e10vk
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|
|
|
þ |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2005
OR
|
|
|
o |
|
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) |
(414) 347-6480
(Registrants telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
|
|
|
|
|
|
|
|
|
Title of Each Class:
|
|
|
|
Common Stock, Par Value $1 Per Share |
|
|
|
|
|
|
Common Share Purchase Rights |
|
|
|
|
|
|
|
|
|
Name of Each Exchange on Which
Registered: |
|
|
|
New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in rule
405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b -2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).o Yes þ No
State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of
June 30, 2005: $6.0 billion *
|
|
|
* Solely for purposes of computing such value and without thereby admitting
that such persons are affiliates of the Registrant, shares held by directors
and executive officers of the Registrant are deemed to be held by affiliates of
the Registrant. Shares held are those shares beneficially owned for purposes of
Rule 13d-3 under the Securities Exchange Act of 1934 but excluding shares
subject to stock options. |
Indicate the number of shares outstanding of each of the Registrants classes of common stock as of
February 15, 2006: 87,490,806
The following documents have been incorporated by reference in this Form 10-K, as indicated:
|
|
|
|
|
Part and Item Number of Form 10-K Into |
Document
|
|
Which Incorporated* |
|
|
|
Proxy Statement for the 2006 Annual |
|
|
Meeting of Shareholders
|
|
Items 10 through 14 of Part III |
|
|
|
* In each case, to the extent provided in the Items listed |
TABLE OF CONTENTS
Part I
Item 1. Business.
A. General
MGIC Investment Corporation (the Company) is a holding company which, through its wholly
owned subsidiary Mortgage Guaranty Insurance Corporation (MGIC), is the leading provider of
private mortgage insurance in the United States to the home mortgage lending industry. Private
mortgage insurance covers residential first mortgage loans and expands home ownership opportunities
by enabling people to purchase homes with less than 20% down payments. If the homeowner defaults,
private mortgage insurance reduces and, in some instances, eliminates the loss to the insured
institution. Private mortgage insurance also facilitates the sale of low down payment and other
mortgage loans in the secondary mortgage market, including to the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (Fannie
Mae and Freddie Mac are collectively referred to as the GSEs). In addition to mortgage insurance
on first liens, the Company, through other subsidiaries, provides lenders with various underwriting
and other services and products related to home mortgage lending.
MGIC is licensed in all 50 states of the United States, the District of Columbia and Puerto
Rico. The Company is a Wisconsin corporation. Its principal office is located at MGIC Plaza, 250
East Kilbourn Avenue, Milwaukee, Wisconsin 53202 (telephone number (414) 347-6480).
The Company also has ownership interests in less than majority-owned joint ventures,
principally Credit-Based Asset Servicing and Securitization LLC (C-BASS) and Sherman Financial
Group LLC (Sherman). C-BASS is principally engaged in the business of investing in the credit
risk of credit sensitive single-family residential mortgages. Sherman is principally engaged in the
business of purchasing and servicing delinquent consumer assets. As used in this Annual Report on
Form 10-K and elsewhere in the Companys filings with the SEC, the term Company means the Company
and its consolidated subsidiaries. The Companys joint ventures are not consolidated with the
Company for financial reporting purposes and are not subsidiaries of the Company.
The Company and its business may be materially affected by the risk factors applicable to the
Company that are included in Item 1A of this Annual Report on Form 10-K. C-BASS and Sherman and
their respective businesses may be materially affected by the risk factors applicable to them
included in Item 1A. These factors may also cause actual results to differ materially from the
results contemplated by forward looking statements that the Company may make.
B. The MGIC Book
Types of Product
In general, there are two principal types of private mortgage insurance: primary and pool.
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). In addition to the loan
principal, the claim amount is affected by the mortgage note rate and the time necessary to
complete the foreclosure
1
process. The insurer generally pays the coverage percentage of the claim amount specified in the
primary policy, but has the option to pay 100% of the claim amount and acquire title to the
property. Primary insurance 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 MGICs insurance refer only to direct (before giving
effect to reinsurance) primary insurance, unless otherwise indicated. References in this document
to primary insurance include insurance written in bulk transactions (see Bulk Transactions
below) that is supplemental to mortgage insurance written in connection with the origination of the
loan or that reduces a lenders credit risk to less than 51% of the value of the property.
Effective with the third quarter of 2001, in reports by private mortgage insurers to the trade
association for the private mortgage insurance industry, mortgage insurance that is supplemental to
other mortgage insurance or that reduces a lenders credit risk to less than 51% of the value of
the property is classified as pool insurance. The trade association classification is used by
members of the private mortgage insurance industry in reports to a mortgage industry publication
that computes and publishes primary market share information.
Primary insurance may be written on a flow basis, in which loans are insured in individual,
loan-by-loan transactions, or may be written on a bulk basis, in which each loan in a portfolio of
loans is individually insured in a single, bulk transaction. New insurance written on a flow basis
was $40.1 billion in 2005 compared to $47.1 billion in 2004 and $71.1 billion in 2003. New
insurance written for bulk transactions was $21.4 billion during 2005 compared to $15.8 billion for
2004 and $25.7 billion for 2003.
The following table shows, on a direct basis, primary insurance in force (the unpaid principal
balance of insured loans as reflected in MGICs records) 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, |
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
Direct Primary Insurance In Force |
|
$ |
170,029 |
|
|
$ |
177,091 |
|
|
$ |
189,632 |
|
|
$ |
196,988 |
|
|
$ |
183,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Primary Risk In Force |
|
$ |
44,860 |
|
|
$ |
45,981 |
|
|
$ |
48,658 |
|
|
$ |
49,231 |
|
|
$ |
45,243 |
|
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.
MGIC charges higher premium rates for higher coverages. 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),
2
the higher premium revenue from deeper coverage is recognized before any higher losses resulting
from that deeper coverage may be incurred. MGICs premium pricing methodology generally targets
substantially similar returns on capital regardless of the depth of coverage. However, there can be
no assurance that changes in the level of premium rates adequately reflect the risks associated
with changes in the depth of coverage.
In partnership with mortgage insurers, the GSEs are also offering programs under which, on
delivery of an insured loan to a GSE, the primary coverage is restructured to an initial shallow
tier of coverage followed by a second tier that is subject to an overall loss limit and
compensation may be paid to the GSE reflecting services or other benefits realized by the mortgage
insurer from the coverage conversion. Lenders receive guaranty fee relief from the GSEs on
mortgages delivered with these restructured coverages.
Mortgage insurance coverage cannot be terminated by the insurer, except for non-payment of
premium, and remains renewable at the option of the insured lender, generally at the renewal rate
fixed when the loan was initially insured. Lenders may cancel insurance written on a flow basis at
any time at their option or because of mortgage repayment, which may be accelerated because of the
refinancing of mortgages. In the case of a loan purchased by Freddie Mac or Fannie Mae, a borrower
meeting certain conditions may require the mortgage servicer to cancel insurance upon the
borrowers request when the principal balance of the loan is 80% or less of the homes current
value.
Under the federal Homeowners Protection Act (the HPA) a borrower has the right to stop
paying premiums for private mortgage insurance on loans closed after July 28, 1999 secured by a
property comprised of one dwelling unit that is the borrowers primary residence when certain
loan-to-value ratio (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 loans amortization
schedule) or actually reaches 80% if the borrower so requests and if certain requirements relating
to the borrowers payment history and the absence of junior liens and a decline in the propertys
value since origination are satisfied. In addition, a borrowers obligation to make payments for
private mortgage insurance generally terminates regardless of whether a borrower so requests when
the LTV ratio (based on the loans amortization schedule) reaches 78% of the unpaid principal
balance of the mortgage and the borrower is (or thereafter becomes) current in his mortgage
payments. A borrowers right to stop paying for private mortgage insurance applies only to borrower
paid mortgage insurance. The HPA requires that lenders give borrowers certain notices with regard
to the cancellation of private mortgage insurance.
In addition, some states require that mortgage servicers periodically notify borrowers of the
circumstances in which they may request a mortgage servicer to cancel private mortgage insurance
and some states allow the borrower to require the mortgage servicer to cancel private mortgage
insurance under certain circumstances or require the mortgage servicer to cancel such insurance
automatically in certain circumstances.
Coverage tends to continue in areas experiencing economic contraction and housing price
depreciation. The persistency of coverage in such areas coupled with cancellation of coverage in
areas experiencing economic expansion and housing price appreciation can increase the percentage of
the insurers portfolio comprised of loans in economically weak areas. This development can also
occur during periods of heavy mortgage refinancing because refinanced loans in areas of economic
expansion experiencing property value appreciation are less likely to require mortgage insurance at
the time of refinancing, while refinanced loans in economically weak areas not experiencing
property
3
value appreciation are more likely to require mortgage insurance at the time of refinancing or not
qualify for refinancing at all and, thus, remain subject to the mortgage insurance coverage.
The percentage of primary risk written with respect to loans representing refinances was 39.5%
in 2005 compared to 37.4% in 2004 and 48.7% in 2003. When a borrower refinances an MGIC-insured
mortgage loan by paying it off in full with the proceeds of a new mortgage that is also insured by
MGIC, 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 MGICs coverage from a
refinanced loan to a new loan results in both a cancellation of insurance and new insurance
written.
In addition to varying with the coverage percentage, MGICs 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 A- and subprime loans and
certain other loans, the location of the borrowers credit score within a range of credit scores.
In general, A- loans have FICO scores between 575 and 619 and subprime loans have FICO credit
scores of less than 575. A FICO score is a score based on a borrowers credit history generated by
a model developed by Fair Isaac and Company.
Premium rates cannot be changed after the issuance of coverage. Because 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 borrowers mortgage loan instrument may require the borrower to pay the mortgage insurance
premium (borrower paid mortgage insurance) or there may be no such requirement imposed on the
borrower, in which case the premium is paid by the lender, who may recover the premium through an
increase in the note rate on the mortgage (lender paid mortgage insurance). Almost all of MGICs
primary insurance in force and new insurance written, other than through bulk transactions, is
borrower paid mortgage insurance. New insurance written through bulk transactions is generally paid
by the securitization vehicles that hold the mortgages; the mortgage note rate generally does not
reflect the premium for the mortgage insurance.
Under the monthly premium plan, a monthly premium payment is made to MGIC to provide only one
month of coverage, rather than one year of coverage provided by the annual premium plan. Under the
annual premium plan, the initial premium is paid to MGIC in advance, and earned over the next
twelve months of coverage, with annual renewal premiums paid in advance thereafter and earned over
the subsequent twelve months of coverage. The annual premiums can be paid with either a higher
premium rate for the initial year of coverage and lower premium rates for the renewal years, or
with premium rates which are equal (level) for the initial year and subsequent renewal years. Under
the single premium plan, a single payment is made to MGIC, covering a specified term exceeding 12
months.
During each of the last three years, the monthly premium plan represented more than 93% of
MGICs new insurance written. The annual and single premium plans represented the remaining new
insurance written.
Pool Insurance. Pool insurance is generally used as an additional credit enhancement for
certain secondary market mortgage transactions. Pool insurance generally covers the loss on a
defaulted mortgage loan which exceeds the claim payment under the primary coverage, if primary
insurance is
4
required on that mortgage loan, as well as the total loss on a defaulted mortgage loan which did
not require primary insurance. Pool insurance may have a stated aggregate loss limit and may also
have a deductible under which no losses are paid by the insurer until losses exceed the deductible.
New pool risk written during 2005 was $358 million and was $208 million in 2004. New pool risk
written during these years was primarily comprised of risk associated with loans delivered to
Freddie Mac and Fannie Mae (agency pool insurance), loans delivered to the Federal Home Loan
Banks under their mortgage purchase programs and loans made under state housing finance programs.
Direct pool risk in force at December 31, 2005 was $2.9 billion compared to $3.0 billion and $2.9
billion at December 31, 2004 and 2003, respectively. The risk amounts referred to above represent
pools of loans with contractual aggregate loss limits and those without such limits. For pools of
loans without such limits, risk is estimated based on the amount that would credit enhance these
loans to a AA level based on a rating agency model. Under this model, at December 31, 2005, 2004
and 2003 for $5.0 billion, $4.9 billion, and $4.9 billion, respectively, of risk without such
limits, risk in force is calculated at $469 million, $418 million, and $353 million, respectively.
New risk written, under this model, for the years ended
December 31, 2005 and 2004 was $51 million
and $65 million, respectively.
The settlement of a nationwide class action alleging that MGIC violated the Real Estate
Settlement Procedures Act (RESPA) by providing agency pool insurance and entering into other
transactions with lenders that were not properly priced (the RESPA Litigation) became final in
October 2003. In a February 1, 1999 circular addressed to all mortgage guaranty insurers licensed
in New York, the New York Department of Insurance (NYID) advised that significantly underpriced
agency pool insurance would violate the provisions of New York insurance law that prohibit mortgage
guaranty insurers from providing lenders with inducements to obtain mortgage guaranty business. In
a January 31, 2000 letter addressed to all mortgage guaranty insurers licensed in Illinois, the
Illinois Department of Insurance advised that providing pool insurance at a discounted or below
market premium in return for the referral of primary mortgage insurance would violate Illinois
law.
Risk Sharing Arrangements. MGIC participates in risk sharing arrangements with the GSEs and
captive reinsurance arrangements with subsidiaries of certain mortgage lenders that reinsure a
portion of the risk on loans originated or purchased by the lender which have MGIC primary
insurance. During the nine months ended September 30, 2005 and the year ended December 31, 2004,
about 48% and 51%, respectively, of MGICs new insurance written on a flow basis was subject to
risk sharing arrangements. (New insurance written through the bulk channel is not subject to such
arrangements.) The percentage of new insurance written during a quarter covered by such
arrangements normally increases after the end of the quarter because, among other reasons, the
transfer of a loan in the secondary market can result in a mortgage insured during a quarter
becoming part of such an arrangement in a subsequent quarter. Therefore, the percentage of new
insurance written for 2005 covered by such arrangements is shown only for the nine months ended
September 30, 2005.
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. Such
guidelines, which were to ensure that the reinsurance constituted a legitimate transfer of risk and
were fair and equitable to the parties, have not yet been issued. As discussed under The mortgage
insurance industry is subject to the risk of private litigation and regulatory proceedings in Item
1A, the Company provided information regarding captive mortgage reinsurance arrangements to the
NYID and the Minnesota Department of Commerce in June 2005 and February 2006, respectively. The
complaint in the RESPA Litigation alleged that MGIC pays inflated captive reinsurance premiums in
5
violation of RESPA. During the three years ended December 31, 2003, 2004 and 2005, MGIC ceded $99.4
million, $101.7 million and $105.2 million of written premium in captive reinsurance arrangements.
External Reinsurance. At December 31, 2005, disregarding reinsurance under captive structures,
less than 2% of MGICs insurance in force was externally reinsured. Reinsuring against possible
loan losses does not discharge MGIC from liability to a policyholder; however, the reinsurer agrees
to indemnify MGIC for the reinsurers share of losses incurred. During 2005, the Company entered
into two separate reinsurance arrangements with unaffiliated special purpose reinsurance companies.
See Managements Discussion and Analysis of Financial Condition and Results of Operations
Results of Consolidated Operations Risk Sharing Arrangements in Item 7.
Bulk Transactions. In bulk transactions, the individual loans in the insured portfolio are
generally insured to specified levels of coverage. The premium in a bulk transaction, which is
negotiated with the securitizer or other owner of the loans, is based on the mortgage insurers
evaluation of the overall risk of the insured loans included in the transaction and is often a
composite rate applied to all of the loans in the transaction.
In general, the loans insured by MGIC in bulk transactions consist of A- loans; subprime
loans; cash out refinances that exceed the standard underwriting requirements of the GSEs; jumbo
loans; and loans with reduced underwriting documentation. A- loans have FICO scores between 575 and
619 and subprime loans have FICO credit scores of less than 575. A jumbo loan has an unpaid
principal balance that exceeds the conforming loan limit. The conforming loan limit is the maximum
unpaid principal amount of a mortgage loan that can be purchased by the GSEs. The conforming loan
limit is subject to annual adjustment, and for mortgages covering a home with one dwelling unit is
$417,000 for 2006 and was $359,650 in 2005 and $333,700 in 2004.
Approximately 60% of MGICs bulk loan risk in force at December 31, 2005 had FICO credit
scores of at least 620, compared to 58% at December 31, 2004. Approximately 25% of MGICs bulk loan
risk in force at December 31, 2005 had A- FICO credit scores compared to 28% at December 31, 2004,
and approximately 15% had subprime credit scores at December 31, 2005 compared to 14% at December
31, 2004. Most of the subprime loans insured by MGIC in 2005 were insured in bulk transactions.
More than 30% of MGICs bulk loan risk in force at December 31, 2005 and 2004 had LTV ratios of 80%
and below.
New insurance written for bulk transactions was $21.4 billion during 2005 compared to $15.8
billion for 2004 and $25.7 billion for 2003. For a discussion of factors that affect new insurance
written through the bulk channel, see Managements Discussion and Analysis of Financial Condition
and Results of Operations Results of Consolidated Operations Bulk Transactions in Item 7.
6
Customers
Originators of residential mortgage loans such as mortgage bankers, savings institutions,
commercial banks, mortgage brokers, credit unions and other lenders have historically determined
the placement of mortgage insurance written on flow basis and as a result are the customers of
MGIC. To obtain primary insurance from MGIC written on flow basis, a mortgage lender must first
apply for and receive a mortgage guaranty master policy (Master Policy) from MGIC. MGIC had
approximately 13,800 master policyholders at December 31, 2005 (not including policies issued to
branches and affiliates of large lenders). In 2005, MGIC issued coverage on mortgage loans for
approximately 3,800 of its master policyholders. MGICs top 10 customers generated 30.5% of its new
insurance written on a flow basis in 2005, compared to 31.9% in 2004 and 33.1% in 2003.
Sales and Marketing and Competition
Sales and Marketing. MGIC sells its insurance products through its own employees, located
throughout all regions of the United States and Puerto Rico.
Competition. For flow business, 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 2005 and 2004 accounted for approximately 24% and 33%,
respectively, of the total low down payment residential mortgages which were subject to
governmental or private mortgage insurance. Loans insured by the FHA cannot exceed maximum
principal amounts which are determined by a percentage of the conforming loan limit. For 2006, the
maximum FHA loan amount for homes with one dwelling unit in high cost areas is as high as
$362,790 and was as high as $312,896 in 2005. Loans insured by the VA do not have mandated maximum
principal amounts but have maximum limits on the amount of the guaranty provided by the VA to the
lender. For loans closed on or after December 10, 2004 the maximum VA guarantee is $104,250.
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 and New York. From time to time, other state legislatures and agencies consider
expansions of the authority of their state governments to insure residential mortgages.
Private mortgage insurers may also be subject to competition from Fannie Mae and Freddie Mac
to the extent the GSEs are compensated for assuming default risk that would otherwise be insured by
the private mortgage insurance industry. Fannie Mae and Freddie Mac each have programs under which
an up-front delivery fee can be paid to the GSE and primary mortgage insurance coverage is
substantially reduced compared to the coverage requirements that would apply in the absence of the
program. In October 1998, Freddie Macs 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 in ways the
Company cannot predict. During 1998, a newly-organized off-shore company funded by the sale of
7
notes to institutional investors provided reinsurance to Freddie Mac against default on a specified
pool of mortgages owned by Freddie Mac. A competitor of MGIC has engaged in transactions in which
it transferred portions of the risk that it had written in certain bulk transactions to
institutional investors in similar reinsurance structures. MGIC has also engaged in similar
reinsurance transactions. See Managements Discussion and Analysis of Financial Condition and
Results of Operations Results of Consolidated Operations Risk Sharing Arrangements in Item
7.
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
80-10-10 and similar loans (generally referred to as piggyback loans), which are loans
comprised of both a first and a second mortgage (for example, an 80% LTV first mortgage and a 10%
LTV second mortgage), with the LTV ratio of the first mortgage below what investors require for
mortgage insurance, compared to a loan in which the first mortgage covers the entire borrowed
amount (which in the preceding example would be a 90% LTV mortgage). Captive mortgage reinsurance
and similar transactions also result in mortgage originators receiving a portion of the premium and
the risk.
The private mortgage insurance industry currently consists of eight active mortgage insurers
and their affiliates; one of the eight is a joint venture in which another mortgage insurer is one
of the joint venturers. The names of these mortgage insurers are listed under Competition or
changes in the Companys relationships with its customers could reduce the Companys revenues or
increase its losses in Item 1B of this Annual Report on Form 10-K. According to Inside Mortgage
Finance, a mortgage industry publication, which obtains its data from reports to it by MGIC and
other mortgage insurers that are to be prepared on the same basis as the reports by insurers to the
trade association for the private mortgage insurance industry, for 1995 and subsequent years, MGIC
has been the largest private mortgage insurer based on new primary insurance written (with a market
share of 22.9% in 2005, 23.5% in 2004, 21.9% in 2003 and 24.8% in 2002) and at December 31, 2005,
MGIC also had the largest book of direct primary insurance in force. Effective with the third
quarter of 2001, these reports do not include as primary mortgage insurance insurance on certain
loans classified by MGIC as primary insurance, such as loans insured through bulk transactions that
already had mortgage insurance placed on the loans at origination.
The private mortgage insurance industry is highly competitive. The Company believes it
competes with other private mortgage insurers for business written through the flow channel
principally on the basis of programs involving captive mortgage reinsurance, agency pool insurance,
and other similar structures involving lenders; the provision of contract underwriting and related
fee-based services to lenders; the provision of other products and services that meet lender needs
for risk management, affordable housing, loss mitigation, capital markets and training support; the
strength of MGICs management team and field organization; and the effective use of technology and
innovation in the delivery and servicing of MGICs insurance products. The Company believes MGICs
additional competitive strengths, compared to other private insurers, are its customer
relationships, name recognition, reputation and the depth of its database covering loans it has
insured. The Company believes it competes for bulk business principally on the basis of the premium
rate and the portion of loans submitted for insurance that the Company is willing to insure.
The complaint in the RESPA Litigation alleged, among other things, that captive mortgage
reinsurance, agency pool insurance, and contract underwriting as provided by the Company violated
RESPA.
8
Certain private mortgage insurers compete for flow business by offering lower premium rates
than other companies, including MGIC, either in general or with respect to particular classes of
business. MGIC on a case-by-case basis will adjust premium rates, generally depending on the risk
characteristics, loss performance or class of business of the loans to be insured, or the costs
associated with doing such business.
In the third quarter of 2001, the Office of Federal Housing Enterprise Oversight (OFHEO)
adopted a risk-based capital stress test for the GSEs, which was amended in February 2002. One of
the elements of the stress test is that future claim payments made by a private mortgage insurer on
GSE loans are reduced below the amount provided by the mortgage insurance policy to reflect the
risk that the insurer will fail to pay. Claim payments from an insurer whose claims-paying ability
rating (which in this document is also referred to as a financial strength rating) is AAA are
subject to a 3.5% reduction over the 10-year period of the stress test, while claim payments from a
AA rated insurer, such as MGIC, are subject to a 8.75% reduction. The effect of the
differentiation among insurers is to require the GSEs to have additional capital for coverage on
loans provided by a private mortgage insurer whose claims-paying rating is less than AAA. As a
result, there is an incentive for the GSEs to use private mortgage insurance provided by a AAA
rated insurer.
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 lenders mortgage loan
application file comply with the lenders 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 Companys new insurance written through the flow channel in recent years involved loans for
which the Company provided contract underwriting services. The complaint in the RESPA Litigation
alleged, among other things, that the pricing of contract underwriting provided by the Company
violated RESPA.
Under its contract underwriting agreements, the Company may be required to provide certain
remedies to its customers if certain standards relating to the quality of the Companys
underwriting work are not met. The cost of remedies provided by the Company to customers for
failing to meet these standards has not been material to the Companys financial position or
results of operations for the years ended December 31, 2005, 2004 and 2003. There can be no
assurance that contract underwriting remedies will not be material in the future.
Risk Management
MGIC believes that mortgage credit risk is materially affected by
|
|
|
the borrowers credit strength, including the borrowers credit
history, debt-to-income ratios, and cash reserves; and |
|
|
|
|
the loan product, which encompasses the LTV ratio, the type of loan
instrument (including whether the instrument provides for fixed or
variable payments and the amortization schedule), the type of property
and the purpose of the loan. |
9
MGIC believes that mortgage credit risk is also affected by the origination practices of the
lender and the condition of the housing market in the area in which the property is located.
MGIC believes that, excluding other factors, claim incidence increases for loans with lower
FICO credit scores compared to loans with higher FICO credit scores; for loans with less than full
underwriting documentation compared to loans with full underwriting documentation; for loans with
higher LTV ratios compared to loans with lower LTV ratios; for ARMs during a prolonged period of
rising interest rates compared to fixed rate loans in such a rate environment; for loans that
permit the deferral of principal amortization compared to loans that require principal amortization
with each monthly payment; for loans in which the original loan amount exceeds the conforming loan
limit compared to loans below such limit; and for cash out refinance loans compared to rate and
term refinance loans.
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.
MGIC charges higher premium rates to reflect the increased risk of claim incidence that it
perceives is associated with a loan, although not all higher risk characteristics are reflected in
the premium rate. There can be no assurance that MGICs premium rates adequately reflect the
increased risk, particularly in a period of economic recession.
Delegated Underwriting and GSE Automated Underwriting Approvals. Delegated underwriting is a
program under which approved lenders are allowed to commit MGIC to insure loans originated through
the flow channel utilizing their own underwriting guidelines and underwriting evaluation. Some
major lenders having delegated underwriting authority use their own proprietary automated
underwriting services to apply their underwriting guidelines to loans. In addition, since 2000,
loans approved by the automated underwriting services of the GSEs have been automatically approved
for MGIC mortgage insurance.
During the last three years, a substantial majority of the loans insured by MGIC through the
flow channel were approved as a result of loan approvals by the automated underwriting services of
the GSEs or though delegated underwriting programs, including those utilizing proprietary
underwriting services. MGIC expects the portion of its flow business that is approved in this
manner to continue to increase. The loan approval criteria of automated underwriting services are
within the risk management discretion and control of the GSEs or the lender operating the service.
As a result of accepting the loan approval decisions of these services, MGIC does not have the
ability to control in advance the risk characteristics of such loans. MGICs risk management
approach to such flow business has been to monitor periodically the credit quality of the loans it
has recently insured in this manner. If as a result of such review MGIC perceives certain loans
insured in this manner have an unacceptably higher risk of claim, MGIC can continue to insure loans
with such characteristics that are thereafter submitted to it at A- rates. In addition, in the case
of loans approved other than through the automated underwriting systems of the GSEs, MGIC can
decline to continue to insure loans having such characteristics.
Bulk Transactions Risk Management. The premium for loans insured in a bulk transaction is
determined by MGICs evaluation of the credit risk of the loans included in the transaction based
on information about the loans represented to MGIC by the securitizer. Individual loan files are
generally not reviewed in advance of the issuance of an insurance commitment but are reviewed at
the time a
10
claim is made to confirm that the loan involved in the claim generally conforms to the
representations that were previously made. MGIC has the right to rescind coverage for loans that do
not conform to such representations.
Exposure to Catastrophic Loss; Defaults; and Claims
The private mortgage insurance industry, which is exposed to the risk of catastrophic loss,
experienced substantial 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 nations
energy producing states; (ii) the development by lenders of new mortgage products to defer the
impact on home buyers of double digit mortgage interest rates; and (iii) changes in federal income
tax incentives which initially encouraged the growth of investment in non-owner occupied
properties.
Defaults. The claim cycle on private mortgage insurance begins with the insurers receipt of
notification of a default on an insured loan from the lender. MGIC defines a default as an insured
loan with a mortgage payment that is 45 days or more past due. Lenders are required to notify MGIC
of defaults within 130 days after the initial default, although most lenders do so earlier. The
incidence of default is affected by a variety of factors, including the level of borrower income
growth, unemployment, divorce and illness, the level of interest rates and general borrower
creditworthiness. Defaults that are not cured result in a claim to MGIC. Defaults may be cured by
the borrower bringing current the delinquent loan payments or by a sale of the property and the
satisfaction of all amounts due under the mortgage.
The following table shows the number of primary and pool loans insured in the MGIC Book,
including loans insured in bulk transactions and A- and subprime loans, the related number of loans
in default and the percentage of loans in default (default rate) as of December 31, 2001-2005:
11
Default Statistics for the MGIC Book
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
PRIMARY INSURANCE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured loans in force |
|
|
1,303,084 |
|
|
|
1,413,678 |
|
|
|
1,551,331 |
|
|
|
1,655,887 |
|
|
|
1,580,283 |
|
Loans in default |
|
|
85,788 |
|
|
|
85,487 |
|
|
|
86,372 |
|
|
|
73,648 |
|
|
|
54,653 |
|
Percentage of loans in default (default rate) |
|
|
6.58 |
% |
|
|
6.05 |
% |
|
|
5.57 |
% |
|
|
4.45 |
% |
|
|
3.46 |
% |
Flow loans in default |
|
|
47,051 |
|
|
|
44,925 |
|
|
|
45,259 |
|
|
|
43,196 |
|
|
|
36,193 |
|
Percentage of flow loans in default (default rate) |
|
|
4.52 |
% |
|
|
3.99 |
% |
|
|
3.76 |
% |
|
|
3.19 |
% |
|
|
2.65 |
% |
Bulk loans in force |
|
|
263,225 |
|
|
|
288,587 |
|
|
|
348,521 |
|
|
|
301,859 |
|
|
|
214,917 |
|
Bulk loans in default |
|
|
38,737 |
|
|
|
40,562 |
|
|
|
41,113 |
|
|
|
30,452 |
|
|
|
18,460 |
|
Percentage of bulk loans in default (default rate) |
|
|
14.72 |
% |
|
|
14.06 |
% |
|
|
11.80 |
% |
|
|
10.09 |
% |
|
|
8.59 |
% |
A-minus and subprime loans in force(1) |
|
|
199,345 |
|
|
|
217,306 |
|
|
|
244,175 |
|
|
|
201,195 |
|
|
|
134,888 |
|
A-minus and subprime loans in default(1) |
|
|
36,485 |
|
|
|
35,824 |
|
|
|
34,525 |
|
|
|
25,504 |
|
|
|
15,649 |
|
Percentage of A-minus and subprime loans in default
(default rate) |
|
|
18.30 |
% |
|
|
16.49 |
% |
|
|
14.14 |
% |
|
|
12.68 |
% |
|
|
11.60 |
% |
POOL INSURANCE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured loans in force |
|
|
767,920 |
|
|
|
790,935 |
|
|
|
1,035,696 |
|
|
|
1,208,157 |
|
|
|
1,351,266 |
|
Loans in default |
|
|
23,772 |
|
|
|
25,500 |
|
|
|
28,135 |
|
|
|
26,676 |
|
|
|
23,623 |
|
Percentage of loans in default (default rate) |
|
|
3.10 |
% |
|
|
3.22 |
% |
|
|
2.72 |
% |
|
|
2.21 |
% |
|
|
1.75 |
% |
|
|
|
(1) |
|
A portion of A-minus and subprime loans is included in the data for flow
loans and the remainder is included in the data for bulk loans. Most A-minus and subprime credit
loans are written through the bulk channel. |
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 Books
primary loans in default by MGIC region at the dates indicated:
Default Rates for Primary Insurance By Region*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31 |
|
Dec. 31 |
|
Dec. 31 |
|
Dec. 31 |
|
Dec. 31 |
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
MGIC REGION: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New England |
|
|
3.98 |
% |
|
|
3.43 |
% |
|
|
3.43 |
% |
|
|
2.91 |
% |
|
|
2.27 |
% |
Northeast |
|
|
6.48 |
|
|
|
6.15 |
|
|
|
5.65 |
|
|
|
4.74 |
|
|
|
3.90 |
|
Mid-Atlantic. |
|
|
4.89 |
|
|
|
4.81 |
|
|
|
4.53 |
|
|
|
4.05 |
|
|
|
3.27 |
|
Southeast |
|
|
6.79 |
|
|
|
6.33 |
|
|
|
6.02 |
|
|
|
4.87 |
|
|
|
3.65 |
|
Great Lakes |
|
|
8.60 |
|
|
|
8.19 |
|
|
|
6.99 |
|
|
|
5.17 |
|
|
|
3.74 |
|
North Central |
|
|
6.01 |
|
|
|
5.78 |
|
|
|
5.38 |
|
|
|
4.22 |
|
|
|
3.21 |
|
South Central |
|
|
7.94 |
|
|
|
6.35 |
|
|
|
5.94 |
|
|
|
4.65 |
|
|
|
3.56 |
|
Plains |
|
|
4.51 |
|
|
|
4.51 |
|
|
|
4.03 |
|
|
|
3.41 |
|
|
|
2.76 |
|
Pacific |
|
|
3.76 |
|
|
|
3.92 |
|
|
|
4.21 |
|
|
|
3.73 |
|
|
|
3.38 |
|
National |
|
|
6.58 |
% |
|
|
6.05 |
% |
|
|
5.57 |
% |
|
|
4.45 |
% |
|
|
3.46 |
% |
|
|
|
* |
|
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 borrowers equity in the home at the time of
default and the borrowers (or the lenders) 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.
12
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,
generally at least 12 months transpires from the date of default to payment of a claim on an
uncured default.
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 lenders conveyance of good and marketable title to the
property to MGIC. MGIC will then sell the property for its own account.
Claim activity is not evenly spread throughout the coverage period of a book of primary
business. For prime loans, relatively few claims are received during the first two years following
issuance of coverage on a loan. This is followed by a period of rising claims which, based on
industry experience, has historically reached its highest level in the third through fourth years
after the year of loan origination. Thereafter, the number of claims received has historically
declined at a gradual rate, although the rate of decline can be affected by conditions in the
economy, including lower housing price appreciation. There can be no assurance that this historical
pattern of claims will continue in the future and due in part to the subprime component of loans
insured in bulk transactions, the peak claim period for bulk loans has generally occurred earlier
than for prime loans. Moreover, when a loan is refinanced, because the new loan replaces, and is a
continuation of, an earlier loan, the pattern of claims frequency for that new loan may be
different from the historical pattern of other loans. As of December 31, 2005, 77.0% of the MGIC
Book primary insurance in force had been written during 2003 2005, 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 the coverage percentage on the loan. The average claim severity on
the MGIC Book primary insurance was $26,361 for 2005 as compared to $24,438 in 2004 and $22,925 in
2003.
Loss Reserves
A significant period of time may elapse between the occurrence of the borrowers 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 the estimated severity of the claims which will arise from the
defaults included in the default inventory. In accordance with industry accounting practices, the
Company does not establish loss reserves for future claims on insured loans which are not currently
in default.
The Company also establishes reserves to provide for the estimated costs of settling claims,
including legal and other fees, and general expenses of administering the claims settlement process
(loss adjustment expenses), and for losses and loss adjustment expenses from defaults which have
occurred, but which have not yet been reported to the insurer.
13
The Companys 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
inherently judgmental. 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 further information about loss reserves, see Managements Discussion and
AnalysisResults of OperationsLosses in Item 7 and Note 6 to the consolidated financial
statements of the Company in Item 8.
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, 2005:
Dispersion of Primary Risk in Force
|
|
|
|
|
|
|
|
|
Top 10 States |
|
|
|
|
|
|
1.
|
|
Florida
|
|
|
|
|
9.0 |
% |
2.
|
|
California
|
|
|
|
|
7.9 |
|
3.
|
|
Texas
|
|
|
|
|
6.8 |
|
4.
|
|
Michigan
|
|
|
|
|
5.1 |
|
5.
|
|
Illinois
|
|
|
|
|
5.0 |
|
6.
|
|
Ohio
|
|
|
|
|
4.8 |
|
7.
|
|
Pennsylvania
|
|
|
|
|
4.0 |
|
8.
|
|
New York
|
|
|
|
|
4.0 |
|
9.
|
|
Georgia
|
|
|
|
|
3.2 |
|
10.
|
|
Indiana
|
|
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
52.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Top 10 MSAs |
|
|
|
|
|
|
1.
|
|
Chicago
|
|
|
|
|
3.7 |
% |
2.
|
|
Atlanta
|
|
|
|
|
2.2 |
|
3.
|
|
Detroit
|
|
|
|
|
2.1 |
|
4.
|
|
Boston
|
|
|
|
|
2.0 |
|
5.
|
|
Los Angeles
|
|
|
|
|
2.0 |
|
6.
|
|
Houston
|
|
|
|
|
1.8 |
|
7.
|
|
Phoenix
|
|
|
|
|
1.8 |
|
8.
|
|
Washington, D.C.
|
|
|
|
|
1.8 |
|
9.
|
|
Riverside-San Bernardino
|
|
|
|
|
1.7 |
|
10.
|
|
Philadelphia
|
|
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
20.7 |
% |
|
|
|
|
|
|
|
|
|
The percentages shown above for various MSAs can be affected by changes, from time
to time, in the federal governments definition of an MSA.
14
Insurance in Force by Policy Year
The following table sets forth for the MGIC Book the dispersion of MGICs primary insurance in
force as of December 31, 2005, 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) |
|
1985-1999 |
|
$ |
10,385 |
|
|
|
6.1 |
% |
2000 |
|
|
2,216 |
|
|
|
1.3 |
|
2001 |
|
|
8,505 |
|
|
|
5.0 |
|
2002 |
|
|
17,673 |
|
|
|
10.4 |
|
2003 |
|
|
37,058 |
|
|
|
21.8 |
|
2004 |
|
|
40,137 |
|
|
|
23.6 |
|
2005 |
|
|
54,055 |
|
|
|
31.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
170,029 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
Risk In Force and Product Characteristics of Risk in Force
At December 31, 2005 and 2004, 94% of MGICs risk in force was primary insurance and the
remaining risk in force was pool insurance. The following table sets forth for the MGIC Book the
dispersion of MGICs primary risk in force as of December 31, 2005, by year(s) of policy
origination since MGIC began operations in 1985:
Primary Risk In Force by Policy Year
|
|
|
|
|
|
|
|
|
|
|
Primary |
|
|
|
|
|
|
Risk in |
|
|
Percent of |
|
Policy Year |
|
Force |
|
|
Total |
|
(In millions of dollars) |
|
1985-1999 |
|
$ |
2,478 |
|
|
|
5.5 |
% |
2000 |
|
|
558 |
|
|
|
1.2 |
|
2001 |
|
|
2,176 |
|
|
|
4.9 |
|
2002 |
|
|
4,589 |
|
|
|
10.2 |
|
2003 |
|
|
9,527 |
|
|
|
21.3 |
|
2004 |
|
|
10,674 |
|
|
|
23.8 |
|
2005 |
|
|
14,858 |
|
|
|
33.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
44,860 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
15
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.
Characteristics of Primary Risk in Force
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2005 |
|
2004 |
Direct Risk in Force (In Millions): |
|
$ |
44,860 |
|
|
$ |
45,981 |
|
|
LTV: (1) |
|
|
|
|
|
|
|
|
100s |
|
|
16.4 |
% |
|
|
13.5 |
% |
95s |
|
|
30.5 |
|
|
|
32.4 |
|
90s(2) |
|
|
44.5 |
|
|
|
45.7 |
|
80s |
|
|
8.6 |
|
|
|
8.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
Loan Type: |
|
|
|
|
|
|
|
|
Fixed(3) |
|
|
74.5 |
% |
|
|
77.2 |
% |
Adjustable rate mortgages (ARMs)(4). |
|
|
25.5 |
|
|
|
22.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
Original Insured Loan Amount(5): |
|
|
|
|
|
|
|
|
Conforming loan limit and below |
|
|
92.4 |
% |
|
|
93.4 |
% |
Non-conforming |
|
|
7.6 |
|
|
|
6.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
Mortgage Term: |
|
|
|
|
|
|
|
|
15-years and under |
|
|
3.0 |
% |
|
|
4.3 |
% |
Over 15 years |
|
|
97.0 |
|
|
|
95.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Type: |
|
|
|
|
|
|
|
|
Single-family(6) |
|
|
91.7 |
% |
|
|
93.6 |
% |
Condominium |
|
|
7.0 |
|
|
|
6.2 |
|
Other(7) |
|
|
1.3 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
Occupancy Status: |
|
|
|
|
|
|
|
|
Primary residence |
|
|
92.5 |
% |
|
|
93.4 |
% |
Second home |
|
|
2.9 |
|
|
|
2.3 |
|
Non-owner occupied |
|
|
4.6 |
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
Documentation: |
|
|
|
|
|
|
|
|
Alt-A(8) |
|
|
13.9 |
% |
|
|
11.7 |
% |
Other |
|
|
86.1 |
|
|
|
88.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
FICO Score: |
|
|
|
|
|
|
|
|
Prime (FICO 620 and above) |
|
|
84.1 |
% |
|
|
84.2 |
% |
A Minus
(FICO 575 619) |
|
|
11.0 |
|
|
|
11.3 |
|
Subprime (FICO below 575) |
|
|
4.9 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
16
|
|
|
|
(1 |
) |
|
Loan-to-value represents the ratio (expressed as a percentage) of the
dollar amount of the mortgage loan to the value of the property at
the time the loan became insured. For purposes of the table, LTV
ratios are classified as in excess of 95% (100s, a classification
that includes 97% to 103% LTV loans); in excess of 90% LTV and up to
95% LTV (95s); in excess of 80% LTV and up to 90% LTV (90s); and
equal to or less than 80% LTV (80s). |
|
|
|
|
(2 |
) |
|
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, 2005 and 2004, 1.8% of the primary risk in force consisted of
these types of loans. |
|
|
|
|
(3 |
) |
|
Includes fixed rate mortgages with temporary buydowns (where in
effect the applicable interest rate is typically reduced by one or
two percentage points during the first two years of the loan), ARMs
in which the initial interest rate is fixed for at least five years
and balloon payment mortgages (a loan with a maturity, typically five
to seven years, that is shorter than the loans amortization period). |
|
|
|
|
(4 |
) |
|
Includes ARMs where payments adjust fully with interest rate
adjustments. Also includes ARMs with negative amortization features,
which at December 31, 2005 and 2004, represented 1.4% and 0.8%,
respectively, of primary risk in force. Does not include ARMs in
which the initial interest rate is fixed for at least five years. As
of December 31, 2005 and 2004, ARMs with LTVs in excess of 90%
represented 6.6% and 5.9%, respectively, of primary risk in force. |
|
|
|
|
(5 |
) |
|
Loans within the conforming loan limit have an original principal
balance that does not exceed the maximum original principal balance
of loans that the GSEs are eligible to purchase. The conforming loan
limit is subject to annual upward adjustment and was $359,650 for
2005 and $333,700 for 2004. Non-conforming loans are loans with an
original principal balance above the conforming loan limit. |
|
|
|
|
(6 |
) |
|
Includes townhouse-style attached housing with fee simple ownership. |
|
|
|
|
(7 |
) |
|
Includes cooperatives and manufactured homes deemed to be real estate. |
|
|
|
|
(8 |
) |
|
Alt-A loans are originated under programs in which there is a reduced
level of verification or disclosure compared to traditional mortgage
loan underwriting, including programs in which the borrowers income
and/or assets are disclosed in the loan application but there is no
verification of those disclosures and programs in which there is no
disclosure of income or assets in the loan application. At December
31, 2005 and 2004, Alt-A loans represented 6.9% of risk in force
written through the flow channel and 32.5% and 25.8%, respectively of
risk in force written through the bulk channel. |
C. Other Business and Joint Ventures
The Company, through subsidiaries, provides various mortgage services for the mortgage finance
industry, such as contract underwriting, portfolio retention and secondary marketing of
mortgage-related assets. The Companys eMagic.com LLC subsidiary provides an Internet portal
through which mortgage originators can access products and services of wholesalers, investors, and
vendors necessary to make a home mortgage loan. In January 2006, the Company acquired Myers
Internet, Inc., which is a provider of web-based point of sale solutions for mortgage originators
and real estate agents.
17
At December 31, 2005, the Company also owned approximately 46% of C-BASS and approximately
34.6% of Sherman, joint ventures with senior management of the particular joint venture and Radian
Group Inc. Effective August 1, 2005, the Company and Radian Group Inc. each sold almost 7
percentage points of their respective interest in Sherman to Shermans management for cash. For
further information about C-BASS and Sherman (which are the principal joint ventures included in
the Income from joint ventures, net of tax line in the Companys Consolidated Statement of
Operations), see Managements Discussion and AnalysisResults of Operations in Item 7 and Note 8
to the consolidated financial statements of the Company in Item 8.
In 1997, the Company, through subsidiaries, began insuring second mortgages, including home
equity loans. New insurance written on second mortgages in 2002 and 2001 was approximately $37.8
million and $1.3 billion, respectively. The Company discontinued writing new second mortgage risk
for loans closing after December 31, 2001.
D. Investment Portfolio
Policy and Strategy
Approximately 76% of the Companys long-term investment portfolio is managed by either
BlackRock, Inc. or Wellington Management Company, LLP, although the Company maintains overall
control of investment policy and strategy. The Company maintains direct management of the remainder
of its investment portfolio.
The Companys current policies emphasize preservation of capital, as well as total return.
Therefore, the Companys 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 Companys investment policies in effect at December 31, 2005 limited investments in the
securities of a single issuer (other than the U.S. government) and generally limit the purchase of
fixed income securities to those that are rated investment grade by at least one rating agency. At
that date, the maximum aggregate book value of the holdings of a single obligor or non-government
money market mutual fund was:
|
|
|
|
|
|
|
U.S. Government securities
|
|
No limit |
|
|
Pre-refunded municipals escrowed in Treasury
securities
|
|
No limit* |
|
|
U.S. Government Agencies (in total)**
|
|
15% of portfolio market value |
|
|
Securities rated AA or AAA
|
|
3% of portfolio market value |
|
|
Securities rated Baa or A
|
|
2% of portfolio market value |
|
|
|
* |
|
No limit subject to management liquidity considerations
|
|
** |
|
As used with respect to the Companys investment portfolio, Government Agencies include Fannie
Mae and Freddie Mac. |
At December 31, 2005, based on amortized cost, approximately 99.3% of the Companys total
fixed income investment portfolio was invested in securities rated A or better, with 81.1% rated
AAA and 15.9% rated AA, in each case by at least one nationally recognized securities rating
organization.
The Companys 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.
18
Investment Operations
At December 31, 2005, the market value of the Companys investment portfolio was approximately
$5.5 billion. At December 31, 2005, municipal securities represented 86.6% of the market value of
the total investment portfolio. Securities due within one year, within one to five years, within
five to ten years, and after ten years, represented 9.2%, 15.1%, 21.0% and 54.7%, respectively, of
the total book value of the Companys investment in debt securities. The Companys after-tax yield
for 2005 was 3.9%, which was comparable to the after-tax yield of 3.8% in 2004.
The ten largest holdings of the Company at December 31, 2005 appear in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Value |
|
|
|
|
|
|
|
|
|
(in thousands |
|
|
|
|
|
|
|
|
|
of dollars) |
|
1. |
|
Georgia State Series C |
|
|
|
|
|
$ |
47,702 |
|
2. |
|
Sales Tax Asset Receivable |
|
|
|
|
|
|
43,688 |
|
3. |
|
Indiana State |
|
|
|
|
|
|
43,377 |
|
4. |
|
New York City Water Finance Authority |
|
|
|
|
|
|
42,195 |
|
5. |
|
North Carolina Municipal Power |
|
|
|
|
|
|
48,908 |
|
6. |
|
Chicago IL Metropolitan Water Reclamation |
|
|
|
|
|
|
40,156 |
|
7. |
|
State of Illinois Sales Tax |
|
|
|
|
|
|
41,445 |
|
8. |
|
Jefferson County Alabama Sewer |
|
|
|
|
|
|
39,497 |
|
9. |
|
University of Texas |
|
|
|
|
|
|
37,940 |
|
10. |
|
Atlanta Georgia Water & Wastewater |
|
|
|
|
|
|
40,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
425,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: This table excludes U.S. Governments, Government Agencies and CMOs. |
The top ten sectors of the Companys investment portfolio appear in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Value |
|
|
|
|
|
|
|
|
|
(in millions |
|
|
|
|
|
|
|
|
|
of dollars) |
|
1. |
|
Tax-Free Municipal |
|
|
|
|
|
$ |
4,402.2 |
|
2. |
|
U.S. Treasuries |
|
|
|
|
|
|
336.4 |
|
3. |
|
Tax-Preferred Cash Equivalents |
|
|
|
|
|
|
260.8 |
|
4. |
|
Cash Equivalents |
|
|
|
|
|
|
198.6 |
|
5. |
|
Asset Backed |
|
|
|
|
|
|
179.4 |
|
6. |
|
Taxable Municipal |
|
|
|
|
|
|
68.5 |
|
7. |
|
Corporate |
|
|
|
|
|
|
23.3 |
|
8. |
|
Certified Capital Companies |
|
|
|
|
|
|
12.0 |
|
9. |
|
Affordable Hsg State Tax Credits |
|
|
|
|
|
|
2.5 |
|
10. |
|
Foreign |
|
|
|
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,485.8 |
|
|
|
|
|
|
|
|
|
|
|
For further information concerning investment operations, see Note 4 to the
consolidated financial statements of the Company, included in Item 8.
E. Regulation
Direct Regulation
The Company and its insurance subsidiaries, including MGIC, are subject to regulation 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
19
administrative powers to state insurance commissioners.
In general, such regulation relates, among other things, to licenses to transact business;
policy forms; premium rates; insurable loans; annual and other reports on financial condition; the
basis upon which assets and liabilities must be stated; requirements regarding contingency reserves
equal to 50% of premiums earned; minimum capital levels and adequacy ratios; reinsurance
requirements; limitations on the types of investment instruments which may be held in an investment
portfolio; the size of risks and limits on coverage of individual risks which may be insured;
deposits of securities; limits on dividends payable; and claims handling. Most states also regulate
transactions between insurance companies and their parents or affiliates and have restrictions on
transactions that have the effect of inducing lenders to place business with the insurer. For a
discussion of a February 1, 1999 circular letter from the NYID and a January 31, 2000 letter from
the Illinois Department of Insurance, see The MGIC BookTypes of ProductPool Insurance, Risk
Sharing Arrangements. See also The mortgage insurance industry is subject to the risk of private
litigation and regulatory proceedings in Item 1A. For a description of limits on dividends
payable, see Managements Discussion and AnalysisLiquidity and Capital Resources in Item 7 and
Note 11 to the consolidated financial statements of the Company in Item 8.
Mortgage insurance premium rates are also subject to state regulation to protect policyholders
against the adverse effects of excessive, inadequate or unfairly discriminatory rates and to
encourage competition in the insurance marketplace. Any increase in premium rates must be
justified, generally on the basis of the insurers loss experience, expenses and future trend
analysis. The general mortgage default experience may also be considered. Premium rates are subject
to review and challenge by state regulators. On February 9, 2006, the Company learned the NYID had
sent it and other mortgage insurers a letter asking for, among other things, a review of premium
rates used in New York and the filing of adjusted premium rates based on recent years experience
or an explanation why such experience would not alter rates.
A number of states generally limit the amount of insurance risk which may be written by a
private mortgage insurer to 25 times the insurers total policyholders reserves, commonly known as
the risk-to-capital requirement.
MGIC is required to establish a contingency loss reserve in an amount equal to 50% of earned
premiums. Such amounts cannot be withdrawn for a period of 10 years, except under certain
circumstances.
Mortgage insurers are generally single-line companies, restricted to writing residential
mortgage insurance business only. Although the Company, as an insurance holding company, is
prohibited from engaging in certain transactions with MGIC without submission to and, in some
instances, prior approval of applicable insurance departments, the Company is not subject to
insurance company regulation on its non-insurance businesses.
Wisconsins insurance regulations generally provide that no person may acquire control of the
Company unless the transaction in which control is acquired has been approved by the Office of the
Commissioner of Insurance of Wisconsin. The regulations provide for a rebuttable presumption of
control when a person owns or has the right to vote more than 10% of the voting securities.
As the most significant purchasers and sellers of conventional mortgage loans and
beneficiaries of private mortgage insurance, Freddie Mac and Fannie Mae impose requirements on
private mortgage insurers in order for such insurers to be eligible to insure loans sold to such
agencies. These requirements of Freddie Mac and Fannie Mae are subject to change from time to time.
Currently, MGIC is an approved mortgage insurer for both Freddie Mac and Fannie Mae. In addition,
to the extent Fannie Mae or Freddie Mac assumes default risk for itself that would otherwise be
insured, changes current guarantee fee arrangements (including as a result of primary mortgage
insurance coverage being restructured as
20
described under The MGIC BookTypes of ProductPrimary Insurance), allows alternative credit
enhancement, alters or liberalizes underwriting guidelines on low down payment mortgages they
purchase, or otherwise changes its business practices or processes with respect to such mortgages,
private mortgage insurers may be affected.
Fannie Mae has issued primary mortgage insurance master policy guidelines applicable to MGIC
and all other Fannie Mae-approved private mortgage insurers, establishing certain minimum terms of
coverage necessary in order for an insurer to be eligible to insure loans purchased by Fannie Mae.
The terms of MGICs Master Policy comply with these guidelines.
In December 2003 Standard & Poors Rating Services (S&P) announced that it lowered MGICs
financial strength rating to AA from AA+ and the Companys long-term counterparty credit rating
to A from A+ because of a weakening of MGICs operating performance from a very strong to a
strong level, as well as rising delinquencies. In addition, the level of risk in MGICs book of
business is increasing relative to its peers, in part due to the growth in its bulk in-force book,
which has grown to about 25% of the total in-force. S&P said in its announcement that the outlook
for MGICs and the Companys ratings was stable. Shortly before S&Ps announcement, Moodys
Investors Service and Fitch Ratings reaffirmed their respective Aa2 and AA+ financial strength
ratings of MGIC.
Maintenance of a financial strength rating of at least AA-/Aa3 is critical to a mortgage
insurers ability to continue to write new business. In assigning financial strength ratings, in
addition to considering the adequacy of the mortgage insurers capital to withstand extreme loss
scenarios under assumptions determined by the rating agency, rating agencies review a mortgage
insurers historical and projected operating performance, business outlook, competitive position,
management, corporate strategy, and other factors. The rating agency issuing the financial strength
rating can withdraw or change its rating at any time.
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. Proposals are discussed from time to time by Congress and certain federal agencies to
reform or modify the FHA and the Government National Mortgage Association, which securitizes
mortgages insured by the FHA.
Subject to certain exceptions, in general, RESPA prohibits any person from giving or receiving
any thing of value pursuant to an agreement or understanding to refer settlement services. See
The mortgage insurance industry is subject to the risk of private litigation and regulatory
proceedings in Item 1B.
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
21
incentives for increased lending to low and moderate income persons, or in targeted areas.
There can be no assurance that other federal laws and regulations affecting such institutions
and entities will not change, or that new legislation or regulations will not be adopted which will
adversely affect the private mortgage insurance industry. In this regard, see the penultimate risk
factor in Item 1A.
F. Employees
At December 31, 2005, the Company and its consolidated subsidiaries had approximately 1,200
full- and part-time employees, of whom approximately 35% were assigned to MGICs 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.
G. Website Access
The Company makes available, free of charge, through its Internet website its Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after the Company electronically files such material with
the SEC. The address of the Companys website is www.mgic.com, and such reports and amendments are
accessible through the Investor link at such address.
Item 1A. Risk Factors.
Forward-Looking Statements and Risk Factors
The Companys revenues and losses could be affected by the risk factors discussed below that
are applicable to the Company, and the Companys income from joint ventures could be affected by
the risk factors discussed below that are applicable to C-BASS and Sherman. These risk factors are
an integral part of Managements Discussion and Analysis.
These factors may also cause actual results to differ materially from the results contemplated
by forward looking statements that the Company may make. Forward looking statements consist of
statements which relate to matters other than historical fact. Among others, statements that
include words such as the Company believes, anticipates or expects, or words of similar
import, are forward looking statements. The Company is not undertaking any obligation to update any
forward looking statements it may make even though these statements may be affected by events or
circumstances occurring after the forward looking statements were made.
The amount of insurance the Company writes could be adversely affected if lenders and
investors select alternatives to private mortgage insurance.
These alternatives to private mortgage insurance include:
|
|
|
lenders originating mortgages using piggyback structures to avoid
private mortgage insurance, such as a first mortgage with an 80%
loan-to-value ratio and a second mortgage with a 10%, 15% or 20%
loan-to-value ratio (referred to as 80-10-10, 80-15-5 or 80-20 loans,
respectively) rather than a first mortgage with a 90%, 95% or 100%
loan-to-value ratio, |
|
|
|
|
investors holding mortgages in portfolio and self-insuring, |
22
|
|
|
investors using credit enhancements other than private mortgage
insurance or using other credit enhancements in conjunction with
reduced levels of private mortgage insurance coverage, and |
|
|
|
|
lenders using government mortgage insurance programs, including those
of the Federal Housing Administration and the Veterans Administration. |
While no data is publicly available, the Company believes that piggyback loans are a
significant percentage of mortgage originations in which borrowers make down payments of less than
20% and that their use is primarily by borrowers with higher credit scores. During the fourth
quarter of 2004, the Company introduced on a national basis a program designed to recapture
business lost to these mortgage insurance avoidance products. This program accounted for 5.7% of
flow new insurance written in the fourth quarter of 2005 and 6.5% of flow new insurance written for
all of 2005.
Deterioration in the domestic economy or changes in the mix of business may result in more
homeowners defaulting and the Companys losses increasing.
Losses result from events that reduce a borrowers ability to continue to make mortgage
payments, such as unemployment, and whether the home of a borrower who defaults on his mortgage can
be sold for an amount that will cover unpaid principal and interest and the expenses of the sale.
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 deterioration in economic conditions
generally increases the likelihood that borrowers will not have sufficient income to pay their
mortgages and can also adversely affect housing values.
Approximately 8.5% of the Companys primary risk in force is located in areas within Alabama
(0.3%), Florida (4.5%), Louisiana (1.0%), Mississippi (0.6%) and Texas (2.2%) that have been
declared eligible for individual and public assistance by the Federal Emergency Management Agency
as a result of Hurricanes Katrina, Rita and Wilma. The effect on the Company from these hurricanes,
however, will not be limited to these areas to the extent that the borrowers in areas that have not
experienced wind or water damage are adversely affected due to deteriorating economic conditions
attributable to these hurricanes.
The mix of business the Company writes also affects the likelihood of losses occurring. In
recent years, the percentage of the Companys volume written on a flow basis that includes segments
the Company views as having a higher probability of claim has continued to increase. These segments
include loans with loan-to-value (LTV) ratios over 95% (including loans with 100% LTV ratios),
FICO credit scores below 620, limited underwriting, including limited borrower documentation, or
total debt-to-income ratios of 38% or higher, as well as loans having combinations of higher risk
factors.
Approximately 9% of the Companys primary risk in force written through the flow channel, and
72% of the Companys primary risk in force written through the bulk channel, consists of adjustable
rate mortgages (ARMs). The Company believes that during a prolonged period of rising interest
rates, claims on ARMs would be substantially higher than for fixed rate loans, although the
performance of ARMs has not been tested in such an environment. In addition, the Company believes
the volume of interest-only loans (which may also be ARMs) and other loans with negative
amortization features, such as pay option ARMs, increased in 2004 and 2005. Because interest-only
loans and pay option ARMs are a relatively recent development, the Company has no data on their
historical performance. The Company believes claim rates on certain of these loans will be
substantially higher than on comparable loans that do not have negative amortization.
23
Competition or changes in the Companys relationships with its customers could reduce the
Companys revenues or increase its losses.
Competition for private mortgage insurance premiums occurs not only among private mortgage
insurers but also with mortgage lenders through captive mortgage reinsurance transactions. In these
transactions, a lenders affiliate reinsures a portion of the insurance written by a private
mortgage insurer on mortgages originated or serviced by the lender. As discussed under The
mortgage insurance industry is subject to risk from private litigation and regulatory proceedings
below, the Company provided information to the New York Insurance Department and the Minnesota
Department of Commerce about captive mortgage reinsurance arrangements. It has been publicly
reported that certain other insurance departments may review or investigate such arrangements.
The level of competition within the private mortgage insurance industry has also increased as
many large mortgage lenders have reduced the number of private mortgage insurers with whom they do
business. At the same time, consolidation among mortgage lenders has increased the share of the
mortgage lending market held by large lenders.
The Companys private mortgage insurance competitors include:
|
|
PMI Mortgage Insurance Company, |
|
|
|
Genworth Mortgage Insurance Corporation, |
|
|
|
United Guaranty Residential Insurance Company, |
|
|
|
Radian Guaranty Inc., |
|
|
|
Republic Mortgage Insurance Company, |
|
|
|
Triad Guaranty Insurance Corporation, and |
|
|
|
CMG Mortgage Insurance Company. |
If interest rates decline, house prices appreciate or mortgage insurance cancellation
requirements change, the length of time that the Companys policies remain in force could decline
and result in declines in the Companys revenue.
In each year, most of the Companys premiums are from insurance that has been written in prior
years. As a result, the length of time insurance remains in force (which is also generally referred
to as persistency) is an important determinant of revenues. The factors affecting the length of
time the Companys insurance remains in force include:
|
|
|
the level of current mortgage interest rates compared to the mortgage
coupon rates on the insurance in force, which affects the
vulnerability of the insurance in force to refinancings, and |
|
|
|
|
mortgage insurance cancellation policies of mortgage investors along
with the rate of home price appreciation experienced by the homes
underlying the mortgages in the insurance in force. |
During the 1990s, the Companys year-end persistency ranged from a high of 87.4% at December
31,
24
1990 to a low of 68.1% at December 31, 1998. At December 31, 2005 persistency was at 61.3%,
compared to the record low of 44.9% at September 30, 2003. Over the past several years,
refinancing has become easier to accomplish and less costly for many consumers. Hence, even in an
interest rate environment favorable to persistency improvement, the Company does not expect
persistency will approach its December 31, 1990 level.
If the volume of low down payment home mortgage originations declines, the amount of
insurance that the Company writes could decline which would reduce the Companys revenues.
The factors that affect the volume of low-down-payment mortgage originations include:
|
|
|
The level of home mortgage interest rates, |
|
|
|
|
the health of the domestic economy as well as conditions in regional and local economies, |
|
|
|
|
housing affordability, |
|
|
|
|
population trends, including the rate of household formation, |
|
|
|
|
the rate of home price appreciation, which in times of heavy refinancing can affect
whether refinance loans have loan-to-value ratios that require private mortgage
insurance, and |
|
|
|
|
government housing policy encouraging loans to first-time homebuyers. |
In general, the majority of the underwriting profit (premium revenue minus losses) that a book
of mortgage insurance generates occurs in the early years of the book, with the largest portion of
the underwriting profit realized in the first year. Subsequent years of a book generally result in
modest underwriting profit or underwriting losses. This pattern of results occurs because
relatively few of the claims that a book will ultimately experience occur in the first few years of
the book, when premium revenue is highest, while subsequent years are affected by declining premium
revenues, as persistency decreases due to loan prepayments, and higher losses.
If all other things were equal, a decline in new insurance written in a year that followed a
number of years of higher volume could result in a lower contribution to the mortgage insurers
overall results. This effect may occur because the older books will be experiencing declines in
revenue and increases in losses with a lower amount of underwriting profit on the new book
available to offset these results.
Whether such a lower contribution would in fact occur depends in part on the extent of the
volume decline. Even with a substantial decline in volume, there may be offsetting factors that
could increase the contribution in the current year. These offsetting factors include higher
persistency and a mix of business with higher average premiums, which could have the effect of
increasing revenues, and improvements in the economy, which could have the effect of reducing
losses. In addition, the effect on the insurers overall results from such a lower contribution may
be offset by decreases in the mortgage insurers expenses that are unrelated to claim or default
activity, including those related to lower volume.
Changes in the business practices of Fannie Mae and Freddie Mac could reduce the Companys
revenues or increase its losses.
The business practices of the Federal National Mortgage Association (Fannie Mae) and the
Federal Home Loan Mortgage Corporation (Freddie Mac), each of which is a government sponsored
entity (GSE), affect the entire relationship between them and mortgage insurers and include:
25
|
|
|
the level of private mortgage insurance coverage, subject to the
limitations of Fannie Mae and Freddie Macs charters, when private
mortgage insurance is used as the required credit enhancement on low
down payment mortgages, |
|
|
|
|
whether Fannie Mae or Freddie Mac influence the mortgage lenders
selection of the mortgage insurer providing coverage and, if so, any
transactions that are related to that selection, |
|
|
|
|
whether Fannie Mae or Freddie Mac will give mortgage lenders an
incentive, such as a reduced guaranty fee, to select a mortgage
insurer that has a AAA claims-paying ability, |
|
|
|
|
rating to benefit from the lower capital requirements for Fannie Mae
and Freddie Mac when a mortgage is insured by a company with that
rating, |
|
|
|
|
the underwriting standards that determine what loans are eligible for
purchase by Fannie Mae or Freddie Mac, which thereby affect the
quality of the risk insured by the mortgage insurer and the
availability of mortgage loans, |
|
|
|
|
the terms on which mortgage insurance coverage can be canceled before
reaching the cancellation thresholds established by law, and |
|
|
|
|
the circumstances in which mortgage servicers must perform activities
intended to avoid or mitigate loss on insured mortgages that are
delinquent. |
The mortgage insurance industry is subject to the risk of private litigation and
regulatory proceedings.
Consumers are bringing a growing number of lawsuits against home mortgage lenders and
settlement service providers. In recent years, seven mortgage insurers, including MGIC, have been
involved in litigation alleging violations of the anti-referral fee provisions of the Real Estate
Settlement Procedures Act, which is commonly known as RESPA, and the notice provisions of the Fair
Credit Reporting Act, which is commonly known as FCRA. MGICs settlement of class action litigation
against it under RESPA became final in October 2003. MGIC settled the named plaintiffs claims in
litigation against it under FCRA in late December 2004 following denial of class certification in
June 2004. There can be no assurance that MGIC will not be subject to future litigation under RESPA
or FCRA or that the outcome of any such litigation would not have a material adverse effect on the
Company. In August 2005, the United States Court of Appeals for the Ninth Circuit decided a case
under FCRA to which the Company was not a party that may make it more likely that the Company will
be subject to future litigation regarding when notices to borrowers are required by FCRA.
In June 2005, in response to a letter from the New York Insurance Department (NYID), the
Company provided information regarding captive mortgage reinsurance arrangements and other types of
arrangements in which lenders receive compensation. In February 2006, in response to an
administrative subpoena from the Minnesota Department of Commerce (the MDC), which regulates
insurance, the Company provided the MDC with information about captive mortgage reinsurance and
certain other matters. In the spring of 2005, spokesmen for insurance commissioners in Colorado and
North Carolina were publicly reported as saying that those commissioners are considering
investigating or reviewing captive mortgage reinsurance arrangements. Insurance departments or
other officials in other states may also conduct such investigations or reviews.
The anti-referral fee provisions of RESPA provide that the Department of Housing and Urban
Development (HUD) as well as the insurance commissioner or attorney general of any state may
bring an action to enjoin violations of these provisions of RESPA. The insurance law provisions of
many states
26
prohibit paying for the referral of insurance business and provide various mechanisms
to enforce this prohibition. While the Company believes its captive reinsurance arrangements are in
conformity with applicable laws and regulations, it is not possible to predict the outcome of any
such reviews or investigations nor is it possible to predict their effect on the Company or the
mortgage insurance industry.
Net premiums written could be adversely affected if the Department of Housing and Urban
Development reproposes and adopts a regulation under the Real Estate Settlement Procedures Act that
is equivalent to a proposed regulation that was withdrawn in 2004.
HUD regulations under RESPA prohibit paying lenders for the referral of settlement services,
including mortgage insurance, and prohibit lenders from receiving such payments. In July 2002, HUD
proposed a regulation that would exclude from these anti-referral fee provisions settlement
services included in a package of settlement services offered to a borrower at a guaranteed price.
HUD withdrew this proposed regulation in March 2004. Under the proposed regulation, if mortgage
insurance were required on a loan, the package must include any mortgage insurance premium paid at
settlement. Although certain state insurance regulations prohibit an insurers payment of referral
fees, had this regulation been adopted in this form, the Companys revenues could have been
adversely affected to the extent that lenders offered such packages and received value from the
Company in excess of what they could have received were the anti-referral fee provisions of RESPA
to apply and if such state regulations were not applied to prohibit such payments.
The Companys income from joint ventures could be adversely affected by credit losses,
insufficient liquidity or competition affecting those businesses.
C-BASS: Credit-Based Asset Servicing and Securitization LLC (C-BASS) is particularly exposed
to credit risk and funding risk. In addition, C-BASSs results are sensitive to its ability to
purchase mortgage loans and securities on terms that it projects will meet its return targets. With
respect to credit risk, a higher proportion of non-conforming mortgage originations (the types of
mortgages C-BASS principally purchases) in 2005 compared to 2004 were products, such as interest
only loans to subprime borrowers, that are viewed by C-BASS as having greater credit risk. In
addition, credit losses are a function of housing prices, which in certain regions have experienced
rates of increase greater than historical norms and greater than growth in median incomes.
With respect to liquidity, the substantial majority of C-BASSs on-balance sheet financing for
its mortgage and securities portfolio is short-term and dependent on the value of the collateral
that secures this debt. While C-BASSs policies governing the management of capital at risk are
intended to provide sufficient liquidity to cover an instantaneous and substantial decline in
value, such policies cannot guaranty that all liquidity required will in fact be available.
Although there has been growth in the volume of non-conforming mortgage originations in recent
years, volume is expected to decline in 2006. There is an increasing amount of competition to
purchase non-conforming mortgages, including from real estate investment trusts and from firms that
in the past acted as mortgage securities intermediaries but which are now establishing their own
captive origination capacity. Decreasing credit spreads also heighten competition in the purchase
of non-conforming mortgages and other securities.
Sherman: The results of Sherman Financial Group LLC (Sherman) are sensitive to its ability
to purchase receivable portfolios on terms that it projects will meet its return targets. While the
volume of charged-off consumer receivables and the portion of these receivables that have been sold
to third parties such as Sherman has grown in recent years, there is an increasing amount of
competition to purchase such portfolios, including from new entrants to the industry, which has
resulted in increases in the prices at which portfolios can be purchased.
27
Item 1B. Unresolved Staff Comments.
None.
28
Item 2. Properties.
At December 31, 2005, the Company leased office space in various cities throughout the United
States under leases expiring between 2006 and 2010 and which required annual rentals of $2.9
million in 2005.
The Company owns its headquarters facility and an additional office/warehouse facility, both
located in Milwaukee, Wisconsin, which contain an aggregate of approximately 310,000 square feet of
space.
Item 3. Legal Proceedings.
The Company is involved in litigation in the ordinary course of business. In the opinion of
management, the ultimate resolution of this pending litigation will not have a material adverse
effect on the financial position or results of operations of the Company.
For information about an administrative summons issued by the Internal Revenue Service, see
the last paragraph of Note 10. Income taxes to the Companys consolidated financial statements,
which paragraph is incorporated by reference.
For information about the risk of legal proceedings, see the text under The mortgage
insurance industry is subject to the risk of private litigation and regulatory proceedings under
Risk factors in Item 1A, which is incorporated by reference.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
29
Executive Officers
Certain information with respect to the Companys executive officers as of March 1, 2006 is
set forth below:
|
|
|
Name and Age |
|
Title |
Curt S. Culver, 53
|
|
Chairman of the Board and Chief Executive Officer of the Company and MGIC;
Director of the Company and MGIC |
|
|
|
Patrick Sinks, 49
|
|
President and Chief Operating Officer of the Company and MGIC |
|
|
|
J. Michael Lauer, 61
|
|
Executive Vice President and Chief Financial Officer of the Company and MGIC |
|
|
|
Lawrence J.
Pierzchalski, 53
|
|
Executive Vice President Risk Management of MGIC |
|
|
|
James A. Karpowicz, 58
|
|
Senior Vice PresidentChief Investment Officer and Treasurer of the Company and
MGIC |
|
|
|
Jeffrey H. Lane, 56
|
|
Senior Vice President, General Counsel and Secretary of the Company and MGIC |
|
|
|
Michael G. Meade, 56
|
|
Senior Vice PresidentInformation Services and Chief Information Officer of MGIC |
Mr. Culver has served as Chief Executive Officer of the Company since January 2000 and as
Chairman of the Board since January 2005. He was President of the Company from January 1999 to
January 2006 and was President of MGIC from May 1996 to January 2006. Mr. Culver has been a senior
officer of MGIC since 1988 having responsibility at various times during his career with MGIC for
field operations, marketing and corporate development. From March 1985 to 1988, he held various
management positions with MGIC in the areas of marketing and sales.
Mr. Sinks became President and Chief Operating Officer of the Company and MGIC in January
2006. He was Executive Vice President-Field Operations of MGIC from January 2004 to January 2006
and was Senior Vice President-Field Operations of MGIC from July 2002 to January 2004. From March
1985 to July 2002, he held various positions within MGICs finance and accounting organization, the
last of which was Senior Vice President, Controller and Chief Accounting Officer.
Mr. Lauer has served as Executive Vice President and Chief Financial Officer of the Company
and MGIC since March 1989.
Mr. Pierzchalski has served as Executive Vice President-Risk Management of MGIC since May 1996
and prior thereto as Senior Vice President-Risk Management or Vice President-Risk Management of
MGIC from April 1990. 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. Karpowicz has served as Senior Vice PresidentChief Investment Officer and Treasurer of
the Company and MGIC since January, 2005 and has been Treasurer since 1998. From 1986 to January,
2005, he held various positions within MGICs investment operations organization, the last of which
was Vice President.
Mr. Lane has served as Senior Vice President, General Counsel and Secretary of the Company and
30
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.
Mr. Meade has served as Senior Vice PresidentInformation Services and Chief Information
Officer since February 1992. From 1985 to 1992 he held various positions within MGICs information
services organization, the last of which was Vice PresidentInformation Services.
31
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters.
(a) The Companys Common Stock is listed on the New York Stock Exchange under the symbol
MTG. The following table sets forth for 2004 and 2005 by calendar quarter the high and low sales
prices of the Common Stock on the New York Stock Exchange.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2005 |
Quarter |
|
High |
|
Low |
|
High |
|
Low |
First |
|
$ |
70.80 |
|
|
$ |
56.20 |
|
|
$ |
70.00 |
|
|
$ |
59.98 |
|
Second |
|
|
76.99 |
|
|
|
63.90 |
|
|
|
66.48 |
|
|
|
56.93 |
|
Third |
|
|
78.95 |
|
|
|
62.42 |
|
|
|
70.02 |
|
|
|
60.56 |
|
Fourth |
|
|
69.94 |
|
|
|
60.00 |
|
|
|
67.75 |
|
|
|
56.70 |
|
In 2004 and 2005 the Company declared and paid the following cash dividends:
|
|
|
|
|
|
|
|
|
Quarter |
|
2004 |
|
2005 |
First |
|
$ |
.0375 |
|
|
$ |
.0750 |
|
Second |
|
|
.0375 |
|
|
|
.1500 |
|
Third |
|
|
.0750 |
|
|
|
.1500 |
|
Fourth |
|
|
.0750 |
|
|
|
.1500 |
|
|
|
$ |
.2250 |
|
|
$ |
.5250 |
|
The Company is a holding company and the payment of dividends from its insurance
subsidiaries is restricted by insurance regulation. For a discussion of these restrictions, see the
sixth paragraph under Managements Discussion and Analysis Liquidity and Capital Resources in
Item 7 on Form 10-K and Note 11 of the Notes to the Consolidated Financial Statements in Item 8,
which are incorporated by reference.
As of February 10, 2006, the number of shareholders of record was 174. In addition, the
Company estimates there are more than 200,000 beneficial owners of shares held by brokers and
fiduciaries.
Information regarding equity compensation plans is contained in Item 12.
(b) Not applicable.
(c) Information about shares of Common Stock repurchased during the fourth quarter of 2005
appears in the table below.
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
(d) |
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Maximum Number of |
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
Shares that May Yet |
|
|
(a) |
|
(b) |
|
Part of Publicly |
|
Be Purchased Under |
|
|
Total Number of |
|
Average Price Paid |
|
Announced Plans or |
|
the Plans or |
Period |
|
Shares Purchased |
|
per Share |
|
Programs |
|
Programs (A) |
October 1, 2005 through October 31, 2005 |
|
|
1,934,409 |
|
|
$ |
59.14 |
|
|
|
1,934,409 |
|
|
|
2,063,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2005 through November 30, 2005 |
|
|
1,248,693 |
|
|
$ |
62.24 |
|
|
|
1,248,693 |
|
|
|
815,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1, 2005 through December 31, 2005 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
815,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,183,102 |
|
|
$ |
60.35 |
|
|
|
3,183,102 |
|
|
|
815,241 |
|
|
|
|
(A) |
|
On May 8, 2003 the Company announced that its Board of Directors
authorized the repurchase of up to five million shares of the
Companys Common Stock in the open market or in private transactions.
On January 26, 2006, the Company announced that its Board authorized
the repurchase of an additional ten million shares in the open market
or in private transactions. |
33
Item 6. Selected Financial Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
|
|
(In thousands of dollars, except per share data) |
|
Summary of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written |
|
$ |
1,252,310 |
|
|
$ |
1,305,417 |
|
|
$ |
1,364,631 |
|
|
$ |
1,177,955 |
|
|
$ |
1,036,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
1,238,692 |
|
|
$ |
1,329,428 |
|
|
$ |
1,366,011 |
|
|
$ |
1,182,098 |
|
|
$ |
1,042,267 |
|
Investment income, net |
|
|
228,854 |
|
|
|
215,053 |
|
|
|
202,881 |
|
|
|
207,516 |
|
|
|
204,393 |
|
Realized investment gains, net |
|
|
14,857 |
|
|
|
17,242 |
|
|
|
36,862 |
|
|
|
29,113 |
|
|
|
37,352 |
|
Other revenue |
|
|
44,127 |
|
|
|
50,970 |
|
|
|
79,657 |
|
|
|
65,836 |
|
|
|
30,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,526,530 |
|
|
|
1,612,693 |
|
|
|
1,685,411 |
|
|
|
1,484,563 |
|
|
|
1,314,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses incurred, net |
|
|
553,530 |
|
|
|
700,999 |
|
|
|
766,028 |
|
|
|
365,752 |
|
|
|
160,814 |
|
Underwriting and other expenses |
|
|
275,416 |
|
|
|
278,786 |
|
|
|
302,473 |
|
|
|
265,633 |
|
|
|
234,494 |
|
Interest expense |
|
|
41,091 |
|
|
|
41,131 |
|
|
|
41,113 |
|
|
|
36,776 |
|
|
|
30,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses |
|
|
870,037 |
|
|
|
1,020,916 |
|
|
|
1,109,614 |
|
|
|
668,161 |
|
|
|
425,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax and joint ventures |
|
|
656,493 |
|
|
|
591,777 |
|
|
|
575,797 |
|
|
|
816,402 |
|
|
|
888,529 |
|
Provision for income tax |
|
|
176,932 |
|
|
|
159,348 |
|
|
|
146,027 |
|
|
|
240,971 |
|
|
|
277,590 |
|
Income from joint ventures, net of tax |
|
|
147,312 |
|
|
|
120,757 |
|
|
|
64,109 |
|
|
|
53,760 |
|
|
|
28,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
626,873 |
|
|
$ |
553,186 |
|
|
$ |
493,879 |
|
|
$ |
629,191 |
|
|
$ |
639,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding (in thousands) |
|
|
92,443 |
|
|
|
98,245 |
|
|
|
99,022 |
|
|
|
104,214 |
|
|
|
107,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
6.78 |
|
|
$ |
5.63 |
|
|
$ |
4.99 |
|
|
$ |
6.04 |
|
|
$ |
5.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
.525 |
|
|
$ |
.2250 |
|
|
$ |
.1125 |
|
|
$ |
.10 |
|
|
$ |
.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
5,486,070 |
|
|
$ |
5,582,627 |
|
|
$ |
5,205,161 |
|
|
$ |
4,726,472 |
|
|
$ |
4,069,447 |
|
Total assets |
|
|
6,357,569 |
|
|
|
6,380,691 |
|
|
|
5,917,387 |
|
|
|
5,300,303 |
|
|
|
4,567,012 |
|
Loss reserves |
|
|
1,124,454 |
|
|
|
1,185,594 |
|
|
|
1,061,788 |
|
|
|
733,181 |
|
|
|
613,664 |
|
Short- and long-term debt |
|
|
685,163 |
|
|
|
639,303 |
|
|
|
599,680 |
|
|
|
677,246 |
|
|
|
472,102 |
|
Shareholders equity |
|
|
4,165,055 |
|
|
|
4,143,639 |
|
|
|
3,796,902 |
|
|
|
3,395,192 |
|
|
|
3,020,187 |
|
Book value per share |
|
|
47.31 |
|
|
|
43.05 |
|
|
|
38.58 |
|
|
|
33.87 |
|
|
|
28.47 |
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
New primary insurance written ($ millions) |
|
$ |
61,503 |
|
|
$ |
62,902 |
|
|
$ |
96,803 |
|
|
$ |
92,532 |
|
|
$ |
86,122 |
|
New primary risk written ($ millions) |
|
|
16,836 |
|
|
|
16,792 |
|
|
|
25,209 |
|
|
|
23,403 |
|
|
|
21,038 |
|
New pool risk written ($ millions) (1) |
|
|
358 |
|
|
|
208 |
|
|
|
862 |
|
|
|
674 |
|
|
|
412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance in force (at year-end) ($ millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct primary insurance |
|
|
170,029 |
|
|
|
177,091 |
|
|
|
189,632 |
|
|
|
196,988 |
|
|
|
183,904 |
|
Direct primary risk |
|
|
44,860 |
|
|
|
45,981 |
|
|
|
48,658 |
|
|
|
49,231 |
|
|
|
45,243 |
|
Direct pool risk (1) |
|
|
2,909 |
|
|
|
3,022 |
|
|
|
2,895 |
|
|
|
2,568 |
|
|
|
1,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary loans in default ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policies in force |
|
|
1,303,084 |
|
|
|
1,413,678 |
|
|
|
1,551,331 |
|
|
|
1,655,887 |
|
|
|
1,580,283 |
|
Loans in default |
|
|
85,788 |
|
|
|
85,487 |
|
|
|
86,372 |
|
|
|
73,648 |
|
|
|
54,653 |
|
Percentage of loans in default |
|
|
6.58 |
% |
|
|
6.05 |
% |
|
|
5.57 |
% |
|
|
4.45 |
% |
|
|
3.46 |
% |
Percentage of loans in default bulk |
|
|
14.72 |
% |
|
|
14.06 |
% |
|
|
11.80 |
% |
|
|
10.09 |
% |
|
|
8.59 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance operating ratios (GAAP) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio |
|
|
44.7 |
% |
|
|
52.7 |
% |
|
|
56.1 |
% |
|
|
30.9 |
% |
|
|
15.4 |
% |
Expense ratio (2) |
|
|
15.9 |
% |
|
|
14.6 |
% |
|
|
14.1 |
% |
|
|
14.8 |
% |
|
|
16.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
60.6 |
% |
|
|
67.3 |
% |
|
|
70.2 |
% |
|
|
45.7 |
% |
|
|
31.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-to-capital ratio (statutory) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MGIC |
|
|
6.3:1 |
|
|
|
6.8:1 |
|
|
|
8.1:1 |
|
|
|
8.7:1 |
|
|
|
9.1:1 |
|
|
|
|
(1) |
|
Represents contractual aggregate loss limits and, for the years ended
December 31, 2005, 2004, 2003 and 2002, for $5.0 billion, $4.9
billion, $4.9 billion and $3.0 billion, respectively, of risk without
such limits, risk is calculated at $51 million, $65 million, $192
million and $147 million, respectively, for new risk written and $469
million, $418 million, $353 million and $161 million, respectively,
for risk in force, the estimated amount that would credit enhance
these loans to a AA level based on a rating agency model. |
|
(2) |
|
The loss ratio (expressed as a percentage) is the ratio of the sum of
incurred losses and loss adjustment expenses to net premiums earned.
The expense ratio (expressed as a percentage) is the ratio of the
combined insurance operations underwriting expenses to net premiums
written. |
35
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Business and General Environment
The Company, through its subsidiary Mortgage Guaranty Insurance Corporation (MGIC), is the
leading provider of private mortgage insurance in the United States to the home mortgage lending
industry. The Companys principal products are primary mortgage insurance and pool mortgage
insurance. Primary mortgage insurance may be written through the flow market channel, in which
loans are insured in individual, loan-by-loan transactions. Primary mortgage insurance may also be
written through the bulk market channel, in which portfolios of loans are individually insured in
single, bulk transactions.
The Companys results of operations are affected by:
|
|
Premiums written and earned |
Premiums written and earned in a year are influenced by:
|
o |
|
New insurance written, which increases the size of the in force book of
insurance. New insurance written is the aggregate principal amount of the mortgages
that are insured during a period and is referred to as NIW. NIW is affected by many
factors, including the volume of low down payment home mortgage originations and
competition to provide credit enhancement on those mortgages, including competition
from other mortgage insurers and alternatives to mortgage insurance, such as piggyback
loans. |
|
|
o |
|
Cancellations, which reduce the size of the in force book of insurance that
generates premiums. Cancellations due to refinancings are affected by the level of
current mortgage interest rates compared to the mortgage coupon rates throughout the in
force book, as well as by home price appreciation. |
|
|
o |
|
Premium rates, which are affected by the risk characteristics of the loans
insured and the percentage of coverage on the loans. |
|
|
o |
|
Premiums ceded to reinsurance subsidiaries of certain mortgage lenders and risk
sharing arrangements with the Federal National Mortgage Association and the Federal
Home Loan Mortgage Corporation (government sponsored entities or GSEs). |
|
|
|
|
Premiums are generated by the insurance that is in force during all or a portion of the
period. Hence, lower average insurance in force in one period compared to another is a
factor that will reduce premiums written and earned, although this effect may be
mitigated (or enhanced) by differences in the average premium rate between the two
periods as well as by premium that is ceded. Also, NIW and cancellations during a period
will generally have a greater effect on premiums written and earned in subsequent periods
than in the period in which these events occur. |
The investment portfolio is comprised almost entirely of highly rated, fixed income
securities. The
36
principal factors that influence investment income are the size of the portfolio and its
yield. As measured by amortized cost (which excludes changes in fair market value, such as from
changes in interest rates), the size of the investment portfolio, which is principally held by
MGIC, is mainly a function of cash generated from operations, including investment earnings, less
cash used for non-investment purposes, such as dividends paid to the Company.
Losses incurred are the expense that results from a payment delinquency on an insured loan. As
explained under Critical Accounting Policies below, this expense is recognized only when a loan
is delinquent. Losses incurred are generally affected by:
|
o |
|
The state of the economy, which affects the likelihood that loans will become
delinquent and whether loans that are delinquent cure their delinquency. The level of
delinquencies has historically followed a seasonal pattern, with a reduction in
delinquencies in the first part of the year, followed by an increase in the latter part
of the year. |
|
|
o |
|
The product mix of the in force book, with loans having higher risk
characteristics generally resulting in higher delinquencies and claims. |
|
|
o |
|
The average claim payment, which is affected by the size of loans insured
(higher average loan amounts tend to increase losses incurred), the percentage coverage
on insured loans (deeper average coverage tends to increase incurred losses), and
housing values, which affect the Companys ability to mitigate its losses through sales
of properties with delinquent mortgages. |
|
|
o |
|
The distribution of claims over the life of a book. Historically, the first two
years after a loan is originated are a period of relatively low claims, with claims
increasing substantially for several years subsequent and then declining, although
persistency and the condition of the economy can affect this pattern. |
|
|
Underwriting and other expenses |
The operating expenses of the Company generally vary primarily due to contract underwriting
volume, which in turn generally varies with the level of mortgage origination activity. Contract
underwriting generates fee income included in Other revenue.
|
|
Income from joint ventures |
The Companys results of operations are also affected by income from joint ventures. Joint
venture income principally consists of the aggregate results of the Companys investment in two
less than majority owned joint ventures, Credit-Based Asset Servicing and Securitization LLC
(C-BASS) and Sherman Financial Group LLC (Sherman).
C-BASS: C-BASS is primarily an investor in the credit risk of credit-sensitive single-family
residential mortgages. It finances these activities through borrowings included on its balance
sheet and by securitization activities generally conducted through off-balance sheet entities.
C-BASS generally retains the first-loss and other subordinate securities created in the
securitization. The loans owned by C-BASS and underlying C-BASSs mortgage securities investments
are serviced by Litton Loan Servicing LP, a subsidiary of C-BASS (Litton). Littons servicing
operations primarily support C-BASSs investment in credit risk, and investments made by funds
managed or co-managed by C-BASS, rather than generating
37
fees for servicing loans owned by third-parties.
C-BASSs consolidated results of operations are affected by:
|
|
|
Portfolio revenue, which in turn is primarily affected by net interest income, gain on
sale and liquidation and hedging gains and losses related to portfolio assets, net of
mark-to-market and whole loan reserve changes. |
|
o |
|
Net interest income |
|
|
|
|
Net interest income is principally a function of the size of C-BASSs portfolio of
whole loans and mortgages and other securities, and the spread between the interest
income generated by these assets and the interest expense of funding them. Interest
income from a particular security is recognized based on the expected yield for the
security. |
|
|
o |
|
Gain on sale and liquidation |
|
|
|
|
Gain on sale and liquidation results from sales of mortgage and other securities, and
liquidation of mortgage loans. Securities may be sold in the normal course of
business or because of the exercise of call rights by third parties. Mortgage loan
liquidations result from loan payoffs, from foreclosure or from sales of real estate
acquired through foreclosure. |
|
|
|
Servicing revenue |
|
|
|
|
Servicing revenue is a function of the unpaid principal balance of mortgage loans serviced
and servicing fees and charges. The unpaid principal balance of mortgage loans serviced by
Litton is affected by mortgages acquired by C-BASS because servicing on subprime and other
mortgages acquired is generally transferred to Litton. Litton also services or provides
special servicing on loans in mortgage securities owned by funds managed or co-managed by
C-BASS. Litton also may obtain servicing on loans in third party mortgage securities
acquired by C-BASS or when the loans become delinquent by a specified number of payments
(known as special servicing). |
|
|
|
|
Revenues from money management activities |
|
|
|
|
These revenues include management fees from C-BASS issued collateralized bond obligations
(CBOs), equity in earnings from C-BASS investments in investment funds managed or
co-managed by C-BASS and management fees and incentive income from investment funds managed
or co-managed by C-BASS. |
|
|
|
|
Transaction revenue, which in turn is affected by gain on securitization and hedging
gains and losses related to securitization |
|
o |
|
Gain on securitization |
|
|
|
|
Gain on securitization is a function of the face amount of the collateral in the
securitization and the margin realized in the securitization. This margin depends on
the difference between the proceeds realized in the securitization and the purchase
price paid by C-BASS for the collateral. The proceeds realized in a securitization
include the value of securities created in the securitization that are retained by
C-BASS. |
38
|
|
|
Hedging gains and losses, net of mark-to-market and whole loan reserve changes |
|
|
|
|
Hedging gains and losses primarily consist of changes in the value of derivative instruments
(including interest rate swaps, interest rate caps and futures) and short positions, as well
as realized gains and losses from the closing of hedging positions. C-BASS uses derivative
instruments and short sales in a strategy to reduce the impact of changes in interest rates
on the value of its mortgage loans and securities. Changes in value of derivative
instruments are subject to current recognition because C-BASS does not account for the
derivatives as hedges under SFAS No. 133. |
|
|
|
|
Mortgage and other securities are classified by C-BASS as trading securities and are carried
at fair value, as estimated by C-BASS. Changes in fair value between period ends (a
mark-to-market) are reflected in C-BASSs statement of operations as unrealized gains or
losses. Changes in fair value of mortgage and other securities may relate to changes in
credit spreads or to changes in the level of interest rates or the slope of the yield curve.
Mortgage loans are not marked-to-market and are carried at the lower of cost or fair value
on a portfolio basis, as estimated by C-BASS. |
|
|
|
|
During a period in which short-term interest rates decline, in general, C-BASSs hedging
positions will decline in value and the change in value, to the extent that the hedges
related to whole loans, will be reflected in C-BASSs earnings for the period as an
unrealized loss. The related increase, if any, in the value of mortgage loans will not be
reflected in earnings but, absent any countervailing factors, when mortgage loans owned
during the period are securitized, the proceeds realized in the securitization should
increase to reflect the increased value of the collateral. |
Sherman: Sherman is principally engaged in purchasing and collecting for its own account
delinquent consumer receivables, which are primarily unsecured, and in originating and servicing
subprime credit card receivables. The borrowings used to finance these activities are included in
Shermans balance sheet.
Shermans consolidated results of operations are affected by:
|
|
|
Revenues from delinquent receivable portfolios |
|
|
|
|
These revenues are the cash collections on such portfolios, and depend on the aggregate
amount of delinquent receivables owned by Sherman, the type of receivable and the length of
time that the receivable has been owned by Sherman. |
|
|
|
|
Amortization of delinquent receivable portfolios |
|
|
|
|
Amortization is the recovery of the cost to purchase the receivable portfolios.
Amortization expense is a function of estimated collections from the portfolios over their
estimated lives. If estimated collections cannot be reasonably predicted, cost is fully
recovered before any net revenue (the difference between revenues from a receivable
portfolio and that portfolios amortization) is recognized. |
|
|
|
|
Costs of collection, which include servicing fees paid to third parties to collect receivables. |
2005 Results
The Companys results of operations in 2005 were principally affected by:
39
Losses incurred decreased in 2005 compared to 2004, primarily due to a decrease in the
estimates regarding how many delinquencies will eventually result in a claim, when compared to
2004.
|
|
Premiums written and earned |
The Companys written and earned premiums in 2005 were lower than in 2004 due to a decline in
the average insurance in force.
Investment income was higher in 2005 than in 2004 due to an increase in the average investment
portfolio as measured by amortized cost, as well as a slight increase in the pre-tax yield.
|
|
Underwriting and other expenses |
Underwriting and other expenses decreased in 2005, compared to 2004, primarily as a result of
decreases in expenses related to contract underwriting activity.
|
|
Income from joint ventures |
Income from joint ventures increased in 2005, compared to 2004, due to higher income from each
of C-BASS and Sherman.
40
RESULTS OF CONSOLIDATED OPERATIONS
As discussed under Forward Looking Statements and Risk Factors in Item 1A, actual results
may differ materially from the results contemplated by forward looking statements. The Company is
not undertaking any obligation to update any forward looking statements it may make in the
following discussion or elsewhere in this document even though these statements may be affected by
events or circumstances occurring after the forward looking statements were made.
NIW
The amount of MGICs NIW (this term is defined under Premiums written and earned in the
OverviewBusiness and General Environment section) during the years ended December 31, 2005, 2004
and 2003 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
($ billions) |
|
|
|
|
|
NIW-Flow Channel |
|
$ |
40.1 |
|
|
$ |
47.1 |
|
|
$ |
71.1 |
|
NIW-Bulk Channel |
|
|
21.4 |
|
|
|
15.8 |
|
|
|
25.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total NIW |
|
$ |
61.5 |
|
|
$ |
62.9 |
|
|
$ |
96.8 |
|
|
|
|
|
|
|
|
|
|
|
Refinance volume as a % of primary
flow NIW |
|
|
28 |
% |
|
|
30 |
% |
|
|
47 |
% |
The decrease in NIW on a flow basis in 2005 was primarily the result of continued market
growth for piggyback loans that offer alternatives to mortgage insurance. For a discussion of NIW
written through
the bulk channel, see Bulk transactions below. The Company expects NIW in 2006 to be
slightly below the level in 2005.
The decrease in NIW on a flow basis in 2004, compared to 2003, was primarily related to a
decrease in the overall mortgage origination market.
41
Cancellations and insurance in force
NIW and cancellations of primary insurance in force during the years ended December 31, 2005,
2004 and 2003 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
($ billions) |
|
|
|
|
|
NIW |
|
$ |
61.5 |
|
|
$ |
62.9 |
|
|
$ |
96.8 |
|
Cancellations |
|
|
(68.6 |
) |
|
|
(75.4 |
) |
|
|
(104.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in primary insurance
in force |
|
$ |
(7.1 |
) |
|
$ |
(12.5 |
) |
|
$ |
(7.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
Direct primary insurance in force |
|
$ |
170.0 |
|
|
$ |
177.1 |
|
|
$ |
189.6 |
|
|
|
|
|
|
|
|
|
|
|
Cancellation activity has historically been affected by the level of mortgage interest rates
and the level of home price appreciation. Cancellations generally move inversely to the change in
the direction of interest rates, although they generally lag a change in direction. MGICs
persistency rate (percentage of insurance remaining in force from one year prior) was 61.3% at
December 31, 2005, 60.2% at December 31, 2004 and 47.1% at December 31, 2003. The Company expects
modest improvement in the persistency rate in 2006, although this expectation assumes the absence
of significant declines in the level of mortgage interest rates from their level in late February
2006.
42
Bulk transactions
The Companys writings of bulk insurance are in part sensitive to the volume of securitization
transactions involving non-conforming loans. The Companys writings of bulk insurance are also
sensitive to competition from other methods of providing credit enhancement in a securitization,
including an execution in which the subordinate tranches in the securitization rather than mortgage
insurance bear the first loss from mortgage defaults. Competition from such an execution in turn
depends on, among other factors, the yield at which investors are willing to purchase tranches of
the securitization that involve a higher degree of credit risk compared to the yield for tranches
involving the lowest credit risk (the difference in such yields is referred to as the spread) and
the amount of credit for losses that a rating agency will give to mortgage insurance. As the spread
narrows, competition from an execution in which the subordinate tranches bear the first loss
increases. The competitiveness of the mortgage insurance execution in the bulk channel may also be
impacted by changes in the Companys view of the risk of the business, which is affected by the
historical performance of previously insured pools and the Companys expectations for regional and
local real estate values. As a result of the sensitivities discussed above, bulk volume can vary
materially from period to period.
NIW for bulk transactions increased from $15.8 billion in 2004 to $21.4 billion in 2005 due
primarily to transactions with customers for which no insurance had been written in 2004, as well
as slightly wider spreads in the last few months of 2005. In 2004, NIW for bulk transactions
decreased from $25.7 billion in 2003, due primarily to narrower spreads and competition from other
mortgage insurers. As it has in past years, the Company priced the bulk business written in 2005 to
generate acceptable returns; there can be no assurance, however, that the assumptions underlying
the premium rates will achieve this objective.
Pool insurance
In addition to providing primary insurance coverage, the Company also insures pools of
mortgage loans. New pool risk written during the years ended December 31, 2005, 2004 and 2003 was
$358 million, $208 million and $862 million, respectively. The Companys direct pool risk in force
was $2.9 billion, $3.0 billion and $2.9 billion at December 31, 2005, 2004 and 2003, respectively.
These risk amounts represent pools of loans with contractual aggregate loss limits and those
without such limits. For pools of loans without such limits, risk is estimated based on the amount
that would credit enhance the loans in the pool to a AA level based on a rating agency model.
Under this model,at December 31, 2005, 2004 and 2003, for $5.0 billion, $4.9 billion and $4.9
billion, respectively, of risk without such limits, risk in force is calculated at $469 million,
$418 million and $353 million, respectively. New risk written, under this model, for the years
ended December 31, 2005 and 2004 was $51 million and $65 million, respectively.
Net premiums written and earned
Net premiums written and earned during 2005 decreased, compared to 2004, due to a decline in
the average insurance in force, which has continued to decline since the beginning of 2003. The
Company expects the average insurance in force during 2006 to be lower than in 2005. As a result,
the Company anticipates that net premiums written and earned in 2006 will decline compared to 2005.
Net premium written and earned decreased in 2004, compared to 2003, due to a decline in the
average insurance in force, as well as a decrease in new insurance written through the flow and
bulk channels.
43
Risk sharing arrangements
For the nine months ended September 30, 2005, approximately 47.8% of the Companys new
insurance written on a flow basis was subject to arrangements with reinsurance subsidiaries of
certain mortgage lenders or risk sharing arrangements with the GSEs compared to 50.6% for the year
ended December 31, 2004 and 52.3% for the year ended December 31, 2003. The percentage of new
insurance written during a period covered by such arrangements normally increases after the end of
the period because, among other reasons, the transfer of a loan in the secondary market can result
in a mortgage insured during a period becoming part of such an arrangement in a subsequent period.
Therefore, the percentage of new insurance written covered by such arrangements is not shown for
the current quarter. Premiums ceded in such arrangements are reported in the period in which they
are ceded regardless of when the mortgage was insured.
In 2005, to reduce exposure to certain geographical areas and categories of risk, including
Alt A loans (loans with reduced levels of borrower disclosure or verification of borrower
disclosure), the Company entered into two separate excess of loss reinsurance agreements under
which it ceded approximately $85.5 million of risk in force in the aggregate to two special purpose
reinsurance companies (the SPRs). The SPRs are not affiliated with the Company and were formed
solely to enter into the reinsurance arrangements. The SPRs obtained their capital from
institutional investors by issuance of various classes of notes the return on which is linked to
the performance of the reinsured portfolio. The SPRs invested the proceeds of the notes in high
quality short-term investments. Income earned on those investments and reinsurance premiums paid by
the Company are applied to pay interest on the notes as well as expenses of the SPRs. The
investments will be liquidated to pay reinsured loss amounts to the Company. Proceeds not required
to pay reinsured losses will be applied to pay principal on the notes. Premiums ceded under these
agreements have not been material and are included in ceded premiums.
Investment income
Investment income for 2005 increased due to an increase in the amortized cost of average
invested assets to $5.4 billion for 2005 from $5.2 billion for 2004, as well as slight increase in
the average investment yield. The portfolios average pre-tax investment yield was 4.28% at
December 31, 2005 and 4.25% at December 31, 2004. The portfolios average after-tax investment
yield was 3.86% at December 31, 2005 and 3.76% at December 31, 2004. The Companys net realized
gains in 2005 and 2004 resulted primarily from the sale of fixed maturities. Under guidance from
the staff of the FASB that was finalized in the fourth quarter of 2005, it could be more likely
that a decrease in the market value of certain investments in the Companys fixed income portfolio
will be required to be recognized as a realized loss in the statement of operations than under the
existing accounting standard.
Investment income for 2004 increased compared to 2003 due to an increase in the amortized cost
of average invested assets to $5.2 billion for 2004 from $4.7 billion for 2003. The Companys net
realized gains for 2003 resulted primarily from the sale of fixed maturities.
Other revenue
The decrease in other revenue in 2005, compared to 2004 is primarily the result of decreased
revenue from non-insurance operations, other than contract underwriting.
44
The decrease in other revenue in 2004, compared to 2003, is primarily the result of decreased
revenue from contract underwriting due to a lower level of mortgage origination activity during
2004 compared to 2003.
Losses
As discussed in Critical Accounting Policies, consistent with industry practices, loss
reserves for future claims are established only for loans that are currently delinquent. (The terms
delinquent and default are used interchangeably by the Company and are defined as an insured
loan with a mortgage payment that is 45 days or more past due.) Loss reserves are established by
managements estimating the number of loans in the Companys inventory of delinquent loans that
will not cure their delinquency (historically, a substantial majority of delinquent loans have
cured), which is referred to as the claim rate, and further estimating the amount that the Company
will pay in claims on the loans that do not cure, which is referred to as claim severity.
Estimation of losses that the Company will pay in the future is inherently judgmental. The
conditions that affect the claim rate and claim severity include the current and future state of
the domestic economy and the current and future strength of local housing markets.
In 2005, net losses incurred were $554 million, of which $680 million pertained to current
year loss development and ($126) million pertained to favorable prior years loss development. In
2004, net losses incurred were $701 million, of which $714 million pertained to current year loss
development and ($13) million pertained to favorable prior years loss development. See Note 6.
Loss reserves to the Companys consolidated financial statements.
The amount of losses incurred pertaining to current year loss development represents the
estimated amount to be ultimately paid on default notices received in the current year. Losses
incurred pertaining to the current year decreased in 2005, compared to 2004, primarily due to
decreases in the estimates regarding how many primary default notices will eventually result in a
claim. These decreases in estimates relate to an improvement in claim rates in all regions except
for the Midwest which had a modest increase, as well as a number of recent delinquencies included
in the year end default inventory that are reserved for at a reduced claim rate and are as a result
of Hurricanes Katrina, Rita and Wilma.
The amount of losses incurred pertaining to prior year loss development represents actual
claim payments that were higher or lower than what was estimated by the Company at the end of the
prior year as well as a re-estimation of amounts to be ultimately paid on defaults remaining in
inventory from the end of the prior year. This re-estimation is the result of managements review
of current trends in default inventory, such as defaults that have resulted in a claim, the amount
of the claim, the change in relative level of defaults by geography and the change in average loan
exposure. In 2005, the $126 million reduction in losses incurred pertaining to prior years was due
primarily to more favorable loss trends experienced during the year. In 2004, the $13 million
reduction in losses incurred pertaining to prior years was due primarily to more stable loss trends
experienced in that year.
The Company anticipates that losses incurred in 2006 will exceed their 2005 level.
In 2004, compared to 2003, losses incurred decreased primarily due to a decrease in the
delinquency inventory compared to the prior period increase. This decrease in delinquency inventory
was in part offset by increases in the estimates regarding how many delinquencies will eventually
result in a claim and how much will be paid on claims.
Information about the composition of the primary insurance default inventory at December 31,
2005, 2004 and 2003 appears in the table below.
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2004 |
|
2003 |
Total loans delinquent |
|
|
85,788 |
|
|
|
85,487 |
|
|
|
86,372 |
|
Percentage of loans delinquent (default rate) |
|
|
6.58 |
% |
|
|
6.05 |
% |
|
|
5.57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Flow loans delinquent |
|
|
47,051 |
|
|
|
44,925 |
|
|
|
45,259 |
|
Percentage of flow loans delinquent (default rate) |
|
|
4.52 |
% |
|
|
3.99 |
% |
|
|
3.76 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk loans delinquent |
|
|
38,737 |
|
|
|
40,562 |
|
|
|
41,113 |
|
Percentage of bulk loans delinquent (default rate) |
|
|
14.72 |
% |
|
|
14.06 |
% |
|
|
11.80 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
A-minus and subprime credit loans delinquent* |
|
|
36,485 |
|
|
|
35,824 |
|
|
|
34,525 |
|
Percentage of A-minus and subprime
credit loans delinquent (default rate) |
|
|
18.30 |
% |
|
|
16.49 |
% |
|
|
14.14 |
% |
|
|
|
* |
|
A portion of A-minus and subprime credit loans is included in flow loans delinquent and the
remainder is included in bulk loans delinquent. Most A-minus and subprime credit loans are written
through the bulk channel. A-minus loans have FICO credit scores of 575-619, as reported to MGIC at
the time a commitment to insure is issued, and subprime loans have FICO credit scores of less than
575. |
The average primary claim paid for 2005 was $26,361 compared to $24,438 in 2004 and $22,925 in
2003.
The pool notice inventory decreased from 25,500 at December 31, 2004 to 23,772 at December 31,
2005; the pool notice inventory was 28,135 at December 31, 2003.
The Company estimates that the default inventory at December 31, 2005 includes 5,300 defaults
related to Hurricanes Katrina, Rita and Wilma. For additional information on the potential effect
of these hurricanes, see Deterioration in the domestic economy or changes in the mix of business
may result in more homeowners defaulting and the Companys losses increasing under Risk Factors
in Item 1A.
46
Information about net losses paid in 2005, 2004 and 2003 appears in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
Net paid claims ($ millions) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
Flow |
|
$ |
281 |
|
|
$ |
273 |
|
|
$ |
194 |
|
Bulk |
|
|
249 |
|
|
|
227 |
|
|
|
160 |
|
Other |
|
|
82 |
|
|
|
77 |
|
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
612 |
|
|
$ |
577 |
|
|
$ |
434 |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005, 77% of the Companys primary insurance in force was written
subsequent to December 31, 2002. On the Companys flow business, the highest claim frequency years
have typically been the third and fourth year after the year of loan origination. However, the
pattern of claims frequency can be affected by many factors, including low persistency (which can
have the effect of accelerating the period in the life of a book during which the highest claim
frequency occurs) and deteriorating economic conditions (which can result in increasing claims
following a period of declining claims). On the Companys bulk business, the period of highest
claims frequency has generally occurred earlier than in the historical pattern on the Companys
flow business.
Underwriting and other expenses
The decrease in underwriting and other expenses in 2005, compared to 2004, as well as the
decrease in 2004, compared to 2003, is primarily attributable to decreases in expenses related to
contract underwriting activity. The Company anticipates that expenses in 2006 will increase
compared to 2005, due to an increase in expenses related to Myers Internet, Inc. acquired in
January 2006 (see Note 16. Subsequent Events to the Companys consolidated financial statements),
international operations, and expensing of unvested stock options granted in 2002. (Beginning in
2003, the Company has expensed the fair value of stock options granted on or after January 1,
2003.)
Consolidated ratios
The table below presents the Companys consolidated loss, expense and combined ratios for the
periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
December 31, |
Consolidated Insurance Operations: |
|
2005 |
|
2004 |
|
2003 |
Loss ratio |
|
|
44.7 |
% |
|
|
52.7 |
% |
|
|
56.1 |
% |
Expense ratio |
|
|
15.9 |
% |
|
|
14.6 |
% |
|
|
14.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
60.6 |
% |
|
|
67.3 |
% |
|
|
70.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
47
The loss ratio (expressed as a percentage) is the ratio of the sum of incurred losses and loss
adjustment expenses to net premiums earned. The expense ratio (expressed as a percentage) is the
ratio of underwriting expenses to net premiums written. The combined ratio is the sum of the loss
ratio and the expense ratio.
Income taxes
The effective tax rate was 27.0% in 2005, compared to 26.9% in 2004 and 25.4% in 2003. During
those periods, the effective tax rate was below the statutory rate of 35%, reflecting the benefits
recognized from tax-preferenced investments. Tax-preferenced investments of the Company include
tax-exempt municipal bonds, interests in mortgage related securities with flow through
characteristics and investments in real estate ventures which generate low income housing credits.
Changes in the effective tax rate principally result from a higher or lower percentage of total
income before tax being generated from tax-preferenced investments.
The higher effective tax rate in 2004, compared to 2003, was principally due to less benefits
being recognized from these investments.
Joint ventures
The Companys equity in the earnings from the C-BASS and Sherman joint ventures with Radian
Group Inc. (Radian) and certain other joint ventures and investments, accounted for in accordance
with the equity method of accounting, is shown separately, net of tax, on the Companys
consolidated statement of operations. The increase in income from joint ventures in 2005, compared
to 2004, as well as the increase in 2004, compared to 2003, is primarily the result of increased
equity earnings from each of Sherman and C-BASS.
48
C-BASS
Summary C-BASS balance sheets and income statements at the dates and for the periods indicated
appear below.
C-BASS Summary Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
($ millions) |
|
Assets: |
|
|
|
|
|
|
|
|
Whole loans |
|
$ |
4,638 |
|
|
$ |
1,753 |
|
Securities |
|
|
2,054 |
|
|
|
1,450 |
|
Servicing |
|
|
468 |
|
|
|
444 |
|
Other |
|
|
534 |
|
|
|
362 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
7,694 |
|
|
$ |
4,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
6,931 |
|
|
|
3,409 |
|
|
|
|
|
|
|
|
|
|
Debt* |
|
|
6,434 |
|
|
|
2,648 |
|
|
|
|
|
|
|
|
|
|
Owners Equity |
|
|
763 |
|
|
|
600 |
|
|
|
|
* |
|
Most of which is scheduled to mature within one year or less. |
Included in total assets and total liabilities at December 31, 2004 were approximately $457
million of assets and the same amount of liabilities from securitizations that did not qualify for
off-balance sheet treatment. The liabilities from these securitizations are not included in Debt in
the table above. There were no such assets and liabilities at December 31, 2005.
The increase in whole loans and securities from 2004 to 2005 and related debt used to finance
these assets principally resulted from acquisitions in the fourth quarter of 2005 and reflected
more favorable market pricing for the acquisition of these assets. Principally as a result of
securitizations during the first two months of 2006, C-BASSs whole loan inventory at February 28,
2006 was approximately $2.6 billion lower than at year-end 2005 and its securities inventory was
approximately $500 million lower. Debt used to finance these assets was also reduced.
49
C-BASS Summary Income Statement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
($ millions) |
|
Portfolio |
|
$ |
292.2 |
|
|
$ |
230.5 |
|
|
$ |
154.6 |
|
Servicing |
|
|
257.5 |
|
|
|
164.7 |
|
|
|
128.4 |
|
Money management |
|
|
35.8 |
|
|
|
19.9 |
|
|
|
24.5 |
|
Transaction |
|
|
39.4 |
|
|
|
64.0 |
|
|
|
49.3 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
624.9 |
|
|
|
479.1 |
|
|
|
356.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense |
|
|
384.3 |
|
|
|
271.0 |
|
|
|
212.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax |
|
$ |
240.6 |
|
|
$ |
208.1 |
|
|
$ |
143.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys share of pretax income |
|
$ |
110.9 |
|
|
$ |
97.9 |
|
|
$ |
66.1 |
|
|
|
|
|
|
|
|
|
|
|
See OverviewBusiness and General EnvironmentIncome from Joint VenturesC-BASS for a
description of the components of the revenue lines.
The increased contribution from C-BASS for 2005, compared to 2004, was primarily due to
increased servicing revenue, net interest income and portfolio mark-to-market and hedging gains.
The increased servicing revenue was due primarily to Littons higher average servicing portfolio.
Higher net interest income was the result of a higher average investment portfolio and higher
earnings on trust deposits for securities serviced by Litton. The portfolio mark-to-market resulted
from securities called by C-BASS and securities obtained by C-BASS through risk sharing
arrangements where C-BASS owned the securities at a discount. The realized gains from hedging
reflected hedging on whole loans securitized.
The increased contribution from C-BASS in 2004 compared to 2003 was primarily due to an
increase in gains on sales and liquidation to third parties of securities and mortgage loans,
higher net interest income, higher mark-to-market from calls by C-BASS of CBO securitizations and
lower hedging losses. Gains on sale and liquidation to third parties increased principally due to
calls of securities at par which had a book value below par. Higher net interest income was
principally the result of a higher average portfolio of mortgage loans. Higher mark-to-market and
lower hedging losses were reflective of changes in interest rates.
The Companys investment in C-BASS on an equity basis at December 31, 2005 was $362.6 million.
The Company received $33.5 million in distributions from C-BASS during 2005.
50
Sherman
Summary Sherman balance sheets and income statements at the dates and for the periods
indicated appear below.
Sherman Summary Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
($ millions) |
|
Total Assets |
|
$ |
979 |
|
|
$ |
484 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
743 |
|
|
|
245 |
|
|
|
|
|
|
|
|
|
|
Debt |
|
|
597 |
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
Members Equity |
|
|
236 |
|
|
|
239 |
|
In March 2005, Sherman acquired the holding company for Credit One Bank (Credit One),
formerly known as First National Bank of Marin, for a payment of cash and subordinated notes.
Credit One originates and services subprime credit cards. During 2005, the increases in total
assets, total liabilities and debt were primarily related to the acquisition of Credit One.
Sherman Summary Income Statement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
($ millions) |
|
Revenues from receivable portfolios |
|
$ |
855.5 |
|
|
$ |
801.8 |
|
|
$ |
603.3 |
|
Portfolio amortization |
|
|
292.8 |
|
|
|
343.4 |
|
|
|
343.9 |
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of amortization |
|
|
562.7 |
|
|
|
458.4 |
|
|
|
259.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card interest income and fees |
|
|
196.7 |
|
|
|
|
|
|
|
|
|
Other revenue |
|
|
71.1 |
|
|
|
59.5 |
|
|
|
34.2 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
830.5 |
|
|
|
517.9 |
|
|
|
293.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
542.9 |
|
|
|
317.3 |
|
|
|
222.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax |
|
$ |
287.6 |
|
|
$ |
200.6 |
|
|
$ |
70.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys share of pre-tax income |
|
$ |
110.3 |
|
|
$ |
83.3 |
|
|
$ |
29.4 |
|
|
|
|
|
|
|
|
|
|
|
The increased contribution from Sherman in 2005, compared to 2004, and in 2004 compared
to 2003, was primarily due to increased revenue, net of amortization, from delinquent receivable
portfolios owned
51
during the comparison periods attributable to continuing collections and lower
amortization and from higher collections due to growth in the amount of delinquent receivable
portfolios owned by Sherman in
sequential periods. The increase in revenue for 2005 was also due to credit card income and fees
generated by Credit One; the increase in expenses in 2005 was also related to Credit One.
The Company anticipates that Shermans income before tax in 2006 will be less than its income
before tax in 2005.
The Companys investment in Sherman on an equity basis at December 31, 2005 was $79.3 million.
The Company received $110.7 million of distributions from Sherman in 2005.
In June 2005, MGIC, Radian (MGIC and Radian are collectively referred to as the Corporate
Partners) and entities (the Management Entities) owned by the senior management (Senior
Management) of Sherman entered into a Securities Purchase Agreement and a Call Option Agreement.
Under the Securities Purchase Agreement, each of MGIC and Radian agreed to sell to one of the
Management Entities 6.92% of the 41.5% interest in Sherman owned by each (a total of 13.84% for
both MGIC and Radian) for approximately $15.7 million, which is $1.0 million in excess of the
approximate book value of the interest at April 30, 2005. Upon completion of the sale in August
2005, Senior Management of Sherman owned an interest in Sherman of 30.84% and each of MGIC and
Radian owned interests of 34.58%.
Under the Call Option Agreement, one of the Management Entities granted separate options (each
an Option) to each Corporate Partner to purchase a 6.92% interest in Sherman (a total of 13.84%
under both Options). Each Option is exercisable beginning in July 2006 at the option price provided
in the Call Option Agreement. If one Corporate Partner does not exercise its Option, the other
Corporate Partner may exercise that Option.
In connection with these transactions, the payout under Shermans annual incentive plan (which
is based on a percentage of Shermans pre-bonus results) was reduced effective May 1, 2005.
Other Matters
Under the Office of Federal Housing Enterprise Oversights (OFHEO) risk-based capital stress
test for the GSEs, claim payments made by a private mortgage insurer on GSE loans are reduced below
the amount provided by the mortgage insurance policy to reflect the risk that the insurer will fail
to pay. Claim payments from an insurer whose claims-paying ability rating is AAA are subject to a
3.5% reduction over the 10-year period of the stress test, while claim payments from a AA rated
insurer, such as MGIC, are subject to an 8.75% reduction. The effect of the differentiation among
insurers is to require the GSEs to have additional capital for coverage on loans provided by a
private mortgage insurer whose claims-paying rating is less than AAA. As a result, there is an
incentive for the GSEs to use private mortgage insurance provided by a AAA rated insurer.
52
Financial Condition
The Company had $300 million, 5.375% Senior Notes due in November 2015 and $200 million, 6%
Senior Notes due in March 2007 outstanding at December 31, 2005. At December 31, 2004 the Company
had $300 million, 7.5% Senior Notes due in October 2005 and $200 Million, 6% Senior Notes due in
March 2007. In October 2005 the Company issued, in a public offering, $300 million, 5.375% Senior
Notes due in 2015. Interest on the Notes is payable semiannually in arrears on May 1 and November 1
of each year, beginning on May 1, 2006. The Senior Notes were rated A-1 by Moodys, A by S&P
and A+ by Fitch. The Company utilized the proceeds from the sale of these Senior Notes, together
with available cash, to repay the $300 million, 7.5% Senior Notes that matured October 17, 2005. At
December 31, 2005 and 2004, the market value of the outstanding debt was $687.9 million and $661.3
million, respectively.
See Results of OperationsJoint ventures above for information about the financial condition
of C-BASS and Sherman.
As of December 31, 2005, 80% of the investment portfolio was invested in tax-preferenced
securities. In addition, at December 31, 2005, based on book value, more than 99% of the Companys
fixed income securities were invested in A rated and above, readily marketable securities,
concentrated in maturities of less than 15 years.
At December 31, 2005, the Companys derivative financial instruments in its investment
portfolio were immaterial. The Company places its investments in instruments that meet high credit
quality standards, as specified in the Companys investment policy guidelines; the policy also
limits the amount of credit exposure to any one issue, issuer and type of instrument. At December
31, 2005, the effective duration of the Companys fixed income investment portfolio was 4.9 years.
This means that for an instantaneous parallel shift in the yield curve of 100 basis points there
would be an approximate 4.9% change in the market value of the Companys fixed income portfolio.
Liquidity and Capital Resources
The Companys consolidated sources of funds consist primarily of premiums written and
investment income. Positive cash flows are invested pending future payments of claims and other
expenses. Management believes that future cash inflows from premiums will be sufficient to meet
future claim payments. Cash flow shortfalls, if any, could be funded through sales of short-term
investments and other investment portfolio securities subject to insurance regulatory requirements
regarding the payment of dividends to the extent funds were required by other than the seller.
Substantially all of the investment portfolio securities are held by the Companys insurance
subsidiaries.
The Company has a $300 million commercial paper program, which is rated A-1 by S&P and P-1
by Moodys. At December 31, 2005 and 2004, the Company had $187.8 and $139.5 million in commercial
paper outstanding with a weighted average interest rate of 4.39% and 2.36%, respectively.
In March of 2005, the Company obtained a $300 million, five year revolving credit facility,
expiring in 2010. The facility replaced the previous $285 million facility that was set to expire
in 2006. Under the terms of the credit facility, the Company must maintain shareholders equity of
at least $2.25 billion and MGIC must maintain a risk-to-capital ratio of not more than 22:1 and
maintain policyholders position (which includes MGICs statutory surplus and its contingency
reserve) of not less than the amount required by Wisconsin insurance regulation. At December 31,
2005, these requirements were met. The facility will
53
continue to be used as a liquidity back up facility for the outstanding commercial paper. The
remaining credit available under the facility after reduction for the amount necessary to support
the commercial paper was $112.2 million and $145.5 million at December 31, 2005 and 2004,
respectively.
In March 2005, an outstanding swap was amended to coincide with the new credit facility. Under
the terms of the swap contract, the Company pays a fixed rate of 5.07% and receives a variable
interest rate based on LIBOR. The swap has an expiration date coinciding with the maturity of the
credit facility and is designated as a cash flow hedge. The cash flow swap outstanding at December
31, 2005 and 2004 are evaluated quarterly with any ineffectiveness being recorded as an expense.
To date this evaluation has not resulted in any hedge ineffectiveness. Swaps are subject to credit
risk to the extent the counterparty would be unable to discharge its obligations under the swap
agreements.
Expense on the interest rate swaps in 2005, 2004 and 2003 of approximately $0.8 million, $3.3
million and $3.4 million, respectively, was included in interest expense. Gains or losses arising
from the amendment or termination of interest rate swaps are deferred and amortized to interest
expense over the life of the hedged items.
The commercial paper, back-up credit facility and the Senior Notes are obligations of the
Company and not of its subsidiaries. The Company is a holding company and the payment of dividends
from its insurance subsidiaries is restricted by insurance regulation. MGIC is the principal source
of dividend-paying capacity. At the end of February 2006, MGIC paid a quarterly dividend of $55
million, as well asan extraordinary dividend of $150 million. As a result of this extraordinary
dividend, MGIC cannot currently pay any dividends without regulatory approval until the end of
February 2007. For additional information about the financial condition, results of operations and
cash flows of the Company, on a parent company basis, and MGIC, on a consolidated basis, see Note
15. Condensed consolidating financial statements to the Companys consolidated financial
statements.
During 2005, the Company repurchased 8.7 million shares of Common Stock under publicly
announced programs at a cost of $533.8 million, a portion of which is subject to adjustment based
on the price of the Companys stock in the first part of 2006. At December 31, 2005, the Company
had authority covering the purchase of an additional 0.8 million shares under these programs. In
January 2006, the Companys Board of Directors authorized the repurchase of an additional 10
million shares. From mid-1997 through December 31, 2005, the Company has repurchased 35.5 million
shares under publicly announced programs at a cost of $2.0 billion. Funds for the shares
repurchased by the Company since mid-1997 have been provided through a combination of debt,
including the Senior Notes and the commercial paper, and internally generated funds.
The Companys principal exposure to loss is its obligation to pay claims under MGICs mortgage
guaranty insurance policies. At December 31, 2005, MGICs direct (before any reinsurance) primary
and pool risk in force (which is the unpaid principal balance of insured loans as reflected in the
Companys records multiplied by the coverage percentage, and taking account of any loss limit) was
approximately $52.3 billion. In addition, as part of its contract underwriting activities, the
Company is responsible for the quality of its underwriting decisions in accordance with the terms
of the contract underwriting agreements with customers. Through December 31, 2005, the cost of
remedies provided by the Company to customers for failing to meet the standards of the contracts
has not been material. However, the decreasing trend of home mortgage interest rates over the last
several years may have mitigated the effect of some of these costs since the general effect of
lower interest rates can be to increase the value of certain loans on which remedies are provided.
There can be no assurance that contract underwriting remedies will not be material in the future.
54
The Companys consolidated risk-to-capital ratio was 7.4:1 at December 31, 2005 compared to
7.9:1 at December 31, 2004. The decrease was due to an increase in capital and a decrease in risk
in force during 2005.
The risk-to-capital ratios set forth above have been computed on a statutory basis. However,
the methodology used by the rating agencies to assign claims-paying ability ratings permits less
leverage than under statutory requirements. As a result, the amount of capital required under
statutory regulations may be lower than the capital required for rating agency purposes. In
addition to capital adequacy, the rating agencies consider other factors in determining a mortgage
insurers claims-paying rating, including its historical and projected operating performance,
business outlook, competitive position, management and corporate strategy.
For
certain material risks of the Companys business, see
Item 1A. The discussion in Item 1A is an integral part of
Managements Discussion and Analysis.
Contractual Obligations
At December 31, 2005, the approximate future payments under the contractual obligations of the
Company of the type described in the table below are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
Contractual Obligations ($ millions): |
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
3-5 years |
|
|
5 years |
|
Long-term debt obligations |
|
$ |
680 |
|
|
$ |
29 |
|
|
$ |
238 |
|
|
$ |
32 |
|
|
$ |
381 |
|
Operating lease obligations |
|
|
13 |
|
|
|
5 |
|
|
|
7 |
|
|
|
1 |
|
|
|
|
|
Purchase obligations |
|
|
17 |
|
|
|
16 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
|
1,124 |
|
|
|
597 |
|
|
|
460 |
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,834 |
|
|
$ |
647 |
|
|
$ |
706 |
|
|
$ |
100 |
|
|
$ |
381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys long-term debt obligations consist of $300 million, 5.375% Senior
Notes due in 2015 and $200 million, 6% Senior Notes due in 2007, as discussed in Note 5. Short
and long-term debt to the Companys consolidated financial statements and under Liquidity and
Capital Resources above. The Companys operating lease obligations include operating leases on
certain office space, data processing equipment and autos, as discussed in Note 12. Leases to the
Companys consolidated financial statements. The Companys purchase obligations included
obligations to purchase computer software, home office furniture and equipment, and Myers Internet,
Inc., as discussed in Note 16. Subsequent Events to the Companys consolidated financial
statements.
The Companys Other long-term liabilities represent the loss reserves established to recognize
the liability for losses and loss adjustment expenses related to defaults on insured mortgage
loans. The establishment of loss reserves is subject to inherent uncertainty and requires
significant judgment by management. The future loss payment periods are estimated based on
historical experience.
55
Critical Accounting Policies
The Company believes that the accounting policies described below involved significant
judgments and estimates used in the preparation of its consolidated financial statements.
Loss reserves
Reserves are established for reported insurance losses and loss adjustment expenses based on
when notices of default on insured mortgage loans are received. A default is defined as an insured
loan with a mortgage payment that is 45 days or more past due. Reserves are also established for
estimated losses incurred on notices of default not yet reported. 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. The estimated claims rates and claims amounts represent what
management believes best reflect the estimate of what will actually be paid on the loans in
default. These estimates are based on managements review of trends in the default inventory, such
as defaults that have resulted in a claim, the amount of the claim, the change in the level of
defaults by geography and the change in average loan exposure. Amounts for salvage recoverable are
considered in the determination of the reserve estimates. The establishment of loss reserves is
subject to inherent uncertainty and requires significant judgment by management. Adjustments to
reserve estimates are reflected in the financial statements in the years in which the adjustments
are made. The liability for reinsurance assumed is based on information provided by the ceding
companies.
The incurred but not reported (IBNR) reserves referred to above result from defaults
occurring prior to the close of an accounting period, but which have not been reported to the
Company. Consistent with reserves for reported defaults, IBNR reserves are established using
estimated claims rates and claims amounts for the estimated number of defaults not reported. As of
December 31, 2005 and 2004, the Company has established IBNR reserves in the amount of $112 million
and $113 million, respectively.
Reserves also provide for the estimated costs of settling claims, including legal and other
expenses and general expenses of administering the claims settlement process.
56
Revenue recognition
When the policy term ends, the primary mortgage insurance written by the Company is renewable
at the insureds option through continued payment of the premium in accordance with the schedule
established at the inception of the policy term. The Company has no ability to reunderwrite or
reprice these policies after issuance. Premiums written under policies having single and annual
premium payments are initially deferred as unearned premium reserve and earned over the policy
term. Premiums written on policies covering more than one year are amortized over the policy life
in accordance with the expiration of risk which is the anticipated claim payment pattern based on
historical experience. Premiums written on annual policies are earned on a monthly pro rata basis.
Premiums written on monthly policies are earned as the monthly coverage is provided. When a policy
is cancelled, all premium that is non-refundable is immediately earned. Any refundable premium is
returned to the lender and will have no effect on earned premium. Policy cancellations also lower
the persistency rate which is a variable used in calculating the rate of amortization of deferred
policy acquisition costs discussed below.
Fee income of the non-insurance subsidiaries is earned and recognized as the services are
provided and the customer is obligated to pay.
Deferred insurance policy acquisition costs
Costs associated with the acquisition of mortgage insurance policies, consisting of employee
compensation and other policy issuance and underwriting expenses, are initially deferred and
reported as deferred insurance policy acquisition costs (DAC). DAC arising from each book of
business is charged against revenue in the same proportion that the underwriting profit for the
period of the charge bears to the total underwriting profit over the life of the policies. The
underwriting profit and the life of the policies are estimated and are reviewed quarterly and
updated when necessary to reflect actual experience and any changes to key variables such as
persistency or loss development. Interest is accrued on the unamortized balance of DAC.
57
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
At December 31, 2005, the Companys derivative financial instruments in its investment
portfolio were immaterial. The Company places its investments in instruments that meet high credit
quality standards, as specified in the Companys investment policy guidelines; the policy also
limits the amount of credit exposure to any one issue, issuer and type of instrument. At December
31, 2005, the effective duration of the Companys fixed income investment portfolio was 4.9 years.
This means that for an instantaneous parallel shift in the yield curve of 100 basis points there
would be an approximate 4.9% change in the market value of the Companys fixed income portfolio.
The Companys borrowings under its commercial paper program are subject to interest rates that
are variable. A discussion of the Companys interest rate swaps appears in the fourth and fifth
paragraphs of Item 7 of this Annual Report on Form 10-K under Liquidity and Capital Resources and
such discussion is incorporated by reference.
Item 8. Financial Statements and Supplementary Data.
The following consolidated financial statements of the Company are filed pursuant to this Item
8:
|
|
|
|
|
|
|
Page No. |
|
Consolidated statements of operations for each of the three years in the period ended
December 31, 2005 |
|
|
59 |
|
Consolidated balance sheets at December 31, 2005 and 2004 |
|
|
60 |
|
Consolidated statements of shareholders equity for each of the three years in the period ended
December 31, 2005 |
|
|
61 |
|
Consolidated statements of cash flows for each of the three years in the period ended
December 31, 2005 |
|
|
62 |
|
Notes to consolidated financial statements |
|
|
63-102 |
|
Report of independent registered public accounting firm |
|
|
103-104 |
|
58
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2005, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands of dollars, except per share data) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written: |
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
1,380,998 |
|
|
$ |
1,420,643 |
|
|
$ |
1,482,349 |
|
Assumed |
|
|
1,075 |
|
|
|
307 |
|
|
|
97 |
|
Ceded (note 7) |
|
|
(129,763 |
) |
|
|
(115,533 |
) |
|
|
(117,815 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written |
|
|
1,252,310 |
|
|
|
1,305,417 |
|
|
|
1,364,631 |
|
(Increase) decrease in unearned premiums |
|
|
(13,618 |
) |
|
|
24,011 |
|
|
|
1,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned (note 7) |
|
|
1,238,692 |
|
|
|
1,329,428 |
|
|
|
1,366,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of expenses (note 4) |
|
|
228,854 |
|
|
|
215,053 |
|
|
|
202,881 |
|
Realized investment gains, net (note 4) |
|
|
14,857 |
|
|
|
17,242 |
|
|
|
36,862 |
|
Other revenue |
|
|
44,127 |
|
|
|
50,970 |
|
|
|
79,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,526,530 |
|
|
|
1,612,693 |
|
|
|
1,685,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses incurred, net (notes 6 and 7) |
|
|
553,530 |
|
|
|
700,999 |
|
|
|
766,028 |
|
Underwriting and other expenses |
|
|
275,416 |
|
|
|
278,786 |
|
|
|
302,473 |
|
Interest expense |
|
|
41,091 |
|
|
|
41,131 |
|
|
|
41,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses |
|
|
870,037 |
|
|
|
1,020,916 |
|
|
|
1,109,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax and joint ventures |
|
|
656,493 |
|
|
|
591,777 |
|
|
|
575,797 |
|
Provision for income tax (note 10) |
|
|
176,932 |
|
|
|
159,348 |
|
|
|
146,027 |
|
Income from joint ventures, net of tax |
|
|
147,312 |
|
|
|
120,757 |
|
|
|
64,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
626,873 |
|
|
$ |
553,186 |
|
|
$ |
493,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share (note 11): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
6.83 |
|
|
$ |
5.67 |
|
|
$ |
5.00 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
6.78 |
|
|
$ |
5.63 |
|
|
$ |
4.99 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
59
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands of dollars) |
|
ASSETS |
|
|
|
|
|
|
|
|
Investment portfolio (note 4): |
|
|
|
|
|
|
|
|
Securities, available-for-sale, at fair value: |
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
5,292,942 |
|
|
$ |
5,413,662 |
|
Equity securities |
|
|
2,488 |
|
|
|
5,326 |
|
Short-term investments |
|
|
190,640 |
|
|
|
163,639 |
|
|
|
|
|
|
|
|
|
Total investment portfolio (amortized cost,
2005-$5,366,235; 2004-$5,388,763) |
|
|
5,486,070 |
|
|
|
5,582,627 |
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
4,616 |
|
|
|
2,829 |
|
Accrued investment income |
|
|
66,369 |
|
|
|
67,255 |
|
Reinsurance recoverable on loss reserves (note 7) |
|
|
14,787 |
|
|
|
17,302 |
|
Prepaid reinsurance premiums (note 7) |
|
|
9,608 |
|
|
|
6,836 |
|
Premiums receivable |
|
|
91,547 |
|
|
|
95,396 |
|
Home office and equipment, net |
|
|
32,666 |
|
|
|
36,382 |
|
Deferred insurance policy acquisition costs |
|
|
18,416 |
|
|
|
27,714 |
|
Investments in joint ventures (note 8) |
|
|
481,778 |
|
|
|
414,309 |
|
Other assets |
|
|
151,712 |
|
|
|
130,041 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
6,357,569 |
|
|
$ |
6,380,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Loss reserves (notes 6 and 7) |
|
$ |
1,124,454 |
|
|
$ |
1,185,594 |
|
Unearned premiums (note 7) |
|
|
159,823 |
|
|
|
143,433 |
|
Short- and long-term debt (note 5) |
|
|
685,163 |
|
|
|
639,303 |
|
Income taxes payable |
|
|
62,006 |
|
|
|
109,741 |
|
Other liabilities |
|
|
161,068 |
|
|
|
158,981 |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,192,514 |
|
|
|
2,237,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingencies (note 13) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity (note 11): |
|
|
|
|
|
|
|
|
Common stock, $1 par value, shares authorized
300,000,000; shares issued 2005 - 122,549,285;
2004 - 122,324,295
outstanding 2005 - 88,046,430; 2004 - 96,260,864 |
|
|
122,549 |
|
|
|
122,324 |
|
Paid-in capital |
|
|
280,052 |
|
|
|
270,450 |
|
Treasury stock (shares at cost 2005 - 34,502,855
2004 - 26,063,431) |
|
|
(1,834,434 |
) |
|
|
(1,313,473 |
) |
Accumulated other comprehensive income, net of
tax (note 2) |
|
|
77,499 |
|
|
|
123,383 |
|
Retained earnings (note 11) |
|
|
5,519,389 |
|
|
|
4,940,955 |
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
4,165,055 |
|
|
|
4,143,639 |
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
6,357,569 |
|
|
$ |
6,380,691 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
60
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years Ended December 31, 2005, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other |
|
|
|
|
|
|
|
|
|
Common |
|
|
Paid-in |
|
|
Treasury |
|
|
comprehensive |
|
|
Retained |
|
|
Comprehensive |
|
|
|
stock |
|
|
capital |
|
|
stock |
|
|
income (note 2) |
|
|
earnings |
|
|
income |
|
|
|
(In thousands of dollars) |
|
Balance, December 31, 2002 |
|
$ |
121,419 |
|
|
$ |
233,330 |
|
|
$ |
(1,035,858 |
) |
|
$ |
147,908 |
|
|
$ |
3,928,393 |
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
493,879 |
|
|
$ |
493,879 |
|
|
Change in unrealized investment gains and losses, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,948 |
) |
|
|
|
|
|
|
(20,948 |
) |
Unrealized gain (loss) on derivatives, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,494 |
|
|
|
|
|
|
|
2,494 |
|
Minimum pension liability adjustment, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,018 |
|
|
|
|
|
|
|
13,018 |
|
Change in members equity |
|
|
|
|
|
|
609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,124 |
) |
|
|
|
|
Common stock shares issued |
|
|
168 |
|
|
|
7,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of outstanding common shares |
|
|
|
|
|
|
|
|
|
|
(94,133 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Reissuance of treasury stock |
|
|
|
|
|
|
(1,933 |
) |
|
|
14,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,821 |
) |
|
|
|
|
|
|
(1,821 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
486,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003 |
|
$ |
121,587 |
|
|
$ |
239,485 |
|
|
$ |
(1,115,969 |
) |
|
$ |
140,651 |
|
|
$ |
4,411,148 |
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
553,186 |
|
|
$ |
553,186 |
|
Change in unrealized investment gains and losses, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,228 |
) |
|
|
|
|
|
|
(22,228 |
) |
Unrealized gain (loss) on derivatives, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,849 |
|
|
|
|
|
|
|
3,849 |
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,032 |
) |
|
|
|
|
Common stock shares issued |
|
|
737 |
|
|
|
35,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of outstanding common shares |
|
|
|
|
|
|
|
|
|
|
(205,014 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Reissuance of treasury stock |
|
|
|
|
|
|
9,483 |
|
|
|
7,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation |
|
|
|
|
|
|
(14,136 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,111 |
|
|
|
(1,347 |
) |
|
|
1,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
535,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004 |
|
$ |
122,324 |
|
|
$ |
270,450 |
|
|
$ |
(1,313,473 |
) |
|
$ |
123,383 |
|
|
$ |
4,940,955 |
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
626,873 |
|
|
$ |
626,873 |
|
Change in unrealized investment gains and losses, net (note 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,119 |
) |
|
|
|
|
|
|
(48,119 |
) |
Unrealized gain (loss) on derivatives, net (note 5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,140 |
|
|
|
|
|
|
|
1,140 |
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,439 |
) |
|
|
|
|
Common stock shares issued |
|
|
225 |
|
|
|
11,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of outstanding common shares |
|
|
|
|
|
|
|
|
|
|
(533,844 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Reissuance of treasury stock |
|
|
|
|
|
|
(19,038 |
) |
|
|
12,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation (note 11) |
|
|
|
|
|
|
17,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,095 |
|
|
|
|
|
|
|
1,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
580,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005 |
|
$ |
122,549 |
|
|
$ |
280,052 |
|
|
$ |
(1,834,434 |
) |
|
$ |
77,499 |
|
|
$ |
5,519,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
61
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2005, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands of dollars) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
626,873 |
|
|
$ |
553,186 |
|
|
$ |
493,879 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred insurance policy
acquisition costs |
|
|
20,344 |
|
|
|
26,020 |
|
|
|
29,455 |
|
Captialized deferred insurance policy
acquisition costs |
|
|
(11,046 |
) |
|
|
(21,121 |
) |
|
|
(30,197 |
) |
Depreciation and other amortization |
|
|
18,977 |
|
|
|
21,631 |
|
|
|
21,224 |
|
Decrease (increase) in accrued investment income |
|
|
886 |
|
|
|
(7,667 |
) |
|
|
(1,156 |
) |
Decrease in reinsurance recoverable
on loss reserves |
|
|
2,515 |
|
|
|
772 |
|
|
|
2,971 |
|
(Increase) decrease in prepaid reinsurance premiums |
|
|
(2,772 |
) |
|
|
692 |
|
|
|
652 |
|
Decrease (increase) in premium receivable |
|
|
3,849 |
|
|
|
26,894 |
|
|
|
(24,539 |
) |
(Decrease) increase in loss reserves |
|
|
(61,140 |
) |
|
|
123,806 |
|
|
|
328,607 |
|
Increase (decrease) in unearned premiums |
|
|
16,390 |
|
|
|
(24,704 |
) |
|
|
(2,030 |
) |
Equity earnings in joint ventures |
|
|
(215,965 |
) |
|
|
(176,499 |
) |
|
|
(91,997 |
) |
Distributions from joint ventures |
|
|
144,161 |
|
|
|
82,300 |
|
|
|
27,450 |
|
Other |
|
|
(34,718 |
) |
|
|
(46,150 |
) |
|
|
(67,683 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
508,354 |
|
|
|
559,160 |
|
|
|
686,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of fixed maturities |
|
|
(1,592,615 |
) |
|
|
(1,782,395 |
) |
|
|
(3,822,762 |
) |
Purchase of equity securities |
|
|
(2,802 |
) |
|
|
|
|
|
|
|
|
Investments in joint ventures |
|
|
(12,928 |
) |
|
|
(12,137 |
) |
|
|
(7,769 |
) |
Sale of
investment in joint ventures |
|
|
15,652 |
|
|
|
|
|
|
|
|
|
Proceeds from sale of equity securities |
|
|
10,167 |
|
|
|
8,244 |
|
|
|
1,798 |
|
Proceeds from sale of fixed maturities |
|
|
1,355,912 |
|
|
|
1,102,533 |
|
|
|
3,017,411 |
|
Proceeds from maturity of fixed maturities |
|
|
283,256 |
|
|
|
286,946 |
|
|
|
351,731 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
56,642 |
|
|
|
(396,809 |
) |
|
|
(459,591 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid to shareholders |
|
|
(48,439 |
) |
|
|
(22,032 |
) |
|
|
(11,124 |
) |
Proceeds from issuance of long-term debt |
|
|
297,732 |
|
|
|
|
|
|
|
|
|
Repayment of long-term debt |
|
|
(300,000 |
) |
|
|
|
|
|
|
|
|
Net proceeds from (repayment of) short-term debt |
|
|
42,833 |
|
|
|
37,804 |
|
|
|
(78,873 |
) |
Proceeds from reissuance of treasury stock |
|
|
1,234 |
|
|
|
2,633 |
|
|
|
305 |
|
Payments for repurchase of common stock |
|
|
(533,844 |
) |
|
|
(205,014 |
) |
|
|
(94,134 |
) |
Common stock shares issued |
|
|
4,276 |
|
|
|
29,380 |
|
|
|
4,856 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(536,208 |
) |
|
|
(157,229 |
) |
|
|
(178,970 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
28,788 |
|
|
|
5,122 |
|
|
|
48,075 |
|
Cash and cash equivalents at beginning of year |
|
|
166,468 |
|
|
|
161,346 |
|
|
|
113,271 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
195,256 |
|
|
$ |
166,468 |
|
|
$ |
161,346 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
62
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
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 and to government sponsored entities (GSEs) to
protect against loss from defaults on low down payment residential mortgage loans. Through
certain other non-insurance subsidiaries, the Company also provides various services for the
mortgage finance industry, such as contract underwriting and portfolio analysis and
retention. |
|
|
|
At December 31, 2005, the Companys direct primary insurance in force (representing the
principal balance in the Companys records of all mortgage loans that it insures) and direct
primary risk in force (representing the insurance in force multiplied by the insurance
coverage percentage) was approximately $170.0 billion and $44.9 billion, respectively. In
addition to providing direct primary insurance coverage, the Company also insures pools of
mortgage loans. The Companys direct pool risk in force at December 31, 2005 was
approximately $2.9 billion. |
|
2. |
|
Basis of presentation and summary of significant accounting policies |
|
|
|
The accompanying financial statements have been prepared on the basis of accounting
principles generally accepted in the United States of America (GAAP). In accordance with
GAAP, management is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates. |
|
|
|
Principles of consolidation |
|
|
|
The consolidated financial statements include the accounts of MGIC Investment Corporation
and its majority-owned subsidiaries. All intercompany transactions have been eliminated.
The Companys 46.1% investment in Credit-Based Asset Servicing and Securitization LLC
(C-BASS) and 34.6% investment in Sherman Financial Group LLC (Sherman), which are joint
ventures with Radian Group Inc., are accounted for using the equity method of accounting and
recorded on the balance sheet as investments in joint ventures. The Company reviews its
investments in joint ventures for evidence of other than temporary impairments, such as an
inability of the investee to sustain an earnings capacity which would justify the carrying
amount of the investment. There were no other than temporary impairment charges for the
years ending December 31, 2005, 2004 and 2003. The Company has certain other joint ventures
and investments, accounted for in accordance with the equity method of accounting, of an
immaterial amount. The Companys equity in the earnings of these joint ventures is shown
separately, net of tax, on the statement of operations. (See note 8.) |
63
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 are reported at fair
value and the related unrealized gains or losses are, after considering the related tax
expense or benefit, recognized as a component of accumulated other comprehensive income in
shareholders equity. The Companys entire investment portfolio is classified as
available-for-sale. Realized investment gains and losses are reported in income based upon
specific identification of securities sold. (See note 4.)
The Company completes a quarterly review of invested assets for evidence of other than
temporary impairments. A cost basis adjustment and realized loss will be taken on invested
assets whose value decline is deemed to be other than temporary. Additionally, for
investments written down, income accruals will be stopped absent evidence that payment is
likely and an assessment of the collectability of previously accrued income made. Factors
used in determining investments whose value decline may be considered other than temporary
include the following:
|
|
|
Investments with a market value less than 80% of amortized costs |
|
|
|
|
For fixed income and preferred stocks, declines in credit ratings to below
investment grade from appropriate rating agencies |
|
|
|
|
Other securities which are under pressure due to market constraints or event risk |
|
|
|
|
Intention of management to hold fixed income securities to maturity |
There were no other than temporary asset impairment charges for the years ending December
31, 2005 and 2003. In 2004, a charge of $1.3 million was recognized as an other than
temporary asset impairment.
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 $42.8 million, $43.5
million and $42.6 million at December 31, 2005, 2004 and 2003, respectively. Depreciation
expense for the years ended December 31, 2005, 2004 and 2003 was $4.6 million, $5.0 million
and $4.9 million, respectively.
Deferred insurance policy acquisition costs
Costs associated with the acquisition of mortgage insurance business, consisting of employee
compensation and other policy issuance and underwriting expenses, are initially deferred and
reported as deferred insurance policy acquisition costs (DAC). Because Statement of
Financial Accounting Standards (SFAS) No. 60, Accounting and Reporting by Insurance
Enterprises, specifically excludes mortgage guaranty insurance from its guidance relating to
the amortization of DAC, amortization of these costs for each underwriting year book of
business is charged against revenue in proportion to estimated gross profits over the
estimated life of the policies using the guidance of SFAS No. 97, Accounting and Reporting
by Insurance Enterprises For Certain Long
64
Duration Contracts and Realized Gains and Losses From the Sale of Investments. This includes
accruing interest on the unamortized balance of DAC. The estimates for each underwriting
year are reviewed quarterly and updated when necessary to reflect actual experience and any
changes to key variables such as persistency or loss development.
During 2005, 2004 and 2003, the Company amortized $20.3 million, $26.0 million and $29.5
million, respectively, of deferred insurance policy acquisition costs.
Loss reserves
Reserves are established for reported insurance losses and loss adjustment expenses based on
when notices of default on insured mortgage loans are received. Reserves are also
established for estimated losses incurred on notices of default not yet reported by the
lender. Consistent with industry practices, the Company does not establish loss reserves
for future claims on insured loans which are not currently in default. Reserves are
established by management using estimated claims rates and claims amounts in estimating the
ultimate loss. Amounts for salvage recoverable are considered in the determination of the
reserve estimates. Adjustments to reserve estimates are reflected in the financial
statements in the years in which the adjustments are made. The liability for reinsurance
assumed is based on information provided by the ceding companies.
The incurred but not reported (IBNR) reserves result from defaults occurring prior to the
close of an accounting period, but which have not been reported to the Company. Consistent
with reserves for reported defaults, IBNR reserves are established using estimated claims
rates and claims amounts for the estimated number of defaults not reported.
Reserves also provide for the estimated costs of settling claims, including legal and other
expenses and general expenses of administering the claims settlement process. (See note 6.)
Revenue recognition
The insurance subsidiaries write policies which are guaranteed renewable contracts at the
insureds option on a single, annual or monthly premium basis. The insurance subsidiaries
have no ability to reunderwrite or reprice these contracts. Premiums written on a single
premium basis and an annual premium basis are initially deferred as unearned premium reserve
and earned over the policy term. Premiums written on policies covering more than one year
are amortized over the policy life in accordance with the expiration of risk which is the
anticipated claim payment pattern based on historical experience. Premiums written on
annual policies are earned on a monthly pro rata basis. Premiums written on monthly
policies are earned as coverage is provided. When a policy is cancelled, all premium that
is non-refundable is immediately earned. Any refundable premium is returned to the lender
and will have no effect on earned premium. Policy cancellations also lower the persistency
rate which is a variable used in calculating the rate of amortization of deferred policy
acquisition costs.
Fee income of the non-insurance subsidiaries is earned and recognized as the services are
provided and the customer is obligated to pay. Fee income consists primarily of contract
underwriting and related fee-based services provided to lenders and is included in Other
revenue on the statement of operations.
Income taxes
The Company and its subsidiaries file a consolidated federal income tax return. A formal
tax sharing
65
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 members 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
recognizes these retirement benefit costs over the period during which employees render the
service that qualifies them for benefits. The Companys 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. The cost to the Company was not significant
in 2005, 2004 and 2003. (See note 9.)
Stock-based compensation
The Company has certain stock-based compensation plans. (See note 11). Effective January 1,
2003, the Company adopted the fair value recognition provisions of SFAS No. 123, Accounting
for Stock-Based Compensation, prospectively to all employee awards granted or modified on or
after January 1, 2003. The adoption of SFAS No. 123 did not have a material effect on the
Companys results of operations or its financial position. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the award and is
recognized over the service period which generally corresponds to the vesting period.
Awards under the Companys plans generally vest over periods ranging from one to five years.
The cost related to stock-based employee compensation included in the determination of net
income for 2005, 2004 and 2003 is less than that which would have been recognized if the
fair value based method had been applied to all awards since the original effective date of
SFAS No. 123. The following table illustrates the effect on net income and earnings per
share if the fair value method had been applied to all outstanding and unvested awards in
each period.
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands of dollars, except per share data) |
|
Net income, as reported |
|
$ |
626,873 |
|
|
$ |
553,186 |
|
|
$ |
493,879 |
|
Add stock-based employee compensation
expense included in reported net income,
net of tax |
|
|
13,017 |
|
|
|
7,656 |
|
|
|
4,146 |
|
Deduct stock-based employee compensation
expense, determined under the fair value
method for all awards, net of tax |
|
|
(17,381 |
) |
|
|
(11,683 |
) |
|
|
(10,503 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
622,509 |
|
|
$ |
549,159 |
|
|
$ |
487,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic, as reported |
|
$ |
6.83 |
|
|
$ |
5.67 |
|
|
$ |
5.00 |
|
|
|
|
|
|
|
|
|
|
|
Basic, pro forma |
|
$ |
6.78 |
|
|
$ |
5.63 |
|
|
$ |
4.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted, as reported |
|
$ |
6.78 |
|
|
$ |
5.63 |
|
|
$ |
4.99 |
|
|
|
|
|
|
|
|
|
|
|
Diluted, pro forma |
|
$ |
6.73 |
|
|
$ |
5.59 |
|
|
$ |
4.92 |
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
Loss reserves and unearned premiums are reported before taking credit for amounts ceded
under reinsurance treaties. Ceded loss reserves are reflected as Reinsurance recoverable
on loss reserves. Ceded unearned premiums are reflected as Prepaid reinsurance premiums.
The Company remains contingently liable for all reinsurance ceded. (See note 7.)
Earnings per share
The Companys basic and diluted earnings per share (EPS) have been calculated in
accordance with SFAS No. 128, Earnings Per Share. The Companys 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 plus common stock equivalents which would include stock awards and 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, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(shares in thousands) |
|
Weighted-average shares
Basic |
|
|
91,787 |
|
|
|
97,549 |
|
|
|
98,776 |
|
Common stock equivalents |
|
|
656 |
|
|
|
696 |
|
|
|
246 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares
Diluted |
|
|
92,443 |
|
|
|
98,245 |
|
|
|
99,022 |
|
|
|
|
|
|
|
|
|
|
|
67
For the years ended December 31, 2005, 2004 and 2003, 1.3 million, 0.6 million and 1.4
million shares, respectively, attributable to outstanding stock options were excluded from
the calculation of diluted earnings per share because the exercise prices of the stock
options were greater than or equal
to the average price of the common shares, and therefore their inclusion would have been
anti-dilutive. For the years ended December 31, 2005 and 2004,
0.4 million and 0.3 million shares, respectively, of performance stock awards have been excluded from the calculation of
diluted earnings per share because the number of shares ultimately issued is contingent on
performance measures established for a specific performance period.
Statement of cash flows
The Companys short-term investments consist entirely of money market funds and commercial
paper with maturities of less than 90 days. For purposes of the consolidated statement of
cash flows, the Company considers short-term investments to be cash equivalents. A
reconciliation follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands of dollars) |
|
Cash and cash equivalents per statement
of cash flows |
|
$ |
195,256 |
|
|
$ |
166,468 |
|
|
$ |
161,346 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
|
(190,640 |
) |
|
|
(120,646 |
) |
|
|
(137,734 |
) |
Commercial paper |
|
|
|
|
|
|
(42,993 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash per balance sheet |
|
$ |
4,616 |
|
|
$ |
2,829 |
|
|
$ |
23,612 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
The Companys total comprehensive income, as calculated per SFAS No. 130, Reporting
Comprehensive Income, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands of dollars) |
|
Net income |
|
$ |
626,873 |
|
|
$ |
553,186 |
|
|
$ |
493,879 |
|
Other comprehensive loss |
|
|
(45,884 |
) |
|
|
(17,268 |
) |
|
|
(7,257 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
580,989 |
|
|
$ |
535,918 |
|
|
$ |
486,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) (net of tax): |
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized net derivative gains and losses |
|
$ |
464 |
|
|
$ |
2,812 |
|
|
$ |
1,412 |
|
Amortization of deferred losses on derivatives |
|
|
676 |
|
|
|
1,037 |
|
|
|
1,082 |
|
Change in unrealized gains and losses on investments |
|
|
(48,119 |
) |
|
|
(22,228 |
) |
|
|
(20,948 |
) |
Minimum pension liability adjustment |
|
|
|
|
|
|
|
|
|
|
13,018 |
|
Other |
|
|
1,095 |
|
|
|
1,111 |
|
|
|
(1,821 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
$ |
(45,884 |
) |
|
$ |
(17,268 |
) |
|
$ |
(7,257 |
) |
|
|
|
|
|
|
|
|
|
|
68
At December 31, 2005, accumulated other comprehensive income of $77.5 million
included $77.9 million of net unrealized gains on investments, ($0.8) million relating
to derivative financial instruments and $0.4 million relating to the accumulated other
comprehensive income of the Companys joint venture investment. At December 31, 2004,
accumulated other comprehensive
income of $123.4 million included $126.0 million of net unrealized gains on investments,
($1.9) million relating to derivative financial instruments and ($0.7) million relating to
the accumulated other comprehensive loss of the Companys joint venture investment. (See
notes 4 and 5.)
Recent accounting pronouncements
In December 2004 the Financial Accounting Standards Board (FASB) issued SFAS No. 123R,
Share-Based Payment. This statement is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation. The fair value recognition provisions of SFAS No. 123 were
voluntarily adopted by the Company in 2003 prospectively to all employee awards granted or
modified on or after January 1, 2003 under SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure. The adoption did not have a material effect on
the Companys results of operations or its financial position. SFAS No. 123R requires that
the compensation cost relating to share-based payment transactions be measured based on the
fair value of the equity or liability instrument issued and be recognized in the financial
statements of the company. In April 2005 the effective date of this statement was delayed.
SFAS No. 123R is now effective for annual reporting periods that begin after June 15, 2005.
The statement will be adopted by the Company beginning January 1, 2006 under the modified
prospective method. The adoption will not have a material effect on the Companys results of
operations or its financial position.
In July 2005, the FASB published an Exposure Draft of a proposed interpretation, Accounting
for Uncertain Tax Positions. The Exposure Draft seeks to reduce the significant diversity
in practice associated with recognition and measurement in the accounting for income taxes.
The FASB has reopened deliberations to consider comments that were received regarding the
Exposure Draft. At this time, the FASB has decided that the final interpretation would
apply to all tax positions accounted for in accordance with SFAS No. 109, Accounting for
Income Taxes. When evaluating a tax position for recognition and measurement, an entity
should presume that a taxing authority will examine a tax position. The interpretation will
most probably adopt a benefit recognition model with a two-step approach, a
more-likely-than-not threshold for recognition and derecognition, and a best estimate
measurement attribute. It is expected to be finalized in the first or second quarter of
2006 with an effective date as of the start of the first annual period beginning after
December 15, 2006. The Company will continue to evaluate the impact, if any, this
interpretation would have on the Companys results of operations and financial position.
The proposed FASB Staff Position (FSP) EITF Issue 03-1-a, Implementation Guidance for the
Application of Paragraph 16 of EITF Issue No. 03-1 was issued as final in the fourth
quarter of 2005. The FSP was retitled FAS 115-1 The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments and superseded EITF 03-1 The Meaning
of Other-Than-Temporary Impairment and its Application to Certain Investments. Under the
guidance, it could be more likely that a decrease in the market value of certain investments
in the Companys fixed income portfolio will be required to be recognized as a realized loss
in the statement of operations than under previously existing accounting standards.
Reclassifications
Certain reclassifications have been made in the accompanying financial statements to 2004
and 2003
69
|
|
amounts to allow for consistent financial reporting. |
|
3. |
|
Related party transactions |
|
|
|
The Company provided certain services to C-BASS and Sherman in 2005, 2004 and 2003 in
exchange for fees. In addition, C-BASS provided certain services to the Company during
2005, 2004 and 2003 in exchange for fees. The net impact of these transactions was not
material to the Company. |
70
4. |
|
Investments |
|
|
|
The amortized cost, gross unrealized gains and losses and fair value of the investment
portfolio at December 31, 2005 and 2004 are shown below. Debt securities consist of fixed
maturities and short-term investments. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
December 31, 2005: |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
|
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies |
|
$ |
336,658 |
|
|
$ |
2,116 |
|
|
$ |
(2,414 |
) |
|
$ |
336,360 |
|
Obligations of U.S. states and
political subdivisions |
|
|
4,630,856 |
|
|
|
133,391 |
|
|
|
(12,456 |
) |
|
|
4,751,791 |
|
Corporate debt securities |
|
|
248,327 |
|
|
|
1,749 |
|
|
|
(517 |
) |
|
|
249,559 |
|
Mortgage-backed securities |
|
|
145,790 |
|
|
|
235 |
|
|
|
(2,253 |
) |
|
|
143,772 |
|
Debt securities issued
by foreign sovereign
governments |
|
|
2,100 |
|
|
|
|
|
|
|
|
|
|
|
2,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
5,363,731 |
|
|
|
137,491 |
|
|
|
(17,640 |
) |
|
|
5,483,582 |
|
Equity securities |
|
|
2,504 |
|
|
|
|
|
|
|
(16 |
) |
|
|
2,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio |
|
$ |
5,366,235 |
|
|
$ |
137,491 |
|
|
$ |
(17,656 |
) |
|
$ |
5,486,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
December 31, 2004: |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
|
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies |
|
$ |
611,465 |
|
|
$ |
9,131 |
|
|
$ |
(3,474 |
) |
|
$ |
617,122 |
|
Obligations of U.S. states and
political subdivisions |
|
|
4,351,789 |
|
|
|
190,210 |
|
|
|
(6,309 |
) |
|
|
4,535,690 |
|
Corporate debt securities |
|
|
237,667 |
|
|
|
3,813 |
|
|
|
(454 |
) |
|
|
241,026 |
|
Mortgage-backed securities |
|
|
166,437 |
|
|
|
808 |
|
|
|
(215 |
) |
|
|
167,030 |
|
Debt securities issued
by foreign sovereign
governments |
|
|
16,079 |
|
|
|
354 |
|
|
|
|
|
|
|
16,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
5,383,437 |
|
|
|
204,316 |
|
|
|
(10,452 |
) |
|
|
5,577,301 |
|
Equity securities |
|
|
5,326 |
|
|
|
|
|
|
|
|
|
|
|
5,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio |
|
$ |
5,388,763 |
|
|
$ |
204,316 |
|
|
$ |
(10,452 |
) |
|
$ |
5,582,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
The amortized cost and fair values of debt securities at December 31, 2005, by
contractual maturity, are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties. Because most mortgage-backed securities provide for
periodic payments throughout their lives, they are listed below in a separate category.
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
|
(In thousands of dollars) |
|
Due in one year or less |
|
$ |
503,092 |
|
|
$ |
503,243 |
|
Due after one year through
five years |
|
|
818,494 |
|
|
|
825,624 |
|
Due after five years through
ten years |
|
|
1,120,475 |
|
|
|
1,152,664 |
|
Due after ten years |
|
|
2,775,880 |
|
|
|
2,858,279 |
|
|
|
|
|
|
|
|
|
|
|
5,217,941 |
|
|
|
5,339,810 |
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
145,790 |
|
|
|
143,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at December 31, 2005 |
|
$ |
5,363,731 |
|
|
$ |
5,483,582 |
|
|
|
|
|
|
|
|
72
At December 31, 2005 and 2004, fixed maturity investments had gross unrealized losses
of $17.7 million and $10.5 million, respectively. For those securities in an unrealized
loss position, the length of time the securities were in such a position, as measured by
their month-end fair values, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
December 31, 2005 |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies |
|
$ |
234,175 |
|
|
$ |
869 |
|
|
$ |
56,991 |
|
|
$ |
1,545 |
|
|
$ |
291,166 |
|
|
$ |
2,414 |
|
Obligations of U.S. states
and political subdivisions |
|
|
977,560 |
|
|
|
8,360 |
|
|
|
167,319 |
|
|
|
4,096 |
|
|
|
1,144,879 |
|
|
|
12,456 |
|
Corporate debt securities |
|
|
2,506 |
|
|
|
31 |
|
|
|
16,612 |
|
|
|
486 |
|
|
|
19,118 |
|
|
|
517 |
|
Mortgage-backed securities |
|
|
125,228 |
|
|
|
1,774 |
|
|
|
12,788 |
|
|
|
479 |
|
|
|
138,016 |
|
|
|
2,253 |
|
Equity securities |
|
|
2,167 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
2,167 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio |
|
$ |
1,341,636 |
|
|
$ |
11,050 |
|
|
$ |
253,710 |
|
|
$ |
6,606 |
|
|
$ |
1,595,346 |
|
|
$ |
17,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
December 31, 2004 |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies |
|
$ |
312,707 |
|
|
$ |
2,941 |
|
|
$ |
14,020 |
|
|
$ |
533 |
|
|
$ |
326,727 |
|
|
$ |
3,474 |
|
Obligations of U.S. states
and political subdivisions |
|
|
517,216 |
|
|
|
5,825 |
|
|
|
33,623 |
|
|
|
484 |
|
|
|
550,839 |
|
|
|
6,309 |
|
Corporate debt securities |
|
|
26,610 |
|
|
|
454 |
|
|
|
|
|
|
|
|
|
|
|
26,610 |
|
|
|
454 |
|
Mortgage-backed securities |
|
|
22,081 |
|
|
|
83 |
|
|
|
18,693 |
|
|
|
132 |
|
|
|
40,774 |
|
|
|
215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio |
|
$ |
878,614 |
|
|
$ |
9,303 |
|
|
$ |
66,336 |
|
|
$ |
1,149 |
|
|
$ |
944,950 |
|
|
$ |
10,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses in all categories of the Companys investments were caused by
interest rate increases. Because the Company has the ability and intent to hold those
investments until a recovery of fair value, which may be maturity, the Company does not
consider those investments to be other-than-temporarily impaired at December 31, 2005.
73
Net investment income is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands of dollars) |
|
Fixed maturities |
|
$ |
218,313 |
|
|
$ |
210,555 |
|
|
$ |
198,968 |
|
Equity securities |
|
|
2,292 |
|
|
|
2,748 |
|
|
|
2,764 |
|
Short-term investments |
|
|
9,564 |
|
|
|
2,844 |
|
|
|
1,996 |
|
Other |
|
|
1,515 |
|
|
|
1,283 |
|
|
|
1,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
231,684 |
|
|
|
217,430 |
|
|
|
205,021 |
|
Investment expenses |
|
|
(2,830 |
) |
|
|
(2,377 |
) |
|
|
(2,140 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
228,854 |
|
|
$ |
215,053 |
|
|
$ |
202,881 |
|
|
|
|
|
|
|
|
|
|
|
The net realized investment gains (losses) and change in net unrealized appreciation
(depreciation) of investments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands of dollars) |
|
Net realized investment gains
(losses) on sale of investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
13,694 |
|
|
$ |
11,827 |
|
|
$ |
38,946 |
|
Equity securities |
|
|
4,544 |
|
|
|
5,290 |
|
|
|
(701 |
) |
Joint ventures |
|
|
(3,379 |
) |
|
|
125 |
|
|
|
(1,385 |
) |
Other |
|
|
(2 |
) |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
14,857 |
|
|
$ |
17,242 |
|
|
$ |
36,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized
appreciation (depreciation): |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
(74,013 |
) |
|
$ |
(34,197 |
) |
|
$ |
(32,227 |
) |
Equity securities |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(74,029 |
) |
|
$ |
(34,197 |
) |
|
$ |
(32,227 |
) |
|
|
|
|
|
|
|
|
|
|
74
The reclassification adjustment relating to the change in investment gains and losses
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands of dollars) |
|
Unrealized holding (losses) gains arising during
the period, net of tax |
|
$ |
(38,381 |
) |
|
$ |
(15,112 |
) |
|
$ |
7,178 |
|
Less: reclassification adjustment for net gains
included in net income, net of tax |
|
|
(9,738 |
) |
|
|
(7,116 |
) |
|
|
(28,126 |
) |
|
|
|
|
|
|
|
|
|
|
Change in unrealized investment gains
and losses, net of tax |
|
$ |
(48,119 |
) |
|
$ |
(22,228 |
) |
|
$ |
(20,948 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
The gross realized gains and the gross realized losses on sales of securities were
$28.4 million and $13.5 million, respectively, in 2005, $22.1 million and $4.9 million,
respectively, in 2004 and $54.6 million and $17.7 million, respectively, in 2003. |
|
|
|
The tax benefit related to the changes in net unrealized (depreciation) appreciation was
$25.9 million, $12.0 million and $11.3 million for 2005, 2004 and 2003, respectively. |
|
|
|
The Company had $22.8 million and $23.1 million of investments on deposit with various
states at December 31, 2005 and 2004, respectively, due to regulatory requirements of those
state insurance departments. |
|
5. |
|
Short- and long-term debt |
|
|
|
The Company has a $300 million commercial paper program, which is rated A-1 by Standard
and Poors (S&P) and P-1 by Moodys. At December 31, 2005 and 2004, the Company had
$187.8 million and $139.5 million in commercial paper outstanding with a weighted average
interest rate of 4.39% and 2.36%, respectively. |
|
|
|
In March of 2005, the Company obtained a $300 million, five year revolving credit facility,
expiring in 2010. The facility replaced the previous $285 million facility that was due to
expire in 2006. Under the terms of the credit facility, the Company must maintain
shareholders equity of at least $2.25 billion and Mortgage Guaranty Insurance Corporation
(MGIC) must maintain a risk-to-capital ratio of not more than 22:1 and maintain
policyholders position (which includes MGICs statutory surplus and its contingency
reserve) of not less than the amount required by Wisconsin insurance regulation. At
December 31, 2005, these requirements were met. The facility will continue to be used as a
liquidity back up facility for the outstanding commercial paper. The remaining credit
available under the facility after reduction for the amount necessary to support the
commercial paper was $112.2 million and $145.5 million at December 31, 2005 and 2004,
respectively. |
|
|
|
The Company had $300 million, 5.375% Senior Notes due in November 2015 and $200 million, 6%
Senior Notes due in March 2007 outstanding at December 31, 2005. At December 31, 2004 the
Company had $300 million, 7.5% Senior Notes due in October 2005 and $200 million, 6% Senior
Notes due in March 2007. In October 2005 the Company issued, in a public offering, $300
million, 5.375% Senior Notes due in 2015. Interest on the notes is payable semiannually in
arrears on May 1 and November 1 of each year, beginning on May 1, 2006. The Senior Notes
were rated A-1 by Moodys, A by S&P and A+ by Fitch. The Company has utilized the
proceeds from the sale of the notes, together with available cash, to repay the $300
million, 7.5% |
75
|
|
Senior Notes that came due October 17, 2005. At December 31, 2005 and 2004, the market value
of the outstanding debt was $687.9 million and $661.3 million, respectively. |
|
|
Interest payments on all long-term and short-term debt were $43.5 million, $42.1 million and
$41.8 million for the years ended December 31, 2005, 2004 and 2003, respectively. |
|
|
|
In March 2005, an outstanding swap was amended to coincide with the new credit facility.
Under the terms of the swap contract, the Company pays a fixed rate of 5.07% and receives a
variable interest rate based on LIBOR. The swap has an expiration date coinciding with the
maturity of the credit facility and is designated as a cash flow hedge. The cash flow swap
outstanding at December 31, 2005 and 2004 are evaluated quarterly with any ineffectiveness
being recorded as an expense. To date these evaluations have not resulted in any hedge
ineffectiveness. Swaps are subject to credit risk to the extent the counterparty would be
unable to discharge its obligations under the swap agreements. |
|
|
|
Expense on the interest rate swaps for the years ended December 31, 2005, 2004 and 2003 of
approximately $0.8 million, $3.3 million and $3.4 million, respectively, was included in
interest expense. Gains or losses arising from the amendment or termination of interest
rate swaps are deferred and amortized to interest expense over the life of the hedged items. |
|
6. |
|
Loss reserves |
|
|
|
As described in Note 2, the Company establishes reserves to recognize the estimated
liability for losses and loss adjustment expenses related to defaults on insured mortgage
loans. The establishment of loss reserves is subject to inherent uncertainty and requires
significant judgment by management. The following table provides a reconciliation of
beginning and ending loss reserves for each of the past three years: |
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands of dollars) |
|
Reserve at beginning of year |
|
$ |
1,185,594 |
|
|
$ |
1,061,788 |
|
|
$ |
733,181 |
|
Less reinsurance recoverable |
|
|
17,302 |
|
|
|
18,074 |
|
|
|
21,045 |
|
|
|
|
|
|
|
|
|
|
|
Net reserve at beginning of year |
|
|
1,168,292 |
|
|
|
1,043,714 |
|
|
|
712,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses incurred: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE incurred in respect
of default notices received in: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
679,697 |
|
|
|
714,450 |
|
|
|
652,231 |
|
Prior years (1) |
|
|
(126,167 |
) |
|
|
(13,451 |
) |
|
|
113,797 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
553,530 |
|
|
|
700,999 |
|
|
|
766,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses paid: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE paid in respect
of default notices received in: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
29,804 |
|
|
|
35,668 |
|
|
|
34,505 |
|
Prior years |
|
|
582,351 |
|
|
|
540,753 |
|
|
|
399,945 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
612,155 |
|
|
|
576,421 |
|
|
|
434,450 |
|
|
|
|
|
|
|
|
|
|
|
Net reserve at end of year |
|
|
1,109,667 |
|
|
|
1,168,292 |
|
|
|
1,043,714 |
|
Plus reinsurance recoverables |
|
|
14,787 |
|
|
|
17,302 |
|
|
|
18,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve at end of year |
|
$ |
1,124,454 |
|
|
$ |
1,185,594 |
|
|
$ |
1,061,788 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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 actual claim payments that were higher or lower
than what was estimated by the Company at the end of the prior year, as well as a
re-estimation of amounts to be ultimately paid on defaults remaining in inventory from the
end of the prior year. This re-estimation is the result of managements review of current
trends in default inventory, such as defaults that have resulted in a claim, the amount of
the claim, the change in the relative level of defaults by geography and the change in
average loan exposure. |
|
|
|
Current year losses incurred decreased in 2005 compared to 2004 primarily due to decreases
in the estimates regarding how many primary default notices will eventually result in a
claim, when compared to the prior period. The primary insurance notice inventory increased
from 85,487 at December 31, 2004 to 85,788 at December 31, 2005 and pool insurance notice
inventory decreased from 25,500 at December 31, 2004 to 23,772 at December 31, 2005. The
average primary claim paid for 2005 was $26,361 compared to $24,438 in 2004. |
|
|
|
The development of the reserves in 2005, 2004 and 2003 is reflected in the prior year line.
In 2005, the $126.2 million reduction in losses incurred related to prior years was due
primarily to more |
77
favorable loss trends experienced during the year. In 2004, the $13.5
million reduction in losses incurred related to prior years was due primarily to more stable
loss trends experienced during that year.
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.
78
Information about the composition of the primary insurance default inventory at December 31,
2005 and 2004 appears in the table below.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
Total loans delinquent |
|
|
85,788 |
|
|
|
85,487 |
|
Percentage of loans delinquent (default rate) |
|
|
6.58 |
% |
|
|
6.05 |
% |
|
|
|
|
|
|
|
|
|
Flow loans delinquent |
|
|
47,051 |
|
|
|
44,925 |
|
Percentage of flow loans delinquent
(default rate) |
|
|
4.52 |
% |
|
|
3.99 |
% |
|
|
|
|
|
|
|
|
|
Bulk loans delinquent |
|
|
38,737 |
|
|
|
40,562 |
|
Percent of bulk loans delinquent
(default rate) |
|
|
14.72 |
% |
|
|
14.06 |
% |
|
|
|
|
|
|
|
|
|
A-minus and subprime credit loans
delinquent* |
|
|
36,485 |
|
|
|
35,824 |
|
Percentage of A-minus and subprime
credit loans delinquent (default rate) |
|
|
18.30 |
% |
|
|
16.49 |
% |
* A portion of A-minus and subprime credit loans is included in flow loans delinquent
and the remainder is included in bulk loans delinquent. Most A-minus and subprime credit
loans are written through the bulk channel. A-minus loans have FICO scores of 575-619, as
reported to MGIC at the time a commitment to insure is issued, and subprime loans have FICO
scores of less than 575.
7. |
|
Reinsurance |
|
|
|
The Company cedes a portion of its business to reinsurers and records assets for reinsurance
recoverable on loss reserves and prepaid reinsurance premiums. Business written between
1985 and 1993 is ceded under various reinsurance agreements with several reinsurers. The
Company also cedes primary business to reinsurance subsidiaries of certain mortgage lenders,
primarily under aggregate excess of loss agreements for each reinsurance period. The
majority of ceded premiums relates to these agreements. In 2005, the Company entered into
two separate excess of loss reinsurance agreements under which it ceded approximately $85.5
million of risk in force in the aggregate to two special purpose reinsurance companies.
Additionally, certain pool polices written by the Company have been reinsured with one
domestic reinsurer. The Company receives a ceding commission under certain reinsurance
agreements. |
|
|
|
The Company monitors the claims paying ability of its reinsurers and does not currently
anticipate any collection problems. Generally, reinsurance recoverables on primary loss
reserves and prepaid reinsurance premiums are backed by trust funds or letters of credit.
No reinsurer represents more than $10 million of the aggregate amount recoverable. |
|
|
|
The effect of these agreements on premiums earned and losses incurred is as follows: |
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands of dollars) |
|
Premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
1,364,598 |
|
|
$ |
1,445,321 |
|
|
$ |
1,484,249 |
|
Assumed |
|
|
1,064 |
|
|
|
333 |
|
|
|
227 |
|
Ceded |
|
|
(126,970 |
) |
|
|
(116,226 |
) |
|
|
(118,465 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
1,238,692 |
|
|
$ |
1,329,428 |
|
|
$ |
1,366,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses incurred: |
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
558,077 |
|
|
$ |
706,782 |
|
|
$ |
769,531 |
|
Assumed |
|
|
(100 |
) |
|
|
(358 |
) |
|
|
(163 |
) |
Ceded |
|
|
(4,447 |
) |
|
|
(5,425 |
) |
|
|
(3,340 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net losses incurred |
|
$ |
553,530 |
|
|
$ |
700,999 |
|
|
$ |
766,028 |
|
|
|
|
|
|
|
|
|
|
|
8. |
|
Investments in joint ventures |
|
|
|
C-BASS |
|
|
|
C-BASS is a mortgage investment and servicing firm specializing in credit-sensitive
single-family residential mortgage assets and residential mortgage-backed securities.
C-BASS principally invests in whole loans (including subprime loans) and mezzanine and
subordinated residential mortgage-backed securities backed by non-conforming residential
mortgage loans. C-BASSs principal sources of revenues during the last three years were net
interest income (including accretion on mortgage securities), servicing fees, money
management fees from C-BASS CBOs and investment funds sponsored by C-BASS, and gains on
securitization and liquidation of mortgage-related assets, offset by hedging losses.
C-BASSs results of operations are affected by the timing of its securitization
transactions. Virtually all of C-BASSs assets do not have readily ascertainable market
values and, as a result, their value for financial statement purposes is estimated by the
management of C-BASS based on, among other things, valuations provided by financing
counterparties. The ultimate value of these assets is the net present value of their future
cash flows, which depends on, among other things, the level of losses on the underlying
mortgages and prepayment activity by the mortgage borrowers. Market value adjustments could
impact C-BASSs results of operations and the Companys share of those results. The
Companys investment in C-BASS on an equity basis at December 31, 2005 was $362.6 million. |
80
C-BASS Summary Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
($ millions) |
|
Assets |
|
|
|
|
|
|
|
|
Whole loans |
|
$ |
4,638 |
|
|
$ |
1,753 |
|
Servicing |
|
|
468 |
|
|
|
444 |
|
Securities |
|
|
2,054 |
|
|
|
1,450 |
|
Other |
|
|
534 |
|
|
|
362 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
7,694 |
|
|
$ |
4,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
6,931 |
|
|
|
3,409 |
|
|
|
|
|
|
|
|
|
|
Debts |
|
|
6,434 |
|
|
|
2,648 |
|
|
|
|
|
|
|
|
|
|
Owners equity |
|
|
763 |
|
|
|
600 |
|
Included in total assets and total liabilities at December 31, 2004 were approximately
$457 million of assets and the same amount of liabilities from securitizations that did not
qualify for off-balance sheet treatment. The liabilities from these securitizations are not
included in Debt in the table above. There were no such assets and liabilities at December
31, 2005.
C-BASS Summary Income Statement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
($ millions) |
|
Portfolio |
|
$ |
292.2 |
|
|
$ |
230.5 |
|
|
$ |
154.6 |
|
Servicing |
|
|
257.5 |
|
|
|
164.7 |
|
|
|
128.4 |
|
Money Management |
|
|
35.8 |
|
|
|
19.9 |
|
|
|
24.5 |
|
Transaction |
|
|
39.4 |
|
|
|
64.0 |
|
|
|
49.3 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
624.9 |
|
|
|
479.1 |
|
|
|
356.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense |
|
|
384.3 |
|
|
|
271.0 |
|
|
|
212.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax |
|
$ |
240.6 |
|
|
$ |
208.1 |
|
|
$ |
143.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys share of pre-tax income |
|
$ |
110.9 |
|
|
$ |
97.9 |
|
|
$ |
66.1 |
|
|
|
|
|
|
|
|
|
|
|
Sherman
Sherman is principally engaged in the business of purchasing and collecting for its own
account delinquent consumer assets which are primarily unsecured. The borrowings used to
finance these activities are included in Shermans balance sheet. A substantial portion of
Shermans consolidated assets are investments in consumer receivable portfolios that do not
have readily
81
ascertainable market values. Shermans results of operations are sensitive to
estimates by Shermans management of ultimate collections on these portfolios.
In March 2005, Sherman acquired the holding company for Credit One Bank (Credit One),
formerly known as First National Bank of Marin, for a payment of cash and subordinated
notes. This acquisition materially increased Shermans consolidated assets as well as its
debt and financial leverage. Credit Ones operations during 2005 consisted of activities
related to originating subprime credit cards. During 2005, Shermans increases in total
assets, total liabilities and debt were primarily related to the acquisition of Credit One.
In June 2005, MGIC, Radian (MGIC and Radian are collectively referred to as the Corporate
Partners) and entities (the Management Entities) owned by the senior management (Senior
Management) of Sherman entered into a Securities Purchase Agreement and a Call Option
Agreement. Under the Securities Purchase Agreement, each of MGIC and Radian agreed to sell
to one of the Management Entities 6.92% of the 41.5% interest in Sherman owned by each (a
total of 13.84% for both MGIC and Radian) for approximately $15.7 million, which is $1.0
million in excess of the approximate book value of the interest at April 30, 2005. Upon
completion of the sale, Senior Management of Sherman owns an interest in Sherman of 30.84%
and each of MGIC and Radian own interests of 34.58%. The sale closed in early August 2005.
Under the Call Option Agreement, one of the Management Entities granted separate options
(each an Option) to each Corporate Partner to purchase a 6.92% interest in Sherman (a
total of 13.84% under both Options). Each Option is exercisable beginning in July 2006 at
the option price provided in the Call Option Agreement. If one Corporate Partner does not
exercise its Option, the other Corporate Partner may exercise that Option. The Securities
Purchase Agreement and Call Option Agreement were filed as exhibits to the Companys Current
Report on Form 8-K filed on June 30, 2005; the description above is qualified by the terms
of the actual agreements. In connection with these transactions, the payout under Shermans
annual incentive plan (which is based on a percentage of Shermans pre-bonus results) was
reduced effective May 1, 2005.
The Companys investment in Sherman on an equity basis at December 31, 2005 was $79.3
million.
Sherman Summary Balance Sheet:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
($ millions) |
|
Total assets |
|
$ |
979 |
|
|
$ |
484 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
743 |
|
|
|
245 |
|
|
|
|
|
|
|
|
|
|
Debt |
|
|
597 |
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
Members equity |
|
|
236 |
|
|
|
239 |
|
82
Sherman Summary Income Statement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
($ millions) |
|
Revenues from receivable portfolios |
|
$ |
855.5 |
|
|
$ |
801.8 |
|
|
$ |
603.3 |
|
Portfolio amortization |
|
|
292.8 |
|
|
|
343.4 |
|
|
|
343.9 |
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of amortization |
|
|
562.7 |
|
|
|
458.4 |
|
|
|
259.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card interest income and fees |
|
|
196.7 |
|
|
|
|
|
|
|
|
|
Other revenue |
|
|
71.1 |
|
|
|
59.5 |
|
|
|
34.2 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
830.5 |
|
|
|
517.9 |
|
|
|
293.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
542.9 |
|
|
|
317.3 |
|
|
|
222.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax |
|
$ |
287.6 |
|
|
$ |
200.6 |
|
|
$ |
70.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys share of pre-tax income |
|
$ |
110.3 |
|
|
$ |
83.3 |
|
|
$ |
29.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Because C-BASS and Sherman are accounted for using the equity method, they are not
consolidated with the Company and their assets and liabilities do not appear in the
Companys balance sheet. The investments in joint ventures item in the Companys balance
sheet reflects the amount of capital contributed by the Company to joint ventures plus the
Companys share of their comprehensive income (or minus its share of their comprehensive
loss) and minus capital distributed to the Company by the joint ventures. (See note 2.) |
|
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: |
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement |
|
|
|
Pension Benefits |
|
|
Benefits |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
|
Reconciliation of projected benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
156,707 |
|
|
$ |
141,202 |
|
|
$ |
63,586 |
|
|
$ |
61,685 |
|
Service cost |
|
|
8,838 |
|
|
|
9,137 |
|
|
|
3,414 |
|
|
|
3,459 |
|
Interest cost |
|
|
9,483 |
|
|
|
8,741 |
|
|
|
3,722 |
|
|
|
3,525 |
|
Plan participants contributions |
|
|
|
|
|
|
|
|
|
|
272 |
|
|
|
220 |
|
Plan amendment (1) |
|
|
404 |
|
|
|
927 |
|
|
|
|
|
|
|
(1,972 |
) |
Actuarial loss (gain) |
|
|
3,398 |
|
|
|
(1,312 |
) |
|
|
(859 |
) |
|
|
(2,376 |
) |
Benefits paid |
|
|
(2,241 |
) |
|
|
(1,988 |
) |
|
|
(1,267 |
) |
|
|
(955 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year |
|
$ |
176,589 |
|
|
$ |
156,707 |
|
|
$ |
68,868 |
|
|
$ |
63,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of fair value of plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning
of year |
|
$ |
180,104 |
|
|
$ |
139,074 |
|
|
$ |
29,692 |
|
|
$ |
22,940 |
|
Adjustment |
|
|
6 |
|
|
|
160 |
|
|
|
199 |
|
|
|
|
|
Actual return on plan assets |
|
|
13,282 |
|
|
|
19,358 |
|
|
|
1,880 |
|
|
|
2,751 |
|
Employer contributions |
|
|
8,127 |
|
|
|
23,500 |
|
|
|
3,812 |
|
|
|
4,736 |
|
Plan participants contributions |
|
|
|
|
|
|
|
|
|
|
272 |
|
|
|
220 |
|
Benefits paid |
|
|
(2,241 |
) |
|
|
(1,988 |
) |
|
|
(1,267 |
) |
|
|
(955 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
$ |
199,278 |
|
|
$ |
180,104 |
|
|
$ |
34,588 |
|
|
$ |
29,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet at end of year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation |
|
$ |
(152,100 |
) |
|
$ |
(132,002 |
) |
|
|
N/A |
|
|
|
N/A |
|
Effect of salary projection |
|
|
(24,489 |
) |
|
|
(24,705 |
) |
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation |
|
|
(176,589 |
) |
|
|
(156,707 |
) |
|
$ |
(68,868 |
) |
|
$ |
(63,586 |
) |
Fair value of plan assets |
|
|
199,278 |
|
|
|
180,104 |
|
|
|
34,588 |
|
|
|
29,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status |
|
|
22,689 |
|
|
|
23,397 |
|
|
|
(34,280 |
) |
|
|
(33,894 |
) |
Unrecognized net actuarial loss (gain) |
|
|
25,287 |
|
|
|
21,759 |
|
|
|
13,211 |
|
|
|
14,209 |
|
Unrecognized net transition obligation |
|
|
|
|
|
|
|
|
|
|
1,984 |
|
|
|
2,268 |
|
Unrecognized prior service cost |
|
|
5,087 |
|
|
|
5,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
53,063 |
|
|
$ |
50,579 |
|
|
$ |
(19,085 |
) |
|
$ |
(17,417 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The pension plan has been amended to provide additional benefits for certain participants
as listed in the plan
documents and for the increased benefit and salary limits on the projected benefit obligation.
The postretirement
medical plan has been amended for changes in coverage levels, deductibles and out-of-pocket
limits. |
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement |
|
|
|
Pension Benefits |
|
|
Benefits |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands of dollars) |
|
Net amount recognized in consolidated
balance sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid benefit cost |
|
$ |
53,063 |
|
|
$ |
50,579 |
|
|
|
N/A |
|
|
|
N/A |
|
Accrued benefit liability |
|
|
|
|
|
|
|
|
|
|
N/A |
|
|
|
N/A |
|
Intangible asset |
|
|
|
|
|
|
|
|
|
|
N/A |
|
|
|
N/A |
|
Accumulated other comprehensive income |
|
|
|
|
|
|
|
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
53,063 |
|
|
$ |
50,579 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Prepaid/(Accrued) benefit cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid/(Accrued) benefit cost at beginning
of year |
|
$ |
50,579 |
|
|
$ |
36,534 |
|
|
$ |
(17,417 |
) |
|
$ |
(15,860 |
) |
Net periodic benefit cost |
|
|
(5,644 |
) |
|
|
(9,455 |
) |
|
|
(5,479 |
) |
|
|
(6,293 |
) |
Contributions |
|
|
8,128 |
|
|
|
23,500 |
|
|
|
2,816 |
|
|
|
4,000 |
|
Benefits paid (net of participants
contributions) |
|
|
|
|
|
|
|
|
|
|
995 |
|
|
|
736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid benefit cost at end of year |
|
$ |
53,063 |
|
|
$ |
50,579 |
|
|
$ |
(19,085 |
) |
|
$ |
(17,417 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides the components of net periodic benefit cost for the
pension and other postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement |
|
|
|
Pension Benefits |
|
|
Benefits |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
8,838 |
|
|
$ |
9,137 |
|
|
$ |
7,963 |
|
|
$ |
3,414 |
|
|
$ |
3,459 |
|
|
$ |
3,135 |
|
Interest cost |
|
|
9,483 |
|
|
|
8,741 |
|
|
|
7,671 |
|
|
|
3,722 |
|
|
|
3,525 |
|
|
|
3,300 |
|
Expected return on plan assets |
|
|
(13,418 |
) |
|
|
(10,370 |
) |
|
|
(6,796 |
) |
|
|
(2,242 |
) |
|
|
(1,720 |
) |
|
|
(989 |
) |
Recognized net actuarial loss (gain) |
|
|
|
|
|
|
1,246 |
|
|
|
1,950 |
|
|
|
301 |
|
|
|
499 |
|
|
|
659 |
|
Amortization of transition obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
284 |
|
|
|
530 |
|
|
|
530 |
|
Amortization of prior service cost |
|
|
741 |
|
|
|
701 |
|
|
|
612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
5,644 |
|
|
$ |
9,455 |
|
|
$ |
11,400 |
|
|
$ |
5,479 |
|
|
$ |
6,293 |
|
|
$ |
6,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
The following benefit payments, which reflect future service, are expected to be paid
in the following fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement |
|
|
|
|
|
|
|
Benefits |
|
|
|
Pension |
|
|
Gross |
|
|
Medicare Part |
|
|
Net |
|
|
|
Benefits |
|
|
Benefits |
|
|
D Subsidy |
|
|
Benefits |
|
|
|
(in thousands of dollars) |
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2,954 |
|
|
|
1,316 |
|
|
|
89 |
|
|
|
1,227 |
|
2007 |
|
|
3,533 |
|
|
|
1,562 |
|
|
|
107 |
|
|
|
1,455 |
|
2008 |
|
|
4,194 |
|
|
|
1,807 |
|
|
|
130 |
|
|
|
1,677 |
|
2009 |
|
|
5,061 |
|
|
|
2,130 |
|
|
|
155 |
|
|
|
1,975 |
|
2010 |
|
|
6,168 |
|
|
|
2,483 |
|
|
|
188 |
|
|
|
2,295 |
|
Years 2011 2015 |
|
|
49,502 |
|
|
|
18,477 |
|
|
|
1,595 |
|
|
|
16,882 |
|
Employer pension and postretirement contributions for the fiscal year ending December
31, 2006 are expected to approximate $10.3 million and $4.6 million, respectively. The
ERISA minimum required pension contribution is zero.
Allocation of Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement |
|
|
|
Pension Benefits |
|
|
Benefits |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Actual |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
82 |
% |
|
|
82 |
% |
|
|
100 |
% |
|
|
100 |
% |
Debt securities |
|
|
15 |
% |
|
|
15 |
% |
|
|
|
|
|
|
|
|
Real estate |
|
|
3 |
% |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
82 |
% |
|
|
82 |
% |
|
|
100 |
% |
|
|
100 |
% |
Debt securities |
|
|
15 |
% |
|
|
15 |
% |
|
|
|
|
|
|
|
|
Real estate |
|
|
3 |
% |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
86
The Companys pension plan portfolio returns are expected to achieve the following objectives
over each market cycle and for at least 5 years:
|
|
Total return should exceed growth in CPI |
|
|
|
Achieve competitive investment results |
|
|
|
Provide consistent investment returns |
|
|
|
Exceed the actuarial return assumption of the retirement plan |
The primary focus in developing asset allocation ranges for the account is the assessment of
the accounts investment objectives and the level of risk that is acceptable to obtain those
objectives. To achieve these goals the minimum and maximum allocation ranges for fixed
securities and equity securities are:
|
|
|
|
|
|
|
|
|
|
|
Minimum |
|
|
Maximum |
|
Fixed |
|
|
0 |
% |
|
|
30 |
% |
Equity |
|
|
70 |
% |
|
|
100 |
% |
Cash equivalents |
|
|
0 |
% |
|
|
10 |
% |
Investment in international oriented funds is limited to a maximum of 15% of the equity
range.
The Companys postretirement plan portfolio returns are expected to achieve the following
objectives over each market cycle and for at least 5 years:
|
|
Total return should exceed growth in CPI |
|
|
|
Provide consistent investment returns |
The primary focus in developing asset allocation ranges for the account is the assessment of
the accounts investment objectives and the level of risk that is acceptable to obtain those
objectives. To achieve these goals the minimum and maximum allocation ranges for fixed
income securities and equity securities are:
|
|
|
|
|
|
|
|
|
|
|
Minimum |
|
|
Maximum |
|
Fixed |
|
|
0 |
% |
|
|
40 |
% |
Equity |
|
|
60 |
% |
|
|
100 |
% |
Cash equivalents |
|
|
0 |
% |
|
|
40 |
% |
Given the long term nature of this portfolio and the lack of any immediate need for cash
flow, it is anticipated that the equity investments will consist of growth stocks and will
typically be at the higher end of the allocation ranges above. Investment in international
oriented funds is limited to a maximum of 15% of the equity range.
87
The assumptions used in the measurement of the Companys pension and other postretirement
benefit obligations are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
|
|
|
|
Other Postretirement Benefits |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Weighted average assumptions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used to determine year-end benefit
obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.00 |
% |
|
|
6.25 |
% |
|
|
6.25 |
% |
|
|
6.00 |
% |
|
|
6.25 |
% |
|
|
6.25 |
% |
Rate of compensation increase |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used to determine net periodic
benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.25 |
% |
|
|
6.25 |
% |
|
|
6.75 |
% |
|
|
6.25 |
% |
|
|
6.25 |
% |
|
|
6.75 |
% |
Expected return on plan assets |
|
|
7.50 |
% |
|
|
7.50 |
% |
|
|
7.50 |
% |
|
|
7.50 |
% |
|
|
7.50 |
% |
|
|
7.50 |
% |
Rate of compensation increase |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
In selecting a discount rate, the Company performed a hypothetical cash flow bond
matching exercise, matching the Companys expected pension plan and postretirement medical
plan cash flows, respectively, against a selected portfolio of high quality corporate bonds.
The modeling was performed using a bond portfolio of noncallable bonds with at least $25
million outstanding. The average yield of these hypothetical bond portfolios was used as
the benchmark for determining the discount rate. In selecting the expected long-term rate
of return on assets, the Company considered the average rate of earnings expected on the
classes of funds invested or to be invested to provide for the benefits of these plans.
This included considering the trusts targeted asset allocation for the year and the
expected returns likely to be earned over the next 20 years.
Plan assets consist of fixed maturities, equity securities and real estate. The Company is
amortizing the unrecognized transition obligation for other postretirement benefits over 20
years.
For measurement purposes a 10.0% health care trend rate was used for 2005. In 2006, the
rate is assumed to be 9.5%, decreasing to 5.0% by 2015 and remaining at this level beyond.
A 1% change in the health care trend rate assumption would have the following effects on
other postretirement benefits:
|
|
|
|
|
|
|
|
|
|
|
1-Percentage |
|
|
1-Percentage |
|
|
|
Point Increase |
|
|
Point Decrease |
|
|
|
(In thousands of dollars) |
|
Effect on total service and interest cost
components |
|
$ |
1,672 |
|
|
$ |
(1,290 |
) |
Effect on postretirement benefit obligation |
|
|
14,323 |
|
|
|
(11,266 |
) |
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 participants eligible 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
88
next $2,000 contributed. The Company recognized profit sharing expense and
401(k) savings plan expense of $5.6 million, $5.7 million and $7.7 million in 2005, 2004 and
2003, respectively.
89
Net deferred tax assets and liabilities as of December 31, 2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands of dollars) |
|
Deferred tax assets |
|
$ |
157,571 |
|
|
$ |
150,876 |
|
Deferred tax liabilities |
|
|
(75,224 |
) |
|
|
(108,692 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
82,347 |
|
|
$ |
42,184 |
|
|
|
|
|
|
|
|
Management believes that all gross deferred tax assets at December 31, 2005 are fully
realizable and no valuation reserve was established.
The components of the net deferred tax asset as of December 31, 2005 and 2004 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands of dollars) |
|
Unearned premium reserves |
|
$ |
14,847 |
|
|
$ |
13,220 |
|
Deferred policy acquisition costs |
|
|
(6,446 |
) |
|
|
(9,700 |
) |
Loss reserves |
|
|
29,254 |
|
|
|
32,485 |
|
Unrealized appreciation in investments |
|
|
(41,731 |
) |
|
|
(66,438 |
) |
Statutory contingency loss reserves |
|
|
(16,116 |
) |
|
|
(20,851 |
) |
Mortgage investments |
|
|
32,899 |
|
|
|
54,605 |
|
Benefit plans |
|
|
(6,347 |
) |
|
|
(6,844 |
) |
Deferred compensation |
|
|
16,251 |
|
|
|
9,301 |
|
Investments in joint ventures |
|
|
58,723 |
|
|
|
35,748 |
|
Other, net |
|
|
1,013 |
|
|
|
658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
82,347 |
|
|
$ |
42,184 |
|
|
|
|
|
|
|
|
90
The following summarizes the components of the provision for income tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands of dollars) |
|
Federal: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
171,420 |
|
|
$ |
158,104 |
|
|
$ |
170,353 |
|
Deferred |
|
|
3,021 |
|
|
|
(762 |
) |
|
|
(28,277 |
) |
State |
|
|
2,491 |
|
|
|
2,006 |
|
|
|
3,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax |
|
$ |
176,932 |
|
|
$ |
159,348 |
|
|
$ |
146,027 |
|
|
|
|
|
|
|
|
|
|
|
The Company paid $264.5 million, $203.2 million and $182.1 million in federal income
tax in 2005, 2004 and 2003, respectively. At December 31, 2005, 2004 and 2003, the Company
owned $1,625.3 million, $1,468.5 million and $1,316.9 million, respectively, of tax and loss
bonds.
The reconciliation of the federal statutory income tax rate to the effective income tax rate
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Federal statutory income tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Tax exempt municipal bond interest |
|
|
(8.4 |
) |
|
|
(8.4 |
) |
|
|
(8.2 |
) |
Mortgage investments |
|
|
|
|
|
|
|
|
|
|
(1.9 |
) |
Other, net |
|
|
0.4 |
|
|
|
0.3 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate |
|
|
27.0 |
% |
|
|
26.9 |
% |
|
|
25.4 |
% |
|
|
|
|
|
|
|
|
|
|
The Internal Revenue Service (IRS) has been conducting an examination of the federal
income tax returns of the Company for 2000 and 2001. During 2005, the IRS expanded the
examination to include the 2002, 2003 and 2004 taxable years. In this examination, they have
summonsed documents which include communications with outside legal counsel engaged by the
Company. Management believes that these documents are protected by the attorney-client
privilege and has declined to waive that privilege, so it has not provided them to the IRS.
The documents relate to a portfolio of investments in the residual interests of Real Estate
Mortgage Investment Conduits (REMICs). This portfolio has been managed and maintained
during years prior to, during and subsequent to the examination period. The tax returns have
included the flow through of income and losses from these investments in the computation of
taxable income. The IRS has indicated that they do not believe that the Company has
established sufficient tax basis in the REMIC residual interests to deduct some portion of
the flow through losses from income. To date, they have not provided a detailed explanation
of their position or the calculation of the dollar amount of any potential adjustment. The
Company will contest any such proposal to increase taxable income and believes that income
taxes related to these years have been properly provided for in the financial statements.
11. |
|
Shareholders equity and dividend restrictions |
Dividends
The Companys insurance subsidiaries are subject to statutory regulations as to maintenance
of policyholders surplus and payment of dividends. The maximum amount of dividends that
the
91
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. As a result of extraordinary
dividends paid, MGIC cannot currently pay any dividends without regulatory approval. The
other insurance subsidiaries of the Company can pay $1.8 million of dividends to the Company
without such regulatory approval.
Certain of the Companys non-insurance subsidiaries also have requirements as to maintenance
of net worth. These restrictions could also affect the Companys ability to pay dividends.
In 2005, 2004 and 2003, the Company paid dividends of $48.4 million, $22.0 million and $11.1
million, respectively, or $0.525 per share in 2005, $0.225 per share in 2004 and $0.1125 per
share in 2003.
Accounting
Principles
The accounting principles used in determining statutory financial amounts differ from 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. Changes in
contingency loss reserves impact the statutory statement of operations.
Contingency loss reserves are not reflected as liabilities under GAAP and
changes in contingency loss reserves do not impact GAAP operations.
Under statutory accounting practices, insurance policy acquisition costs
are charged against operations in the year incurred. Under GAAP, these
costs are deferred and amortized as the related premiums are earned
commensurate with the expiration of risk.
Under statutory accounting practices, purchases of tax and loss bonds are
accounted for as investments. Under GAAP, purchases of tax and loss bonds
are recorded as payments of current income taxes.
Under statutory accounting practices, fixed maturity investments are
generally 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 fair value, with
the unrealized gain or loss recognized, net of tax, as an increase or
decrease to shareholders equity.
Under statutory accounting practices, certain assets, designated as
non-admitted assets, are charged directly against statutory surplus.
Such assets are reflected on the GAAP financial statements.
Under statutory accounting practices, the Companys share of the net
income or loss of its investments in joint ventures is credited directly
to statutory surplus.
92
Under GAAP, income from joint ventures is shown
separately, net of tax, on the statement of operations.
The
statutory net income, policyholders surplus, and the contingency reserve liability of
the insurance subsidiaries (excluding the non-insurance companies), as well as the dividends
paid by MGIC to the Company, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Net |
|
Policyholders |
|
Contingency |
|
Dividends paid by MGIC |
December 31, |
|
Income |
|
Surplus |
|
Reserve |
|
to the Company |
(In thousands of dollars) |
2005 |
|
$ |
316,908 |
|
|
$ |
1,678,566 |
|
|
$ |
4,662,652 |
|
|
$ |
552,200 |
|
2004 |
|
|
179,623 |
|
|
|
1,840,084 |
|
|
|
4,234,157 |
|
|
|
162,900 |
|
2003 |
|
|
286,473 |
|
|
|
1,699,295 |
|
|
|
3,800,265 |
|
|
|
232,023 |
|
Stock
incentive plans
The Company has 1991 and 2002 stock incentive plans. When the 2002 plan was adopted in
2002, no further awards could be made under the 1991 plan. The maximum number of shares
covered by awards under the 2002 plan is the total of
7.1 million shares plus the number of shares that must be purchased at a purchase price of not less than the fair market value of
the shares as a condition to the award of restricted stock under the 2002 plan. The maximum
number of shares of restricted stock that can be awarded under the
2002 plan is 5.9 million shares. Both plans provide for the award of stock options with maximum terms of 10 years
and for the grant of restricted stock or restricted stock units, and the 2002 plan also
provides for the grant of stock appreciation rights. The exercise price of options is the
closing price of the common stock on the New York Stock Exchange on the date of grant. The
vesting provisions of options and restricted stock are determined at the time of grant.
Directors may receive awards under the 2002 plan and were eligible for awards of restricted
stock under the 1991 plan.
A summary of option activity in the stock incentive plans during 2003, 2004 and 2005 is as
follows:
93
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
Shares |
|
|
|
Exercise |
|
|
Subject |
|
|
|
Price |
|
|
to Option |
|
Outstanding, December 31, 2002 |
|
$ |
49.42 |
|
|
|
3,587,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
43.70 |
|
|
|
606,000 |
|
Exercised |
|
|
30.15 |
|
|
|
(168,780 |
) |
Forfeited or expired |
|
|
55.08 |
|
|
|
(121,880 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2003 |
|
|
49.19 |
|
|
|
3,902,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
68.20 |
|
|
|
612,000 |
|
Exercised |
|
|
43.69 |
|
|
|
(787,678 |
) |
Forfeited or expired |
|
|
54.94 |
|
|
|
(191,800 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2004 |
|
|
53.39 |
|
|
|
3,535,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
42.92 |
|
|
|
(254,490 |
) |
Forfeited or expired |
|
|
62.56 |
|
|
|
(6,200 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2005 |
|
$ |
54.19 |
|
|
|
3,274,731 |
|
|
|
|
|
|
|
|
The exercise price of the options granted in 2003 and 2004 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.
Information about restricted stock or restricted stock units granted during 2003, 2004 and
2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2005 |
|
2004 |
|
2003 |
Shares or units granted |
|
|
495,919 |
|
|
|
274,869 |
|
|
|
298,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant date
fair market value |
|
$ |
64.21 |
|
|
$ |
68.08 |
|
|
$ |
43.44 |
|
For the year ended December 31, 2005, approximately 144 thousand shares of restricted
stock became vested and approximately 1 thousand shares of restricted stock were forfeited.
At December 31, 2005, 4,988,341 shares were available for future grant under the 2002 stock
incentive plan. Of the shares available for future grant, 4,915,510 are available for
restricted stock awards.
For purposes of determining the pro forma net income disclosure in Note 2, the fair value of
these options was estimated at grant date using the binomial option pricing model for the
2004 options and the Black-Scholes model for the 2003 and prior options with the following
weighted average assumptions for each year:
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants Issued in Year Ended December 31, |
|
|
2004 |
|
|
|
2003 |
Risk free interest rate |
|
|
3.27 |
% |
|
|
|
|
2.91 |
% |
|
|
Expected life |
|
|
5.50 |
years |
|
|
|
|
4.87 |
years |
|
|
Expected volatility |
|
|
30.20 |
% |
|
|
|
|
29.40 |
% |
|
|
Expected dividend yield |
|
|
0.25 |
% |
|
|
|
|
0.25 |
% |
|
|
Fair value of each option |
|
$ |
21.68 |
|
|
|
|
$ |
13.12 |
|
|
|
The following is a summary of stock options outstanding at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
|
|
|
|
Average |
|
Exercise |
|
|
|
|
|
Average |
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
Price Range |
|
Shares |
|
|
Life (years) |
|
|
Price |
|
|
Shares |
|
|
Price |
|
$33.81 - $47.31 |
|
|
1,559,031 |
|
|
|
4.4 |
|
|
$ |
43.36 |
|
|
|
911,061 |
|
|
$ |
42.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$53.70 - $68.63 |
|
|
1,715,700 |
|
|
|
6.3 |
|
|
$ |
64.03 |
|
|
|
893,250 |
|
|
$ |
62.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,274,731 |
|
|
|
5.4 |
|
|
$ |
54.19 |
|
|
|
1,804,311 |
|
|
$ |
52.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004 and 2003, option shares of 1,465,301 and 1,754,929 were
exercisable at an average exercise price of $49.47 and $45.88, respectively. The Company also granted
an immaterial amount of equity instruments other than options and restricted stock during
2003, 2004 and 2005.
Under terms of the Companys Shareholder Rights Agreement each outstanding share of the
Companys Common Stock is accompanied by one Right. The Distribution Date occurs ten days
after an announcement that a person has become the beneficial owner (as defined in the
Agreement) of the Designated Percentage of the Companys Common Stock (the date on which
such an acquisition occurs is the Shares Acquisition Date and a person who makes such an
acquisition is an Acquiring Person), or ten business days after a person announces or
begins a tender offer in which consummation of such offer would result in ownership by a
person of 15 percent or more of the Common Stock. The Designated Percentage is 15% or more,
except that for certain investment advisers and investment companies advised by such
advisers, the Designated Percentage is 20% or more if certain conditions are met. The Rights
are not exercisable until the Distribution Date. Each Right will initially entitle
shareholders to buy one-half of one share of the Companys Common Stock at a Purchase Price
of $225 per full share (equivalent to $112.50 for each one-half share), subject to
adjustment. If there is an Acquiring Person, then each Right (subject to certain
limitations) will entitle its holder to purchase, at the Rights then-current Purchase
Price, a number of shares of Common Stock of the Company (or if after the Shares Acquisition
Date, the Company is acquired in a business combination, common shares of the acquiror)
having a market value at the time equal to twice the Purchase Price. The Rights will expire
on July 22, 2009, subject to extension. The Rights are redeemable at a price of $0.001 per
Right at any time prior to the time a person becomes an Acquiring Person. Other than
certain amendments, the Board of Directors may amend the Rights in any respect without the
consent of the holders of the Rights.
95
The Company leases certain office space as well as data processing equipment and autos under
operating leases that expire during the next six years. Generally, all rental payments are
fixed.
Total rental expense under operating leases was $7.6 million, $8.0 million and $8.2 million
in 2005, 2004 and 2003, respectively.
At December 31, 2005, minimum future operating lease payments are as follows (in thousands
of dollars):
|
|
|
|
|
2006 |
|
$ |
5,169 |
|
2007 |
|
|
4,470 |
|
2008 |
|
|
2,428 |
|
2009 |
|
|
921 |
|
2010 and thereafter |
|
|
129 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
13,117 |
|
|
|
|
|
13. |
|
Litigation and contingencies |
The Company is involved in litigation in the ordinary course of business. In the opinion of
management, the ultimate resolution of this pending litigation will not have a material
adverse effect on the financial position or results of operations of the Company.
Consumers are bringing a growing number of lawsuits against home mortgage lenders and
settlement service providers. In recent years, seven mortgage insurers, including MGIC, have
been involved in litigation alleging violations of the anti-referral fee provisions of the
Real Estate Settlement Procedures Act, which is commonly known as RESPA, and the notice
provisions of the Fair Credit Reporting Act, which is commonly known as FCRA. MGICs
settlement of class action litigation against it under RESPA became final in October 2003.
MGIC settled the named plaintiffs claims in litigation against it under FCRA in late
December 2004 following denial of class certification in June 2004. There can be no
assurance that MGIC will not be subject to future litigation under RESPA or FCRA or that the
outcome of any such litigation would not have a material adverse effect on the Company. In
August 2005, the United States Court of Appeals for the Ninth Circuit decided a case under
FCRA to which the Company was not a party that may make it more likely that the Company will
be subject to future litigation regarding when notices to borrowers are required by FCRA.
In June 2005, in response to a letter from the New York Insurance Department (NYID), the
Company provided information regarding captive mortgage reinsurance arrangements and other
types of arrangements in which lenders receive compensation. In February 2006, in response
to an administrative subpoena from the Minnesota Department of Commerce (the MDC), which
regulates insurance, the Company provided the MDC with information about captive mortgage
reinsurance and certain other matters. In the spring of 2005, spokesmen for insurance
commissioners in Colorado and North Carolina were publicly reported as saying that those
commissioners are considering investigating or reviewing captive mortgage reinsurance
arrangements. Insurance departments or other officials in other states may also conduct such
investigations or reviews. The
anti-referral fee provisions of RESPA provide that the Department of Housing and Urban
Development (HUD) as well as the insurance commissioner or attorney general of any state
may
96
bring an action to enjoin violations of these provisions of RESPA. The insurance law
provisions of many states prohibit paying for the referral of insurance business and provide
various mechanisms to enforce this prohibition. While the Company believes its captive
reinsurance arrangements are in conformity with applicable laws and regulations, it is not
possible to predict the outcome of any such reviews or investigations nor is it possible to
predict their effect on the Company or the mortgage insurance industry.
Under its contract underwriting agreements, the Company may be required to provide certain
remedies to its customers if certain standards relating to the quality of the Companys
underwriting work are not met. The cost of remedies provided by the Company to customers
for failing to meet these standards has not been material to the Companys financial
position or results of operations for the years ended December 31, 2005, 2004 and 2003.
See note 10 for a description of federal income tax contingencies.
97
14. |
|
Unaudited quarterly financial data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
2005 |
|
First |
|
Second |
|
Third |
|
Fourth |
|
Year |
|
|
(In thousands of dollars, except per share data) |
Net premiums written |
|
$ |
312,239 |
|
|
$ |
309,220 |
|
|
$ |
314,178 |
|
|
$ |
316,673 |
|
|
$ |
1,252,310 |
|
Net premiums earned |
|
|
316,079 |
|
|
|
311,633 |
|
|
|
305,841 |
|
|
|
305,139 |
|
|
|
1,238,692 |
|
Investment income, net of expenses |
|
|
57,003 |
|
|
|
57,178 |
|
|
|
57,338 |
|
|
|
57,335 |
|
|
|
228,854 |
|
Losses incurred, net |
|
|
98,866 |
|
|
|
136,915 |
|
|
|
146,197 |
|
|
|
171,552 |
|
|
|
553,530 |
|
Underwriting and other expenses |
|
|
67,895 |
|
|
|
68,059 |
|
|
|
69,695 |
|
|
|
69,767 |
|
|
|
275,416 |
|
Net income |
|
|
182,013 |
|
|
|
174,357 |
|
|
|
142,382 |
|
|
|
128,121 |
|
|
|
626,873 |
|
Earnings per share (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
1.91 |
|
|
|
1.88 |
|
|
|
1.56 |
|
|
|
1.45 |
|
|
|
6.83 |
|
Diluted |
|
|
1.90 |
|
|
|
1.87 |
|
|
|
1.55 |
|
|
|
1.44 |
|
|
|
6.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
2004 |
|
First |
|
Second |
|
Third |
|
Fourth |
|
Year |
|
|
(In thousands of dollars, except per share data) |
Net premiums written |
|
$ |
329,062 |
|
|
$ |
319,126 |
|
|
$ |
320,803 |
|
|
$ |
336,426 |
|
|
$ |
1,305,417 |
|
Net premiums earned |
|
|
341,516 |
|
|
|
331,128 |
|
|
|
324,224 |
|
|
|
332,560 |
|
|
|
1,329,428 |
|
Investment income, net of expenses |
|
|
53,141 |
|
|
|
52,314 |
|
|
|
54,187 |
|
|
|
55,411 |
|
|
|
215,053 |
|
Losses incurred, net |
|
|
190,677 |
|
|
|
154,073 |
|
|
|
169,802 |
|
|
|
186,447 |
|
|
|
700,999 |
|
Underwriting and other expenses |
|
|
67,314 |
|
|
|
72,723 |
|
|
|
68,782 |
|
|
|
69,967 |
|
|
|
278,786 |
|
Net income |
|
|
130,073 |
|
|
|
154,524 |
|
|
|
134,069 |
|
|
|
134,520 |
|
|
|
553,186 |
|
Earnings per share (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
1.32 |
|
|
|
1.57 |
|
|
|
1.37 |
|
|
|
1.40 |
|
|
|
5.67 |
|
Diluted |
|
|
1.31 |
|
|
|
1.56 |
|
|
|
1.36 |
|
|
|
1.39 |
|
|
|
5.63 |
|
|
|
|
(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. |
15. |
|
Condensed consolidating financial statements |
The following condensed financial information sets forth, on a consolidating basis, the
balance sheet, statement of operations, and statement of cash flows information for MGIC
Investment Corporation (Parent Company), which represents the Companys investments in all
of its subsidiaries under the equity method, Mortgage Guaranty Insurance Corporation and
Subsidiaries (MGIC Consolidated), and all other subsidiaries of the Company (Other) on a
combined basis. The eliminations column represents entries eliminating investments in
subsidiaries, intercompany balances, and intercompany revenues and expenses.
98
Condensed Consolidating Balance Sheet
At December 31, 2005
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent |
|
|
MGIC |
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Consolidated |
|
|
Other |
|
|
Eliminations |
|
|
Total |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
2,779 |
|
|
$ |
5,219,521 |
|
|
$ |
263,770 |
|
|
$ |
|
|
|
$ |
5,486,070 |
|
Cash |
|
|
2 |
|
|
|
4,324 |
|
|
|
290 |
|
|
|
|
|
|
|
4,616 |
|
Reinsurance recoverable on loss reserves |
|
|
|
|
|
|
78,097 |
|
|
|
36 |
|
|
|
(63,346 |
) |
|
|
14,787 |
|
Prepaid reinsurance premiums |
|
|
|
|
|
|
17,521 |
|
|
|
3 |
|
|
|
(7,916 |
) |
|
|
9,608 |
|
Deferred insurance policy acquisition costs |
|
|
|
|
|
|
18,416 |
|
|
|
|
|
|
|
|
|
|
|
18,416 |
|
Investments in subsidiaries/joint ventures |
|
|
4,842,932 |
|
|
|
481,778 |
|
|
|
|
|
|
|
(4,842,932 |
) |
|
|
481,778 |
|
Other assets |
|
|
13,542 |
|
|
|
356,624 |
|
|
|
28,274 |
|
|
|
(56,146 |
) |
|
|
342,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,859,255 |
|
|
$ |
6,176,281 |
|
|
$ |
292,373 |
|
|
$ |
(4,970,340 |
) |
|
$ |
6,357,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss reserves |
|
$ |
|
|
|
$ |
1,124,454 |
|
|
$ |
63,346 |
|
|
$ |
(63,346 |
) |
|
$ |
1,124,454 |
|
Unearned premiums |
|
|
|
|
|
|
159,823 |
|
|
|
7,916 |
|
|
|
(7,916 |
) |
|
|
159,823 |
|
Short- and long-term debt |
|
|
685,124 |
|
|
|
9,364 |
|
|
|
|
|
|
|
(9,325 |
) |
|
|
685,163 |
|
Other liabilities |
|
|
9,076 |
|
|
|
232,109 |
|
|
|
13,435 |
|
|
|
(31,546 |
) |
|
|
223,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
694,200 |
|
|
|
1,525,750 |
|
|
|
84,697 |
|
|
|
(112,133 |
) |
|
|
2,192,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
4,165,055 |
|
|
|
4,650,531 |
|
|
|
207,676 |
|
|
|
(4,858,207 |
) |
|
|
4,165,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
4,859,255 |
|
|
$ |
6,176,281 |
|
|
$ |
292,373 |
|
|
$ |
(4,970,340 |
) |
|
$ |
6,357,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheet
At December 31, 2004
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent |
|
|
MGIC |
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Consolidated |
|
|
Other |
|
|
Eliminations |
|
|
Total |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
18,355 |
|
|
$ |
5,315,382 |
|
|
$ |
248,890 |
|
|
$ |
|
|
|
$ |
5,582,627 |
|
Cash |
|
|
|
|
|
|
2,505 |
|
|
|
324 |
|
|
|
|
|
|
|
2,829 |
|
Reinsurance recoverable on loss reserves |
|
|
|
|
|
|
84,916 |
|
|
|
67 |
|
|
|
(67,681 |
) |
|
|
17,302 |
|
Prepaid reinsurance premiums |
|
|
|
|
|
|
8,312 |
|
|
|
4 |
|
|
|
(1,480 |
) |
|
|
6,836 |
|
Deferred insurance policy acquisition costs |
|
|
|
|
|
|
27,714 |
|
|
|
|
|
|
|
|
|
|
|
27,714 |
|
Investments in subsidiaries/joint ventures |
|
|
4,767,631 |
|
|
|
414,309 |
|
|
|
|
|
|
|
(4,767,631 |
) |
|
|
414,309 |
|
Other assets |
|
|
11,381 |
|
|
|
353,202 |
|
|
|
22,488 |
|
|
|
(57,997 |
) |
|
|
329,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,797,367 |
|
|
$ |
6,206,340 |
|
|
$ |
271,773 |
|
|
$ |
(4,894,789 |
) |
|
$ |
6,380,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss reserves |
|
$ |
|
|
|
$ |
1,185,594 |
|
|
$ |
67,681 |
|
|
$ |
(67,681 |
) |
|
$ |
1,185,594 |
|
Unearned premiums |
|
|
|
|
|
|
143,433 |
|
|
|
1,480 |
|
|
|
(1,480 |
) |
|
|
143,433 |
|
Short- and long-term debt |
|
|
639,263 |
|
|
|
8,847 |
|
|
|
|
|
|
|
(8,807 |
) |
|
|
639,303 |
|
Other liabilities |
|
|
14,465 |
|
|
|
266,682 |
|
|
|
15,189 |
|
|
|
(27,614 |
) |
|
|
268,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
653,728 |
|
|
|
1,604,556 |
|
|
|
84,350 |
|
|
|
(105,582 |
) |
|
|
2,237,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
4,143,639 |
|
|
|
4,601,784 |
|
|
|
187,423 |
|
|
|
(4,789,207 |
) |
|
|
4,143,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
4,797,367 |
|
|
$ |
6,206,340 |
|
|
$ |
271,773 |
|
|
$ |
(4,894,789 |
) |
|
$ |
6,380,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
Condensed Consolidating Statement of Operations
Year ended December 31, 2005
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent |
|
|
MGIC |
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Consolidated |
|
|
Other |
|
|
Eliminations |
|
|
Total |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written |
|
$ |
|
|
|
$ |
1,177,862 |
|
|
$ |
74,702 |
|
|
$ |
(254 |
) |
|
$ |
1,252,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
|
|
|
|
|
1,170,681 |
|
|
|
68,265 |
|
|
|
(254 |
) |
|
|
1,238,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed
net income of subsidiaries |
|
|
100,261 |
|
|
|
|
|
|
|
|
|
|
|
(100,261 |
) |
|
|
|
|
Dividends received from subsidiaries |
|
|
552,200 |
|
|
|
|
|
|
|
|
|
|
|
(552,200 |
) |
|
|
|
|
Investment income, net of expenses |
|
|
2,465 |
|
|
|
216,780 |
|
|
|
10,033 |
|
|
|
(424 |
) |
|
|
228,854 |
|
Realized investment gains (losses), net |
|
|
|
|
|
|
15,017 |
|
|
|
(160 |
) |
|
|
|
|
|
|
14,857 |
|
Other revenue |
|
|
|
|
|
|
1,794 |
|
|
|
42,333 |
|
|
|
|
|
|
|
44,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
654,926 |
|
|
|
1,404,272 |
|
|
|
120,471 |
|
|
|
(653,139 |
) |
|
|
1,526,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses incurred, net |
|
|
|
|
|
|
523,535 |
|
|
|
29,995 |
|
|
|
|
|
|
|
553,530 |
|
Underwriting and other expenses |
|
|
278 |
|
|
|
191,061 |
|
|
|
84,376 |
|
|
|
(299 |
) |
|
|
275,416 |
|
Interest expense |
|
|
41,091 |
|
|
|
424 |
|
|
|
|
|
|
|
(424 |
) |
|
|
41,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses |
|
|
41,369 |
|
|
|
715,020 |
|
|
|
114,371 |
|
|
|
(723 |
) |
|
|
870,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax and joint ventures |
|
|
613,557 |
|
|
|
689,252 |
|
|
|
6,100 |
|
|
|
(652,416 |
) |
|
|
656,493 |
|
Provision (credit) for income tax |
|
|
(13,316 |
) |
|
|
190,718 |
|
|
|
(185 |
) |
|
|
(285 |
) |
|
|
176,932 |
|
Income from joint ventures, net of tax |
|
|
|
|
|
|
147,312 |
|
|
|
|
|
|
|
|
|
|
|
147,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
626,873 |
|
|
$ |
645,846 |
|
|
$ |
6,285 |
|
|
$ |
(652,131 |
) |
|
$ |
626,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Operations
Year ended December 31, 2004
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent |
|
|
MGIC |
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Consolidated |
|
|
Other |
|
|
Eliminations |
|
|
Total |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written |
|
$ |
|
|
|
$ |
1,232,791 |
|
|
$ |
72,978 |
|
|
$ |
(352 |
) |
|
$ |
1,305,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
|
|
|
|
|
1,256,141 |
|
|
|
73,639 |
|
|
|
(352 |
) |
|
|
1,329,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed
net income of subsidiaries |
|
|
416,385 |
|
|
|
|
|
|
|
|
|
|
|
(416,385 |
) |
|
|
|
|
Dividends received from subsidiaries |
|
|
162,900 |
|
|
|
|
|
|
|
|
|
|
|
(162,900 |
) |
|
|
|
|
Investment income, net of expenses |
|
|
1,240 |
|
|
|
205,650 |
|
|
|
8,667 |
|
|
|
(504 |
) |
|
|
215,053 |
|
Realized investment gains, net |
|
|
4 |
|
|
|
16,853 |
|
|
|
322 |
|
|
|
63 |
|
|
|
17,242 |
|
Other revenue |
|
|
|
|
|
|
4,984 |
|
|
|
45,986 |
|
|
|
|
|
|
|
50,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
580,529 |
|
|
|
1,483,628 |
|
|
|
128,614 |
|
|
|
(580,078 |
) |
|
|
1,612,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses incurred, net |
|
|
|
|
|
|
664,228 |
|
|
|
36,771 |
|
|
|
|
|
|
|
700,999 |
|
Underwriting and other expenses |
|
|
272 |
|
|
|
191,214 |
|
|
|
87,697 |
|
|
|
(397 |
) |
|
|
278,786 |
|
Interest expense |
|
|
41,124 |
|
|
|
509 |
|
|
|
|
|
|
|
(502 |
) |
|
|
41,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses |
|
|
41,396 |
|
|
|
855,951 |
|
|
|
124,468 |
|
|
|
(899 |
) |
|
|
1,020,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax and joint ventures |
|
|
539,133 |
|
|
|
627,677 |
|
|
|
4,146 |
|
|
|
(579,179 |
) |
|
|
591,777 |
|
Provision (credit) for income tax |
|
|
(14,053 |
) |
|
|
173,799 |
|
|
|
(1,065 |
) |
|
|
667 |
|
|
|
159,348 |
|
Income from joint ventures, net of tax |
|
|
|
|
|
|
120,757 |
|
|
|
|
|
|
|
|
|
|
|
120,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
553,186 |
|
|
$ |
574,635 |
|
|
$ |
5,211 |
|
|
$ |
(579,846 |
) |
|
$ |
553,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
Condensed Consolidating Statement of Operations
Year ended December 31, 2003
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent |
|
|
MGIC |
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Consolidated |
|
|
Other |
|
|
Eliminations |
|
|
Total |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written |
|
$ |
|
|
|
$ |
1,283,006 |
|
|
$ |
82,121 |
|
|
$ |
(496 |
) |
|
$ |
1,364,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
|
|
|
|
|
1,284,081 |
|
|
|
82,426 |
|
|
|
(496 |
) |
|
|
1,366,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed
net income of subsidiaries |
|
|
288,305 |
|
|
|
|
|
|
|
|
|
|
|
(288,305 |
) |
|
|
|
|
Dividends received from subsidiaries |
|
|
232,023 |
|
|
|
|
|
|
|
|
|
|
|
(232,023 |
) |
|
|
|
|
Investment income, net of expenses |
|
|
645 |
|
|
|
194,591 |
|
|
|
8,022 |
|
|
|
(377 |
) |
|
|
202,881 |
|
Realized investment gains, net |
|
|
|
|
|
|
34,939 |
|
|
|
1,811 |
|
|
|
112 |
|
|
|
36,862 |
|
Other revenue |
|
|
|
|
|
|
8,505 |
|
|
|
71,152 |
|
|
|
|
|
|
|
79,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
520,973 |
|
|
|
1,522,116 |
|
|
|
163,411 |
|
|
|
(521,089 |
) |
|
|
1,685,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses incurred, net |
|
|
|
|
|
|
706,337 |
|
|
|
59,691 |
|
|
|
|
|
|
|
766,028 |
|
Underwriting and other expenses |
|
|
228 |
|
|
|
196,898 |
|
|
|
105,888 |
|
|
|
(541 |
) |
|
|
302,473 |
|
Interest expense |
|
|
41,107 |
|
|
|
383 |
|
|
|
|
|
|
|
(377 |
) |
|
|
41,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses |
|
|
41,335 |
|
|
|
903,618 |
|
|
|
165,579 |
|
|
|
(918 |
) |
|
|
1,109,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax and joint ventures |
|
|
479,638 |
|
|
|
618,498 |
|
|
|
(2,168 |
) |
|
|
(520,171 |
) |
|
|
575,797 |
|
Provision (credit) for income tax |
|
|
(14,241 |
) |
|
|
162,731 |
|
|
|
(2,551 |
) |
|
|
88 |
|
|
|
146,027 |
|
Income from joint ventures, net of tax |
|
|
|
|
|
|
64,109 |
|
|
|
|
|
|
|
|
|
|
|
64,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
493,879 |
|
|
$ |
519,876 |
|
|
$ |
383 |
|
|
$ |
(520,259 |
) |
|
$ |
493,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2005
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent |
|
|
MGIC |
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Consolidated |
|
|
Other |
|
|
Eliminations |
|
|
Total |
|
Net cash from operating activities: |
|
$ |
536,734 |
(1) |
|
$ |
520,348 |
|
|
$ |
19,582 |
|
|
$ |
(568,310 |
) |
|
$ |
508,354 |
|
Net cash (used in) from investing activities: |
|
|
(15,889 |
) |
|
|
74,631 |
|
|
|
(18,210 |
) |
|
|
16,110 |
|
|
|
56,642 |
|
Net cash used in financing activities: |
|
|
(536,208 |
) |
|
|
(552,200 |
) |
|
|
|
|
|
|
552,200 |
|
|
|
(536,208 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in Cash |
|
$ |
(15,363 |
) |
|
$ |
42,779 |
|
|
$ |
1,372 |
|
|
$ |
|
|
|
$ |
28,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes dividends received from subsidiaries of $552,200. |
Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2004
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent |
|
|
MGIC |
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Consolidated |
|
|
Other |
|
|
Eliminations |
|
|
Total |
|
Net cash from operating activities: |
|
$ |
161,437 |
(1) |
|
$ |
543,228 |
|
|
$ |
32,594 |
|
|
$ |
(178,099 |
) |
|
$ |
559,160 |
|
Net cash used in investing activities: |
|
|
(6,860 |
) |
|
|
(379,806 |
) |
|
|
(25,342 |
) |
|
|
15,199 |
|
|
|
(396,809 |
) |
Net cash used in financing activities: |
|
|
(157,229 |
) |
|
|
(162,900 |
) |
|
|
|
|
|
|
162,900 |
|
|
|
(157,229 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in Cash |
|
$ |
(2,652 |
) |
|
$ |
522 |
|
|
$ |
7,252 |
|
|
$ |
|
|
|
$ |
5,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes dividends received from subsidiaries of $162,900. |
Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2003
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent |
|
|
MGIC |
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
Consolidated |
|
|
Other |
|
|
Eliminations |
|
|
Total |
|
Net cash from operating activities: |
|
$ |
216,201 |
(1) |
|
$ |
655,771 |
|
|
$ |
47,383 |
|
|
$ |
(232,719 |
) |
|
$ |
686,636 |
|
Net cash used in investing activities: |
|
|
(19,185 |
) |
|
|
(402,837 |
) |
|
|
(48,542 |
) |
|
|
10,973 |
|
|
|
(459,591 |
) |
Net cash used in financing activities: |
|
|
(178,970 |
) |
|
|
(221,746 |
) |
|
|
|
|
|
|
221,746 |
|
|
|
(178,970 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in Cash |
|
$ |
18,046 |
|
|
$ |
31,188 |
|
|
$ |
(1,159 |
) |
|
$ |
|
|
|
$ |
48,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes dividends received from subsidiaries of $232,023. |
16. |
|
Subsequent Events |
|
|
|
On January 10, 2006, MGIC acquired Myers Internet, Inc., a provider of web-based point of
sale solutions for mortgage originators and real estate agents. The Company does not believe
that the acquisition will have a material impact on future results of operations or financial
position of the Company. |
102
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of MGIC Investment Corporation:
We have completed integrated audits of MGIC Investment Corporation and Subsidiaries December 31,
2005 and 2004 consolidated financial statements and of its internal control over financial
reporting as of December 31, 2005 and 2004, and an audit of its December 31, 2003 consolidated
financial statements in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Our opinions on MGIC Investment Corporation and Subsidiaries December 31,
2005, 2004, and 2003 consolidated financial statements and on its internal control over financial
reporting as of December 31, 2005, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations, shareholders equity and cash flows present fairly, in all material
respects, the financial position of MGIC Investment Corporation and Subsidiaries at December 31,
2005 and 2004, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2005 in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the responsibility of the
Companys 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 the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
Internal control over financial reporting
Also, in our opinion, managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting, that the Company maintained effective internal control
over financial reporting as of December 31, 2005 based on criteria established in Internal Control
- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005, based on criteria established in
Internal Control Integrated Framework issued by the COSO. The Companys management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on managements assessment and on the effectiveness of the Companys
internal control over financial reporting based on our audit. We conducted our audit of internal
control over financial reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design and operating effectiveness of internal
103
control, and performing such other procedures as we consider necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
March 8, 2006
104
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Managements Conclusion Regarding the Effectiveness of Disclosure Controls
The Companys management, with the participation of the Companys principal executive officer
and principal financial officer, has evaluated the Companys disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended), as of the end of
the period covered by this Annual Report on Form 10-K. Based on such evaluation, the Companys
principal executive officer and principal financial officer concluded that such controls and
procedures were effective as of the end of such period.
Managements Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f)). The Companys
internal control over financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Because of its inherent
limitations, however, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies of procedures may deteriorate.
The Companys management, with the participation of the Companys principal executive officer
and principal financial officer, has evaluated the effectiveness of the Companys internal control
over financial reporting using the framework in Internal Control Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on such evaluation, the
Companys management concluded that the Companys internal control over financial reporting was
effective as of December 31, 2005.
PricewaterhouseCoopers LLP, an independent registered public accounting firm that audited the
Companys financial statements included in this Annual Report, has audited and issued an
attestation report on managements assessment of the Companys internal control over financial
reporting. Their report is included at the end of Item 8 of this Annual Report.
Changes in Internal Control during the Fourth Quarter
There was no change in the Companys internal control over financial reporting that occurred
during the fourth quarter of 2005 that materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting.
Item 9B. Other Information.
None.
105
PART III
Item 10. Directors and Executive Officers of the Registrant.
This information (other than on the executive officers) will be included in the Companys
Proxy Statement for the 2006 Annual Meeting of Shareholders, and is hereby incorporated by
reference. The information on the executive officers appears at the end of Part I of this Form
10-K.
The Company intends to disclose on its website any waivers and amendments to its Code of
Business Conduct that are required to be disclosed under Item 5.05 of Form 8-K.
Item 11. Executive Compensation.
This information will be included in the Companys Proxy Statement for the 2006 Annual Meeting
of Shareholders and, other than information covered by Instruction (9) to Item 402 (a) of
Regulation S-K of the Securities and Exchange Commission, is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
This information, other than information regarding equity compensation plans required by Item
201 (d) of Regulation S-K of the Securities and Exchange Commission which appears below, will be
included in the Companys Proxy Statement for the 2006 Annual Meeting of Shareholders, and is
hereby incorporated by reference.
The table below sets forth certain information, as of December 31, 2005, about options
outstanding under the Companys 1991 Stock Incentive Plan (the 1991 Plan) and its 2002 Stock
Incentive Plan (the 2002 Plan). Other than under these plans, no options, warrants or rights were
outstanding at that date under any compensation plan or individual compensation arrangement of the
Company. The Company has no compensation plan under which its equity securities may be issued that
has not been approved by shareholders. Share units issued under the Deferred Compensation Plan for
Non-Employee Directors, which have no voting power and can be settled only in cash, are not
considered to be equity securities for this purpose.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
(b) |
|
(c) |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
Number of Securities |
|
|
Number of Securities |
|
Exercise Price of |
|
Remaining Available |
|
|
to be Issued Upon |
|
Outstanding |
|
Under Equity |
|
|
Exercise of |
|
Options, |
|
Compensation Plans |
|
|
Outstanding Options, |
|
Warrants and |
|
(Excluding Securities |
|
|
Warrants and Rights |
|
Rights |
|
Reflected in Column (a)) |
Plan Category
Equity compensation plans approved by security holders |
|
|
3,274,731 |
|
|
$ |
54.19 |
|
|
|
4,988,341 |
* |
Equity compensation plans not approved by security
holders |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
Total |
|
|
3,274,731 |
|
|
$ |
54.19 |
|
|
|
4,988,341 |
* |
|
|
|
* |
|
All of these shares are available under the 2002 Plan. The 2002
Plan provides that the number of shares available is increased by
the number of shares that must be purchased at a purchase price of
not less than fair market value as a condition to the award of
restricted stock. The 2002 Plan limits the number of shares awarded
as restricted stock or deliverable under restricted stock units to
5,900,000 shares, of which
4,915,510 shares remained available at December 31, 2005. |
106
Item 13. Certain Relationships and Related Transactions.
To the extent applicable, this information will be included in the Companys Proxy Statement
for the 2006 Annual Meeting of Shareholders, and is hereby incorporated by reference.
Item 14. Principal Accountant Fees and Services.
This information will be included in the Companys Proxy Statement for the 2006 Annual Meeting
of Shareholders, and is hereby incorporated by reference.
107
PART IV
Item 15. Exhibits and Financial Statement Schedules.
|
1. |
|
Financial statements. The following financial statements are filed in Item 8 of this
Annual Report on Form 10-K: |
Report of independent registered public accounting firm
Consolidated statements of operations for each of the three years in the period
ended December 31, 2005
Consolidated balance sheets at December 31, 2005 and 2004
Consolidated statements of shareholders equity for each of the three years in
the period ended December 31, 2005
Consolidated statements of cash flows for each of the three years in the period
ended December 31, 2005
Notes to consolidated financial statements
|
2. |
|
Financial statement schedules. The following financial statement schedules are filed as
part of this Form 10-K and appear immediately following the signature page: |
Report of independent registered public accounting firm on financial statement
schedules
Schedules at and for the specified years in the three-year period ended
December 31, 2005:
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.
108
|
3. |
|
Exhibits. The accompanying Index to Exhibits is incorporated by reference in answer to
this portion of this Item and, except as otherwise indicated in the next sentence, the
Exhibits listed in such Index are filed as part of this Form 10-K. Exhibit 32 is not filed
as part of this Form 10-K but accompanies this Form 10-K. |
109
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 10, 2006.
MGIC INVESTMENT CORPORATION
|
|
|
|
|
By
|
|
/s/ Curt S. Culver
|
|
|
|
|
|
|
|
|
|
Curt S. Culver |
|
|
|
|
Chairman of the Board and Chief |
|
|
|
|
Executive Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below as of the date set forth above by the following persons on behalf of the registrant and in
the capacities indicated.
Name and Title
/s/ Curt S. Culver
Curt S. Culver
Chairman of the Board, Chief Executive
Officer and Director
/s/ J. Michael Lauer
J. Michael Lauer
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ Joseph J. Komanecki
Joseph J. Komanecki
Senior Vice President, Controller and
Chief Accounting Officer
(Principal Accounting Officer)
/s/ James A. Abbott
James A. Abbott, Director
/s/ Mary K. Bush
Mary K. Bush, Director
/s/ Karl E. Case
Karl E. Case, Director
/s/ David S. Engelman
David S. Engelman, Director
/s/ Thomas M. Hagerty
Thomas M. Hagerty, Director
/s/ Kenneth M. Jastrow, II
Kenneth M. Jastrow, II, Director
/s/ Daniel P. Kearney
Daniel P. Kearney, Director
/s/ Michael E. Lehman
Michael E. Lehman, Director
/s/ William A. McIntosh
William A. McIntosh, Director
/s/ Leslie M. Muma
Leslie M. Muma, Director
110
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedules
To the Board of Directors
of MGIC Investment Corporation:
Our audits of the consolidated financial statements, of managements assessment of the
effectiveness of internal control over financial reporting and of the effectiveness of internal
control over financial reporting, referred to in our report dated March 8, 2006 appearing in this
Annual Report on Form 10-K also included an audit of the financial statement schedules listed in
Item 15(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present
fairly, in all material respects, the information set forth therein when read in conjunction with
the related consolidated financial statements.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 8, 2006
111
MGIC INVESTMENT CORPORATION
SCHEDULE I SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount at |
|
|
|
Amortized |
|
|
Fair |
|
|
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 |
|
$ |
336,658 |
|
|
$ |
336,360 |
|
|
$ |
336,360 |
|
States, municipalities and political subdivisions |
|
|
4,630,856 |
|
|
|
4,751,791 |
|
|
|
4,751,791 |
|
Foreign governments |
|
|
2,100 |
|
|
|
2,100 |
|
|
|
2,100 |
|
Public utilities |
|
|
2,078 |
|
|
|
2,209 |
|
|
|
2,209 |
|
All other corporate bonds |
|
|
201,399 |
|
|
|
200,482 |
|
|
|
200,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
5,173,091 |
|
|
|
5,292,942 |
|
|
|
5,292,942 |
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks: |
|
|
|
|
|
|
|
|
|
|
|
|
Industrial, miscellaneous and all other |
|
|
2,504 |
|
|
|
2,488 |
|
|
|
2,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
|
2,504 |
|
|
|
2,488 |
|
|
|
2,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
190,640 |
|
|
|
190,640 |
|
|
|
190,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
5,366,235 |
|
|
$ |
5,486,070 |
|
|
$ |
5,486,070 |
|
|
|
|
|
|
|
|
|
|
|
112
MGIC INVESTMENT CORPORATION
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
PARENT COMPANY ONLY
December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands of dollars) |
|
ASSETS |
|
|
|
|
|
|
|
|
Investment portfolio, at fair value: |
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
2,570 |
|
|
$ |
2,781 |
|
Cash and short-term investments |
|
|
211 |
|
|
|
15,574 |
|
|
|
|
|
|
|
|
Total investment portfolio |
|
|
2,781 |
|
|
|
18,355 |
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries, at equity in net assets |
|
|
4,842,932 |
|
|
|
4,767,631 |
|
Accounts receivable affiliates |
|
|
951 |
|
|
|
274 |
|
Income taxes receivable affiliates |
|
|
276 |
|
|
|
1,060 |
|
Accrued investment income |
|
|
20 |
|
|
|
62 |
|
Other assets |
|
|
12,295 |
|
|
|
9,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,859,255 |
|
|
$ |
4,797,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Short- and long-term debt |
|
$ |
685,124 |
|
|
$ |
639,263 |
|
Other liabilities |
|
|
9,076 |
|
|
|
14,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
694,200 |
|
|
|
653,728 |
|
|
|
|
|
|
|
|
|
|
Shareholders equity (note B): |
|
|
|
|
|
|
|
|
Common stock, $1 par value, shares authorized
300,000,000; shares issued 2005 122,549,285;
2004 122,324,295; outstanding 2005 88,046,430; 2004 96,260,864 |
|
|
122,549 |
|
|
|
122,324 |
|
Paid-in capital |
|
|
280,052 |
|
|
|
270,450 |
|
Treasury stock (shares at cost, 2005 34,502,855;
2004 26,063,431) |
|
|
(1,834,434 |
) |
|
|
(1,313,473 |
) |
Accumulated other comprehensive income, net of tax |
|
|
77,499 |
|
|
|
123,383 |
|
Retained earnings |
|
|
5,519,389 |
|
|
|
4,940,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
4,165,055 |
|
|
|
4,143,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
4,859,255 |
|
|
$ |
4,797,367 |
|
|
|
|
|
|
|
|
See accompanying supplementary notes to Parent Company condensed financial statements.
113
MGIC INVESTMENT CORPORATION
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
PARENT COMPANY ONLY
For the Years Ended December 31, 2005, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands of dollars) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net income of subsidiaries |
|
$ |
100,261 |
|
|
$ |
416,385 |
|
|
$ |
288,305 |
|
Dividends received from subsidiaries |
|
|
552,200 |
|
|
|
162,900 |
|
|
|
232,023 |
|
Investment income, net |
|
|
2,465 |
|
|
|
1,240 |
|
|
|
645 |
|
Realized investment gains, net |
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
654,926 |
|
|
|
580,529 |
|
|
|
520,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
278 |
|
|
|
272 |
|
|
|
228 |
|
Interest expense |
|
|
41,091 |
|
|
|
41,124 |
|
|
|
41,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
41,369 |
|
|
|
41,396 |
|
|
|
41,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax |
|
|
613,557 |
|
|
|
539,133 |
|
|
|
479,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit for income tax |
|
|
(13,316 |
) |
|
|
(14,053 |
) |
|
|
(14,241 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
626,873 |
|
|
|
553,186 |
|
|
|
493,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net |
|
|
(45,884 |
) |
|
|
(17,268 |
) |
|
|
(7,257 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
580,989 |
|
|
$ |
535,918 |
|
|
$ |
486,622 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying supplementary notes to Parent Company condensed financial statements.
114
MGIC INVESTMENT CORPORATION
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED
STATEMENTS OF CASH FLOWS
PARENT COMPANY ONLY
For the Years Ended December 31, 2005, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
(In thousands of dollars) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
626,873 |
|
|
$ |
553,186 |
|
|
$ |
493,879 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net income of subsidiaries |
|
|
(100,261 |
) |
|
|
(416,385 |
) |
|
|
(288,305 |
) |
Increase in accounts receivable affiliates |
|
|
(677 |
) |
|
|
(331 |
) |
|
|
|
|
Decrease (increase) in income taxes receivable |
|
|
784 |
|
|
|
6,737 |
|
|
|
(4,723 |
) |
Decrease (increase) in accrued investment income |
|
|
42 |
|
|
|
151 |
|
|
|
(206 |
) |
(Increase) decrease in other assets |
|
|
(2,310 |
) |
|
|
(6,279 |
) |
|
|
2,637 |
|
Decrease in other liabilities |
|
|
(5,389 |
) |
|
|
(7,170 |
) |
|
|
(6,031 |
) |
Other |
|
|
17,672 |
|
|
|
31,528 |
|
|
|
18,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
536,734 |
|
|
|
161,437 |
|
|
|
216,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Transactions with subsidiaries |
|
|
(16,100 |
) |
|
|
(15,199 |
) |
|
|
(9,479 |
) |
Purchase of fixed maturities |
|
|
|
|
|
|
(2,078 |
) |
|
|
(10,000 |
) |
Sale of fixed maturities |
|
|
211 |
|
|
|
10,417 |
|
|
|
294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(15,889 |
) |
|
|
(6,860 |
) |
|
|
(19,185 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid to shareholders |
|
|
(48,439 |
) |
|
|
(22,032 |
) |
|
|
(11,124 |
) |
Proceeds from issuance of long-term debt |
|
|
297,732 |
|
|
|
|
|
|
|
|
|
Repayment of long-term debt |
|
|
(300,000 |
) |
|
|
|
|
|
|
|
|
Net proceeds from (repayment of) short-term debt |
|
|
42,833 |
|
|
|
37,804 |
|
|
|
(78,873 |
) |
Reissuance of treasury stock |
|
|
1,234 |
|
|
|
2,633 |
|
|
|
305 |
|
Repurchase of common stock |
|
|
(533,844 |
) |
|
|
(205,014 |
) |
|
|
(94,134 |
) |
Common stock issued |
|
|
4,276 |
|
|
|
29,380 |
|
|
|
4,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(536,208 |
) |
|
|
(157,229 |
) |
|
|
(178,970 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and short-term investments |
|
|
(15,363 |
) |
|
|
(2,652 |
) |
|
|
18,046 |
|
Cash and cash equivalents at beginning of year |
|
|
15,574 |
|
|
|
18,226 |
|
|
|
180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
211 |
|
|
$ |
15,574 |
|
|
$ |
18,226 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying supplementary notes to Parent Company condensed financial statements.
115
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
SUPPLEMENTARY NOTES
Note A
The accompanying Parent Company financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements appearing in Item
8 of this Annual Report on Form 10-K.
Note B
The Companys 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. As a
result of extraordinary dividends paid, MGIC cannot currently pay any dividends without regulatory
approval. The other insurance subsidiaries of the Company can pay $1.8 million of dividends
without such regulatory approval.
Certain of the Companys non-insurance subsidiaries also have requirements as to maintenance
of net worth. These restrictions could also affect the Companys ability to pay dividends.
In 2005, 2004 and 2003, the Company paid dividends of $48.4 million, $22.0 million and $11.1
million, respectively, or $0.525 per share in 2005, and $0.225 in 2004 and $0.1125 in 2003.
116
MGIC INVESTMENT CORPORATION
SCHEDULE IV REINSURANCE
MORTGAGE INSURANCE PREMIUMS EARNED
Years Ended December 31, 2005, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
$ |
1,364,598 |
|
|
$ |
126,970 |
|
|
$ |
1,064 |
|
|
$ |
1,238,692 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
$ |
1,445,321 |
|
|
$ |
116,226 |
|
|
$ |
333 |
|
|
$ |
1,329,428 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
$ |
1,484,249 |
|
|
$ |
118,465 |
|
|
$ |
227 |
|
|
$ |
1,366,011 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117
INDEX TO EXHIBITS
[Item 15(a)3]
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
3.1
|
|
Articles of Incorporation, as amended(1) |
|
|
|
3.2
|
|
Amended and Restated Bylaws(2) |
|
|
|
4.1
|
|
Article 6 of the Articles of Incorporation (included within Exhibit 3.1) |
|
|
|
4.2
|
|
Amended and Restated Bylaws (included as Exhibit 3.2) |
|
|
|
4.3
|
|
Rights Agreement, dated as of July 22, 1999, between MGIC Investment Corporation and Firstar Bank
Milwaukee, N.A., which includes as Exhibit A thereto the Form of Right Certificate and as Exhibit B
thereto the Summary of Rights to Purchase Common shares(3) |
|
|
|
4.3.1
|
|
First Amendment to Rights Agreement, dated as of October 28, 2002, between the Company and U.S. Bank
National Association(4) |
|
|
|
4.3.2
|
|
Second Amendment to Rights Agreement, dated as of October 28, 2002, between the Company and Wells
Fargo Bank Minnesota, National Association (as successor Rights Agent to U.S. Bank National
Association)(5) |
|
|
|
4.3.3
|
|
Third Amendment to Rights Agreement, dated as of May 14, 2004, between the Company and Wells Fargo
Bank Minnesota, National Association(6) |
|
|
|
4.4
|
|
Indenture, dated as of October 15, 2000, between the Company and Bank One Trust Company, National
Association, as Trustee(7) [The Company is a party to various other agreements with respect
to its long-term debt. These agreements are not being filed pursuant to Reg. S-K Item 602(b) (4) (iii)
(A). The Company hereby agrees to furnish a copy of such agreements to the Commission upon its
request.] |
|
|
|
10.1
|
|
Form of Stock Option Agreement under 2002 Stock Incentive Plan(8) |
|
|
|
10.1.1
|
|
Form of Incorporated Terms to Stock Option Agreement under 2002 Stock Incentive Plan(9) |
|
|
|
10.2
|
|
Form of Restricted Stock Agreement under 2002 Stock Incentive Plan(10) |
|
|
|
10.2.1
|
|
Form of Incorporated Terms to Restricted Stock Agreement under 2002 Stock Incentive Plan(11) |
|
|
|
10.2.2
|
|
Form of Restricted Stock and Restricted Stock Unit Agreement under 2002 Stock Incentive Plan |
|
|
|
10.2.3
|
|
Form of Incorporated Terms to Restricted Stock and Restricted Stock Unit Agreement under 2002 Stock
Incentive Plan |
|
|
|
10.2.4
|
|
Form of Restricted Stock and Restricted Stock Unit Agreement (for Directors)(12) |
|
|
|
10.2.5
|
|
Form of Incorporated Terms to Restricted Stock and Restricted Stock Unit Agreement(13) |
118
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
10.3
|
|
MGIC Investment Corporation 1991 Stock Incentive Plan(14) |
|
|
|
10.3.1
|
|
MGIC Investment Corporation 2002 Stock Incentive Plan, as amended(15) |
|
|
|
10.4
|
|
Two Forms of Stock Option Agreement under 1991 Stock Incentive Plan.(16) |
|
|
|
10.4.1
|
|
Form of Stock Option Agreement under 1991 Stock Incentive Plan(17) |
|
|
|
10.4.2
|
|
Form of Incorporated Terms to Stock Option Agreement under 1991 Stock Incentive Plan(18) |
|
|
|
10.5
|
|
Two Forms of Restricted Stock Award Agreement under 1991 Stock Incentive Plan(19) |
|
|
|
10.5.1
|
|
Form of Restricted Stock Agreement under 1991 Stock Incentive Plan(20) |
|
|
|
10.5.2
|
|
Form of Incorporated Terms to Restricted Stock Agreement under 1991 Stock Incentive Plan(21) |
|
|
|
10.6
|
|
Executive Bonus Framework(22) |
|
|
|
10.7
|
|
Supplemental Executive Retirement Plan(23) |
|
|
|
10.8
|
|
MGIC Investment Corporation
Deferred Compensation Plan for Non-Employee Directors.(24) |
|
|
|
10.9
|
|
MGIC Investment Corporation 1993 Restricted Stock Plan for Non-Employee Directors.(25) |
|
|
|
10.10
|
|
Two Forms of Award Agreement under MGIC Investment Corporation 1993 Restricted Stock Plan for
Non-Employee Directors.(26) |
|
|
|
10.11
|
|
Form of Key Executive Employment and Severance Agreement.(27) |
|
|
|
10.12
|
|
Form of Agreement Not to Compete(28) |
|
|
|
10.13
|
|
Other Compensation Agreements with Executive Officers and Directors |
|
|
|
10.14
|
|
Securities Purchase Agreement, dated as of June 15, 2005, by and among Meeting Street Partners II,
Inc., Radian Guaranty, Inc. and Mortgage Guaranty Insurance Corporation (In accordance with Reg. S-K
item 601(b)(2), Schedules 2.2, 2.6, 3.1(d) and 5.6 to such Agreement have been
omitted.)(29) |
|
|
|
10.15
|
|
Call Option Agreement, dated as of June 15, 2005, by and among Sherman Capital, L.L.C., Radian
Guaranty, Inc. and Mortgage Guaranty Insurance Corporation.(30) |
|
|
|
11
|
|
Statement re: computation of per share earnings |
|
|
|
21
|
|
Direct and Indirect Subsidiaries and Joint Ventures(31) |
|
|
|
23
|
|
Consent of Independent Registered Public Accounting Firm |
119
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
31.1
|
|
Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002 |
|
|
|
32
|
|
Certification of CEO and CFO under Section 906 of Sarbanes-Oxley Act of 2002 (as indicated in Item 15
of this Annual Report on Form 10-K, this Exhibit is not being filed). |
The following documents, identified in the footnote references above, are incorporated by
reference, as indicated, to: the Companys Annual Reports on Form 10-K for the years ended December
31, 1993, 1994, 1997, 1999, 2001, 2002, 2003 or 2004 (the 1993 10-K, 1994 10-K, 1997 10-K,
1999 10-K, 2001 10-K, 2002 10-K, 2003 10-K, and 2004 10-K, respectively); to the
Companys Quarterly Reports on Form 10-Q for the Quarters ended June 30, 1994 or 1998 or September
30, 2002 or 2004 (the June 30, 1994 10-Q, June 30, 1998 10-Q, September 30, 2002 10-Qand
September 30, 2004 10-Q, respectively); to the Companys registration Statement Form 8-A filed
July 27, 1999 (the 8-A), as amended by Amendment No. 1 filed October 29, 2002 (the 8-A/A-No. 1)
and by Amendment No. 2 filed May 14, 2004 (the 8-A/A-No. 2); to the Companys Current Reports on
Form 8-K dated October 17, 2000 (the October 2000 8-K), February 1, 2005 (the February 2005
8-K), May 17, 2005 (the May 2005 8-K), June 30, 2005 (the June 2005 8-K) and January 31, 2006
(the January 2006 8-K); or to the Companys Proxy Statement for its 2005 Annual Meeting of
Shareholders (the 2005 Proxy Statement). The documents are further identified by cross-reference
to the Exhibits in the respective documents where they were originally filed:
|
|
|
(1) |
|
Exhibit 3 to the June 30, 1998 10-Q. |
|
(2) |
|
Exhibit 3 to the January 2006 8-K. |
|
(3) |
|
Exhibit 4.1 to the 8-A. |
|
(4) |
|
Exhibit 4.2 to the 8-A/A-No. 1. |
|
(5) |
|
Exhibit 4.3 to the 8-A/A-No. 1. |
|
(6) |
|
Exhibit 4.4 to the 8-A/A-No. 2. |
|
(7) |
|
Exhibit 4.1 to the October 2000 8-K. |
|
(8) |
|
Exhibit 10.1 to the 2002 10-K. |
|
(9) |
|
Exhibit 10.1.1 to the 2002 10-K. |
|
(10) |
|
Exhibit 10.2 to the 2002 10-K. |
|
(11) |
|
Exhibit 10.2.1 to the 2002 10-K. |
|
(12) |
|
Exhibit 10.2.4 to the 2004 10-K. |
|
(13) |
|
Exhibit 10.2.5 to the 2004 10-K. |
120
|
|
|
(14) |
|
Exhibit 10.7 to the 1999 10-K. |
|
(15) |
|
Exhibit B to the 2005 Proxy Statement. |
|
(16) |
|
Exhibit 10.9 to the 1999 10-K. |
|
(17) |
|
Exhibit 10.4.1 to the 2001 10-K. |
|
(18) |
|
Exhibit 10.4.2 to the 2001 10-K. |
|
(19) |
|
Exhibit 10.10 to the 1999 10-K. |
|
(20) |
|
Exhibit 10.5.1 to the 2001 10-K. |
|
(21) |
|
Exhibit 10.5.2 to the 2001 10-K. |
|
(22) |
|
Exhibit 1 to the May 2005 8-K. |
|
(23) |
|
Exhibit 10.7 to the 2003 10-K. |
|
(24) |
|
Exhibit 10 to the September 30, 2002 10-Q. |
|
(25) |
|
Exhibit 10.24 to the 1993 10-K. |
|
(26) |
|
Exhibits 10.27 and 10.28 to the June 30, 1994 10-Q. |
|
(27) |
|
Exhibit 10.17 to the 1999 10-K. |
|
(28) |
|
Exhibit 10.3 to the February 2005 8-K. |
|
(29) |
|
Exhibit 2.1 to the June 2005 8-K. |
|
(30) |
|
Exhibit 2.2 to the June 2005 8-K. |
|
(31) |
|
Exhibit 21 to the 2003 10-K. |
Supplementary List of the Exhibits which relate to management contracts or compensatory plans
or arrangements:
|
|
|
10.1
|
|
Form of Stock Option Agreement under 2002 Stock Incentive Plan |
|
|
|
10.1.1
|
|
Form of Incorporated Terms to Stock Option Agreement under 2002 Stock Incentive Plan |
|
|
|
10.2
|
|
Form of Restricted Stock Agreement under 2002 Stock Incentive Plan |
|
|
|
10.2.1
|
|
Form of Incorporated Terms to Restricted Stock Agreement under 2002 Stock Incentive Plan |
|
|
|
10.2.2
|
|
Form of Restricted Stock and Restricted Stock Unit Agreement under
2002 |
121
|
|
|
|
|
Stock Incentive Plan |
|
|
|
10.2.3
|
|
Form of Incorporated Terms to Restricted Stock and Restricted Stock Unit Agreement
under 2002 Stock Incentive Plan |
|
|
|
10.2.4
|
|
Form of Restricted Stock and Restricted Stock Unit Agreement (for Directors) |
|
|
|
10.2.5
|
|
Form of Incorporated Terms to Restricted Stock and Restricted Stock
Unit Agreement |
|
|
|
10.3
|
|
MGIC Investment Corporation 1991 Stock Incentive Plan |
|
|
|
10.3.1
|
|
MGIC Investment Corporation 2002 Stock Incentive Plan, as amended |
|
|
|
10.4
|
|
Two Forms of Stock Option Agreement under 1991 Stock Incentive Plan |
|
|
|
10.4.1
|
|
Form of Stock Option Agreement under 1991 Stock Incentive Plan |
|
|
|
10.4.2
|
|
Form of Incorporated Terms to Stock Option Agreement under 1991 Stock Incentive Plan |
|
|
|
10.5
|
|
Two Forms of Restricted Stock Award Agreement under 1991 Stock Incentive Plan |
|
|
|
10.5.1
|
|
Form of Restricted Stock Agreement under 1991 Stock Incentive Plan |
|
|
|
10.5.2
|
|
Form of Incorporated Terms to Restricted Stock Agreement under 1991 Stock Incentive Plan |
|
|
|
10.6
|
|
Executive Bonus Framework |
|
|
|
10.7
|
|
Supplemental Executive Retirement Framework |
|
|
|
10.8
|
|
MGIC Investment Corporation Deferred Compensation Plan for Non-Employee Directors |
|
|
|
10.9
|
|
MGIC Investment Corporation 1993 Restricted Stock Plan for Non-Employee Directors |
|
|
|
10.10
|
|
Two Forms of Award Agreement under MGIC Investment Corporation 1993 Restricted Stock
Plan for Non-Employee Directors |
|
|
|
10.11
|
|
Form of Key Executive Employment and Severance Agreement |
|
|
|
10.12
|
|
Form of Agreement Not to Compete |
|
|
|
10.13
|
|
Other Compensation Agreements with Executive Officers and Directors |
122