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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
Commission file number 1-10816
MGIC Investment Corporation
(Exact name of registrant as specified in its charter)
Wisconsin 39-1486475
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
MGIC Plaza, 250 East Kilbourn Avenue, Milwaukee, Wisconsin 53202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (414) 347-6480
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class: Common Stock, Par Value $1 Per Share
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 1, 1999: $3.6 billion.*
- ---------------
* Solely for purposes of computing such value and without thereby admitting that
such persons are affiliates of the Registrant, shares held by The Northwestern
Mutual Life Insurance Company and 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.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of February 1, 1999: 109,002,358.
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
- -------- ------------
1. Information from 1998 Annual Report to Item 1 of Part I
Shareholders (for Fiscal Year Items 5 through 8 of Part II
Ended December 31, 1998)
2. Proxy Statement for the 1999 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. [ ]
2
Part I
Item 1. Business.
A. General
MGIC Investment Corporation (the "Company") is a holding company which,
through its indirect 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 home owner 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, insures residential second mortgages and 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
There are two principal types of private mortgage
insurance: "primary" and "pool."
3
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 114% 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.
The following table shows, on a direct basis, primary insurance in force
(the unpaid principal balance of insured loans) and primary risk in force (the
coverage percentage applied to the unpaid principal balance), for insurance that
has been written by MGIC (the "MGIC Book") as of the dates indicated:
Primary Insurance and Risk In Force
December 31,
-------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In millions of dollars)
Direct Primary
Insurance In Force......... $137,990 $138,497 $131,397 $120,341 $104,416
Direct Primary
Risk In Force.............. $ 32,891 $ 32,175 $ 29,308 $ 25,502 $ 20,756
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 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%.
As a result of these deeper coverage requirements, coverage percentages on
new insurance written in 1995-1998 were higher than coverages on loans insured
in prior years. The following table shows new insurance written during the last
three years for 95s with 30% coverage and for 90s with 25% coverage:
4
Coverage Categories as a Percentage of New Insurance Written
Year Ended December 31,
LTV/
Coverage 1998 1997 1996
-------------------- ---- ---- ----
95 /30% 33.9% 38.7% 38.4%
90 /25% 38.6% 39.1% 38.9%
Effective March 1, 1999, Fannie Mae changed its mortgage insurance
requirements for fixed rate mortgages on owner occupied properties having terms
greater than 20 years when the loan is approved by Desktop Underwriter (Fannie
Mae's automated underwriting service). Lenders may deliver these loans to Fannie
Mae with the coverage requirements in effect immediately prior to March 1, 1999
(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 Fannie Mae,
and in the case of 90s, with either (i) 17% coverage or (ii) 12% coverage and
the payment of a delivery fee to Fannie Mae. Fannie Mae has publicly stated that
it intends to purchase supplemental private mortgage insurance coverage on those
loans delivered for which it is paid a delivery fee. In March 1999, Freddie Mac
introduced comparable mortgage insurance requirements for loans approved by its
Loan Prospector automated underwriting service, except that in addition to fixed
rate mortgages having terms greater than 20 years, other loan types (such as
adjustable rate mortgages ("ARMs") and mortgages in which the amortization
period exceeds the term of the loan (balloon mortgages)) are eligible for the
18%/12% coverage with the payment of a delivery fee to Freddie Mac.
In response to Fannie Mae's new coverage options, MGIC introduced new
premium plans that provide 25% coverage on 95s and 17% coverage on 90s (these
coverages satisfy GSE requirements on loans described above) when an up-front
premium is paid to MGIC.
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 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
5
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.
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 and in certain circumstances when such principal
balance is 80% or less of the home's original value.
Under the federal Homeowners Protection Act (the "HPA"), enacted in
July 1998, 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 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. For loans within the conforming loan limit that are classified as high
risk by Fannie Mae and Freddie Mac and for loans above the conforming loan limit
that are so classified by the originating lender, the borrower's right to stop
paying for private mortgage insurance occurs at a later point in time. A
borrower's right to stop paying for private mortgage insurance does not apply to
lender 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. Under the HPA, states having laws
regarding any requirements relating to private mortgage insurance that were in
effect on January 2, 1998 may provide for mortgage insurance cancellation and
notice requirements that are more favorable to borrowers than under the HPA if
such provisions are enacted by July 29, 2000.
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
6
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. Reflecting the historically low level of interest rates
that prevailed throughout 1998, the percentage of primary risk written with
respect to loans representing refinances was 25.6% in 1998 as compared to 12.2%
in 1997 and 13.7% in 1996.
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 MGIC's program to insure A minus loans,
MGIC's evaluation of the borrower's credit worthiness. 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
fund 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 funded by the lender, usually through an increase in the note rate on
the mortgage ("lender paid mortgage insurance"). Almost all of MGIC's primary
insurance and new insurance written is borrower paid 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. To offset the reduced initial cash flow, the
annualized premium rates for the monthly premium plan are higher than the
premium rates for the annual plan for comparable loans. Under the annual premium
plan, the initial premium is paid to MGIC in advance, and earned over the next
twelve months of coverage, with annual renewal premiums paid in advance
thereafter and earned over the subsequent twelve months of coverage. The annual
premiums can be paid with either a higher premium rate for the initial year of
coverage and lower premium rates for the renewal years, or with premium rates
which are equal (level) for the initial year and subsequent renewal years. Under
the single premium plan, a single payment is made to MGIC, covering a specified
term exceeding 12 months.
7
During 1998 and 1997, the monthly premium plan represented 93.9% and
92.8%, respectively, 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 1998 was $618 million and was $394 million in 1997. 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, 1998 was $927 million compared to $530 million and $181 million at
December 31, 1997 and 1996, respectively.
In a letter received by MGIC in January 1998, the U.S. Department of
Housing and Urban Development ("HUD") wrote to MGIC seeking an analysis of
MGIC's agency pool insurance transactions under the Real Estate Settlement
Procedures Act of 1974 ("RESPA"). In February 1998, MGIC provided HUD with
MGIC's analysis, which set forth MGIC's opinion that MGIC's agency pool
transactions comply with RESPA. There can be no assurance that HUD will agree
with MGIC's analysis. In March 1998, HUD wrote to the other private mortgage
insurers and offered them an opportunity to submit their views in writing on
agency pool insurance under RESPA. HUD's publicly announced regulatory agenda
for 1999 includes the issuance of a statement that will set forth HUD's views on
the application of RESPA to agency pool insurance. Among other things, RESPA
generally prohibits any person from giving or receiving any "thing of value"
pursuant to an agreement or understanding to refer settlement services. Among
other remedies, there is civil liability for violation of this provision of
RESPA in an amount equal to three times the amount of any charge paid for the
settlement service involved in the violation. Under regulations adopted by HUD,
"settlement services" are services provided in connection with settlement of a
mortgage loan, including services involving mortgage insurance.
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 "signficantly 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." The Company
understands that during 1998 the California Department of Insurance was
reviewing for compliance with California
8
insurance law agency pool insurance as well as products, such as captive
mortgage reinsurance, offered by private mortgage insurers.
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 16% of MGIC's new insurance written in 1998 was subject to captive
mortgage reinsurance and other similar structures. In an August 1997 letter, HUD
set forth tests to determine whether, in HUD's view, captive mortgage
reinsurance programs comply with RESPA. Certain of the tests involve complex
judgments regarding premium and risk ceded and there can be no assurance that
MGIC's captive program complies with RESPA. In a February 1, 1999 circular
addressed to all mortgage insurers licensed in New York, the NYID said that it
was in the process of developing guidelines that would articulate the parameters
under which captive mortgage reinsurance is permissible under New York insurance
law.
Other Reinsurance. At December 31, 1998, disregarding reinsurance under
captive structures, less than 5% of MGIC's insurance in force was 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.
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
and as a result are the customers of MGIC. To obtain primary insurance from
MGIC, a mortgage lender must first apply for and receive a mortgage guaranty
master policy ("Master Policy") from MGIC. MGIC had approximately 10,000 master
policyholders at December 31, 1998 (not including policies issued to branches
and affiliates of large lenders). In 1998, MGIC issued coverage on mortgage
loans for approximately 4,600 of its master policyholders. Reflecting
consolidation among large residential lenders, MGIC's top 10 customers generated
33.7% of its new insurance written in 1998, compared to 27.0% in 1997 and 20.0%
in 1996.
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, 1998, MGIC had
30 underwriting service centers located in 21 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
1998 accounted for approximately 44% (compared to approximately 46% during 1997)
of the total low down payment residential mortgages which were
9
subject to governmental or private mortgage insurance. See "Regulation ,
Indirect Regulation" below. In October 1998, the maximum loan amounts that could
be insured by the FHA and the VA were increased as a result of legislation that
set the limit as a higher percentage of the conforming loan limit than in the
past. For 1999, the maximum loan amount in "high cost" counties may be as high
as $208,800.
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. During 1998, Fannie Mae and Freddie Mac each introduced programs under
which for certain loans an up-front delivery fee is 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. During the first
quarter of 1999, Fannie Mae and Freddie Mac implemented changes in their
mortgage insurance requirements which use an equivalent structure. 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 nine
active mortgage insurers (including a joint venture in which a mortgage insurer
is one of the joint venturers). For 1995 and subsequent years, MGIC has been the
largest private mortgage insurer based on new primary
10
insurance written (with a market share of 23.1% in 1998 and 26.6% in 1997) and
at December 31, 1998, MGIC also had the largest book of direct primary insurance
in force. The parent companies of mortgage insurers ranked fifth and seventh in
market share of new insurance written in 1998 are parties to a definitive merger
agreement. The combined companies would have had the second largest market share
of new insurance written in 1998 if their individual market shares were
aggregated. The source of the market share information in this paragraph
regarding the fifth and seventh ranked companies is Inside Mortgage Finance, a
mortgage industry trade publication.
The private mortgage insurance industry is highly competitive and, in
recent years, the dynamics of industry competition have undergone significant
change. The Company believes MGIC competes with other private mortgage insurers
principally on the basis of programs involving agency pool insurance, captive
reinsurance 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 and reputation.
Certain private mortgage insurers compete 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.
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.
Risk Management
Risk Management Approach. MGIC evaluates 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
11
repay the mortgage loan and the characteristics and value of the
property. The analysis of the borrower includes reviewing the
borrower's housing and total debt ratios as well as the borrower's
FICO credit score, as reported by credit reporting agencies. 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 and loans with a maturity longer than
fifteen years.
. Mortgage Lender. MGIC evaluates from time to time its major
customers and the performance of their business which MGIC has
insured.
Based on historical performance, the Company believes that the claim
incidence for 95s is substantially higher than for 90s or loans with lower LTV
ratios; 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 $200,000 is higher than for loans where such amount is
$200,000 or less; and for loans with FICO credit scores below 620 is higher than
for loans with FICO credit scores of 620 and above. While there is no meaningful
data on claim incidence for loans with LTVs in excess of 95% ("97s") because
this product has only been recently offered by the industry, the Company
anticipates that claim incidence on 97s will be higher than on 95s. MGIC charges
higher premium rates for insuring 95s, 97s, ARMs and A minus loans. However,
there can be no assurance that such higher rates adequately reflect the
increased risk associated with those types of loans, particularly in a period of
economic recession.
12
There are also other types of loan characteristics relating to the
individual loan or borrower which affect the risk potential for a loan. The
presence of a number of higher-risk characteristics in a loan materially
increases the likelihood of a claim on such a loan unless there are other
characteristics to lower the risk.
Underwriting Process. To obtain primary insurance on a specific
mortgage loan, a master policyholder typically submits an application to an MGIC
underwriting service center, supported by various documents, if required by
MGIC. MGIC utilizes national underwriting guidelines to evaluate the potential
risk of default on mortgage loans submitted for insurance coverage. These
guidelines generally are consistent with Fannie Mae and Freddie Mac underwriting
guidelines and take into account the applicable premium rates charged by MGIC
and the loss experience of the private mortgage insurance industry, as well as
the initiatives to expand home ownership opportunities undertaken by Fannie Mae
and Freddie Mac. MGIC's underwriters have discretionary authority to insure
loans which deviate in one or more respects from MGIC's underwriting guidelines.
In most such cases, offsetting underwriting strengths must be identified.
In order to react to local or regional economic conditions, MGIC has
also developed for use by its underwriting staff certain modified guidelines
which attempt to address particular regional or local market developments. These
"special market underwriting guidelines" are updated from time to time and
deviate in varying degrees from MGIC's national guidelines based on MGIC's
analysis of area housing markets and related economic indicators and conditions.
The special market underwriting guidelines are more liberal than the published
national guidelines in some markets, but in other markets are more restrictive.
To assist its staff of underwriters, MGIC utilizes a computer-assisted
underwriting system which analyzes and approves certain mortgage insurance
applications based on MGIC's underwriting standards, but without personal
underwriter intervention, thereby allowing MGIC's underwriting staff to devote
additional attention to evaluating more difficult underwriting decisions. MGIC
audits a representative sample of applications approved by the system.
Delegated Underwriting 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. While MGIC does not underwrite on a
case-by-case 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.
13
At December 31, 1998, MGIC's delegated underwriting program involved
approximately 625 lenders, including all of MGIC's top twenty customers. Loans
insured under MGIC's delegated underwriting program accounted for approximately
33.6% of MGIC's total risk in force at December 31, 1998. The percentage of new
risk written by delegated underwriters decreased to 36.2% in 1998 from 36.8% in
1997 and 41.0% in 1996. The Company believes that the decreases in 1997 and 1998
are attributable to MGIC's introduction in mid-1996 of a program under which
MGIC approves a loan for insurance if the borrower satisfies certain minimum
criteria for credit scores and debt ratios. The performance of loans insured
under the delegated underwriting program has been comparable to MGIC's
non-delegated business, although performance of that program has not yet been
tested in a period of severe economic stress.
Beginning in 1998, loans approved by the automated underwriting
services of the GSEs are deemed acceptable for MGIC mortgage insurance without
MGIC itself underwriting the loan.
Past Industry Losses; Defaults; and Claims
Past Industry Losses. The private mortgage insurance industry,
including the WMAC Book (see "The WMAC Book" below), experienced substantial
unanticipated incurred losses in the mid-to-late 1980s. From the 1970s until
1981, rising home prices in the United States generally led to profitable
insurance underwriting results for the industry and caused private mortgage
insurers to emphasize market share. To maximize market share, until the
mid-1980s, private mortgage insurers employed liberal underwriting practices,
and charged premium rates which, in retrospect, generally did not adequately
reflect the risk assumed (particularly on pool insurance). These industry
practices compounded the losses which resulted from changing economic and market
conditions which occurred during the early and mid-1980s, including (i) severe
regional recessions and attendant declines in property values in the nation's
energy producing states; (ii) the development by lenders of new mortgage
products to defer the impact on home buyers of double digit mortgage interest
rates; and (iii) changes in federal income tax incentives which initially
encouraged the growth of investment in non-owner occupied properties.
14
Defaults. The claim cycle on private mortgage insurance begins with the
insurer's receipt of notification of a default on an insured loan from the
lender. Lenders are required to notify MGIC of defaults within 130 days after
the initial default, although most lenders do so earlier. The incidence of
default is affected by a variety of factors, including the level of borrower
income growth, unemployment, divorce and illness, the level of interest rates
and general borrower creditworthiness. Defaults that are not cured result in a
claim to MGIC. Defaults may be cured by the borrower bringing current the
delinquent loan payments or by a sale of the property and the satisfaction of
all amounts due under the mortgage.
The following table shows the number of primary and pool loans insured
in the MGIC Book, 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,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
PRIMARY INSURANCE
Insured loans in force ... 1,320,994 1,342,976 1,299,038 1,219,304 1,080,882
Loans in default ......... 29,253 28,493 25,034 19,980 15,439
Percentage of loans in
default (default rate) ... 2.21% 2.12% 1.93% 1.64% 1.43%
POOL INSURANCE
Insured loans in force ... 899,063 374,378 19,123 20,427 23,242
Loans in default ......... 6,524 2,174 855 1,053 1,097
Percentage of loans in
default (default rate) ... 0.73% 0.58% 4.47% 5.15% 4.72%
The default rate for primary loans has increased since 1994 due to an
increase in the risk profile of loans insured in late 1994 and the first half of
1995 and the continued maturation of MGIC's insurance in force. The number of
pool insurance loans in force increased at December 31, 1998 and 1997 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. 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 1998 due to the aging of the underlying loans in earlier pools.
15
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,
1998 1997 1996
---- ---- ----
MGIC REGION:
New England............. 1.78% 1.89% 2.09%
Northeast............... 3.05 3.03 2.74
Mid-Atlantic............ 2.28 2.23 1.96
Southeast............... 2.23 2.13 1.83
Great Lakes............. 1.89 1.75 1.57
North Central........... 1.91 1.72 1.49
South Central........... 2.00 1.86 1.56
Plains.................. 1.40 1.27 0.97
Pacific................. 2.73 2.69 2.70
National............... 2.21% 2.12% 1.93%
- --------------------
* The default rate is affected by both the number of loans in default at any
given date as well as the number of insured loans in force at such date.
Claims. Claims result from defaults which are not cured. Whether a
claim results from an uncured default principally depends on the borrower's
equity in the home at the time of default and the borrower's (or the lender's)
ability to sell the home for an amount sufficient to satisfy all amounts due
under the mortgage. Claims are affected by various factors, including local
housing prices and employment levels, and interest rates.
Under the terms of the Master Policy, the lender is required to file a
claim for primary insurance with MGIC within 60 days after it has acquired good
and marketable title to the underlying property through foreclosure. Depending
on the applicable state foreclosure law, an average of about 12 months
transpires from the date of default to payment of a claim on an uncured default.
The claim amount generally averages about 114% of the unpaid principal amount of
the loan.
16
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. 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.
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, 1998, 59.6% of the MGIC Book primary insurance in force had been written
during 1996, 1997, and 1998, although a portion of such insurance arose from the
refinancing of earlier originations.
In addition to the increasing level of claim activity arising from the
maturing of the MGIC Book, another important factor affecting MGIC Book losses
is the amount of the average claim paid, which is generally referred to as claim
severity. The main determinants of claim severity are the amount of the mortgage
loan and coverage percentage on the loan. The average claim severity on the MGIC
Book primary insurance was $20,705 for 1998 as compared to $21,669 in 1997,
reflecting the decline in the number of claims paid from certain high cost
regions of the country. Although prior to 1995 the coverage percentage remained
relatively constant on the MGIC Book, claim severity may increase for books with
higher coverage percentages (generally written beginning in 1995).
Loss Reserves
A significant period of time may elapse between the occurrence of the
borrower's default on a mortgage payment (the event triggering a potential
future claim payment by MGIC), the reporting of such default to MGIC and the
eventual payment of the claim related to such uncured default. To recognize the
liability for unpaid losses related to outstanding reported defaults (known as
the default inventory), the Company (similar to other private mortgage insurers)
establishes loss reserves, representing the estimated percentage of defaults
which will ultimately result in a claim (known as the claim rate), and estimates
of the severity of each claim which will arise from the defaults included in the
default inventory. In accordance with industry accounting practices, the Company
does not establish loss reserves for future claims on insured loans which are
not currently in default.
17
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,
especially in light of the rapidly changing economic conditions over the past
few years in certain regions of the United States. In addition, 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 description of 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, 1998:
Dispersion of Primary Risk in Force
Top 10 States Top 10 MSAs
1. California 11.7% 1. Chicago 4.1%
2. Texas 6.8 2. Los Angeles 3.2
3. Illinois 5.5 3. Boston 3.1
4. Michigan 5.2 4. Washington, DC 3.0
5. Florida 4.7 5. Atlanta 2.5
6. Ohio 4.6 6. Philadelphia 2.2
7. New York 4.5 7. Detroit 2.0
8. Pennsylvania 4.3 8. Dallas 1.7
9. New Jersey 3.5 9. Houston 1.7
10. Massachusetts 3.3 10. Seattle 1.6
----- -----
Total 54.1% Total 25.1%
===== =====
The percentages shown above for various MSAs can be affected by changes,
from time to time, in the federal government's definition of an MSA.
18
Insurance in Force by Policy Year
The following table sets forth the dispersion of MGIC's primary
insurance in force as of December 31, 1998, 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)
1985-1992 $ 14,498 10.5%
1993 14,635 10.6
1994 12,433 9.0
1995 14,230 10.3
1996 18,516 13.4
1997 24,781 18.0
1998 38,897 28.2
-------- -----
Total $137,990 100.0%
======== =====
Product Characteristics of Risk in Force
At December 31, 1998 and 1997, 96.7% and 98.2%, 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.
19
Characteristics of Primary Risk in Force
December 31, December 31,
1998 1997
----------- ------------
Direct Risk in Force (Dollars in Millions):...... $32,891 $32,175
Lender Concentration:
Top 10 lenders............................... 26.4% 20.5%
Top 20 lenders............................... 37.3% 31.0%
LTV:(1)
95s(2)....................................... 48.3% 46.6%
90s(3)....................................... 51.6 53.2
80s.......................................... 0.1 0.2
------ ------
Total..................................... 100.0% 100.0%
====== ======
Loan Type:
Fixed(4)..................................... 80.4% 73.6%
ARM(5)....................................... 17.5 23.4
Balloon(6)................................... 2.0 2.9
Other........................................ 0.1 0.1
------ ------
Total..................................... 100.0% 100.0%
====== ======
Original Insured Loan Amount:
$200,000 and less ........................... 86.6% 87.0%
Over $200,000 ............................... 13.4 13.0
------ ------
Total..................................... 100.0% 100.0%
====== ======
Mortgage Term:
15-years and under........................... 4.4% 4.4%
Over 15-years................................ 95.6 95.6
------ ------
Total..................................... 100.0% 100.0%
====== ======
Property Type:
Single-family(7)............................. 93.8% 93.6%
Condominium.................................. 5.8 6.0
Other(8)..................................... 0.4 0.4
------ ------
Total..................................... 100.0% 100.0%
====== ======
Occupancy Status:
Primary residence............................ 98.2% 98.6%
Second home.................................. 1.2 1.0
Non-owner occupied........................... 0.6 0.4
------ ------
Total..................................... 100.0% 100.0%
====== ======
- --------------------
(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. They are
20
identified as in excess of 90% 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% LTV loans, which were 3.4% and 2.3%, respectively, of primary
risk in force at December 31, 1998 and 1997.
(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, 1998 and 1997, 3.1%
and 3.2%, 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).
(5) Includes ARMs where payments adjust fully with interest rate adjustments.
Also includes ARMs with negative amortization, which at December 31, 1998
and 1997, represented 1.5% and 2.1%, respectively, of primary risk in force.
As of December 31, 1998 and 1997, ARMs with LTVs in excess of 90%
represented 7.5% and 9.5%, 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) Includes townhouse-style attached housing with fee simple ownership.
(8) Includes cooperatives and manufactured homes deemed to be real estate.
C. The WMAC Book
In 1985, the Company acquired certain assets and businesses of
Wisconsin Mortgage Assurance Corporation ("WMAC") and WMAC's parent, including
the MGIC name and offices of WMAC, and hired substantially all of WMAC's
employees ("Acquisition"). WMAC retained substantially all of its insurance in
force, net of domestic reinsurance (the "WMAC Book" and sometimes in other
documents referred to as the "Old Book"). Effective as of the time of the
Acquisition, WMAC reinsured 100% of the WMAC Book with several international
reinsurers (the "WMAC Reinsurers"). As a result of subsequent transactions, at
December 31, 1998, approximately 33.6% of the WMAC Book was reinsured with the
WMAC Reinsurers and the remainder was reinsured by a subsidiary of the Company.
On December 31, 1998, MGIC purchased WMAC from a third party for $2
million. MGIC contributed an additional $13 million of capital to WMAC to comply
with minimum regulatory capital requirements. The acquisition had no impact on
the Company's earnings during 1998. WMAC's direct primary insurance in force,
direct primary risk in force and direct pool risk in force was approximately
$3.5 billion, $.9 billion and $.4 billion, respectively, at December 31, 1998.
D. Other Business
The Company, through subsidiaries, provides various mortgage services
for the mortgage finance industry, such as contract underwriting, premium
reconciliation and claims administration for HUD and the Federal Deposit
Insurance Corporation (as successor to the Resolution Trust Corporation),
respectively, and secondary marketing of mortgage-related assets. The Company
also
21
owns approximately 48% of Credit-Based Asset Servicing and Securitization LLC
and Litton Loan Servicing LP (collectively, "C-BASS"). C-BASS, which began
operations in mid-1996, is principally engaged in the acquisition, sale and
servicing of delinquent and other residential mortgage assets. For a further
description of C-BASS, see Note 8 to the consolidated financial statements of
the Company, 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 C-BASS represented 4.8% and 3.8% of the Company's consolidated
revenues in 1998 and 1997, respectively.
In 1997, the Company, through subsidiaries, began insuring second
mortgages, including home equity loans. New insurance written on second
mortgages in 1998 was immaterial.
E. Investment Portfolio
Policy and Strategy
Cash flow from the Company's investment portfolio represented
approximately 34% of its total cash flow from operations during 1998.
Approximately 87% 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, 1998 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, 1998, based on amortized cost, approximately 98.9% of
the Company's total fixed income investment portfolio was invested in securities
rated "A" or better, with 61.5% which were rated "AAA" and 27.7% 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.
22
Investment Operations
At December 31, 1998, the consolidated book value (which is equal to
market value) of the Company's investment portfolio was approximately $2.8
billion. At December 31, 1998, municipal securities represented 77.3% of the
book 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 6.3%, 11.2%, 38.5% and 44.0%, respectively, of the total book value
of the Company's investment in debt securities. The Company's net pre-tax
investment income was $143.0 million for the year ended December 31, 1998,
representing an after-tax yield of 4.9% for the year, a decline from 5.0% for
1997, resulting from a decline in the average interest rate on investments in
1998 as compared to 1997.
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.
F. 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, see "The MGIC
Book-Types of Product-Pool Insurance" and "-Captive Mortgage Reinsurance." For a
description of limits on dividends payable, see Note 11 to the consolidated
financial statements of the Company, included in Exhibit 13 to this Annual
Report on Form 10-K.
Mortgage insurance premium rates are also subject to state regulation
to protect policyholders against the adverse effects of excessive, inadequate or
unfairly discriminatory rates and to encourage competition in the insurance
marketplace. Any increase in premium rates must be justified, generally on the
basis of the insurer's loss experience, expenses and future trend analysis. The
general mortgage default experience may also be considered. Premium rates are
subject to
23
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. This essentially prohibits
MGIC from using its capital resources in support of other types of insurance or
non-insurance business. 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.
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, allows alternative credit enhancement, alters or liberalizes
underwriting guidelines on low down payment mortgages they purchase, or
otherwise changes its business practices or processes with respect to such
mortgages, private mortgage insurers may be affected.
Fannie Mae has issued primary mortgage insurance master policy
guidelines applicable to MGIC and all other Fannie Mae-approved private mortgage
insurers, establishing certain minimum terms of coverage necessary in order for
an insurer to be eligible to insure loans purchased by Fannie Mae. The terms of
MGIC's Master Policy comply with these guidelines.
MGIC's claims-paying ability is rated "AA+" by Standard & Poor's
Corporation and "Aa2" by Moody's Investors Service, Inc. Maintenance of a
claims-paying ability rating of at least AA-/Aa3 is critical to a mortgage
insurer's ability to continue to write new business. In assigning claims-paying
ability ratings, rating agencies review a mortgage insurer's competitive
position and business, management, corporate strategy, historical and projected
operating and underwriting 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.
24
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. In 1998, the FHA's authority was
expanded by legislation to permit it to insure mortgages having higher principal
balances. 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. Among other remedies, there is civil
liability for violation of this provision of RESPA in an amount equal to three
times the amount of any charge paid for the settlement service involved in the
violation. Under regulations adopted by HUD, "settlement services" are services
provided in connection with settlement of a mortgage loan, including services
involving mortgage insurance. In recent years, RESPA has been a source of
substantial uncertainty and litigation for the home mortgage lending and real
estate settlement services industries.
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.
25
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 (including legislation or regulation that expands the
permissible insurance activities of affiliates of depositary institutions) will
not be adopted which will adversely affect the private mortgage insurance
industry.
G. Employees
At December 31, 1998, the Company had 1,200 full- and part-time
employees, of whom approximately one-half were assigned to its Milwaukee
headquarters and the other half assigned 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, 1998, the Company leased office space in various cities
throughout the United States under leases expiring between 1999 and 2006 and
which required annual rentals of $2.1 million in 1998.
The Company owns its headquarters facility and an additional
office/warehouse facility, both located in Milwaukee, Wisconsin, which contain
an aggregate of approximately 340,000 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 affect on
the financial position of the Company.
26
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, 1999 is set forth below:
Name and Age Title
William H. Lacy, 54........... Chairman of the Board and Chief Executive Officer
of the Company and Chairman of the Board of MGIC;
Director of the Company and MGIC
Curt S. Culver, 46............ President of the Company and President and Chief
Executive Officer of MGIC; Director of the
Company and MGIC
J. Michael Lauer, 54.......... Executive Vice President and Chief Financial
Officer of the Company and MGIC
James S. MacLeod, 51.......... Executive Vice President-Field Operations of MGIC
Lawrence J. Pierzchalski, 46.. Executive Vice President, Risk Management of MGIC
Gordon H. Steinbach, 53....... Executive Vice President, Credit Policy of MGIC
Lou T. Zellner, 48............ Executive Vice President-Corporate Development
of MGIC
Jeffrey H. Lane, 49........... Senior Vice President, General Counsel and
Secretary of the Company and MGIC
Mr. Lacy has served as Chief Executive Officer of the Company since
October 1987 and as Chairman of the Board of the Company since January 1999. He
has been Chairman of the Board of MGIC since May 1996 and was Chief Executive
Officer of MGIC from the beginning of its business operations in March 1985
until January 1999.
27
Mr. Culver has served as President of the Company and as Chief
Executive Officer of MGIC since January 1999. 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. 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. 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. Steinbach has served as Executive Vice President-Credit Policy of
MGIC since October 1996. He served as Executive Vice President-Affordable
Housing and Claims of MGIC from July 1992 to October 1996 and prior thereto was
a senior officer of MGIC since March 1985 having responsibility at various times
during his career with MGIC for risk management and underwriting.
Mrs. Zellner has served as Executive Vice President-Corporate
Development of MGIC since January 1999. Prior thereto, she was a senior officer
of MGIC since 1986 having responsibility at various times during her career with
MGIC for corporate development, non-insurance operations, claims and
reinsurance. From 1983-1986, Mrs. Zellner was Wisconsin Deputy Commissioner of
Insurance.
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.
28
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 to last paragraph under the
caption "Management's Discussion and Analysis-Results of Consolidated
Operations - 1998 Compared with 1997," in the second paragraph under
the caption "Management's Discussion and Analysis-Financial Condition"
and in Note 5 of the Notes to the consolidated financial statements,
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, 1998, and the related consolidated balance sheet of the
Company as of December 31, 1998 and 1997, 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.
29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
30
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information on the Directors of the Registrant is included in the
Company's Proxy Statement for the 1999 Annual Meeting of Shareholders,
and is hereby incorporated by reference. The information on the
Executive Officers of the Registrant 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
1999 Annual Meeting of Shareholders (other than information covered by
Instruction (9) to Item 402 (a) of Regulation S-K of the Securities and
Exchange Commission), and 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
1999 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
1999 Annual Meeting of Shareholders, and is hereby incorporated by
reference.
31
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)1. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1998.
32
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, 1998
Consolidated balance sheet at December 31, 1998 and 1997
Consolidated statement of shareholders' equity for each of the three years in
the period ended December 31, 1998
Consolidated statement of cash flows for each of the three years in the period
ended December 31, 1998
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, 1998:
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.
33
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 30, 1999.
MGIC INVESTMENT CORPORATION
By /s/ William H. Lacy
William H. Lacy
Chairman 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/ William H. Lacy /s/ David S. Engelman
William H. Lacy David S. Engelman, Director
Chairman, Chief Executive Officer
and Director
/s/ James D. Ericson
/s/ J. Michael Lauer James D. Ericson, Director
J. Michael Lauer
Executive Vice President and /s/ Daniel Gross
Chief Financial Officer Daniel Gross, Director
(Principal Financial Officer)
/s/ Kenneth M. Jastrow, II
/s/ Patrick Sinks Kenneth M. Jastrow, II, Director
Patrick Sinks
Vice President, Controller and /s/ Sheldon B. Lubar
Chief Accounting Officer Sheldon B. Lubar, Director
(Principal Accounting Officer)
/s/ William A. McIntosh
/s/ James A. Abbott William A. McIntosh, Director
James A. Abbott, Director
/s/ Leslie M. Muma
/s/ Mary K. Bush Leslie M. Muma, Director
Mary K. Bush, Director
/s/ Peter J. Wallison
/s/ Karl E. Case Peter J. Wallison, Director
Karl E. Case, Director
/s/ Edward J. Zore
/s/ Curt S. Culver Edward J. Zore, Director
Curt S. Culver, Director
34
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 6, 1999 appearing in the 1998 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) 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 6, 1999
35
MGIC INVESTMENT CORPORATION
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1998
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 $ 65,811 $ 71,416 $ 71,416
States, municipalities and political subdivisions 2,030,847 2,149,590 2,149,590
Foreign governments 15,884 17,256 17,256
Public utilities 56,600 60,263 60,263
All other corporate bonds 291,276 304,345 304,345
--------------- --------------- ---------------
Total fixed maturities 2,460,418 2,602,870 2,602,870
Equity securities:
Common stocks:
Banks, trust and insurance companies 1,333 4,377 4,377
Industrial, miscellaneous and all other 250 250 250
--------------- --------------- ---------------
Total equity securities 1,583 4,627 4,627
--------------- --------------- ---------------
Short-term investments 172,209 172,209 172,209
--------------- --------------- ---------------
Total investments $ 2,634,210 $ 2,779,706 $ 2,779,706
=============== =============== ===============
36
MGIC INVESTMENT CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET AND COMPREHENSICE INCOME
PARENT COMPANY ONLY
December 31, 1998 and 1997
1998 1997
(In thousands of dollars)
ASSETS
Investment portfolio, at market value:
Fixed maturities $ 1,056 $ 11,487
Short-term investments 21,983 5,411
--------------- ---------------
Total investment portfolio 23,039 16,898
Cash 5 -
Investment in subsidiaries, at equity in net assets 2,072,944 1,693,879
Income taxes receivable - affiliates 259 18,912
Accrued investment income 27 224
Other assets 848 9
--------------- ---------------
Total assets $ 2,097,122 $ 1,729,922
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 442,000 $ 237,500
Accounts payable - affiliates 11,009 3,057
Other liabilities 3,522 2,583
--------------- ---------------
Total liabilities 456,531 243,140
--------------- ---------------
Shareholders' equity (note B):
Common stock, $1 par value, shares authorized
300,000,000; shares issued 121,110,800;
outstanding 1998 - 109,003,032; 1997 - 113,791,593 121,111 121,111
Paid-in surplus 217,022 218,499
Treasury stock (shares at cost, 1998 - 12,107,768;
1997 - 7,319,207) (482,465) (252,942)
Accumulated other comprehensive income - unrealized
appreciation in investment portfolio of subsidiaries, net of tax 94,572 83,985
Retained earnings 1,690,351 1,316,129
--------------- ---------------
Total shareholders' equity 1,640,591 1,486,782
--------------- ---------------
Total liabilities and shareholders' equity $ 2,097,122 $ 1,729,922
=============== ===============
See accompanying supplementary notes to Parent Company condensed financial statements.
37
MGIC INVESTMENT CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
PARENT COMPANY ONLY
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
(In thousands of dollars)
Revenue:
Equity in undistributed net income of subsidiaries $ 368,242 $ 304,434 $ 240,631
Dividends received from subsidiaries 28,394 22,143 16,349
Investment income, net 1,117 1,576 1,256
Realized investment gains (losses), net 334 233 (32)
Other income 9 - 3
---------------- -------------- --------------
Total revenue 398,096 328,386 258,207
---------------- -------------- --------------
Expenses:
Operating expenses 180 374 216
Interest expense 18,624 6,080 -
---------------- -------------- --------------
Total expenses 18,804 6,454 216
---------------- -------------- --------------
Income before tax 379,292 321,932 257,991
Credit for income tax (6,173) (1,818) -
---------------- -------------- --------------
Net income 385,465 323,750 257,991
---------------- -------------- --------------
Other comprehensive income - unrealized
investment gains (losses), net 10,587 43,300 (14,052)
---------------- -------------- --------------
Comprehensive income $ 396,052 $ 367,050 $ 243,939
================ ============== ==============
See accompanying supplementary notes to Parent Company condensed financial statements.
38
MGIC INVESTMENT CORPORATION
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF CASH FLOWS
PARENT COMPANY ONLY
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
(In thousands of dollars)
Cash flows from operating activities:
Net income $ 385,465 $ 323,750 $ 257,991
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (368,242) (304,434) (240,631)
Decrease (increase) in income taxes receivable 18,653 (6,824) (6,443)
Decrease in accrued investment income 197 36 18
Increase (decrease) in accounts payable - affiliates 7,952 (9,299) 1,413
Increase in other liabilities 939 2,583 -
(Increase) decrease in other assets (839) 6 (16)
Other 17,845 3,516 3,840
---------------- -------------- --------------
Net cash provided by operating activities 61,970 9,334 16,172
---------------- -------------- --------------
Cash flows from investing activities:
Increase in investment in subsidiaries - (5,000) (10,000)
Purchase of fixed maturities (500) (8,650) (7,232)
Sale of fixed maturities 10,901 17,756 4,600
Sale of equity securities - - 30
---------------- -------------- --------------
Net cash provided by (used in) investing activities 10,401 4,106 (12,602)
---------------- -------------- --------------
Cash flows from financing activities:
Dividends paid to shareholders (11,243) (11,029) (9,425)
Net increase in notes payable 204,500 237,500 -
Interest payments on notes payable (17,665) (3,836) (3,793)
Reissuance of treasury stock 15,454 13,072 10,209
Repurchase of common stock (246,840) (248,426) -
---------------- -------------- --------------
Net cash (used in) provided by financing activities (55,794) (12,719) (3,009)
---------------- -------------- --------------
Net increase in cash and short-term investments 16,577 721 561
Cash and short-term investments at beginning of year 5,411 4,690 4,129
---------------- -------------- --------------
Cash and short-term investments at end of year $ 21,988 $ 5,411 $ 4,690
================ ============== ==============
See accompanying notes to Parent Company condensed financial statements.
39
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 on pages 14 through 31 of the MGIC Investment
Corporation 1998 Annual Report to Shareholders.
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 1999, the Company's principal insurance
subsidiary, Mortgage Guaranty Insurance Corporation can pay $49.4 million of
dividends and the other insurance subsidiaries of the Company can pay $4.5
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 1998, 1997 and 1996, the Company paid dividends of $11.2 million, $11.0
million and $9.4 million, respectively or $.10 per share in 1998, $.095 per
share in 1997 and $.08 per share in 1996.
40
MGIC INVESTMENT CORPORATION
SCHEDULE IV - REINSURANCE
MORTGAGE INSURANCE PREMIUMS EARNED
Years Ended December 31, 1998, 1997 and 1996
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,
1998 $770,775 $ 17,161 $ 9,670 $763,284 1.3%
======== ========= ======== ========
1997 $712,069 $ 15,990 $12,665 $708,744 1.8%
======== ========= ======== ========
1996 $623,148 $ 19,350 $13,245 $617,043 2.1%
======== ========= ======== ========
41
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.
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)
[The Company is a party to separate Credit Agreements with different
groups of financial institutions. These Credit 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 Credit 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(2)
10.2 Tax Agreement between NML, the Company and certain subsidiaries of the
Company, dated January 1, 1986, including amendment thereto dated as of
August 2, 1991(3)
10.3 Tax Sharing Agreement between the Company, MGIC and certain
subsidiaries of MGIC, dated January 22, 1986(4)
10.4 Amendment to Tax Agreement, dated as of August 14, 1991, by and between
NML, the Company, and its subsidiaries(5)
10.5 Amended and Restated Investment Advisory and Servicing Agreement
between the Company and Northwestern Mutual Investment Services, Inc.
("NMIS"), dated December 5, 1997.(6) [Northwestern Mutual Investment
Services, LLC has succeed to NMIS as a party to such Agreement.]
Exhibit
Numbers Description of Exhibits
10.6 MGIC Investment Corporation Amended and Restated 1989 Stock Option Plan
(including forms of option agreement).(7)
10.7 MGIC Investment Corporation 1991 Stock Incentive Plan.
10.8 Form of Stock Option Agreement under 1991 Stock Option Plan (now known
as the 1991 Stock Incentive Plan).(8)
10.9 Form of Stock Option Agreement under 1991 Stock Incentive Plan (1997
Form 1).(9)
10.10 Form of Restricted Stock Award Agreement under 1991 Stock Incentive
Plan.
10.11 Executive Bonus Plan
10.12 Supplemental Executive Retirement Plan.(10)
10.13 MGIC Investment Corporation Deferred Compensation Plan for Non-Employee
Directors.(11)
10.14 MGIC Investment Corporation 1993 Restricted Stock Plan for Non-Employee
Directors.(12)
10.15 Two forms of Award Agreement under MGIC Investment Corporation 1993
Restricted Stock Plan for Non-Employee Directors.(13)
10.16 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)
11 Statement re: computation of per share earnings
13 Information from the 1998 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 Price Waterhouse LLP
27 Financial Data Schedule
Supplementary List of the above Exhibits which relate to management
contracts or compensatory plans or arrangements.
Exhibit
Numbers Description of Exhibits
10.6 MGIC Investment Corporation Amended and Restated 1989 Stock Option Plan
(including forms of option agreement).
10.7 MGIC Investment Corporation 1991 Stock Incentive Plan.
10.8 Form of Stock Option Agreement under 1991 Stock Option Plan (now known
as the 1991 Stock Incentive Plan).
10.9 Form of Stock Option Agreement under 1991 Stock Incentive Plan (1997
Form 1).
10.10 Form of Restricted Stock Award Agreement under 1991 Stock Incentive
Plan.
10.11 Executive Bonus Plan
10.12 Supplemental Executive Retirement Plan.
10.13 MGIC Investment Corporation Deferred Compensation Plan for Non-Employee
Directors
10.14 MGIC Investment Corporation 1993 Restricted Stock Plan for Non-Employee
Directors.
10.15 Two forms of Award Agreement under MGIC Investment Corporation 1993
Restricted Stock Plan for Non-Employee Directors.
The following documents, identified in the footnote references above,
are incorporated by reference, as indicated, to: the Company's Form S-1
Registration Statement (No. 33-41289), which became effective in August 1991
(the "1991 S-1"); the Company's Annual Reports on Form 10-K for the years ended
December 31, 1991, 1993, 1994, 1996 or 1997 (the "1991 10-K," "1993 10-K," "1994
10-K," "1996 10-K," and "1997 10-K" respectively); or to the Quarterly Reports
on Form 10-Q for the Quarters ended June 30, 1994 or 1998 (the "June 30, 1994
10-Q" and "June 30, 1998 10-Q," respectively). 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 10.1 to the 1991 S-1.
(3) The Tax Agreement is Exhibit 10.8 to the 1991 S-1 and the amendment
thereto is Exhibit 10.21 to the 1991 S-1.
(4) Exhibit 10.9 to the 1991 S-1.
(5) Exhibit 10.10 to the 1991 10-K.
(6) Exhibit 10.5 to the 1997 10-K.
(7) Exhibit 10.16 to the 1991 S-1.
(8) Exhibit 10.19 to the 1991 10-K.
(9) Exhibit 10.9 to the 1997 10-K.
(10) Exhibit 10.16 to the 1996 10-K
(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.
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
MGIC INVESTMENT CORPORATION
ARTICLE I. OFFICES
1.01. Principal and Business Offices. The corporation may have such
principal and other business offices, either within or without the State of
Wisconsin, as the Board of Directors may designate or as the business of the
corporation may require from time to time.
1.02. Registered Office. The registered office of the corporation
required by the Wisconsin Business Corporation Law to be maintained in the State
of Wisconsin may be, but need not be, identical with the principal office in the
State of Wisconsin, and the address of the registered office may be changed from
time to time by the Board of Directors or by the registered agent. The business
office of the registered agent of the corporation shall be identical to such
registered office.
ARTICLE II. SHAREHOLDERS
2.01. Annual Meeting. The annual meeting of the shareholders ("Annual
Meeting") shall be held on the first Monday in May, at such time or on such
other day as may be designated by resolution of the Board of Directors. In
fixing a meeting date for any Annual Meeting, the Board of Directors may
consider such factors as it deems relevant within the good faith exercise of its
business judgment.
2.02. Purposes of Annual Meeting. At each Annual Meeting, the
shareholders shall elect directors and transact any other business as may
properly come before the Annual Meeting. If the election of directors shall not
be held on the date designated herein, or fixed as herein provided, for any
Annual Meeting, or any adjournment thereof, the Board of Directors shall cause
the election to be held at a special meeting of shareholders (a "Special
Meeting") as soon thereafter as is practicable.
2.03. Special Meetings. A Special Meeting, for any purpose or purposes,
unless otherwise prescribed by the Wisconsin Insurance Corporation Law, may be
called by the Board of Directors, the Chairman of the Board or the President.
The corporation shall call a Special Meeting in the event that the holders of at
least 10% of all of the votes entitled to be cast on any issue proposed to be
considered at the proposed Special Meeting sign, date and deliver to the
corporation one or more written demands for the meeting describing one or more
purposes for which it is to be held.
2.04. Place of Meeting. The Board of Directors, the Chairman of the
Board, the President or the Secretary may designate any place, either within or
without the State of Wisconsin, as the place of meeting for any Annual Meeting
or for any Special Meeting or for any postponement or adjournment thereof. If no
designation is made, the place of meeting shall be the principal business office
of the corporation in the State of Wisconsin. Any meeting may be adjourned to
reconvene at any place designated by vote of the Board of Directors or by the
Chairman of the Board, the President or the Secretary.
2.05. Notice of Meeting. Written or printed notice stating the date,
time and place of any Annual Meeting or Special Meeting shall of delivered not
less than three days (unless a longer period is required by the Wisconsin
Business Corporation Law) nor more than 60 days before the date of such meeting
either personally or by mail, by or at the direction of the Chairman of the
Board, the President or the Secretary, to each shareholder of record entitled to
vote at such meeting and to such other shareholders as required by the Wisconsin
Business Corporation Law. If mailed, notice pursuant to this Section 2.05 shall
be deemed to be effective when deposited in the United States mail, addressed to
the shareholder at his address as it appears on the stock record books of the
corporation, with postage thereon prepaid. Unless otherwise required by the
Wisconsin Business Corporation Law or the articles of incorporation of the
corporation, a notice of an Annual Meeting need not include a description of the
purpose for which the meeting is called. In the case of any Special Meeting, the
notice of meeting shall describe the purpose or purposes for which the Special
Meeting is called. If an Annual Meeting or Special Meeting is adjourned to a
different date, time or place, the corporation shall not be required to give
notice of the new date, time or place if the new date, time or place is
announced at the meeting before adjournment; provided, however, that if a new
Meeting Record Date (as defined in Section 2.06) for an adjourned meeting is or
must be fixed, the corporation shall give notice of the adjourned meeting to
persons who are shareholders as of the new Meeting Record Date.
2.06. Fixing of Record Date. The Board of Directors may fix in advance
a date not less than 10 days and not more than 70 days prior to the date of any
Annual Meeting or Special Meeting as the record date for the purpose of
determining shareholders entitled to notice of, and to vote at, such meeting
("Meeting Record Date"). The shareholders of record on the Meeting Record Date
shall be the shareholders entitled to notice of, and to vote at, the meeting.
Except as provided by the Wisconsin Business Corporation Law for a court-ordered
adjournment, a determination of shareholders entitled to notice of, and to vote
at, any Annual Meeting or Special Meeting is effective for any adjournment of
such meeting unless the Board of Directors fixes a new Meeting Record Date,
which it shall do if the meeting is adjourned to a date more than 120 days after
the date fixed for the original meeting. The Board of Directors may also fix in
advance a date as the record date for the purpose of determining shareholders
entitled to take any other action or determining shareholders for any other
purpose. Such record date shall be not more than 70 days prior to the date on
which the particular action, requiring such determination of shareholders, is to
be taken. The record date for determining shareholders entitled to a
distribution (other than a distribution involving a purchase, redemption or
other acquisition of the corporation's shares) or a share dividend is the date
on which the Board of
Directors authorizes the distribution or share dividend, as the case may be,
unless the Board of Directors fixes a different record date.
2.07. Voting Records. After a Meeting Record Date has been fixed, the
corporation shall prepare a list of the names of all of the shareholders
entitled to notice of the meeting. The list shall be arranged by class or series
of shares, if any, and show the address of, and number of shares held by, each
shareholder. Such list shall be available for inspection by any shareholder,
beginning two business days after notice of the meeting is given for which the
list was prepared and continuing to the date of the meeting, at the
corporation's principal office or at a place identified in the meeting notice in
the city where the meeting will be held. A shareholder or his agent may, on
written demand, inspect and, subject to the limitations imposed by the Wisconsin
Business Corporation Law, copy the list, during regular business hours and at
his expense, during the period that it is available for inspection pursuant to
this Section 2.07. The corporation shall make the shareholders' list available
at the meeting and any shareholder or his agent or attorney may inspect the list
at any time during the meeting or any adjournment thereof. Refusal or failure to
prepare or make available the shareholders' list shall not affect the validity
of any action taken at a meeting of shareholders.
2.08. Quorum and Voting Requirements; Postponements; Adjournments.
(a) Shares entitled to vote as a separate voting group may take action
on a matter at any Annual Meeting or Special Meeting only if a quorum of those
shares exists with respect to that matter. If the corporation has only one class
of stock outstanding, such class shall constitute a separate voting group for
purposes of this Section 2.08. Except as otherwise provided in the articles of
incorporation of this corporation or the Wisconsin Business Corporation Law, a
majority of the votes entitled to be cast on the matter shall constitute a
quorum of the voting group for action on that matter. Once a share is
represented for any purpose at any Annual Meeting or Special Meeting, other than
for the purpose of objecting to holding the meeting or transacting business at
the meeting, it is considered present for purposes of determining whether a
quorum exists for the remainder of the meeting and for any adjournment of that
meeting, unless a new Record Date is or must be set for the adjourned meeting.
If a quorum exists, except in the case of the election of directors, action on a
matter shall be approved if the votes cast within the voting group favoring the
action exceed the votes cast opposing the action, unless the articles or
incorporation of the corporation or the Wisconsin Business Corporation Law
requires a greater number of affirmative votes. Unless otherwise provided in the
articles of incorporation of the corporation, each director shall be elected by
a plurality of the votes cast by the shares entitled to vote in the election of
directors at any Annual Meeting or Special Meeting at which a quorum is present.
(b) The Board of Directors acting by resolution may postpone and
reschedule any previously scheduled Annual Meeting or Special Meeting. Any
Annual Meeting or Special Meeting may be adjourned from time to time, whether or
not there is a quorum, (i) at any time, upon a resolution of shareholders if the
votes cast in favor of such resolution by the holders of shares of each voting
group entitled to vote on any matter theretofore properly brought before the
meeting exceed the number of votes cast against such resolution by the holders
of shares of each
such voting group or (ii) at any time prior to the transaction of any business
at such meeting, by the Chairman of the Board or the President or pursuant to a
resolution of the Board of Directors. No notice of the time and place of
adjourned meetings need be given except as required by the Wisconsin Business
Corporation Law. At any adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally notified.
2.09. Conduct of Meetings. The Chairman of the Board, and in his
absence, the Vice Chairman of the Board, and in his absence, the President, and
in their absence, a Vice President in the order provided under Section 4.08, and
in their absence, any person chosen by the shareholders present shall call any
Annual Meeting or Special Meeting to order and shall act as chairman of such
meeting, and the Secretary of the corporation shall act as secretary of all
Annual Meetings and Special Meetings, but in the absence of the Secretary, the
presiding officer may appoint any other person to act as secretary of the
meeting.
2.10. Proxies. At all Annual Meetings and Special Meetings, a
shareholder entitled to vote may vote in person or by proxy. A shareholder may
appoint a proxy to vote or otherwise act for the shareholder by signing an
appointment form, either personally or by his attorney-in-fact. An appointment
of a proxy is effective when received by the Secretary or other officer or agent
of the corporation authorized to tabulate votes. An appointment is valid for
eleven months from the date of its signing unless a different period is
expressly provided in the appointment form. Unless otherwise provided, a proxy
may be revoked any time before it is voted, either by written notice filed with
the Secretary or the acting secretary of the meeting or by oral notice given by
the shareholder to the presiding officer during the meeting. The presence of a
shareholder who has filed his proxy does not of itself constitute a revocation.
The Board of Directors shall have the power and authority to make rules
establishing presumptions as to the validity and sufficiency of proxies.
2.11. Voting of Shares.
(a) Each outstanding share shall be entitled to one vote upon each
matter submitted to a vote at any Annual Meeting or Special Meeting, except to
the extent that the voting rights of the shares of any class or classes are
enlarged, limited or denied by the Wisconsin Business Corporation Law or the
articles of incorporation of the corporation.
(b) Shares held by another corporation, if a sufficient number of
shares entitled to elect a majority of the directors of such other corporation
is held directly or indirectly by this corporation, shall not be entitled to
vote at any Annual Meeting or Special Meeting, but shares held in a fiduciary
capacity may be voted.
2.12. Acceptance of Instruments Showing Shareholder Action. If the name
signed on a vote, consent, waiver or proxy appointment corresponds to the name
of a shareholder, the corporation, if acting in good faith, may accept the vote,
consent, waiver or proxy appointment and give it effect as the act of a
shareholder. If the name signed on a vote, consent, waiver or proxy appointment
does not correspond to the name of a shareholder, the
corporation may accept the vote, consent, waiver or proxy appointment and give
it effect as the act of the shareholder if any of the following apply:
(a) The shareholder is an entity and the name signed purports to be
that of an officer or agent of the entity.
(b) The name purports to be that of a personal representative,
administrator, executor, guardian or conservator representing the shareholder
and, if the corporation requests, evidence of fiduciary status acceptable to the
corporation is presented with respect to the vote, consent, waiver or proxy
appointment.
(c) The name signed purports to be that of a receiver or trustee in
bankruptcy of the shareholder and, if the corporation requests, evidence of this
status acceptable to the corporation is presented with respect to the vote,
consent, waiver or proxy appointment.
(d) The name signed purports to be that of a pledgee, beneficial owner,
or attorney-in-fact of the shareholder and, if the corporation requests,
evidence acceptable to the corporation of the signatory's authority to sign for
the shareholder is presented with respect to the vote, consent, waiver or proxy
appointment.
(e) Two or more persons are the shareholder as co-tenants or
fiduciaries and the name signed purports to be the name of at least one of the
co-owners and the person signing appears to be acting on behalf of all
co-owners.
The corporation may reject a vote, consent, waiver or proxy appointment
if the Secretary or other officer or agent of the corporation who is authorized
to tabulate votes, acting in good faith, has reasonable basis for doubt about
the validity of the signature on it or about the signatory's authority to sign
for the shareholder.
2.13 Waiver of Notice by Shareholders. A shareholder may waive any
notice required by the Wisconsin Business Corporation Law, the articles of
incorporation of the corporation or these Bylaws before or after the date and
time stated in the notice. The waiver shall be in writing and signed by the
shareholder entitled to the notice, contain the same information that would have
been required in the notice under applicable provisions of the Wisconsin
Business Corporation Law (except that the time and place of meeting need not be
stated) and be delivered to the corporation for inclusion in the corporate
records. A shareholder's attendance at any Annual Meeting or Special Meeting, in
person or by proxy, waives objection to all of the following: (a) lack of notice
or defective notice of the meeting, unless the shareholder at the beginning of
the meeting or promptly upon arrival objects to holding the meeting or
transacting business at the meeting; and (b) consideration of a particular
matter at the meeting that is not within the purpose described in the meeting
notice, unless the shareholder objects to considering the matter when it is
presented.
ARTICLE III. BOARD OF DIRECTORS
3.01 General Powers; Number and Classification; Vacancy.
(a) All corporate powers shall be exercised by or under the authority
of, and the business and affairs of the corporation shall be managed under the
direction of, the Board of Directors.
(b) The number of directors of the corporation shall be not less than 7
nor more than 17, as determined from time to time by the Board of Directors,
divided into three substantially equal classes and designated as Class I, Class
II and Class III, respectively. Commencing at a Special Meeting to be held
promptly after the adoption of these Bylaws, a class of directors shall be
elected to Class I for a term to expire at the 1992 Annual Meeting, a class of
directors shall be elected to Class II for a term to expire at the 1993 Annual
Meeting and a class of directors shall be elected to Class III for a term to
expire at the 1994 Annual Meeting and, in each case, until their successors are
duly qualified and elected. At each Annual Meeting thereafter the successors to
the class of directors whose term shall expire at the time of Annual Meeting
shall be elected to hold office until the third succeeding Annual Meeting, and
until their successors are duly qualified and elected or until there is a
decrease in the number of directors that takes effect after the expiration of
their term.
(c) Any vacancy occurring in the Board of Directors, including a
vacancy created by an increase in the number of directors, shall be filled by
the affirmative vote of a majority of the directors then in office, though less
than a quorum of the Board of Directors, or by a sole remaining director. Any
director so elected shall serve until the next election of the class for which
such director shall have been chosen and until his successor shall be duly
qualified and elected.
3.02. Resignations and Qualifications. A director may resign at any
time by delivering written notice which complies with the Wisconsin Business
Corporation Law to the Board of Directors, the Chairman of the Board or to the
corporation. A director's resignation is effective when the notice is delivered
unless the notice specifies a later effective date. Directors need not be
residents of the State of Wisconsin or shareholders of the corporation.
3.03. Regular Meetings. A regular meeting of the Board of Directors
shall be held without other notice than this Bylaw immediately after the Annual
Meeting. The place of such regular meeting shall be the same as the place of the
Annual Meeting which precedes it, or such other suitable place as may be
announced to directors at or before such Annual Meeting. The Board of Directors
may provide, by resolution, the date, time and place, either within or without
the State of Wisconsin, for the holding of additional regular meetings of the
Board of Directors without other notice than such resolution.
3.04. Special Meetings. Special meetings of the Board of Directors may
be called by or at the request of the Chairman of the Board, President,
Secretary or any two directors. The Chairman of the Board, the President or the
Secretary may designate any place,
either within or without the State of Wisconsin, as the place for holding any
such special meeting. If no designation is made, the place of meeting shall be
the principal business office of the corporation in the State of Wisconsin.
3.05 Notice; Waiver. Notice of each meeting of the Board of Directors
(unless otherwise provided in or pursuant to Section 3.03) shall be given to
each director not less than 24 hours prior to the meeting by giving oral,
telephonic or written notice to a director communicated in person, or by
telegram, facsimile or other form of wire or wireless communication, or not less
than 48 hours prior to a meeting by delivering, sending by private carrier or
mailing written notice to the business address or such other address as a
director shall have designated in writing filed with the Secretary. If mailed,
such notice shall be deemed to be effective when deposited in the United States
mail so addressed with postage thereon prepaid. If notice be given by telegram,
such notice shall be deemed to be effective when the telegram addressed as in
case of notice by mail is delivered to the telegraph company. If notice is given
by private carrier, such notice shall be deemed to be effective when the notice
addressed as in case of notice by mail is delivered to the private carrier.
Whenever any notice whatever is required to be given to any director of the
corporation under the articles of incorporation of the corporation, these Bylaws
or any provision of the Wisconsin Business Corporation Law, a waiver thereof in
writing, signed at any time, whether before or after the date and time of
meeting, by the director entitled to such notice, shall be deemed equivalent to
the giving of such notice. The corporation shall retain any such waiver as part
of its permanent corporate records, but only for so long as such other permanent
corporate records are maintained. A director's attendance at, or participation
in, a meeting waives any required notice to him of the meeting unless the
director at the beginning of the meeting or promptly upon his arrival objects to
holding the meeting or transacting business at the meeting and does not
thereafter vote for or assent to action taken at the meeting. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the Board of Directors need be specified in the notice, or waiver of notice,
of such meeting.
3.06. Quorum. Except as otherwise provided by the Wisconsin Business
Corporation Law, the articles of incorporation of the corporation or these
Bylaws, a majority of the number of directors fixed in Section 3.01 shall
constitute a quorum for the transaction of business at any meeting of the Board
of Directors, but a majority of the directors present (though less than such
quorum) may adjourn any meeting of the Board of Directors or any committee
thereof, as the case may be, from time to time without further notice. Except as
otherwise provided by the Wisconsin Business Corporation Law, the articles of
incorporation or by these Bylaws, a quorum of any committee of the Board of
Directors created pursuant to Section 3.12 hereof shall consist of a majority of
the number of directors appointed to serve on the committee, but a majority of
the members present (though less than a quorum) may adjourn the meeting from
time to time without further notice.
3.07. Manner of Acting. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors, unless the act of a greater number is required by the Wisconsin
Business Corporation Law, the articles of incorporation of this corporation or
these Bylaws.
3.08. Conduct of Meetings. The Chairman of the Board, and in his
absence, the Vice Chairman of the Board, and in their absence, the President and
in their absence, a Vice President in the order provided under Section 4.08, and
in their absence, any director chosen by the directors present, shall call
meetings of the Board of Directors, but in the absence of the Secretary, the
presiding officer may appoint any Assistant Secretary or any director or any
other person present to act as secretary of the meeting. Minutes of any regular
or special meeting of the Board of Directors shall be prepared and distributed
to each director.
3.09. Compensation. The Board of Directors, irrespective of any
personal interest of any of its members, may establish reasonable compensation
of all directors for services to the corporation as directors, officers or
otherwise, or may delegate such authority to an appropriate committee. The Board
of Directors also shall have authority to provide for, or to delegate authority
to an appropriate committee to provide for, reasonable pensions, disability or
death benefits, and other benefits or payments, to directors, officers and
employees and to their estates, families, dependents, or beneficiaries on
account of prior services rendered by such directors, officers and employees to
the corporation.
3.10. Unanimous Consent Without Meeting. Any action required or
permitted by the articles of incorporation of the corporation, these Bylaws or
any provision of the Wisconsin Business Corporation Law to be taken by the Board
of Directors (or any committee thereof created pursuant to Section 3.12) at a
meeting may be taken without a meeting if a consent in writing, setting forth
the action so taken, shall be signed by all members of the Board of Directors or
of the committee, as the case may be, then in office. Any such consent action
may be signed in separate counterparts and shall be effective when the last
director or committee member signs the consent, unless the consent specifies a
different effective date.
3.11. Presumption of Assent. A director of the corporation who is
present at a meeting of the Board of Directors or any committee thereof of which
he is a member at which action on any corporate matter is taken shall be
presumed to have assented to the action taken unless any of the following
occurs: (a) the director objects at the beginning of the meeting or promptly
upon his arrival to holding the meeting or transacting business at the meeting;
(b) the director's dissent or abstention from the action taken is entered in the
minutes of the meeting; or (c) the director delivers written notice that
complies with the Wisconsin Business Corporation Law of his dissent or
abstention to the presiding officer of the meeting before its adjournment or to
the corporation immediately after adjournment of the meeting. Such right to
dissent or abstain shall not apply to a director who voted in favor of such
action.
3.12. Committees.
(a) (i) An Executive Committee consisting of three or more members of
the Board of Directors be and it hereby is created. The Board of Directors by
the affirmative vote of a majority of the number of directors fixed in Section
3.01, shall designate the members of the Executive Committee, one of whom shall
be designated by the Board of Directors as Chairman of the Executive Committee.
The Executive Committee shall have and may exercise all powers of the Board of
Directors in the management of the business and affairs of the corporation when
the Board of Directors is not in session; provided, however, that the Executive
Committee shall have no power or authority to take action on behalf of the Board
of Directors to the extent limited in Section 3.12(b) of these Bylaws or the
Wisconsin Business Corporation Law. The Board of Directors shall have the power
at any time to fill vacancies in, to change the members of, or to dissolve the
Executive Committee by the affirmative vote of a majority of the directors then
in office, though less than a quorum of the Board of Directors, or by a sole
remaining director.
(ii) Notice of each meeting of the Executive Committee shall be given
to each member thereof in accordance with Section 3.05. The attendance or
participation of a committee member at a meeting shall constitute a waiver of
required notice to him of such meeting, unless the committee member at the
beginning of the meeting or promptly upon his arrival objects to holding the
meeting or transacting business at the meeting and does not thereafter vote for
or assent to action taken at the meeting. Neither the business to be transacted
at, not the purpose of, any meeting of the Executive Committee need be specified
in the notice, or waiver of notice, of such meeting.
(iii) The act of the majority of the members present at a meeting at
which a quorum is present shall be the act of the Executive Committee, unless
the act of a greater number is required by the Wisconsin Business Corporation
Law or by the articles incorporation of the corporation or these Bylaws.
(iv) The Chairman of the Executive Committee, and, in his absence, any
member chosen by the members present, shall call meetings of the Executive
Committee to order and shall act as chairman of the meeting. The presiding
officer may appoint any member or other person present to act as secretary of
the meeting. Unless otherwise provided by the Wisconsin Business Corporation
Law, the articles of incorporation of the corporation or these Bylaws, the
Executive Committee shall fix its own rules governing the conduct of its
activities and shall keep and report to the Board of Directors regular minutes
of the proceedings of the Executive Committee for subsequent approval by the
Board of Directors.
(b) The Board of Directors by resolution adopted by the affirmative
vote of a majority of the number of directors fixed in Section 3.01 may
designate one or more other committees, appoint members of the Board of
Directors to serve on the committees and designate other members of the Board of
Directors to serve as alternates. Alternate members of a committee shall take
the place of any absent member or members at any meeting of such committee upon
request of the Chairman of the Board or the President or upon request of the
chairman of such meeting. Each committee (other than the Executive Committee)
shall consist of two or more directors elected by, and to serve at the pleasure
of, the Board of Directors. A committee may be authorized to exercise the
authority of the Board of Directors, except that a committee (including the
Executive Committee) may not do any of the following: (a) authorize
distributions; (b) approve or propose to shareholders action that the Wisconsin
Business Corporation Law requires to be approved by shareholders; (c) fill
vacancies on the Board of Directors or, unless the Board of Directors provides
by resolution that vacancies on a committee shall be filled by the affirmative
vote of the remaining committee members, on any Board committee; (d) amend the
articles of incorporation of the corporation; (e) adopt, amend or repeal
these Bylaws; (f) approve a plan of merger not requiring shareholder approval;
(g) authorize or approve reacquisition of shares, except according to a formula
or method prescribed by the Board of Directors; and (h) authorize or approve the
issuance or sale or contract for sale of shares, or determine the designation
and relative rights, preferences and limitations of a class or series of shares,
except that the Board of Directors may authorize a committee to do so within
limits prescribed by the Board of Directors. Unless otherwise provided by the
Board of Directors in creating the committee, a committee (including the
Executive Committee) may employ counsel, accountants and other consultants to
assist it in the exercise of its authority. Notices of committee meetings shall
be given to committee members in compliance with Section 3.05. Each such
committee shall fix its own rules governing the conduct of its activities and
shall make such reports to the Board of Directors of its activities as the Board
of Directors may request.
3.13. Telephonic Meetings. Except as herein provided and
notwithstanding any place set forth in the notice of the meeting or these
Bylaws, members of the Board of Directors (and any committees thereof created
pursuant to Section 3.12) may participate in regular or special meetings by, or
through the use of, any means of communication by which all participants may
simultaneously hear each other, such as by conference telephone. If a meeting is
conducted by such means, then at the commencement of such meeting the presiding
officer shall inform the participating directors that a meeting is taking place
at which official business may be transacted. Any participant in a meeting by
such means shall be deemed present in person at such meeting. If action is to be
taken at any meeting held by such means on any of the following: (a) a plan of
merger or share exchange; (b) a sale, lease, exchange or other disputation of
substantial property or assets of the corporation; (c) a voluntary dissolution
or the revocation of voluntary dissolution proceedings; or (d) a filing for
bankruptcy, then the identity of each director participating in such meeting
must be verified by the disclosure at such meeting by each such director of each
such director's social security number to the secretary of the meeting before a
vote may be taken on any of the foregoing matters. For purposes of the preceding
clause (b), the phrase "sale, lease, exchange or other disposition of
substantial property or assets" shall mean any sale, lease, exchange or other
disposition of property or assets of the corporation having a net book value
equal to 10% or more of the net book value of the total assets of the
corporation on and as of the close of the fiscal year last ended prior to the
date of such meeting and as to which financial statements of the corporation
have been prepared.
ARTICLE IV. OFFICERS
4.01. Number. The principal offices of the corporation shall be a
President, one or more Vice Presidents, as authorized from time to time by the
Board of Directors, a Controller, a Secretary and a Treasurer and such other
officers and agents as the Board of Directors may from time to time determine
necessary, each of whom shall be chosen by the Board of Directors. The Board of
Directors may also from time to time elect or appoint a Chairman of the Board
and a Vice Chairman of the Board. The Board of Directors may also authorize any
duly authorized officer to appoint one or more officers or assistant officers.
Any number of offices may be held by the same person.
4.02. Election and Term of Office. The officers of the corporation to
be elected by the Board of Directors shall be elected annually at the first
meeting of the Board of Directors held after each Annual Meeting. If the
election of officers shall not be held at such meeting, such election shall be
held as soon thereafter as practicable. Each officer shall hold office until his
successor shall have been duly chosen or until his prior death, resignation or
removal.
4.03. Removal. The Board of Directors may remove any officer and,
unless restricted by the Board of Directors or these Bylaws, an officer may
remove any officer or assistant officer appointed by that officer, at any time,
with or without cause and notwithstanding the contract rights, if any, of the
officer removed. The election or appointment of an officer does not of itself
create contract rights.
4.04. Resignations and Vacancies.
(a) An officer may resign at any time by delivering notice to the
corporation that complies with the Wisconsin Business Corporation Law. The
resignation shall be effective when the notice is delivered, unless the notice
specifies a later effective date and the corporation accepts the later effective
date.
(b) A vacancy in the office of President, Secretary or Treasurer shall
be filled by the Board of Directors for the unexpired portion of the term. A
vacancy in any other office may also be filled by the Board of Directors, should
it deem it necessary to do so. If a resignation of an officer is effective at a
later date as contemplated by this Section 4.04, the Board of Directors may fill
the pending vacancy before the effective date if the Board of Directors provides
that the successor may not take office until the effective date.
4.05. Chairman of the Board. The Chairman of the Board shall be the
Chief Executive Officer of the corporation, and subject to the control of the
Board of Directors, shall, in general, supervise and control the business and
affairs of the corporation and shall determine long-range, strategic direction
and objectives and shall formulate major corporate policies. The Chairman of the
Board shall preside at all Annual Meetings and Special Meetings and at all
meetings of the Board of Directors. He shall also in general perform such other
duties and functions as may be assigned herein and as may be delegated or
assigned to him by the Board of Directors from time to time. The Chairman of the
Board shall have authority, subject to such rules as may be prescribed by the
Board of Directors, to appoint and remove such agents and employees of the
corporation as he shall deem necessary, to prescribe their powers, duties and
compensation and to delegate authority to them. The Chairman shall have
authority to sign, execute and acknowledge, on behalf of the corporation, all
deeds, mortgages, bonds, stock certificates, contracts, leases, reports and all
other departments or instruments necessary or proper to be executed in the
course of the corporation's regular business, or which shall be authorized by
the Board of Directors.
4.06. Vice Chairman of the Board. The Vice Chairman of the Board, if
one shall be elected or appointed, shall in the absence of the Chairman of the
Board, perform the duties and functions of the Chairman of the Board. He shall
also in general perform such other duties
and functions as may be delegated or assigned to him by the Board of Directors
or the Chairman of the Board.
4.07. President. The President shall perform such duties as may be
delegated to or assigned to him by the Chief Executive Officer or by the Board
of Directors from time to time. The President shall have authority to sign,
execute and acknowledge, on behalf of the corporation, all deeds, mortgages,
securities, contracts, leases, reports and all other documents necessary or
proper to be executed in the course of the corporation's regular business, or
which shall be authorized by the Board of Directors, and, except as otherwise
provided by law or the Board of Directors, he may authorize any Vice President
or other officer or agent of the corporation to sign, execute and acknowledge
such documents or instruments in his place and stead.
4.08. The Vice Presidents. The Board of Directors shall elect one or
more Vice Presidents as it shall deem necessary for the carrying out of the
corporation's business, some of whom may be designated as Executive Vice
Presidents and some of whom may be designated as Senior Vice Presidents. In the
absence of the President or in the event of his death, inability or refusal to
act, the Vice President (or, in the event there be more than one Vice President,
giving priority to any Executive Vice Presidents, and then to any Senior Vice
Presidents (in the order of their respective priorities), but otherwise in the
order designated by the Board of Directors or in the absence of any such
designation, then in order of choosing) shall perform the duties of the
President and, when so acting, shall have all the powers of and be subject to
all restrictions upon the President. Any Vice President shall perform such
duties and have such authority, as, from time to time, may be delegated or
assigned to him by the President, or by the Board of Directors. The execution of
any instrument of the corporation by any Vice President shall be conclusive
evidence as to third parties of his authority to act in the stead of the
President.
4.09. The Secretary. The Secretary shall: (a) keep the minutes of the
Annual Meetings and Special Meetings and other meetings of the Board of
Directors in one or more books provided for that purpose (including records of
consent actions taken by the shareholders or the Board of Directors (or
committees thereof) without a meeting; (b) see that all notices are duly given
in accordance with the provisions of these Bylaws or as required by the
Wisconsin Business Corporation Law; (c) be custodian of the corporate records
and of the seal of the corporation and see that the seal of the corporation is
affixed to all documents the execution of which on behalf of the corporation
under its seal is duly authorized; (d) maintain a record of the shareholders of
the corporation, in a form that permits preparation of a list of the names and
addresses of all shareholders, by class or series of shares, if any, and showing
the number and class or series of shares, if any, held by each shareholder; (e)
sign with the President, or a Vice President, certificates for shares of the
corporation, the issuance of which shall have been authorized by resolution of
the Board of Directors; (f) have general charge of the stock transfer books of
the corporation; and (g) in general perform all duties incident to the office of
Secretary and have such other duties and exercise such authority as from time to
time may be delegated or assigned to him by the President, any Vice President or
the Board of Directors.
4.10. The Treasurer. The Treasurer shall: (a) have charge and custody
of and be responsible for all funds and securities of the corporation; (b)
receive and give receipts for moneys due and payable to the corporation from any
source whatsoever, and deposit all such moneys in the name of the corporation in
such banks, trust companies or other depositories as shall be selected in
accordance with the provisions of Section 5.04; and (c) in general perform all
of the duties incident to the office of Treasurer and have such other duties and
exercise such other authority as from time to time may be delegated or assigned
to him by the President, any Vice President or the Board of Directors. If
required by the Board of Directors, the Treasurer shall give a bond for the
faithful discharge of his duties in such sum and with such surety or sureties as
the Board of Directors shall determine.
4.11. Controller. Subject to the control and supervision of the Board
of Directors, the Controller shall have charge of the books of account of the
corporation and maintain appropriate accounting records and he shall perform
such other duties and exercise such other authority as from time to time may be
delegated or assigned to him by the Board of Directors, the President or the
Vice President responsible for financial matters.
4.12. Assistant Secretaries and Assistant Treasurers. There shall be
such number of Assistant Secretaries and Assistant Treasurers as the Board of
Directors may from time to time authorize. The Assistant Secretaries may sign
with the President or a Vice President certificates for shares of the
corporation, the issuance of which shall have been authorized by a resolution of
the Board of Directors. The Assistant Treasurers shall respectively, if required
by the Board of Directors, give bonds for the faithful discharge of their duties
in such sums and with such sureties as the Board of Directors shall determine.
The Assistant Secretaries and Assistant Treasurers, in general, shall perform
such duties and have such authority as shall from time to time be delegated or
assigned to them by the Secretary or the Treasurer, respectively, or by the
President, any Vice President or the Board of Directors.
4.13. Other Assistants and Acting Officers. The Board of Directors
shall have the power to appoint, or to authorize any duly appointed officer of
the corporation to appoint, any person to act as assistant to any officer, or as
agent for the corporation in his stead, or to perform the duties of such officer
whenever for any reason it is impracticable for such officer to act personally,
and such assistant or acting officer or other agent so appointed by the Board of
Directors or an authorized officer shall have the power to perform all the
duties of the office to which he is so appointed to be assistant, or as to which
he is so appointed to act, except as such power may be otherwise defined or
restricted by the Board of Directors or the appointing officer.
4.14. Salaries. The salaries of the principal officers shall be fixed
from time to time by the Board of Directors or, except in the case of the
Chairman of the Board, the Vice Chairman of the Board, President or any
Executive Vice President, by a duly authorized committee thereof, and no officer
shall be prevented from receiving such salary by reason of the fact that he is
also a director of the corporation.
ARTICLE V. CONTRACTS, LOANS, CHECKS
AND DEPOSITS; SPECIAL CORPORATE ACTS
5.01. Contracts. The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute or deliver any
instrument in the name of and on behalf of the corporation, and such
authorization may be general or confined to specific instances. In the absence
of other designation, all deeds, mortgages and instruments of assignment or
pledge made by the corporation shall be executed in the name of the corporation
by the President or any Vice President and by the Secretary, an Assistant
Secretary, the Treasurer or an Assistant Treasurer; the Secretary or an
Assistant Secretary, when necessary or required, shall affix the corporate seal
thereto; and when so executed no other party to such instrument or any third
party shall be required to make any inquiry into the authority of the signing
officer or officers.
5.02. Loans. No loans shall be contracted on behalf of the corporation
and no evidences of indebtedness shall be issued in its name unless authorized
by or under the authority of a resolution of the Board of Directors. Such
authorization may be general or confined to specific instances.
5.03. Checks, Drafts, Etc. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the corporation, shall be signed by such officer or officers, agent or agents of
the corporation and in such manner as shall from time to time be determined by
or under the authority of a resolution of the Board of Directors.
5.04. Deposits. All funds of the corporation not otherwise employed
shall be deposited from time to time to the credit of the corporation in such
banks, trust companies or other depositories as may be selected by or under the
authority of a resolution of the Board of Directors.
5.05. Voting of Securities Owned by the Corporation. Subject always to
the specific directions of the Board of Directors, any share or shares of stock
or other securities issued by any other corporation and owned or controlled by
the corporation may be voted at any meeting of security holders of such other
corporation by the President or by any Vice President who may be present.
Whenever, in the judgment of the President or of any Vice President, it is
desirable for the corporation to execute a proxy or written consent in respect
to any share or shares of stock or other securities issued by any other
corporation and owned by the corporation, such proxy or consent shall be
executed in the name of the corporation by the President or by any one of the
Vice Presidents and, if required, should be attested by the Secretary or an
Assistant Secretary under the corporate seal without necessity of any
authorization by the Board of Directors. Any person or persons designated in the
manner above stated as the proxy or proxies of the corporation shall have full
right, power and authority to vote the share or shares of stock issued by such
other corporation and owned by the corporation the same as such share or shares
might be voted by the corporation.
5.06. No Nominee Procedures. The corporation has not established, and
nothing in these Bylaws shall be deemed to establish, any procedure by which a
beneficial owner of the corporation's shares that are registered in the name of
a nominee is recognized by the corporation as the shareholder under Section
180.0723 of the Wisconsin Business Corporation Law.
ARTICLE VI. CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.01. Certificates for Shares. Certificates representing shares of the
corporation shall be in such form consistent with the Wisconsin Business
Corporation Law, as shall be determined by the Board of Directors. Such
certificates shall be signed by the President or a Vice President and by the
Treasurer or an Assistant Treasurer or by the Secretary or an Assistant
Secretary. All certificates for shares shall be consecutively numbered or
otherwise identified. The name and address of the person to whom the shares
represented thereby are issued, with the number of shares and date of issue,
shall be registered upon the stock transfer books of the corporation. All
certificates surrendered to the corporation for transfer shall be canceled and
no new certificate shall be issued until the former certificate for a like
number of shares shall have been surrendered and canceled, except as provided in
Section 6.06.
6.02. Facsimile Signature and Seal. The seal of the corporation on any
certificates for shares may be a facsimile. The signatures of the President or
Vice President and the Treasurer or Assistant Treasurer or the Secretary or an
Assistant Secretary upon a certificate may be facsimiles if the certificate is
manually countersigned (a) by a transfer agent other than the corporation or its
employee, or (b) by a registrar other than the corporation or its employee.
6.03. Signature by Former Officers. The validity of a share certificate
is not affected if a person who signed the certificate (either manually or in
facsimile) no longer holds office when the certificate is issued. If any
officer, who has signed or whose facsimile signature has been placed upon any
certificate for shares, has ceased to be such officer before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer at the date of its issue.
6.04. Transfer of Shares. Prior to due presentment of a certificate for
shares for registration of transfer the corporation may treat the registered
owner of such shares as the person exclusively entitled to vote, to receive
notifications and otherwise to exercise all the rights and powers of an owner.
Where a certificate for shares is presented to the corporation with a request to
register for transfer, the corporation shall not be liable to the owner or any
other person suffering loss as a result of such registration of transfer if (a)
there were on the certificate the necessary endorsements, and (b) the
corporation had no duty to inquire into adverse claims or has discharged any
such duty. The corporation may require reasonable assurance that such
endorsements are genuine and effective and compliance with such other
regulations as may be prescribed under the authority of the Board of Directors.
6.05. Restrictions on Transfer. The face or reverse side of each
certificate representing shares shall bear a conspicuous notation of any
restriction imposed by the corporation upon the transfer of such shares.
6.06. Lost, Destroyed or Stolen Certificates. The Board of Directors
may direct a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the corporation alleged to
have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate of stock to be lost, stolen or
destroyed. When authorizing such issue of a new certificate or certificates, the
Board of Directors may, in its discretion and as a condition precedent to the
issuance thereof, require the person requesting such new certificate or
certificates, or his or her legal representative, to give the corporation a bond
in such sum as it may direct as indemnity against any claim that may be made
against the corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
6.07. Consideration for Shares. The Board of Directors may authorize
shares to be issued for consideration consisting of any tangible or intangible
property or benefit to the corporation, including cash, promissory notes,
services performed, contracts for services to be performed or other securities
of the corporation. Before the corporation issues shares, the Board of Directors
shall determine that the consideration received or to be received for the shares
to be issued is adequate. The determination of the Board of Directors is
conclusive insofar as the adequacy of consideration for the issuance of shares
relates to whether the shares are validly issued, fully paid and nonassessable.
The corporation may place in escrow shares issued in whole or in part for a
contract for future services or benefits, a promissory note, or other property
to be issued in the future, or make other arrangements to restrict the transfer
of the shares, and may credit distributions in respects of the shares against
their purchase price, until the services are performed, the benefits or property
are received or the promissory note is paid. If the services are not performed,
the benefits or property are not received or the promissory note is not paid,
the corporation may cancel, in whole or in part, the shares escrowed or
restricted and the distributions credited.
6.08. Stock Regulations. The Board of Directors shall have the power
and authority to make all such further rules and regulations not inconsistent
with the statues of the State of Wisconsin as it may deem expedient concerning
the issue, transfer and registration of certificates representing shares of the
corporation.
ARTICLE VII. SEAL
7.01. The Board of Directions shall provide a corporate seal
for the corporation which shall be circular in form and shall have inscribed
thereon the name of the corporation, and the state of incorporation and the
words, "Corporate Seal."
ARTICLE VIII. INDEMNIFICATION
8.01. Certain Definitions. All capitalized terms used in this
Article VIII and not otherwise hereinafter defined in this Section 8.01 shall
have the meaning set forth in Section 180.0850 of the Statute. The following
terms (including any plural forms thereof) used in this Article VIII shall be
defined as follows:
(a) "Affiliate" shall include, without limitation, any corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise
that directly or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the Corporation.
(b) "Authority" shall mean the entity selected by the Director or
Officer to determine his or her right to indemnification pursuant to Section
8.04.
(c) "Board" shall mean the entire then elected and serving Board of
Directors of the Corporation, including all members thereof who are Parties to
the subject Proceeding or any related Proceeding.
(d) "Breach of Duty" shall mean the Director or Officer breached or
failed to perform his or her duties to the Corporation and his or her breach of
or failure to perform those duties is determined, in accordance with Section
8.04, to constitute misconduct under Section 180.0851 (2) (a) 1, 2, 3 or 4 of
the Statute.
(e) "Corporation," as used herein and as defined in the Statute and
incorporated by reference into the definitions of certain other capitalized
terms used herein, shall mean this Corporation, including, without limitation,
any successor corporation or entity to this Corporation by way of merger,
consolidation or acquisition of all or substantially all of the capital stock or
assets of this Corporation.
(f) "Director or Officer" shall have the meaning set forth in the
Statute; provided, that, for purposes of this Article VIII, it shall be
conclusively presumed that any Director or Officer serving as a director,
officer, partner, trustee, member of any governing or decision-making committee,
employee or agent of an Affiliate shall be so serving at the request of the
Corporation.
(g) "Disinterested Quorum" shall mean a quorum of the Board who are not
Parties to the subject Proceeding or any related Proceeding.
(h) "Party" shall have the meaning set forth in the Statute; provided,
that, for purposes of this Article VIII, the term "Party" shall also include any
Director or Officer or employee who is or was a witness in a Proceeding at a
time when he or she has not otherwise been formally named a Party thereto.
(i) "Proceeding" shall have the meaning set forth in the Statute;
provided, that, in accordance with Section 180.0859 of the Statute and for
purposes of this Article VIII, the term "Proceeding" shall also include all
Proceedings (i) brought under (in whole or in part) the Securities Act of 1933,
as amended, the Exchange Act, their respective state counterparts, and/or any
rule or regulation promulgated under any of the foregoing; (ii) brought before
an Authority or otherwise to enforce rights hereunder; (iii) any appeal from a
Proceeding; and (iv) any Proceeding in which the Director or Officer is a
plaintiff or petitioner because he or she is a
Director or Officer; provided, however, that any such Proceeding under this
subsection (iv) must be authorized by a majority vote of a Disinterested Quorum.
(j) "Statute" shall mean Sections 180.0850 through 180.0859, inclusive,
of the Wisconsin Business Corporation Law as the same shall then be in effect,
including any amendments thereto, but, in the case of any such amendment, only
to the extent such amendment permits or requires the Corporation to provide
broader indemnification rights than the Statute permitted or required the
Corporation to provide prior to such amendment.
8.02 Mandatory Indemnification. To the fullest extent permitted or
required by the Statute, the Corporation shall indemnify a Director or Officer
against all Liabilities incurred by or on behalf of such Director or Officer in
connection with a Proceeding in which the Director or Officer is a Party because
he or she is a Director or Officer.
8.03. Procedural Requirements.
(a) A Director or Officer who seeks indemnification under Section 8.02
shall make a written request therefor to the Corporation. Subject to Section
8.03 (b), within 60 days of the Corporation's receipt of such request, the
Corporation shall pay or reimburse the Director or Officer for the entire amount
of Liabilities incurred by the Director or Officer in connection with the
subject Proceeding (net of any Expenses previously advanced pursuant to Section
8.05).
(b) No indemnification shall be required to be paid by the Corporation
pursuant to Section 8.02 if, within such 120-day period, (i) a Disinterested
Quorum, by a majority vote thereof, determines that the Director or Officer
requesting indemnification engaged in misconduct constituting a Breach of Duty
of (ii) a Disinterested Quorum cannot be obtained.
(c) In either case of nonpayment pursuant to Section 8.03(b), the Board
shall immediately authorize by resolution that an Authority, as provided in
Section 8.04, determine whether the Director's or Officer's conduct constituted
a Breach of Duty and, therefore, whether indemnification should be denied
hereunder.
(d) (i) If the Board does not authorize an Authority to determine the
Director's or Officer's right to indemnification hereunder within such 120-day
period and/or (ii) if indemnification of the requested amount of Liabilities is
paid by the Corporation, then it shall be conclusively presumed for all purposes
that a Disinterested Quorum has affirmatively determined that the Director or
Officer did not engage in misconduct constituting a Breach of Duty and, in the
case of subsection (i) above (but not subsection (ii)), indemnification by the
Corporation of the requested amount of Liabilities shall be paid to the Director
or Officer immediately.
8.04. Determination of Indemnification.
(a) If the Board authorizes an Authority to determine a Director's or
Officer's right to indemnification pursuant to Section 8.03, then the Director
or Officer requesting
indemnification shall have the absolute discretionary authority to select one of
the following as such Authority:
(i) An independent legal counsel; provided, that such counsel
shall be mutually selected by such Director or Officer and by a majority
vote of a Disinterested Quorum or, if a Disinterested Quorum cannot be
obtained, then by a majority vote of the Board; or
(ii) A panel of three arbitrators selected from the panels of
arbitrators of the American Arbitration Association in Milwaukee,
Wisconsin; provided, that (A) one arbitrator shall be selected by such
Director or Officer, the second arbitrator shall be selected by a
majority vote of a Disinterested Quorum or, if a Disinterested Quorum
cannot be obtained, then by a majority vote of the Board, and the third
arbitrator shall be selected by the two previously selected arbitrators,
and (B) in all other respects, such panel shall be governed by the
American Arbitration Association's then existing Commercial Arbitration
Rules.
(b) In any such determination by the selected Authority there shall
exist a rebuttable presumption that the Director's or Officer's conduct did not
constitute a Breach of Duty and that indemnification against the requested
amount of Liabilities is required. The burden of rebutting such a presumption by
clear and convincing evidence shall be on the Corporation or such other party
asserting that such indemnification should not be allowed.
(c) The Authority shall make its determination within 60 days of being
selected and shall submit a written opinion of its conclusion simultaneously to
both the Corporation and the Director or Officer.
(d) If the Authority determines that indemnification is required
hereunder, the Corporation shall pay the entire requested amount of Liabilities
(net of any Expenses previously advanced pursuant to Section 8.05), including
interest thereon at a reasonable rate, as determined by the Authority, within 10
days of receipt of the Authority's opinion; provided, that, if it is determined
by the Authority that a Director or Officer is entitled to indemnification
against Liabilities' incurred in connection with some claims, issues or matters,
but not as to other claims, issues or matters, involved in the subject
Proceeding, the Corporation shall be required to pay (as set forth above) only
the amount of such requested Liabilities as the Authority shall deem appropriate
in light of all of the circumstances of such Proceeding.
(e) The determination by the Authority that indemnification is required
hereunder shall be binding upon the Corporation regardless of any prior
determination that the Director or Officer engaged in a Breach of Duty.
(f) All Expenses incurred in the determination process under this
Section 8.04 by either the Corporation or the Director or Officer, including,
without limitation, all Expenses of the selected Authority, shall be paid by the
Corporation.
8.05. Mandatory Allowance of Expenses.
(a) The Corporation shall pay or reimburse from time to time or at any
time, within 10 days after the receipt of the Director's or Officer's written
request therefor, the reasonable Expenses of the Director or Officer as such
Expenses are incurred; provided, the following conditions are satisfied:
(i) The Director or Officer furnishes to the Corporation an
executed written certificate affirming his or her good faith belief
that he or she has not engaged in misconduct which constitutes a Breach
of Duty; and
(ii) The Director or Officer furnishes to the Corporation an
unsecured executed written agreement to repay any advances made under
this Section 8.05 if it is ultimately determined by an Authority that
he or she is not entitled to be indemnified by the Corporation for such
Expenses pursuant to Section 8.04.
(b) If the Director or Officer must repay any previously advanced
Expenses pursuant to this Section 8.05, such Director or Officer shall not be
required to pay interest on such amounts.
8.06. Indemnification and Allowance of Expenses of Certain Others.
(a) The Board may, in its sole and absolute discretion as it deems
appropriate, pursuant to a majority vote thereof, indemnify a director or
officer of an Affiliate (who is not otherwise serving as a Director or Officer)
against all Liabilities, and shall advance the reasonable Expenses, incurred by
such director or officer in a Proceeding to the same extent hereunder as if such
director or officer incurred such Liabilities because he or she was a Director
or Officer, if such director or officer is a Party thereto because he or she is
or was a director or officer of the Affiliate.
(b) The Corporation shall indemnify an employee who is not a Director
or Officer, to the extent he or she has been successful on the merits or
otherwise in defense of a Proceeding, for all Expenses incurred in the
Proceeding if the employee was a Party because he or she was an employee of the
Corporation.
(c) The Board may, in its sole and absolute discretion as it deems
appropriate, pursuant to a majority vote thereof, indemnify (to the extent not
otherwise provided in Section 8.06(b) hereof) against Liabilities incurred by,
and/or provide for the allowance of reasonable Expenses of, an employee or
authorized agent of the Corporation acting within the scope of his or her duties
as such and who is not otherwise a Director or Officer.
8.07. Insurance. The Corporation may purchase and maintain insurance on
behalf of a Director or Officer or any individual who is or was an employee or
authorized agent of the Corporation against any Liability asserted against or
incurred by such individual in his or her capacity as such or arising from his
or her status as such, regardless of whether the
Corporation is required or permitted to indemnify against any such Liability
under this Article VIII.
8.08. Severability. If any provision of this Article VIII shall be
deemed invalid or inoperative, or if a court of competent jurisdiction
determines that any of the provisions of this Article VIII contravene public
policy, this Article VIII shall be construed so that the remaining provisions
shall not be affected, but shall remain in full force and effect, and any such
provisions which are invalid or inoperative or which contravene public policy
shall be deemed, without further action or deed by or on behalf of the
Corporation, to be modified, amended and/or limited, but only to the extent
necessary to render the same valid and enforceable; it being understood that it
is the Corporation's intention to provide the Directors and Officers with the
broadest possible protection against personal liability allowable under the
Statute.
8.09. Nonexclusively of Article VIII. The rights of a Director, Officer
or employee (or any other person) granted under this Article VIII shall not be
deemed exclusive of any other rights to indemnification against Liabilities or
allowance of Expenses which the Director, Officer or employee (or such other
person) may be entitled to under any written agreement, Board resolution, vote
of shareholders of the Corporation or otherwise, including, without limitation,
under the Statute. Nothing contained in this Article VIII shall be deemed to
limit the Corporation's obligations to indemnify against Liabilities or allow
Expenses to a Director, Officer or employee under the Statute.
8.10. Contractual Nature of Article VIII; Repeal or Limitation of
Rights. This Article VIII shall be deemed to be a contract between the
Corporation and each Director, Officer and employee of the Corporation and any
repeal or other limitation of this Article VIII or any repeal or limitation of
the Statute or any other applicable law shall not limit any rights of
indemnification against Liabilities or allowance of Expenses then existing or
arising out of events, acts or omissions occurring prior to such repeal or
limitation, including, without limitation, the right to indemnification against
Liabilities or allowance of Expenses for Proceedings commenced after such repeal
or limitation to enforce this Article VIII with regard to acts, omissions or
events arising prior to such repeal or limitation.
ARTICLE IX. FISCAL YEAR
9.01. The fiscal year of the corporation shall be the calendar year.
ARTICLE X. AMENDMENTS
10.01. By Shareholders. Except as otherwise provided in the articles of
incorporation of the corporation or these Bylaws, these Bylaws may be altered,
amended or repealed and new Bylaws may be adopted by the shareholders at any
Annual Meeting or Special Meeting at which a quorum is in attendance.
10.02. By Directors. Except as otherwise provided in the articles of
incorporation of the corporation or these Bylaws, these Bylaws may also be
altered, amended or repealed and new Bylaws may be adopted by the Board of
Directors by affirmative vote of a majority of the number of directors present
at any meeting at which a quorum is in attendance; provided, however, that
notice of any proposal to take any such action shall have been given to each
director not less than 72 hours prior to the meeting by one of the methods set
forth in Section 3.05; but no Bylaw adopted by the shareholders shall be
amended, repealed or readopted by the Board of Directors unless the Bylaw so
adopted so permits.
10.03. Implied Amendments. Except as otherwise provided in the articles
of incorporation of the corporation or these Bylaws, any action taken or
authorized by the shareholders or by the Board of Directors, which would be
inconsistent with the Bylaws then in effect but is taken or authorized by
affirmative vote of not less than the number of shares or the number of
directors required to amend the Bylaws so that the Bylaws would be consistent
with such action, shall be given the same effect as though the Bylaws had been
temporarily amended or suspended so far, but only so far, as is necessary to
permit the specific action so taken or authorized.
EXHIBIT 10.7
MGIC INVESTMENT CORPORATION
1991 STOCK INCENTIVE PLAN, AS AMENDED
1. Purpose. The purpose of the MGIC Investment Corporation 1991 Stock
Incentive Plan, as amended to March 6, 1997 and as proposed to be further
amended in accordance with amendments adopted by the Board (as hereinafter
defined) on March 6, 1997 (the "Amended Plan"), is to secure for MGIC Investment
Corporation (the "Company") and its subsidiaries the benefits of the additional
incentive inherent in the ownership of the Company's Common Stock, $1.00 par
value (the "Common Stock"), by certain key employees and executive officers of
the Company and its subsidiaries and directors of the Company, who are important
to the success and the growth of the business of the Company and to help the
Company secure and retain the services of such persons. In addition to granting
stock options ("Options"), the Amended Plan provides for a deposit share program
("Deposit Share Program") and for the award of Common Stock, subject to certain
terms, conditions and restrictions ("Restricted Stock"). It is intended that
certain of the Options issued pursuant to the Amended Plan will constitute
incentive stock Options ("Incentive Stock Options") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
the remainder of the Options issued pursuant to the Amended Plan will constitute
nonstatutory Options. The Options and Restricted Stock are hereinafter referred
to collectively as "Awards".
2. Administration.
(a) Stock Award Committee. The Amended Plan shall be
administered under the supervision of the Board of Directors of the
Company (the "Board"), which shall exercise its powers, to the extent
herein provided, through the agency of the Stock Award Committee (the
"Committee"), which shall consist of at least two members and shall be
appointed from among the members of the Board. Any member of the
Committee may resign or be removed by the Board and new members may be
appointed by the Board. Additionally, the Committee shall be
constituted so as to satisfy at all times the outside director
requirement of Code Section 162(m) and the regulations thereunder or
any substitute provision therefor.
(b) Rules and Regulations. The Committee, from time to time,
may adopt rules and regulations for carrying out the provisions and
purposes of the Amended Plan. The interpretation and construction of
any provision of the Amended Plan by the Committee shall be final,
conclusive and binding on all interested parties. In order to carry out
its responsibilities, the Committee may execute such documents and
enter into such agreements and make all determinations deemed necessary
or advisable to effectuate the purposes of the Amended Plan.
(c) Authority. The Committee shall have all the powers vested
in it by the terms of the Amended Plan, such powers to include
exclusive authority (subject to the terms of the Amended Plan and
applicable law) to select the persons to be granted Awards under the
Amended Plan, to determine the type, size and terms of Awards to be
made to each person selected, to determine the time when Awards will be
granted and to establish objectives and conditions for earning Awards.
The Committee shall determine which Options are to be Incentive Stock
Options and which are to be nonstatutory Options and shall in each case
enter into a written Option agreement with the recipient thereof (an
"Option Agreement") setting forth the terms and conditions of the grant
and the exercise of the subject Option, as determined by the Committee
in accordance with the Amended Plan. To the extent that the aggregate
fair market value of Common Stock with respect to which Incentive Stock
Options under the Amended Plan and any other plans of the Company or
its subsidiaries are exercisable by an Employee (as hereinafter
defined) for the first time during any calendar year exceeds $100,000,
such Options shall be treated as Options which are not Incentive Stock
Options. To the extent the Code is amended from time to time to provide
additional or different limitations on the grant of Incentive Stock
Options, the foregoing limitation shall be considered to be amended
accordingly. The Committee shall have full power and authority to
administer and interpret the Amended Plan and to adopt such rules,
regulations, agreements, guidelines and instruments for the
administration of the Amended Plan and for the conduct of its business
as the Committee deems necessary or advisable. The Committee's
interpretation of the Amended Plan, and all actions taken and
determinations made by the Committee pursuant to the powers vested in
it, shall be conclusive and binding on all parties concerned, including
the Company, its subsidiaries, its shareholders, Participants (as
defined in Section 4 below) and any employee of the Company or its
subsidiaries. The Committee may delegate duties to any person or
persons; provided, that, no delegation of duties is permitted with
respect to (i) any grant, award or other acquisition from the Company
if the person or persons to whom duties are delegated would not satisfy
the standard of Rule 16b-3(d)(1) under the Securities Exchange Act of
1934, as amended, or any substitute provision therefor or the
requirements of Section 162(m) of the Code and (ii) any disposition to
the Company if the person or persons to whom duties are delegated would
not satisfy the standard of Rule 16b-3(d)(1).
(d) Records. The Committee shall maintain a written record of
its proceedings. A majority of the Committee members shall constitute a
quorum for any meeting. Any determination or action of the Committee
may be made or taken by a majority of the members present at any such
meeting, or without a meeting by a resolution or written memorandum
concurred in by all of the members then in office.
2
3. Stock Subject to Awards. The aggregate number of shares of Common
Stock for which Awards may be granted under the Amended Plan shall not exceed
7,000,000 shares, subject to adjustment as provided in Section 8 below. If, and
to the extent that, Options granted under the Amended Plan terminate or expire
without having been exercised, or shares of Restricted Stock under the Amended
Plan are forfeited, the shares covered by such terminated or expired Options or
forfeited Restricted Stock, as the case may be, may be the subject of further
grants under the Amended Plan. Restricted Stock granted under the Amended Plan
and shares issued upon the exercise of any Option granted under the Amended Plan
may be, at the Company's discretion, shares of authorized and unissued Common
Stock, shares of issued Common Stock held in the Company's treasury or
reacquired shares or any combination thereof. The foregoing notwithstanding, the
maximum number of shares of Restricted Stock for which Awards may be granted is
400,000 shares.
4. Persons Eligible. Under the Amended Plan, (i) Awards may be granted
to any key employee or executive officer of the Company who is an employee of
the Company or its subsidiaries, including any employee who is also a member of
the Board (an "Employee") and (ii) shares of Restricted Stock shall be awarded
to each Non-Employee Director under the Deposit Share Program, as provided
herein. "Non-Employee Director" means a member of the Board who is not an
employee of the Company or of any person, directly or indirectly, controlling,
controlled by or under common control with the Company and is not a member of
the Board representing a holder of any class of securities of the Company. In
determining the Employees to whom Awards are to be granted and the number of
shares to be covered by an Award, the Committee shall take into consideration
the Employee's present and potential contribution to the success of the Company
and such other factors as the Committee may deem proper and relevant. An
Employee receiving an Award, and a Non-Employee Director receiving shares of
Restricted Stock under the Amended Plan are individually hereinafter referred to
as a "Participant". In no event may Awards be granted to any one Participant for
more than twenty percent (20%) of the aggregate number of shares of Common Stock
for which Awards may be granted under the Amended Plan, including for this
purpose Awards granted to such Participant which are subsequently cancelled,
forfeited or otherwise terminated.
5. Provisions Applicable to Options.
(a) Price and Type of Options. The purchase price of each
share of Common Stock under any Option granted under the Amended Plan
shall be as determined by the Committee in its sole discretion, but
shall not be less than the Fair Market Value thereof (determined in a
manner equivalent to the determination under Section 6(e), unless in
the case of Incentive Stock Options, the Code requires a different
method, in which case the method required by the Code shall be followed
for Incentive Stock Options) on the date of grant. The type of Option
granted shall be as determined by the Committee, but any Incentive
Stock Options granted shall be subject to such terms and conditions as
are required for the qualification as such by the Code on the date of
grant. Any Options
3
granted under the Amended Plan shall be clearly identified as Incentive
Stock Options or nonstatutory stock Options.
(b) Exercisability of Options. The Committee shall determine
when and to what extent an Option shall be vested; and may provide for
Options to be vested based upon such performance related goals as the
Committee in its sole discretion deems appropriate ("Performance
Goals"). The Committee may, in its sole discretion, also provide that
some or all Options granted shall immediately become vested or
exercisable as of a date fixed by the Committee upon a change in
control of the Company as defined by the Committee or in the event of a
sale, lease or transfer of all or substantially all of the Company's
assets, equity securities or businesses, or merger, consolidation or
other business combination of the Company. The Committee may also if it
so elects make any such action contingent upon consummation of the
event which prompted the action.
(c) Termination of Options. The unexercised portion of any
Option granted under the Amended Plan shall automatically and without
notice terminate and become null and void at the time of the earliest
to occur of the following:
(i) Thirty (30) days after the termination of the
Participant'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
Participant's death, 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 at
least seven (7) years or a leave of absence approved by the
Company;
(ii) Three Hundred Sixty-Five (365) days after the
termination of the Participant's employment with the Company
and all subsidiaries thereof by reason of the Participant's
death, or by reason of the Participant'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 at least seven (7) years;
(iii)Thirty (30) days after expiration or termination
of a leave of absence approved by the Company unless the
Participant becomes reemployed with the Company or any
subsidiary prior to such 30-day period in which event the
Option shall continue in effect in accordance with its terms;
(iv) The expiration of the Option Period (as
hereinafter defined); or
4
(v) In whole or in part, at such earlier time or upon
the occurrence of such earlier event as the Committee in its
discretion may have provided upon the granting of such Option.
(d) Term of Options. The term of each Option granted under the
Amended Plan will be for such period (herein referred to as the "Option
Period") of not less than seven (7) years and not more than ten (10)
years as the Committee shall determine. With respect to Incentive Stock
Options, such term may not exceed ten (10) years or such other term
provided in the Code. Each Option shall be subject to earlier
termination as described under "Termination of Options" in subparagraph
(c) above. An Option shall be considered granted on the date the
Committee acts to grant the Option or such date thereafter as the
Committee shall specify.
(e) Exercise of Options. Options granted under the Amended
Plan may be exercised by the Participant, as to all or part of the
shares covered thereby, in accordance with the terms of such
Participant's Option Agreement. A partial exercise of an Option may not
be made with respect to fewer than ten (10) shares unless the shares
purchased are the total number then available for purchase under the
Option. A Participant shall exercise such Option by delivering ten (10)
days' (or such shorter period as the Company shall permit) prior
written notice of the exercise thereof on a form prescribed by the
Company to the Secretary of the Company at its principal office,
specifying the number of shares to be purchased. The purchase price of
the shares as to which an Option shall be exercised shall be paid in
full in cash or its equivalent at the time of exercise.
The Participant shall be responsible for paying all
withholding taxes, if any, applicable to any Option exercise and the
Company shall have the right to take any action necessary to insure
that the Participant pays the required withholding taxes. Upon payment
of the Option purchase price and the required withholding taxes, the
Company shall cause a certificate for the shares so purchased to be
delivered to the Participant.
(f) Stock Withholding. Notwithstanding the terms of
subparagraph (e) above, a Participant shall be permitted to satisfy the
Company's withholding tax requirements by electing to have the Company
withhold shares of Common Stock otherwise issuable to the Participant
or to deliver to the Company shares of Common Stock having a fair
market value on the date income is recognized pursuant to the exercise
of an Option equal to the amount required to be withheld. The election
shall be made in writing and shall be made according to such rules and
in such form as the Committee may determine.
(g) Exercise of Options following Participant's Death. If a
Participant dies ("Deceased Participant") while in the employ of the
Company, and if the Deceased Participant's death occurs prior to the
date the Option terminates, regardless of whether the Option is subject
to exercise under the terms of the Option, such Option shall become
5
immediately vested and exercisable by the personal representative of
the Deceased Participant or the person to whom the Deceased
Participant's rights under the Option would be transferred by law or
applicable laws of descent and distribution. The Committee may also
provide as to Options outstanding as of January 1, 1994 for a right to
surrender the Option to the Company at a price equal to the difference
between the aggregate Option price and the fair value of the Common
Stock subject to the Option as of the Deceased Participant's death. The
surrender shall also be subject to such terms and conditions as are
determined by the Committee and set forth in the Option Agreement.
(h) Non-Transferability of Options. Except to the extent as
may be permitted under rules established by the Committee, an Option or
any right evidenced thereby shall not be transferable otherwise than by
will or the laws of descent and distribution, and shall be exercisable
during the Participant's lifetime only by him or by his guardian or
legal representative.
(i) Rights of Participant. The Participant shall have none of
the rights of a shareholder of the Company with respect to the shares
subject to any Option granted under the Amended Plan until a
certificate or certificates for such shares shall have been issued upon
the exercise of any Option.
6. Restricted Stock Awards. The Committee may make awards of Restricted
Stock ("Restricted Stock Awards") to Participants who are Employees, and shall
make Awards to Non-Employee Directors, subject to the provisions of this Section
6.
(a) Restricted Stock Agreements. Restricted Stock Awards shall
be evidenced by Restricted Stock agreements ("Restricted Stock
Agreements") which shall conform to the requirements of the Amended
Plan and may contain such other provisions (such as provisions for the
protection of Restricted Stock in the event of mergers, consolidations,
dissolutions and liquidations affecting either the Restricted Stock
Agreement or the Common Stock issued thereunder) as the Committee shall
deem advisable.
(b) Payment of Restricted Stock Awards. Restricted Stock
Awards shall be made by delivering to the Participant or an Escrow
Agent (as defined below) a certificate or certificates for such shares
of Restricted Stock of the Company, as determined by the Committee
("Restricted Shares"), which Restricted Shares shall be registered in
the name of such Participant. The Participant shall have all of the
rights of a holder of Common Stock with respect to such Restricted
Shares except as to such restrictions as appear on the face of the
certificate. The Committee may designate the Company or one or more of
its employees to act as custodian or escrow agent for the certificates
("Escrow Agent").
6
(c) Terms, Conditions and Restrictions. Restricted Shares
shall be subject to such terms and conditions, including vesting and
forfeiture provisions, if any, and to such restrictions against resale,
transfer or other disposition as may be provided in this Amended Plan
and, consistent therewith, as may be determined by the Committee at
such time as it grants a Restricted Stock Award to a Participant. Any
new or different Restricted Shares or other securities resulting from
any adjustment of such Restricted Shares pursuant to Section 8 hereof
shall be subject to the same terms, conditions and restrictions as the
Restricted Shares prior to such adjustment. The Committee may in its
discretion, remove, modify or accelerate the release of restrictions on
any Restricted Shares as it deems appropriate. In the event of the
Participant's death, all transfers or other restrictions to which the
Participant's Restricted Shares are subject shall immediately lapse,
and the Deceased Participant's legal representative or person receiving
such Restricted Shares under the Deceased Participant's will or under
the laws of descent and distribution shall take such Restricted Shares
free of any such transfer or other restrictions.
(d) Dividends and Voting Rights. Except as otherwise provided
by the Committee, during the restricted period the Participant shall
have the right to receive dividends from and to vote the Participant's
Restricted Shares.
(e) Deposit Share Program. Subject to the provisions set forth
below and subject to rules established by the Committee, pursuant to
the Company's Deposit Share Program, (1) Employees may elect to acquire
shares of Common Stock with a Fair Market Value up to a percentage
designated by the Committee of cash bonuses under the Company's
incentive compensation programs designated by the Committee, and (2)
Non-Employee Directors shall be entitled to acquire shares of Common
Stock with a Fair Market Value equal to up to 50% of the compensation
of such Non-Employee Director for service as a director of the Company,
including for service as a member of a Committee of the Board, during
the preceding calendar year (in each case, "Deposit Shares"). Deposit
Shares shall be issued in an amount which the Deposit Share Participant
(as defined in Section 6(e)(i) below) elects to use to acquire Common
Stock (subject to limits provided in this Section 6(e)) divided by the
Fair Market Value of a share of Common Stock on the Award Date (as
defined in Section 6(e)(ii) below). For purposes hereof, the term "Fair
Market Value" shall be as determined by the Committee, except that
during any period the Common Stock is traded on a recognized exchange,
Fair Market Value shall be based upon the last sales price of Common
Stock on the principal securities exchange on which the same is traded
on the Award Date or if no sales of Common Stock have taken place on
such date, the last sales price on the first date following the Award
Date on which sales occur. Deposit Share Participants electing to
deposit Deposit Shares with the Company under the Deposit Share Program
and receive Restricted Stock Awards in connection therewith shall do so
as follows:
7
(i) The Committee shall notify each Participant who
is an Employee selected to participate in the Deposit Share
Program and each Non-Employee Director (such Employees and
Non-Employee Directors together referred to as "Deposit Share
Participants") of the maximum amount which they are permitted
to use to acquire Common Stock to be deposited with the Escrow
Agent, and Deposit Share Participants may choose to deposit
any number of Deposit Shares they are permitted to deposit
under the Committee rules (Deposit Shares so acquired and
deposited are herein sometimes referred to as the "Original
Deposit").
(ii) Deposit Share Participants must make their
irrevocable election on or before the date designated by the
Committee or if no date is designated, then at least thirty
(30) days prior to the Award Date. The Award Date ("Award
Date") for each year in which a Deposit Share Participant is
eligible to receive Deposit Shares shall be February 15, or
the Monday following February 15 in any year in which February
15 falls on a Saturday or Sunday, unless the Committee
designates a different Award Date. The Award Date for
Employees and Non-Employee Directors need not be the same. The
Committee shall have the discretion to waive any date or
deadline established pursuant to this section. The Committee
may also allow a Deposit Share Participant who is an Employee
to acquire Deposit Shares in lieu of a bonus, or to deliver a
check equal to the dollar amount of bonuses for which the
Deposit Share Participant may purchase Deposit Shares, in
which case the full amount of the cash bonus (less applicable
withholding) will be paid to the Employee and the Employee
shall deliver a check to the Company, subject to the
limitations established by the Committee.
(iii) All elections shall be in writing and filed
with the Committee or its designee. Such elections may, if
permitted by the Committee, also specify one of the following
alternatives regarding the manner in which dividends are paid
on all deposited stock (including Deposit Shares, shares
purchased with dividends, if any, and matching Restricted
Shares (but only if the Committee allows dividends on such
Restricted Shares to be paid and credited)):
(1) Dividends shall be accumulated by the
Escrow Agent for the purchase of additional shares
for the Deposit Share Participant's account; or
(2) Dividends shall be paid currently to the
Deposit Share Participant.
A Deposit Share Participant shall be deemed to have elected
Alternative (1) unless or until the Deposit Share Participant
delivers written notice to the Company selecting Alternative
(2) as the method by which dividends are to be paid and
credited.
8
(iv) As soon as practicable following an Original
Deposit, the Company shall match the Deposit Shares deposited
with the Escrow Agent for the Deposit Share Participant's
account by depositing (1) for an Employee, up to one (1)
Restricted Share for each Deposit Share in the Original
Deposit, as determined by the Committee, and (2) for a
Non-Employee Director, one and one-half (1-1/2) Restricted
Share for each Deposit Share in the Original Deposit.
Restricted Shares shall be distributed to the Deposit Share
Participant entitled thereto as promptly as practicable after
they vest.
(v) With respect to Employees, the Restricted Shares
deposited by the Company shall vest in accordance with the
schedule determined by the Committee. With respect to
Non-Employee Directors, the Restricted Shares shall vest on
the third anniversary of the date of the Award. Awards of
Restricted Stock that are not vested shall be forfeited upon
the Non-Employee Director ceasing to be a director of the
Company for any reason, except in the case of death, as
hereinafter provided in Section 6 (e) (ix), except in the case
of a Permissible Event (as hereinafter defined) or except as
otherwise provided by the Committee. If a Non-Employee
Director ceases to be a director by reason of a Permissible
Event, the Restricted Shares shall continue to vest during the
balance of the three-year vesting period if (1) no later than
the date on which the Non-Employee Director ceases to be a
director of the Company, the Non-Employee Director enters into
an agreement approved by the Committee under which the
Non-Employee Director agrees not to compete with the Company
or its subsidiaries during the balance of such period and (2)
the Non-Employee Director complies with the agreement. Any
Restricted Shares that do not vest by reason of a Permissible
Event shall be forfeited unless otherwise provided by the
Committee. A Permissible Event shall be any termination of
service as a director of the Company by reason of:
(1) the Non-Employee Director being
ineligible for continued service as a director of the
Company under the Company's retirement policy; or
(2) the Non-Employee Director's taking a
position with or providing services to a
governmental, charitable or educational institution
whose policies prohibit continued service on the
Board or due to the fact that continued service as a
director would be a violation of law.
The Company may, in its sole discretion, provide that some or
all Restricted Stock shall immediately become vested in the
circumstances with respect to immediate vesting of Options
contemplated by Section 5(b).
9
(vi) Shares purchased with dividends paid on
deposited stock (Original Deposit, Restricted Stock or any
shares purchased with dividends) may be withdrawn from a
Deposit Share Participant's account at any time.
(vii) A Deposit Share Participant's interests in the
Original Deposit or the Restricted Stock may not be sold,
pledged, assigned or transferred in any manner, other than by
will or the laws of descent and distribution, so long as such
shares are held by the Escrow Agent, and any such sale,
pledge, assignment or other transfer shall be null and void;
provided, however, a pledge of the Deposit Share Participant's
interest in the Original Deposit or a transfer of such
Participant's interest in the Original Deposit (any permitted
transfer not being considered a withdrawal of the Original
Deposit) or in the Restricted Stock may be permitted in
accordance with rules which the Committee may establish. To
the extent Restricted Shares become vested, at the same time
as Restricted Shares are released by the Escrow Agent, the
Escrow Agent shall also release a percentage (computed to the
nearest whole percent) of the Original Deposit equal to the
number of Restricted Shares then being released, divided by
the number of Restricted Shares deposited by the Company with
respect to the Original Deposit.
(viii) Any or all of the Original Deposit may be
withdrawn at any time. Such withdrawal shall cause a
forfeiture of any non-vested Restricted Shares attributable to
the Deposit Shares being withdrawn. Any Deposit Shares
withdrawn shall be deemed to have been withdrawn under Section
6(e)(vi) to the extent there are any such shares, and then
under this Section 6(e)(viii).
(ix) In the event the employment with the Company or
its subsidiaries of a Deposit Share Participant who is an
Employee is terminated during the vesting period by reason of
the Deposit Share Participant's death, the vesting
requirements shall be deemed fulfilled upon the date of such
termination of employment. In the event a Non-Employee
Director's service as a director of the Company is terminated
during the vesting period by reason of the Non-Employee
Director's death, the vesting requirements shall be deemed to
be fulfilled on the date of such termination of service.
(x) In the event the employment with the Company and
its subsidiaries of a Deposit Share Participant who is an
Employee is terminated during the vesting period for any
reason other than death, the Restricted Shares, to the extent
not otherwise vested, shall automatically be forfeited and
returned to the Company unless the Committee shall, in its
sole discretion, otherwise provide.
10
7. Right to Terminate Employment. Nothing in the Amended Plan or in any
Award granted under the Amended Plan to a Participant who is an Employee shall
confer upon any such Participant the right to continue in the employment of the
Company or affect the right of the Company to terminate such a Participant's
employment at any time, nor cause any Award granted to become exercisable as a
result of the election by the Company of its right to terminate at any time the
employment of such a Participant subject, however, to the provisions of any
agreement of employment between the Company and such Participant. Nothing in the
Amended Plan or in any Award of Restricted Stock under the Amended Plan to a
Participant who is a Non-Employee Director shall confer upon such Director the
right to continue as a member of the Board.
8. Dilution and Other Adjustments. 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 Option price per share under, and (if
appropriate) the terms and conditions of, any outstanding Award, shall be
modified or provided for by the Committee in a manner consistent with such
capital adjustment, and the shares reserved for issuance under this Amended Plan
shall likewise be modified. The determination of the Committee as to any such
adjustment shall be conclusive and binding for all purposes of the Amended Plan.
9. Form of Agreements with Participants. Each Option Agreement and/or
Restricted Stock Agreement to be executed by a Participant shall be in such form
as the Committee shall in its discretion determine.
10. Legend on Certificates; Restrictions on Transfer. The Company may,
to the extent deemed necessary or advisable, endorse an appropriate legend
referring to any restrictions imposed by state law or the Securities Act of
1933, as amended, upon the certificate or certificates representing any shares
issued or transferred to the Participant pursuant to Awards.
11. Securities Act Compliance. Notwithstanding any provision of the
Amended Plan to the contrary, the Committee shall take whatever action it may
consider necessary or appropriate to comply with the Securities Act of 1933, as
amended, or any other then applicable securities law, including limiting the
granting and exercise of Options or the issuance of shares thereunder.
12. Amendment, Expiration and Termination of the Amended Plan. Under
the Amended Plan, Awards may be granted at any time and from time to time before
the tenth anniversary date of adoption of amendments to this Plan by the
Company's Board of Directors on January 27, 1994 (the date on which this Plan
was last previously amended) at which time the Amended Plan will expire, except
as to Awards then outstanding. The foregoing notwithstanding, no Incentive Stock
Options may be granted after January 1, 2001. The
11
Amended Plan will remain in effect with respect to outstanding Awards until such
Awards have been exercised or have expired, as the case may be. The Amended Plan
may be terminated or modified at any time by the Board of Directors before the
expiration of the Amended Plan, except with respect to any Awards then
outstanding under the Amended Plan, provided that any increase in the maximum
number of shares subject to Awards specified in Section 3 or in Section 4 hereof
shall be subject to the approval of the Company's shareholders unless made
pursuant to the provisions of Section 8 hereof. No amendment of the Amended Plan
shall adversely affect any right of any Participant with respect to any Award
theretofore granted under the Amended Plan.
13. Effective Date. If the Amended Plan is not approved by the
Company's shareholders prior to September 1, 1997, the MGIC Investment
Corporation 1991 Stock Incentive Plan as in effect immediately prior to March 6,
1997 shall remain in effect and shall not be deemed to have been amended.
14. Governing Law. The Amended Plan and any Option Agreement and/or
Restricted Stock Agreement shall be governed by and construed in accordance with
the internal substantive laws, and not the choice of law rules, of the State of
Wisconsin.
12
EXHIBIT 10.10
MGIC INVESTMENT CORPORATION
RESTRICTED STOCK AWARD AGREEMENT
THIS AGREEMENT is made and entered into as of the date set forth on the
signature page hereof by and between MGIC INVESTMENT CORPORATION, a Wisconsin
corporation (the "Company"), and the non-employee director of the Company whose
signature is set forth on the signature page hereof (the "Non-Employee
Director").
W I T N E S S E T H:
WHEREAS, the MGIC Investment Corporation 1991 Stock Incentive Plan
(hereinafter referred to, as amended, as the "Plan"), permits shares of the
Company's common stock, $1.00 par value per share (the "Stock"), to be awarded
under its Deposit Share Program to non-employee directors of the Company who
elect to participate in the Program; and
WHEREAS, the Non-Employee Director has elected to participate in the
Program.
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements herein set forth, the parties hereby mutually covenant and agree
as follows:
1. Award of Restricted Stock. Subject to the terms and conditions set
forth herein, the Company hereby awards the Non-Employee Director the number of
shares of Stock set forth on the signature page hereof (the "Restricted Stock").
2. Restrictions. Except as otherwise provided herein, the Restricted
Stock may not be sold, transferred or otherwise alienated or hypothecated until
the date set forth on the signature page hereof (the "Release Date"). Shares of
Restricted Stock may be transferred by gift pursuant to the "Rules for Transfer
of Awards Under the 1991 Stock Incentive Plan" attached to this Agreement as
Exhibit A (the "Rules"). Any person to whom shares of Restricted Stock are
transferred pursuant to the Rules is herein referred to as a "Permitted
Transferee."
3. Escrow. Certificates for shares of Restricted Stock shall be issued
as soon as practicable in the name of the Non-Employee Director but shall be
held in escrow by the Company, as escrow agent. Upon issuance of such
certificates, (i) the Company shall give the Non-Employee Director 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 Non-Employee Director, subject to the
terms of this Agreement, and (ii) the Non-Employee Director 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 which have not been transferred to a
Permitted Transferee shall be delivered to the Non-Employee Director, 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 Non-Employee
Director on the Release Date. Notwithstanding the foregoing or anything to the
contrary herein, the Non-Employee Director agrees and acknowledges with respect
to any Restricted Stock that has not been registered under the Securities Act of
1933, as amended (the "Act"), that (i) the Non-Employee Director 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 for the
Restricted Stock to such effect.
5. Termination of Directorship Due to Death. If the Non-Employee
Director ceases to be a director of the Company by reason of the Non-Employee
Director's death, (a) the restrictions of Paragraph 2 applicable to the
Restricted Stock shall terminate and (b) the vesting requirements for the
Restricted Shares shall be deemed to be fulfilled on the date of the
Non-Employee Director's death.
6. Forfeiture. Awards of Restricted Stock hereunder that have not
vested shall be forfeited by the Non-Employee Director and shall revert to the
Company upon the Non-Employee Director ceasing to be a director of the Company
for any reason other than the Non-Employee Director's death or a "Permissible
Event," unless otherwise provided by the Committee. A Permissible Event is
termination of service as a director of the Company by reason of (a) the
Non-Employee Director being ineligible for continued service as a director of
the Company under the Company's retirement policy, or (b) the Non-Employee
Director's taking a position with or providing services to a governmental,
charitable or educational institution whose policies prohibit continued service
on the Company's Board of Non-Employee Directors or under circumstances in which
that continued service as a director of the Company would be a violation of law.
If the Non-Employee Director ceases to be a director of the Company by reason of
a Permissible Event, the Restricted Stock shall continue to vest during the
balance of the Restricted Period if (1) no later than the date on which the
Non-Employee Director ceases to be a director of the Company, the Non-Employee
Director enters into an agreement approved by the Committee under which the
Non-Employee Director agrees not to compete with the Company or its subsidiaries
during the balance of such period and (2) the Non-Employee Director complies
with the agreement. All Restricted Stock that does not so vest shall be
forfeited to the Company, unless otherwise determined by the Committee.
7. Beneficiary. (a) The person whose name appears on the signature page
hereof after the caption "Beneficiary" or any successor designated by the
Non-Employee Director in accordance herewith (the person who is the Non-Employee
Director's Beneficiary at the time of his death herein referred to as the
"Beneficiary") shall be entitled to receive the vested Restricted Stock to be
released to the Beneficiary under Paragraphs 3 and 5 as a result of the death of
the Non-Employee Director. The Non-Employee Director may from time to time
revoke or change the 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
Non-Employee Director's death, and in no event shall any designation be
effective as of a date prior to such receipt. If no such Beneficiary designation
is in effect at the time of an Non-Employee Director's death, or if no
designated Beneficiary survives the Non-Employee Director or if such designation
conflicts with law, the Non-Employee Director's estate shall be entitled to
receive the Restricted Stock upon the death of the Non-Employee Director.
(b) A Permitted Transferee shall be entitled to designate a
Beneficiary with respect to the shares of Restricted Stock transferred
to the Permitted Transferee by completing the appropriate portion of
the election form contemplated by Paragraph 5 of the Rules (the
"Election Form"). Such Beneficiary shall be entitled to receive the
vested Restricted Stock to be released under Paragraphs 3 and 5 as a
result of the death of the Non-Employee Director or otherwise to be
released hereunder if, in either case, the Permitted Transferee dies,
prior to such release. The Permitted Transferee may from time to time
revoke or change such 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 Non-Employee Director's death, and in no event shall any
designation be effective as of a date prior to such receipt. If no such
designated Beneficiary survives the Permitted Transferee, such
Beneficiary's estate, of if such designation conflicts with law, the
Permitted Transferee's estate, shall be entitled to receive the
Restricted Stock released hereunder.
(c) If the Committee is in doubt as to the right of any person
to receive such Restricted Stock, the Company may retain such Stock,
without liability for any interest thereon, until the Committee
determines the person entitled thereto, or the Company may deliver such
Restricted Stock to any court of appropriate jurisdiction and such
delivery shall be a complete discharge of the liability of the Company
therefor.
8. Certificate Legend. In addition to any legends placed on
certificates for Restricted Stock under Paragraph 4 hereof, each certificate for
shares of Restricted Stock shall bear the following legend:
"The sale or other transfer of the shares of stock represented by this
certificate, whether voluntary, or by operation of law, is subject to
certain restrictions set forth in the MGIC Investment Corporation 1991
Stock Incentive Plan, as amended, and a Restricted Stock Award
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 foregoing
legend shall be removed from the certificates representing such Stock upon
request of the Non-Employee Director or a Permitted Transferee for whom the
shares have been transferred.
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 Non-Employee Director 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 Non-Employee
Director 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
Non-Employee Director shall have, with respect to the Restricted Stock,
all other rights of holders of Stock.
10. 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.
11. Change in Control. (a) If a change in control occurs, the
restrictions of Paragraph 2 applicable to the Restricted Stock shall terminate
on the date of the change in control. For this purpose, "change in control"
shall mean any event which results in the legal or beneficial ownership in one
person or group of persons acting in concert of shares of Stock representing
more than fifty percent (50%) of the outstanding Stock on the date of such
event. It is understood that if a change in control occurs, this Paragraph 11(a)
shall apply even if the transaction by which such change in control occurs is
also described in Paragraph 11(b).
(b) In the event of a sale, lease or transfer of all or
substantially all of the Company's assets, equity securities or
business, or merger, consolidation or other business combination
involving the Company, the Committee may in its discretion provide that
all or any portion of the restrictions of Paragraph 2 applicable to all
or any portion of the Restricted Stock shall terminate, contingent upon
the consummation of such event or not so contingent, and may take all
such action as it deems necessary in connection therewith.
12. Powers of Company Not Affected. 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. Nothing herein shall
confer upon the Non-Employee Director the right to continue as a member of the
Company's Board of Directors.
13. Interpretation by Committee. The Non-Employee Director 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 Non-Employee Directors awarded Restricted Stock.
14. 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.
(d) Any notice, filing or delivery hereunder or with respect
to Restricted Stock shall be given to the Non-Employee Director at
either his or her address as indicated in the records of the Company to
which communications are generally sent to him or her; shall be given
to a Permitted Transferee at his address as indicated in the Election
Form; 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 Non-Employee Director, any
Permitted Transferee, the Beneficiary and the personal
representative(s) and heirs of the Non-Employee Director, except that
the Non-Employee Director may not transfer any interest in any
Restricted Stock prior to the release of the restrictions imposed by
Paragraph 2 other than as provided in Paragraph 2.
(f) The term "certificate" as used herein with regard to
shares of Restricted Stock, includes electronic registration in the
system of the Company's transfer agent for the Stock.
15. Deposit Share Program. If any of the Original Deposit (as defined
in the Plan) is withdrawn prior to the release of any of the Restricted Stock,
the Restricted Stock attributable to the shares withdrawn shall first be the
Restricted Stock to be released on the first Release Date and shall then be the
Restricted Stock to be released on the Second Release Date, as both such Dates
are specified on the signature page hereof. In the event of any conflict between
the terms hereof and the terms and conditions of Section 6(e) of the Plan
relating to the Deposit Share Program, the terms and conditions of Section 6(e)
shall prevail.
16. Permitted Transferee. In the event Shares of Restricted Stock are
transferred to a Permitted Transferee, (i) the provisions of Paragraphs 3, 4, 9,
and 13 shall apply mutatis muntandis to the shares so transferred and to the
Permitted Transferee; (ii) the provisions of Paragraphs 5, 8, 10, 11, 12, 14 and
15 shall continue to apply without any change with respect to the shares so
transferred; and (iii) the provisions of Paragraph 6 shall continue to apply
without any change with respect to the shares so transferred, except that the
shares to be forfeited shall be those shares of Restricted Stock that have not
vested and which are held by the Permitted Transferee.
IN WITNESS WHEREOF, the Company has caused this instrument to be
executed by its duly authorized officer and its corporate seal hereunto affixed,
and the Non-Employee Director has hereunto affixed his hand and seal, all on the
day and year set forth below.
MGIC INVESTMENT CORPORATION
By:------------------------------ ----------------------------------------
No. of Shares of Restricted Stock:_______
Date of Agreement: _____________________
Award Date: _________________________
Release Date: _________________________
Beneficiary: ___________________________
Address of Beneficiary:
_________________________________________
_________________________________________
Beneficiary's Tax Identification
Number:__________________________________
Exhibit 10.11
EXECUTIVE BONUS PLAN OF
MGIC INVESTMENT CORPORATION
(the "Company")
The Executive Bonus Plan of the Company in effect for 1999 (which is not
contained in a formal plan document), applies 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, 1998. Under the Executive Bonus Plan, if
the Company achieves a minimum level of net income for 1999, an executive
officer will be eligible for a bonus, depending upon the executive officer's
performance with regard to the achievement of individual goals, within various
ranges of up to 100% of such executive officer's base salary, depending on the
range applicable to the executive officer.
EXHIBIT 11
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (1)
For The Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
(In thousands, except per share data)
BASIC EARNINGS PER SHARE
Average common shares outstanding 112,135 116,332 117,787
======== ======== ========
Net income $385,465 $323,750 $257,991
======== ======== ========
Net income per share $ 3.44 $ 2.78 $ 2.19
======== ======== ========
DILUTED EARNINGS PER SHARE
Adjusted shares outstanding:
Average common shares outstanding 112,135 116,332 117,787
Net shares to be issued upon exercise of
common stock equivalents 1,447 1,592 1,259
-------- -------- --------
Adjusted shares outstanding 113,582 117,924 119,046
======== ======== ========
Net income $385,465 $323,750 $257,991
======== ======== ========
Net income per share $ 3.39 $ 2.75 $ 2.17
======== ======== ========
(1) Per Statement of Financial Accounting Standards No. 128, "Earnings Per
Share".
EXHIBIT 13
MGIC INVESTMENT CORPORATION & SUBSIDIARIES - YEARS ENDED DECEMBER 31, 1998, 1997, 1996, 1995 AND 1994
FIVE-YEAR SUMMARY OF FINANCIAL INFORMATION
1998 1997 1996 1995 1994
-------------- ------------- ------------- -------------- --------------
(In thousands of dollars, except per share data)
Summary of Operations
Revenues:
Net premiums written...................... $ 749,161 $ 690,248 $ 588,927 $ 480,312 $ 410,296
============== ============= ============= ============== ==============
Net premiums earned....................... 763,284 708,744 617,043 506,500 403,990
Investment income, net.................... 143,019 123,602 105,355 87,543 75,233
Realized investment gains, net............ 18,288 3,261 1,220 1,496 336
Other revenue............................. 47,075 32,665 22,013 22,347 22,667
-------------- ------------- ------------- -------------- --------------
Total revenues.......................... 971,666 868,272 745,631 617,886 502,226
-------------- ------------- ------------- -------------- --------------
Losses and expenses:
Losses incurred, net...................... 211,354 242,362 234,350 189,982 153,081
Underwriting and other expenses........... 190,031 157,194 146,483 137,559 136,027
Interest expense.......................... 18,624 6,399 3,793 3,821 3,856
Ceding commission......................... (2,928) (3,056) (4,023) (4,885) (7,821)
-------------- ------------- ------------- -------------- --------------
Total losses and expenses............... 417,081 402,899 380,603 326,477 285,143
-------------- ------------- ------------- -------------- --------------
Income before tax............................ 554,585 465,373 365,028 291,409 217,083
Provision for income tax..................... 169,120 141,623 107,037 83,844 57,565
-------------- ------------- ------------- -------------- --------------
Net income................................... $ 385,465 $ 323,750 $ 257,991 $ 207,565 $ 159,518
============== ============= ============= ============== ==============
Weighted average common shares
outstanding (in thousands) (1)............ 113,582 117,924 119,046 118,567 117,955
============== ============= ============= ============== ==============
Diluted earnings per share (1)............... $ 3.39 $ 2.75 $ 2.17 $ 1.75 $ 1.35
============== ============= ============= ============== ==============
Dividends per share (1)...................... $ .10 $ .095 $ .08 $ .08 $ .08
============== ============= ============= ============== ==============
Balance sheet data
Total investments......................... $ 2,779,706 $ 2,416,740 $ 2,036,234 $ 1,687,221 $ 1,292,960
Total assets.............................. 3,050,541 2,617,687 2,222,315 1,874,719 1,476,266
Loss reserves............................. 681,274 598,683 514,042 371,032 274,469
Long-term notes payable................... 442,000 237,500 - 35,799 36,147
Shareholders' equity...................... 1,640,591 1,486,782 1,366,115 1,121,392 838,074
Book value per share...................... 15.05 13.07 11.59 9.56 7.18
(1) In May 1997, the Company declared a two-for-one stock split of the common stock in the form of a 100% stock dividend. The
additional shares were issued on June 2, 1997. Prior year shares, dividends per share and earnings per share have been
restated to reflect the split.
- -----------------------------------------------------------------------------------------------------------------------------------
A brief description of the Company's business is contained in Note 1 to the Consolidated Financial Statements of the Company, page
eighteen.
Two
MGIC INVESTMENT CORPORATION & SUBSIDIARIES - YEARS ENDED DECEMBER 31, 1998, 1997, 1996, 1995 AND 1994
FIVE-YEAR SUMMARY OF FINANCIAL INFORMATION
1998* 1997 1996 1995 1994
-------------- ------------- ------------- -------------- --------------
New primary insurance written ($ millions)... $ 43,697 $ 32,250 $ 32,756 $ 30,277 $ 34,419
New primary risk written ($ millions)........ 10,850 8,305 8,305 7,599 7,042
New pool risk written ($ millions)........... 618 394 2 1 27
Insurance in force (at year-end) ($ millions)
Direct primary insurance.................. 137,990 138,497 131,397 120,341 104,416
Direct primary risk....................... 32,891 32,175 29,308 25,502 20,756
Direct pool risk.......................... 1,133 590 232 254 295
Primary loans in default ratios
Policies in force......................... 1,320,994 1,342,976 1,299,038 1,219,304 1,080,882
Loans in default.......................... 29,253 28,493 25,034 19,980 15,439
Percentage of loans in default............ 2.21% 2.12% 1.93% 1.64% 1.43%
Insurance operating ratios (GAAP)
Loss ratio................................ 27.7% 34.2% 38.0% 37.5% 37.9%
Expense ratio............................. 19.6% 18.4% 21.6% 24.6% 28.1%
-------------- ------------- ------------- -------------- --------------
Combined ratio............................ 47.3% 52.6% 59.6% 62.1% 66.0%
============== ============= ============= ============== ==============
Risk-to-capital ratios (statutory)
Combined insurance subsidiaries........... 13.6:1 16.4:1 18.8:1 19.9:1 20.6:1
MGIC...................................... 12.9:1 15.7:1 18.1:1 19.1:1 19.6:1
* The above information for 1998 and the 1998 information under "Financial Highlights" excludes the activity of Wisconsin
Mortgage Assurance Corporation ("WMAC") acquired on December 31, 1998. For further description of WMAC, see Note 1 to the
Consolidated Financial Statements of the Company, page eighteen.
Three
Management's Discussion and Analysis
Results of Consolidated Operations
1998 Compared with 1997
Net income for 1998 was $385.5 million, compared with $323.8 million in 1997, an
increase of 19%. Diluted earnings per share for 1998 was $3.39, compared with
$2.75 in 1997, an increase of 23%. The percentage increase in diluted earnings
per share was favorably affected by the lower adjusted shares outstanding in
1998 as a result of common stock repurchased by the Company in the second half
of 1997 and during 1998.
The amount of new primary insurance written by Mortgage Guaranty Insurance
Corporation ("MGIC") during 1998 was $43.7 billion, compared with $32.2 billion
in 1997. Reflecting the favorable mortgage interest rate environment that
prevailed throughout 1998, refinancing activity accounted for 31% of new primary
insurance written in 1998, compared to 15% in 1997.
The $43.7 billion of new primary insurance written during 1998 was offset by the
cancellation of $44.2 billion of insurance in force, and resulted in a net
decrease of $0.5 billion in primary insurance in force, compared to new primary
insurance written of $32.2 billion, cancellation of $25.1 billion, and a net
increase of $7.1 billion in insurance in force during 1997. Direct primary
insurance in force was $138.0 billion at December 31, 1998, compared to $138.5
billion at December 31, 1997. In addition to providing direct primary insurance
coverage, the Company also insures pools of mortgage loans. New pool risk
written during 1998 and 1997, which was virtually all agency pool insurance, was
$618.1 million and $394.4 million, respectively.
The Company's direct pool risk in force at December 31, 1998 was $1.1 billion
compared to $590.3 million at December 31, 1997 and is expected to increase in
1999 as a result of outstanding commitments to write additional agency pool
insurance.
Cancellation activity has historically been affected by the level of mortgage
interest rates and increased during 1998 due to favorable mortgage interest
rates which resulted in a decrease in the MGIC persistency rate (percentage of
insurance remaining in force from one year prior) to 68.1% at December 31, 1998,
from 80.9% at December 31, 1997. Future cancellation activity could also be
affected as a result of legislation that will go into effect in July 1999
regarding cancellation of mortgage insurance.
Net premiums written increased 9% to $749.2 million in 1998, from $690.2 million
in 1997. Net premiums earned increased 8% to $763.3 million in 1998, from $708.7
million in 1997. The increases were primarily a result of a higher percentage of
renewal premiums on mortgage loans with deeper coverages.
Effective March 1, 1999, Fannie Mae changed its mortgage insurance requirements
for certain fixed-rate mortgages approved by Fannie Mae's automated underwriting
service. The changes permit lower coverage percentages on these loans than the
deeper coverage percentages that went into effect in 1995. In March 1999,
Freddie Mac announced that it was implementing similar changes. MGIC's premium
rates vary with the depth of coverage. While lower coverage percentages result
in lower premium revenue, lower coverage percentages should also result in lower
incurred losses at the same level of claim
Four
incidence. MGIC's premium revenues could also be affected to the extent Fannie
Mae and Freddie Mac are compensated for assuming default risk that would
otherwise be insured by the private mortgage insurance industry. These
Government Sponsored Enterprises (GSEs) introduced programs in 1998 and 1999
under which a delivery fee could be paid to them, with mortgage insurance
coverage reduced below the coverage that would be required in the absence of the
delivery fee.
Approximately 16% of MGIC's new insurance written in 1998 was subject to captive
mortgage reinsurance and similar arrangements. The percentage of new insurance
written subject to captive mortgage reinsurance arrangements is expected to
increase in 1999 as new transactions are consummated. In a February 1999
circular letter, the New York Department of Insurance said it was in the process
of developing guidelines that would articulate the parameters under which
captive mortgage reinsurance is permissible under New York insurance law.
Investment income for 1998 was $143.0 million, an increase of 16% over the
$123.6 million in 1997. This increase was primarily the result of an increase in
the amortized cost of average investment assets to $2.5 billion for 1998, from
$2.1 billion for 1997, an increase of 16%. The increase was partially offset by
a decrease in the portfolio's average pre-tax investment yield to 5.6% in 1998
from 5.8% in 1997. The portfolio's average after-tax investment yield was 4.9%
for 1998 compared to 5.0% for 1997. The Company realized gains of $18.3 million
during 1998 compared to $3.3 million in 1997. The increase is primarily the
result of the sale of equity securities in 1998.
Other revenue was $47.1 million in 1998, compared with $32.7 million in 1997.
The increase is primarily the result of an increase in contract underwriting
revenue of $11.8 million and an increase of $5.3 million in equity earnings from
Credit-Based Asset Servicing and Securitization LLC and Litton Loan Servicing LP
(collectively, "C-BASS"), a joint venture with Enhance Financial Services Group
Inc., offset by a $2.7 million reduction in fee-based services under government
contracts. In accordance with generally accepted accounting principles, C-BASS
is required to mark to market its mortgage-related assets which, including open
trades, were $550 million at December 31, 1998 and are expected to increase in
the future. Market valuation adjustments could impact the Company's share of
C-BASS's results of operations.
Net losses incurred decreased 13% to $211.4 million in 1998, from $242.4 million
in 1997. Such decrease was primarily attributable to an increase in the
redundancy in prior year loss reserves, generally favorable economic conditions
throughout the country and only a moderate increase in the primary notice
inventory from 28,493 at December 31, 1997 to 29,253 at December 31, 1998. The
redundancy results from actual claim rates and actual claim amounts being lower
than those estimated by the Company when originally establishing the reserve at
December 31, 1997. The pool notice inventory increased from 2,098 at December
31, 1997 to 6,524 at December 31, 1998, attributable to defaults on new agency
pool insurance written during 1997 and 1998. At December 31, 1998, 60% of the
primary insurance in force was written during the last three years, compared to
57% at December 31, 1997. The highest claim frequency years have typically been
the third through fifth years after the year of loan origination. However, the
pattern
Five
of claims frequency for refinance loans may be different from the historical
pattern of other loans.
Underwriting and other expenses increased 21% in 1998 to $190.0 million from
$157.2 million in 1997. This increase was primarily due to increases associated
with contract and field office underwriting expenses and an increase in premium
tax due to higher premiums written.
Interest expense in 1998 increased to $18.6 million from $6.4 million in 1997
due to higher outstanding notes payable, the proceeds of which were used to
repurchase common stock.
The Company entered into financial derivative transactions in 1998, consisting
of interest rate swaps and put-swaptions to reduce and manage interest rate risk
on its notes payable. In 1998, earnings on an interest rate swap and premium
income on three put-swaptions aggregating approximately $0.5 million for all
such transactions were netted against interest expense.
The consolidated insurance operations loss ratio was 27.7% for 1998 compared to
34.2% for 1997. The consolidated insurance operations expense and combined
ratios were 19.6% and 47.3%, respectively, for 1998 compared to 18.4% and 52.6%,
respectively, for 1997.
The effective tax rate was 30.5% in 1998, compared with 30.4% in 1997. 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 1998 resulted from a lower percentage of total income
before tax being generated from tax-preferenced investments in 1998.
1997 Compared with 1996
Net income for 1997 was $323.8 million, compared with $258.0 million in 1996, an
increase of 25%. After giving effect to the Company's two-for-one stock split,
effective June 2, 1997, diluted earnings per share for 1997 was $2.75, compared
with $2.17 in 1996, an increase of 27%.
The amount of new primary insurance written by MGIC during 1997 was $32.2
billion compared with $32.8 billion in 1996. Refinancing activity accounted for
15% of new primary insurance written in 1997 compared to 17% in 1996.
The $32.2 billion of new primary insurance written during 1997 was offset by the
cancellation of $25.1 billion of insurance in force and resulted in a net
increase of $7.1 billion in primary insurance in force, compared to new primary
insurance written of $32.8 billion, cancellation of $21.7 billion, and a net
increase of $11.1 billion in insurance in force during 1996. Direct primary
insurance in force was $138.5 billion at December 31, 1997, compared to $131.4
billion at December 31, 1996. In addition to providing direct primary insurance
coverage, the Company also insures pools of mortgage loans. New pool risk
written during 1997, which was virtually all agency pool insurance, and 1996 was
$394.4 million and $1.5 million, respectively. The Company's direct pool risk in
force at December 31, 1997 was $590.3 million compared to $232.3 million at
December 31, 1996.
Cancellation activity increased during 1997 due to favorable mortgage interest
rates which resulted in a decrease in the MGIC persistency rate to 80.9% at
December 31, 1997, from 82.0% at December 31, 1996.
Six
Net premiums written increased 17% to $690.2 million in 1997, from $588.9
million in 1996. Net premiums earned increased 15% to $708.7 million in 1997,
from $617.0 million in 1996. The increases were primarily a result of a higher
percentage of renewal premiums on mortgage loans with deeper coverages and the
growth in insurance in force.
Investment income for 1997 was $123.6 million, an increase of 17% over the
$105.4 million in 1996. This increase was primarily the result of an increase in
the amortized cost of average investment assets to $2.1 billion for 1997, from
$1.8 billion for 1996, an increase of 19%. The increase was partially offset by
a decrease in the portfolio's average pre-tax investment yield to 5.8% in 1997
from 5.9% in 1996. The portfolio's average after-tax investment yield was 5.0%
for 1997 compared to 5.1% for 1996.
Other revenue was $32.7 million in 1997, compared with $22.0 million in 1996.
The increase is primarily the result of $7.1 million of equity earnings from
C-BASS and an increase in contract underwriting revenue.
Ceding commission for 1997 was $3.1 million, compared to $4.0 million in 1996, a
decrease of 23%. The decrease was primarily attributable to reductions in
premiums ceded under quota share reinsurance agreements.
Net losses incurred increased 3% to $242.4 million in 1997, from $234.4 million
in 1996. Such increase was primarily due to an increase in the primary insurance
notice inventory from 25,034 at December 31, 1996 to 28,493 at December 31,
1997, resulting from higher delinquency levels on insurance written in 1994
through 1996, the continued higher level of loss activity in certain high-cost
geographic regions, a higher level of defaults which resulted from a higher
percentage of the Company's insurance in force reaching its peak claim paying
years and an increase in the number of defaults with deeper coverages.
Offsetting this increase were favorable developments in prior-year loss reserves
resulting from actual claim rates and actual claim amounts being lower than
those estimated by the Company when originally establishing the reserve at
December 31, 1996. At December 31, 1997, 57% of the primary insurance in force
was written during the last three years, compared to 61% at December 31, 1996.
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 the historical pattern of
other loans. A substantial portion of the insurance written in 1992 and 1993
represented insurance on the refinance of mortgage loans originated in earlier
years.
Underwriting and other expenses increased 7% in 1997 to $157.2 million from
$146.5 million in 1996. This increase in expenses was primarily due to an
increase in expenses associated with the fee-based services for underwriting and
an increase in premium tax due to higher premiums written.
The consolidated insurance operations loss ratio was 34.2% for 1997 compared to
38.0% for 1996. The consolidated insurance operations expense and combined
ratios were 18.4% and 52.6%, respectively, for 1997 compared to 21.6% and 59.6%,
respectively, for 1996.
The effective tax rate was 30.4% in 1997, compared with 29.3% in 1996. 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 1997 resulted from a lower percentage of total
Seven
income before tax being generated from tax-preferenced investments in 1997.
Financial Condition
Consolidated total investments were $2.8 billion at December 31, 1998, compared
with $2.4 billion at December 31, 1997, an increase of 15%. The increase
includes an increase of $16.3 million in unrealized gains on securities marked
to market. The Company generated consolidated cash flows from operating
activities of $420.9 million during 1998, compared to $371.9 million generated
during 1997. The increase in operating cash flows during 1998 is due primarily
to an increase in renewal premiums and investment income offset by an increase
in underwriting expenses. As of December 31, 1998, the Company had $172.2
million of short-term investments with maturities of 90 days or less, and 76% of
the portfolio was invested in tax-preferenced securities. In addition, at
December 31, 1998, based on book value, the Company's fixed income securities
were approximately 99% invested in "A" rated and above, readily marketable
securities, concentrated in maturities of less than 15 years. At December 31,
1998 the Company had $4.6 million of investments in equity securities compared
to $116.1 million at December 31, 1997.
At December 31, 1998, 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, 1998, the average
duration of the Company's investment portfolio was 5.8 years. The effect of a 1%
increase/ decrease in market interest rates would result in a 5.8%
decrease/increase in the value of the Company's fixed income portfolio.
The Company's investments in joint ventures increased $45.9 million from $29.4
million at December 31, 1997 to $75.3 million at December 31, 1998 as a result
of additional investments of $33.5 million and equity earnings of $12.4 million.
Consolidated loss reserves increased 14% to $681.3 million at December 31, 1998
from $598.7 million at December 31, 1997, reflecting an increase in the number
of both primary and pool loans in default. The Company's loss reserves at
December 31, 1998 reflect credit quality concerns on defaults from insurance
written in 1994 through 1996, an increase in the number of defaults with deeper
coverages and the growth in pool insurance. Consistent with industry practices,
the Company does not establish loss reserves for future claims on insured loans
which are not currently in default. Reinsurance recoverable on loss reserves
increased to $45.5 million at December 31, 1998 from $26.4 million at December
31, 1997 as a result of third-party reinsurance on the insurance in force
written by Wisconsin Mortgage Assurance Corporation, which was acquired by the
Company on December 31, 1998.
Consolidated unearned premiums decreased $14.6 million from $198.3 million at
December 31, 1997, to $183.7 million at December 31, 1998, reflecting the high
level of monthly premium policies written in 1998, for which there is no
unearned premium.
Consolidated shareholders' equity increased to $1.6 billion at December 31,
1998, from $1.5 billion at December 31, 1997, an increase of 10%. This increase
consisted of $385.5 million of
Eight
net income during 1998, $15.8 million from the reissuance of treasury stock, and
an increase in net unrealized gains on investments, net of tax, of $10.6
million, offset by the repurchase of $246.8 million of outstanding common shares
and dividends declared of $11.2 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 74% of underwriting expenses are
personnel-related costs, most of which are considered by the Company to be fixed
costs over the short term. Approximately 6% 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 cash flows of approximately $420.9 million, $371.9 million and $386.1
million in 1998, 1997 and 1996, 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, could be
funded through sales of short-term investments and other investment portfolio
securities.
During 1997 and 1998, the Company repurchased approximately 4.7 million and 5.3
million shares, respectively, of its outstanding common stock at a cost of
approximately $248 and $247 million, respectively. Funds to repurchase the
shares were primarily provided by borrowings under credit facilities evidenced
by notes payable.
The 1997 and 1998 credit facilities provide up to $225 million and $250 million,
respectively, of availability at December 31, 1998. The 1997 credit facility
will decrease by $25 million each year through June 20, 2001. Any outstanding
borrowings under this facility mature on June 20, 2002. The 1998 credit facility
decreases by $25 million each year beginning June 9, 1999 through June 9, 2002.
Any outstanding borrowings under this facility mature on June 9, 2003. The
Company has the option, on notice to lenders, to prepay any borrowings under the
facilities subject to certain provisions.
In January 1997, the Company repaid mortgages payable of $35.4 million, which
were secured by the home office and substantially all of the furniture and
fixtures of the Company.
The Company has a 48% investment in C-BASS and is guaranteeing one-half of a $50
million credit facility as part of C-BASS's funding arrangements. The facility
matures in July 1999.
MGIC is the principal insurance subsidiary of the Company. MGIC's
risk-to-capital ratio was 12.9:1 at December 31, 1998 compared to 15.7:1 at
December 31, 1997. The decrease was due to MGIC's increased policyholders'
reserves, partially offset by the net additional risk in force of $349.2
million, net of reinsurance, during 1998.
The Company's combined insurance risk-to-capital ratio was 13.6:1 at December
31, 1998, compared to 16.4:1 at December 31, 1997. The decrease was due to the
same reasons as described above.
The risk-to-capital ratios set forth above have been computed on a statutory
basis. However, the methodology used by the rating agencies to assign
claims-paying ability ratings permits less leverage than under statutory
requirements. As a result,
Nine
the amount of capital required under statutory regulations may be lower than the
capital required for rating agency purposes. In addition to capital adequacy,
the rating agencies consider other factors in determining a mortgage insurer's
claims-paying rating, including its competitive position, business outlook,
management, corporate strategy, and historical and projected operating
performance.
For certain material risks of the Company's business, see "Risk Factors" below.
Risk Factors
The Company and its business may be materially affected by the factors discussed
below. These factors may also cause actual results to differ materially from the
results contemplated by forward looking statements that the Company may make.
Reductions in the volume of low down payment home mortgage originations may
adversely affect the amount of private mortgage insurance (PMI) written by the
PMI industry. The factors that affect the volume of low down payment mortgage
originations include:
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,
o the rate of home price appreciation, which in times of heavy refinancing
affects whether refinance loans have loan-to-value ratios that require PMI,
and
o government housing policy encouraging loans to first-time homebuyers.
By selecting alternatives to PMI, lenders and investors may adversely affect the
amount of PMI written by the PMI industry. These alternatives include:
o government mortgage insurance programs, including those of the Federal
Housing Administration and the Veterans Administration,
o holding mortgages in portfolio and self-insuring,
o use of credit enhancements by investors, including Fannie Mae and Freddie
Mac, other than PMI or using other credit enhancements in conjunction with
reduced levels of PMI coverage, and
o mortgage originations structured to avoid PMI, such as a first mortgage
with an 80% loan-to-value ratio and a second mortgage with a 10%
loan-to-value ratio (referred to as an 80-10-10 loan) rather than a first
mortgage with a 90% loan-to-value ratio.
Fannie Mae and Freddie Mac have a material impact on the PMI industry. Because
Fannie Mae and Freddie Mac are the largest purchasers of low down payment
conventional mortgages, the business practices of these GSEs have a direct
effect on private mortgage insurers. These practices affect the entire
relationship between the GSEs and mortgage insurers and include:
Ten
o the level of PMI coverage, subject to the limitations of the GSE's charters
when PMI is used as the required credit enhancement on low down payment
mortgages,
o whether the mortgage lender or the GSE chooses the mortgage insurer
providing coverage,
o the underwriting standards that determine what loans are eligible for
purchase by the GSEs, which thereby affect the quality of the risk insured
by the mortgage insurer, as well as the availability of mortgage loans,
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.
The Company expects the level of competition within the PMI industry to remain
intense. Competition for PMI premiums occurs not only among private mortgage
insurers but increasingly with mortgage lenders through captive mortgage
reinsurance transactions in which a lender's affiliate reinsures a portion of
the insurance written by a private mortgage insurer on mortgages originated by
the lender. The level of competition within the PMI industry has also increased
as many large mortgage lenders have reduced the number of private mortgage
insurers with whom they do business at the same time as consolidation among
mortgage lenders has increased the share of the mortgage lending market held by
large lenders. Changes in interest rates, house prices and cancellation policies
may materially affect persistency. In each year, most of MGIC's premiums are
from insurance that has been written in prior years. As a result, the length of
time insurance remains in force is an important determinant of revenues. The
factors affecting persistency of the insurance in force include:
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.
The strong economic climate that has existed throughout the United States for
some time has favorably impacted losses and encouraged competition to assume
default risk. Losses result from events that adversely affect a borrower's
ability to continue to make mortgage payments, such as unemployment, and whether
the home of a borrower who defaults on his mortgage can be sold for an amount
that will cover unpaid principal and interest and the expenses of the sale.
Favorable economic conditions generally reduce the likelihood that borrowers
will lack sufficient income to pay their mortgages and also favorably affect the
value of homes, thereby reducing and in some cases even eliminating a loss from
a mortgage default. A significant deterioration in economic conditions would
adversely affect MGIC's losses. The low level of losses that has recently
prevailed in the private mortgage insurance industry has encouraged competition
to assume default risk through captive reinsurance arrangements, self-insurance,
80-10-10 loans and other means.
Eleven
Litigation against mortgage lenders and settlement service providers has been
increasing. In recent years, consumers have brought a growing number of lawsuits
against home mortgage lenders and settlement service providers seeking monetary
damages. The Real Estate Settlement Procedures Act gives home mortgage borrowers
the right to bring lawsuits seeking damages of three times the amount of the
charge paid for a settlement service involved in a violation of this law. Under
rules adopted by the United States Department of Housing and Urban Development,
"settlement services" are services provided in connection with settlement of a
mortgage loan, including services involving mortgage insurance.
The pace of change in the home mortgage lending and mortgage insurance
industries will likely accelerate. The Company expects the processes involved in
home mortgage lending will continue to evolve through greater use of technology.
This evolution could effect fundamental changes in the way home mortgages are
distributed. Lenders who are regulated depositary institutions could gain
expanded insurance powers if financial modernization proposals become law. The
capital markets are beginning to emerge as providers of insurance in competition
with traditional insurance companies. These trends and others increase the level
of uncertainty attendant to the PMI business, demand rapid response to change
and place a premium on innovation.
Year 2000 Compliance
Almost all of the Company's information technology systems ("IT Systems"),
including all of its "business critical" IT Systems, either have been originally
developed to be Year 2000 compliant or have been reprogrammed. The Company plans
to reprogram the remaining IT Systems (the "Remaining Systems") and to complete
internal testing of all IT Systems for Year 2000 compliance by the end of the
second quarter of 1999. In general, the Remaining Systems have either been
developed and maintained by the Company's Information Technology Department or
use off-the-shelf software from national software vendors such as Microsoft and
IBM who have publicly announced that their software is Year 2000 compliant. All
of the IT Systems developed and maintained by the Information Technology
Department have already been internally tested for Year 2000 compliance and all
IT Systems using off-the-shelf software have been assessed. If the Company is
unable to complete any required reprogramming of the Remaining Systems on a
timely basis, the efficiency of certain of the Company's business processes will
likely decline but this consequence is not expected to be material to the
Company.
Some of the Company's "business critical" IT Systems interface with computer
systems of third parties. The Company, Fannie Mae, Freddie Mac and many of these
third parties are participating in the Mortgage Bankers Association Year 2000
Inter-Industry Work Group (the "MBA Work Group"). The MBA Work Group has
scheduled compliance testing among participants for the first and second
quarters of 1999 and is continuing efforts to attract additional participants
for compliance testing. The Company and one national service bureau have already
conducted certain successful Year 2000 compliance testing and it is possible the
Company will conduct additional Year 2000 compliance testing with individual
companies in advance of the MBA Work Group testing. However, the Company
understands it is the position of a number of larger companies in the MBA Work
Group not to engage in any testing with third parties in advance of the testing
sponsored by the MBA Work Group. Not all companies with which the Company's IT
Systems interface will be participating in the MBA Work Group testing.
Twelve
The Company is contacting the larger companies not participating in the MBA Work
Group testing to determine interest in one-on-one testing.
All costs incurred through December 1998 for IT Systems for Year 2000 compliance
have been expensed and were immaterial. The costs of the remaining reprogramming
and testing are expected to be immaterial.
Telecommunications services and electricity are essential to the Company's
ability to conduct business. The Company's long-distance voice and data
telecommunications suppliers and the local telephone company serving the
Company's owned headquarters and warehouse facilities have written to the
Company to the effect that their respective systems will be Year 2000 compliant.
The electric company serving these facilities has given the Company oral
assurance that it will also be Year 2000 compliant. In addition, the Company is
planning to acquire back-up power for its headquarters. The Company has received
written assurance regarding Year 2000 compliance from landlords of the Company's
underwriting service centers and local telephone companies.
The Company has long practiced contingency planning to address business
disruption risks and has procedures for planning and executing contingency
measures to provide for business continuity in the event of any circumstance
that results in disruption to the Company's headquarters, warehouse facilities
and leased workplace environments, including lack of utility services,
transportation disruptions, and service provider failures. The Company is
developing additional plans for the "special case" of business disruption due to
Year 2000 compliance issues. These plans, which are scheduled to be ready by the
end of the first quarter of 1999, will address continuity measures in five
areas: physical building environment, including conducting operations at
off-site facilities; business operations units, as discussed below; external
factors over which the Company does not have control but can implement measures
to minimize adverse impact on the Company's business; application system
restoration priorities for the Company's computer systems; and contingencies
specifically targeted towards monitoring Company facilities and systems at
year-end 1999.
The business unit recovery plans address resumption of business in the worst
case scenario of a total loss to a Company facility, including the inability to
utilize computerized systems.
In view of the timing and scope of the MBA Work Group and other testing, the
Company's contingency planning does not currently include developing special
procedures with individual third parties if they are not themselves Year 2000
compliant. If the Company is unable to do business with such third parties
electronically, it would seek to do business with them on a paper basis. Without
knowing the identity of non-compliant third parties and the amount of
transactions occurring between the Company and them, the Company cannot evaluate
the effects on its business if it were necessary to substitute paper business
processes for electronic business processes with such third parties. Among other
effects, Year 2000 non-compliance by such third parties could delay receipt of
renewal premiums by the Company or the reporting to the Company of mortgage loan
delinquencies and could also affect the amount of the Company's new insurance
written.
Thirteen
MGIC INVESTMENT CORPORATION & SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Consolidated Statement of Operations
1998 1997 1996
-------------- --------------- ---------------
REVENUES: (In thousands of dollars, except per share data)
Premiums written:
Direct.................................................... $ 755,620 $ 692,134 $ 587,626
Assumed................................................... 8,352 11,597 16,912
Ceded (note 7)............................................ (14,811) (13,483) (15,611)
-------------- --------------- ---------------
Net premiums written........................................ 749,161 690,248 588,927
Decrease in unearned premiums............................... 14,123 18,496 28,116
-------------- --------------- ---------------
Net premiums earned (note 7)................................ 763,284 708,744 617,043
Investment income, net of expenses (note 4)................. 143,019 123,602 105,355
Realized investment gains, net (note 4)..................... 18,288 3,261 1,220
Other revenue............................................... 47,075 32,665 22,013
-------------- --------------- ---------------
Total revenues............................................ 971,666 868,272 745,631
-------------- --------------- ---------------
LOSSES AND EXPENSES:
Losses incurred, net (notes 6 and 7)........................ 211,354 242,362 234,350
Underwriting and other expenses............................. 190,031 157,194 146,483
Interest expense............................................ 18,624 6,399 3,793
Ceding commission (note 7).................................. (2,928) (3,056) (4,023)
-------------- --------------- ---------------
Total losses and expenses................................. 417,081 402,899 380,603
-------------- --------------- ---------------
Income before tax.............................................. 554,585 465,373 365,028
Provision for income tax (note 10)............................. 169,120 141,623 107,037
-------------- --------------- ---------------
Net income..................................................... $ 385,465 $ 323,750 $ 257,991
============== =============== ===============
Earnings per share (note 11):
Basic....................................................... $ 3.44 $ 2.78 $ 2.19
============== =============== ===============
Diluted..................................................... $ 3.39 $ 2.75 $ 2.17
============== =============== ===============
See accompanying notes to consolidated financial statements.
Fourteen
MGIC INVESTMENT CORPORATION & SUBSIDIARIES
DECEMBER 31, 1998 AND 1997
Consolidated Balance Sheet
1998 1997
---------------- -----------------
(In thousands of dollars)
ASSETS
Investment portfolio (note 4):
Securities, available-for-sale, at market value:
Fixed maturities........................................................ $ 2,602,870 $ 2,185,954
Equity securities....................................................... 4,627 116,053
Short-term investments.................................................. 172,209 114,733
---------------- -----------------
Total investment portfolio............................................ 2,779,706 2,416,740
Cash ........................................................................ 4,650 4,893
Accrued investment income.................................................... 41,477 35,485
Reinsurance recoverable on loss reserves (note 7)............................ 45,527 26,415
Reinsurance recoverable on unearned premiums (note 7)........................ 8,756 9,239
Home office and equipment, net............................................... 32,400 33,784
Deferred insurance policy acquisition costs.................................. 24,065 27,156
Investments in joint ventures (note 8)....................................... 75,246 29,400
Other assets................................................................. 38,714 34,575
---------------- -----------------
Total assets.......................................................... $ 3,050,541 $ 2,617,687
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Loss reserves (notes 6 and 7)............................................. $ 681,274 $ 598,683
Unearned premiums (note 7)................................................ 183,739 198,305
Notes payable (note 5).................................................... 442,000 237,500
Income taxes payable (note 10)............................................ 31,032 27,717
Other liabilities......................................................... 71,905 68,700
---------------- -----------------
Total liabilities..................................................... 1,409,950 1,130,905
---------------- -----------------
Contingencies (note 13)
Shareholders' equity (note 11):
Common stock, $1 par value, shares authorized 300,000,000;
shares issued 121,110,800; outstanding 1998 - 109,003,032;
1997 - 113,791,593.......................................................
121,111 121,111
Paid-in surplus........................................................... 217,022 218,499
Treasury stock (shares at cost 1998 - 12,107,768;
1997 - 7,319,207)....................................................... (482,465) (252,942)
Accumulated other comprehensive income - unrealized
appreciation in investments, net of tax (note 2)........................ 94,572 83,985
Retained earnings (note 11)............................................... 1,690,351 1,316,129
---------------- -----------------
Total shareholders' equity.............................................. 1,640,591 1,486,782
---------------- -----------------
Total liabilities and shareholders' equity.............................. $ 3,050,541 $ 2,617,687
================ =================
See accompanying notes to consolidated financial statements.
Fifteen
MGIC INVESTMENT CORPORATION & SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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, 1995......... $ 121,111 $ 198,874 $ (8,172) $ 54,737 $ 754,842
Net income......................... - - - - 257,991 $ 257,991
Unrealized investment losses, net.. - - - (14,052) - (14,052)
-------------
Comprehensive income............... - - - - - $ 243,939
=============
Dividends declared................. - - - - (9,425)
Reissuance of treasury stock....... - 9,110 1,099 - -
------------ ------------ ------------ -------------- ------------
Balance, December 31, 1996......... 121,111 207,984 (7,073) 40,685 1,003,408
Net income......................... - - - - 323,750 $ 323,750
Unrealized investment gains, net... - - - 43,300 - 43,300
-------------
Comprehensive income............... - - - - - $ 367,050
=============
Dividends declared................. - - - - (11,029)
Repurchase of outstanding
common shares.................... - - (248,426) - -
Reissuance of treasury stock....... - 10,515 2,557 - -
------------ ------------ ------------ -------------- ------------
Balance, December 31, 1997......... 121,111 218,499 (252,942) 83,985 1,316,129
Net income......................... - - - - 385,465 $ 385,465
Unrealized investment gains, net... - - - 10,587 - 10,587
-------------
Comprehensive income............... - - - - - $ 396,052
=============
Dividends declared................. - - - - (11,243)
Repurchase of outstanding
common shares.................... - - (246,840) - -
Reissuance of treasury stock....... - (1,477) 17,317 - -
------------ ------------ ------------ -------------- ------------
Balance, December 31, 1998......... $ 121,111 $ 217,022 $ (482,465) $ 94,572 $ 1,690,351
============ ============ ============ ============== ============
See accompanying notes to consolidated financial statements.
Sixteen
MGIC INVESTMENT CORPORATION & SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Consolidated Statement of Cash Flows
1998 1997 1996
---------------- ---------------- ----------------
(In thousands of dollars)
Cash flows from operating activities:
Net income....................................................... $ 385,465 $ 323,750 $ 257,991
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred insurance policy
acquisition costs.......................................... 20,717 21,373 26,772
Increase in deferred insurance policy acquisition costs...... (17,626) (16,573) (20,772)
Depreciation and other amortization.......................... 7,742 8,187 8,969
Increase in accrued investment income........................ (5,992) (2,122) (4,150)
(Increase) decrease in reinsurance recoverable on
loss reserves.............................................. (19,112) 3,412 4,029
Decrease in reinsurance recoverable on unearned premiums..... 483 2,506 3,740
Increase in loss reserves.................................... 82,591 84,641 143,010
Decrease in unearned premiums................................ (14,566) (21,002) (31,856)
Equity (earnings) loss in joint ventures..................... (12,420) (7,100) 800
Other........................................................ (6,336) (25,186) (2,478)
---------------- ---------------- ----------------
Net cash provided by operating activities........................... 420,946 371,886 386,055
---------------- ---------------- ----------------
Cash flows from investing activities:
Purchase of equity securities.................................... (3,886) (112,780) -
Purchase of fixed maturities..................................... (916,129) (685,217) (1,095,559)
Investments in joint ventures.................................... (33,426) (7,350) (15,750)
Proceeds from sale of equity securities.......................... 116,164 9,971 -
Proceeds from sale or maturity of fixed maturities............... 529,358 447,284 782,349
---------------- ---------------- ----------------
Net cash used in investing activities............................... (307,919) (348,092) (328,960)
---------------- ---------------- ----------------
Cash flows from financing activities:
Dividends paid to shareholders................................... (11,243) (11,029) (9,425)
Net increase in notes payable.................................... 204,500 202,076 (375)
Interest payments on notes payable............................... (17,665) (3,836) (3,793)
Reissuance of treasury stock..................................... 15,454 13,072 10,209
Repurchase of common stock....................................... (246,840) (248,426) -
---------------- ---------------- ----------------
Net cash used in financing activities............................... (55,794) (48,143) (3,384)
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents................ 57,233 (24,349) 53,711
Cash and cash equivalents at beginning of year...................... 119,626 143,975 90,264
---------------- ---------------- ----------------
Cash and cash equivalents at end of year............................ $ 176,859 $ 119,626 $ 143,975
================ ================ ================
See accompanying notes to consolidated financial statements.
Seventeen
MGIC INVESTMENT CORPORATION & SUBSIDIARIES -- DECEMBER 31, 1998, 1997 AND 1996
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,
premium reconciliation and portfolio analysis.
At December 31, 1998, 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, excluding Wisconsin
Mortgage Assurance Corporation ("WMAC"), was approximately $138.0 billion and
$32.9 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, 1998 was approximately $1.1 billion.
On December 31, 1998, the Company purchased WMAC from a third party for $2
million. MGIC contributed an additional $13 million of capital to WMAC to comply
with minimum regulatory capital requirements. WMAC wrote mortgage insurance on
first mortgages collateralized by one-to-four-family residences until February
28, 1985 at which time it ceased writing new business. The acquisition had no
impact on the Company's earnings during 1998. WMAC's direct primary insurance in
force, direct primary risk in force and direct pool risk in force was
approximately $3.5 billion, $.9 billion and $.4 billion, respectively, at
December 31, 1998. (See note 7.)
The Company's largest shareholder, The Northwestern Mutual Life Insurance
Company ("NML"), held approximately 11% of the common stock of the Company at
December 31, 1998.
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 48% investments in Credit-Based
Asset Servicing and Securitization LLC and Litton Loan Servicing LP
(collectively, "C-BASS"), joint ventures with Enhance Financial Services Group
Inc., are accounted for on the equity method and recorded on the balance sheet
as investment in joint ventures. The Company's equity earnings from C-BASS are
included in other revenue. (See note 8.)
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. During
1996, 1997 and 1998, the Company's entire investment portfolio was 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 $45.2
million and $40.9 million at December 31, 1998 and 1997, respectively.
Eighteen
Deferred insurance policy acquisition costs
The cost of acquiring insurance policies, including compensation, premium
taxes and other underwriting expenses, is deferred, to the extent recoverable,
and amortized as the related premiums are earned. No expenses are deferred on
monthly premium policies.
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. (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.
Premiums written on annual policies are earned on a monthly pro rata basis.
Premiums written on monthly policies are earned as the premiums are due.
Fee income of the non-insurance subsidiaries is earned as the services are
provided.
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.)
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.)
Nineteen
Earnings per share
The Company's basic and diluted earnings per share ("EPS") have been
calculated in accordance with Statement of Financial Accounting Standards No.
128, Earnings Per Share ("SFAS 128"). The 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,
---------------------------------
1998 1997 1996
---- ---- ----
(shares in thousands)
Weighted-average shares -
Basic EPS 112,135 116,332 117,787
Common stock equivalents 1,447 1,592 1,259
---------- --------- ----------
Weighted-average shares -
Diluted EPS 113,582 117,924 119,046
========== ========= ==========
Earnings per share for 1996 has been restated to reflect the provisions of
SFAS 128. Previously reported EPS for 1996, after adjustment for the stock split
(see note 11), equaled diluted EPS under SFAS 128.
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.
Recent accounting pronouncements
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). The
statement establishes standards for the reporting and display of comprehensive
income and its components in annual financial statements. The Company's other
comprehensive income consists of the change in unrealized appreciation on
investments, net of tax, and as permitted under the provisions of SFAS 130, is
presented in the Consolidated Statement of Shareholders' Equity. The adoption of
SFAS 130 had no impact on total shareholders' equity. Realized investment gains
of $18.3 million in 1998 include sales of securities which had unrealized
appreciation of $19.0 million at December 31, 1997.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits ("SFAS 132"). The statement provides new employer
disclosure requirements regarding pension plans and other postretirement plans
and does not address the measurement or recognition of such benefits. (See note
9.)
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"), which will be effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. The statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. Management does not anticipate adoption of SFAS 133 will
have a significant effect on the Company's results of operations or its
financial position due to its limited use of derivative instruments. (See notes
4 and 5.)
Reclassifications
Certain reclassifications have been made in the accompanying financial
statements to 1997 and 1996 amounts to allow for consistent financial reporting.
3. Related party transactions
The Company contracts with Northwestern Mutual Investment Services, Inc., a
subsidiary of NML, for investment portfolio management and accounting services.
The Company incurred expense of $1.0 million, $1.1 million and $.9 million for
these services in 1998, 1997 and 1996, respectively.
The Company provided certain services to C-BASS in exchange for an
immaterial amount of fees during 1998, 1997 and 1996.
Twenty
4. Investments
The following table summarizes the Company's investments at December 31,
1998 and 1997:
Financial
Amortized Market Statement
Cost Value Value
--------------- --------------- ---------------
(In thousands of dollars)
At December 31, 1998:
Securities, available-for-sale:
Fixed maturities............................................. $ 2,460,418 $ 2,602,870 $ 2,602,870
Equity securities............................................ 1,583 4,627 4,627
Short-term investments....................................... 172,209 172,209 172,209
--------------- --------------- --------------
Total investment portfolio..................................... $ 2,634,210 $ 2,779,706 $ 2,779,706
=============== =============== ==============
At December 31, 1997:
Securities, available-for-sale:
Fixed maturities............................................. $ 2,069,133 $ 2,185,954 $ 2,185,954
Equity securities............................................ 103,670 116,053 116,053
Short-term investments....................................... 114,733 114,733 114,733
--------------- --------------- --------------
Total investment portfolio..................................... $ 2,287,536 $ 2,416,740 $ 2,416,740
=============== =============== ===============
The amortized cost and market value of investments at December 31, 1998 are
as follows:
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1998: Cost Gains Losses Value
- ------------------ --------------- --------------- --------------- ---------------
(In thousands of dollars)
U.S. Treasury securities and obligations of U.S. government
corporations and agencies.................................. $ 65,811 $ 5,746 $ (141) $ 71,416
Obligations of states and political subdivisions.............. 2,030,847 120,033 (1,290) 2,149,590
Corporate securities.......................................... 518,965 16,819 (100) 535,684
Mortgage-backed securities.................................... 1,120 16 (3) 1,133
Debt securities issued by foreign sovereign governments....... 15,884 1,372 - 17,256
--------------- --------------- --------------- ---------------
Total debt securities...................................... 2,632,627 143,986 (1,534) 2,775,079
Equity securities............................................. 1,583 3,044 - 4,627
--------------- --------------- --------------- ---------------
Total investment portfolio................................. $ 2,634,210 $ 147,030 $ (1,534) $ 2,779,706
=============== =============== =============== ===============
The amortized cost and market value of investments at December 31, 1997 are as
follows:
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1997: Cost Gains Losses Value
--------------- --------------- --------------- ---------------
(In thousands of dollars)
U.S. Treasury securities and obligations of U.S. government
corporations and agencies.................................. $ 60,972 $ 3,573 $ (2) $ 64,543
Obligations of states and political subdivisions.............. 1,620,660 102,915 (555) 1,723,020
Corporate securities.......................................... 487,711 9,984 (42) 497,653
Mortgage-backed securities.................................... 437 32 - 469
Debt securities issued by foreign sovereign governments....... 14,086 916 - 15,002
--------------- --------------- --------------- ---------------
Total debt securities...................................... 2,183,866 117,420 (599) 2,300,687
Equity securities............................................. 103,670 14,582 (2,199) 116,053
--------------- --------------- --------------- ---------------
Total investment portfolio................................. $ 2,287,536 $ 132,002 $ (2,798) $ 2,416,740
=============== =============== =============== ===============
Twenty-one
The amortized cost and market values of debt securities at December 31,
1998, 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........ $ 175,430 $ 175,572
Due after one year through
five years................... 298,734 311,433
Due after five years through
ten years.................... 1,000,720 1,066,596
Due after ten years............ 1,156,623 1,220,345
------------- ------------
2,631,507 2,773,946
Mortgage-backed securities..... 1,120 1,133
------------- ------------
Total at December 31, 1998..... $ 2,632,627 $ 2,775,079
============= ============
Net investment income is comprised of the following:
1998 1997 1996
----------- ----------- ----------
(In thousands of dollars)
Fixed maturities....... $ 133,307 $ 117,448 $ 99,832
Equity securities...... 1,133 485 240
Short-term investments. 9,603 6,813 6,223
Other ................. 79 65 82
----------- ----------- ----------
Investment income...... 144,122 124,811 106,377
Investment expenses.... (1,103) (1,209) (1,022)
----------- ----------- ----------
Net investment income.. $ 143,019 $ 123,602 $ 105,355
=========== =========== ==========
The net realized investment gains (losses) and change in net unrealized
appreciation (depreciation) of investments are as follows:
1998 1997 1996
---------- ---------- ---------
(In thousands of dollars
Net realized investment gains
(losses) on sale of
investments:
Fixed maturities........ $ 8,349 $ 3,734 $ 1,252
Equity securities....... 9,941 (472) (30)
Short-term investments.. (2) (1) (2)
---------- ---------- ---------
18,288 3,261 1,220
---------- ---------- ---------
Change in net unrealized
appreciation (depreciation):
Fixed maturities........ 25,631 56,934 (22,064)
Equity securities....... (9,339) 9,677 233
Short-term investments.. - - -
---------- ---------- ---------
16,292 66,611 (21,831)
---------- ---------- ---------
Net realized investment
gains (losses) and change
in net unrealized
appreciation (depreciation) $ 34,580 $ 69,872 $ (20,611)
========== ========== =========
The gross realized gains and the gross realized losses on sales of
available-for-sale securities were $22.7 million and $4.4 million, respectively
in 1998 and $5.7 million and $2.4 million, respectively in 1997.
The tax expense (benefit) of the changes in net unrealized appreciation
(depreciation) was $5.7 million, $23.3 million and ($7.6) million for 1998, 1997
and 1996, respectively.
5. Notes payable
During 1997 and 1998, the Company repurchased approximately 4.7 million and
5.3 million shares, respectively, of its outstanding common stock at a cost of
approximately $248 and $247 million, respectively. Funds to repurchase the
shares were primarily provided by borrowings under credit facilities evidenced
by notes payable.
The 1997 and 1998 credit facilities provide up to $225 million and $250
million, respectively, of availability at December 31, 1998. The 1997 credit
facility will decrease by $25 million each year through June 20, 2001. Any
outstanding borrowings under this facility mature on June 20, 2002. The 1998
credit facility decreases by $25 million each year beginning June 9, 1999
through June 9, 2002. Any outstanding borrowings under this facility mature on
June 9, 2003. The Company has the option on notice to lenders, to prepay any
borrowings under the agreements subject to certain provisions.
At December 31, 1998, the Company's outstanding balance of the notes payable
on the 1997 and 1998 credit facilities were $210 million and $232 million,
respectively, which approximated market value. The interest rate on the notes
payable varies based on LIBOR and at December 31, 1998 and December 31, 1997 the
rate was 5.80% and 6.01%, respectively. The weighted average interest rate on
the notes payable for borrowings under the 1997 and 1998 credit agreements was
5.86% per annum for the year ended December 31, 1998.
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 Standard & Poor's Corporation
("S&P"). At December 31, 1998, the Company had shareholders' equity of $1,641
million and MGIC had a claims paying ability rating of AA+ from S&P.
twenty-two
In January 1997, the Company repaid mortgages payable of $35.4 million,
which were secured by the home office and substantially all of the furniture and
fixtures of the Company.
The Company entered into financial derivative transactions, consisting of
interest rate swaps and put-swaptions to reduce and manage interest rate risk.
With respect to all such transactions, a notional amount of $100 million
represents the stated principal balance used as a basis for calculating
payments.
During the fourth quarter of 1998, the Company entered into a $100 million
interest rate swap to convert a portion of the variable rate debt under the
credit facilities to fixed rate. On the swap, the Company receives a floating
rate based on LIBOR and pays a fixed rate of 4.67%. The swap expires October 6,
2001. In addition, during the fourth quarter of 1998, the Company sold three
successive $100 million put-swaptions for investment purposes. All three
put-swaptions expired unexercised, the last expiring on January 6, 1999.
Earnings in 1998 on the swap of approximately $.2 million and premium income on
the put-swaptions of approximately $.3 million are netted against interest
expense in the Consolidated Statement of Operations.
6. Loss reserves
Loss reserve activity was as follows:
1998 1997 1996
------------ ------------ ------------
(In thousands of dollars)
Reserve at beginning
of year............. $ 598,683 $ 514,042 $ 371,032
Less reinsurance
recoverable......... 26,415 29,827 33,856
------------ ------------ ------------
Net reserve at
beginning of year... 572,268 484,215 337,176
Reserve transfer (1).. 538 537 35,657
------------ ------------ ------------
Adjusted reserve at
beginning of year... 572,806 484,752 372,833
Losses incurred:
Losses and LAE
incurred in
respect of default
notices received
in:
Current year.... 377,786 360,623 312,630
Prior years (2). (166,432) (118,261) (78,280)
------------ ------------ ------------
Subtotal...... 211,354 242,362 234,350
------------ ------------ ------------
Losses paid:
Losses and LAE paid
in respect of
default notices
received in:
Current year.... 8,752 15,257 16,872
Prior years..... 139,661 139,589 106,096
------------ ------------ ------------
Subtotal...... 148,413 154,846 122,968
------------ ------------ ------------
Net reserve at end of
year.................. 635,747 572,268 484,215
Plus reinsurance
recoverables........ 45,527 26,415 29,827
------------ ------------ ------------
Reserve at end of year $ 681,274 $ 598,683 $ 514,042
============ ============ ============
(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.
twenty-three
Current year losses incurred increased from 1997 to 1998 due to an increase
in the primary insurance notice inventory from 28,493 at December 31, 1997 to
29,253 at December 31, 1998 and an increase in the pool insurance notice
inventory from 2,098 at December 31, 1997 to 6,524 at December 31, 1998. The
Company's loss reserves at December 31, 1998 reflect credit quality concerns on
defaults from insurance written in 1994 through 1996, an increase in the number
of defaults with deeper coverages and the growth in pool insurance. Offsetting
this increase were favorable developments in prior years' loss reserves, with
the net effect of total losses incurred decreasing from $242.4 million in 1997
to $211.4 million in 1998.
The favorable development of the reserves in 1998, 1997 and 1996 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, 1997, 1996 and 1995,
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. There is no quota share
reinsurance on business written subsequent to December 31, 1993.
In September 1996, the Company signed an agreement with WMAC and a WMAC
reinsurer to assume all of the reinsurer's interest in WMAC mortgage insurance
writings, which had been previously ceded to that reinsurer. As a result, the
portion of WMAC's insurance in force reinsured by the Company increased from
approximately 21 percent to approximately 65 percent. The Company received
approximately $40 million as payment for its assumption of existing loss and
unearned premium reserves related to the insurance in force being assumed from
WMAC. In 1997 and 1998, the Company signed similar agreements with WMAC and
other WMAC reinsurers resulting in an increase in the portion of WMAC's
insurance in force reinsured by the Company to approximately 66 percent and 67
percent, respectively. (See note 1.)
As a result of the purchase of WMAC on December 31, 1998, reinsurance
recoverable on loss reserves as shown in the Consolidated Balance Sheet includes
approximately $26 million of reinsured loss reserves.
The effect of reinsurance on premiums earned and losses incurred is as
follows:
1998 1997 1996
------------ ------------ ------------
(In thousands of dollars)
Premiums earned:
Direct................. $ 770,775 $ 712,069 $ 623,148
Assumed................ 9,670 12,665 13,245
Ceded ................. (17,161) (15,990) (19,350)
------------ ------------ ------------
Net premiums earned.... $ 763,284 $ 708,744 $ 617,043
============ ============ ============
Losses incurred:
Direct................. $ 216,340 $ 247,137 $ 226,702
Assumed................ (3,234) 3,683 17,073
Ceded ................. (1,752) (8,458) (9,425)
------------ ------------ ------------
Net losses incurred.... $ 211,354 $ 242,362 $ 234,350
============ ============ ============
8. Investment in C-BASS
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. All such mortgage-related assets are
recorded at fair value and as a result are exposed to market valuation
adjustments which could impact the Company's share of C-BASS's results of
operations.
twenty-four
At December 31, 1998 the Company had contributed approximately $56 million
of capital to C-BASS. Total combined assets of C-BASS at December 31, 1998 were
approximately $623 million, of which approximately $550 million were
mortgage-related assets, including open trades. Total liabilities were
approximately $468 million, of which approximately $459 million were funding
arrangements, including accrued interest. For the year ended December 31, 1998,
revenues of approximately $70 million and expenses of approximately $44 million
resulted in income before tax of approximately $26 million.
The Company is guaranteeing one half of a $50 million credit facility as
part of C-BASS's funding arrangements. The facility matures in July 1999.
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
-------------------------- --------------------------
1998 1997 1998 1997
------------ ----------- ------------ ------------
(In thousands of dollars)
Reconciliation of benefit obligation:
Benefit obligation at beginning of year...................... $ 51,190 $ 42,844 $ 19,364 $ 17,815
Service cost.............................................. 4,064 3,569 1,612 1,379
Interest cost............................................. 3,959 3,169 1,357 1,267
Amendments................................................ - 3,447 - -
Actuarial loss (gain)..................................... 7,908 (1,181) 883 (872)
Benefits paid............................................. (841) (658) (206) (225)
------------ ----------- ------------ ------------
Benefit obligation at end of year............................ $ 66,280 $ 51,190 $ 23,010 $ 19,364
============ =========== ============ ============
Reconciliation of fair value of plan assets:
Fair value of plan assets at beginning of year............... $ 57,578 $ 46,256 $ 8,632 $ 6,248
Actual return on plan assets.............................. 9,895 8,864 1,141 1,270
Employer contributions.................................... 7,190 3,116 1,272 1,114
Benefits paid............................................. (841) (658) - -
------------ ----------- ------------ ------------
Fair value of plan assets at end of year..................... $ 73,822 $ 57,578 $ 11,045 $ 8,632
============ =========== ============ ============
Reconciliation of funded status:
Benefit obligation at end of year............................ $ (66,280) $ (51,190) $ (23,010) $ (19,364)
Fair value of plan assets at end of year..................... 73,822 57,578 11,045 8,632
------------ ----------- ------------ ------------
Funded status at end of year................................. 7,542 6,388 (11,965) (10,732)
Unrecognized net actuarial gain........................... (4,741) (7,485) (3,145) (3,753)
Unrecognized net transition obligation.................... 63 95 7,419 7,949
Unrecognized prior service cost........................... 2,542 2,725 - -
------------ ----------- ------------ ------------
Prepaid (accrued) benefit cost............................... $ 5,406 $ 1,723 $ (7,691) $ (6,536)
============ =========== ============ ============
twenty-five
The following table provides the components of net periodic benefit cost for
the pension and other postretirement benefit plans:
Other Postretirement
Pension Benefits Benefits
----------------------------------------- -----------------------------------------
1998 1997 1996 1998 1997 1996
------------ ------------ ------------ ------------ ------------ ------------
(In thousands of dollars)
Service cost................................. $ 4,064 $ 3,569 $ 3,378 $ 1,612 $ 1,379 $ 1,208
Interest cost................................ 3,959 3,169 2,777 1,357 1,267 1,171
Expected return on plan assets............... (4,674) (3,521) (3,026) (696) (506) (388)
Recognized net actuarial gain................ - - - (170) (67) -
Amortization of transition obligation........ 32 32 32 530 530 530
Amortization of prior service cost........... 183 (20) (62) - - -
------------ ------------ ------------ ------------ ------------ ------------
Net periodic benefit cost.................... $ 3,564 $ 3,229 $ 3,099 $ 2,633 $ 2,603 $ 2,521
============ ============ ============ ============ ============ ============
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
----------------------------------------- ---------------------------------------
1998 1997 1996 1998 1997 1996
------------ ------------ ------------- ------------ ------------ ----------
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 postretirement benefits
over 20 years. The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation is 7.5% decreasing to 6% for 2000
and remaining level thereafter. A 1% change in the health care trend rate
assumption would have the following effects:
1-Percentage 1-Percentage
Point Point
Increase Decrease
-------------- ---------------
(In thousands of dollars)
Effect on total service and
interest cost components...... $ 678 $ (562)
Effect on postretirement
benefit obligation............ 4,912 (4,082)
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 $5.0 million, $3.8 million and
$3.6 million in 1998, 1997 and 1996, respectively.
10. Income taxes
The components of the net deferred tax liability as of December 31, 1998 and
1997 are as follows:
1998 1997
---------- ----------
(In thousands of dollars)
Unearned premium reserves.............. $ (16,897) $ (18,337)
Deferred policy acquisition costs...... 8,423 9,504
Loss reserves.......................... (11,688) (6,622)
Unrealized appreciation in
investments.......................... 50,923 45,221
Other ................................. (2,227) (3,957)
------------ ----------
Net deferred tax liability............. $ 28,534 $ 25,809
============ ==========
At December 31, 1998, gross deferred tax assets and liabilities amounted to
$60.4 million and $88.9 million, respectively. Management believes that all
gross deferred tax assets at December 31, 1998 are fully realizable and no
valuation reserve has been established.
twenty-six
The following summarizes the components of the provision for income tax:
1998 1997 1996
----------- ---------- -----------
(In thousands of dollars)
Federal:
Current................ $ 171,244 $ 147,983 $ 116,160
Deferred............... (4,198) (7,833) (10,325)
State ................. 2,074 1,473 1,202
----------- ---------- -----------
Provision for income tax $ 169,120 $ 141,623 $ 107,037
=========== ========== ===========
The Company paid $160.6 million, $151.1 million and $103.9 million in
federal income tax in 1998, 1997 and 1996, respectively.
The reconciliation of the tax provision computed at the federal tax rate of
35% to the reported provision for income tax is as follows:
1998 1997 1996
----------- ----------- -----------
(In thousands of dollars)
Tax provision computed
at federal tax rate....... $ 194,105 $ 162,881 $ 127,760
(Decrease) increase in tax
provision resulting from:
Tax exempt municipal bond
interest................. (28,973) (24,926) (22,114)
Other, net......... 3,988 3,668 1,391
----------- ----------- -----------
Provision for income tax $ 169,120 $ 141,623 $ 107,037
=========== =========== ===========
The Internal Revenue Service has completed examining the Company's income
tax returns through 1994. The results of these examinations had no material
effect on the financial statements.
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 1999, MGIC can pay $49.4 million of dividends and the
other insurance subsidiaries of the Company can pay $4.5 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 1998, 1997 and 1996, the Company paid dividends of $11.2 million, $11.0
million and $9.4 million, respectively or $.10 per share in 1998, $.095 per
share in 1997 and $.08 per share in 1996.
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.
Statutory financial statements only include a provision for current income
taxes due, and purchases of Tax and Loss Bonds are accounted for as
investments. GAAP financial statements provide for deferred income taxes,
and 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-seven
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 Reserves
- -------------- ----------- ------------ ------------
(In thousands of dollars)
1998 $ 187,535 $ 585,280 $ 1,939,626
1997 144,963 394,274 1,625,810
1996 67,094 274,118 1,317,438
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.
The Company has two stock option plans which permit certain officers and
employees to purchase common stock at specified prices. A summary of activity in
the stock option plans during 1996, 1997 and 1998 is as follows:
Average Shares
Exercise Subject to
Price Option
---------- -----------
Outstanding, December 31, 1995... $ 9.15 3,312,566
Granted....................... 30.57 61,334
Exercised..................... 4.80 (636,654)
Canceled...................... 15.41 (132,620)
---------- -----------
Outstanding, December 31, 1996... 10.40 2,604,626
Granted....................... 37.04 1,592,000
Exercised..................... 9.08 (532,332)
Canceled...................... 31.19 (29,420)
---------- -----------
Outstanding, December 31, 1997... 22.09 3,634,874
Granted....................... 62.28 109,500
Exercised..................... 10.99 (478,848)
Canceled...................... 33.99 (70,002)
---------- -----------
Outstanding, December 31, 1998... $ 24.87 3,195,524
========== ===========
The exercise price of the options granted in 1996, 1997 and 1998 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,
1998, 3,678,915 shares were available for future grant under the stock option
plans.
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 plans 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,
--------------------------------------
1998 1997 1996
----------- ---------- -----------
Net income $ 381,689 $ 320,416 $ 257,807
Earnings per share:
Basic $ 3.40 $ 2.75 $ 2.19
Diluted $ 3.36 $ 2.72 $ 2.17
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:
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
Risk free interest rate 6.37% 6.44% 6.73%
Expected life.......... 6.82 years 6.88 years 5.63 years
Expected volatility.... 27.98% 28.07% 28.60%
Expected dividend yield 0.17% 0.16% 0.21%
The following is a summary of stock options outstanding at December 31,
1998:
Options Outstanding Options
Exercisable
----------------------------- ---------------------
Remaining Average Average
Exercise Average Exercise Exercise
Price Range Shares Life (yrs.) Price Shares Price
- --------------- --------- ---------- -------- --------- ---------
$2.50-$3.45 621,200 1.8 $3.27 621,200 $ 3.27
$9.63-$20.88 936,714 4.9 15.33 876,876 15.28
$26.69-$41.00 1,512,110 8.0 36.29 253,649 35.92
$60.25-$68.63 125,500 9.7 65.36 - -
--------- --------- -------- --------- ---------
Total 3,195,524 6.0 $24.87 1,751,725 $ 14.01
========= ========= ======== ========= =========
At December 31, 1997 and 1996, option shares of 1,540,076 and 1,683,700 were
exercisable at an average exercise price of $8.56 and $7.12, respectively. The
Company also granted an immaterial amount of equity instruments other than
options during 1997 and 1998.
twenty-eight
On June 2, 1997 the Company effected a two-for-one stock split of the
Company's common stock in the form of a 100% stock dividend. Per share and
certain equity amounts set forth in the accompanying financial statements and
notes have been adjusted to take into account the stock split.
12. Leases
The Company leases certain office space as well as data processing equipment
and autos under operating leases that expire during the next eight years.
Generally, all rental payments are fixed.
Total rental expense under operating leases was $5.4 million, $5.3 million
and $5.1 million in 1998, 1997 and 1996, respectively.
At December 31, 1998, minimum future operating lease payments are as follows
(in thousands of dollars):
1999........................... $ 4,312
2000........................... 2,897
2001........................... 1,818
2002........................... 1,180
2003........................... 579
2004 and thereafter............ 418
-------------
Total....................... $ 11,204
=============
13. Contingencies
The Company is involved in litigation in the ordinary course of business. In
the opinion of management, the ultimate disposition of the pending litigation
will not have a material adverse effect on the financial position of the
Company.
twenty-nine
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,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. 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 generally accepted auditing
standards 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 the opinion expressed above.
/s/
Milwaukee, Wisconsin
January 6, 1999
thirty
Unaudited Quarterly Financial Data
Quarter
--------------------------------------------------------------- 1998
1998 First Second Third Fourth Year
- ---------------------------------------- ------------- ------------- ------------- ------------- -------------
(In thousands of dollars, except per share data)
Net premiums written..................... $ 176,487 $ 186,663 $ 190,567 $ 195,444 $ 749,161
Net premiums earned...................... 189,821 189,248 191,066 193,149 763,284
Investment income, net of expenses....... 34,389 35,325 36,461 36,844 143,019
Losses incurred, net..................... 59,438 52,514 51,487 47,915 211,354
Underwriting and other expenses.......... 45,158 45,532 46,498 52,843 190,031
Net income............................... 94,047 95,212 96,492 99,714 385,465
Earnings per share (a):
Basic................................. .83 .83 .87 .91 3.44
Diluted............................... .81 .82 .86 .91 3.39
Quarter
--------------------------------------------------------------- 1997
1997 First Second Third Fourth Year
- ---------------------------------------- ------------- ------------- ------------- ------------- -------------
(In thousands of dollars, except per share data)
Net premiums written..................... $ 155,606 $ 170,916 $ 184,003 $ 179,723 $ 690,248
Net premiums earned...................... 170,292 173,479 180,542 184,431 708,744
Investment income, net of expenses....... 29,508 30,372 31,548 32,174 123,602
Losses incurred, net..................... 63,194 58,251 60,785 60,132 242,362
Underwriting and other expenses.......... 38,213 37,920 39,907 41,154 157,194
Net income............................... 72,436 80,615 84,175 86,524 323,750
Earnings per share (a), (b):
Basic................................. .61 .68 .73 .76 2.78
Diluted............................... .61 .67 .72 .75 2.75
(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.
(b) Amounts have been restated to reflect the provisions of SFAS 128.
thirty-one
MGIC Stock
- ----------
MGIC Investment Corporation Common Stock is listed on the New York Stock
Exchange under the symbol MTG. At December 31, 1998, 109,003,032 shares were
outstanding. The following table sets forth for 1997 and 1998 by quarter the
high and low sales prices of the Company's common stock on the New York Stock
Exchange Composite Tape.
1997 1998
------------------------- ------------------------
Quarters High Low High Low
1st $ 40.7500 $ 35.3750 $ 74.5000 $ 62.0000
2nd 50.2500 35.2500 69.0000 55.3750
3rd 59.7500 46.1250 65.4375 36.8750
4th 66.9375 55.6250 48.2500 24.2500
In 1997 and 1998 the Company declared and paid the following cash dividends:
Quarters 1997 1998
----------------- ------------------
1st $ .020 $ .025
2nd .025 .025
3rd .025 .025
4th .025 .025
------------- ------------
$ .095 $ .100
============= ============
Dividend and stock price per data have been restated where applicable to reflect
the June 1997 two-for-one stock split.
See Note 11 to the Consolidated Financial Statements for information relating to
restrictions on the payment of cash dividends. As of January 31, 1999, the
number of shareholders of record was 364. In addition, there were approximately
29,000 beneficial owners of shares held by brokers and fiduciaries.
EXHIBIT 21
MGIC INVESTMENT CORPORATION
DIRECT AND INDIRECT SUBSIDIARIES OF MGIC INVESTMENT CORPORATION1
1. MGIC Assurance Corporation
2. MGIC Credit Assurance Corporation
3. MGIC Insurance Services Corporation
4. MGIC Investor Services Corporation
5. MGIC Mortgage Insurance Corporation
6. MGIC Mortgage Marketing Corporation
7. MGIC Mortgage Reinsurance Corporation
8. MGIC Mortgage Securities Corporation
9. MGIC Reinsurance Corporation
10. MGIC Reinsurance Corporation of Wisconsin
11. MGIC Residential Reinsurance Corporation
12. MGIC Surety Corporation
13. Mortgage Guaranty Insurance Corporation
14. Mortgage Guaranty Reinsurance Corporation
15. Wisconsin Mortgage Assurance Corporation
- --------
1 All subsidiaries listed are 100% directly or indirectly owned by the
registrant and all are incorporated in Wisconsin.
EXHIBIT 23
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 6, 1999 appearing in the 1998 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 on the Financial Statement
Schedules, which appears in this Form 10-K.
1. Registration Statement on Form S-8 (Registration No. 33-42120)
2. Registration Statement on Form S-8 (Registration No. 33-43543)
PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
March 29, 1999
7
12-MOS
DEC-31-1998
DEC-31-1998
2602870
0
0
4627
0
0
2779706
176859
0
24065
3050541
681274
183739
0
0
442000
0
0
121111
1519480
3050541
763284
143019
18288
47075
211354
3091
186940
554585
169120
385465
0
0
0
385465
3.44
3.39
0
0
0
0
0
0
0
