorporated
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1. Information from 2000 Annual Report to Item 1 of Part I
Shareholders (for Fiscal Year Items 5 through 8 of
Ended December 31, 2001) Part II
2. Proxy Statement for the 2002 Annual Items 10 through 13 of Part III
Meeting of Shareholders
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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Part I
Item 1. Business.
A. General
MGIC Investment Corporation (the "Company") is a holding company which,
through its wholly owned subsidiary, Mortgage Guaranty Insurance Corporation
("MGIC"), is the leading provider of private mortgage insurance coverage in the
United States to the home mortgage lending industry. Private mortgage insurance
covers residential first mortgage loans and expands home ownership opportunities
by enabling people to purchase homes with less than 20% down payments. If the
homeowner defaults, private mortgage insurance reduces and, in some instances,
eliminates the loss to the insured institution. Private mortgage insurance also
facilitates the sale of low down payment mortgage loans in the secondary
mortgage market, principally to the Federal National Mortgage Association
("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac")
(Fannie Mae and Freddie Mac are collectively referred to as the "GSEs"). In
addition to mortgage insurance on first liens, the Company, through other
subsidiaries, provides lenders with various underwriting and other services and
products related to home mortgage lending.
MGIC is licensed in all 50 states of the United States, the District of
Columbia and Puerto Rico. The Company is a Wisconsin corporation. Its principal
office is located at MGIC Plaza, 250 East Kilbourn Avenue, Milwaukee, Wisconsin
53202 (telephone number (414) 347-6480).
The Company and its business may be materially affected by the factors
discussed in "Management's Discussion and Analysis -- Risk Factors" in Exhibit
13 to this Annual Report on Form 10-K. These factors may also cause actual
results to differ materially from the results contemplated by forward looking
statements that the Company may make.
B. The MGIC Book
Types of Product
In general, there are two principal types of private mortgage
insurance: "primary" and "pool."
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Primary Insurance. Primary insurance provides mortgage default
protection on individual loans and covers unpaid loan principal, delinquent
interest and certain expenses associated with the default and subsequent
foreclosure (collectively, the "claim amount"). The insurer generally pays the
coverage percentage of the claim amount specified in the primary policy, but has
the option to pay 100% of the claim amount and acquire title to the property.
The claim amount averages about 115% of the unpaid principal balance of the
loan. Primary insurance generally applies to owner occupied, first mortgage
loans on one-to-four family homes, including condominiums. Primary coverage can
be used on any type of residential mortgage loan instrument approved by the
mortgage insurer. References in this document to amounts of insurance written or
in force, risk written or in force and other historical data related to MGIC's
insurance refer only to direct (before giving effect to reinsurance) primary
insurance, unless otherwise indicated. References in this document to "primary
insurance" include insurance written in bulk transactions (see "Bulk
Transactions" below) that is supplemental to mortgage insurance written in
connection with the origination of the loan. Effective with the third quarter of
2001, in reports by private mortgage insurers to the trade association for the
private mortgage insurance industry, mortgage insurance that is supplemental to
other mortgage insurance is classified as pool insurance. The trade association
classification is used by members of the private mortgage insurance industry in
reports to a mortgage industry publication that computes and publishes primary
market share information.
The following table shows, on a direct basis, primary insurance in
force (the unpaid principal balance of insured loans as reflected in MGIC's
records) and primary risk in force (the coverage percentage applied to the
unpaid principal balance and, for new risk written in 2001 and risk in force as
of December 31, 2001, taking into account any loss limit that is applicable to a
portfolio or group of insured loans), for insurance that has been written by
MGIC (the "MGIC Book") as of the dates indicated:
Primary Insurance and Risk In Force
December 31,
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2001 2000 1999 1998 1997
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(In millions of dollars)
Direct Primary
Insurance In Force.............. $183,904 $160,192 $147,607 $137,990 $138,497
Direct Primary
Risk In Force................... $42,678(1) $39,090 $35,623 $32,891 $32,175
(1) Net of aggregate loss limits for 2001. Aggregate loss limits for years prior
to 2001 are immaterial and are not reflected.
The coverage percentage provided by MGIC is determined by the lender.
For loans sold by lenders to Fannie Mae or Freddie Mac, the coverage percentage
must comply with the
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requirements established by the particular GSE to which the loan is delivered.
Effective in the first quarter of 1995, Freddie Mac and Fannie Mae increased
their coverage requirements for, among other loan types, 30-year fixed rate
mortgages with loan-to-value ratios, determined at loan origination ("LTVs"), of
90.01-95.00% ("95s") from 25% coverage to 30% coverage and for such mortgages
with LTVs of 85.01-90.00% ("90s") from 17% to 25%. During the first quarter of
1999, the GSEs changed their mortgage insurance requirements for fixed rate and
certain other mortgages on owner occupied properties having terms greater than
20 years when the loan is approved by their automated underwriting services.
Lenders may deliver these loans to the GSEs with the prior coverage requirements
(30% for a 95 and 25% for a 90), or in the case of 95s, with either (i) 25%
coverage or (ii) 18% coverage and the payment of a delivery fee to the GSE, and
in the case of 90s, with either (i) 17% coverage or (ii) 12% coverage and the
payment of a delivery fee to the GSE.
The following table shows new insurance written during the last five
years for 95s with 30% coverage and for 90s with 25% coverage:
Coverage Categories as a Percentage of New Insurance Written
Year Ended December 31,
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LTV/
Coverage 2001 2000 1999 1998 1997
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95 / 30% 26.5% 32.2% 32.0% 33.9% 38.7%
90 / 25% 29.7% 29.6% 34.7 38.6% 39.1%
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Total 56.2% 61.8% 66.7% 72.5% 77.8%
The Company expects the aggregate percentage of its new insurance written with
95/30% and 90/25% coverage will continue to decline in response to the GSEs
changed mortgage insurance requirements.
MGIC charges higher premium rates for higher coverages, and the deeper
coverage requirements imposed by the GSEs beginning in 1995 have resulted in
higher earned premiums for loans with the same characteristics (such as LTV and
loan type). MGIC believes depth of coverage requirements have no significant
impact on frequency of default. Higher coverage percentages generally result in
increased severity (which is the amount paid on a claim), and lower coverage
percentages generally result in decreased severity. In accordance with industry
accounting practice, reserves for losses are only established for loans in
default. Because relatively few defaults occur in the early years of a book of
business (see "Past Industry Losses; Defaults; and Claims--Claims" below),
the higher premium revenue from deeper coverage is recognized before any higher
losses resulting from that deeper coverage may be incurred. On the other hand,
while a decline in
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coverage percentage will result in lower premium revenue, it should also result
in lower incurred (and paid) losses at the same level of claim incidence.
However, given the historical pattern of claims, the decline in revenue will
precede the benefits of reduced severity. MGIC's premium pricing methodology
generally targets substantially similar returns on capital regardless of the
depth of coverage. However, there can be no assurance that changes in the level
of premium rates adequately reflect the risks associated with changes in the
depth of coverage.
In partnership with mortgage insurers, the GSEs are also offering
programs under which, on delivery of an insured loan to a GSE, the primary
coverage is restructured to an initial shallow tier of coverage followed by a
second tier that is subject to an overall loss limit and, depending on the
program, compensation may be paid to the GSE reflecting services or other
benefits realized by the mortgage insurer from the coverage conversion. Lenders
receive guaranty fee relief from the GSEs on mortgages delivered with these
restructured coverages.
Mortgage insurance coverage cannot be terminated by the insurer, except
for non-payment of premium, and remains renewable at the option of the insured
lender, generally at the renewal rate fixed when the loan was initially insured.
Lenders may cancel insurance at any time at their option or because of mortgage
repayment, which may be accelerated because of the refinancing of mortgages. In
the case of a loan purchased by Freddie Mac or Fannie Mae, a borrower meeting
certain conditions may require the mortgage servicer to cancel insurance upon
the borrower's request when the principal balance of the loan is 80% or less of
the home's current value.
Under the federal Homeowners Protection Act (the "HPA") a borrower has
the right to stop paying premiums for private mortgage insurance on loans closed
after July 28, 1999 secured by a property comprised of one dwelling unit that is
the borrower's primary residence when certain LTV ratio thresholds determined by
the value of the home at loan origination and other requirements are met. In
general, a borrower may stop making mortgage insurance payments when the LTV
ratio is scheduled to reach 80% (based on the loan's amortization schedule
established at loan origination) if the borrower so requests and if certain
requirements relating to the borrower's payment history and the absence of
junior liens and a decline in the property's value since origination are
satisfied. In addition, a borrower's obligation to make payments for private
mortgage insurance generally terminates regardless of whether a borrower so
requests when the LTV ratio reaches 78% of the unpaid principal balance of the
mortgage and the borrower is (or thereafter becomes) current in his mortgage
payments. A borrower's right to stop paying for private mortgage insurance
applies only to borrower paid mortgage insurance. The HPA requires that lenders
give borrowers certain notices with regard to the cancellation of private
mortgage insurance.
In addition, some states require that mortgage servicers periodically
notify borrowers of the circumstances in which they may request a mortgage
servicer to cancel private mortgage insurance and some states allow the borrower
to require the mortgage servicer to cancel private mortgage insurance under
certain circumstances or require the mortgage servicer to cancel such insurance
automatically in certain circumstances.
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Coverage tends to continue in areas experiencing economic contraction
and housing price depreciation. The persistency of coverage in such areas
coupled with cancellation of coverage in areas experiencing economic expansion
and housing price appreciation can increase the percentage of the insurer's
portfolio comprised of loans in economically weak areas. This development can
also occur during periods of heavy mortgage refinancing because refinanced loans
in areas of economic expansion experiencing property value appreciation are less
likely to require mortgage insurance at the time of refinancing, while
refinanced loans in economically weak areas not experiencing property value
appreciation are more likely to require mortgage insurance at the time of
refinancing or not qualify for refinancing at all and, thus, remain subject to
the mortgage insurance coverage.
When a borrower refinances an MGIC-insured mortgage loan by paying it
off in full with the proceeds of a new mortgage, the insurance on that existing
mortgage is cancelled, and insurance on the new mortgage is considered to be new
primary insurance written. Therefore, continuation of MGIC's coverage from a
refinanced loan to a new loan results in both a cancellation of insurance and
new insurance written. The percentage of primary risk written with respect to
loans representing refinances was 43.7% in 2001 compared to 18.0% in 2000 and
22.3% in 1999.
In addition to varying with the coverage percentage, MGIC's premium
rates vary depending upon the perceived risk of a claim on the insured loan and,
thus, take into account the LTV, the loan type (fixed payment versus non-fixed
payment) and mortgage term and, for subprime loans, where the borrower's credit
score falls within a range of credit scores. In general, subprime loans are
mortgages that would not meet the standard underwriting guidelines of Fannie Mae
and Freddie Mac for prime quality mortgages due to credit quality,
documentation, or other factors, such as in a refinance transaction exceeding a
specified increase in the amount of mortgage debt due to cash being paid to the
borrower.
Premium rates cannot be changed after the issuance of coverage. Because
the Company believes that over the long term each region of the United States is
subject to similar factors affecting risk of loss on insurance written, MGIC
generally utilizes a nationally based, rather than a regional or local, premium
rate policy.
The borrower's mortgage loan instrument may require the borrower to pay
the mortgage insurance premium ("borrower paid mortgage insurance") or there may
be no such requirement imposed on the borrower, in which case the premium is
paid by the lender, who may recover the premium through an increase in the note
rate on the mortgage ("lender paid mortgage insurance"). Almost all of MGIC's
primary insurance in force and new insurance written, other than through bulk
transactions, is borrower paid mortgage insurance. New insurance written through
bulk transactions is generally paid by the securitization vehicles that hold the
mortgages; the mortgage note rate generally does not reflect the premium for the
mortgage insurance.
Under the monthly premium plan, a monthly premium payment is made to
MGIC to provide only one month of coverage, rather than one year of coverage
provided by the annual premium plan. Under the annual premium plan, the initial
premium is paid to MGIC in advance, and earned over
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the next twelve months of coverage, with annual renewal premiums paid in advance
thereafter and earned over the subsequent twelve months of coverage. The annual
premiums can be paid with either a higher premium rate for the initial year of
coverage and lower premium rates for the renewal years, or with premium rates
which are equal (level) for the initial year and subsequent renewal years. Under
the single premium plan, a single payment is made to MGIC, covering a specified
term exceeding 12 months.
During each of the last three years, the monthly premium plan
represented more than 90% of MGIC's new insurance written. The annual premium
plan represented substantially all of the remaining new insurance written.
Pool Insurance. Pool insurance is generally used as an additional
"credit enhancement" for certain secondary market mortgage transactions. Pool
insurance generally covers the loss on a defaulted mortgage loan which exceeds
the claim payment under the primary coverage, if primary insurance is required
on that mortgage loan, as well as the total loss on a defaulted mortgage loan
which did not require primary insurance, in each case up to a stated aggregate
loss limit.
During the first quarter of 1997, the Company began writing pool
insurance generally covering fixed-rate, 30-year mortgage loans delivered to
Freddie Mac and Fannie Mae ("agency pool insurance"). The aggregate loss limit
on agency pool insurance generally does not exceed 1% of the aggregate original
principal balance of the mortgage loans in the pool. New pool risk written
during 2001 was $412 million and was $345 million in 2000. New pool risk written
during these years was virtually all agency pool insurance, with the remaining
risk written associated with loans insured under state housing finance programs.
Net (giving effect to external reinsurance) MGIC Book pool risk in force at
December 31, 2001 was $1.8 billion compared to $1.5 billion and $1.4 billion at
December 31, 2000 and 1999, respectively.
For a discussion of litigation brought as a nationwide class action
alleging that MGIC violated the Real Estate Settlement Procedures Act ("RESPA")
by providing agency pool insurance and entering into other transactions with
lenders that were not properly priced (the "RESPA Litigation"). The settlement
of the RESPA Litigation, which was approved by the District Court in June 2001
but which has been challenged through an appeal of a related order, includes an
injunction that specifies the basis on which agency pool insurance may be
provided in compliance with RESPA. See Item 3 "Legal Proceedings." There can be
no assurance that the standards established by the injunction will be
determinative of compliance with RESPA were additional litigation to be brought
in the future.
In a February 1, 1999 circular addressed to all mortgage guaranty
insurers licensed in New York, the New York Department of Insurance ("NYID")
advised that "significantly underpriced" agency pool insurance would violate the
provisions of New York insurance law that prohibit mortgage guaranty insurers
from providing lenders with inducements to obtain mortgage guaranty business.
The NYID circular does not provide standards under which the NYID will evaluate
whether agency pool insurance is "significantly underpriced." In response to
subsequent inquiries from the NYID, MGIC provided various information about
agency pool insurance to the NYID. In
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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.
Captive Mortgage Reinsurance. MGIC's products include captive mortgage
reinsurance in which an affiliate of a lender reinsures a portion of the risk on
loans originated or purchased by the lender which have MGIC primary insurance.
Approximately 24% of MGIC's primary risk in force at December 31, 2001 was
subject to captive mortgage reinsurance and other similar arrangements compared
to approximately 21% at year-end 2000. The complaint in the RESPA Litigation
alleges that MGIC pays "inflated" captive mortgage reinsurance premiums in
violation of RESPA. The settlement includes an injunction that specifies the
basis on which captive mortgage reinsurance may be provided in compliance with
RESPA. There can be no assurance that the standards established by the
injunction will be determinative of compliance with RESPA were additional
litigation to be brought in the future.
External Reinsurance. At December 31, 2001, disregarding reinsurance
under captive structures, less than 4% of MGIC's insurance in force was
externally reinsured. Reinsuring against possible loan losses does not discharge
MGIC from liability to a policyholder; however, the reinsurer agrees to
indemnify MGIC for the reinsurer's share of losses incurred.
Bulk Transactions
Primary insurance may be written on a flow basis, in which loans are
insured in individual, loan-by-loan transactions, or may be written on a bulk
basis, in which a portfolio of loans is insured in a single, bulk transaction.
Generally, in bulk transactions, the individual loans in the insured portfolio
are insured to specified levels of coverage and there may be an aggregate loss
limit applicable to all of the insured loans. Bulk transaction are frequently
effected in connection with the securitization of mortgage loans by securitizers
other than the GSEs. The premium in a bulk transaction is based on the mortgage
insurer's evaluation of the overall risk of the insured loans included in the
transaction and is negotiated with the securitizer or other owner of the loans.
In general, the loans insured by MGIC in bulk transactions consist of
Alt A loans; jumbo loans with FICO credit scores of at least 700; and subprime
loans. Alt A loans meet the conforming loan limit referred to below and have
FICO credit scores of at least 620, which is viewed as the cut-off for prime
quality loans, but do not meet the standard underwriting requirements of the
GSEs because of reduced documentation or other factors, such as in a refinance
transaction exceeding a specified increase in the amount of the mortgage debt
due to cash being paid to the borrower. A jumbo loan has an unpaid principal
balance that exceeds the conforming loan limit. The conforming loan limit is the
maximum unpaid principal amount of a mortgage loan that can be purchased by the
GSEs. The conforming loan limit is subject to annual adjustment, and for
mortgages covering a home with one dwelling unit is $300,700 for 2002 and was
$275,000 in 2001 and $240,000 in 2000. Subprime loans have FICO credit scores of
less than 620.
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More than half of MGIC's bulk loan risk in force at December 31, 2001
had FICO credit scores of at least 620. More than half of MGIC's subprime bulk
loan risk in force at December 31, 2001 had A- FICO credit scores, which are
between 575 and 620. Most of the subprime loans insured by MGIC in 2001 were
insured in bulk transactions. More than half of MGIC's bulk loan risk in force
at December 31, 2001 had LTV ratios of 80% and below.
New insurance written for bulk transactions was $25.7 billion during
2001 compared to $7.0 billion for 2000 and $2.2 billion for 1999. The company
does not anticipate that the level of growth in the bulk business during the
last two years will continue in 2002.
Customers
Originators of residential mortgage loans such as mortgage bankers,
savings institutions, commercial banks, mortgage brokers, credit unions and
other lenders have historically determined the placement of mortgage insurance
written on flow basis and as a result are the customers of MGIC. To obtain
primary insurance from MGIC written on flow basis, a mortgage lender must first
apply for and receive a mortgage guaranty master policy ("Master Policy") from
MGIC. MGIC had approximately 12,000 master policyholders at December 31, 2001
(not including policies issued to branches and affiliates of large lenders). In
2001, MGIC issued coverage on mortgage loans for approximately 4,700 of its
master policyholders. MGIC's top 10 customers generated 38.4% of its new
insurance written on a flow basis in 2001, compared to 36.2% in 2000 and 32.5%
in 1999.
Sales and Marketing and Competition
Sales and Marketing. MGIC sells its insurance products through its own
employees, located throughout the United States. At December 31, 2001, MGIC had
30 underwriting centers located in 19 states and in Puerto Rico.
Competition. MGIC and other private mortgage insurers compete
directly with federal and state governmental and quasi-governmental agencies,
principally the FHA and, to a lesser degree, the Veterans Administration ("VA").
These agencies sponsor government-backed mortgage insurance programs, which
during 2001 accounted for approximately 37% (compared to approximately 41%
during 2000) of the total low down payment residential mortgages which were
subject to governmental or private mortgage insurance. See "Regulation, Indirect
Regulation" below. Loans insured by the FHA cannot exceed maximum principal
amounts which are determined by a percentage of the conforming loan limit. For
2002, the maximum FHA loan amount for homes with one dwelling unit in "high
cost" areas is as high as $261,609 and was as high as $239,250 in 2001 and
$219,849 in 2000. Loans insured by the VA do not have mandated maximum principal
amounts but have maximum limits on the amount of the guaranty provided by the VA
to the lender. For most of 2001, the maximum VA guaranty was $50,750, which was
the same amount as in 2000. For loans closed after December 27, 2001 the maximum
VA guarantee is $60,000.
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In addition to competition from the FHA and the VA, MGIC and other
private mortgage insurers face competition from state-supported mortgage
insurance funds in several states, including California, Illinois and New York.
From time to time, other state legislatures and agencies consider expansions of
the authority of their state governments to insure residential mortgages.
Private mortgage insurers may also be subject to competition from
Fannie Mae and Freddie Mac to the extent the GSEs are compensated for assuming
default risk that would otherwise be insured by the private mortgage insurance
industry. Fannie Mae and Freddie Mac each have programs under which an up-front
delivery fee can be paid to the GSE and primary mortgage insurance coverage is
substantially reduced compared to the coverage requirements that would apply in
the absence of the program. See "Types of Product--Primary Insurance" above. In
October 1998, Freddie Mac's charter was amended (and the amendment immediately
repealed) to give Freddie Mac flexibility to use protection against default in
addition to private mortgage insurance and the two other types of credit
enhancement required by the charter for low down payment mortgages purchased by
Freddie Mac. In addition, to the extent up-front delivery fees are not retained
by the GSEs to compensate for their assumption of default risk, and are used
instead to purchase supplemental coverage from mortgage insurers, the resulting
concentration of purchasing power in the hands of the GSEs could increase
competition among insurers to provide such coverage.
The capital markets may also develop as competitors to private mortgage
insurers. During 1998, a newly-organized off-shore company funded by the sale of
notes to institutional investors provided "reinsurance" to Freddie Mac against
default on a specified pool of mortgages owned by Freddie Mac.
MGIC and other mortgage insurers also compete with transactions
structured to avoid mortgage insurance on low down payment mortgage loans. Such
transactions include self-insuring and originating loans comprised of both a
first and a second mortgage, with the LTV ratio of the first mortgage below what
investors require for mortgage insurance, instead of originating a loan in which
the first mortgage covers the entire borrowed amount. Captive mortgage
reinsurance and similar transactions also result in mortgage originators
receiving a portion of the premium and the risk.
The private mortgage insurance industry currently consists of eight
active mortgage insurers and their affiliates; one of the eight is a joint
venture in which a mortgage insurer is one of the joint venturers. The names of
these mortgage insurers are listed in "Management's Discussion and
Analysis--Risk Factors" in Exhibit 13 to this Annual Report on Form 10-K.
According to Inside Mortgage Finance, a mortgage industry publication, which
obtains its data from reports to it by MGIC and other mortgage insurers that are
to be prepared on the same basis as the reports by insurers to the trade
association for the private mortgage insurance industry, for 1995 and subsequent
years, MGIC has been the largest private mortgage insurer based on new primary
insurance written (with a market share of 25.0% in 2001, 24.5% in 2000 and 24.3%
in 1999) and at December 31, 2001, MGIC also had the largest book of direct
primary insurance in force. Effective
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with the third quarter of 2001, these reports do not include as "primary
mortgage insurance" insurance on certain loans classified by MGIC as primary
insurance, such as loans insured through bulk transactions that already had
mortgage insurance placed on the loans at origination.
The private mortgage insurance industry is highly competitive and, over
the past five years, the dynamics of industry competition have undergone
significant change. The Company believes it competes with other private mortgage
insurers for flow business 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; the provision of other products and services that
meet lender needs for underwriting risk management, affordable housing, loss
mitigation, capital markets and training support; the strength of MGIC's
management team and field organization; and the effective use of technology and
innovation in the delivery and servicing of MGIC's insurance products. The
Company believes MGIC's additional competitive strengths, compared to other
private insurers, are its customer relationships, name recognition, reputation
and the depth of its database covering loans it has insured.
The complaint in the RESPA Litigation alleges, among other things, that
captive mortgage reinsurance, agency pool insurance, and contract underwriting
as provided by the Company violate RESPA. The settlement includes an injunction
that specifies the basis on which these products and services may be provided in
compliance with RESPA. There can be no assurance that the standards established
by the injunction will be determinative of compliance with RESPA were additional
litigation to be brought in the future.
Certain private mortgage insurers compete for flow business by offering
lower premium rates than other companies, including MGIC, either in general or
with respect to particular classes of business. MGIC on a case-by-case basis
will adjust premium rates, generally depending on the risk characteristics, loss
performance or class of business of the loans to be insured, or the costs
associated with doing such business.
In the third quarter of 2001, the Office of Federal Housing Enterprise
Oversight ("OFHEO") adopted a risk-based capital stress test for the GSEs. One
of the elements of the stress test is that future claim payments made by a
private mortgage insurer on GSE loans are reduced below the amount provided by
the mortgage insurance policy to reflect the risk that the insurer will fail to
pay. Claim payments from an insurer whose claims-paying ability rating is "AAA"
were subject to a 5% reduction over the 10-year period of the stress test, while
claim payments from a "AA" rated insurer, such as MGIC, were subject to a 15%
reduction. In February 2002, OFHEO adopted amendments to the stress test that
reduced the differential between "AAA" and "AA" rated mortgage insurers to
5.25%. 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.
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Contract Underwriting and Related Services
The Company performs contract underwriting services for lenders in
which the Company judges whether the data relating to the borrower and the loan
contained in the lender's mortgage loan application file comply with the
lender's loan underwriting guidelines. The Company also provides an interface to
submit such data to the automated underwriting systems of the GSEs, which
independently judge the data. These services are provided for loans that require
private mortgage insurance as well as for loans that do not require private
mortgage insurance. A material portion of the Company's new insurance written in
recent years involved loans for which the Company provided contract underwriting
services. The complaint in the RESPA Litigation alleges, among other things,
that the pricing of contract underwriting provided by the Company violates
RESPA. The settlement specifies the basis on which contract underwriting may be
provided in compliance with RESPA. There can be no assurance that the standards
established by the injunction will be determinative of compliance with RESPA
were additional litigation to be brought in the future.
Risk Management
Risk Management Approach. MGIC's risk management philosophy focuses on
evaluating four major elements of risk:
. Individual Loan and Borrower. Except to the extent its delegated
underwriting program is being utilized or for loans approved by the
automated underwriting services of the GSEs (see "Delegated
Underwriting and GSE Automated Underwriting Approvals" below), MGIC
evaluates insurance applications based on its analysis of the
borrower's ability to repay the mortgage loan and the
characteristics and value of the property. The analysis of the
borrower includes reviewing the borrower's FICO credit score, as
reported by credit reporting agencies, as well as the borrower's
housing and total debt ratios. In the case of delegated
underwriting, compliance with program parameters is monitored by
periodic audits of delegated business.
. Geographic Market. MGIC places significant emphasis on the condition
of the housing markets around the nation in determining its
underwriting policies.
. Product. The type of mortgage instrument that the borrower selects
and the purpose of the loan are important factors in MGIC's analysis
of mortgage default risk. MGIC analyzes four general characteristics
of the product to quantify this risk evaluation: (i) LTV ratio; (ii)
type of loan instrument; (iii) type of property; and (iv) purpose of
the loan. In addition to its underwriting guidelines (as referred to
below), pricing is MGIC's principal method used to manage these
risks. Loans with higher LTV ratios generally have a higher premium,
as do instruments such as ARMs with an initial interest period of
less than five years and loans with a maturity longer than fifteen
years.
-13-
. Mortgage Lender. MGIC evaluates from time to time its major
customers and the performance of their business which MGIC has
insured.
The Company believes that, excluding other factors, the claim incidence
for 95s is substantially higher than for 90s or loans with lower LTV ratios; for
loans with LTVs greater than 95 (which include loans with LTVs of up to 103) is
substantially higher than for 95s; for ARMs during a prolonged period of rising
interest rates would be substantially higher than for fixed rate loans; for
loans in which the original loan amount exceeds the conforming loan limit is
higher than for loans where such amount is below the conforming loan limit; and
for loans with lower FICO credit scores (which include subprime loans) is higher
than for loans with higher FICO credit scores. MGIC charges higher premium rates
to reflect the increased risk of claim incidence that it perceives is associated
with a loan. However, there can be no assurance that MGIC's premium rates
adequately reflect the increased risk, particularly in a period of economic
recession.
There are also other types of loan characteristics relating to the
individual loan or borrower which affect the risk potential for a loan. The
presence of a number of higher-risk characteristics in a loan materially
increases the likelihood of a claim on such a loan unless there are other
characteristics to lower the risk.
Underwriting Process. To obtain primary insurance on a specific
mortgage loan for which delegated underwriting is not being used, a master
policyholder typically submits an application to MGIC, supported by various
documents, if required by MGIC. MGIC utilizes national underwriting guidelines
to evaluate the potential risk of default on mortgage loans submitted for
insurance coverage. These guidelines generally are consistent with Fannie Mae
and Freddie Mac underwriting guidelines and take into account the applicable
premium rates charged by MGIC and the loss experience of the private mortgage
insurance industry, as well as the initiatives to expand home ownership
opportunities undertaken by Fannie Mae and Freddie Mac. MGIC's underwriters have
discretionary authority to insure loans which deviate in one or more respects
from MGIC's underwriting guidelines. In most such cases, offsetting underwriting
strengths must be identified.
In order to react to local or regional economic conditions, MGIC has
also developed for use by its underwriting staff certain modified guidelines
which attempt to address particular regional or local market developments. These
"special market underwriting guidelines" are updated from time to time and
deviate in varying degrees from MGIC's national guidelines based on MGIC's
analysis of area housing markets and related economic indicators and conditions.
The special market underwriting guidelines are more liberal than the published
national guidelines in some markets, but in other markets are more restrictive.
To assist its staff of underwriters, MGIC utilizes a computer-assisted
underwriting system which analyzes and approves certain mortgage insurance
applications based on MGIC's underwriting standards, but without personal
underwriter intervention, thereby allowing MGIC's underwriting staff to devote
additional attention to evaluating more difficult underwriting decisions. MGIC
audits a representative sample of applications approved by the system.
-14-
Delegated Underwriting and GSE Automated Underwriting Approvals.
Delegated underwriting is a program whereby approved lenders are allowed to
commit MGIC to insure loans utilizing their MGIC-approved underwriting
guidelines and underwriting evaluation. For delegated loans insured on a flow
basis, while MGIC does not underwrite on a loan-by-loan basis the credit of the
borrower, the value of the property, or other factors which it normally
considers in its underwriting decision, it does audit on a regular basis a
sample of the loans insured. Loans insured in bulk transactions are categorized
as delegated underwritten loans. For these loans, the audit is conducted prior
to the commitment for the insurance and includes other procedures for certain
loans that are not audited.
At December 31, 2001, MGIC's delegated underwriting program involved
approximately 536 lenders, including all of MGIC's top twenty customers. Loans
insured under MGIC's delegated underwriting program accounted for approximately
42.0% of MGIC's total risk in force at December 31, 2001. The percentage of new
risk written by delegated underwriters increased to 53.1% in 2001 from 46.8% in
2000 (this increase is principally due to loans insured in bulk transactions)
and was 38.4% in 1999.
Loans covered under agency pool insurance are not underwritten by MGIC
on a loan-by-loan basis. If the loan has primary insurance provided by MGIC,
delegated underwriting is used, and if the loan has primary insurance provided
by another mortgage insurer or has no primary insurance, the lender underwrites
the loan to standards set forth in the agency pool insurance agreement with the
lender.
MGIC also has a reduced document submission program under which it
approves a loan for insurance if the borrower satisfies certain minimum criteria
for credit scores and debt ratios.
Since 2000, loans approved by the automated underwriting services of
the GSEs have been automatically approved for MGIC mortgage insurance and were
generally insured at premium rates applicable to prime quality loans. Because
some of the loans approved by these services have higher risk than prime quality
loans, MGIC plans to charge subprime premium rates for these loans.
Past Industry Losses; Defaults; and Claims
Past Industry Losses. The private mortgage insurance industry
experienced substantial unanticipated incurred losses in the mid-to-late 1980s.
From the 1970s until 1981, rising home prices in the United States generally led
to profitable insurance underwriting results for the industry and caused private
mortgage insurers to emphasize market share. To maximize market share, until the
mid-1980s, private mortgage insurers employed liberal underwriting practices,
and charged premium rates which, in retrospect, generally did not adequately
reflect the risk assumed (particularly on pool insurance). These industry
practices compounded the losses which resulted from changing economic and market
conditions which occurred during the early and mid-1980s, including (i) severe
regional recessions and attendant declines in property values in the nation's
-15-
energy producing states; (ii) the development by lenders of new mortgage
products to defer the impact on home buyers of double digit mortgage interest
rates; and (iii) changes in federal income tax incentives which initially
encouraged the growth of investment in non-owner occupied properties.
Defaults. The claim cycle on private mortgage insurance begins with the
insurer's receipt of notification of a default on an insured loan from the
lender. Lenders are required to notify MGIC of defaults within 130 days after
the initial default, although most lenders do so earlier. The incidence of
default is affected by a variety of factors, including the level of borrower
income growth, unemployment, divorce and illness, the level of interest rates
and general borrower creditworthiness. Defaults that are not cured result in a
claim to MGIC. Defaults may be cured by the borrower bringing current the
delinquent loan payments or by a sale of the property and the satisfaction of
all amounts due under the mortgage.
The following table shows the number of primary and pool loans insured
in the MGIC Book, including for new insurance written in 2001 and 2000 on loans
in bulk transactions, the related number of loans in default and the percentage
of loans in default (default rate) as of the dates indicated:
Default Statistics for the MGIC Book
December 31,
--------------------------------------------------------------------------------------
2001 2000 1999 1998(1) 1997(1)
---- ---- ---- ------- -------
PRIMARY INSURANCE
Insured loans in force ... 1,580,283 1,448,348 1,370,020 1,320,994 1,342,976
Loans in default ......... 54,653 37,422 29,761 29,253 28,493
Percentage of loans in default
(default rate) ........... 3.46% 2.58% 2.17% 2.21% 2.12%
Loans in default excluding
bulk loans................ 36,193 29,889 27,062 - -
Percentage of loans in default
excluding bulk loans.... . 2.65% 2.19% 2.02% - -
Bulk loans in force....... 214,917 83,513 33,569 - -
Bulk loans in default..... 18,460 7,533 2,699 - -
Percentage of bulk loans in
default (default rate).... 8.59% 9.02% 8.04% - -
POOL INSURANCE
Insured loans in force ... 1,351,266 1,360,059 1,181,512 899,063 374,378
Loans in default ......... 23,623 18,209 11,638 6,524 2,174
Percentage of loans in default
(default rate) ........... 1.75% 1.34% 0.99% 0.73% 0.58%
(1)Information relating to defaults excluding bulk defaults, and to bulk
defaults in 1997 and 1998 is not separately presented and is not material.
-16-
The default rate for primary loans excluding bulk loans has generally
increased due to an increase in the risk profile of loans insured since 1997 and
the continued maturation of MGIC's insurance in force. The default rate for bulk
loans reflects the higher default rate associated with such loans. The default
rate for bulk loans is expected to continue to increase. The number of pool
insurance loans in force increased at December 31, 1997-2001 as a result of
agency pool insurance writings, and the number of pool insurance loans in
default at those dates increased due to the increase in pool insurance in force
and the aging of the loans in the pools. The percentage of pool insurance loans
in default decreased from 1996 to 1997 as a result of the increase in pool
insurance in force and increased from 1997 to 2001 due to the aging of the loans
in the pools.
Regions of the United States may experience different default rates due
to varying localized economic conditions from year to year. The following table
shows the percentage of the MGIC Book's primary loans in default by MGIC region
at the dates indicated:
Default Rates for Primary Insurance By Region*
Dec. 31 Dec. 31 Dec. 31
2001 2000 1999
---- ---- ----
MGIC REGION:
New England............. 2.27% 1.84% 1.60%
Northeast............... 3.90 3.15 3.02
Mid-Atlantic............ 3.27 2.69 2.19
Southeast............... 3.65 2.72 2.24
Great Lakes............. 3.74 2.68 2.09
North Central........... 3.21 2.22 1.85
South Central........... 3.56 2.56 2.00
Plains.................. 2.76 1.98 1.40
Pacific................. 3.38 2.63 2.42
National............. 3.46% 2.58% 2.17%
- --------------------
* The default rate is affected by both the number of loans in default at any
given date as well as the number of insured loans in force at such date.
Claims. Claims result from defaults which are not cured. Whether a
claim results from an uncured default principally depends on the borrower's
equity in the home at the time of default and the borrower's (or the lender's)
ability to sell the home for an amount sufficient to satisfy all amounts due
under the mortgage. Claims are affected by various factors, including local
housing prices and employment levels, and interest rates.
-17-
Under the terms of the Master Policy, the lender is required to file a
claim for primary insurance with MGIC within 60 days after it has acquired good
and marketable title to the underlying property through foreclosure. Depending
on the applicable state foreclosure law, an average of about 12 months
transpires from the date of default to payment of a claim on an uncured default.
The claim amount generally averages about 115% of the unpaid principal amount of
the loan.
Within 60 days after the claim has been filed, MGIC has the option of
either (i) paying the coverage percentage specified for that loan, with the
insured retaining title to the underlying property and receiving all proceeds
from the eventual sale of the property or (ii) paying 100% of the claim amount
in exchange for the lender's conveyance of good and marketable title to the
property to MGIC, with MGIC then selling the property for its own account.
Claim activity is not evenly spread throughout the coverage period of a
book of primary business. For prime loans, relatively few claims are received
during the first two years following issuance of coverage on a loan. This is
followed by a period of rising claims which, based on industry experience, has
historically reached its highest level in the third through fifth years after
the year of loan origination. Thereafter, the number of claims received has
historically declined at a gradual rate, although the rate of decline can be
affected by conditions in the economy, including lower housing price
appreciation. There can be no assurance that this historical pattern of claims
will continue in the future and due in part to the subprime component of loans
insured in bulk transactions, MGIC expects that the peak claim period for bulk
loans will occur earlier than for prime loans. Moreover, when a loan is
refinanced, because the new loan replaces, and is a continuation of, an earlier
loan, the pattern of claims frequency for that new loan may be different from
the historical pattern of other loans. As of December 31, 2001, 68.5% of the
MGIC Book primary insurance in force had been written during 1999, 2000 and
2001, although a portion of such insurance arose from the refinancing of earlier
originations.
In addition to the increasing level of claim activity arising from the
maturing of the MGIC Book, another important factor affecting MGIC Book losses
is the amount of the average claim paid, which is generally referred to as claim
severity. The main determinants of claim severity are the amount of the mortgage
loan and coverage percentage on the loan. The average claim severity on the MGIC
Book primary insurance was $18,607 for 2001 as compared to $18,977 in 2000,
reflecting the decline in the number of claims paid from certain high cost
regions of the country.
Loss Reserves
A significant period of time may elapse between the occurrence of the
borrower's default on a mortgage payment (the event triggering a potential
future claim payment by MGIC), the reporting of such default to MGIC and the
eventual payment of the claim related to such uncured default. To recognize the
liability for unpaid losses related to outstanding reported defaults (known as
the default inventory), the Company (similar to other private mortgage insurers)
establishes loss reserves, representing the estimated percentage of defaults
which will ultimately result in a claim
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(known as the claim rate), and estimates of the severity of each claim which
will arise from the defaults included in the default inventory. In accordance
with industry accounting practices, the Company does not establish loss reserves
for future claims on insured loans which are not currently in default.
The Company also establishes reserves to provide for the estimated
costs of settling claims, including legal and other fees, and general expenses
of administering the claims settlement process ("loss adjustment expenses"), and
for losses and loss adjustment expenses from defaults which have occurred, but
which have not yet been reported to the insurer.
The Company's reserving process is based upon the assumption that past
experience, adjusted for the anticipated effect of current economic conditions
and projected future economic trends, provides a reasonable basis for estimating
future events. However, estimation of loss reserves is a difficult process.
Economic conditions that have affected the development of the loss reserves in
the past may not necessarily affect development patterns in the future, in
either a similar manner or degree.
For a further information about loss reserves, see Note 6 to the
consolidated financial statements of the Company, included in Exhibit 13 to this
Annual Report on Form 10-K.
Geographic Dispersion
The following table reflects the percentage of primary risk in force in
the top 10 states and top 10 metropolitan statistical areas ("MSAs") for the
MGIC Book at December 31, 2001:
Dispersion of Primary Risk in Force
Top 10 States Top 10 MSAs
------------- -----------
1. California 12.0% 1. Chicago 3.9%
2. Florida 6.3 2. Los Angeles 3.3
3. Texas 6.2 3. Atlanta 2.5
4. Michigan 5.3 4. Washington, D.C. 2.3
5. Illinois 5.2 5. Detroit 2.3
6. Ohio 4.6 6. Boston 2.2
7. New York 4.2 7. Phoenix 2.0
8. Pennsylvania 4.0 8. Philadelphia 1.8
9. Georgia 3.2 9. Houston 1.7
10. New Jersey 2.8 10. New York 1.5
----- -------
Total 53.8% Total 23.5%
===== =====
The percentages shown above for various MSAs can be affected by changes,
from time to time, in the federal government's definition of an MSA.
-19-
Insurance in Force by Policy Year
The following table sets forth the dispersion of MGIC's primary
insurance in force as of December 31, 2001, by year(s) of policy origination
since MGIC began operations in 1985:
Primary Insurance In Force by Policy Year
Primary
Insurance in Percent of
Policy Year Force Total
-------------- ------------
(In millions of dollars)
1985-1995 $ 20,239 11.0%
1996 6,216 3.4
1997 8,808 4.8
1998 22,649 12.3
1999 25.228 13.7
2000 26,050 14.2
2001 74,714 40.6
------ ----
Total $183,904 100.0%
======== ======
Product Characteristics of Risk in Force
At December 31, 2001 and 2000, 95.6% and 95.9%, respectively, of MGIC's
risk in force was primary insurance and the remaining risk in force was pool
insurance. The following table reflects at the dates indicated the (i) total
dollar amount of primary risk in force for the MGIC Book and (ii) percentage of
such primary risk in force (as determined on the basis of information available
on the date of mortgage origination) by the categories indicated.
-20-
Characteristics of Primary Risk in Force
December 31, December 31,
2001 2000
------------ ------------
Direct Risk in Force (Dollars in Millions):.... $42,678 $39,090
Lender Concentration:
Top 10 lenders............................. 29.5% 28.8%
Top 20 lenders............................. 39.7% 40.6%
LTV: (1)
100s(2).................................... 6.4% 5.6%
95s........................................ 40.6 44.7
90s(3)..................................... 46.2 47.0
80s........................................ 6.8 2.7
----- -----
Total.................................. 100.0% 100.0%
===== =====
Loan Type:
Fixed(4)................................... 85.3% 87.7%
ARM(5)..................................... 13.9 11.1
Balloon(6)................................. 0.8 1.2
Other...................................... 0.0 0.0
----- -----
Total.................................. 100.0% 100.0%
===== =====
Original Insured Loan Amount(7):
Conforming loan limit and below............ 91.0% 90.8%
Non-conforming............................. 9.0 9.2
----- -----
Total.................................. 100.0% 100.0%
===== =====
Mortgage Term:
15-years and under......................... 3.9% 3.6%
Over 15 years.............................. 96.1 96.4
----- -----
Total.................................. 100.0% 100.0%
===== =====
Property Type:
Single-family(8)........................... 93.8% 93.9%
Condominium................................ 5.9 5.8
Other(9)................................... 0.3 0.3
----- -----
Total.................................. 100.0% 100.0%
===== =====
Occupancy Status:
Primary residence.......................... 96.2% 97.1%
Second home................................ 1.7 1.5
Non-owner occupied......................... 2.1 1.4
----- -----
Total.................................. 100.0% 100.0%
===== =====
- --------------------
-21-
(1) Loan-to-value represents the ratio (expressed as a percentage) of the
dollar amount of the mortgage loan to the value of the property at the time
the loan became insured. For purposes of the table, LTV ratios are
classified as in excess of 95% ("100s"); in excess of 90% LTV and up to 95%
LTV ("95s"); in excess of 80% LTV and up to 90% LTV ("90s"); and equal to
or less than 80% LTV ("80s").
(2) Includes 97% to 103% LTV loans for year 2001.
(3) MGIC includes in its classification of 90s, loans where the borrower makes
a down payment of 10% and finances the associated mortgage insurance
premium payment as part of the mortgage loan. At December 31, 2001 and
2000, 2.4% and 2.7%, respectively, of the primary risk in force consisted
of these types of loans.
(4) Includes fixed rate mortgages with temporary buydowns (where in effect, the
applicable interest rate is typically reduced by one or two percentage
points during the first two years of the loan) and adjustable rate
mortgages in which the initial interest rate is fixed for at least five
years.
(5) Includes ARMs where payments adjust fully with interest rate adjustments.
Also includes ARMs with negative amortization, which at December 31, 2001
and 2000, represented 0.9% and 1.2%, respectively, of primary risk in
force. Does not include ARMs in which the initial interest rate is fixed
for at least five years. As of December 31, 2001 and 2000, ARMs with LTVs
in excess of 90% represented 2.5% and 3.2%, respectively, of primary risk
in force.
(6) Balloon payment mortgages are loans with a maturity, typically five to
seven years, that is shorter than the loans' amortization period.
(7) Loans within the conforming loan limit have an original principal balance
that does not exceed the maximum original principal balance of loans that
the GSEs are eligible to purchase. The conforming loan limit is subject to
annual upward adjustment and was $275,000 for 2001 and $252,700 for 2000.
Non-conforming loans are loans with an original principal balance above the
conforming loan limit.
(8) Includes townhouse-style attached housing with fee simple ownership.
(9) Includes cooperatives and manufactured homes deemed to be real estate.
C. Other Business and Joint Ventures
The Company, through subsidiaries, provides various mortgage services
for the mortgage finance industry, such as contract underwriting, portfolio
retention and secondary marketing of mortgage-related assets. At December 31,
2001, the Company also owned approximately 46% of Credit-Based Asset Servicing
and Securitization LLC ("C-BASS") and approximately 46% of Sherman Financial
Group LLC, joint ventures with senior management of the joint ventures and
Radian Group Inc. At December 31, 2001, the Company owned less than 50% of
Customers Forever LLC (more than 50% assuming the conversion of convertible debt
held by the Company and Metavante Corporation); Customers Forever is a joint
venture with senior management of the joint venture and Metavante Corporation.
For further information about the C-BASS and Sherman joint ventures, see
"Management's Discussion and Analysis--Results of Consolidated Operations--2001
Compared to 2000" and Note 8 to the consolidated financial statements of the
Company, both of which are included in Exhibit 13 to this Annual Report on Form
10-K. The revenues recognized from these mortgage services operations, other
non-insurance services and the joint ventures
-22-
represented 5.4% and 3.6% of the Company's consolidated revenues in both 2001
and 2000, respectively.
The Company's eMagic.com, LLC subsidiary, launched in January 2000,
provides an Internet portal through which mortgage originators can access
products and services of wholesalers, investors, and vendors necessary to make a
home mortgage loan.
In 1997, the Company, through subsidiaries, began insuring second
mortgages, including home equity loans. New insurance written on second
mortgages in 2001, 2000 and 1999 was approximately $1.3 billion, $1.1 billion
and $1.1 billion. The Company discontinued writing new second mortgage risk
effective January 1, 2002.
D. Investment Portfolio
Policy and Strategy
Cash flow from the Company's investment portfolio represented
approximately 36% of its total cash flow from operations during 2001.
Approximately 75% of the Company's long-term investment portfolio is managed by
a subsidiary of The Northwestern Mutual Life Insurance Company, although the
Company maintains overall control of investment policy and strategy. The Company
maintains direct management of the remainder of its investment portfolio.
The Company's current policies emphasize preservation of capital, as
well as total return. Therefore, the Company's investment portfolio consists
almost entirely of high-quality, fixed-income investments. Liquidity is sought
through diversification and investment in publicly traded securities. The
Company attempts to maintain a level of liquidity commensurate with its
perceived business outlook and the expected timing, direction and degree of
changes in interest rates. The Company's investment policies in effect at
December 31, 2001 limited investments in the securities of a single issuer
(other than the U.S. government and its agencies) and generally did not permit
purchasing fixed income securities rated below "A."
At December 31, 2001, based on amortized cost, approximately 98.1% of
the Company's total fixed income investment portfolio was invested in securities
rated "A" or better, with 72.8% which were rated "AAA" and 19.7% which were
rated "AA," in each case by at least one nationally recognized securities rating
organization.
The Company's investment policies and strategies are subject to change
depending upon regulatory, economic and market conditions and the existing or
anticipated financial condition and operating requirements, including the tax
position, of the Company.
-23-
Investment Operations
At December 31, 2001, the market value of the Company's investment
portfolio was approximately $4.1 billion. At December 31, 2001, municipal
securities represented 75.4% of the market value of the total investment
portfolio. Securities due within one year, within one to five years, within five
to ten years, and after ten years, represented 5.6%, 20.6%, 31.1% and 42.7%,
respectively, of the total book value of the Company's investment in debt
securities. The Company's net pre-tax investment income was $204.4 million for
the year ended December 31, 2001. The Company's after-tax yield for 2001 was
4.6%, which was comparable to the after-tax yield in 2000.
For further information concerning investment operations, see Note 4 to
the consolidated financial statements of the Company, included in Exhibit 13 to
this Annual Report on Form 10-K.
E. Regulation
Direct Regulation
The Company and its insurance subsidiaries, including MGIC, are subject
to regulation, principally for the protection of policyholders, by the insurance
departments of the various states in which each is licensed to do business. The
nature and extent of such regulation varies, but generally depends on statutes
which delegate regulatory, supervisory and administrative powers to state
insurance commissioners.
In general, such regulation relates, among other things, to licenses to
transact business; policy forms; premium rates; annual and other reports on
financial condition; the basis upon which assets and liabilities must be stated;
requirements regarding contingency reserves equal to 50% of premiums earned;
minimum capital levels and adequacy ratios; reinsurance requirements;
limitations on the types of investment instruments which may be held in an
investment portfolio; the size of risks and limits on coverage of individual
risks which may be insured; deposits of securities; limits on dividends payable;
and claims handling. Most states also regulate transactions between insurance
companies and their parents or affiliates and have restrictions on transactions
that have the effect of inducing lenders to place business with the insurer. For
a discussion of a February 1, 1999 circular letter from the NYID and a January
31, 2000 letter from the Illinois Department of Insurance, see "The MGIC
Book--Types of Product--Pool Insurance" and "--Captive Mortgage Reinsurance."
For a description of limits on dividends payable, see "Management's Discussion
and Analysis-Liquidity and Capital Resources" and Note 11 to the consolidated
financial statements of the Company, both of which are included in Exhibit 13 to
this Annual Report on Form 10-K.
Mortgage insurance premium rates are also subject to state regulation
to protect policyholders against the adverse effects of excessive, inadequate or
unfairly discriminatory rates and to encourage competition in the insurance
marketplace. Any increase in premium rates must be
-24-
justified, generally on the basis of the insurer's 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.
A number of states generally limit the amount of insurance risk which
may be written by a private mortgage insurer to 25 times the insurer's total
policyholders' reserves, commonly known as the "risk-to-capital" requirement.
MGIC is required to contribute to a contingency loss reserve an amount
equal to 50% of earned premiums. Such amounts cannot be withdrawn for a period
of 10 years, except under certain circumstances.
Mortgage insurers are generally single-line companies, restricted to
writing residential mortgage insurance business only. Although the Company, as
an insurance holding company, is prohibited from engaging in certain
transactions with MGIC without submission to and, in some instances, prior
approval of applicable insurance departments, the Company is not subject to
insurance company regulation on its non-insurance businesses.
Wisconsin's insurance regulations generally provide that no person may
acquire control of the Company unless the transaction in which control is
acquired has been approved by the Office of the Commissioner of Insurance of
Wisconsin. The regulations provide for a rebuttable presumption of control when
a person owns or has the right to vote more than 10% of the voting securities.
As the most significant purchasers and sellers of conventional mortgage
loans and beneficiaries of private mortgage insurance, Freddie Mac and Fannie
Mae impose requirements on private mortgage insurers in order for such insurers
to be eligible to insure loans sold to such agencies. These requirements of
Freddie Mac and Fannie Mae are subject to change from time to time. Currently,
MGIC is an approved mortgage insurer for both Freddie Mac and Fannie Mae. In
addition, to the extent Fannie Mae or Freddie Mac assumes default risk for
itself that would otherwise be insured, changes current guarantee fee
arrangements (including as a result of primary mortgage insurance coverage being
restructured as described under "The MGIC Book--Types of Product--Primary
Insurance"), allows alternative credit enhancement, alters or liberalizes
underwriting guidelines on low down payment mortgages they purchase, or
otherwise changes its business practices or processes with respect to such
mortgages, private mortgage insurers may be affected.
Fannie Mae has issued primary mortgage insurance master policy
guidelines applicable to MGIC and all other Fannie Mae-approved private mortgage
insurers, establishing certain minimum terms of coverage necessary in order for
an insurer to be eligible to insure loans purchased by Fannie Mae. The terms of
MGIC's Master Policy comply with these guidelines.
MGIC's claims-paying ability is rated "AA+" by Standard & Poor's
Corporation and "Aa2" by Moody's Investors Service, Inc. Maintenance of a
claims-paying ability rating of at least AA-/Aa3 is critical to a mortgage
insurer's ability to continue to write new business. In assigning
-25-
claims-paying ability ratings, rating agencies review a mortgage insurer's
competitive position and business, management, corporate strategy, historical
and projected operating and underwriting performance, adequacy of capital to
withstand extreme loss scenarios under assumptions determined by the rating
agency, as well as other factors. The rating agency issuing the claims-paying
ability rating can withdraw or change its rating at any time.
Indirect Regulation
The Company and MGIC are also indirectly, but significantly, impacted
by regulations affecting purchasers of mortgage loans, such as Freddie Mac and
Fannie Mae, and regulations affecting governmental insurers, such as the FHA and
VA, and lenders. Private mortgage insurers, including MGIC, are highly dependent
upon federal housing legislation and other laws and regulations to the extent
they affect the demand for private mortgage insurance and the housing market
generally. From time to time, those laws and regulations have been amended to
affect competition from government agencies. See "The MGIC Book - Sales and
Marketing and Competition - Competition." Proposals are discussed from time to
time by Congress and certain federal agencies to reform or modify the FHA and
the Government National Mortgage Association, which securitizes mortgages
insured by the FHA.
Subject to certain exceptions, in general, RESPA prohibits any person
from giving or receiving any "thing of value" pursuant to an agreement or
understanding to refer settlement services. See "Item 3--Legal Proceedings."
The OTS, the OCC, the Federal Reserve Board, and the Federal Deposit
Insurance Corporation have uniform guidelines on real estate lending by insured
lending institutions under their supervision. The guidelines specify that a
residential mortgage loan originated with an LTV of 90% or greater should have
appropriate credit enhancement in the form of mortgage insurance or readily
marketable collateral, although no depth of coverage percentage is specified in
the guidelines.
Lenders are subject to various laws, including the Home Mortgage
Disclosure Act, the Community Reinvestment Act and the Fair Housing Act, and
Fannie Mae and Freddie Mac are subject to various laws, including laws relating
to government sponsored enterprises, which may impose obligations or create
incentives for increased lending to low and moderate income persons, or in
targeted areas.
There can be no assurance that other federal laws and regulations
affecting such institutions and entities will not change, or that new
legislation or regulations will not be adopted which will adversely affect the
private mortgage insurance industry.
-26-
F. Employees
At December 31, 2001, the Company had 1,223 full- and part-time
employees, of whom approximately 53% were assigned to its Milwaukee headquarters
and 47% to its 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.
Item 2. Properties.
At December 31, 2001, the Company leased office space in various cities
throughout the United States under leases expiring between 2002 and 2006 and
which required annual rentals of $3.4 million in 2001.
The Company owns its headquarters facility and an additional
office/warehouse facility, both located in Milwaukee, Wisconsin, which contain
an aggregate of approximately 310,000 square feet of space.
Item 3. Legal Proceedings.
The Company is involved in litigation in the ordinary course of
business. No pending litigation is expected to have a material adverse effect on
the financial position of the Company.
In addition, MGIC is a defendant in Downey et. al. v. MGIC, filed in
Federal District Court for the Southern District of Georgia in May 2000
following the dismissal of a similar case filed in December, 1999. The Downey
case sought certification as nationwide class action. Equivalent actions seeking
nationwide class action certification were filed in December 1999 against three
other mortgage insurers (PMI, Republic and United Guaranty) and in June 2000 an
equivalent class action was filed against Triad, another mortgage insurer. In
August 2000, the Federal District Court dismissed the cases against PMI,
Republic and United Guaranty on the ground that the Federal McCarran-Ferguson
Act barred the RESPA claims brought by the individual plaintiffs in those cases.
Because the pending case against MGIC dated only from May 2000, the time for
MGIC to file a motion to dismiss the case against it under the motion schedule
established by the Court had not yet occurred. In February 2001, the Court
dismissed the case against Triad on the same basis as the cases against PMI,
Republic and United Guaranty were dismissed.
In December 2000 MGIC, PMI and United Guaranty entered into a
settlement agreement with the plaintiffs. In the fourth quarter of 2000, the
Company recorded a $23.2 million charge to cover the estimated costs of the
settlement, including payments to borrowers. In June 2001, the Federal District
Court issued a final order approving the December 2000 settlement agreement and
certified a nationwide class of borrowers. Due to appeals of related orders
denying certain class members the right to intervene to challenge certain
aspects of the settlement in Downey and the PMI and United Guaranty cases,
payments to borrowers in the settlement are delayed pending the
-27-
outcome of the appeals. The settlement includes an injunction that prohibits
certain practices and specifies the basis on which agency pool insurance,
captive mortgage reinsurance, contract underwriting and other products may be
provided in compliance with the Real Estate Settlement Procedures Act. There can
be no assurance that the standards established by the injunction will be
determinative of compliance with RESPA were additional litigation to be brought
in the future.
The complaint in the case alleges that MGIC violated the Real Estate
Settlement Procedures Act by providing agency pool insurance, captive mortgage
reinsurance, contract underwriting and other products that were not properly
priced, in return for the referral of mortgage insurance. The complaint seeks
damages of three times the amount of the mortgage insurance premiums that have
been paid and that will be paid at the time of judgment for the mortgage
insurance found to be involved in a violation of the Real Estate Settlement
Procedures Act. The complaint also seeks injunctive relief, including
prohibiting MGIC from receiving future premium payments. If the settlement is
not fully implemented, the litigation will continue. In these circumstances,
there can be no assurance that the ultimate outcome of the litigation will not
materially affect the Company's financial position or results of operations.
In January 2002, the Federal Court of Appeals for the Eleventh Circuit
reversed the dismissal of the case against Triad holding that the
McCarran-Ferguson Act did not bar the RESPA claims of the individual plaintiff.
The dismissal of the Republic case was also appealed to the Court of Appeals for
the Eleventh Circuit but no decision has been rendered.
-28-
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Executive Officers
Certain information with respect to the Company's executive officers as
of March 1, 2002 is set forth below:
Name and Age Title
Curt S. Culver, 49................... President and Chief Executive Officer of
the Company and MGIC; Director of the
Company and MGIC
John D. Fisk, 45..................... Executive Vice President--Strategic
Planning of the Company and MGIC
J. Michael Lauer, 57................. Executive Vice President and Chief
Financial Officer of the Company and MGIC
James S. MacLeod, 54................. Executive Vice President--Field
Operations of MGIC
Lawrence J. Pierzchalski, 49......... Executive Vice President--Risk Management
of MGIC
Jeffrey H. Lane, 52.................. Senior Vice President, General Counsel
and Secretary of the Company and MGIC
Mr. Culver has served as President of the Company since January 1999
and as Chief Executive Officer since January 2000. He has been President of MGIC
since May 1996 and was Chief Operating Officer of MGIC from May 1996 until he
became Chief Executive Officer in January 1999. Mr. Culver has been a senior
officer of MGIC since 1988 having responsibility at various times during his
career with MGIC for field operations, marketing and corporate development. From
March 1985 to 1988, he held various management positions with MGIC in the areas
of marketing and sales.
Mr. Fisk joined the Company in February 2002. From January 2000 to May
2001 he was Chief Executive Officer of LoanChannel.com, an internet small
business lending portal. For more than 17 years before then, he held various
positions with Freddie Mac, including Senior Vice President--Investor & Dealer
Services from May 1993 to September 1997 and Executive Vice President--Single
Family Securitization Group from September 1997 to January 2000 when he left to
found LoanChannel.com.
-29-
Mr. Lauer has served as Executive Vice President and Chief Financial
Officer of the Company and MGIC since March 1989.
Mr. MacLeod has served as Executive Vice President-Field Operations of
MGIC since January 1998 and was Senior Vice President-Field Operations of MGIC
from May 1996 to January 1998. Mr. MacLeod has been a senior officer of MGIC
since 1987 having responsibility at various times during his career with MGIC
for sales, business development and marketing. From March 1985 to 1987, he held
various management positions with MGIC in the areas of underwriting and risk
management.
Mr. Pierzchalski has served as Executive Vice President-Risk Management
of MGIC since May 1996 and prior thereto as Senior Vice President-Risk
Management or Vice President-Risk Management of MGIC from April 1990. From March
1985 to April 1990, he held various management positions with MGIC in the areas
of market research, corporate planning and risk management.
Mr. Lane has served as Senior Vice President, General Counsel and
Secretary of the Company and MGIC since August 1996. For more than five years
prior to his joining the Company, Mr. Lane was a partner of Foley & Lardner, a
law firm headquartered in Milwaukee, Wisconsin.
-30-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The information set forth under the caption "MGIC Stock" in
Exhibit 13 to this Annual Report on Form 10-K is incorporated
herein by reference.
Item 6. Selected Financial Data.
The information set forth in the tables under the caption
"Five-Year Summary of Financial Information" in Exhibit 13 to
this Annual Report on Form 10-K is hereby incorporated by
reference in answer to this Item.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information set forth under the caption "Management's
Discussion and Analysis" in Exhibit 13 to this Annual Report
on Form 10-K is hereby incorporated by reference in answer to
this Item.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information set forth in the third paragraph under the
caption "Management's Discussion and Analysis - Financial
Condition," and in the eight and ninth paragraphs under the
caption "Management's Discussion and Analysis - Liquidity and
Capital Resources," all in Exhibit 13 to this Annual Report
on Form 10-K, is hereby incorporated by reference in answer
to this Item.
Item 8. Financial Statements and Supplementary Data.
The consolidated statements of operations, of shareholders'
equity and of cash flows for each of the years in the
three-year period ended December 31, 2001, and the related
consolidated balance sheet of the Company as of December 31,
2001 and 2000, together with the related notes thereto and
the report of independent accountants, as well as the
unaudited quarterly financial data, all set forth in Exhibit
13 to this Annual Report on Form 10-K, are hereby
incorporated by reference in answer to this Item.
-31-
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
-32-
PART III
Item 10. Directors and Executive Officers of the Registrant.
This information (other than for executive officers) is
included in the Company's Proxy Statement for the 2002 Annual
Meeting of Shareholders, and is hereby incorporated by
reference. The information on the executive officers appears
at the end of Part I of this Form 10-K.
Item 11. Executive Compensation.
This information is included in the Company's Proxy Statement
for the 2002 Annual Meeting of Shareholders and, other than
information covered by Instruction (9) to Item 402 (a) of
Regulation S-K of the Securities and Exchange Commission, is
hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
This information is included in the Company's Proxy Statement
for the 2002 Annual Meeting of Shareholders, and is hereby
incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
This information is included in the Company's Proxy Statement
for the 2002 Annual Meeting of Shareholders, and is hereby
incorporated by reference.
-33-
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial statements. The financial statements listed
in the accompanying Index to Consolidated Financial
Statements and Financial Statement Schedules are filed
as part of this Form 10-K.
2. Financial statement schedules. The financial statement
schedules listed in the accompanying Index to
Consolidated Financial Statements and Financial
Statement Schedules are filed as part of this Form
10-K.
3. Exhibits. The accompanying Index to Exhibits is
incorporated by reference in answer to this portion
of this Item and the Exhibits listed in such Index are
filed as part of this Form 10-K.
(b) Reports on Form 8-K
During the quarter ended December 31, 2001, the Company did
not file any Reports on Form 8-K.
-34-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
[Item 14(a) 1 and 2]
Consolidated Financial Statements (all contained in Exhibit 13 to this Annual
Report on Form 10-K)
Consolidated statement of operations for each of the three years in the period
ended December 31, 2001
Consolidated balance sheet at December 31, 2001 and 2000
Consolidated statement of shareholders' equity for each of the three years in
the period ended December 31, 2001
Consolidated statement of cash flows for each of the three years in the period
ended December 31, 2001
Notes to consolidated financial statements
Report of independent accountants
Financial Statement Schedules (all contained immediately following the signature
page to this Annual Report on Form 10-K)
Report of independent accountants on financial statement schedules
Schedules at and for the specified years in the three-year period ended December
31, 2001:
Schedule I - Summary of investments, other than investments in related
parties
Schedule II - Condensed financial information of Registrant
Schedule IV - Reinsurance
All other schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedules, or
because the information required is included in the consolidated financial
statements and notes thereto.
-35-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 28, 2002.
MGIC INVESTMENT CORPORATION
By /s/ Curt S. Culver
-----------------------------------------
Curt S. Culver
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below as of the date set forth above by the following persons on
behalf of the registrant and in the capacities indicated.
Name and Title
/s/ Curt S. Culver /s/ David S. Engelman
- -------------------------------------- --------------------------------
Curt S. Culver David S. Engelman, Director
President, Chief Executive
Officer and Director /s/ Thomas M. Hagerty
--------------------------------
Thomas M. Hagerty, Director
/s/ J. Michael Lauer /s/ Kenneth M. Jastrow, II
- -------------------------------------- --------------------------------
J. Michael Lauer Kenneth M. Jastrow, II, Director
Executive Vice President and
Chief Financial Officer /s/ Daniel P. Kearney
(Principal Financial Officer) --------------------------------
Daniel P. Kearney, Director
/s/ Patrick Sinks /s/ Michael E. Lehman
- -------------------------------------- --------------------------------
Patrick Sinks Michael E. Lehman, Director
Senior Vice President, Controller
and Chief Accounting Officer /s/ Sheldon B. Lubar
(Principal Accounting Officer) --------------------------------
Sheldon B. Lubar, Director
/s/ James A. Abbott /s/ William A. McIntosh
- -------------------------------------- --------------------------------
James A. Abbott, Director William A. McIntosh, Director
/s/ Mary K. Bush /s/ Leslie M. Muma
- -------------------------------------- --------------------------------
Mary K. Bush, Director Leslie M. Muma, Director
/s/ Karl E. Case
- --------------------------------------
Karl E. Case, Director
-36-
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors
of MGIC Investment Corporation:
Our audits of the consolidated financial statements referred to in our report
dated January 9, 2002 appearing in the 2001 Annual Report to Shareholders of
MGIC Investment Corporation (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedules listed in Item
14(a)(2) of this Form 10-K. In our opinion, these financial statement
schedules present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
January 9, 2002
-37-
MGIC INVESTMENT CORPORATION
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2001
Amount at
Amortized Market which shown in
Type of Investment Cost Value the balance sheet
------------------ ----------------- --------------- ------------------------
(In thousands of dollars)
Fixed maturities:
Bonds:
United States Government and government
agencies and authorities $ 307,761 $ 305,448 $ 305,448
States, municipalities and political subdivisions 2,998,688 3,069,511 3,069,511
Foreign governments 13,985 15,207 15,207
Public utilities 75,975 78,062 78,062
All other corporate bonds 407,806 420,512 420,512
----------------- ------------------ --------------------
Total fixed maturities 3,804,215 3,888,740 3,888,740
Equity securities:
Common stocks:
Industrial, miscellaneous and all other 21,481 20,747 20,747
----------------- ------------------ --------------------
Total equity securities 21,481 20,747 20,747
----------------- ------------------ --------------------
Short-term investments 159,960 159,960 159,960
----------------- ------------------ --------------------
Total investments $ 3,985,656 $ 4,069,447 $ 4,069,447
================= ================== ====================
-38-
MGIC INVESTMENT CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
PARENT COMPANY ONLY
December 31, 2001 and 2000
2001 2000
---- ----
(In thousands of dollars)
ASSETS
Investment portfolio, at market value:
Fixed maturities $ 1,709 $ 1,373
Short-term investments 20,774 8,172
--------------- ---------------
Total investment portfolio 22,483 9,545
Investment in subsidiaries, at equity in net assets 3,486,574 2,854,667
Income taxes receivable - affiliates 2,897 0
Accrued investment income 87 19
Other assets 5,271 11,261
--------------- ---------------
Total assets $ 3,517,312 $ 2,875,492
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Short- and long-term debt $ 472,102 $ 397,364
Other liabilities 25,023 13,246
--------------- ---------------
Total liabilities 497,125 410,610
--------------- ---------------
Shareholders' equity (note B):
Common stock, $1 par value, shares authorized
300,000,000; shares issued 121,110,800;
outstanding 2001 - 106,086,594; 2000 - 106,825,758 121,111 121,111
Paid-in surplus 214,040 207,882
Treasury stock (shares at cost, 2001 - 15,024,206;
2000 - 14,285,042) (671,168) (621,033)
Accumulated other comprehensive income, net of tax 46,644 75,814
Retained earnings 3,309,560 2,681,108
--------------- ---------------
Total shareholders' equity 3,020,187 2,464,882
--------------- ---------------
Total liabilities and shareholders' equity $ 3,517,312 $ 2,875,492
=============== ===============
See accompanying supplementary notes to Parent Company condensed financial
statements.
-39-
MGIC INVESTMENT CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF OPERATIONS
PARENT COMPANY ONLY
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
(In thousands of dollars)
Revenue:
Equity in undistributed net income of subsidiaries $ 644,714 $ 550,014 $ 313,292
Dividends received from subsidiaries 12,751 11,091 169,650
Investment income, net 746 800 1,362
Realized investment gains (losses), net 29 (659) (216)
--------------- ------------- -----------
Total revenue 658,240 561,246 484,088
--------------- ------------- -------------
Expenses:
Operating expenses 926 735 312
Interest expense 30,623 28,759 20,402
--------------- ------------- -------------
Total expenses 31,549 29,494 20,714
--------------- ------------- -------------
Income before tax 626,691 531,752 463,374
Credit for income tax (12,446) (10,247) (6,827)
--------------- ------------- -------------
Net income 639,137 541,999 470,201
--------------- ------------- -------------
Other comprehensive income - unrealized
investment gains (losses), net (29,170) 116,549 (135,307)
--------------- ------------- -------------
Comprehensive income $ 609,967 $ 658,548 $ 334,894
=============== ============= =============
See accompanying supplementary notes to Parent Company condensed financial
statements.
-40-
MGIC INVESTMENT CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF CASH FLOWS
PARENT COMPANY ONLY
Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
(In thousands of dollars)
Cash flows from operating activities:
Net income $ 639,137 $ 541,999 $ 470,201
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (644,714) (550,014) (313,292)
(Increase) decrease in income taxes receivable (2,897) 4,518 (4,259)
(Increase) decrease in accrued investment income (68) 190 (182)
Increase (decrease) in other liabilities 11,777 10,559 (1,517)
Decrease (increase) in other assets 5,990 (10,303) (110)
Other 7,576 29,005 (1,916)
---------------- -------------- --------------
Net cash provided by operating activities 16,801 25,954 148,925
---------------- -------------- --------------
Cash flows from investing activities:
Transactions with subsidiaries (8,657) (5,050) 67,801
Purchase of fixed maturities (500) (10,500) (14,448)
Sale of fixed maturities 164 21,920 1,843
------------- ------------ ------------
Net cash provided by investing activities (8,993) 6,370 55,196
---------------- -------------- --------------
Cash flows from financing activities:
Dividends paid to shareholders (10,685) (10,618) (10,825)
Proceeds from issuance of short- and long-term debt 205,521 309,079 43,000
Repayment of short- and long-term debt (133,384) (336,751) (60,000)
Reissuance of treasury stock 16,830 18,699 3,912
Repurchase of common stock (73,488) (6,224) (200,533)
---------------- -------------- --------------
Net cash used in financing activities 4,794 (25,815) (224,446)
---------------- -------------- --------------
Net increase (decrease) in cash and short-term investments 12,602 6,509 (20,325)
Cash and short-term investments at beginning of year 8,172 1,663 21,988
---------------- -------------- --------------
Cash and short-term investments at end of year $ 20,774 $ 8,172 $ 1,663
================ ============== ==============
See accompanying notes to Parent Company condensed financial statements.
-41-
MGIC INVESTMENT CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
SUPPLEMENTARY NOTES
Note A
The accompanying Parent Company financial statements should be read in
conjunction with the Consolidated Financial Statements and Notes to Consolidated
Financial Statements appearing in Exhibit 13 of this Annual Report on Form 10-K.
Note B
The Company's insurance subsidiaries are subject to statutory regulations
as to maintenance of policyholders' surplus and payment of dividends. The
maximum amount of dividends that the insurance subsidiaries may pay in any
twelve-month period without regulatory approval by the Office of the
Commissioner of Insurance of the State of Wisconsin is the lesser of adjusted
statutory net income or 10% of statutory policyholders' surplus as of the
preceding calendar year end. Adjusted statutory net income is defined for this
purpose to be the greater of statutory net income, net of realized investment
gains, for the calendar year preceding the date of the dividend or statutory net
income, net of realized investment gains, for the three calendar years preceding
the date of the dividend less dividends paid within the first two of the
preceding three calendar years. In 2002, MGIC can pay $137.4 million of
dividends and the other insurance subsidiaries of the Company can pay $7.8
million of dividends without such regulatory approval.
Certain of the Company's non-insurance subsidiaries also have requirements
as to maintenance of net worth. These restrictions could also affect the
Company's ability to pay dividends.
In 2001, 2000 and 1999, the Company paid dividends of $10.7 million, $10.6
million and $10.8 million, respectively, or $0.10 per share.
-42-
MGIC INVESTMENT CORPORATION
SCHEDULE IV - REINSURANCE
MORTGAGE INSURANCE PREMIUMS EARNED
Years Ended December 31, 2001, 2000 and 1999
Assumed Percentage
Ceded to From of Amount
Gross Other Other Net Assumed to
Amount Companies Companies Amount Net
--------------- ------------- -------------- -------------- --------------
(In thousands of dollars)
Year ended December 31,
2001 $ 1,107,168 $ 65,587 $ 686 $ 1,042,267 0.1%
=============== ============= ============== ==============
2000 $ 939,981 $ 50,889 $ 999 $ 890,091 0.1%
=============== ============= ============== ==============
1999 $ 819,485 $ 28,346 $ 1,442 $ 792,581 0.2%
=============== ============= ============== ==============
-43-
INDEX TO EXHIBITS
[Item 14(a)3]
Exhibit
Numbers Description of Exhibits
- ------- -----------------------
3.1 Articles of Incorporation, as amended.(1)
3.2 Amended and Restated Bylaws. (2)
4.1 Article 6 of the Articles of Incorporation (included within Exhibit
3.1)
4.2 Amended and Restated Bylaws (included as Exhibit 3.2)
4.3 Rights Agreement, dated as of July 22, 1999, between MGIC Investment
Corporation and Firstar Bank Milwaukee, N.A., which includes as
Exhibit A thereto the Form of Right Certificate and as Exhibit B
thereto the Summary of Rights to Purchase Common shares(3)
4.4 Indenture, dated as of October 15, 2000, between MGIC Investment
Corporation and Bank One Trust Company, National Association, as
Trustee(4)
[The Company is a party to various other agreements with respect to
its long-term debt. These agreements are not being filed pursuant to
Reg. S-K Item 602(b) (4) (iii) (A). The Company hereby agrees to
furnish a copy of such agreements to the Commission upon its
request.]
10.1 Common Stock Purchase Agreement between the Company and The
Northwestern Mutual Life Insurance Company ("NML"), dated November
30, 1984(5)
10.2 Amended and Restated Investment Advisory and Servicing Agreement
between the Company and Northwestern Mutual Investment Services,
Inc. ("NMIS"), dated December 5, 1997.(6) [Mason Street Advisors,
LLC has succeeded NMIS as a party to such Agreement.]
10.3 MGIC Investment Corporation 1991 Stock Incentive Plan.(7)
10.4 Two Forms of Stock Option Agreement under 1991 Stock Incentive
Plan.(8)
10.4.1 Form of Stock Option Agreement under 1991 Stock Incentive Plan
10.4.2 Form of Incorporated Terms to Stock Option Agreement under 1991
Stock Incentive Plan
-44-
Exhibit
Numbers Description of Exhibits
- ------- -----------------------
10.5 Two Forms of Restricted Stock Award Agreement under 1991 Stock
Incentive Plan.(9)
10.5.1 Form of Restricted Stock Agreement under 1991 Stock Incentive Plan
10.5.2 Form of Incorporated Terms to Restricted Stock Agreement under 1991
Stock Incentive Plan
10.6 Executive Bonus Plan
10.7 Supplemental Executive Retirement Plan (10)
10.8 MGIC Investment Corporation Deferred Compensation Plan for
Non-Employee Directors.(11)
10.9 MGIC Investment Corporation 1993 Restricted Stock Plan for
Non-Employee Directors.(12)
10.10 Two Forms of Award Agreement under MGIC Investment Corporation 1993
Restricted Stock Plan for Non-Employee Directors.(13)
10.11 Form of MGIC Mortgage Guaranty Master Policy, in effect generally
for insurance commitments issued beginning March 1, 1995, including
the Master Policy Program Endorsement relating to delegated
underwriting.(14)
10.12 Form of Key Executive Employment and Severance Agreement.(15)
10.13 Non-Competition, Confidentiality and Severance Agreement, dated
February 25, 2002, between the Company and John D. Fisk
11 Statement re: computation of per share earnings
13 Information from the 2001 Annual Report of the Company to
Shareholders which is incorporated by reference in this Annual
Report on Form 10-K.
21 List of Subsidiaries
23 Consent of PricewaterhouseCoopers LLP
-45-
Supplementary List of the above Exhibits which relate to management
contracts or compensatory plans or arrangements.
10.3 MGIC Investment Corporation 1991 Stock Incentive Plan.
10.4 Two Forms of Stock Option Agreement under 1991 Stock Incentive Plan.
10.4.1 Form of Stock Option Agreement under 1991 Stock Incentive Plan
10.4.2 Form of Incorporated Terms to Stock Option Agreement under 1991 Stock
Incentive Plan
10.5 Two Forms of Restricted Stock Award Agreement under 1991 Stock
Incentive Plan.
10.5.1 Form of Restricted Stock Agreement under 1991 Stock Incentive Plan
10.5.2 Form of Incorporated Terms to Restricted Stock Agreement under 1991
Stock Incentive Plan
10.6 Executive Bonus Plan
10.7 Supplemental Executive Retirement Plan.
10.8 MGIC Investment Corporation Deferred Compensation Plan for
Non-Employee Directors.
10.9 MGIC Investment Corporation 1993 Restricted Stock Plan for
Non-Employee Directors.
10.10 Two Forms of Award Agreement under MGIC Investment Corporation 1993
Restricted Stock Plan for Non-Employee Directors.
10.12 Form of Key Executive Employment and Severance Agreement
10.13 Non-Competition, Confidentiality and Severance Agreement, dated
February 25, 2002, between the Company and John D. Fisk
-46-
The following documents, identified in the footnote references
above, are incorporated by reference, as indicated, to: the Company's Annual
Reports on Form 10-K for the years ended December 31, 1993, 1994, 1997 or 1999
(the "1993 10-K," "1994 10-K," "1997 10-K," and "1999 10-K," respectively); to
the Company's Quarterly Reports on Form 10-Q for the Quarters ended June 30,
1994, 1998 or 2000 (the "June 30, 1994 10-Q," "June 30, 1998 10-Q" and "June 30,
2000 10-Q," respectively); to the Company's registration Statement Form 8-A
filed July 27, 1999 (the "8-A"); to the Company's Current Report on form 8-K
dated October 17, 2000 (the "8-K"); or to the Company's Form S-1 Registration
Statement (No. 33-41289) (the "S-1"). The documents are further identified by
cross-reference to the Exhibits in the respective documents where they were
originally filed:
(1) Exhibit 3 to the June 30, 1998 10-Q.
(2) Exhibit 3.2 to the 1999 10-K.
(3) Exhibit 4.1 to the 8-A.
(4) Exhibit 4.1 to the 8-K.
(5) Exhibit 10.1 to the S-1.
(6) Exhibit 10.5 to the 1997 10-K.
(7) Exhibit 10.7 to the 1999 10-K.
(8) Exhibit 10.9 to the 1999 10-K.
(9) Exhibit 10.10 to the 1999 10-K.
(10) Exhibit 10 to the June 30, 2000 10-Q.
(11) Exhibit 10.23 to the 1993 10-K.
(12) Exhibit 10.24 to the 1993 10-K.
(13) Exhibits 10.27 and 10.28 to the June 30, 1994 10-Q.
(14) Exhibit 10.26 to the 1994 10-K.
(15) Exhibit 10.17 to the 1999 10-K.
-47-
EXHIBIT 10.4.1
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT is made and entered into as of the date
indicated on the signature page under "Date of Agreement" by and between MGIC
Investment Corporation, a Wisconsin corporation (the "Company"), and the
employee of Mortgage Guaranty Insurance Corporation whose signature is set forth
on the signature page hereto (the "Employee").
INTRODUCTION
The Company is granting options to purchase shares of the Company's
Common Stock, $1.00 par value per share (the "Stock"), to the Employee under the
MGIC Investment Corporation 1991 Stock Incentive Plan, as amended (the "Plan")
and this Agreement.
This Agreement consists of this instrument and the Incorporated Terms
Dated As of January 23, 2002 to Stock Option Agreement (the "Incorporated
Terms"), which although not attached to this instrument, are part of this
Agreement and are being sent to the Employee as indicated in Paragraph 1(b)
below.
The parties mutually agree as follows:
1. (a) The Company hereby grants to the Employee the right and option
(the "Stock Option") to purchase from the Company, on the terms and conditions
herein set forth, the number of shares of Common Stock set forth on the
signature page hereof after "Number of Shares" (the "Option Shares"), at a
purchase price per share set forth on the signature page after "Option Price Per
Share" (the "Option Price"), exercisable as hereinafter stated; provided,
however, that such number of shares and/or Option Price is subject to adjustment
as provided in Section 6 of this Stock Option Agreement. The Stock Option shall
be exercisable in whole or in part, to the extent provided in Section 4 hereof.
As a condition of the grant of the Stock Option, Employee must execute this
Agreement and an agreement not to compete in the form provided to the Employee
by the Company. The Stock Option is a nonstatutory stock option and not an
Incentive Stock Option within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended.
(b) The Incorporated Terms are incorporated in this instrument with the
same effect as if they were physically set forth in this instrument. The
Incorporated Terms and this instrument constitute a single agreement which is
referred to as "this Agreement." The terms "herein," "hereof," "above" and
similar terms used in this Agreement refer to this Agreement and not to this
instrument or the Incorporated Terms. The Employee is receiving the text of the
Incorporated Terms as an attachment to an e-mail dated on or about that refers
to this Agreement. The Company is hereby advising the Employee to print and
retain a copy of the Incorporated Terms. The Employee agrees if there is any
difference between the text of the Incorporated Terms received as indicated
above and the text of the Incorporated Terms retained by the Company's Secretary
in connection with the meeting of the Management Development Committee, the text
of the copy retained by the Secretary will control.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
by its duly authorized officer, and the Employee has hereunto affixed his hand
and seal, all as of the day and year set forth below.
Date of Agreement:
MGIC INVESTMENT CORPORATION
By:____________________________________________
Title: President and Chief Executive Officer
Sign Here: (SEAL)
-----------------------------------------
Name of Employee:
Number of Shares:
Option Price Per Share: $
Final Termination Date:
(See Section 4(b)(iv) of Incorporated Terms)
VESTING SCHEDULE
(See Section 4(a) of Incorporated Terms)
Date: Percent Exercisable or Vested:
----- ------------------------------
Prior to 0%
20%
40%
60%
80%
100%
-2-
EXHIBIT 10.4.2
INCORPORATED TERMS
DATED AS OF JANUARY 23, 2002
TO
STOCK OPTION AGREEMENT
The following are the "Incorporated Terms" referred to in the instrument
entitled "Stock Option Agreement" which refers to these Incorporated Terms and
which has been signed by the Company and the Employee (the "Base Instrument").
The Incorporated Terms and the Base Instrument constitute a single agreement and
that agreement consists of the Base Instrument and the Incorporated Terms. The
Incorporated Terms dovetail with the Base Instrument; because the last paragraph
of the Base Instrument is Paragraph 1, the Incorporated Terms begin with
Paragraph 2.
2. (a) The Stock Option, and any part thereof, shall be exercised by the
giving of ten days' (or such shorter period as the Company may permit) prior
written notice of exercise to the Secretary of the Company in a form determined
by the Company from time to time, which form shall, among other things, specify
the number of whole Option Shares to be purchased, and shall be accompanied by
payment in full of the aggregate Option Price for the number of Option Shares to
be purchased. A partial exercise of the Stock Option may not be made with
respect to fewer than ten (10) Option Shares unless the Option Shares purchased
are the total number then available for purchase under the Stock Option. Such
notice shall be deemed to have been given when hand-delivered or telecopied to
the person that the Company may specify from time to time, and, shall be
irrevocable and unconditional once given.
(b) The aggregate Option Price for such Option Shares may be paid either
by cash or a certified or bank cashier's check payable to the order of the
Company, or as otherwise permitted by the Company. The Company hereby permits
such Price to be paid by delivery to the Company shares of Common Stock having a
fair market value equal to such Price, provided that the shares so delivered
have been owned by the Employee for such period as the Company may specify from
time to time (which period in the case of restricted stock shall not begin until
the shares have vested). If the number of shares of Common Stock determined
pursuant to the preceding sentence includes a fractional share, the number of
shares delivered shall be reduced to the next lower whole number and the
Employee shall deliver to the Company cash or its equivalent in lieu of such
fractional share, or otherwise make arrangements satisfactory to the Company for
payment of such amount.
(c) The Employee shall be responsible for paying all withholding taxes
applicable to the exercise of any Stock Option. The Company shall have the right
to take any action necessary to insure that the Employee pays the required
withholding taxes. The Employee shall be permitted to satisfy the Company's tax
withholding requirements by making an election (the "Election") to have the
Company withhold Option Shares otherwise issuable to the Employee, or to deliver
to the Company shares of Common Stock, having a fair market value on the date
income is recognized with respect to the exercise of the Stock Option (the "Tax
Date") equal in amount to the amount to be so withheld. If the number of shares
of Common Stock determined pursuant to the preceding sentence includes a
fractional share, the number of shares withheld or delivered shall be reduced to
the next lower whole number and the Employee
shall deliver to the Company cash or its equivalent in lieu of such fractional
share, or otherwise make arrangements satisfactory to the Company for payment of
such amount. The Election shall be irrevocable and must be received by the
Secretary of the Company at his corporate office on or prior to the Employee's
Tax Date. The Election shall be made in writing and be in such form as the
Company shall determine.
(d) The Company's determination of fair market value for purposes of
Sections 2(b) and (c) shall be conclusive. Upon payment of the aggregate Option
Price for the Option Shares and the required withholding taxes, the Company
shall cause a certificate for the Option Shares so purchased to be delivered to
the Employee.
3. Neither the Employee nor his legal representative shall be or have any
rights or privileges of a shareholder of the Company in respect of any of the
Option Shares issuable upon exercise of the Stock Option unless and until a
certificate or certificates for such Option Shares shall have been issued upon
the exercise of the Stock Option.
4. (a) The Stock Option shall be deemed to have been granted as of the
date of this Stock Option Agreement and shall become exercisable or vested as
follows:
(i) The percentage of the Option Shares which shall vest and may
be exercised by the Employee shall be as set forth on the signature page
hereof under "Vesting Schedule" with respect to each date set forth
thereon. For purposes of such vesting schedule, vesting shall occur on
the date specified and in the percentage indicated in such schedule; and
(ii) Without limiting the discretion of the Committee to act in
other cases, if a "Change in Control of the Company" (as defined in the
Annex attached hereto) occurs, the Stock Option shall become fully vested
and exercisable in full as of the date thereof.
(b) If the Employee's employment with the Company terminates for any
reason, the Stock Option to the extent not exercisable or vested as of the date
of termination shall not become exercisable or vested as a result of events
(including the passage of time or the achievement of another anniversary date
for vesting and exercise) occurring subsequent to the date of termination. The
vested but unexercised portion of the Stock Option shall automatically and
without notice terminate and become null and void at the time of the earliest
date (the "Termination Date") to occur of the following:
(i) Thirty (30) days after the termination of the Employee's
employment with the Company and all subsidiaries thereof for any reason
(including without limitation, disability or termination by the Company
and all subsidiaries thereof, with or without cause) other than by reason
of the Employee's death or a leave of absence approved by the Company or
by reason of the Employee's retirement from the Company and all
subsidiaries thereof after reaching age 55 and after having been employed
by the Company or any subsidiary thereof for an aggregate period of at
least seven (7) years; or
-2-
(ii) Three Hundred Sixty-Five (365) days following the termination
of the Employee's employment with the Company and all subsidiaries
thereof by reason of the Employee's death or by reason of the Employee's
retirement from the Company and all subsidiaries thereof after reaching
age 55 and after having been employed by the Company or any subsidiary
thereof for an aggregate period of at least seven (7) years; or
(iii) Thirty (30) days after expiration or termination of a leave
of absence approved by the Company unless the Employee becomes reemployed
with the Company prior to such 30-day period in which event the Stock
Option shall continue in effect in accordance with its terms; or
(iv) the date set forth after "Final Termination Date" on the
signature page hereof.
(c) The Committee, in its sole discretion, may from time to time
accelerate or waive any conditions to the exercise of the Stock Option.
(d) If the Employee dies while in the employ of the Company or any
subsidiary then, regardless of whether the Stock Option is subject to exercise
under Section 4(a) above, the Stock Option shall become immediately vested and
exercisable by the personal representative of the Employee or the person to whom
the Employee's rights under the Stock Option are transferred by law or
applicable laws of descent and distribution.
5. Nothing herein contained shall confer upon the Employee the right to
continue in the employment of the Company or affect the right of the Company to
terminate the Employee's employment at any time, or permit the exercise of the
Stock Option as a result of the Company electing to terminate at any time the
employment of the Employee subject, however, to the provisions of any agreement
of employment between the Company and the Employee. The Employee acknowledges
that a termination of employment could occur at a time at which the portion of
the Stock Option that is not exercisable or vested could have substantial value
and that as a result of such termination, the Employee will not be able to
realize such value nor will the Employee be entitled to any compensation on
account of such value. In addition, the Employee acknowledges that a termination
of employment will likely cause the vested but unexercised portion of the Stock
Option to terminate earlier than it otherwise would, with the result that the
value to the Employee of having a longer exercise period will be lost without
any compensation to the Employee on account of such loss.
6. In the event of any change in the outstanding shares of the Company
("capital adjustment") for any reason, including but not limited to, any stock
split, stock dividend, recapitalization, merger, consolidation, reorganization,
combination or exchange of shares or other similar event, an adjustment in the
number or kind of shares of Common Stock subject to the Stock Option, the Option
Price under the Stock Option shall be made by the Committee in a manner
consistent with such capital adjustment. The determination of the Committee as
to any
-3-
such adjustment shall be conclusive and binding for all purposes of this
Stock Option Agreement.
7. Notwithstanding any provision of this Stock Option Agreement to the
contrary, the Committee may take whatever action it may consider necessary or
appropriate to comply with the Securities Act of 1933, as amended, or any other
applicable securities law, including limiting the exercisability of the Stock
Option or the issuance of Option Shares hereunder.
8. The Stock Option may not be exercised if the issuance of such Option
Shares upon such exercise would constitute a violation of any applicable Federal
or state securities law or other law or regulation. As a condition to the
exercise of the Stock Option, the Company may require the Employee to make any
representation and warranty to the Company as may be required by any applicable
law or regulation.
9. Except as herein otherwise provided or as otherwise permitted by the
Committee, the Stock Option and any rights and privileges conferred by this
Stock Option Agreement shall not be transferred, assigned, pledged or
hypothecated in any way (whether by operation of law or otherwise) and shall not
be subject to execution, attachment, or similar process. Upon any attempt so to
transfer, assign, pledge, hypothecate, or otherwise dispose of the Stock Option,
or of any right or privilege conferred hereby, contrary to the provisions
hereof, or upon the levy of an attachment or similar process upon the rights and
privileges conferred hereby, the Stock Option and the rights and privileges
conferred hereby shall immediately become null and void.
10. The Stock Option shall be deemed to have been granted pursuant to the
Plan and is subject to the terms and provisions thereof. In the event of any
conflict between the terms hereof and the provisions of the Plan, the terms and
conditions of the Plan shall prevail. Any and all terms used herein, unless
otherwise specifically defined herein, shall have the meaning ascribed to them
in the Plan. A copy of the Plan is available on request of the Employee made in
writing or by e-mail to the Company's Secretary.
11. This Stock Option Agreement shall be binding upon and inure to the
benefit of the parties hereto and any successors to the business of the Company,
but neither this Stock Option Agreement nor any rights hereunder shall be
assignable by the Employee, except as may be permitted pursuant to Section 9
above.
12. All decisions or interpretations of the Committee with respect to any
question arising under the Plan or under this Stock Option Agreement shall be
binding, conclusive and final. As a condition of the granting of the Stock
Option, the Employee agrees, for himself and his personal representatives, that
any dispute or disagreement which may arise under or as a result of or pursuant
to this Stock Option Agreement shall be determined by the Committee in its sole
discretion, and that any interpretation or determination by the Committee shall
be final, binding and conclusive. Such determinations need not be uniform and
may be made differently by the Committee with respect to other employees of the
Company who are, have been, or will be granted stock options by the Company.
-4-
13. The waiver by the Company of any provision of this Stock Option
Agreement shall not operate as or be construed to be a subsequent waiver of the
same provisions or waiver of any other provision hereof.
14. Except as herein otherwise provided, the Stock Option shall be
irrevocable before the Termination Date and its validity and construction shall
be governed by the laws of the State of Wisconsin (excluding the conflict of
laws provisions of such laws).
The end of Paragraph 14 is the end of the Incorporated Terms. The
remainder of the Agreement is contained in the Base Instrument.
-5-
ANNEX
Definition of "Change in Control of the Company" and Related Terms
1. Change in Control of the Company. A "Change in Control of the Company"
shall be deemed to have occurred if an event set forth in any one of the
following paragraphs shall have occurred:
(i) any Person (other than (A) the Company or any of its
subsidiaries, (B) a trustee or other fiduciary holding securities under
any employee benefit plan of the Company or any of its subsidiaries, (C)
an underwriter temporarily holding securities pursuant to an offering of
such securities or (D) a corporation owned, directly or indirectly, by
the shareholders of the Company in substantially the same proportions as
their ownership of stock in the Company ("Excluded Persons")) is or
becomes the Beneficial Owner, directly or indirectly, of securities of
the Company (not including in the securities beneficially owned by such
Person any securities acquired directly from the Company or its
Affiliates after July 22, 1999, pursuant to express authorization by the
Board of Directors of the Company (the "Board") that refers to this
exception) representing 50% or more of either the then outstanding shares
of common stock of the Company or the combined voting power of the
Company's then outstanding voting securities entitled to vote generally
in the election of directors; or
(ii) the following individuals cease for any reason to constitute
a majority of the number of directors of the Company then serving: (A)
individuals who, on July 22, 1999, constituted the Board and (B) any new
director (other than a director whose initial assumption of office is in
connection with an actual or threatened election contest, including but
not limited to a consent solicitation, relating to the election of
directors of the Company, as such terms are used in Rule 14a-11 of
Regulation 14A under the Act) whose appointment or election by the Board
or nomination for election by the Company's shareholders was approved by
a vote of at least two-thirds (2/3) of the directors then still in office
who either were directors on July 22, 1999, or whose initial appointment,
election or nomination for election as a director which occurred after
July 22, 1999 was approved by such vote of the directors then still in
office at the time of such initial appointment, election or nomination
who were themselves either directors on July 22, 1999 or initially
appointed, elected or nominated by such two-thirds (2/3) vote as
described above ad infinitum (collectively the "Continuing Directors");
provided, however, that individuals who are appointed to the Board
pursuant to or in accordance with the terms of an agreement relating to a
merger, consolidation, or share exchange involving the Company (or any
direct or indirect subsidiary of the Company) shall not be Continuing
Directors for purposes of this Agreement until after such individuals are
first nominated for election by a vote of at least two-thirds (2/3) of
the then Continuing Directors and are thereafter elected as directors by
the shareholders of the Company at a meeting of shareholders held
Annex - Page 1 of 3
following consummation of such merger, consolidation, or share exchange;
and, provided further, that in the event the failure of any such persons
appointed to the Board to be Continuing Directors results in a Change in
Control of the Company, the subsequent qualification of such persons as
Continuing Directors shall not alter the fact that a Change in Control of
the Company occurred; or
(iii) a merger, consolidation or share exchange of the Company
with any other corporation is consummated or voting securities of the
Company are issued in connection with a merger, consolidation or share
exchange of the Company (or any direct or indirect subsidiary of the
Company) pursuant to applicable stock exchange requirements, other than
(A) a merger, consolidation or share exchange which would result in the
voting securities of the Company entitled to vote generally in the
election of directors outstanding immediately prior to such merger,
consolidation or share exchange continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity or any parent thereof) at least 50% of the combined
voting power of the voting securities of the Company or such surviving
entity or any parent thereof entitled to vote generally in the election
of directors of such entity or parent outstanding immediately after such
merger, consolidation or share exchange, or (B) a merger, consolidation
or share exchange effected to implement a recapitalization of the Company
(or similar transaction) in which no Person (other than an Excluded
Person) is or becomes the Beneficial Owner, directly or indirectly, of
securities of the Company (not including in the securities beneficially
owned by such Person any securities acquired directly from the Company or
its Affiliates after July 22, 1999, pursuant to express authorization by
the Board that refers to this exception) representing at least 50% of the
combined voting power of the Company's then outstanding voting securities
entitled to vote generally in the election of directors; or
(iv) the sale or disposition by the Company of all or
substantially all of the Company's assets (in one transaction or a series
of related transactions within any period of 24 consecutive months),
other than a sale or disposition by the Company of all or substantially
all of the Company's assets to an entity of which at least 75% of the
combined voting power of the voting securities entitled to vote generally
in the election of directors immediately after such sale are owned by
Persons in substantially the same proportions as their ownership of the
Company immediately prior to such sale.
2. Related Definitions. For purposes of this Annex, the following terms,
when capitalized, shall have the following meanings:
(i) Act. The term "Act" means the Securities Exchange Act of 1934,
as amended.
(ii) Affiliate and Associate. The terms "Affiliate" and
"Associate" shall have the respective meanings ascribed to such terms in
Rule l2b-2 of the General Rules and Regulations under the Act.
Annex - Page 2 of 3
(iii) Beneficial Owner. A Person shall be deemed to be the
"Beneficial Owner" of any securities:
(a) which such Person or any of such Person's Affiliates or
Associates has the right to acquire (whether such right is
exercisable immediately or only after the passage of time)
pursuant to any agreement, arrangement or understanding, or upon
the exercise of conversion rights, exchange rights, rights,
warrants or options, or otherwise; provided, however, that a
Person shall not be deemed the Beneficial Owner of, or to
beneficially own, (A) securities tendered pursuant to a tender or
exchange offer made by or on behalf of such Person or any of such
Person's Affiliates or Associates until such tendered securities
are accepted for purchase, or (B) securities issuable upon
exercise of Rights issued pursuant to the terms of the Company's
Rights Agreement, dated as of July 22, 1999, between the Company
and Firstar Bank Milwaukee, N.A., as amended from time to time (or
any successor to such Rights Agreement), at any time before the
issuance of such securities;
(b) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or
dispose of or has "beneficial ownership" of (as determined
pursuant to Rule l3d-3 of the General Rules and Regulations under
the Act), including pursuant to any agreement, arrangement or
understanding; provided, however, that a Person shall not be
deemed the Beneficial Owner of, or to beneficially own, any
security under this Subsection 1 (c) as a result of an agreement,
arrangement or understanding to vote such security if the
agreement, arrangement or understanding: (A) arises solely from a
revocable proxy or consent given to such Person in response to a
public proxy or consent solicitation made pursuant to, and in
accordance with, the applicable rules and regulations under the
Act and (B) is not also then reportable on a Schedule l3D under
the Act (or any comparable or successor report); or
(c) which are beneficially owned, directly or indirectly,
by any other Person with which such Person or any of such Person's
Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting
(except pursuant to a revocable proxy as described in Subsection
1(c) (ii) above) or disposing of any voting securities of the
Company.
(iv) Person. The term "Person" shall mean any individual, firm,
partnership, corporation or other entity, including any successor (by
merger or otherwise) of such entity, or a group of any of the foregoing
acting in concert.
Annex - Page 3 of 3
EXHIBIT 10.5.1
RESTRICTED STOCK AGREEMENT
THIS RESTRICTED STOCK AGREEMENT is made and entered into as of the date
indicated on the signature page under "Date of Agreement" by and between MGIC
Investment Corporation, a Wisconsin corporation (the "Company"), and the
employee of Mortgage Guaranty Insurance Corporation whose signature is set forth
on the signature page hereto (the "Employee").
INTRODUCTION
The Company is awarding shares of the Company's Common Stock, $1.00 par
value per share (the "Stock"), to the Employee under the MGIC Investment
Corporation 1991 Stock Incentive Plan, as amended (the "Plan") and this
Agreement.
This Agreement consists of this instrument and the Incorporated Terms
Dated As of January 23, 2002 to Restricted Stock Agreement (the "Incorporated
Terms"), which although not attached to this instrument, are part of this
Agreement and are available as indicated in Paragraph 1(b) below.
The parties mutually agree as follows:
1. Award of Restricted Stock; Incorporated Terms.
(a) Subject to the terms and conditions set forth herein, the Company
awards the Employee the number of shares of Stock set forth after "Total Shares
of Restricted Stock" on the signature page hereof (the "Restricted Stock"). Of
such shares of Restricted Stock, the number of shares set forth after "Shares of
Base Restricted Stock" on the signature page shall be the "Base Restricted
Stock" and the number of shares set forth after "Shares of Matching Restricted
Stock" on the signature page shall be the "Matching Restricted Stock." The term
"Restricted Stock" as used in the remainder of this Agreement shall be applied
separately to the Base Restricted Stock and the Matching Restricted Stock as if
the term "Restricted Stock" were the term "Base Restricted Stock" or the term
"Matching Restricted Stock," as the case may be.
(b) The Incorporated Terms are incorporated in this instrument with the
same effect as if they were physically set forth in this instrument. The
Incorporated Terms and this instrument constitute a single agreement which is
referred to as "this Agreement." The terms "herein," "hereof," "above" and
similar terms used in this Agreement refer to this Agreement as a whole. The
Employee can obtain the text of the Incorporated Terms by accessing Lotus Notes
on the Company's computer network; selecting "Inside MGIC"; "Stock Options and
Restricted Stock"; and "Restricted Stock-Incorporated Terms Dated As of January
23, 2002." The Company is hereby advising the Employee to print and retain a
copy of the Incorporated Terms. The Employee agrees if there is any difference
between the text of the Incorporated Terms obtained as indicated above and the
text of the Incorporated Terms
retained by the Company's Secretary in connection with the January 23, 2002
meeting of the Management Development Committee, the text of the copy retained
by the Secretary will control.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
by its duly authorized officer, and the Employee has hereunto affixed his hand
and seal, all as of the day and year set forth below.
Date of Agreement:
MGIC INVESTMENT CORPORATION
By:
--------------------------------------------
Title: President and Chief Executive Officer
Sign Here: (SEAL)
-----------------------------------------
Name:
Total Shares of Restricted Stock: _________
Shares of Base Restricted Stock: _________
Shares of Matching Restricted Stock: _________
Base Restricted Stock
Release Date:
Matching Restricted Stock
Release Date:
* * * *
Beneficiary:
----------------------------------
Address of Beneficiary:
-----------------------------------------------
-----------------------------------------------
Beneficiary Tax Identification
No:
--------------------------------------------
-2-
EXHIBIT 10.5.2
INCORPORATED TERMS
DATED AS OF JANUARY 23, 2002
TO
RESTRICTED STOCK AGREEMENT
The following are the "Incorporated Terms" referred to in the instrument
entitled "Restricted Stock Agreement" which refers to these Incorporated Terms
and which has been signed by the Company and the Employee (the "Base
Instrument"). The Incorporated Terms and the Base Instrument constitute a single
agreement and that agreement consists of the Base Instrument and the
Incorporated Terms. The Incorporated Terms dovetail with the Base Instrument;
because the last paragraph of the Base Instrument is Paragraph 1, the
Incorporated Terms begin with Paragraph 2.
2. Restrictions. Except as otherwise provided herein, the Restricted
Stock may not be sold, transferred or otherwise alienated or hypothecated until,
in the case of the Base Restricted Stock, the date set forth after "Base
Restricted Stock Release Date" on the signature page, and in the case of the
Matching Restricted Stock, the date set forth after "Matching Restricted Stock
Release Date" on the signature page. The term "Release Date" shall be applied
separately to the Base Restricted Stock and the Matching Restricted Stock as if
the term "Release Date" were the term "Base Restricted Stock Release Date" or
the term "Matching Restricted Stock Release Date" and such application shall
correspond to the application of the term "Restricted Stock" as set forth in
Paragraph 1(a) of the Base Instrument.
3. Escrow. Shares of Restricted Stock shall be issued as soon as
practicable in the name of the Employee but shall be held in escrow by the
Company, as escrow agent. Upon issuance of such shares, (i) the Company shall
give the Employee a receipt for the Restricted Stock held in escrow which will
state that the Company holds such Stock in escrow for the account of the
Employee, subject to the terms of this Agreement, and (ii) the Employee shall
give the Company a stock power for such Stock duly endorsed in blank which will
be held in escrow for use in the event such Stock is forfeited in whole or in
part. Unless forfeited as provided herein, Restricted Stock shall cease to be
held in escrow and certificates for such Stock shall be delivered to the
Employee, or in the case of his death, to his Beneficiary (as hereinafter
defined) on the Release Date or upon any other termination of the restrictions
imposed by Paragraph 2 hereof.
4. Transfer After Release Date; Securities Law Restrictions. Except as
otherwise provided herein, Restricted Stock shall become free of the
restrictions of Paragraph 2 and be freely transferable by the Employee on the
Release Date. Notwithstanding the foregoing or anything to the contrary herein,
the Employee agrees and acknowledges with respect to any Restricted Stock that
has not been registered under the Securities Act of 1933, as amended (the "Act")
(i) he will not sell or otherwise dispose of such Stock except pursuant to an
effective registration statement under the Act and any applicable state
securities laws, or in a transaction which, in the opinion of counsel for the
Company, is exempt from such
registration, and (ii) a legend will be placed on the certificates or other
evidence for the Restricted Stock to such effect.
5. Termination of Employment Due to Death. If the Employee's employment
with the Company or any of its subsidiaries is terminated because of death prior
to the Release Date, the restrictions of Paragraph 2 applicable to the
Restricted Stock shall terminate on the date of death and such Restricted Stock
shall be free of such restrictions and, except as otherwise provided in
Paragraph 4 hereof, freely transferable.
6. Termination of Employment Other Than Due to Death. If the Employee's
employment with the Company and all of its subsidiaries is terminated prior to
the Release Date for any reason (including without limitation, disability or
termination by the Company and all subsidiaries thereof, with or without cause)
other than death, all Restricted Stock shall be forfeited to the Company on the
date of such termination unless the Management Development Committee of the
Company's Board of Directors, which is the Stock Award Committee contemplated by
the Plan and which administers the Plan (the "Committee") determines, on such
terms and conditions, if any, as the Committee may impose, that all or a portion
of the Restricted Stock shall be released to the Employee and the restrictions
of Paragraph 2 applicable thereto shall terminate. Absence of the Employee on
leave approved by a duly elected officer of the Company, other than the
Employee, shall not be considered a termination of employment during the period
of such leave. If Restricted Stock is forfeited, the Employee hereby appoints
the Company, acting through any Senior Vice President or more senior officer, as
the Employee's attorney-in-fact to transfer such forfeited Restricted Stock to
the Company.
7. Beneficiary. (a) The person whose name appears on the signature page
hereof after the caption "Beneficiary" or any successor designated by the
Employee in accordance herewith (the person who is the Employee's Beneficiary at
the time of his death herein referred to as the "Beneficiary") shall be entitled
to receive the Restricted Stock to be released to the Beneficiary under
Paragraphs 3 and 5 as a result of the death of the Employee. The Employee may
from time to time revoke or change his Beneficiary without the consent of any
prior Beneficiary by filing a new designation with the Committee. The last such
designation received by the Committee shall be controlling; provided, however,
that no designation, or change or revocation thereof, shall be effective unless
received by the Committee prior to the Employee's death, and in no event shall
any designation be effective as of a date prior to such receipt.
(b) If no such Beneficiary designation is in effect at the time of an
Employee's death, or if no designated Beneficiary survives the Employee or if
such designation conflicts with law, the Employee's estate shall be entitled to
receive the Restricted Stock upon the death of the Employee. If the Committee is
in doubt as to the right of any person to receive such Restricted Stock, the
Company may retain such Stock and any distributions thereon, without liability
for any interest thereon, until the Committee determines the person entitled
thereto, or the Company may deliver such Restricted Stock and any
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distributions thereon to any court of appropriate jurisdiction and such delivery
shall be a complete discharge of the liability of the Company therefor.
8. Restricted Stock Legend. In addition to any legends placed on
certificates for Restricted Stock or other evidence of ownership of Restricted
Stock under Paragraph 4 hereof, each certificate or such other evidence for
shares of Restricted Stock shall bear the following legend:
"The sale or other transfer of these shares of stock, whether voluntary,
or by operation of law, is subject to certain restrictions set forth in
the MGIC Investment Corporation 1991 Stock Incentive Plan and a
Restricted Stock Agreement between MGIC Investment Corporation and the
registered owner hereof. A copy of such Plan and such Agreement may be
obtained from the Secretary of MGIC Investment Corporation."
When the restrictions imposed by Paragraph 2 hereof terminate, the Employee
shall be entitled to have the foregoing legend removed from such Stock.
9. Voting Rights; Dividends and Other Distributions. (a) While the
Restricted Stock is subject to restrictions under Paragraph 2 and prior to any
forfeiture thereof, the Employee may exercise full voting rights for the
Restricted Stock registered in his name and held in escrow hereunder.
(b) While the Restricted Stock is subject to the restrictions under
Paragraph 2 and prior to any forfeiture thereof, the Employee shall be entitled
to receive all dividends and other distributions paid with respect to the
Restricted Stock. If any such dividends or distributions are paid in Stock, such
shares shall be subject to the same restrictions as the shares of Restricted
Stock with respect to which they were paid, including the requirement that
Restricted Stock be held in escrow pursuant to Paragraph 3 hereof.
(c) Subject to the provisions of this Agreement, the Employee shall have,
with respect to the Restricted Stock, all other rights of holders of Stock.
10. Tax Withholding. (a) It shall be a condition of the obligation of the
Company to issue or release from escrow Restricted Stock to the Employee or the
Beneficiary, and the Employee agrees, that the Employee shall pay to the Company
upon its demand, such amount as may be requested by the Company for the purpose
of satisfying its liability to withhold federal, state, or local income or other
taxes incurred by reason of the award of the Restricted Stock or as a result of
the termination of the restrictions on such Stock hereunder.
(b) If the Employee does not make an election under Section 83(b) of the
Internal Revenue Code of 1986, as amended, with respect to the Restricted Stock
awarded hereunder, the Employee may satisfy the Company's withholding tax
requirements by electing to have the Company withhold that number of shares of
Restricted Stock otherwise deliverable to the Employee from escrow hereunder or
to deliver to the Company a number of shares of
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Stock, in each case, having a fair market value (as determined by the Committee)
on the Tax Date (as defined below) equal to the minimum amount required to be
withheld as a result of the termination of the restrictions on such Restricted
Stock. The election must be in writing and be delivered to the Company prior to
the Tax Date. If the number of shares so calculated to be withheld shall include
a fractional share, the Employee shall deliver cash in lieu of such fractional
share. All elections shall be made in a form approved by the Committee and shall
be subject to disapproval, in whole or in part, by the Committee. As used
herein, "Tax Date" means the date on which the Employee must include in his
gross income for federal income tax purposes the fair market value of the
Restricted Stock over the purchase price therefor.
11. Adjustments in Event of Change in Stock. In the event of any change
in the outstanding shares of Stock ("capital adjustment") for any reason,
including but not limited to, any stock splits, stock dividend,
recapitalization, merger, consolidation, reorganization, combination or exchange
of shares or other similar event which, in the judgment of the Committee, could
distort the implementation of the Plan or the realization of its objectives, the
Committee may make such adjustments in the shares of Restricted Stock subject to
this Agreement, or in the terms, conditions or restrictions of this Agreement as
the Committee deems equitable.
12. Change in Control. If a "Change in Control of the Company" (as
defined in Annex attached hereto) occurs, the restrictions of Paragraph 2
applicable to the Restricted Stock shall terminate on the date of the Change in
Control of the Company and such date shall be deemed to be the Release Date.
13. Powers of Company Not Affected; No Right to Continued Employment.
(a) The existence of the Restricted Stock shall not affect in any way the
right or power of the Company or its stockholders to make or authorize any
combination, subdivision or reclassification of the Stock or any reorganization,
merger, consolidation, business combination, exchange of shares, or other change
in the Company's capital structure or its business, or any issue of bonds,
debentures or stock having rights or preferences equal, superior or affecting
the Restricted Stock or the rights thereof, or dissolution or liquidation of the
Company, or any sale or transfer of all or any part of its assets or business,
or any other corporate act or proceeding, whether of a similar character or
otherwise. The determination of the Committee as to any such adjustment shall be
conclusive and binding for all purposes of this Agreement.
(b) Nothing herein contained shall confer upon the Employee any right to
continue in the employment of any Participating Company or interfere with or
limit in any way the right of any Participating Company to terminate the
Employee's employment at any time, subject, however, to the provisions of any
agreement of employment between any Participating Company and the Employee. The
Employee acknowledges that a termination of his or her employment could occur at
a time before which the restrictions referred to in Paragraph 2 above have
lapsed, resulting in the forfeiture of the Restricted Stock by the Employee. In
such
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event, the Employee will not be able to realize the value of the Restricted
Stock nor will the Employee be entitled to any compensation on account of such
value.
14. Interpretation by Committee. The Employee agrees that any dispute or
disagreement which may arise in connection with this Agreement shall be resolved
by the Committee, in its sole discretion, and that any interpretation by the
Committee of the terms of this Agreement or the Plan and any determination made
by the Committee under this Agreement or the Plan may be made in the sole
discretion of the Committee and shall be final, binding, and conclusive. Any
such determination need not be uniform and may be made differently among
Employees awarded Restricted Stock.
15. Miscellaneous. (a) This Agreement shall be governed and construed in
accordance with the laws of the State of Wisconsin applicable to contracts made
and to be performed therein between residents thereof.
(b) The waiver by the Company of any provision of this Agreement shall
not operate or be construed to be a subsequent waiver of the same provision or
waiver of any other provision hereof.
(c) The Restricted Stock shall be deemed to have been awarded pursuant to
the Plan and is subject to the terms and conditions thereof. In the event of any
conflict between the terms hereof and the provisions of the Plan, the terms and
conditions of the Plan shall prevail. Any and all terms used herein, unless
specifically defined herein shall have the meaning ascribed to them in the Plan.
A copy of the Plan is available on request of the Employee made in writing or by
e-mail to the Company's Secretary.
(d) Any notice, filing or delivery hereunder or with respect to
Restricted Stock shall be given to the Employee at either his usual work
location or his home address as indicated in the records of the Company, and
shall be given to the Committee or the Company at 250 East Kilbourn Avenue,
Milwaukee 53202, Attention: Secretary. All such notices shall be given by first
class mail, postage pre-paid, or by personal delivery.
(e) This Agreement shall be binding upon and inure to the benefit of the
Company and its successors and assigns and shall be binding upon and inure to
the benefit of the Employee, the Beneficiary and the personal representative(s)
and heirs of the Employee, except that the Employee may not transfer any
interest in any Restricted Stock prior to the release of the restrictions
imposed by Paragraph 2.
The end of Paragraph 15 is the end of the Incorporated Terms. The
remainder of the Agreement is contained in the Base Instrument.
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ANNEX
Definition of "Change in Control of the Company" and Related Terms
1. Change in Control of the Company. A "Change in Control of the Company"
shall be deemed to have occurred if an event set forth in any one of the
following paragraphs shall have occurred:
(i) any Person (other than (A) the Company or any of its
subsidiaries, (B) a trustee or other fiduciary holding securities under
any employee benefit plan of the Company or any of its subsidiaries, (C)
an underwriter temporarily holding securities pursuant to an offering of
such securities or (D) a corporation owned, directly or indirectly, by
the shareholders of the Company in substantially the same proportions as
their ownership of stock in the Company ("Excluded Persons")) is or
becomes the Beneficial Owner, directly or indirectly, of securities of
the Company (not including in the securities beneficially owned by such
Person any securities acquired directly from the Company or its
Affiliates after July 22, 1999, pursuant to express authorization by the
Board of Directors of the Company (the "Board") that refers to this
exception) representing 50% or more of either the then outstanding shares
of common stock of the Company or the combined voting power of the
Company's then outstanding voting securities entitled to vote generally
in the election of directors; or
(ii) the following individuals cease for any reason to constitute
a majority of the number of directors of the Company then serving: (A)
individuals who, on July 22, 1999, constituted the Board and (B) any new
director (other than a director whose initial assumption of office is in
connection with an actual or threatened election contest, including but
not limited to a consent solicitation, relating to the election of
directors of the Company, as such terms are used in Rule 14a-11 of
Regulation 14A under the Act) whose appointment or election by the Board
or nomination for election by the Company's shareholders was approved by
a vote of at least two-thirds (2/3) of the directors then still in office
who either were directors on July 22, 1999, or whose initial appointment,
election or nomination for election as a director which occurred after
July 22, 1999 was approved by such vote of the directors then still in
office at the time of such initial appointment, election or nomination
who were themselves either directors on July 22, 1999 or initially
appointed, elected or nominated by such two-thirds (2/3) vote as
described above ad infinitum (collectively the "Continuing Directors");
provided, however, that individuals who are appointed to the Board
pursuant to or in accordance with the terms of an agreement relating to a
merger, consolidation, or share exchange involving the Company (or any
direct or indirect subsidiary of the Company) shall not be Continuing
Directors for purposes of this Agreement until after such individuals are
first nominated for election by a vote of at least two-thirds (2/3) of
the then Continuing Directors and are thereafter elected as
A-1
directors by the shareholders of the Company at a meeting of shareholders
held following consummation of such merger, consolidation, or share
exchange; and, provided further, that in the event the failure of any
such persons appointed to the Board to be Continuing Directors results in
a Change in Control of the Company, the subsequent qualification of such
persons as Continuing Directors shall not alter the fact that a Change in
Control of the Company occurred; or
(iii) a merger, consolidation or share exchange of the Company
with any other corporation is consummated or voting securities of the
Company are issued in connection with a merger, consolidation or share
exchange of the Company (or any direct or indirect subsidiary of the
Company) pursuant to applicable stock exchange requirements, other than
(A) a merger, consolidation or share exchange which would result in the
voting securities of the Company entitled to vote generally in the
election of directors outstanding immediately prior to such merger,
consolidation or share exchange continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity or any parent thereof) at least 50% of the combined
voting power of the voting securities of the Company or such surviving
entity or any parent thereof entitled to vote generally in the election
of directors of such entity or parent outstanding immediately after such
merger, consolidation or share exchange, or (B) a merger, consolidation
or share exchange effected to implement a recapitalization of the Company
(or similar transaction) in which no Person (other than an Excluded
Person) is or becomes the Beneficial Owner, directly or indirectly, of
securities of the Company (not including in the securities beneficially
owned by such Person any securities acquired directly from the Company or
its Affiliates after July 22, 1999, pursuant to express authorization by
the Board that refers to this exception) representing at least 50% of the
combined voting power of the Company's then outstanding voting securities
entitled to vote generally in the election of directors; or
(iv) the sale or disposition by the Company of all or
substantially all of the Company's assets (in one transaction or a series
of related transactions within any period of 24 consecutive months),
other than a sale or disposition by the Company of all or substantially
all of the Company's assets to an entity of which at least 75% of the
combined voting power of the voting securities entitled to vote generally
in the election of directors immediately after such sale are owned by
Persons in substantially the same proportions as their ownership of the
Company immediately prior to such sale.
2. Related Definitions. For purposes of this Annex, the following terms,
when capitalized, shall have the following meanings:
(i) Act. The term "Act" means the Securities Exchange Act of 1934,
as amended.
A-2
(ii) Affiliate and Associate. The terms "Affiliate" and
"Associate" shall have the respective meanings ascribed to such terms in
Rule l2b-2 of the General Rules and Regulations under the Act.
(iii) Beneficial Owner. A Person shall be deemed to be the
"Beneficial Owner" of any securities:
(a) which such Person or any of such Person's Affiliates or
Associates has the right to acquire (whether such right is
exercisable immediately or only after the passage of time)
pursuant to any agreement, arrangement or understanding, or upon
the exercise of conversion rights, exchange rights, rights,
warrants or options, or otherwise; provided, however, that a
Person shall not be deemed the Beneficial Owner of, or to
beneficially own, (A) securities tendered pursuant to a tender or
exchange offer made by or on behalf of such Person or any of such
Person's Affiliates or Associates until such tendered securities
are accepted for purchase, or (B) securities issuable upon
exercise of Rights issued pursuant to the terms of the Company's
Rights Agreement, dated as of July 22, 1999, between the Company
and Firstar Bank Milwaukee, N.A., as amended from time to time (or
any successor to such Rights Agreement), at any time before the
issuance of such securities;
(b) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or
dispose of or has "beneficial ownership" of (as determined
pursuant to Rule l3d-3 of the General Rules and Regulations under
the Act), including pursuant to any agreement, arrangement or
understanding; provided, however, that a Person shall not be
deemed the Beneficial Owner of, or to beneficially own, any
security under this Subsection 1 (c) as a result of an agreement,
arrangement or understanding to vote such security if the
agreement, arrangement or understanding: (A) arises solely from a
revocable proxy or consent given to such Person in response to a
public proxy or consent solicitation made pursuant to, and in
accordance with, the applicable rules and regulations under the
Act and (B) is not also then reportable on a Schedule l3D under
the Act (or any comparable or successor report); or
(c) which are beneficially owned, directly or indirectly,
by any other Person with which such Person or any of such Person's
Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting
(except pursuant to a revocable proxy as described in Subsection
1(c) (ii) above) or disposing of any voting securities of the
Company.
A-3
(iv) Person. The term "Person" shall mean any individual,
firm, partnership, corporation or other entity, including any
successor (by merger or otherwise) of such entity, or a group of
any of the foregoing acting in concert.
A-4
EXHIBIT 10.6
EXECUTIVE BONUS PLAN OF
MGIC INVESTMENT CORPORATION
(the "Company")
The Executive Bonus Plan of the Company in effect for 2001 (which is not
contained in a formal plan document), applied to certain officers of the
Company, including the executive officers of the Company identified in the Form
10-K for the year ended December 31, 2001. Under the Executive Bonus Plan, if
the Company achieved a minimum level of net income for 2001, an executive
officer was eligible for a bonus, depending upon the executive officer's
individual performance, of up to 150-200% of such executive officer's base
salary, depending on the maximum applicable to the executive officer. The
officer could elect to receive up to one-third of the bonus in restricted stock
of the Company that vested in one year. For each share of restricted stock so
elected, the Company awarded one and one-half shares of restricted stock that
vested in three years.
EXHIBIT 10.13
2/20/02
NON-COMPETITION, CONFIDENTIALITY AND SEVERANCE AGREEMENT
As a condition to and in partial consideration of the grant of a Stock
Option pursuant to the MGIC Investment Corporation (the "Company") 1991 Stock
Incentive Plan, as amended, by the Company to John D. Fisk (hereinafter
"Employee"); and
In recognition of the circumstances that,
the Employee was recently a senior officer of Freddie Mac, which views
itself as, and in substance is, a competitor of the Company's principal
subsidiary, Mortgage Guaranty Insurance Corporation ("MGIC"); and that
the Employee is being hired as an employee of MGIC and as a senior
officer of the Company and its subsidiaries (individually, a "Subsidiary" and
collectively, the "Subsidiaries"), and in that capacity will be made aware of
various confidential information regarding the Company and the Subsidiaries and
will have, or is anticipated to have in due course, management responsibility
for a broad range of functions of the Company and the Subsidiaries, and will
have wide interaction with the senior executives of the Company and the
Subsidiaries; and
In further consideration for the Company's agreement to cause severance
benefits to be paid to the Employee as provided below,
the Employee and the Company agree as follows:
1. (a) Employee shall not render "services" to any "competitor" during
the term of his employment with MGIC and for a period of one year after the
termination of his employment with MGIC.
(b) The term "competitor" means any company (regardless of the form of
its organization), including a proprietorship,
(i) engaged in the business of guaranteeing or insuring mortgages in any
geographic area in which the Company, MGIC or another Subsidiary is engaged in
guaranteeing or insuring mortgages, or
(ii) engaged in any other business in which the Company or a Subsidiary
is engaged, in any geographic area in which the Company or a Subsidiary is so
engaged, but only if such business accounted for at least 10% of the revenues of
the Company and its Subsidiaries, on a consolidated basis, during the four
fiscal
quarters preceding the fiscal quarter in which the Employee's employment
terminated.
It is understood that, without creating any implication that in the
absence of this sentence Fannie Mae or Freddie Mac would not be a "competitor"
as defined above, Fannie Mae and Freddie Mac are "competitors." It is also
understood that because the business of MGIC is conducted throughout the United
States and in Puerto Rico, the geographic scope of the restriction under clause
(i) above shall be the United States and Puerto Rico, and if the business of
MGIC or a Subsidiary expands beyond the those areas, the scope of such
restriction shall expand so that it is coincident with the scope of such
expansion.
(c) The term "services" means services incident to having oversight or
management responsibilities for any or all of corporate or business development,
corporate or business strategy, risk management, underwriting, capital markets
activities and e-commerce, regardless of whether such services are performed as
an employee of a competitor, as an independent contractor for a competitor, an
employee of an independent contractor for a competitor or otherwise.
2. (a) During the term of his employment with MGIC and for a period of
three years after the termination of such employment, the Employee shall not
make any "unauthorized disclosure" nor shall the Employee make any "unauthorized
use." Notwithstanding the foregoing, the Employee's obligations hereunder not to
make any unauthorized disclosure and not to make any unauthorized use shall
continue beyond such three-year period for an additional seven years (for a
total of ten years) with respect to any information that is a "trade secret" as
defined in Section 134.90 of the Wisconsin Statutes, or any successor thereto.
(b) The term "unauthorized disclosure" means disclosure by the Employee
to any person of any "confidential information." The term "confidential
information" means information relating to the business or operations of the
Company or a Subsidiary obtained by the Employee (it is understood that for
purposes of this Agreement information obtained by the Employee includes
information that is prepared by the Employee) while employed by MGIC or that was
communicated to him in connection with discussions with MGIC in connection with
his retention as an employee, including, but not limited to, information with
respect to business strategies, methods to execute such strategies, product
offerings, product research, product development, assumptions underlying the
pricing of products or products in development, and customer relationships.
Confidential information does not include information generally known in the
mortgage insurance, mortgage guaranty, mortgage banking or mortgage
securitization industries, other than as a result of disclosure by Employee in
violation of this Agreement. Confidential information shall
2
cease to be such upon its being disclosed to the public, other than as a result
of disclosure by Employee in violation of this Agreement.
(c) The term "unauthorized use" means use of confidential information for
any purpose other than a purpose that the Employee reasonably believes is in the
best interests of the Company and the Subsidiaries.
(d) The Employee agrees that all memoranda, notes, financial models,
analytics, data and other documents and information and all copies thereof
relating to the business or operations of the Company or any Subsidiary obtained
by Employee while employed by MGIC (such memoranda, notes and other items
referred to above are collectively herein called the "Items") are the exclusive
property of the Company and the Subsidiaries. The Employee shall not copy or
duplicate any of the Items, and shall not remove them from the facilities of the
Company or any Subsidiary. The Employee agrees that he will deliver the original
and all copies of all of the Items that may be in his possession or control to
MGIC on termination of his employment with MGIC, or at any other time on MGIC's
request.
(e) It is understood that the restrictions on disclosure in Paragraph
2(b) shall not be violated due to disclosure to an employee of MGIC or to a
person to whom disclosure is reasonably necessary or appropriate in connection
with the performance of Employee's duties as an employee or officer of MGIC or
of the Company and its Subsidiaries. It is understood that the restrictions on
copying, duplicating and removal in Paragraph 2(d) shall not be violated due to
copying, duplication or removal that is reasonably necessary or appropriate in
connection with the performance of Employee's duties as an employee or officer
of MGIC or of the Company and its Subsidiaries.
(f) If the Employee is requested under legal process to make any
disclosure that is prohibited by this Agreement, the Employee will provide the
Company with prompt notice of such request so that it may seek an appropriate
protective order or other appropriate remedy. Subject to the foregoing, and
notwithstanding the preceding provisions of Paragraph 2, the Employee may
disclose that portion (and only that portion) of the confidential information
that the Employee reasonably believes he is legally compelled by such process to
disclose and shall advise the Company of the portion of the confidential
information that was so disclosed.
3. (a) If Employee's employment with MGIC and all Subsidiaries terminates
prior to February 25, 2004, other than due to an "uncovered termination," and
the termination does not entitle the Executive to a "Termination Payment" under
the Key Executive Employment and Severance Agreement of even date herewith
between the Executive and the Company, subject to the cessation and repayment of
severance
3
benefits as provided in Paragraph 3(d), the Company will cause MGIC to provide
the Employee with "severance benefits."
(b) The term "uncovered termination" means a termination of employment
due to
(i) Employee's death;
(ii) Employee's inability to perform his job responsibilities on a
substantially full-time basis for a period of at least 60 consecutive days or
for 90 days during any period of 180 days due to physical or mental illness or
injury;
(iii) the Employee's conviction of, or his plea of guilty or no contest
to, a felony; willful misconduct by the Employee in performing his duties for
MGIC or the Employee's unreasonable refusal to perform such duties; or the
Employee's breach of this Agreement; or
(iv) voluntary resignation by the Employee, other than voluntary
resignation as a result of a meaningful reduction in Employee's job status,
responsibilities or compensation, compared to such status, responsibilities and
compensation at the inception of Employee's employment with MGIC.
(c) The term "severance benefits" means
(i) severance pay of $300,000 in the aggregate, paid in 26 equal,
consecutive bi-weekly installments of $11,538.48 each, with the first
installment to be paid on MGIC's first regularly scheduled pay day after the
bi-weekly pay period in which Employee's termination of employment occurred (the
period during which such payments are made is herein referred to as the
"severance period"); and
(ii) Employee's continued participation during the severance period in
the medical, dental, vision (if enrollment in the medical and dental coverages
had been waived by Employee), life and accidental death and disability, spousal
life and accidental death and disability, child life, and long-term disability
coverages in which Employee had enrolled prior to his termination of employment,
with the right to change such coverages at the next enrollment period after his
termination of employment in accordance with the terms available to employees of
MGIC in general if the coverages that would be changed would be effective during
the severance period.
MGIC shall be entitled to deduct from all payments under Paragraphs 3(c)(i), all
legally required payroll deductions on account of severance benefits, including
but not limited to federal and state income tax and FICA withholding, and will
further deduct all payroll deductions for the coverages in which the Employee is
enrolled as contemplated by Paragraph 3(c)(ii).
4
(d) No severance benefits will be provided to Employee or if due to the
timing of Employee's termination of employment, the Employee has already been
provided with severance benefits, no further severance benefits will be provided
to Employee,
(i) unless Employee (or his executor, in the circumstances contemplated
below) signs and delivers to the Company the Release and Covenant Not to Sue
attached as Exhibit A (the "Release") within 22 days after the day on which
Employee's employment terminated; or
(ii) if Employee revokes the Release as provided in Paragraph 5 of the
Release.
In addition, if Employee does not sign and deliver the Release within such
22-day period (or such longer period in the circumstances in which a longer
period is provided as set forth below) or revokes the Release as contemplated
above, Employee (or his estate in the circumstances set forth below) shall
immediately pay MGIC the sum of the aggregate amount of all payments made to
Employee under Paragraph 3(c)(i) and the aggregate amount of MGIC's cost in
providing the benefits provided under Paragraph 3(c)(ii). If during such 22-day
period and prior to the time at which the Employee signs and delivers the
Release to the Company, the Employee dies or becomes disabled due to physical
illness or injury such that the Employee is not physically capable of signing
the Release, the 22-day period shall be extended to, in the case of the
Employee's death, 30 days after an executor is validly appointed for the
Employee's estate, and in the case of such disability, 30 days after the
Employee is physically capable of signing the Release. Notwithstanding such
extension, no further payments will be made under Paragraph 3(d)(i) after the
end of the 22-day period until the signed Release is delivered to the Company in
accordance with the preceding sentence, at which time all payments that would
have been made had the Release been signed within the 22-day period will be made
in a lump sum. As used in this Paragraph 3(d), the term "signed" means signed,
dated and notarized in accordance with the notarization block on the signature
page of the Release.
(e) The severance benefits are in lieu of any other compensation or
benefit on account of Employee's termination of employment, all of which
compensation and benefits are hereby waived by the Employee. This waiver does
not apply, however, to benefits under life or other insurance policies.
4. The Employee represents that he is not subject to any restriction that
on its face would prevent him from performing his duties incident to being an
employee of MGIC or from being an officer of MGIC, the Company or the
Subsidiaries.
5. The provisions of this Non-Competition, Confidentiality and Severance
Agreement shall bind the Employee and inure to the benefit of the Company and
each Subsidiary, notwithstanding any termination of the Stock Option Agreement
associated with this Non-Competition, Confidentiality and Severance Agreement,
5
or any termination of the related stock option, or any issuance of shares to the
Employee upon exercise of the stock option.
The Employee acknowledges that the Company and each Subsidiary are third
party beneficiaries of this Agreement and each one is entitled to enforce the
provisions of this Agreement by an action for injunction, damages or both, and
for such other relief as may be proper. If in a final judgment by a court of
competent jurisdiction, the Employee is found to have violated the restrictions
of Paragraphs 1 or 2 of this Agreement, damages shall be comprised of the sum of
the aggregate amount of all payments made to Employee under Paragraph 3(c)(i) of
this Agrement and the aggregate amount of MGIC's cost in providing the benefits
provided under Paragraph 3(c)(ii) of this Agreement plus such other damages to
which the Company and the Subsidiaries are entitled.
The Employee was given a copy of a predecessor version of this Agreement
for his review on or about February 12, 2002 and that he was advised through the
medium of this sentence in such copy that he could discuss the restrictions in
this Agreement with the Company's General Counsel and ask questions about such
restrictions. In response to a request for a severance arrangement, the
severance provisions of Paragraph 3 were added to this Agreement and the
Employee was e-mailed this Agreement, including Exhibit A, on or about February
20, 2002. The Agreement e-mailed to the Employee was redlined to show the
changes made to the predecessor version, other than the addition of Paragraph 3
and Exhibit A, which did not appear in the predecessor version.
The Employee acknowledges that nothing herein creates an obligation,
whether or not legally enforceable, regarding the Employee's future prospects or
position with the Company or any Subsidiary, including any obligation to
continue the employment of Employee.
The validity and construction of this Agreement shall be governed by the
internal laws of the State of Wisconsin (excluding the conflict of laws
provisions of such laws).
Dated: As of this 25th day of February, 2002.
MGIC Investment Corporation
/s/ John D. Fisk By /s/ Curt S. Culver
- ---------------------------- ------------------------
John D. Fisk Curt S. Culver
Chief Executive Officer
6
Exhibit A
Release and Covenant Not to Sue
This is the Release and Covenant Not to Sue contemplated by Paragraph
3(d) of the Non-Competition, Confidentiality and Severance Agreement, dated as
of February 25, 2002 (such Agreement is herein referred to as the
"Non-Competition, Confidentiality and Severance Agreement" and the provisions of
Paragraph 3 of the Non-Competition, Confidentiality and Severance Agreement are
herein referred to as the "Severance Provisions"), between MGIC Investment
Corporation (the "Company") and John D. Fisk ("Former Employee").
1. (a) Former Employee hereby fully releases and forever discharges the
Company and its Subsidiaries, and its and their present and former directors,
officers, employees, attorneys, agents representatives, predecessors,
successors, and assigns from any and all claims, demands, liens, agreements,
contracts, covenants, actions, suits, causes of action, obligations,
controversies, debts, costs, expenses, damages, judgments, orders and
liabilities, of whatever kind or nature, in law, equity or otherwise, including
attorneys' fees, whether now known or unknown, vested or contingent, suspected
or unsuspected, and whether concealed or hidden, which have existed, may have
existed or which do exist relating to the employment of Former Employee by the
Company or its Subsidiaries, or the resignation or termination of Former
Employee's employment with the Company or its Subsidiaries, with the exception
of any claimed breach(es) of the Severance Provisions or any other agreements in
writing between the Company and Former Employee if such agreements have been
signed on behalf of the Company by its President, any Executive Vice President
or any Senior Vice President (such other agreements are herein referred to as
"Other Agreements").
(b) Without in any way limiting the generality of the foregoing language,
this release shall include any and all claims, demands or causes of action
arising out of or in any way connected with any occurrences, acts, omissions,
transactions, practices or policies which were, or could have been, asserted in
connection with a civil action brought under federal common law, state common
law, including but not limited to a tort or wrongful discharge claim, breach of
contract claim, and/or under any other federal, state or local statute, law,
ordinance, regulation, rule or order, including, but not limited to, any claims
under the Age Discrimination in Employment Act, 29 U.S.C.ss.621 et seq., as
amended; Title VII of the Civil Rights Act of 1964, 42 U.S.C.ss.2000e et seq.,
as amended; the Americans with Disabilities Act of 1990, 42 U.S.C.ss.12101 et
seq., as amended; the Wisconsin Fair Employment Law, Wis. Stat.ss.111.31 et
seq., as amended; any similar laws of the United States, the State of Wisconsin,
or any other state or municipality; or pursuant to any claims whatsoever arising
out of, or related to the employment of him by the Company or a Subsidiary, the
termination of his employment with the Company or
a Subsidiary, and/or related to any allegations by Former Employee of
discrimination or wrong-doing by the Company or any Subsidiary.
2. Except for actions relating to the breach of the Severance Provisions
or any Other Agreements, Former Employee further covenants and agrees never to
institute, directly or indirectly, or in any manner to aid another person in,
any action or proceeding of any kind against the Company, any Subsidiary, or any
of their respective current or former officers, directors or employees regarding
his employment by the Company or any Subsidiary or any matter related to the
termination of his employment by the Company or any Subsidiary or regarding any
of the restrictions imposed by Paragraphs 1 or 2 of the Non-Competition,
Confidentiality and Severance Agreement .
3. It is the intention of Former Employee in executing this Agreement
that it shall be effective as a bar to each and every claim, demand and cause of
action described above. Former Employee expressly consents that the release and
covenant not to sue contained herein shall be given full force and effect
according to each and all of their respective terms and conditions. Former
Employee acknowledges and agrees that the release and covenant not to sue
contained herein are essential and material terms of the Severance Provisions
and that without such terms, the Company would have been unwilling to agree to
cause the payments and benefits contemplated by the Severance Provisions to be
made, and would not be otherwise be required to cause there to be provided the
payments and benefits contemplated by the Severance Provisions. Former Employee
understands and acknowledges the significance and consequences of such terms.
4. Former Employee acknowledges, represents and warrants that an
unexecuted copy of this Release and Covenant Not to Sue was in his possession on
the day on which his employment with the Company and the Subsidiaries
terminated; that the Company has advised Former Employee to consult with an
attorney prior to signing this Release and Covenant Not to Sue; and that the
Company has given Former Employee at least twenty-one days in which to consider
this Release and Covenant Not to Sue and seek the advice of counsel.
5. This Release and Covenant Not to Sue will not become effective or
enforceable for a period of seven days after execution by Former Employee.
Former Employee may revoke this Release and Covenant Not to Sue during such
seven day period by providing the Company with written notice of revocation
within such period, which notice shall be directed to the Company at 250 East
Kilbourn Avenue, Milwaukee, Wisconsin 53202, Attention: General Counsel. In the
event Former Employee does not provide the Company with notice of revocation
within such seven day period, this Release and Covenant Not to Sue shall then be
fully binding on, and non-revocable by, Former Employee. In the event Former
Employee revokes this Release and Covenant Not to Sue pursuant to the terms
hereof, this Release and Covenant Not to Sue shall be null and void and of
2
no further force and effect, and Former Employee shall immediately pay MGIC the
sum of the aggregate amount of all payments made to Former Employee under
Paragraph 3(c)(i) of the Non-Competition, Confidentiality and Severance
Agreement and the aggregate amount of MGIC's cost in providing the benefits
provided under Paragraph 3(c)(ii).
6. The Employee acknowledges that the Company and each Subsidiary are
third party beneficiaries of this Release and Covenant Not to Sue and each one
is entitled to enforce the provisions of this Release and Covenant Not to Sue by
an action for injunction, damages or both, and for such other relief as may be
proper. Capitalized definitional terms used in this Release and Covenant Not to
Sue are used as defined in the Non-Competition, Confidentiality and Severance
Agreement. The validity and construction of this Release and Covenant Not to Sue
shall be governed by the internal laws of the State of Wisconsin (excluding the
conflict of laws provisions of such laws).
Dated: ___________________
- -------------------------
John D. Fisk
State of _________)
)
County of _______)
I, , a Notary Public in and for said County, in the State aforesaid, do
hereby certify that John D. Fisk, personally known to me to be the same person
whose name is subscribed to the foregoing Release and Covenant Not to Sue,
appeared before me this day in person and acknowledged that he signed and
delivered the said instrument as his free and voluntary act for the uses and
purposes therein set forth.
GIVEN under my hand and Notarial Seal this _____ day of ________, 200_.
------------------------------------
Notary Public
My Commission Expires:______________
3
EXHIBIT 11
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (1)
For The Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
(In thousands, except per share data)
BASIC EARNINGS PER SHARE
Average common shares outstanding 106,941 106,202 108,061
============== ============== ==============
Net income $ 639,137 $ 541,999 $ 470,201
============== ============== ==============
Net income per share $ 5.98 $ 5.10 $ 4.35
============== ============== ==============
DILUTED EARNINGS PER SHARE
Adjusted shares outstanding:
Average common shares outstanding 106,941 106,202 108,061
Net shares to be issued upon
exercise of common stock
equivalents 854 1,058 1,197
-------------- -------------- --------------
Adjusted shares outstanding 107,795 107,260 109,258
============== ============== ==============
Net income $ 639,137 $ 541,999 $ 470,201
============== ============== ==============
Net income per share $ 5.93 $ 5.05 $ 4.30
============== ============== ==============
(1) Per Statement of Financial Accounting Standards No. 128, "Earnings Per Share".
EXHIBIT 13
MGIC INVESTMENT CORPORATION & SUBSIDIARIES --
YEARS ENDED DECEMBER 31, 2001, 2000, 1999, 1998 AND 1997
Five-Year Summary of Financial Information
-------------------------------------------------------------------------------
2001 2000 1999 1998 1997
-------------- -------------- -------------- -------------- --------------
(In thousands of dollars, except per share data)
Summary of Operations
Revenues:
Net premiums written....................... $ 1,036,353 $ 887,388 $ 792,345 $ 749,161 $ 690,248
============== ============== ============== ============== ==============
Net premiums earned........................ $ 1,042,267 $ 890,091 $ 792,581 $ 763,284 $ 708,744
Investment income, net..................... 204,393 178,535 153,071 143,019 123,602
Realized investment gains, net............. 37,352 1,432 3,406 18,288 3,261
Other revenue.............................. 73,829 40,283 47,697 47,075 32,665
-------------- -------------- -------------- -------------- --------------
Total revenues........................... 1,357,841 1,110,341 996,755 971,666 868,272
-------------- -------------- -------------- -------------- --------------
Losses and expenses:
Losses incurred, net....................... 160,814 91,723 97,196 211,354 242,362
Underwriting and other expenses............ 234,494 177,837 198,147 187,103 154,138
Interest expense........................... 30,623 28,759 20,402 18,624 6,399
Litigation settlement...................... - 23,221 - - -
-------------- -------------- -------------- -------------- --------------
Total losses and expenses................ 425,931 321,540 315,745 417,081 402,899
-------------- -------------- -------------- -------------- --------------
Income before tax............................. 931,910 788,801 681,010 554,585 465,373
Provision for income tax...................... 292,773 246,802 210,809 169,120 141,623
-------------- -------------- -------------- -------------- --------------
Net income.................................... $ 639,137 $ 541,999 $ 470,201 $ 385,465 $ 323,750
============== ============== ============== ============== ==============
Weighted average common shares outstanding
(in thousands)............................... 107,795 107,260 109,258 113,582 117,924
============== ============== ============== ============== ==============
Diluted earnings per share.................... $ 5.93 $ 5.05 $ 4.30 $ 3.39 $ 2.75
============== ============== ============== ============== ==============
Dividends per share........................... $ .10 $ .10 $ .10 $ .10 $ .095
============== ============== ============== ============== ==============
Balance sheet data
Total investments.......................... $ 4,069,447 $ 3,472,195 $ 2,789,734 $ 2,779,706 $ 2,416,740
Total assets............................... 4,567,012 3,857,781 3,104,393 3,050,541 2,617,687
Loss reserves.............................. 613,664 609,546 641,978 681,274 598,683
Short- and long-term debt.................. 472,102 397,364 425,000 442,000 237,500
Shareholders' equity....................... 3,020,187 2,464,882 1,775,989 1,640,591 1,486,782
Book value per share....................... 28.47 23.07 16.79 15.05 13.07
- ---------------------------------------------------------------------------------------------------------------------
A brief description of the Company's business is contained in Note 1 to the
Consolidated Financial Statements of the Company.
one
MGIC INVESTMENT CORPORATION & SUBSIDIARIES --
YEARS ENDED DECEMBER 31, 2001, 2000, 1999, 1998 AND 1997
Five-Year Summary of Financial Information
- --------------------------------------------------------------------------------
2001 2000 1999 1998 1997
-------------- -------------- -------------- -------------- --------------
New primary insurance written ($ millions).... $ 86,122 $ 41,546 $ 46,953 $ 43,697 $ 32,250
New primary risk written ($ millions)......... 21,038 10,353 11,422 10,850 8,305
New pool risk written ($ millions)............ 412 345 564 618 394
Insurance in force (at year-end) ($ millions)
Direct primary insurance................... 183,904 160,192 147,607 137,990 138,497
Direct primary risk........................ 42,678 39,090 35,623 32,891 32,175
Direct pool risk........................... 1,950 1,676 1,557 1,133 590
Primary loans in default ratios
Policies in force.......................... 1,580,283 1,448,348 1,370,020 1,320,994 1,342,976
Loans in default........................... 54,653 37,422 29,761 29,253 28,493
Percentage of loans in default............. 3.46% 2.58% 2.17% 2.21% 2.12%
Percentage of loans in default-- bulk (1).. 8.59% 9.02% 8.04% - -
Insurance operating ratios (GAAP)
Loss ratio................................. 15.4% 10.3% 12.3% 27.7% 34.2%
Expense ratio.............................. 16.5% 16.4% 19.7% 19.6% 18.4%
-------------- -------------- -------------- -------------- --------------
Combined ratio............................. 31.9% 26.7% 32.0% 47.3% 52.6%
============== ============== ============== ============== ==============
Risk-to-capital ratio (statutory)
MGIC....................................... 9.1:1 10.6:1 11.9:1 12.9:1 15.7:1
(1) Information relating to bulk defaults in 1997 and 1998 is not separately presented and is not material.
two
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Consolidated Operations
2001 Compared with 2000
Net income for 2001 was $639.1 million, compared with $542.0 million in 2000, an
increase of 18%. Diluted earnings per share was $5.93 for 2001 compared with
$5.05 in 2000. Included in diluted earnings per share for 2001 was $0.23 for
realized gains. The 2000 earnings per share included $0.01 for realized gains
and a $0.14 charge for the RESPA settlement made in the fourth quarter of 2000.
See "Other Matters" below. Earnings per share excluding amounts for realized
gains in 2000 and 2001 and excluding the RESPA settlement in 2000 was $5.70 for
2001, compared to $5.18 for 2000, an increase of 10%. Earnings per share
excluding amounts for realized gains increased 15% during the first half of 2001
compared to 2000, and earnings per share excluding amounts for realized gains
and the RESPA settlement increased 5% during the second half of 2001 compared to
the second half of 2000. 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.
Total revenues for 2001 were $1,357.8 million, an increase of 22% from the
$1,110.3 million for 2000. This increase was primarily attributable to an
increase in new business writings, which included $25.7 billion of bulk
transactions. Also contributing to the increase in revenues was an increase in
investment income resulting from strong cash flows and increases in realized
gains and other revenue. See below for a further discussion of premiums,
investment income and other revenue.
Losses and expenses for 2001 were $425.9 million, an increase of 32% from $321.5
million for the same period of 2000. The increase from last year can be
attributed to an increase in losses related to an increase in notice inventories
and an increase in expenses related to increases in insured volume and in
contract underwriting. See below for a further discussion of losses incurred and
underwriting expenses.
The amount of new primary insurance written by Mortgage Guaranty Insurance
Corporation ("MGIC") during 2001 was $86.1 billion, compared with $41.5 billion
in 2000. Refinancing activity increased to 42% of new primary insurance written
in 2001 on a flow basis (or $25.1 billion), compared to 13% in 2000 (or $4.6
billion) as a result of the decreasing mortgage interest rate environment in
2001. New primary insurance written in bulk transactions increased to 30% of new
primary insurance written in 2001 compared to 17% in 2000, reflecting the
increasing use of mortgage insurance in certain mortgage securitizations and
MGIC's share of this market. A portion of the loans insured in bulk transactions
are refinance loans.
The $86.1 billion of new primary insurance written during 2001 was offset by the
cancellation of $62.4 billion of insurance in force, and resulted in a net
increase of $23.7 billion in primary insurance in force, compared to new primary
insurance written of $41.5 billion, cancellation of $28.9 billion, and a net
increase of $12.6 billion in insurance in force during 2000. Direct primary
insurance in force was $183.9 billion at December 31, 2001, compared to $160.2
billion at December 31, 2000.
In addition to providing direct primary insurance coverage, the Company also
insures pools of mortgage loans. New pool risk written during 2001 and 2000,
which was virtually all agency pool insurance, was $411.7 million and $345.5
million, respectively. The Company's direct pool risk in force at December 31,
2001 was $2.0 billion compared to $1.7 billion at December 31, 2000.
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 increased during 2001 compared to
the cancellation levels of 2000 principally due to the lower mortgage interest
rate environment which resulted in a decrease in the MGIC persistency rate
(percentage of insurance remaining in force from one year prior) to 61.0% at
December 31, 2001, from 80.4% at December 31, 2000. Future cancellation activity
could also be somewhat higher than it otherwise would have been as a result of
legislation that went into effect in July 1999 regarding cancellation of
mortgage insurance. Cancellation activity could also increase as more of the
Company's bulk loans season. The Company anticipates that the bulk loans will
have
three
materially lower persistency than the Company's flow business.
New insurance written for bulk transactions was $25.7 billion during 2001
compared to $7.0 billion for 2000 and $2.2 billion for 1999. The Company does
not anticipate that the level of growth in the bulk business during the last
three years will continue in 2002. The Company expects that the loans that are
included in bulk transactions will have delinquency and claim rates in excess of
those on the Company's flow business. While the Company believes it has priced
its bulk business to generate acceptable returns, there can be no assurance that
the assumptions underlying the premium rates adequately address the risk and
persistency of this business.
Net premiums written increased 17% to $1,036.4 million in 2001, from $887.4
million in 2000. Net premiums earned increased 17% to $1,042.3 million in 2001,
from $890.1 million in 2000. The increases were primarily a result of the growth
in insurance in force and a higher percentage of renewal premiums on products
with higher premium rates offset in part by an increase in ceded premiums to
$65.3 million in 2001, compared to $52.9 million in 2000, primarily due to an
increase in captive mortgage reinsurance.
Mortgages (newly insured during 2001 or 2000) equal to approximately 27% of
MGIC's new insurance written during 2001 were subject to captive mortgage
reinsurance and similar arrangements compared to 33% during 2000. 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 December 31, 2001
approximately 24% of MGIC's risk in force was subject to captive reinsurance and
similar arrangements compared to 21% at December 31, 2000. The amount of
premiums ceded under captive mortgage reinsurance arrangements and the amount of
risk in force subject to such arrangements are expected to continue to increase.
Investment income for 2001 was $204.4 million, an increase of 14% over the
$178.5 million in 2000. This increase was primarily the result of an increase in
the amortized cost of average investment assets to $3.7 billion for 2001, from
$3.1 billion for 2000, an increase of 18%. The portfolio's average pre-tax
investment yield was 5.4% and 6.0% at December 31, 2001 and 2000, respectively.
The portfolio's average after-tax investment yield was 4.6% and 4.9% at December
31, 2001 and 2000, respectively. The Company realized gains of $37.4 million
during 2001 compared to $1.4 million in 2000, resulting primarily from the sale
of corporate and taxable municipal securities.
Other revenue, which is composed of various components, was $73.8 million in
2001, compared with $40.3 million in 2000. The increase is primarily the result
of an increase in contract underwriting revenue and increases in equity earnings
from Credit-Based Asset Servicing and Securitization LLC ("C-BASS") and Sherman
Financial Group LLC, ("Sherman"), joint ventures with Radian Group Inc.
("Radian").
C-BASS engages in the acquisition and resolution of delinquent single-family
residential mortgage loans ("mortgage loans"). C-BASS also purchases and sells
mortgage-backed securities ("mortgage securities"), interests in real estate
mortgage investment conduit residuals and performs mortgage loan servicing. In
addition, C-BASS issues mortgage-backed debt securities collateralized by
mortgage loans and mortgage securities. C-BASS's results of operations are
affected by the timing of these securitization transactions. 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. This valuation is made by C-BASS management in
connection with each release of financial statements. In the case of assets that
are residual interests in securitizations, these estimates reflect the net
present value of the future cash flows from these assets, which in turn depend
on, among other things, estimates of the level of losses on the underlying
mortgages and prepayment activity by the mortgage borrowers. Market value
adjustments could impact C-BASS's results of operations and the Company's share
of those results.
four
Total combined assets of C-BASS at December 31, 2001 and 2000 were approximately
$1.3 billion and $1.0 billion, respectively, of which approximately $1,071
million and $867 million, respectively, were mortgage-related assets, including
open trades. Total liabilities at December 31, 2001 and 2000 were approximately
$981 million and $765 million, respectively, of which approximately $938 million
and $746 million, respectively, were funding arrangements, including accrued
interest, virtually all of which were short-term. For the years ended December
31, 2001 and 2000, revenues of approximately $216 million and $153 million,
respectively, and expenses of approximately $130 million and $97 million,
respectively, resulted in income before tax of approximately $86 million and $56
million, respectively.
Sherman is engaged in the business of purchasing, servicing and securitizing
delinquent unsecured consumer assets such as credit card loans and Chapter 13
bankruptcy debt. A substantial portion of Sherman's consolidated assets are
investments in receivable portfolios that do not have readily ascertainable
market values. Initially the portfolios are valued at cost. Subsequently their
value for financial statement purposes is estimated by the management of Sherman
based on the estimated future cash flow from the portfolios. The assets are
valued by Sherman's management each time financial statements are released.
Market value adjustments could impact Sherman's results of operations and the
Company's share of those results.
Because C-BASS and Sherman are accounted for by the equity method, they are not
consolidated with the Company and their assets and liabilities do not appear in
the Company's balance sheet. The "investments in joint ventures" item in the
Company's balance sheet reflects the amount of capital contributed by the
Company to the joint ventures plus the Company's share of their net income (or
minus its share of their net loss) and minus capital distributed to the Company
by the joint ventures.
As discussed in "Note 2 -- Loss Reserves" to the Company's consolidated
financial statements, consistent with industry practice, loss reserves for
future claims are established only for loans that are currently delinquent. (The
terms "delinquent" and "default" are used interchangeably by the Company.) Loss
reserves are established by management's estimating the number of loans in the
Company's inventory of delinquent loans that will not cure their delinquency
(historically, a substantial majority of delinquent loans have cured), which is
referred to as the claim rate, and further estimating the amount that the
Company will pay in claims on the loans that do not cure, which is referred to
as claim severity. Estimation of losses that the Company 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.
Net losses incurred increased 75% to $160.8 million in 2001, from $91.7 million
in 2000. The increase was due to an increase in the primary notice inventory
related to bulk default activity, which in turn was the result of the higher
volume of bulk business; the maturation of the relatively large 1998 and 1999
books of business which had entered their peak delinquency periods; and defaults
arising from the early development of the 2000 book of business. The primary
insurance notice inventory increased from 37,422 at December 31, 2000 to 54,653
at December 31, 2001 and pool notice inventory increased from 18,209 at December
31, 2000 to 23,623 at December 31, 2001. Included in the notice inventory was
the bulk notice inventory of 18,460 at December 31, 2001 and 7,533 at December
31, 2000. The default rate at December 31, 2001 was 3.46% compared to 2.58% at
December 31, 2000. Excluding bulk defaults, the default rates were 2.65% and
2.19% at December 31, 2001 and 2000, respectively. The default rate on bulk
loans were 8.59% and 9.02% at December 31, 2001 and 2000, respectively. The
Company does not view the decline in the bulk loan default rate as meaningful
and expects that each of the default rates reported above will increase in the
future. The average claim paid for 2001 was $18,607 compared to $18,977 in 2000.
The redundancy in loss reserves in 2001 of $212.1 million was relatively
consistent with 2000's redundancy of $229.0 million. Loss reserves are redundant
when the estimate of the losses that would be paid in the future on loans in the
default inventory at the end of the prior year exceeds the losses that were paid
five
on those loans during the subsequent year, and are deficient when the losses
paid during the subsequent year exceed the estimate. See "Note 6 -- Loss
Reserves" to the Company's consolidated financial statements.
At December 31, 2001, 69% of the primary insurance in force was written during
the last three years, compared to 67% at December 31, 2000. Based on all of the
loans in the Company's insurance in force, the highest claim frequency years
have typically been the third through fifth years after the year of loan
origination. However, the pattern of claims frequency for refinance loans may be
different from this historical pattern and the Company expects the period of
highest claims frequency on bulk transaction loans will occur earlier than in
this historical pattern.
Underwriting and other expenses increased to $234.5 million in 2001 from $177.8
million in 2000, an increase of 32%. The increase can be attributed to increases
in both insurance and non-insurance expenses related to increased volume and
contract underwriting.
Interest expense in 2001 increased to $30.6 million from $28.8 million in 2000
due to slightly higher weighted average interest rates in 2001 compared to 2000,
and higher weighted average balances.
The consolidated insurance operations loss ratio was 15.4% for 2001 compared to
10.3% for 2000. The consolidated insurance operations expense and combined
ratios were 16.5% and 31.9%, respectively, for 2001 compared to 16.4% and 26.7%,
respectively, for 2000.
The effective tax rate was 31.4% in 2001, compared with 31.3% in 2000. During
both years, 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 2001 resulted from a lower percentage of total income
before tax being generated from tax-preferenced investments in 2001.
Other Matters
In June 2001, the Federal District Court for the Southern District of Georgia,
before which Downey et. al. v. MGIC was pending, issued a final order approving
a settlement agreement and certified a nationwide class of borrowers. In the
fourth quarter of 2000, the Company recorded a $23.2 million charge to cover the
estimated costs of the settlement, including payments to borrowers. Due to
appeals of related orders denying certain class members the right to intervene
to challenge certain aspects of the settlement in Downey and two related cases,
payments to borrowers in the settlement are delayed pending the outcome of the
appeals. The settlement includes an injunction that prohibits certain practices
and specifies the basis on which agency pool insurance, captive mortgage
reinsurance, contract underwriting and other products may be provided in
compliance with the Real Estate Settlement Procedures Act, which is known as
RESPA. There can be no assurance that the standards established by the
injunction will be determinative of compliance with RESPA were additional
litigation to be brought in the future.
The complaint in the case alleges that MGIC violated the Real Estate Settlement
Procedures Act by providing agency pool insurance, captive mortgage reinsurance,
contract underwriting and other products that were not properly priced, in
return for the referral of mortgage insurance. The complaint seeks damages of
three times the amount of the mortgage insurance premiums that have been paid
and that will be paid at the time of judgment for the mortgage insurance found
to be involved in a violation of the Real Estate Settlement Procedures Act. The
complaint also seeks injunctive relief, including prohibiting MGIC from
receiving future premium payments. If the settlement is not fully implemented,
the litigation will continue. In these circumstances, there can be no assurance
that the ultimate outcome of the litigation will not materially affect the
Company's financial position or results of operations.
In the third quarter of 2001, the Office of Federal Housing Enterprise Oversight
("OFHEO") adopted a risk-based capital stress test for the GSEs. One of the
elements of the stress test is that future claim payments
six
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' were subject to a 5% reduction over the 10-year period of the
stress test, while claim payments from a `AA' rated insurer, such as MGIC, were
subject to a 15% reduction. In February 2002, OFHEO adopted amendments to the
stress test that reduced the differential between `AAA' and `AA' rated mortgage
insurers to 5.25%. 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.
2000 Compared with 1999
Net income for 2000 was $542.0 million, compared with $470.2 million in 1999, an
increase of 15%. Diluted earnings per share was $5.05 for 2000 compared with
$4.30 in 1999. Included in diluted earnings per share for 2000 were a $0.14
charge for the RESPA settlement agreement and $0.01 for realized gains. The 1999
earnings per share included $0.02 for realized gains and $0.10 for loss reserve
reductions made in the fourth quarter of 1999. Excluding the aforementioned
amounts, earnings per share was $5.18 for 2000, compared to $4.18 for 1999, an
increase of 24%.
Total revenues for 2000 were $1,110.3 million, an increase of 11% from the
$996.8 million for 1999. This increase was primarily attributed to an
improvement in persistency, which generated an increase in renewal premiums.
Also contributing to the increase in revenues was an increase in investment
income resulting from strong cash flows. See below for a further discussion of
premiums and investment income.
Losses and expenses for 2000 were $321.5 million, an increase of 2% from $315.7
million for the same period of 1999. The increase was primarily attributed to
the RESPA settlement, offset by a decline in underwriting expenses resulting
from a decline in contract underwriting activity and an increase in deferred
insurance policy acquisition costs.
The amount of new primary insurance written by MGIC during 2000 was $41.5
billion, compared with $47.0 billion in 1999. Refinancing activity decreased to
13% of new primary insurance written in 2000, compared to 25% in 1999 as a
result of the increasing mortgage interest rate environment of the second half
of 1999 and in 2000. New insurance written for bulk transactions was 17% of new
insurance written during 2000 compared to 5% for 1999.
The $41.5 billion of new primary insurance written during 2000 was offset by the
cancellation of $28.9 billion of insurance in force, and resulted in a net
increase of $12.6 billion in primary insurance in force, compared to new primary
insurance written of $47.0 billion, cancellation of $37.4 billion, and a net
increase of $9.6 billion in insurance in force during 1999. Direct primary
insurance in force was $160.2 billion at December 31, 2000, compared to $147.6
billion at December 31, 1999.
New pool risk written during 2000 and 1999, which was virtually all agency pool
insurance, was $345.5 million and $563.8 million, respectively. The Company's
direct pool risk in force at December 31, 2000 was $1.7 billion compared to $1.6
billion at December 31, 1999.
Cancellations decreased during 2000 due to increasing mortgage interest rates
which resulted in an increase in the MGIC persistency rate (percentage of
insurance remaining in force from one year prior) to 80.4% at December 31, 2000,
from 72.9% at December 31, 1999.
Net premiums written increased 12% to $887.4 million in 2000, from $792.3
million in 1999. Net premiums earned increased 12% to $890.1 million in 2000,
from $792.6 million in 1999. The increases were primarily a result of a higher
percentage of renewal premiums on products with higher premium rates and the
growth in insurance in force offset by an increase in ceded premiums to $52.9
million in 2000, compared to $26.2 million in 1999, primarily due to an increase
in captive mortgage reinsurance and similar arrangements.
seven
Mortgages (newly insured during 2000 or 1999) equal to approximately 33% of
MGIC's new insurance written during 2000 were subject to captive mortgage
reinsurance and similar arrangements compared to 32% during 1999. At December
31, 2000 approximately 21% of MGIC's risk in force was subject to captive
reinsurance and similar arrangements compared to 15% at December 31, 1999.
Investment income for 2000 was $178.5 million, an increase of 17% over the
$153.1 million in 1999. This increase was primarily the result of an increase in
the amortized cost of average investment assets to $3.1 billion for 2000, from
$2.7 billion for 1999, an increase of 13%. The portfolio's average pre-tax
investment yield was 6.0% and 5.6% at December 31, 2000 and 1999, respectively.
The portfolio's average after-tax investment yield was 4.9% in 2000 and 1999.
The Company realized gains of $1.4 million during 2000 compared to $3.4 million
in 1999.
Other revenue was $40.3 million in 2000, compared with $47.7 million in 1999.
The change is primarily the result of decreases in contract underwriting and FHA
fee revenue (a contract with the FHA was completed in 1999) and an increase in
equity losses for Customers Forever LLC, a joint venture with Marshall & Ilsley
Corporation, which were offset by increases in equity earnings from C-BASS and
Sherman.
Total combined assets of C-BASS at December 31, 2000 and 1999 were approximately
$1.0 billion and $934 million, respectively, of which approximately $867 million
and $773 million, respectively, were mortgage-related assets, including open
trades. Total liabilities at December 31, 2000 and 1999 were approximately $765
million and $744 million, respectively, of which approximately $746 million and
$617 million, respectively, were funding arrangements, including accrued
interest, virtually all of which were short-term. For the years ended December
31, 2000 and 1999, revenues of approximately $153 million and $112 million,
respectively, and expenses of approximately $97 million and $72 million,
respectively, resulted in income before tax of approximately $56 million and $40
million, respectively.
Net losses incurred decreased 6% to $91.7 million in 2000, from $97.2 million in
1999. Such decrease was primarily due to generally strong economic conditions,
including in California, and a related decline in losses paid which led the
Company to reduce its estimate of the claim rate and the severity (the "reserve
factors") for loans in the primary and pool notices inventory. Partially
offsetting the reduction in reserve factors was an increase in the primary
insurance notice inventory from 29,761 at December 31, 1999 to 37,422 at
December 31, 2000, primarily reflecting an increase in notices related to bulk
transactions, and an increase in pool insurance notice inventory from 11,638 at
December 31, 1999 to 18,209 at December 31, 2000. Included in the notice
inventory was the bulk notice inventory of 7,533 at December 31, 2000 and 2,699
at December 31, 1999. The default rate at December 31, 2000 was 2.58% compared
to 2.17% at December 31, 1999. Excluding bulk defaults, the default rates were
2.19% and 2.02% for 2000 and 1999, respectively. The default rate on bulk loans
were 9.02% and 8.04% at December 31, 2000 and 1999, respectively. The average
claim paid for 2000 was $18,977 compared to $19,444 in 1999. The redundancy in
loss reserves for 2000 was relatively consistent with that experienced in 1999.
At December 31, 2000, 67% of the primary insurance in force was written during
the last three years, compared to 65% at December 31, 1999.
Underwriting and other expenses decreased to $177.8 million in 2000 from $198.1
million in 1999, a decrease of 10%. This decrease was primarily due to decreases
in contract underwriting and an increase in deferred insurance policy
acquisition costs.
Interest expense in 2000 increased to $28.8 million from $20.4 million in 1999
due to higher weighted average interest rates in 2000 compared to 1999.
The consolidated insurance operations loss ratio was 10.3% for 2000 compared to
12.3% for 1999. The consolidated insurance operations expense and combined
ratios were 16.4% and 26.7%, respectively, for 2000 compared to 19.7% and 32.0%,
respectively, for 1999.
eight
The effective tax rate was 31.3% in 2000, compared with 31.0% in 1999. During
both years, 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 tax-preferenced investments in 2000.
Financial Condition
Consolidated total investments increased approximately $597 million to $4.1
billion at December 31, 2001 from $3.5 billion at December 31, 2000, primarily
due to positive net cash flow offset by unrealized losses on securities marked
to market of $33 million. The Company generated consolidated cash flows from
operating activities of $626.1 million during 2001, compared to $551.0 million
generated during 2000. The increase in operating cash flows during 2001 compared
to 2000 is due primarily to increases in new business renewal premiums,
investment income and other revenue (which includes contract underwriting
revenue).
As of December 31, 2001, the Company had $160.0 million of short-term
investments with maturities of 90 days or less, and 72% of the portfolio was
invested in tax-preferenced securities. In addition, at December 31, 2001, based
on book value, the Company's fixed income securities were approximately 98%
invested in `A' rated and above, readily marketable securities, concentrated in
maturities of less than 15 years. At December 31, 2001 the Company had $20.7
million of investments in equity securities compared to $22.0 million at
December 31, 2000.
At December 31, 2001, 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 December 31, 2001, the average
duration of the Company's investment portfolio was 5.5 years. The effect of a 1%
increase/ decrease in market interest rates would result in a 5.5% decrease/
increase in the value of the Company's fixed income portfolio.
The Company's investments in joint ventures increased $22.9 million from $138.8
million at December 31, 2000 to $161.7 million at December 31, 2001 as a result
of equity earnings of $28.1 million and additional investments of $15.0 million
offset by dividends received of $20.2 million. As discussed under "Results of
Consolidated Operations -- 2001 Compared with 2000," the joint ventures are
reported on the equity method. Only the Company's investment in the joint
ventures appears on the Company's balance sheet.
Consolidated loss reserves increased to $613.7 million at December 31, 2001 from
$609.5 million at December 31, 2000, reflecting increases in the primary and
pool insurance notice inventories. Consistent with industry practices, the
Company does not establish loss reserves for future claims on insured loans
which are not currently in default. For additional discussion of loss reserves,
see "Results of Consolidated Operations -- 2001 Compared with 2000."
Consolidated unearned premiums decreased $6.2 million from $180.7 million at
December 31, 2000, to $174.5 million at December 31, 2001, primarily reflecting
the continued high level of monthly premium policies written for which there is
no unearned premium.
Consolidated shareholders' equity increased to $3.0 billion at December 31,
2001, from $2.5 billion at December 31, 2000, an increase of 23%. This increase
consisted of $639.1 million of net income during 2001 and $29.5 million from the
reissuance of treasury stock offset by unrealized losses on investments, net of
tax, of $21.3 million, unrealized losses on derivatives, net of tax, of $7.8
million, the repurchase of $73.5 million of outstanding common shares and
dividends declared of $10.7 million.
Liquidity and Capital Resources
The Company's consolidated sources of funds consist primarily of premiums
written and investment income. Funds are applied primarily to the payment of
claims and expenses. Approximately 70% of underwriting expenses are
personnel-related costs, most of which are considered by the Company to be fixed
costs over the
nine
short term. Approximately 5% of operating expenses relate to occupancy costs,
which are fixed costs. Substantially all of the remaining operating expenses are
considered by the Company to be variable in nature, with data processing costs
and taxes, licenses and fees representing approximately 3% and 9%, respectively,
of total operating expenses. The Company generated positive operating cash flows
of approximately $626.1 million, $551.0 million and $455.0 million in 2001, 2000
and 1999, respectively, as shown on the Consolidated Statement of Cash Flows.
Positive cash flows are invested pending future payments of claims and other
expenses. Cash-flow shortfalls, if any, at the Company's insurance subsidiaries
could be funded through sales of short-term investments and other investment
portfolio securities. Substantially all of the investment portfolio securities
are held by the Company's insurance subsidiaries.
During the first quarter of 2001, the Company established a $200 million
commercial paper program, which was rated `A-1' by Standard and Poors ("S&P")
and `P-1' by Moody's. At December 31, 2001, the Company had $172.1 million in
commercial paper outstanding with a weighted average interest rate of 1.91%. S&P
affirmed the `A-1' rating in February 2002. If the Company's commercial paper
rating were to fall below `A-1' or `P-1,' the Company would likely have
difficulty selling commercial paper and any commercial paper that could be sold
would require an interest rate in excess of the `A-1/P-1' rating.
The Company has credit facilities under which $200 million was available at
December 31, 2001, with $100 million expiring in 2003 and $100 million expiring
in 2004. Under the terms of the credit facilities, the Company must maintain
shareholders' equity of at least $1 billion and MGIC must maintain a claims
paying ability rating of `AA-` or better with S&P. At December 31, 2001, the
Company had shareholders' equity of $3.02 billion and MGIC had a claims paying
ability rating of `AA+' from S&P. (S&P affirmed the `AA+' rating in February
2002.) These facilities are currently being used as liquidity back up facilities
for the outstanding commercial paper. The remaining credit available under these
facilities after reduction for the amount necessary to support the commercial
paper was $27.9 million at December 31, 2001. The Company had $98 million
outstanding under the credit facility at December 31, 2000.
In June of 2000, the Company filed a $500 million public debt shelf registration
statement. During the fourth quarter of 2000, the Company issued, in public
offerings, $300 million, 71/2% Senior Notes due in 2005. The notes are unsecured
and were rated `A1' by Moody's and `A+' by S&P. The Company had Senior Notes
outstanding of $300 million at December 31, 2001 and 2000.
The proceeds of the commercial paper and the Senior Notes were used to fund the
repurchase of Common Stock. In January 2002, the Company announced a new share
repurchase program covering up to 5.5 million shares in addition to the 800,000
shares remaining from the prior repurchase program. Funds for shares to be
purchased in the future are expected to be provided from a combination of
internally generated funds and borrowings. From mid-1997 until the end of 2001,
the Company repurchased 15.0 million shares of Common Stock at a cost of $775.5
million.
The commercial paper, back-up credit facilities and the Senior Notes are
obligations of the Company and not of its subsidiaries. The Company is a holding
company and the payment of dividends from its insurance subsidiaries is
restricted by insurance regulation. MGIC is the principal source of
dividend-paying capacity. As a result of a $150 million dividend paid to the
Company by MGIC in February 2002, MGIC may not pay additional dividends until
February 2003 without the approval of the Office of the Commissioner of
Insurance of the State of Wisconsin.
Interest payments on all long-term debt were $26.9 million, $25.5 million and
$22.0 million for the years ended December 31, 2001, 2000 and 1999,
respectively. At December 31, 2001, the market value of the long-term debt is
$492.6 million. The commercial paper is classified as short-term debt.
The Company uses interest rate swaps to hedge interest rate exposure associated
with its short- and long-term debt. During 1999, the Company utilized three
interest
ten
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. The notional amount of $100 million represents the stated principal
balance used for calculating payments. The Company received and paid amounts
based on rates that were both fixed and variable. Earnings on the swaps during
1999, of approximately $3.8 million, were netted against interest expense.
In 2000, two of the swaps were amended and designated as fair-value hedges which
qualified for short-cut accounting. The Company paid an interest rate based on
LIBOR and received a fixed rate of 7.5% to hedge the 5-year Senior Notes issued
in the fourth quarter of 2000. These swaps were terminated in September 2001.
The gain on termination is being amortized over the remaining life of the
underlying debt. The remaining swap was also amended during 2000 and designated
as a cash flow hedge. Under the terms of the swap contract, the Company pays a
fixed rate of 6.79% and receives an interest rate based on LIBOR. The swap has
an expiration date coinciding with the maturity of the credit facilities and is
designated as a hedge. Gains or losses arising from the amendment or termination
of interest rate swaps are deferred and amortized to interest expense over the
life of the hedged items. Earnings on the swaps during 2000 of approximately
$0.3 million were netted against interest expense. Expenses on the swaps during
2001, of approximately $3.7 million, were included in interest expense. The swap
outstanding at December 31, 2001 is evaluated quarterly using regression
analysis with any ineffectiveness being recorded as an expense. To date this
evaluation has not resulted in any hedge ineffectiveness. The swaps are subject
to credit risk to the extent the counterparty would be unable to discharge its
obligations under the swap agreements.
MGIC is the principal insurance subsidiary of the Company. MGIC's
risk-to-capital ratio was 9.1:1 at December 31, 2001 compared to 10.6:1 at
December 31, 2000. The decrease was due to MGIC's increased policyholders'
reserves, partially offset by the net additional risk in force of $2.8 billion,
net of reinsurance, during 2001.
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
Our revenues and losses could be affected by the risk factors discussed below.
These factors may also cause actual results to differ materially from the
results contemplated by forward looking statements that the Company may make.
Forward looking statements consist of statements which relate to matters other
than historical fact. Among others, statements that include words such as the
Company "believes," "anticipates" or "expects," or words of similar import, are
forward looking statements.
If the volume of low down payment home mortgage originations declines, the
amount of insurance that we write could also decline which could result in
declines in our future revenues.
The factors that affect the volume of low down payment mortgage originations
include:
o the level of home mortgage interest rates,
o the health of the domestic economy as well as conditions in regional and
local economies,
o housing affordability,
o population trends, including the rate of household formation,
eleven
o the rate of home price appreciation, which in times of heavy refinancing
affects whether refinance loans have loan-to-value ratios that require
private mortgage insurance, and
o government housing policy encouraging loans to first-time homebuyers.
Our new insurance written volume increased 107% in 2001 compared to the same
period in 2000. One of the reasons our volume was higher in 2001 was because
many borrowers refinanced their mortgages during 2001 due to a lower interest
rate environment, which also led to lenders canceling insurance that we wrote in
the past. While we have not experienced lower volume in recent years other than
as a result of declining refinancing activity, one of the risks we face is that
substantially higher interests rates will substantially reduce purchase activity
by first-time homebuyers and that the decline in cancellations of insurance that
in the past have accompanied higher interest rates will not be sufficient to
offset the decline in premiums from loans that are not made.
If lenders and investors select alternatives to private mortgage insurance, the
amount of insurance that we write could decline, which could result in declines
in our future revenues.
These alternatives to private mortgage insurance include:
o lenders using government mortgage insurance programs, including those of
the Federal Housing Administration and the Veterans Administration,
o investors holding mortgages in portfolio and self-insuring,
o investors using credit enhancements other than private mortgage insurance
or using other credit enhancements in conjunction with reduced levels of
private mortgage insurance coverage, and
o lenders structuring mortgage originations to avoid private mortgage
insurance, such as a first mortgage with an 80% loan-to-value ratio and a
second mortgage with a 10% loan-to-value ratio (referred to as an 80-10-10
loan) rather than a first mortgage with a 90% loan-to-value ratio.
We believe, that during 2001, lenders and investors were self-insuring and
making 80-10-10 loans at about the same percentage as they did over the last
several years. Although during 2001 and 2000, the share of the low down payment
market held by loans with Federal Housing Administration and Veterans
Administration mortgage insurance was lower than in 1999, during three of the
prior four years, the Federal Housing Administration and Veterans
Administration's collective share of this market increased. Investors are using
reduced mortgage insurance coverage on a higher percentage of loans that we
insure than they had over the last several years.
Because most of the loans MGIC insures are sold to Fannie Mae and Freddie Mac,
changes in their business practices could reduce our revenues or increase our
losses.
The business practices of Fannie Mae and Freddie Mac affect the entire
relationship between them and mortgage insurers and include:
o the level of private mortgage insurance coverage, subject to the
limitations of Fannie Mae and Freddie Mac's charters, when private mortgage
insurance is used as the required credit enhancement on low down payment
mortgages,
o whether Fannie Mae or Freddie Mac influence the mortgage lender's selection
of the mortgage insurer providing coverage and, if so, any transactions
that are related to that selection,
o whether Fannie Mae or Freddie Mac will give mortgage lenders an incentive,
such as a reduced guaranty fee, to select a mortgage insurer that has a
`AAA' claims-paying ability rating to benefit from the lower capital
requirements for Fannie Mae and Freddie Mac when a mortgage is insured by a
company with that rating,
twelve
o the underwriting standards that determine what loans are eligible for
purchase by Fannie Mae or Freddie Mac, which thereby affect the quality of
the risk insured by the mortgage insurer and the availability of mortgage
loans,
o the terms on which mortgage insurance coverage can be canceled before
reaching the cancellation thresholds established by law, and
o the circumstances in which mortgage servicers must perform activities
intended to avoid or mitigate loss on insured mortgages that are
delinquent.
Because we participate in an industry that is intensely competitive, changes in
our competitors' business practices could reduce our revenues or increase our
losses.
Competition for private mortgage insurance premiums occurs not only among
private mortgage insurers but increasingly with mortgage lenders through captive
mortgage reinsurance transactions. In these transactions, a lender's affiliate
reinsures a portion of the insurance written by a private mortgage insurer on
mortgages originated by the lender. 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. In 1996, we reinsured under captive reinsurance
arrangements virtually none of our primary insurance. At the end of 2001, about
24% of our risk in force was subject to captive reinsurance arrangements. The
level of competition within the private mortgage insurance industry has also
increased as many large mortgage lenders have reduced the number of private
mortgage insurers with whom they do business. At the same time, consolidation
among mortgage lenders has increased the share of the mortgage lending market
held by large lenders. Our top ten customers generated 27.0% of the new primary
insurance that we wrote on a flow basis in 1997 compared to 38.4% in 2001.
Our private mortgage insurance competitors include:
o PMI Mortgage Insurance Company
o GE Capital Mortgage Insurance Corporation
o United Guaranty Residential Insurance Company
o Radian Guaranty Inc.
o Republic Mortgage Insurance Company
o Triad Guaranty Insurance Corporation
o CMG Mortgage Insurance Company
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 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 the length of time our
insurance remains in force include:
o 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
o 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.
While it is difficult to measure the extent of the decline, in recent years, the
length of time that our policies remain in force has declined somewhat. Due to
this decline, our premium revenues were lower than they would have been if the
length had not declined.
If the domestic economy deteriorates, more homeowners may default and our losses
may increase.
Losses result from events that reduce 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
thirteen
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. In
recent years, due in part to the strength of the economy, we have had low losses
by historical standards. A significant deterioration in economic conditions
would probably increase our losses.
Our industry is subject to litigation risk.
In recent years, consumers have brought a growing number of lawsuits against
home mortgage lenders and settlement service providers. As of February 2002,
seven mortgage insurers, including our MGIC subsidiary, were involved in
litigation alleging violations of the Real Estate Settlement Procedures Act. Our
MGIC subsidiary and two other mortgage insurers entered into an agreement to
settle the cases against them in December 2000, and another mortgage insurer
entered into a comparable settlement agreement in February 2002. In June 2001,
the Court entered a final order approving the settlement to which we and the
other two insurers are parties, although due to appeals of orders denying
certain class members the right to intervene to challenge certain aspects of
this settlement, the final implementation of the settlement will not occur until
the appeals are resolved. We took a $23.2 million pre-tax charge in 2000 to
cover our share of the estimated costs of our settlement. While our settlement
includes an injunction that prohibits certain practices and specifies the basis
on which other practices may be done in compliance with the Real Estate
Settlement Procedures Act, we may still be subject to future litigation under
the Real Estate Settlement Procedures Act.
Because we expect the pace of change in our industry and in home mortgage
lending to remain high, we will be disadvantaged unless we are able to respond
to new ways of doing business.
We expect the processes involved in home mortgage lending will continue to
evolve through greater use of technology. This evolution could effect
fundamental changes in the way home mortgages are distributed. Affiliates of
lenders who are regulated depositary institutions gained expanded insurance
powers under financial modernization legislation and the capital markets may
emerge as providers of insurance in competition with traditional insurance
companies. These trends and others increase the level of uncertainty in our
business, demand rapid response to change and place a premium on innovation.
fourteen
MGIC INVESTMENT CORPORATION & SUBSIDIARIES
Years Ended December 31, 2001, 2000 and 1999
CONSOLIDATED STATEMENT OF OPERATIONS
2001 2000 1999
---- ---- ----
(In thousands of dollars, except per share data)
Revenues:
Premiums written:
Direct ......................................... $ 1,101,160 $ 939,482 $ 816,351
Assumed ........................................ 516 847 2,215
Ceded (note 7) ................................. (65,323) (52,941) (26,221)
--------------- --------------- ---------------
Net premiums written .............................. 1,036,353 887,388 792,345
Decrease in unearned premiums ..................... 5,914 2,703 236
--------------- --------------- ---------------
Net premiums earned (note 7) ...................... 1,042,267 890,091 792,581
Investment income, net of expenses (note 4) ....... 204,393 178,535 153,071
Realized investment gains, net (note 4) ........... 37,352 1,432 3,406
Other revenue ..................................... 73,829 40,283 47,697
--------------- --------------- ---------------
Total revenues ................................. 1,357,841 1,110,341 996,755
--------------- --------------- ---------------
Losses and expenses:
Losses incurred, net (notes 6 and 7) .............. 160,814 91,723 97,196
Underwriting and other expenses ................... 234,494 177,837 198,147
Interest expense .................................. 30,623 28,759 20,402
Litigation settlement (note 13) ................... - 23,221 -
--------------- --------------- ---------------
Total losses and expenses ...................... 425,931 321,540 315,745
--------------- --------------- ---------------
Income before tax .................................... 931,910 788,801 681,010
Provision for income tax (note 10) ................... 292,773 246,802 210,809
--------------- --------------- ---------------
Net income ........................................... $ 639,137 $ 541,999 $ 470,201
=============== =============== ===============
Earnings per share (note 11):
Basic ............................................. $ 5.98 $ 5.10 $ 4.35
=============== =============== ===============
Diluted ........................................... $ 5.93 $ 5.05 $ 4.30
=============== =============== ===============
See accompanying notes to consolidated financial statements.
fifteen
MGIC INVESTMENT CORPORATION & SUBSIDIARIES
December 31, 2001 and 2000
CONSOLIDATED BALANCE SHEET
2001 2000
---- ----
ASSETS (In thousands of dollars)
------
Investment portfolio (note 4):
Securities, available-for-sale, at market value:
Fixed maturities ...................................... $ 3,888,740 $ 3,298,561
Equity securities ..................................... 20,747 22,042
Short-term investments ................................ 159,960 151,592
--------------- --------------
Total investment portfolio ........................ 4,069,447 3,472,195
Cash ......................................................... 26,392 5,598
Accrued investment income .................................... 59,036 51,419
Reinsurance recoverable on loss reserves (note 7) ............ 26,888 33,226
Reinsurance recoverable on unearned premiums (note 7) ........ 8,415 8,680
Home office and equipment, net ............................... 34,762 31,308
Deferred insurance policy acquisition costs .................. 32,127 25,839
Investments in joint ventures (note 8) ....................... 161,674 138,838
Other assets ................................................. 148,271 90,678
--------------- --------------
Total assets .......................................... $ 4,567,012 $ 3,857,781
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Loss reserves (notes 6 and 7) ............................. $ 613,664 $ 609,546
Unearned premiums (note 7) ................................ 174,545 180,724
Short- and long-term debt (note 5) ........................ 472,102 397,364
Income taxes payable ...................................... 80,937 83,185
Other liabilities ......................................... 205,577 122,080
--------------- --------------
Total liabilities ..................................... 1,546,825 1,392,899
--------------- --------------
Contingencies (note 13)
Shareholders' equity (note 11):
Common stock, $1 par value, shares authorized
300,000,000; shares issued 121,110,800;
outstanding 2001 - 106,086,594; 2000 - 106,825,758 .... 121,111 121,111
Paid-in surplus ........................................... 214,040 207,882
Treasury stock (shares at cost 2001 - 15,024,206;
2000 - 14,285,042) ..................................... (671,168) (621,033)
Accumulated other comprehensive income, net of tax
(note 2) ............................................... 46,644 75,814
Retained earnings (note 11) ............................... 3,309,560 2,681,108
--------------- --------------
Total shareholders' equity ............................ 3,020,187 2,464,882
--------------- --------------
Total liabilities and shareholders' equity ............ $ 4,567,012 $ 3,857,781
=============== ==============
See accompanying notes to consolidated financial statements.
sixteen
MGIC INVESTMENT CORPORATION & SUBSIDIARIES
Years Ended December 31, 2001, 2000 and 1999
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Accumulated
other
Common Paid-in Treasury comprehensive Retained Comprehensive
stock surplus stock income (note 2) earnings Income
----------- ----------- ------------- -------------- ------------- --------------
(In thousands of dollars)
Balance, December 31, 1998 ............. $ 121,111 $ 217,022 $ (482,465) $ 94,572 $ 1,690,351
Net income ............................. - - - - 470,201 $ 470,201
Unrealized investment losses, net ...... - - - (135,307) - (135,307)
--------------
Comprehensive income ................... - - - - - $ 334,894
==============
Dividends declared ..................... - - - - (10,825)
Repurchase of outstanding
common shares ...................... - - (200,533) - -
Reissuance of treasury stock ........... - (5,429) 17,291 - -
----------- ----------- ------------- ------------ -------------
Balance, December 31, 1999 ............. 121,111 211,593 (665,707) (40,735) 2,149,727
Net income ............................. - - - - 541,999 $ 541,999
Unrealized investment gains, net ....... - - - 116,549 - 116,549
--------------
Comprehensive income ................... - - - - - $ 658,548
==============
Dividends declared ..................... - - - - (10,618)
Repurchase of outstanding
common shares ....................... - - (6,224) - -
Reissuance of treasury stock ........... - (3,711) 50,898 - -
----------- ----------- ------------- ------------ -------------
Balance, December 31, 2000 ............. 121,111 207,882 (621,033) 75,814 2,681,108
Net income ............................. - - - - 639,137 $ 639,137
Unrealized investment losses, net ...... - - - (21,351) - (21,351)
Unrealized loss on derivatives,
net (note 5) ......................... - - - (7,819) - (7,819)
--------------
Comprehensive income ................... - - - - - $ 609,967
==============
Dividends declared ..................... - - - - (10,685)
Repurchase of outstanding
common shares ....................... - - (73,488) - -
Reissuance of treasury stock ........... - 6,158 23,353 - -
----------- ----------- ------------- ------------ -------------
Balance, December 31, 2001 ............. $ 121,111 $ 214,040 $ (671,168) $ 46,644 $ 3,309,560
=========== =========== ============= ============ =============
See accompanying notes to consolidated financial statements.
seventeen
MGIC INVESTMENT CORPORATION & SUBSIDIARIES
Years Ended December 31, 2001, 2000 and 1999
CONSOLIDATED STATEMENT OF CASH FLOWS
2001 2000 1999
---- ---- ----
(In thousands of dollars)
Cash flows from operating activities:
Net income ...................................... $ 639,137 $ 541,999 $ 470,201
Adjustment to reconcile net income to
net cash provided by operating
activities:
Amortization of deferred insurance
policy acquisition costs ............. 22,233 20,597 16,822
Increase in deferred insurance policy
acquisition costs .................... (28,521) (24,086) (15,107)
Depreciation and other amortization ..... 8,281 6,860 11,746
Increase in accrued investment income ... (7,617) (4,706) (5,236)
Decrease in reinsurance recoverable
on loss reserves .................... 6,338 2,595 9,706
Decrease (increase) in reinsurance
recoverable on unearned premiums .... 265 (2,050) 2,126
Increase (decrease) in loss reserves .... 4,118 (32,432) (39,296)
Decrease in unearned premiums ........... (6,179) (654) (2,361)
Equity earnings in joint ventures ....... (28,097) (18,113) (12,700)
Other ................................... 16,161 61,027 19,114
-------------- -------------- --------------
Net cash provided by operating activities .......... 626,119 551,037 455,015
-------------- -------------- --------------
Cash flows from investing activities:
Purchase of equity securities ................... (71) (14,629) (14,035)
Purchase of fixed maturities .................... (2,801,654) (1,807,718) (1,223,599)
Investments in joint ventures ................... (15,000) (19,180) (13,599)
Proceeds from sale of equity securities ......... 1,685 14,029 4,150
Proceeds from sale or maturity of fixed
maturities ................................... 2,213,289 1,349,398 949,723
-------------- -------------- --------------
Net cash used in investing activities .............. (601,751) (478,100) (297,360)
-------------- -------------- --------------
Cash flows from financing activities:
Dividends paid to shareholders .................. (10,685) (10,618) (10,825)
Proceeds from issuance of short- and
long-term debt ............................... 205,521 309,079 43,000
Repayment of short- and long-term debt .......... (133,384) (336,751) (60,000)
Reissuance of treasury stock .................... 16,830 18,699 3,912
Repurchase of common stock ...................... (73,488) (6,224) (200,533)
-------------- -------------- --------------
Net cash provided by (used in) financing
activities .................................... 4,794 (25,815) (224,446)
-------------- -------------- --------------
Net increase (decrease) in cash and cash
equivalents ................................... 29,162 47,122 (66,791)
Cash and cash equivalents at beginning of year ..... 157,190 110,068 176,859
-------------- -------------- --------------
Cash and cash equivalents at end of year ........... $ 186,352 $ 157,190 $ 110,068
============== ============== ==============
See accompanying notes to consolidated financial statements.
eighteen
MGIC INVESTMENT CORPORATION & SUBSIDIARIES --
December 31, 2001, 2000 and 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of business
MGIC Investment Corporation ("Company") is a holding company which, through
Mortgage Guaranty Insurance Corporation ("MGIC") and several other subsidiaries,
is principally engaged in the mortgage insurance business. The Company provides
mortgage insurance to lenders throughout the United States to protect against
loss from defaults on low down payment residential mortgage loans. Through
certain other non-insurance subsidiaries, the Company also provides various
services for the mortgage finance industry, such as contract underwriting and
portfolio analysis and retention.
At December 31, 2001, the Company's direct primary insurance in force
(representing the current principal balance of all mortgage loans that are
currently insured) and direct primary risk in force (representing the insurance
in force multiplied by the insurance coverage percentage), excluding MGIC
Indemnity Corporation ("MIC"), formerly known as Wisconsin Mortgage Assurance
Corporation, was approximately $183.9 billion and $45.2 billion, respectively.
In addition to providing direct primary insurance coverage, the Company also
insures pools of mortgage loans. The Company's direct pool risk in force at
December 31, 2001 was approximately $2.0 billion. MIC's direct primary insurance
in force, direct primary risk in force and direct pool risk in force was
approximately $0.7 billion, $0.2 billion and $0.3 billion, respectively, at
December 31, 2001. (See note 7.)
2. Basis of presentation and summary of significant accounting policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires management 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 period. Actual results could differ from those estimates.
Principles of consolidation
The consolidated financial statements include the accounts of MGIC
Investment Corporation and its wholly-owned subsidiaries. All intercompany
transactions have been eliminated. The Company's 45.9% investment in
Credit-Based Asset Servicing and Securitization LLC ("C-BASS") and 45.5%
investment in Sherman Financial Group LLC, ("Sherman"), which are joint ventures
with Radian Group Inc. and 45.8% investment in Customers Forever LLC,
("Customers Forever"), a joint venture with Marshall & Ilsley Corporation are
accounted for on the equity method and recorded on the balance sheet as
investments in joint ventures. The Company's equity earnings from these joint
ventures are included in other revenue. (See note 8.)
The Company has certain other joint ventures and investments of an
immaterial amount.
Investments
The Company categorizes its investment portfolio according to its ability
and intent to hold the investments to maturity. Investments which the Company
does not have the ability and intent to hold to maturity are considered to be
available-for- sale and must be recorded at market and the unrealized gains or
losses recognized as an increase or decrease to shareholders' equity. The
Company's 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.)
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, the Company uses accelerated depreciation methods.
Home office and equipment is shown net of accumulated depreciation of $34.9
million and $31.3 million at December 31, 2001 and 2000, 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 acquisition costs
(DAC). Because Statement of Financial Accounting Standards No. 60, Accounting
and Reporting by Insurance Enterprises, specifically excludes mortgage guaranty
insurance from its guidance relating to the amortization of DAC,
nineteen
amortization of these costs for each underwriting year book of business are
charged against revenue in proportion to estimated gross profits over the life
of the policies using the guidance of Statement of Financial Accounting
Standards No. 97, Accounting and Reporting by Insurance Enterprises For Certain
Long Duration Contracts and Realized Gains and Losses From the Sale of
Investments. This includes accruing interest on the unamortized balance of DAC.
The estimates for each underwriting year are updated annually to reflect actual
experience and any changes to key assumptions such as persistency or loss
development.
During 2001, 2000 and 1999, the Company amortized $22.2 million, $20.6
million and $16.8 million, respectively, of deferred insurance policy
acquisition costs.
Loss reserves
Reserves are established for reported insurance losses and loss adjustment
expenses based on when notices of default on insured mortgage loans are
received. Reserves are also established for estimated losses incurred on notices
of default not yet reported by the lender. Consistent with industry practices,
the Company does not establish loss reserves for future claims on insured loans
which are not currently in default. Reserves are established by management using
estimated claims rates and claims amounts in estimating the ultimate loss.
Amounts for salvage recoverable are considered in the determination of the
reserve estimates. Adjustments to reserve estimates are reflected in the
financial statements in the years in which the adjustments are made. The
liability for reinsurance assumed is based on information provided by the ceding
companies.
The incurred but not reported ("IBNR") reserves result from defaults
occurring prior to the close of an accounting period, but which have not been
reported to the Company. Consistent with reserves for reported defaults, IBNR
reserves are established using estimated claims rates and claims amounts for the
estimated number of defaults not reported.
Reserves also provide for the estimated costs of settling claims, including
legal and other expenses and general expenses of administering the claims
settlement process. (See note 6.)
Income recognition
The insurance subsidiaries write policies which are guaranteed renewable
contracts at the insured's option on a single, annual or monthly premium basis.
The insurance subsidiaries have no ability to reunderwrite or reprice these
contracts. Premiums written on a single premium basis and an annual premium
basis are initially deferred as unearned premium reserve and earned over the
policy term. Premiums written on policies covering more than one year are
amortized over the policy life in accordance with the expiration of risk which
is the anticipated claim payment pattern based on historical experience.
Premiums written on annual policies are earned on a monthly pro rata basis.
Premiums written on monthly policies are earned as coverage is provided.
Fee income of the non-insurance subsidiaries is earned and recognized as
the services are provided and the customer is obligated to pay.
Income taxes
The Company and its subsidiaries file a consolidated federal income tax
return. A formal tax sharing agreement exists between the Company and its
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 member's
separate taxable income and tax liability on a separate company basis.
Federal tax law permits mortgage guaranty insurance companies to deduct
from taxable income, subject to certain limitations, the amounts added to
contingency loss reserves. Generally, the amounts so deducted must be included
in taxable income in the tenth subsequent 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. The Company accounts 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. (See note
10.)
twenty
Benefit plans
The Company has a non-contributory defined benefit pension plan covering
substantially all employees. Retirement benefits are based on compensation and
years of service. The Company's policy is to fund pension cost as required under
the Employee Retirement Income Security Act of 1974. (See note 9.)
The Company accrues the estimated costs of retiree medical and life
benefits over the period during which employees render the service that
qualifies them for benefits. The Company offers both medical and dental benefits
for retired employees and their spouses. Benefits are generally funded on a
pay-as-you-go basis. (See note 9.)
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 "Reinsurance recoverable on unearned premiums". The Company remains
contingently liable for all reinsurance ceded. (See note 7.)
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. The Company's net income is the same for both basic and
diluted EPS. Basic EPS is based on the weighted-average number of common shares
outstanding. Diluted EPS is based on the weighted-average number of common
shares outstanding and common stock equivalents which would arise from the
exercise of stock options. The following is a reconciliation of the weighted-
average number of shares used for basic EPS and diluted EPS. (See note 11.)
Years Ended December 31,
----------------------------------------
2001 2000 1999
---- ---- ----
(shares in thousands)
Weighted-average shares -
Basic EPS 106,941 106,202 108,061
Common stock equivalents 854 1,058 1,197
----------- ---------- ----------
Weighted-average shares -
Diluted EPS 107,795 107,260 109,258
=========== ========== ==========
Statement of cash flows
For purposes of the consolidated statement of cash flows, the Company
considers short-term investments to be cash equivalents, as short-term
investments have original maturities of three months or less.
Comprehensive income
The Company's total comprehensive income, as calculated per SFAS No. 130,
Reporting Comprehensive Income, was as follows:
Years Ended December 31,
2001 2000 1999
---- ---- ----
(In thousands of dollars)
Net income $639,137 $541,999 $470,201
Other comprehensive (loss) income (29,170) 116,549 (135,307)
--------- -------- --------
Total comprehensive income $609,967 $658,548 $334,894
========= ======== ========
Other comprehensive (loss) income (net of tax):
Cumulative effect - FAS 133 $ (5,982) $ N/A $ N/A
Net derivative losses (2,919) N/A N/A
Amortization of deferred losses 1,082 N/A N/A
FAS 115 (21,351) 116,549 (135,307)
--------- -------- --------
Comprehensive income $ (29,170) $116,549 $(135,307)
========= ======== =========
The difference between the Company's net income and total comprehensive
income for the years ended December 31, 2001, 2000 and 1999 is due to the change
in unrealized appreciation/depreciation on investments, the cumulative effect of
the adoption of SFAS No. 133 and the market value adjustment of the hedges, all
net of tax.
Recent accounting pronouncements
The Company adopted Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
effective January 1, 2001. The statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. The adoption of
SFAS 133 did not 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 5.)
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), Business
Combinations, and No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets.
SFAS 141 is effective for all business combinations initiated after June 30,
2001 and SFAS 142 is effective for fiscal years beginning after December 15,
2001.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for
twenty-one
the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal
years beginning after December 15, 2001.
Management does not anticipate adoption of these pronouncements will have a
significant effect on the Company's results of operations or its financial
position.
Reclassifications
Certain reclassifications have been made in the accompanying financial
statements to 2000 and 1999 amounts to allow for consistent financial reporting.
3. Related party transactions
The Company provided certain services to C-BASS and Customers Forever in
2001, 2000 and 1999 in exchange for an immaterial amount of fees. In addition,
C-BASS provided certain services to the Company during 2001, 2000 and 1999 in
exchange for an immaterial amount of fees.
twenty-two
4. Investments
The following table summarizes the Company's investments at December 31,
2001 and 2000:
Financial
Amortized Market Statement
Cost Value Value
----------------- ---------------- -----------------
(In thousands of dollars)
At December 31, 2001:
Securities, available-for-sale:
Fixed maturities ..................... $ 3,804,274 $ 3,888,740 $ 3,888,740
Equity securities .................... 21,481 20,747 20,747
Short-term investments ............... 159,901 159,960 159,960
----------------- ----------------- -----------------
Total investment portfolio ............... $ 3,985,656 $ 4,069,447 $ 4,069,447
================= ================= =================
At December 31, 2000:
Securities, available-for-sale:
Fixed maturities ..................... $ 3,182,063 $ 3,298,561 $ 3,298,561
Equity securities .................... 21,903 22,042 22,042
Short-term investments ............... 151,592 151,592 151,592
----------------- ----------------- -----------------
Total investment portfolio ............... $ 3,355,558 $ 3,472,195 $ 3,472,195
================= ================= =================
The amortized cost and market value of investments at December 31, 2001 are
as follows:
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 2001: Cost Gains Losses Value
- ------------------ ---------------- --------------- ---------------- ---------------
(In thousands of dollars)
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies ...................... $ 307,761 $ 3,486 $ (5,799) $ 305,448
Obligations of states and
political subdivisions ............ 2,998,688 85,336 (14,513) 3,069,511
Corporate securities ................. 564,659 15,201 (1,497) 578,363
Mortgage-backed securities ........... 79,082 1,089 - 80,171
Debt securities issued
by foreign sovereign
governments ....................... 13,985 1,222 - 15,207
---------------- --------------- ---------------- ---------------
Total debt securities ............. 3,964,175 106,334 (21,809) 4,048,700
Equity securities .................... 21,481 - (734) 20,747
---------------- --------------- ---------------- ---------------
Total investment portfolio ........ $ 3,985,656 $ 106,334 $ (22,543) $ 4,069,447
================ =============== ================ ===============
The amortized cost and market value of investments at December 31, 2000 are
as follows:
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 2000: Cost Gains Losses Value
- ------------------ ----------------- --------------- ---------------- ------------------
(In thousands of dollars)
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies ...................... $ 220,168 $ 6,033 $ (592) $ 225,609
Obligations of states and
political subdivisions ............ 2,382,766 106,776 (1,226) 2,488,316
Corporate securities ................. 715,115 12,152 (7,282) 719,985
Mortgage-backed securities ........... 1,648 9 - 1,657
Debt securities issued
by foreign sovereign
governments ....................... 13,958 628 - 14,586
----------------- --------------- ---------------- ------------------
Total debt securities ............. 3,333,655 125,598 (9,100) 3,450,153
Equity securities .................... 21,903 757 (618) 22,042
----------------- --------------- ---------------- ------------------
Total investment portfolio ........ $ 3,355,558 $ 126,355 $ (9,718) $ 3,472,195
================= =============== ================ ==================
twenty-three
The amortized cost and market values of debt securities at December 31,
2001, by contractual maturity, are shown below. Debt securities consist of fixed
maturities and short-term investments. 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.
Amortized Market
Cost Value
---------------- ------------------
(In thousands of dollars)
Due in one year or less ............ $ 225,653 $ 226,632
Due after one year through
five years ...................... 810,272 835,696
Due after five years through
ten years ....................... 1,239,608 1,257,389
Due after ten years ................ 1,609,560 1,648,812
----------------- -------------------
3,885,093 3,968,529
Mortgage-backed securities ......... 79,082 80,171
----------------- -------------------
Total at December 31, 2001 ......... $ 3,964,175 $ 4,048,700
================= ===================
Net investment income is comprised of the following:
2001 2000 1999
---- ---- ----
(In thousands of dollars)
Fixed maturities ........... $ 195,821 $ 167,810 $ 144,614
Equity securities .......... 2,953 1,279 975
Short-term investments ..... 6,863 10,673 8,865
Other ...................... 495 341 46
-------------- ------------- --------------
Investment income .......... 206,132 180,103 154,500
Investment expenses ........ (1,739) (1,568) (1,429)
-------------- ------------- --------------
Net investment income ...... $ 204,393 $ 178,535 $ 153,071
============== ============= ==============
The net realized investment gains (losses) and change in net unrealized
appreciation (depreciation) of investments are as follows:
2001 2000 1999
---- ---- ----
(In thousands of dollars)
Net realized investment gains (losses)
on sale of investments:
Fixed maturities .................... $ 38,199 $ 1,440 $ 3,409
Equity securities ................... (876) - -
Short-term investments .............. 29 (8) (3)
-------------- -------------- ------------------
37,352 1,432 3,406
-------------- -------------- ------------------
Change in net unrealized appreciation
(depreciation):
Fixed maturities .................... (32,032) 182,387 (208,338)
Equity securities ................... (873) (3,084) 179
Short-term investments .............. 59 - -
-------------- -------------- ------------------
(32,846) 179,303 (208,159)
-------------- -------------- ------------------
Net realized investment gains
(losses) and change in net
unrealized appreciation
(depreciation) ......................... $ 4,506 $ 180,735 $ (204,753)
============== ============== ==================
The gross realized gains and the gross realized losses on sales of
available-for-sale securities were $50.8 million and $13.4 million,
respectively, in 2001, $18.2 million and $16.8 million, respectively, in 2000
and $14.5 million and $11.1 million, respectively, in 1999.
The tax (benefit) expense of the changes in net unrealized (depreciation)
appreciation was ($11.5) million, $62.8 million and ($72.9) million for 2001,
2000 and 1999, respectively.
5. Short- and long- term debt
During the first quarter of 2001, the Company established a $200 million
commercial paper program, which was rated "A-1" by Standard and Poors ("S&P")
and "P-1" by Moody's. At December 31, 2001, the Company had $172.1 million in
commercial paper outstanding with a weighted average interest rate of 1.91%.
The Company has a $200 million credit facility available at December 31,
2001, with $100 million expiring in 2003 and $100 million expiring in 2004.
Under the terms of the credit facilities, the Company must maintain
shareholders' equity of at least $1 billion and MGIC must maintain a claims
paying ability rating of AA- or better with S&P. At December 31, 2001, the
Company had shareholders' equity of $3.02 billion and MGIC had a claims paying
ability rating of AA+ from S&P. These facilities are currently being used as
liquidity back up facilities for the outstanding commercial paper. The remaining
credit available under these facilities after reduction for the amount necessary
to support the commercial paper was $27.9 million at December 31, 2001. The
Company had $98 million outstanding under the credit facility at December 31,
2000.
In June of 2000, the Company filed a $500 million public debt shelf
registration statement. During the fourth quarter of 2000, the Company issued,
in public offerings, $300 million, 7-1/2% Senior Notes due in 2005. The notes
are unsecured and were rated "A1" by Moody's and "A+" by S&P. The Company had
Senior Notes outstanding of $300 million at December 31, 2001 and 2000.
Interest payments on all long-term debt were $26.9 million, $25.5 million
and $22.0 million for the years ended December 31, 2001, 2000 and 1999,
twenty-four
respectively. At December 31, 2001, the market value of the long-term debt is
$492.6 million.
The Company uses interest rate swaps to hedge interest rate exposure
associated with its short- and long-term debt. During 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. The notional amount of $100 million represents the
stated principal balance used for calculating payments. The Company received and
paid amounts based on rates that were both fixed and variable. Earnings on the
swaps during 1999, of approximately $3.8 million, were netted against interest
expense.
In 2000, two of the swaps were amended and designated as fair-value hedges
which qualified for short cut accounting. The Company paid an interest rate
based on LIBOR and received a fixed rate of 7.5% to hedge the 5 year Senior
Notes issued in the fourth quarter of 2000. These swaps were terminated in
September 2001. The gain on termination is being amortized over the remaining
life of the underlying debt. The remaining swap was also amended during 2000 and
designated as a cash flow hedge. Under the terms of the swap contract, the
Company pays a fixed rate of 6.79% and receives an interest rate based on LIBOR.
The swap has an expiration date coinciding with the maturity of the credit
facilities and is designated as a hedge. Gains or losses arising from the
amendment or termination of interest rate swaps are deferred and amortized to
interest expense over the life of the hedged items. Earnings on the swaps during
2000 of approximately $0.3 million were netted against interest expense.
Expenses on the swaps during 2001, of approximately $3.7 million, were included
in interest expense. The swap outstanding at December 31, 2001 is evaluated
quarterly using regression analysis with any ineffectiveness being recorded as
an expense. To date this evaluation has not resulted in any hedge
ineffectiveness. The swaps are subject to credit risk to the extent the
counterparty would be unable to discharge its obligations under the swap
agreements.
6. Loss reserves
Loss reserve activity was as follows:
2001 2000 1999
---- ---- ----
(In thousands of dollars)
Reserve at beginning of year ................ $ 609,546 $ 641,978 $ 681,274
Less reinsurance recoverable ................ 33,226 35,821 45,527
--------------- -------------- --------------
Net reserve at beginning of year ............ 576,320 606,157 635,747
Reserve transfer (1) ........................ - 85 833
--------------- -------------- --------------
Adjusted reserve at beginning
of year ................................ 576,320 606,242 636,580
Losses incurred:
Losses and LAE incurred in respect
of default notices received in:
Current year ......................... 372,940 320,769 333,193
Prior years (2) ...................... (212,126) (229,046) (235,997)
--------------- -------------- --------------
Subtotal .......................... 160,814 91,723 97,196
--------------- -------------- --------------
Losses paid:
Losses and LAE paid in respect
of default notices received in:
Current year ......................... 14,047 9,044 7,601
Prior years .......................... 136,311 112,601 120,018
--------------- -------------- --------------
Subtotal .......................... 150,358 121,645 127,619
--------------- -------------- --------------
Net reserve at end of year .................. 586,776 576,320 606,157
Plus reinsurance recoverables ............... 26,888 33,226 35,821
--------------- -------------- --------------
Reserve at end of year ...................... $ 613,664 $ 609,546 $ 641,978
=============== ============== ==============
(1) Received in conjunction with the cancellation of certain reinsurance treaties. (See note 7.)
(2) A negative number for a prior year indicates a redundancy of loss reserves, and a positive
number for a prior year indicates a deficiency of loss reserves.
The top portion of the table above shows losses incurred on default notices
received in the current year and in prior years, respectively. The amount of
losses incurred relating to default notices received in the current year
represents the estimated amount to be ultimately paid on such default notices.
The amount of losses incurred relating to default notices received in prior
years represents an adjustment made in the current year for defaults which were
included in the loss reserve at the end of the prior year.
Current year losses incurred increased from 2000 to 2001 primarily due to
an increase in the primary notice inventory related to bulk default activity,
the maturation of the 1998 and 1999 books of business and defaults arising from
the early development of the 2000 book of business. The primary insurance notice
inventory increased from 37,422 at December 31, 2000 to 54,653 at December 31,
2001 and pool insurance notice
twenty-five
inventory increased from 18,209 at December 31, 2000 to 23,623 at December 31,
2001. Included in the notice inventory was the bulk notice inventory of 18,460
at December 31, 2001 and 7,533 at December 31, 2000. The default rate at
December 31, 2001 was 3.46% compared to 2.58% at December 31, 2000. Excluding
bulk defaults, the default rates were 2.65% and 2.19% at December 31, 2001 and
2000, respectively. The default rates on bulk loans were 8.59% and 9.02% at
December 31, 2001 and 2000, respectively. The average claim paid for 2001 was
$18,607 compared to $18,977 in 2000.
The favorable development of the reserves in 2001, 2000 and 1999 is
reflected in the prior year line, and results from the actual claim rates and
actual claim amounts being lower than those estimated by the Company when
originally establishing the reserve at December 31, 2000, 1999 and 1998,
respectively.
The lower portion of the table above shows the breakdown between claims
paid on default notices received in the current year and default notices
received in prior years. Since it takes, on average, about twelve months for a
default which is not cured to develop into a paid claim, most losses paid relate
to default notices received in prior years.
7. Reinsurance
The Company cedes a portion of its business to reinsurers and records
assets for reinsurance recoverable on estimated reserves for unpaid losses and
unearned premiums. Business written between 1985 and 1993 is ceded under various
quota share reinsurance agreements with several reinsurers. The Company receives
a ceding commission in connection with this reinsurance. Beginning in 1997, the
Company has ceded business to captive reinsurance subsidiaries of certain
mortgage lenders primarily under excess of loss reinsurance agreements.
The reinsurance recoverable on loss reserves and the reinsurance
recoverable on unearned premiums primarily represent amounts recoverable from
large international reinsurers. The Company monitors the financial strength of
its reinsurers including their claims paying ability rating and does not
currently anticipate any collection problems. Generally, reinsurance
recoverables on loss reserves and unearned premiums are backed by trust funds or
letters of credit. No reinsurer represents more than $10 million of the
aggregate amount recoverable. As a result of the purchase of MIC on December 31,
1998, reinsurance recoverable on loss reserves as shown in the Consolidated
Balance Sheet includes approximately $11 million and $15 million of reinsured
loss reserves at December 31, 2001 and December 31, 2000, respectively.
The effect of reinsurance on premiums earned and losses incurred is as
follows:
2001 2000 1999
(In thousands of dollars)
Premiums earned:
Direct .................. $ 1,107,168 $ 939,981 $ 819,485
Assumed ................. 686 999 1,442
Ceded ................... (65,587) (50,889) (28,346)
--------------- -------------- --------------
Net premiums earned ..... $ 1,042,267 $ 890,091 $ 792,581
=============== ============== ==============
Losses incurred:
Direct .................. $ 157,360 $ 93,218 $ 94,920
Assumed ................. (123) 35 (1,332)
Ceded ................... 3,577 (1,530) 3,608
--------------- -------------- --------------
Net losses incurred ..... $ 160,814 $ 91,723 $ 97,196
=============== ============== ==============
8. Investments in joint ventures
C-BASS engages in the acquisition and resolution of delinquent
single-family residential mortgage loans ("mortgage loans"). C-BASS also
purchases and sells mortgage-backed securities ("mortgage securities"),
interests in real estate mortgage investment conduit residuals and performs
mortgage loan servicing. In addition, C-BASS issues mortgage-backed debt
securities collateralized by mortgage loans and mortgage securities.
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.
Total combined assets of C-BASS at December 31, 2001 and 2000 were
approximately $1.3 billion and $1.0 billion, respectively, of which
approximately $1,071 million and $867 million, respectively, were
mortgage-related assets, including open trades. Total liabilities at December
31, 2001 and 2000 were approximately $981 million and $765 million,
respectively, of which approximately $938 million and $746 million,
respectively, were funding arrangements, including accrued interest. For the
years ended December 31, 2001 and 2000, revenues of approximately $216 million
and $153 million,
twenty-six
respectively, and expenses of approximately $130 million and $97 million,
respectively, resulted in income before tax of approximately $86 million and $56
million, respectively. The Company's investment in C-BASS on an equity basis at
December 31, 2001 was $127.8 million.
Sherman is engaged in the business of purchasing, servicing and
securitizing delinquent unsecured consumer assets such as credit card loans and
Chapter 13 bankruptcy debt. 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 statement
purposes is estimated by the management of Sherman. Market value adjustments
could impact the Company's share of Sherman's results of operations. The
Company's investment in Sherman on an equity basis at December 31, 2001 was
$36.1 million.
The Company expects that it will provide additional funding to the joint
ventures.
9. Benefit plans
The following tables provide reconciliations of the changes in the benefit
obligation, fair value of plan assets and funded status of the pension and other
postretirement benefit plans:
Other Postretirement
Pension Benefits Benefits
------------------------- ------------------------
2001 2000 2001 2000
---- ---- ---- ----
(In thousands of dollars)
Reconciliation of benefit obligation:
Benefit obligation at beginning of year ...... $ 74,182 $ 69,971 $ 27,924 $ 24,512
Service cost .............................. 5,113 4,734 2,065 1,943
Interest cost ............................. 5,518 4,885 2,056 1,831
Plan transfer ............................. 1,202 -- -- --
Actuarial loss (gain) ..................... 6,838 (4,341) 5,336 (18)
Benefits paid ............................. (1,224) (1,067) (649) (344)
-------- -------- -------- --------
Benefit obligation at end of year ............ $ 91,629 $ 74,182 $ 36,732 $ 27,924
======== ======== ======== ========
Reconciliation of fair value of plan assets:
Fair value of plan assets at beginning
of year .................................. $ 86,285 $ 86,848 $ 13,556 $ 13,330
Actual return on plan assets .............. (4,385) (1,627) (1,095) (524)
Employer contributions .................... 9,483 2,131 1,641 750
Benefits paid ............................. (1,224) (1,067) -- --
-------- -------- -------- --------
Fair value of plan assets at end of year ..... $ 90,159 $ 86,285 $ 14,102 $ 13,556
======== ======== ======== ========
Reconciliation of funded status:
Benefit obligation at end of year ............ $(91,629) $(74,182) $(36,732) $(27,924)
Fair value of plan assets at end of year ..... 90,159 86,285 14,102 13,556
-------- -------- -------- --------
Funded status at end of year ................. (1,470) 12,103 (22,630) (14,368)
Unrecognized net actuarial loss (gain) .... 8,935 (7,977) 4,075 (3,426)
Unrecognized net transition obligation .... -- -- 5,829 6,359
Unrecognized prior service cost ........... 2,864 2,176 -- --
-------- -------- -------- --------
Prepaid (accrued) benefit cost ............... $ 10,329 $ 6,302 $(12,726) $(11,435)
======== ======== ======== ========
twenty-seven
The following table provides the components of net periodic benefit cost
for the pension and other postretirement benefit plans:
Other Postretirement
Pension Benefits Benefits
------------------------------------ ------------------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
(In thousands of dollars)
Service cost ............................. $ 5,113 $ 4,734 $ 5,869 $ 2,065 $ 1,943 $ 2,041
Interest cost ............................ 5,518 4,885 4,677 2,056 1,831 1,644
Expected return on plan assets ........... (6,350) (6,496) (5,543) (1,016) (1,009) (844)
Recognized net actuarial gain ............ (27) (520) - (54) (146) (17)
Amortization of transition obligation .... - 32 32 530 530 530
Amortization of prior service cost ....... 232 183 183 - - -
----------- ----------- ------------ ----------- ----------- ------------
Net periodic benefit cost ................ $ 4,486 $ 2,818 $ 5,218 $ 3,581 $ 3,149 $ 3,354
=========== =========== ============ =========== =========== ============
The assumptions used in the measurement of the Company's pension and other
postretirement benefit obligations are shown in the following table:
Other Postretirement
Pension Benefits Benefits
-------------------------------- ------------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Weighted-average interest rate
assumptions as of December 31:
Discount rate ....................... 7.0% 7.5% 7.5% 7.0% 7.5% 7.5%
Expected return on plan assets ...... 7.5% 7.5% 7.5% 7.5% 7.5% 7.5%
Rate of compensation increase ....... 6.0% 6.0% 6.0% N/A N/A N/A
Plan assets consist of fixed maturities and equity securities. The Company
is amortizing the unrecognized transition obligation for other postretirement
benefits over 20 years.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation is:
Medical Pre 65: ..... 9.0% for 2001 graded down by 0.5% to 6.0% in
2007 and remaining level thereafter.
Medical Post 65: .... 9.0% for 2001 graded down by 0.5% to 6.0% in
2007 and remaining at 6.0% thereafter.
Dental: ............. 6.0% per year.
A 1% change in the health care trend rate assumption would have the
following effects on other postretirement benefits:
1-Percentage 1-Percentage
Point Increase Point Decrease
----------------- -----------------
(In thousands of dollars)
Effect on total service and interest cost
components ..................................... $ 844 $ (721)
Effect on postretirement benefit obligation ....... 6,896 (5,966)
The Company has a profit sharing and 401(k) savings plan for employees. At
the discretion of the Board of Directors, the Company may make a profit sharing
contribution of up to 5% of each participant's compensation. The Company
provides a matching 401(k) savings contribution on employees' before-tax
contributions at a rate of 80% of the first $1,000 contributed and 40% of the
next $2,000 contributed. Profit sharing costs and the Company's matching
contributions to the 401(k) savings plan were $5.8 million, $4.7 million and
$5.3 million in 2001, 2000 and 1999, respectively.
10. Income taxes
The components of the net deferred tax liability as of December 31, 2001
and 2000 are as follows:
2001 2000
---- ----
(In thousands of dollars)
Unearned premium reserves ................... $ (11,269) $ (12,054)
Deferred policy acquisition costs ........... 11,244 9,044
Loss reserves ............................... (4,009) (6,368)
Unrealized appreciation in investments ...... 25,116 40,822
Contingency reserve ......................... 50,018 51,330
Mortgage investments ........................ 45,966 16,499
Litigation settlement ....................... (7,918) (8,128)
Other, net .................................. (2,698) (9,364)
-------------- --------------
Net deferred tax liability .................. $ 106,450 $ 81,781
============== ==============
twenty-eight
At December 31, 2001, gross deferred tax assets and liabilities amount to
$70.8 million and $177.2 million, respectively. Management believes that all
gross deferred tax assets at December 31, 2001 are fully realizable and no
valuation reserve is established.
The following summarizes the components of the provision for income tax:
2001 2000 1999
---- ---- ----
(In thousands of dollars)
Federal:
Current .................... $ 248,679 $ 208,949 $ 179,423
Deferred ................... 40,376 34,476 28,874
State ......................... 3,718 3,377 2,512
------------- ------------- -------------
Provision for income tax ...... $ 292,773 $ 246,802 $ 210,809
============= ============= =============
The Company paid $271.3 million, $199.9 million and $173.1 million in
federal income tax in 2001, 2000 and 1999, respectively. At December 31, 2001
and 2000, the Company owned $1,004.3 million and $838.0 million, respectively,
of tax and loss bonds.
The reconciliation of the tax provision computed at the federal tax rate of
35% to the reported provision for income tax is as follows:
2001 2000 1999
---- ---- ----
(In thousands of dollars)
Tax provision computed at federal
tax rate ......................... $ 326,169 $ 276,080 $ 238,354
(Decrease) increase in tax
provision resulting from:
Tax exempt municipal bond
interest .................. (35,715) (32,350) (31,851)
Other, net .................... 2,319 3,072 4,306
------------ ------------ ------------
Provision for income tax ............ $ 292,773 $ 246,802 $ 210,809
============ ============ ============
11. Shareholders' equity and dividend restrictions
The Company's insurance subsidiaries are subject to statutory regulations
as to maintenance of policyholders' surplus and payment of dividends. The
maximum amount of dividends that the insurance subsidiaries may pay in any
twelve-month period without regulatory approval by the Office of the
Commissioner of Insurance of the State of Wisconsin ("OCI") is the lesser of
adjusted statutory net income or 10% of statutory policyholders' surplus as of
the preceding calendar year end. Adjusted statutory net income is defined for
this purpose to be the greater of statutory net income, net of realized
investment gains, for the calendar year preceding the date of the dividend or
statutory net income, net of realized investment gains, for the three calendar
years preceding the date of the dividend less dividends paid within the first
two of the preceding three calendar years. In 2002, MGIC can pay $137.4 million
of dividends and the other insurance subsidiaries of the Company can pay $7.8
million of dividends without such regulatory approval.
Certain of the Company's non-insurance subsidiaries also have requirements
as to maintenance of net worth. These restrictions could also affect the
Company's ability to pay dividends.
In 2001, 2000 and 1999, the Company paid dividends of $10.7 million, $10.6
million and $10.8 million, respectively, or $0.10 per share in 2001, 2000 and
1999.
The principles used in determining statutory financial amounts differ from
generally accepted accounting principles ("GAAP"), primarily for the following
reasons:
Under statutory accounting practices, mortgage guaranty insurance companies
are required to maintain contingency loss reserves equal to 50% of premiums
earned. Such amounts cannot be withdrawn for a period of ten years except
as permitted by insurance regulations. Contingency loss reserves are not
reflected as liabilities under GAAP.
Under statutory accounting practices, insurance policy acquisition costs
are charged against operations in the year incurred. Under GAAP, these
costs are deferred and amortized as the related premiums are earned
commensurate with the expiration of risk.
Under statutory accounting practices, purchases of tax and loss bonds are
accounted for as investments. Under GAAP, purchases of tax and loss bonds
are recorded as payments of current income taxes.
Under statutory accounting practices, fixed maturity investments are valued
at amortized cost. Under GAAP, those investments which the Company does not
have the ability and intent to hold to maturity are considered to be
available for sale and are recorded at market, with the unrealized gain or
loss recognized, net of tax, as an increase or decrease to shareholders'
equity.
twenty-nine
The statutory net income, equity and the contingency reserve liability of
the insurance subsidiaries (excluding the non-insurance companies) are as
follows:
Year Ended Net Contingency
December 31, Income Equity Reserve
------------ ------ ------ ---------
(In thousands of dollars)
2001 $ 426,294 $ 1,451,808 $ 3,039,332
2000 348,137 991,343 2,616,653
1999 296,287 637,234 2,253,418
The differences between the statutory net income and equity presented above
for the insurance subsidiaries and the consolidated net income and equity
presented on a GAAP basis primarily represent the differences between GAAP and
statutory accounting practices, and the effect of the treasury shares on
consolidated equity.
In 1998, the NAIC adopted the Codification of Statutory Accounting
Principles guidance, which replaces the current Accounting Practices and
Procedures manual as the NAIC's primary guidance on statutory accounting as of
January 1, 2001. The Codification provides guidance for areas where statutory
accounting has been silent and also changes current statutory accounting in
other areas. The OCI has adopted the Codification guidance, effective January 1,
2001. The effect of the adoption has not had a material impact on the Company's
insurance subsidiaries' statutory surplus. The most significant change affecting
surplus is the requirement to record deferred income taxes.
The Company has a stock option plan which permits certain officers and
employees to purchase common stock at specified prices. A summary of activity in
the stock option plans during 1999, 2000 and 2001 is as follows:
Average Shares
Exercise Subject
Price to Option
-------------- --------------------
Outstanding, December 31, 1998 ........ $ 24.87 3,193,924
Granted ............................ 42.29 791,750
Exercised .......................... 8.74 (413,930)
Canceled ........................... 45.94 (25,480)
------------------
Outstanding, December 31, 1999 ........ 30.52 3,546,264
------------------
Granted ............................ 45.40 954,000
Exercised .......................... 16.91 (1,080,208)
Canceled ........................... 37.96 (35,060)
------------------
Outstanding, December 31, 2000 ........ 38.96 3,384,996
------------------
Granted ............................ 57.90 533,750
Exercised .......................... 29.28 (555,952)
Canceled ........................... 44.15 (25,107)
------------------
Outstanding, December 31, 2001 ........ 43.56 3,337,687
==================
The exercise price of the options granted in 1999, 2000 and 2001 was equal
to the market value of the stock on the date of grant. The options are
exercisable between one and ten years after the date of grant. At December 31,
2001, 1,270,959 shares were available for future grant under the stock option
plan.
The Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS 123"). Had compensation cost for the Company's stock option plan been
determined based on the fair value method described by SFAS 123, the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below (in thousands, except per share data):
Year Ended December 31,
------------------------------------------------
2001 2000 1999
---- ---- ----
Net income $ 625,654 $ 530,625 $ 464,793
Earnings per share:
Basic ...................... $ 5.85 $ 5.00 $ 4.30
Diluted .................... $ 5.80 $ 4.95 $ 4.25
The fair value of these options was estimated at grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions for each year:
Grants Issued in Year Ended December 31,
-----------------------------------------------
2001 2000 1999
---- ---- ----
Risk free interest rate ....... 5.10% 6.75% 5.18%
Expected life ................. 5.0 years 6.8 years 5.4 years
Expected volatility ........... 39.64% 33.62% 33.55%
Expected dividend yield ....... 0.16% 0.15% 0.16%
Fair value of each option ..... $24.43 $21.96 $16.70
The following is a summary of stock options outstanding at December 31,
2001:
Options Outstanding Options Exercisable
----------------------------------------------- -------------------------------
Remaining Average Average
Exercise Average Exercise Exercise
Price Range Shares Life (years) Price Shares Price
----------- ------ ------------ ------------ ------ --------
$9.63 - $20.88 157,100 2.1 $ 15.65 157,100 $ 15.65
$26.69 - $47.31 2,531,437 6.7 41.29 1,240,368 38.38
$53.70 - $68.63 649,150 8.4 59.17 89,300 64.50
-------------- ------------
Total 3,337,687 6.8 43.56 1,486,768 37.55
============== ============
At December 31, 2000 and 1999, option shares of 1,229,038 and 1,721,204
were exercisable at an average exercise price of $31.93 and $20.03,
respectively. The Company also granted an immaterial amount of equity
thirty
instruments other than options during 1999, 2000 and 2001.
The Company adopted a Shareholder Rights Plan on July 22, 1999. Under terms
of the plan, on August 9, 1999, Common Share Purchase Rights were distributed as
a dividend at the rate of one Common Share Purchase Right for each outstanding
share of the Company's Common Stock. The "Distribution Date" occurs ten days
after an announcement that a person has acquired 15 percent or more of the
Company's Common Stock (the date on which such an acquisition occurs is the
"Shares Acquisition Date" and a person who makes such an acquisition is an
"Acquiring Person"), or ten business days after a person announces or begins a
tender offer in which consummation of such offer would result in ownership by a
person of 15 percent or more of the Common Stock. The Rights are not exercisable
until the Distribution Date. Each Right will initially entitle shareholders to
buy one-half of one share of the Company's Common Stock at a Purchase Price of
$225 per full share (equivalent to $112.50 for each one-half share), subject to
adjustment. If there is an Acquiring Person, then each Right (subject to certain
limitations) will entitle its holder to purchase, at the Rights' then-current
Purchase Price, a number of shares of Common Stock of the Company (or if after
the Shares Acquisition Date, the Company is acquired in a business combination,
common shares of the acquiror) having a market value at the time equal to twice
the Purchase Price. The Rights will expire on July 22, 2009, subject to
extension. The Rights are redeemable at a price of $0.001 per Right at any time
prior to the time a person becomes an Acquiring Person. Other than certain
amendments, the Board of Directors may amend the Rights in any respect without
the consent of the holders of the Rights.
12. Leases
The Company leases certain office space as well as data processing
equipment and autos under operating leases that expire during the next seven
years. Generally, all rental payments are fixed.
Total rental expense under operating leases was $6.7 million, $5.3 million
and $5.5 million in 2001, 2000 and 1999, respectively.
At December 31, 2001, minimum future operating lease payments are as
follows (in thousands of dollars):
2002 ......................................... $ 5,709
2003 ......................................... 4,519
2004 ......................................... 2,131
2005 ......................................... 1,047
2006 ......................................... 232
2007 and thereafter .......................... 0
--------------
Total ..................................... $ 13,638
==============
13. Contingencies and litigation settlement
The Company is involved in litigation in the ordinary course of business.
In the opinion of management, the ultimate resolution of this pending litigation
will not have a material adverse effect on the financial position or results of
operations of the Company.
In addition, in June 2001, the Federal District Court for the Southern
District of Georgia, before which Downey et. al.v. MGIC is pending, issued a
final order approving a settlement agreement and certified a nationwide class of
borrowers. In the fourth quarter of 2000, the Company recorded a $23.2 million
charge to cover the estimated costs of the settlement, including payments to
borrowers. Due to appeals of related orders denying certain class members the
right to intervene to challenge certain aspects of the settlement in Downey and
two related cases, payments to borrowers in the settlement are delayed pending
the outcome of the appeals. The settlement includes an injunction that prohibits
certain practices and specifies the basis on which agency pool insurance,
captive mortgage reinsurance, contract underwriting and other products may be
provided in compliance with the Real Estate Settlement Procedures Act.
The complaint in the case alleges that MGIC violated the Real Estate
Settlement Procedures Act by providing agency pool insurance, captive mortgage
reinsurance, contract underwriting and other products that were not properly
priced, in return for the referral of mortgage insurance. The complaint seeks
damages of three times the amount of the mortgage insurance premiums that have
been paid and that will be paid at the time of judgment for the mortgage
insurance found to be involved in a violation of the Real Estate Settlement
Procedures Act. The complaint also seeks injunctive
thirty-one
relief, including prohibiting MGIC from receiving future premium payments. If
the settlement is not fully implemented, the litigation will continue. In these
circumstances, there can be no assurance that the ultimate outcome of the
litigation will not materially affect the Company's financial position or
results of operations.
thirty-two
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors & Shareholders of
MGIC Investment Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of MGIC
Investment Corporation and Subsidiaries (the "Company") at December 31, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
January 9, 2002
thirty-three
UNAUDITED QUARTERLY FINANCIAL DATA
Quarter 2001
2001 First Second Third Fourth Year
---- ----- ------ ----- ------ ----
(In thousands of dollars, except per share data)
Net premiums written ....................... $229,588 $256,903 $271,006 $278,856 $1,036,353
Net premiums earned ........................ 241,182 257,372 264,780 278,933 1,042,267
Investment income, net of expenses ......... 50,045 51,566 51,021 51,761 204,393
Losses incurred, net ....................... 29,377 36,304 43,468 51,665 160,814
Underwriting and other expenses, net ....... 51,654 58,524 58,317 65,999 234,494
Net income ................................. 157,924 161,218 158,992 161,003 639,137
Earnings per share (a):
Basic ................................... 1.48 1.51 1.48 1.51 5.98
Diluted ................................. 1.46 1.49 1.47 1.50 5.93
Quarter 2000
2000 First Second Third Fourth Year
---- ----- ------ ----- ------ ----
(In thousands of dollars, except per share data)
Net premiums written ........................ $199,320 $220,814 $236,208 $231,046 $887,388
Net premiums earned ......................... 210,104 218,434 229,208 232,345 890,091
Investment income, net of expenses .......... 40,609 42,731 46,125 49,070 178,535
Losses incurred, net ........................ 22,615 22,540 21,442 25,126 91,723
Underwriting and other expenses, net ........ 47,008 46,198 40,055 44,576 177,837
Litigation settlement ....................... - - - 23,221 23,221
Net income .................................. 127,220 136,103 146,355 132,321 541,999
Earnings per share (a):
Basic .................................... 1.20 1.28 1.38 1.24 5.10
Diluted .................................. 1.19 1.27 1.36 1.23 5.05
(a) Due to the use of weighted average shares outstanding when calculating
earnings per share, the sum of the quarterly per share data may not equal
the per share data for the year.
thirty-four
MGIC Stock
MGIC Investment Corporation Common Stock is listed on the New York Stock
Exchange under the symbol MTG. At December 31, 2001, 106,086,594 shares were
outstanding. The following table sets forth for 2000 and 2001 by quarter the
high and low sales prices of the Common Stock on the New York Stock Exchange
Composite Tape.
2000 2001
------------------------- ------------------------
Quarters High Low High Low
1st $ 59.2500 $ 31.9375 $ 69.3600 $ 51.0000
2nd 54.8750 42.0000 77.3100 61.0000
3rd 64.3125 44.7500 76.5000 54.0000
4th 71.5000 58.5000 66.2000 50.5600
In 2000 and 2001 the Company declared and paid the following cash dividends:
2000 2001
----------------- ------------------
Quarters
1st $ .025 $ .025
2nd .025 .025
3rd .025 .025
4th .025 .025
------------- ------------
$ .100 $ .100
============= ============
The Company is a holding company and the payment of dividends from its insurance
subsidiaries is restricted by insurance regulation. For a discussion of these
restrictions, see the sixth paragraph under "Management's Discussion and
Analysis -- Liquidity and Capital Resources" and Note 11 of the Notes to the
Consolidated Financial Statements.
As of March 4, 2002, the number of shareholders of record was 244. In addition,
there were approximately 107,400 beneficial owners of shares held by brokers and
fiduciaries.
EXHIBIT 21
MGIC INVESTMENT CORPORATION
DIRECT AND INDIRECT SUBSIDIARIES AND JOINT VENTURES
OF MGIC INVESTMENT CORPORATION(1 )
1. MGIC Assurance Corporation
2. MGIC Credit Assurance Corporation
3. MGIC Indemnity Corporation
4. MGIC Insurance Services Corporation
5. MGIC Investor Services Corporation
6. MGIC Mortgage Insurance Corporation
7. MGIC Mortgage Marketing Corporation
8. MGIC Mortgage and Consumer Asset I LLC
9. MGIC Mortgage and Consumer Asset II LLC
10. MGIC Mortgage Reinsurance Corporation
11. MGIC Mortgage Securities Corporation
12. MGIC Reinsurance Corporation
13. MGIC Reinsurance Corporation of Vermont
14. MGIC Reinsurance Corporation of Wisconsin
15. MGIC Residential Reinsurance Corporation
16. MGIC Surety Corporation
17. Mortgage Guaranty Insurance Corporation
18. eMagic.com LLC
19. Credit-Based Asset Servicing and Securitization LLC(2)
20. Sherman Financial Group LLC(2)
The names of certain less than 50% owned persons that would not in the aggregate
be a significant subsidiary are omitted.
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(1) Except as otherwise noted in Footnote 1, all companies listed are 100%
directly or indirectly owned by the registrant and all are incorporated
in Wisconsin.
(2) Less than 50% owned and organized under Delaware law.
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements listed below of MGIC Investment Corporation of our report dated
January 9, 2002 relating to the consolidated financial statements, which appears
in the 2001 Annual Report to Shareholders, which is incorporated by reference in
this Annual Report on Form 10-K. We also consent to the incorporation by
reference of our report dated January 9, 2002 relating to the financial
statement schedules, which appears in this Form 10-K.
1. Registration Statement on Form S-8 (Registration No. 33-43543)
2. Registration Statement on Form S-8 (Registration No. 33-79340)
3. Registration Statement on Form S-8 (Registration No. 333-56350)
4. Registration Statement on Form S-8 (Registration No. 333-56346)
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
March 28, 2002