FORM 10-K
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
OR
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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)
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WISCONSIN
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39-1486475 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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MGIC PLAZA, 250 EAST KILBOURN AVENUE, |
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MILWAUKEE, WISCONSIN
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53202 |
(Address of principal executive
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(Zip Code) |
offices) |
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(414) 347-6480
(Registrants telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of Each Class:
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Common Stock, Par Value $1 Per Share |
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Common Share Purchase Rights |
Name of Each Exchange on Which
Registered:
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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 o No þ
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 Noo
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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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, 2008: Approximately $756 million*
* 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 25, 2009: 124,951,497
The following documents have been incorporated by reference in this Form 10-K, as indicated:
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Part and Item Number of Form 10-K Into |
Document |
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Which Incorporated* |
Proxy Statement for the 2009 Annual
Meeting of Shareholders
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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
We are a holding company, and through our wholly owned subsidiary Mortgage Guaranty Insurance
Corporation (MGIC) we are the leading provider of private mortgage insurance in the United
States. In 2008, our net premiums written exceeded $1.4 billion and our new insurance written was
$48.2 billion. As of December 31, 2008, our insurance in force was $227.0 billion and our risk in
force was $59.0 billion. For further information about our results of operations, see our
consolidated financial statements in Item 8. MGIC is licensed in all 50 states of the United
States, the District of Columbia, Puerto Rico and Guam. In addition to mortgage insurance on first
liens, we, through our subsidiaries, provide lenders with various underwriting and other services
and products related to home mortgage lending.
Overview of the Private Mortgage Insurance Industry
The private mortgage insurance industry was established in 1957 to provide a private
market alternative to federal government insurance programs. Private mortgage insurance covers
losses from homeowner defaults on residential first mortgage loans, reducing and, in some
instances, eliminating the loss to the insured institution if the homeowner defaults. Private
mortgage insurance plays an important role in the housing finance system by expanding home
ownership opportunities through helping people purchase homes with less than 20% down payments,
especially first time homebuyers. In this annual report, we refer to loans with less than 20% down
payments as low down payment mortgages or loans. During 2007 and 2008 more than $550 billion of
mortgages were insured by private mortgage insurance companies, allowing approximately 4 million
borrowers to access low down payment loans. Private mortgage insurance facilitates the sale of low
down payment mortgages in the secondary mortgage market to the Federal National Mortgage
Association, commonly known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, commonly
known as Freddie Mac. In this annual report, we refer to Fannie Mae and Freddie Mac collectively as
the GSEs. The GSEs purchase residential mortgages from mortgage lenders and investors as part of
their governmental mandate to provide liquidity in the secondary mortgage market and we believe
that the GSEs purchased over 50% of the mortgages underlying our flow new insurance written during the last five
years. As a result, the private mortgage insurance industry in the U.S. is defined in part by the
requirements and practices of the GSEs. These requirements and practices, as well as those of the federal regulators that oversee the GSEs
and lenders, impact the operating results and financial performance of companies in the mortgage
insurance industry. Private mortgage insurance also reduces the regulatory
capital that depository institutions are required to hold against low down payment mortgages.
The U.S. single-family residential mortgage market has historically experienced long-term
growth, including an increase in mortgage debt outstanding every year between 1985, when our
company began operations, and 2007. The rate of growth in U.S. residential mortgage debt was
particularly strong from 2001 through 2006. In 2007, this growth rate began slowing and we believe
that U.S. residential mortgage debt outstanding decreased in 2008. During the last several years
of this period of increased growth and continuing through 2007, the mortgage lending industry
increasingly made home loans at higher loan-to-value ratios, to individuals with higher risk credit
profiles and based on less documentation and verification of information provided by the borrower.
Beginning in 2007, job creation slowed and the housing markets began slowing in certain areas, with
declines in certain other areas. In 2008, payroll employment in the U.S. decreased substantially
and almost all areas experienced home price declines. Together, these conditions resulted in
significant adverse developments for us and our industry. After
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earning an
average of approximately $580 million annually from 2004 through 2006 and earnings of $169
million in the first half of 2007, we had net losses of $1.670 billion for full-year 2007 and
$518.9 million for 2008.
During 2008, the insurer financial strength rating of MGIC was downgraded a number of times by all
three rating agencies. See the risk factor titled Our financial strength rating has been
downgraded below Aa3/AA-, which could reduce the volume of our new business writings in Item 1A.
Beginning in late 2007 and continuing through 2008, we made significant underwriting changes that
limited the types of loans that we will insure in an effort to improve the risk profile of our new
business.
Due to the changing environment described above and the credit crisis that began in the
third quarter of 2008, at this time we are facing two particularly significant challenges, which we
believe are shared by the other participants in our industry:
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Whether we will have access to sufficient capital to continue to write new business.
For additional information about this challenge, see Managements Discussion and Analysis
of Financial Condition and Results of Operations Overview Capital in Item 7. |
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Whether private mortgage insurance will remain a significant credit enhancement
alternative for low down payment single-family mortgages. For additional information
about this challenge, see Managements Discussion and Analysis of Financial Condition and
Results of Operations Overview Future of the Domestic Residential Housing Finance
System in Item 7. |
General Information About Our Company
We are a Wisconsin corporation. Our principal office is located at MGIC Plaza, 250 East
Kilbourn Avenue, Milwaukee, Wisconsin 53202 (telephone number (414) 347-6480).
Historically, our investments in joint ventures and related loss or income from joint
ventures principally consisted of our investment and related earnings in two less than majority
owned joint ventures, Credit-Based Asset Servicing and Securitization LLC, C-BASS, and Sherman
Financial Group LLC, Sherman. In 2007, joint venture losses included an impairment charge equal to
our entire equity interest in C-BASS, as well as equity losses incurred by C-BASS in the fourth
quarter that reduced the carrying value of our $50 million note from C-BASS to zero. As a result,
beginning in 2008, our joint venture income principally consisted of income from Sherman. In August
of 2008, we sold our entire interest in Sherman to Sherman. Beginning in the fourth quarter of
2008, our results of operations are no longer affected by any joint venture results.
As used in this annual report, we, us and our refer to MGIC Investment
Corporations consolidated operations. Sherman, C-BASS and our other less than majority-owned
joint ventures and investments are not consolidated with us for financial reporting purposes, are
not our subsidiaries and are not included in the terms we, us and our. The description of
our business in this document generally does not apply to our Australian operations, which are
immaterial. For information about our Australian operations, see Managements Discussion and
Analysis of Financial Condition and Results of Operations Overview Australia in Item 7.
Our revenues and losses may be materially affected by the risk factors applicable to us
that are included in Item 1A of this annual report. These risk factors are an integral part of
this annual report. These factors may also cause actual results to differ materially from the
results contemplated by forward looking statements that we may make. We are not undertaking any
obligation to update any forward looking statements or other statements we may make even though
these statements may be affected by events or circumstances occurring after the forward looking
statements or other statements were made. No investor should rely on the fact that such statements
are current at any time other than the time at which this annual report was filed with the
Securities and Exchange Commission.
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B. The MGIC Book
In our industry, a book is a group of loans that a mortgage insurer insures in a particular
period, normally a calendar year. We refer to the insurance that has been written by MGIC as the
MGIC Book.
Types of Product
In general, there are two principal types of private mortgage insurance: primary and pool.
We are currently not issuing new commitments for pool insurance and expect that the volume of any
future pool business will be insignificant to us.
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). For the effect of
bankruptcy cramdowns on the claim amount, see Exposure to Catastrophic Loss; Defaults; Claims;
Loss Mitigation Claims below. In addition to the loan principal, the claim amount is affected by
the mortgage note rate and the time necessary to complete the foreclosure 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 is
generally written on first mortgage loans secured by owner occupied single-family homes, which are
one-to-four family homes and condominiums. Primary insurance is also written on first liens
secured by non-owner occupied single-family homes, which are referred to in the home mortgage
lending industry as investor loans, and on vacation or second homes. 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 our 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 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. For more than the past five years, reports by
private mortgage insurers to the trade association for the private mortgage insurance industry have
classified 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 as pool insurance. The trade
association classification is used by members of the private mortgage insurance industry in reports
to Inside Mortgage Finance, 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 $46.6 billion in 2008 compared to $69.0 billion in 2007 and $39.3 billion in 2006.
New insurance written for bulk transactions was $1.6 billion for 2008 compared to $7.8 billion in
2007 and $18.9 billion for 2006. As noted in - Bulk Transactions below, in the fourth quarter of
2007, we decided to stop writing the portion of our bulk business that insures mortgage loans
included in home equity (or private label) securitizations, which are the terms the market uses
to refer to securitizations sponsored by firms besides the GSEs or Ginnie Mae, such as Wall Street
investment banks. We refer to portfolios of loans we insured through the bulk channel that we knew
would serve as collateral in a home equity securitization as Wall Street bulk transactions.
While we will continue to insure loans on a bulk basis when we believe that the loans will be sold
to a GSE or retained by the lender, we expect the volume of any future business written through the
bulk channel will be insignificant to us.
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The following table shows, on a direct basis, primary insurance in force (the unpaid
principal balance of insured loans as reflected in our records) and primary risk in force (the
coverage percentage applied to the unpaid principal balance) for the MGIC Book as of the dates
indicated:
Primary Insurance and Risk In Force
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December 31, |
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2008 |
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2006 |
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(In millions) |
Direct Primary Insurance In Force |
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226,955 |
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211,745 |
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176,531 |
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170,029 |
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177,091 |
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Direct Primary Risk In Force |
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58,981 |
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55,794 |
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47,079 |
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44,860 |
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45,981 |
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For loans sold 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. For other loans, the
lender determines the coverage percentage we provide, from the coverage percentages that we offer.
We charge higher premium rates for higher coverage percentages. 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 GAAP for the
mortgage insurance industry, reserves for losses are only established for loans in default.
Because, historically, relatively few defaults typically occur in the early years of a book of
business, the higher premium revenue from deeper coverage has historically been generally
recognized before any significant higher losses resulting from that deeper coverage may be
incurred. See - Exposure to Catastrophic Loss; Defaults; Claims; Loss Mitigation -
Claims. Our 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 recent years the GSEs, with mortgage insurers, have offered programs under which, on
delivery of an insured loan to a GSE, the primary coverage was restructured to an initial shallow
tier of coverage followed by a second tier that was subject to an overall loss limit, and
compensation may have been 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 coverage percentages. We believe that the GSEs
ceased offering these programs in 2008, though we continue to insure loans subject to these
programs.
In general, mortgage insurance coverage cannot be terminated by the insurer. However, a
mortgage insurer may terminate or rescind coverage for, among other reasons, non-payment of premium and in the
case of certain material misrepresentations made in connection with the issuance of the insurance
policy. See Exposure to Catastrophic Loss; Defaults; Claims; Loss Mitigation Loss
Mitigation. Mortgage insurance coverage is renewable at the option of the insured lender, 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, or 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 thresholds determined by the value of the home at loan origination and other
requirements are met. Generally, the loan-to-value ratios used in this annual report represent the
ratio, expressed as a
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percentage, of the dollar amount of the first mortgage loan to the value of the property at the
time the loan became insured and do not reflect subsequent housing price appreciation or
depreciation. In general, under the HPA a borrower may stop making mortgage insurance payments
when the loan-to-value 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, 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
loan-to-value ratio (based on the loans amortization schedule) reaches 78% of the unpaid principal
balance of the mortgage and the borrower is or later 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 private
mortgage insurance automatically in certain circumstances.
Coverage tends to continue in areas experiencing economic contraction and housing price
depreciation. The persistency of coverage in these areas coupled with cancellation of coverage in
areas experiencing economic expansion and housing price appreciation can increase the percentage of
an 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 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
21.9% in 2008 compared to 23.2% in 2007 and 32.0% in 2006. When a borrower refinances a mortgage
loan insured by us by paying it off in full with the proceeds of a new mortgage that is also
insured by us, 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 our
coverage from a refinanced loan to a new loan results in both a cancellation of insurance and new
insurance written. When a lender and borrower modify a loan rather
than replace it with a new one, or enters into a new loan pursuant to
a loan modification program,
our insurance continues without being cancelled, assuming that we
consent to the modification or new loan.
In addition to varying with the coverage percentage, our premium rates for insurance vary
depending upon the perceived risk of a claim on the insured loan and, thus, take into account,
among other things, the loan-to-value ratio, whether the loan is a fixed payment loan or a
non-fixed payment loan (a non-fixed payment loan is referred to in the home mortgage lending
industry as an adjustable rate mortgage or ARM), the mortgage term, whether the loan finances a
home in a market we categorize as higher risk, whether the property is the borrowers primary
residence and, for A-, subprime loans and certain other loans, the location of the borrowers
credit score within a range of credit scores. In general, in this annual report we classify as
A- loans that have FICO credit scores between 575 and 619 and we classify as subprime loans that have
FICO credit scores of less than 575. However, in this annual report we classify loans without
complete documentation as reduced documentation loans
regardless of FICO credit score rather than as
prime, A- or subprime loans, although as discussed in footnote 3 to the table titled Default
Statistics for the MGIC Book in Exposure to Catastrophic Loss; Defaults; Claims; Loss
Mitigation Defaults below, certain doc
waiver GSE loans are included as full doc loans by us.
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A FICO
credit 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 we believe that
over the long term each region of the United States is subject to similar factors affecting risk of
loss on insurance written, we generally utilize a nationally based, rather than a regional or
local, premium rate policy for insurance written through the flow channel. However, beginning in
2008, changes in our underwriting guidelines implemented more restrictive standards in markets and
for loan characteristics that we categorize as higher risk.
The borrowers mortgage loan instrument may require the borrower to pay the mortgage
insurance premium. Our industry refers to loans having this requirement as borrower paid. If
the borrower is not required to pay the premium, then the premium is paid by the lender, who may
recover the premium through an increase in the note rate on the mortgage or higher origination
fees. Our industry refers to loans in which the premium is paid by the lender as lender paid.
Most of our 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 or investors that hold the mortgages, and the
mortgage note rate generally does not reflect the premium for the mortgage insurance. In February
2008, Freddie Mac and Fannie Mae informed us and the rest of our industry that they were reviewing
the appropriateness of all mortgage insurers lender-paid insurance premium rates. We have not
received subsequent updates regarding the status of these reviews.
Under the monthly premium plan, the borrower or lender pays us a monthly premium payment
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 us in advance, and we
earn and recognize the premium 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 for the initial
year and subsequent renewal years. Under the single premium plan, the borrower or lender pays us a
single payment covering a specified term exceeding twelve months.
During each of the last three years, the monthly premium plan represented more than 85%
of our 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 required on that mortgage loan, as well as the total loss on a defaulted mortgage loan
which did not require primary insurance. Pool insurance usually has 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.
We are currently not issuing new commitments for pool insurance and expect that the
volume of any future pool business will be insignificant to us. New pool risk written was $145
million in 2008 compared to $211 million in 2007 and $240 million in 2006. New pool risk written
during 2006 and 2007 was primarily comprised of risk associated with loans delivered to the GSEs
(agency pool insurance), loans insured through private label securitizations, loans delivered to
the Federal Home Loan Banks under their mortgage purchase programs and loans made under state
housing finance programs. New pool risk written during 2008 was primarily comprised of risk
associated with agency pool insurance and loans made under state housing finance programs. Direct
pool risk in force at December
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31, 2008 was $1.9 billion compared to $2.8 billion and $3.1 billion at December 31, 2007 and 2006,
respectively. The risk amounts referred to above represent pools of loans with contractual
aggregate loss limits and in some cases those without these limits. For pools of loans without
these 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, 2008, 2007 and 2006 for
$2.5 billion, $4.1 billion, and $4.4 billion, respectively, of risk without these limits, risk in
force is calculated at $150 million, $475 million, and $473 million, respectively. New risk
written, under this model, for the years ended December 31, 2008, 2007 and 2006 was $1 million, $2
million and $4 million, respectively.
The settlement of a nationwide class action alleging that MGIC violated the Real Estate
Settlement Procedures Act, or RESPA, by providing agency pool insurance and entering into other
transactions with lenders that were not properly priced 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 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.
In February 2008, Freddie Mac and Fannie Mae informed us and the rest of our industry
that they were reviewing the appropriateness of all mortgage insurers criteria and underwriting
requirements for pool insurance on mortgages to the extent that they do not meet such insurers
published underwriting guidelines. We have not received subsequent updates regarding the status of
these reviews.
Risk
Sharing Arrangements. We have participated 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 serviced by the lenders which have MGIC primary insurance.
In a February 1, 1999 circular addressed to all mortgage insurers licensed in New York,
the New York Department of Insurance 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. These guidelines, which were to ensure that the reinsurance constituted a
legitimate transfer of risk and were fair and equitable to the parties, have not been issued.
As discussed under We are subject to the risk of private litigation and regulatory proceedings in
Item 1A, we provided information regarding captive mortgage reinsurance arrangements to the New
York Department of Insurance and the Minnesota Department of Commerce. The complaint in the RESPA
litigation described in - Pool Insurance alleged that MGIC pays inflated captive
reinsurance premiums in violation of RESPA. Since December 2006, class action litigation was
separately brought against a number of large lenders alleging that their captive mortgage
reinsurance arrangements violated RESPA. We are not a defendant in any of these cases and we
believe no other mortgage insurer is a defendant.
In addition, we participate in risk sharing arrangements with persons unrelated to our
customers. When we reinsure a portion of our risk through such a reinsurer, we make an upfront
payment or cede a portion of our premiums in return for a reinsurer agreeing to indemnify us for
its share of losses incurred. Although reinsuring against possible loan losses does not discharge
us from liability to a policyholder, it can reduce the amount of capital we are required to retain
against potential future losses for rating agency and insurance regulatory purposes.
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For further information about risk sharing arrangements, see Managements Discussion and
AnalysisResults of Consolidated OperationsRisk Sharing Arrangements in Item 7 and Note 9 to our
consolidated financial statements in Item 8.
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 the fourth quarter of 2007, we decided to stop writing the portion of our bulk
business insuring loans included in Wall Street bulk transactions. These securitizations
represented approximately 41% and 66% of our new insurance written for bulk transactions during
2007 and 2006, respectively, and 10% of our risk in force, or 74% of our bulk risk in force, at
December 31, 2008. New insurance written for bulk transactions was $1.6 billion during 2008, all
of which were eligible for delivery to the GSEs, compared to $7.8 billion for 2007 and
$18.9 billion for 2006. We wrote no new business through the bulk channel during the second half of
2008. We expect the volume of any future business written through the bulk channel will be
insignificant to us. In general, the loans insured by us in Wall Street bulk transactions
consisted of loans with reduced underwriting documentation; cash out refinances that exceed the
standard underwriting requirements of the GSEs; A- loans; subprime loans; and jumbo loans. 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 was $417,000 for 2006, 2007 and early 2008; this amount was temporarily increased
to up to $729,500 in the most costly communities in early 2008. For additional information about
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.
Customers
Originators of residential mortgage loans such as savings institutions, commercial banks,
mortgage brokers, credit unions, mortgage bankers and other lenders have historically determined
the placement of mortgage insurance written on a flow basis and as a result are our customers. To
obtain primary insurance from us written on a flow basis, a mortgage lender must first apply for and
receive a mortgage guaranty master policy from us. In 2008, we issued coverage on mortgage loans
for more than 3,300 of our master policyholders. Our top 10 customers, none of whom represented
more than 10% of our consolidated revenues, generated 40.3% of our new insurance written on a flow
basis in 2008, compared to 43.0% in 2007 and 34.2% in 2006.
When writing insurance for Wall Street bulk transactions, we historically dealt primarily
with securitizers of the loans or other owners of the loans, who considered whether credit
enhancement provided through the structure of the securitization would eliminate or reduce the need
for mortgage insurance.
Sales and Marketing and Competition
Sales and Marketing. We sell our insurance products through our own employees, located
throughout all regions of the United States, Puerto Rico and Guam.
9
Competition. Our competition includes other mortgage insurers, governmental agencies and
products designed to eliminate the need to purchase private mortgage insurance. For flow business,
we 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. These agencies sponsor government-backed mortgage insurance programs, which during
2008 accounted for approximately 60.3%, of the total low down payment residential mortgages which
were subject to governmental or private mortgage insurance, a substantial increase from
approximately 22.7% in both 2007 and 2006, according to statistics reported by Inside Mortgage
Finance. We believe the FHA, which in recent years was not viewed by us as a significant
competitor, accounted for the overwhelming majority of this increase in 2008.
Loans insured by the FHA cannot exceed maximum principal amounts which are determined by
a percentage of the conforming loan limit. For loans originated in the first half of 2007, the
maximum FHA loan amount for homes with one dwelling unit in high cost areas was as high as
$362,790; this amount was temporarily increased to up to $729,750 in the most costly areas for
loans originated in the second half of 2007 or during 2008. For loans originated in 2009, this
limit was lowered to $721,050 in Alaska and Hawaii and $625,500 in other states. Loans insured by
the Veterans Administration do not have mandated maximum principal amounts but have maximum limits
on the amount of the guaranty provided by the Veterans Administration to the lender. For loans
closed on or after December 10, 2004, the maximum Veterans
Administration guaranty is $156,375 in
Alaska and Hawaii and $104,250 in other states.
In addition to competition from the FHA and the Veterans Administration, we 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 expanding the authority of their state governments to insure residential
mortgages.
Private mortgage insurers are also subject to competition from the GSEs to the extent
that they are compensated for assuming default risk that would otherwise be insured by the private
mortgage insurance industry. See Managements Discussion and Analysis of Financial Condition and
Results of Operations Overview Future of the Domestic Residential Housing Finance System for a
discussion about the risk that private mortgage insurance will not remain a significant credit
enhancement for low down payment single-family mortgages and Changes in the business practices of
Fannie Mae and Freddie Mac could reduce our revenues or increase our losses in Item 1A for a
discussion of how potential changes in the GSEs business practices could affect us.
The capital markets and their participants have historically competed with mortgage
insurers by offering alternative products and services and may further develop as competitors to
private mortgage insurers in ways we cannot predict. Competition from such alternative products
and services was substantial prior to 2007 but declined materially in late 2007 and their presence
was insignificant in 2008.
Prior to 2008, we and other mortgage insurers also competed with transactions structured
to avoid mortgage insurance on low down payment mortgage loans. These 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% loan-to-value ratio
first mortgage and a 10% loan-to-value ratio second mortgage), with the loan-to-value 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%
loan-to-value ratio mortgage). Competition from piggyback structures was substantial prior to 2007
but declined materially later in 2007 and declined further in 2008.
10
The U.S. private mortgage insurance industry currently consists of seven active mortgage
insurers and their affiliates; one of the seven is a joint venture in which another mortgage
insurer participates and another is, according to filings with the Securities and Exchange
Commission as of February 20, 2009, our largest shareholder. The names of these mortgage insurers
are listed under Competition or changes in our relationships with our customers could reduce our
revenues or increase our losses in Item 1A. In 2008, a mortgage insurer ceased writing new
insurance and placed its existing book of business in run-off. According to Inside Mortgage
Finance, which obtains its data from reports provided by us 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 more than ten years, we have been the largest private mortgage
insurer based on new primary insurance written, with a market share
of 24.5% in 2008, 21.3% in 2007,
21.6% in 2006, 22.9% in 2005 and 23.5% in 2004, and at December 31, 2008, we also had the largest
book of direct primary insurance in force. For more than five years, these reports do not include
as primary mortgage insurance insurance on certain loans classified by us 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. We believe that we
currently compete with other private mortgage insurers based on customer relationships, name
recognition, reputation, the ancillary products and services provided to lenders (including
contract underwriting services), the strength of management teams and field organizations, the
depths of databases covering insured loans and the effective use of technology and innovation in
the delivery and servicing of insurance products. Several private mortgage insurers compete based
on the types of captive mortgage reinsurance that they offer. Historically, the industry has
competed 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; financial strength as it is perceived by persons making or influencing the selection of a
mortgage insurer; the provision of other products and services that meet lender needs for risk
management, affordable housing, loss mitigation, capital markets and training support; and the
effective use of technology and innovation in the delivery and servicing of insurance products. We
believe competition for Wall Street bulk business was based principally on the premium rate and the
portion of loans submitted for insurance that the insurers were willing to insure.
The complaint in the RESPA litigation described in - Pool Insurance alleged, among
other things, that captive mortgage reinsurance, agency pool insurance, and contract underwriting
we provided violated RESPA.
Certain private mortgage insurers compete for flow business by offering lower premium
rates than other companies, including us, either in general or with respect to particular customers
or classes of business. On a case-by-case basis, we 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.
The mortgage insurance industry historically viewed a financial strength rating of
Aa3/AA- as critical to writing new business. At the time that this annual report was finalized,
the financial strength of MGIC, our principal mortgage insurance subsidiary, was rated Ba2 by
Moodys Investors Service and the outlook for this rating was considered, by Moodys, to be
developing; Standard & Poors Rating Services insurer financial strength rating of MGIC was A-
with a negative outlook; and the financial strength of MGIC was rated A- by Fitch Ratings with a
negative outlook. MGIC could be further downgraded by one or more of these rating agencies.
11
For further information about the importance of our ratings, see the risk factor titled
Our financial strength rating has been downgraded below Aa3/AA-, which could reduce the volume of
our new business writings in Item 1A. In assigning financial strength ratings, in addition to
considering the adequacy of the mortgage insurers capital to withstand very high claim scenarios
under assumptions determined by the rating agency, we believe rating agencies review a mortgage
insurers historical and projected operating performance, franchise risk, 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.
Contract Underwriting and Related Services
We perform contract underwriting services for lenders in which we judge 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. We also provide an interface to submit 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 our new insurance written through
the flow channel in recent years involved loans for which we provided contract underwriting
services. The complaint in the RESPA litigation described in - Pool Insurance alleged,
among other things, that the pricing of contract underwriting provided by us violated RESPA.
Under our contract underwriting agreements, we may be required to provide certain
remedies to our customers if certain standards relating to the quality of our underwriting work are
not met. The cost of remedies provided by us to customers for failing to meet these standards has
not been material to our financial position or results of operations for the years ended December
31, 2008, 2007 and 2006. However, a generally positive economic environment for residential real
estate that continued through a portion of 2007 may have mitigated the effect of some of these costs, the claims
for which may lag, by as much as several years, deterioration in the economic environment for
residential real estate. There can be no assurance that contract underwriting remedies will not be
material in the future.
12
In February 2008, Freddie Mac and Fannie Mae informed us and the rest of our industry
that they were reviewing all mortgage insurers business justifications for activities, such as
contract underwriting services, that have the potential for creating non-insurance related
contingent liabilities. We have not received subsequent updates regarding the status of these
reviews.
Risk Management
We believe that mortgage credit risk is materially affected by:
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the borrowers credit strength, including the borrowers credit history,
debt-to-income ratios, and cash reserves and the willingness of a borrower with sufficient
resources to make mortgage payments to do so when the mortgage balance exceeds the value
of the home; |
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|
the loan product, which encompasses the loan-to-value 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; |
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origination practices of lenders and the percentage of coverage on insured loans; |
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the size of loans insured; and |
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the condition of the economy, including housing values and employment, in the area in
which the property is located. |
We believe that, excluding other factors, claim incidence increases:
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for loans with lower FICO credit scores compared to loans with higher FICO credit
scores; |
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|
for loans with less than full underwriting documentation compared to loans with full
underwriting documentation; |
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during periods of economic contraction and housing price depreciation, including when
these conditions may not be nationwide, compared to periods of economic expansion and
housing price appreciation; |
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|
for loans with higher loan-to-value ratios compared to loans with lower loan-to-value
ratios; |
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|
for ARMs when the reset interest rate significantly exceeds
the interest rate at loan
origination; |
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|
for loans that permit the deferral of principal amortization compared to loans that
require principal amortization with each monthly payment; |
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|
for loans in which the original loan amount exceeds the conforming loan limit
compared to loans below that limit; and |
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for cash out refinance loans compared to rate and term refinance loans. |
Other types of loan characteristics relating to the individual loan or borrower may also
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.
13
We charge higher premium rates to reflect the increased risk of claim incidence that we
perceive is associated with a loan, although not all higher risk characteristics are reflected in
the premium rate. There can be no assurance that our premium rates adequately reflect the
increased risk, particularly in a period of economic recession, slowing home price appreciation or
housing price declines. For additional information, see our risk factors in Item 1A, including the
one titled The premiums we charge may not be adequate to compensate us for our liabilities for
losses and as a result any inadequacy could materially affect our financial condition and results
of operations.
In 2008, we made significant underwriting changes that limited the types of loans that we
will insure. For information about these changes, see Managements Discussion and Analysis of
Financial Condition and Results of Operations Results of Consolidated Operations New insurance
written in Item 7.
Delegated Underwriting and GSE Automated Underwriting Approvals. Delegated underwriting
is a program under which approved lenders are allowed to commit us to insure loans originated
through the flow channel. Until January 2007, lenders were able to commit us to insure loans
utilizing only their own underwriting guidelines and underwriting evaluation. In addition, from
2000 through January 2007, loans approved by the automated underwriting services of the GSEs were
automatically approved for MGIC mortgage insurance. As a result, during this period, a substantial
majority of the loans insured by us through the flow channel were approved as a result of loan
approvals by the automated underwriting services of the GSEs or through delegated underwriting
programs, including those utilizing lenders proprietary underwriting services. Beginning in 2007,
loans that did not meet our underwriting guidelines would not automatically be insured by us even
though the loans were approved by the underwriting services described above. As a result, our
delegated underwriting program began requiring lenders to commit us to insure only loans that
complied with our underwriting guidelines.
Exposure to Catastrophic Loss; Defaults; Claims; Loss Mitigation
Exposure to Catastrophic Loss. The private mortgage insurance industry has from time to
time experienced catastrophic loss similar to the losses currently being experienced. Prior to the
current cycle of such losses, the last time that private mortgage insurers experienced substantial
losses was 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 (1) severe
regional recessions and attendant declines in property values in the nations energy producing
states; (2) the lenders development of new mortgage products to defer the impact on home buyers of
double digit mortgage interest rates; and (3) 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. We define a default as an
insured loan with a mortgage payment that is 45 days or more past due. Lenders are required to
notify us 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, rates of
housing price appreciation or depreciation and general borrower creditworthiness. Defaults that
are not cured result in a claim to us. See - Claims. 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.
14
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, or default rate, as of December 31, 2004-2008:
Default Statistics for the MGIC Book
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December 31, |
|
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
PRIMARY INSURANCE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insured loans in force |
|
|
1,472,757 |
|
|
|
1,437,432 |
|
|
|
1,283,174 |
|
|
|
1,303,084 |
|
|
|
1,413,678 |
|
Loans in default |
|
|
182,188 |
|
|
|
107,120 |
|
|
|
78,628 |
|
|
|
85,788 |
|
|
|
85,487 |
|
Default rate all loans |
|
|
12.37 |
% |
|
|
7.45 |
% |
|
|
6.13 |
% |
|
|
6.58 |
% |
|
|
6.05 |
% |
Flow loans in default |
|
|
122,693 |
|
|
|
61,352 |
|
|
|
42,438 |
|
|
|
47,051 |
|
|
|
44,925 |
|
Default rate flow loans |
|
|
9.51 |
% |
|
|
4.99 |
% |
|
|
4.08 |
% |
|
|
4.52 |
% |
|
|
3.99 |
% |
Bulk loans
in force(1) |
|
|
182,268 |
|
|
|
208,903 |
|
|
|
243,395 |
|
|
|
263,225 |
|
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|
288,587 |
|
Bulk loans
in default(1) |
|
|
59,495 |
|
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|
45,768 |
|
|
|
36,190 |
|
|
|
38,737 |
|
|
|
40,562 |
|
Default rate bulk loans |
|
|
32.64 |
% |
|
|
21.91 |
% |
|
|
14.87 |
% |
|
|
14.72 |
% |
|
|
14.06 |
% |
Prime loans
in default(2) |
|
|
95,672 |
|
|
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49,333 |
|
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|
36,727 |
|
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41,395 |
|
|
|
39,988 |
|
Default rate prime loans |
|
|
7.90 |
% |
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|
4.33 |
% |
|
|
3.71 |
% |
|
|
4.11 |
% |
|
|
3.66 |
% |
A-minus
loans in default(2) |
|
|
31,907 |
|
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|
22,863 |
|
|
|
18,182 |
|
|
|
20,358 |
|
|
|
20,734 |
|
Default rate A-minus loans |
|
|
30.19 |
% |
|
|
19.20 |
% |
|
|
16.81 |
% |
|
|
17.21 |
% |
|
|
15.00 |
% |
Subprime
loans in default(2) |
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|
13,300 |
|
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|
12,915 |
|
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|
12,227 |
|
|
|
13,762 |
|
|
|
14,150 |
|
Default rate subprime loans |
|
|
43.30 |
% |
|
|
34.08 |
% |
|
|
26.79 |
% |
|
|
25.20 |
% |
|
|
22.78 |
% |
Reduced documentation loans delinquent(3) |
|
|
41,309 |
|
|
|
22,009 |
|
|
|
11,492 |
|
|
|
10,273 |
|
|
|
10,615 |
|
Default rate reduced doc loans |
|
|
32.88 |
% |
|
|
15.48 |
% |
|
|
8.19 |
% |
|
|
8.39 |
% |
|
|
8.89 |
% |
POOL INSURANCE |
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|
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|
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|
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|
|
|
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Insured loans in force |
|
|
603,332 |
|
|
|
757,114 |
|
|
|
766,453 |
|
|
|
767,920 |
|
|
|
790,935 |
|
Loans in default |
|
|
33,884 |
|
|
|
25,224 |
|
|
|
20,458 |
|
|
|
23,772 |
|
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|
25,500 |
|
Percentage of loans in default (default rate) |
|
|
5.62 |
% |
|
|
3.33 |
% |
|
|
2.67 |
% |
|
|
3.10 |
% |
|
|
3.22 |
% |
|
|
|
(1) |
|
At December 31, 2008, 118,000 bulk loans in force and 45,482 bulk loans in default
related to Wall Street bulk transactions. Among other things, the default rate for bulk loans is
influenced by our decision to stop writing the portion of our bulk business that we refer to as
Wall Street bulk transactions. This decision increases the default rate because it results in a
greater percentage of the bulk business consisting of vintages that traditionally have higher
default rates. |
|
(2) |
|
We define prime loans as those having FICO credit scores of 620 or greater, A-minus
loans as those having FICO credit scores of 575-619, and subprime credit loans as those having FICO
credit scores of less than 575, all as reported to MGIC at the time a commitment to insure is
issued. Most A-minus and subprime credit loans were written through the bulk channel. |
|
(3) |
|
In accordance with industry practice, loans approved by GSE and other automated
underwriting (AU) systems under doc waiver programs that do not require verification of borrower
income are classified by us as full documentation. Based in part on information provided by the
GSEs, we estimate full documentation loans of this type were approximately 4% of 2007 new insurance
written. Information for other periods is not available. We understand these AU systems grant such
doc waivers for loans they judge to have higher credit quality. We also understand that the GSEs
terminated their doc waiver programs in the second half of 2008. |
15
Different areas 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 loans we insured that were in default as of December 31, 2008, 2007 and 2006 for the 15 states
for which we paid the most losses during 2008:
State Default Rates
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December 31, |
|
|
2008 |
|
2007 |
|
2006 |
California |
|
|
25.17 |
% |
|
|
13.60 |
% |
|
|
6.31 |
% |
Florida |
|
|
29.46 |
|
|
|
12.30 |
|
|
|
4.62 |
|
Michigan |
|
|
13.61 |
|
|
|
9.78 |
|
|
|
9.07 |
|
Arizona |
|
|
21.54 |
|
|
|
7.48 |
|
|
|
3.13 |
|
Ohio |
|
|
9.93 |
|
|
|
8.01 |
|
|
|
8.03 |
|
Illinois |
|
|
13.28 |
|
|
|
7.73 |
|
|
|
6.36 |
|
Georgia |
|
|
14.36 |
|
|
|
8.79 |
|
|
|
8.07 |
|
Texas |
|
|
8.68 |
|
|
|
6.27 |
|
|
|
6.45 |
|
Nevada |
|
|
25.10 |
|
|
|
8.73 |
|
|
|
4.12 |
|
Minnesota |
|
|
13.17 |
|
|
|
9.07 |
|
|
|
7.71 |
|
Colorado |
|
|
9.02 |
|
|
|
6.27 |
|
|
|
6.97 |
|
Virginia |
|
|
11.99 |
|
|
|
6.62 |
|
|
|
4.27 |
|
Massachusetts |
|
|
10.86 |
|
|
|
7.42 |
|
|
|
5.68 |
|
Indiana |
|
|
10.07 |
|
|
|
6.77 |
|
|
|
6.80 |
|
New York |
|
|
10.52 |
|
|
|
7.49 |
|
|
|
5.84 |
|
Other states |
|
|
9.03 |
|
|
|
5.85 |
|
|
|
5.54 |
|
The default inventory for the 15 states for which we paid the most losses during 2008, at
the dates indicated, appears in the table below.
Default Inventory by State
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|
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|
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|
|
December 31, |
|
|
2008 |
|
2007 |
|
2006 |
California |
|
|
14,960 |
|
|
|
6,925 |
|
|
|
3,000 |
|
Florida |
|
|
29,384 |
|
|
|
12,548 |
|
|
|
4,526 |
|
Michigan |
|
|
9,853 |
|
|
|
7,304 |
|
|
|
6,522 |
|
Arizona |
|
|
6,338 |
|
|
|
2,169 |
|
|
|
800 |
|
Ohio |
|
|
8,555 |
|
|
|
6,901 |
|
|
|
6,395 |
|
Illinois |
|
|
9,130 |
|
|
|
5,435 |
|
|
|
4,092 |
|
Georgia |
|
|
7,622 |
|
|
|
4,623 |
|
|
|
3,492 |
|
Texas |
|
|
10,540 |
|
|
|
7,103 |
|
|
|
6,490 |
|
Nevada |
|
|
3,916 |
|
|
|
1,337 |
|
|
|
530 |
|
Minnesota |
|
|
3,642 |
|
|
|
2,478 |
|
|
|
1,820 |
|
Colorado |
|
|
2,328 |
|
|
|
1,534 |
|
|
|
1,354 |
|
Virginia |
|
|
3,360 |
|
|
|
1,761 |
|
|
|
981 |
|
Massachusetts |
|
|
2,634 |
|
|
|
1,596 |
|
|
|
1,027 |
|
Indiana |
|
|
5,497 |
|
|
|
3,763 |
|
|
|
3,392 |
|
New York |
|
|
4,493 |
|
|
|
3,153 |
|
|
|
2,458 |
|
Other states |
|
|
59,936 |
|
|
|
38,490 |
|
|
|
31,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182,188 |
|
|
|
107,120 |
|
|
|
78,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Claims. Claims result from defaults which are not cured. Whether a claim results from
an uncured default depends, in large part, on the borrowers equity in the home at the time of
default, the borrowers or the lenders ability to sell the home for an amount sufficient to
satisfy all amounts due under the mortgage and the willingness and ability of the borrower and
lender to enter into a loan modification that provides for a cure of the default. Various factors
affect the frequency and amount of claims, including local housing prices and employment levels,
and interest rates.
Under the terms of our master policy, the lender is required to file a claim for primary
insurance with us within 60 days after it has acquired title to the underlying
property (typically through foreclosure). Depending on the applicable state foreclosure law,
generally at least twelve months pass from the date of default to payment of a claim on an uncured
default. The rate at which claims are received and paid has slowed recently due to various state
and lender foreclosure moratoriums, servicing delays including as a result of attempts to modify
loans, fraud investigations by us, our pursuit of mitigation opportunities and a lack of capacity
in the court systems.
Within 60 days after a claim has been filed and all documents required to be submitted to
us have been delivered, we have the option of either (1) 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 (2) paying 100% of the claim amount in exchange
for the lenders conveyance of good and marketable title to the property to us. After we receive
title to properties, we sell them for our 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 typically received during the first two years
following issuance of coverage on a loan. This is typically followed by a period of rising claims
which, based on industry experience, has historically reached its highest level in the third and
fourth years after the year of loan origination. Thereafter, the number of claims typically
received has historically declined at a gradual rate, although the rate of decline can be affected
by conditions in the economy, including slowing home price appreciation or housing price
depreciation. Due in part to the subprime component of loans insured in Wall Street bulk
transactions (which were the majority of our bulk transactions prior to 2007), 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, 2008, 66% of the MGIC Book of primary insurance in force had been
written on or after January 1, 2006, although a portion of that insurance arose from the
refinancing of earlier originations. See - Insurance In Force by Policy Year.
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, the coverage percentage on the loan and local market
conditions. The average claim severity on the MGIC Book of primary insurance was $52,239 for 2008,
compared to $37,165 for 2007, and $28,228 in 2006. The continued increase in average claim
severity in 2008 was primarily the result of the default inventory containing higher loan exposures
with expected higher average claim payments as well as our inability to mitigate losses through the
sale of properties due to slowing home price appreciation or home price declines in some areas.
17
Information about net claims we paid during 2006 through 2008 appears in the table below.
Net paid claims ($ millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Prime (FICO 620 & >) |
|
$ |
547 |
|
|
$ |
332 |
|
|
$ |
251 |
|
A-Minus (FICO 575-619) |
|
|
250 |
|
|
|
161 |
|
|
|
125 |
|
Subprime (FICO < 575) |
|
|
132 |
|
|
|
101 |
|
|
|
68 |
|
Reduced doc (All FICOs) |
|
|
395 |
|
|
|
190 |
|
|
|
81 |
|
Other |
|
|
48 |
|
|
|
45 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
Direct losses paid |
|
|
1,372 |
|
|
|
829 |
|
|
|
575 |
|
|
|
|
|
|
|
|
|
|
|
Reinsurance |
|
|
(19 |
) |
|
|
(12 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
Net losses paid |
|
|
1,353 |
|
|
|
817 |
|
|
|
567 |
|
|
|
|
|
|
|
|
|
|
|
LAE |
|
|
48 |
|
|
|
53 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
Net losses and LAE
before terminations |
|
|
1,401 |
|
|
|
870 |
|
|
|
611 |
|
|
|
|
|
|
|
|
|
|
|
Reinsurance terminations |
|
|
(265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and LAE paid |
|
$ |
1,136 |
|
|
$ |
870 |
|
|
$ |
611 |
|
|
|
|
|
|
|
|
|
|
|
Information regarding the 15 states for which we paid the most primary losses during 2008
appears in the table below.
Primary paid claims by state ($ millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
California |
|
$ |
315.8 |
|
|
$ |
81.7 |
|
|
$ |
2.8 |
|
Florida |
|
|
129.3 |
|
|
|
37.6 |
|
|
|
4.4 |
|
Michigan |
|
|
98.9 |
|
|
|
98.0 |
|
|
|
73.8 |
|
Arizona |
|
|
60.8 |
|
|
|
10.5 |
|
|
|
0.7 |
|
Ohio |
|
|
58.3 |
|
|
|
73.2 |
|
|
|
71.5 |
|
Illinois |
|
|
52.0 |
|
|
|
34.9 |
|
|
|
20.5 |
|
Georgia |
|
|
50.4 |
|
|
|
35.4 |
|
|
|
39.6 |
|
Texas |
|
|
47.7 |
|
|
|
51.1 |
|
|
|
48.9 |
|
Nevada |
|
|
45.1 |
|
|
|
12.3 |
|
|
|
1.4 |
|
Minnesota |
|
|
43.2 |
|
|
|
33.6 |
|
|
|
16.0 |
|
Colorado |
|
|
32.5 |
|
|
|
31.6 |
|
|
|
30.1 |
|
Virginia |
|
|
32.3 |
|
|
|
12.7 |
|
|
|
1.8 |
|
Massachusetts |
|
|
28.9 |
|
|
|
24.3 |
|
|
|
6.5 |
|
Indiana |
|
|
26.0 |
|
|
|
33.3 |
|
|
|
34.8 |
|
New York |
|
|
23.9 |
|
|
|
13.2 |
|
|
|
9.2 |
|
Other states |
|
|
278.8 |
|
|
|
201.0 |
|
|
|
162.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,323.9 |
|
|
$ |
784.4 |
|
|
$ |
524.6 |
|
There have been recent proposals to give bankruptcy judges the authority to reduce
mortgage balances in bankruptcy cases. Such reductions are sometimes referred to as bankruptcy
cramdowns. A bankruptcy cramdown is not an event that entitles an insured party to make a claim
under our insurance policy. If a borrower ultimately satisfies his or her mortgage after a
bankruptcy cramdown, then our insurance policies provide that we would not be required to pay any
claim. Under our insurance policies, however, if a borrower re-defaults on a mortgage after a
bankruptcy cramdown, the claim we would be required to pay would be based upon the original,
unreduced loan balance. We are not aware of any bankruptcy cramdown proposals that would change
these provisions of our insurance policies.
Loss Mitigation. Before paying a claim, we review the loan file to determine whether we
are required, under the applicable insurance policy, to pay the claim or whether we are entitled to
reduce the
18
amount of the claim. For example, all of our insurance policies provide that we can reduce or deny
a claim if the servicer did not comply with its obligation to
mitigate our loss by
performing reasonable loss mitigation efforts or diligently pursuing a foreclosure or bankruptcy
relief in a timely manner. We also do not cover losses resulting from property damage that has
not been repaired.
In addition, subject to rescission caps in certain of our Wall Street bulk transactions,
all of our insurance policies allow us to rescind coverage under certain circumstances. Because we
review the loan origination documents and information as part of our normal processing when a claim
is submitted to us, rescissions occur most often after we have received a claim. Historically,
claims submitted to us on policies we rescinded represented less than 5% of our claims resolved
during the year. This increased to approximately 15% in the fourth quarter of 2008. In light of
the number of claims investigations we are pursuing and our perception that books of insurance we
wrote before 2008 contain a significant number of loans involving fraud, we expect our rescission
rate to increase. When we rescind coverage, we return all premiums
previously paid to us under the policy and are relieved of our obligation to pay a claim under the
policy, although if the insured disputes our right to rescind coverage, whether the requirements
to rescind are met ultimately would be determined by arbitration or judicial proceedings.
Objections to rescission may be made several years after we have rescinded an insurance policy.
Historically, we have received an immaterial number of such
objections, but that may change
as our rate of rescissions increases.
Most of our rescissions involve material misrepresentations made, or fraud committed, in
connection with the origination of a loan regarding information we received and relied upon when
the loan was insured. In general, our insurance policies allow us to rescind coverage if a
material misrepresentation is made and if the lender or related parties such as the originator and
the mortgage loan broker were aware of such misrepresentation. Ultimately, our ability to
rescind coverage for material misrepresentation requires a thorough investigation of the facts
surrounding the origination of the insured mortgage loan and the discovery of sufficient evidence
regarding a misrepresentation and the materiality of the misrepresentation. These types of
investigations are very fact-intensive, can be more difficult in reduced documentation and no
documentation loan scenarios and often depend on factors outside our control, including whether the
borrower cooperates with our investigation.
One of the loss mitigation techniques available to us is obtaining a deficiency judgment
against the borrower and attempting to recover some or all of the paid claim from the borrower.
However, ten states, including Arizona, Illinois, New York, Ohio, Texas and Virginia, prohibit
mortgage guaranty insurance companies from obtaining deficiency judgments if the applicable
property is a single-family home that the borrower lived in. In five other states, including
California, deficiency judgments are effectively prohibited. Finally, some states, including,
Florida, Indiana, Illinois and Ohio (when, in the latter two states, the circumstances prohibiting
deficiency judgments do not apply), have a judicial foreclosure process in which a deficiency
judgment is obtained. In our experience, the increased time and costs associated with separate
actions to obtain a deficiency judgment usually outweigh the potential benefits of collecting the
deficiency judgment. In recent years, recoveries on deficiency judgments have been less than 1% of
our paid claims.
The recent increase in our paid claims has not been accompanied by a similar increase in recoveries
on deficiency judgments. This has occurred because the number of borrowers against whom we are
seeking deficiency judgments has not increased. This in turn is due to our view that the number of
borrowers whose credit quality would warrant our seeking deficiency judgments has remained
essentially unchanged despite the substantial increase in the number of potential deficiency
candidates.
Loss Reserves and Premium Deficiency Reserves
A significant period of time may elapse between the time when a borrower defaults on a
mortgage payment, which is the event triggering a potential future claim payment by us, the
reporting of the default to us and the eventual payment of the claim related to the uncured
default. To recognize the liability for
19
unpaid losses related to outstanding reported defaults, or default inventory, we establish loss
reserves, representing the estimated percentage of defaults which will ultimately result in a
claim, which is 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 GAAP for the mortgage
insurance industry, we generally do not establish loss reserves for future claims on insured loans
which are not currently in default.
We also establish reserves to provide for the estimated costs of settling claims, general
expenses of administering the claims settlement process, legal fees and other fees (loss
adjustment expenses), and for losses and loss adjustment expenses from defaults which have
occurred, but which have not yet been reported to us.
Our reserving process bases our estimates of future events on our past experience.
However, estimation of loss reserves is inherently judgmental and 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, see the risk factors titled
Because we establish loss reserves only upon a loan default rather than based on estimates of our
ultimate losses, our earnings may be adversely affected by losses disproportionately in certain
periods and Loss reserve estimates are subject to uncertainties and paid claims may substantially
exceed our loss reserves in Item 1A.
After our reserves are initially established, we perform premium deficiency tests using
best estimate assumptions as of the testing date. We establish premium deficiency reserves, if
necessary, when the present value of expected future losses and expenses exceeds the present value
of expected future premium and already established reserves. In the fourth quarter of 2007, we
recorded premium deficiency reserves of $1,211 million relating to Wall Street bulk transactions
remaining in our insurance in force. As of December 31, 2008, this premium deficiency reserve was
$454 million. A premium deficiency reserve represents the present value of expected future losses
and expenses that exceeded the present value of expected future premium and already established
loss reserves on the applicable loans.
For further information about loss reserves, see Managements Discussion and
AnalysisResults of Consolidated OperationsLosses in Item 7 and Note 8 to our consolidated
financial statements in Item 8.
Geographic Dispersion
The following table reflects the percentage of primary risk in force in the top 10 states
and top 10 core-based statistical areas for the MGIC Book at December 31, 2008:
Dispersion
of Primary Risk In Force
|
|
|
|
|
|
|
|
|
Top 10 States |
|
|
|
|
|
|
|
|
1. Florida |
|
|
8.2 |
% |
|
|
|
|
2. California |
|
|
7.6 |
|
|
|
|
|
3. Texas |
|
|
7.0 |
|
|
|
|
|
4. Illinois |
|
|
4.5 |
|
|
|
|
|
5. Pennsylvania |
|
|
4.3 |
|
|
|
|
|
6. Ohio |
|
|
4.3 |
|
|
|
|
|
7. Michigan |
|
|
3.9 |
|
|
|
|
|
8. Georgia |
|
|
3.5 |
|
|
|
|
|
9. New York |
|
|
3.2 |
|
|
|
|
|
10. North
Carolina |
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
49.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
Top 10 core-based statistical areas |
|
|
|
|
1. Chicago-Naperville-Joliet |
|
|
3.1 |
% |
2. Atlanta-Sandy Springs-Marietta |
|
|
2.4 |
|
3. Houston-Baytown-Sugarland |
|
|
2.1 |
|
4. Washington-Arlington-Alexandria |
|
|
1.9 |
|
5. Phoenix-Mesa-Scottsdale |
|
|
1.8 |
|
6. Riverside-San Bernardino-Ontario |
|
|
1.7 |
|
7. San Juan-Caguas-Guaynabo |
|
|
1.7 |
|
8. Los Angeles-Long Beach-Glendale |
|
|
1.7 |
|
9. Dallas-Plano-Irving |
|
|
1.4 |
|
10. Philadelphia |
|
|
1.4 |
|
|
|
|
|
|
Total |
|
|
19.2 |
% |
|
|
|
|
|
The percentages shown above for various core-based statistical areas can be affected by
changes, from time to time, in the federal governments definition of a core-based statistical
area.
Insurance In Force by Policy Year
The following table sets forth for the MGIC Book the dispersion of our primary insurance
in force as of December 31, 2008, by year(s) of policy origination since we began operations in
1985:
Primary Insurance In Force by Policy Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy Year |
|
Flow |
|
|
Bulk |
|
|
Total |
|
|
Percent of Total |
|
| |
(In millions of dollars) |
|
1985-2001 |
|
$ |
8,555 |
|
|
$ |
1,208 |
|
|
$ |
9,763 |
|
|
|
4.3 |
% |
2002 |
|
|
5,955 |
|
|
|
1,205 |
|
|
|
7,160 |
|
|
|
3.2 |
|
2003 |
|
|
12,850 |
|
|
|
2,090 |
|
|
|
14,940 |
|
|
|
6.6 |
|
2004 |
|
|
14,104 |
|
|
|
2,268 |
|
|
|
16,372 |
|
|
|
7.2 |
|
2005 |
|
|
21,137 |
|
|
|
5,732 |
|
|
|
26,869 |
|
|
|
11.8 |
|
2006 |
|
|
27,428 |
|
|
|
11,300 |
|
|
|
38,728 |
|
|
|
17.1 |
|
2007 |
|
|
60,394 |
|
|
|
6,661 |
|
|
|
67,055 |
|
|
|
29.5 |
|
2008 |
|
|
44,566 |
|
|
|
1,502 |
|
|
|
46,068 |
|
|
|
20.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
194,989 |
|
|
$ |
31,966 |
|
|
$ |
226,955 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Risk
In Force and Product Characteristics of Risk In Force
At December 31, 2008 and 2007, 97% and 95%, respectively, of our 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 our primary risk in force as of December 31, 2008, by
year(s) of policy origination since we began operations in 1985:
Primary Risk In Force by Policy Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy Year |
|
Flow |
|
|
Bulk |
|
|
Total |
|
|
Percent of Total |
|
| |
(In millions of dollars) |
|
1985-2001 |
|
$ |
2,116 |
|
|
$ |
311 |
|
|
$ |
2,427 |
|
|
|
4.1 |
% |
2002 |
|
|
1,578 |
|
|
|
344 |
|
|
|
1,922 |
|
|
|
3.3 |
|
2003 |
|
|
3,381 |
|
|
|
621 |
|
|
|
4,002 |
|
|
|
6.8 |
|
2004 |
|
|
3,780 |
|
|
|
640 |
|
|
|
4,420 |
|
|
|
7.5 |
|
2005 |
|
|
5,584 |
|
|
|
1,767 |
|
|
|
7,351 |
|
|
|
12.5 |
|
2006 |
|
|
7,050 |
|
|
|
3,490 |
|
|
|
10,540 |
|
|
|
17.9 |
|
2007 |
|
|
15,427 |
|
|
|
1,741 |
|
|
|
17,168 |
|
|
|
29.1 |
|
2008 |
|
|
10,925 |
|
|
|
226 |
|
|
|
11,151 |
|
|
|
18.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
49,841 |
|
|
$ |
9,140 |
|
|
$ |
58,981 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
22
The following table reflects at the dates indicated the (1) total dollar amount of
primary risk in force for the MGIC Book and (2) percentage of that 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, |
|
|
|
2008 |
|
|
2007 |
|
Direct Risk In Force (In Millions): |
|
$ |
58,981 |
|
|
$ |
55,794 |
|
|
|
|
|
|
|
|
|
|
Loan-to-value ratios:(1) |
|
|
|
|
|
|
|
|
100s |
|
|
29.6 |
% |
|
|
30.1 |
% |
95s |
|
|
29.1 |
|
|
|
27.5 |
|
90s(2) |
|
|
35.6 |
|
|
|
35.3 |
|
80s |
|
|
5.7 |
|
|
|
7.1 |
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Type: |
|
|
|
|
|
|
|
|
Fixed(3) |
|
|
89.3 |
% |
|
|
86.4 |
% |
Adjustable rate mortgages (ARMs)(4) |
|
|
10.7 |
|
|
|
13.6 |
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original Insured Loan Amount:(5) |
|
|
|
|
|
|
|
|
Conforming loan limit and below |
|
|
94.3 |
% |
|
|
94.0 |
% |
Non-conforming |
|
|
5.7 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Term: |
|
|
|
|
|
|
|
|
15-years and under |
|
|
1.1 |
% |
|
|
1.2 |
% |
Over 15 years |
|
|
98.9 |
|
|
|
98.8 |
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
Property Type: |
|
|
|
|
|
|
|
|
Single-family(6) |
|
|
89.7 |
% |
|
|
89.9 |
% |
Condominium |
|
|
9.3 |
|
|
|
8.9 |
|
Other(7) |
|
|
1.0 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy Status: |
|
|
|
|
|
|
|
|
Primary residence |
|
|
93.1 |
% |
|
|
92.8 |
% |
Second home |
|
|
3.5 |
|
|
|
3.3 |
|
Non-owner occupied |
|
|
3.4 |
|
|
|
3.9 |
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Documentation: |
|
|
|
|
|
|
|
|
Reduced documentation(8) |
|
|
12.0 |
% |
|
|
14.7 |
% |
Full documentation |
|
|
88.0 |
|
|
|
85.3 |
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FICO Score:(9) |
|
|
|
|
|
|
|
|
Prime (FICO 620 and above) |
|
|
90.7 |
% |
|
|
88.4 |
% |
A Minus (FICO 575 - 619) |
|
|
7.2 |
|
|
|
8.8 |
|
Subprime (FICO below 575) |
|
|
2.1 |
|
|
|
2.8 |
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
23
|
|
|
(1) |
|
Loan-to-value ratio represents the ratio (expressed as a percentage)
of the dollar amount of the first mortgage loan to the value of the
property at the time the loan became insured and does not reflect
subsequent housing price appreciation or depreciation. Subordinate
mortgages may also be present. For purposes of the table,
loan-to-value ratios are classified as in excess of 95% (100s, a
classification that includes 97% to 103% loan-to-value ratio loans);
in excess of 90% loan-to-value ratio and up to 95% loan-to-value
ratio (95s); in excess of 80% loan-to-value ratio and up to 90%
loan-to-value ratio (90s); and equal to or less than 80%
loan-to-value ratio (80s). |
|
(2) |
|
We include in our 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, 2008 and 2007, 1.2% and 1.3%, respectively, 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 pay option ARMs and other ARMs with
negative amortization features, which collectively at December 31,
2008, 2007 and 2006, represented 3.8%, 4.5% and 5.5%, respectively,
of primary risk in force. As indicated in note (3), does not include
ARMs in which the initial interest rate is fixed for at least five
years. As of December 31, 2008, 2007 and 2006, ARMs with
loan-to-value ratios in excess of 90% represented 2.7%, 4.0% and
6.1%, 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 adjustment and was $417,000 for 2006, 2007
and early 2008; this amount was temporarily increased to up to
$729,500 in the most costly communities in early 2008. 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) |
|
Reduced documentation loans, many of which are commonly referred to
as 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, 2008, 2007 and 2006, reduced
documentation loans represented 6.8%, 8.2% and 7.9%, respectively, of
risk in force written through the flow channel and 40.3%, 41.2% and
42.3%, respectively of risk in force written through the bulk
channel. In accordance with industry practice, loans approved by GSE
and other automated underwriting (AU) systems under doc waiver
programs that do not require verification of borrower income are
classified by us as full documentation. Based in part on
information provided by the GSEs, we estimate full documentation
loans of this type were approximately 4% of 2007 new insurance
written. Information for other periods is not available. We
understand these AU systems grant such doc waivers for loans they
judge to have higher credit quality. We also understand that the
GSEs terminated their doc waiver programs in the second half of
2008. |
|
(9) |
|
Represents the FICO score at loan origination. The weighted average
FICO score at loan origination for new insurance written in 2008,
2007 and 2006 was 733, 691 and 690, respectively. |
C. Other Business and Joint Ventures
We provide various mortgage services for the mortgage finance industry, such as portfolio
retention and secondary marketing of mortgage-related assets. Our eMagic.com LLC subsidiary
provides an Internet portal through which mortgage industry participants can access products and
services of wholesalers, investors and vendors necessary to make a home mortgage loan. Our Myers
Internet, Inc. subsidiary provides website hosting, design and marketing solutions for mortgage
originators and real estate agents.
For information about our Australian operations, see Managements Discussion and
Analysis of Financial Condition and Results of Operations Overview Australia in Item 7.
24
At December 31, 2008, we owned approximately 45.5% of the equity interest in C-BASS,
which prior to 2008 was one of our principal joint ventures included in the Income from joint
ventures, net of tax line in our Consolidated Statement of Operations. A third party has an
option that expires in December 2014 to purchase 22.5% of C-BASS equity from us for an exercise
price of $2.5 million. C-BASS is a joint venture with its senior management and Radian Group Inc.
that was formerly engaged principally in the business of investing in the credit risk of subprime
single-family residential mortgages. In 2007, C-BASS ceased its operations and is managing its
portfolio pursuant to a consensual, non-bankruptcy restructuring, under which its assets are to be
paid out over time to its secured and unsecured creditors. For further information about C-BASS,
see Managements Discussion and AnalysisResults of Consolidated Operations in Item 7 and Note 10
to our consolidated financial statements in Item 8.
Until August 2008, when we sold our entire interest in Sherman to Sherman, Sherman was a
joint venture with its senior management and Radian Group Inc. Our interest sold represented
approximately 24.25% of Shermans equity. In September 2007, we sold certain interests in Sherman
for approximately $240.8 million. For further information about Sherman, which during 2008 was our
principal joint venture included in the Income from joint ventures, net of tax line in our
Consolidated Statement of Operations, see Managements Discussion and AnalysisResults of
Consolidated Operations in Item 7 and Note 10 to our consolidated financial statements in Item 8.
D. Investment Portfolio
Policy and Strategy
At December 31, 2008, the fair value of our investment portfolio and cash and cash
equivalents was approximately $8.1 billion. As of December 31, 2008, approximately $394 million of
our portfolio was held at the parent company level and the remainder of our portfolio was held by
our subsidiaries, primarily MGIC. The portion of our portfolio that is held at the parent company
level is held in cash or cash equivalents. The remainder of the discussion of our investment
portfolio refers to our investment portfolio only and not to cash and cash equivalents.
Approximately 49% of our investment portfolio is managed by either BlackRock, Inc. or
Wellington Management Company, LLP, although we maintain overall control of investment policy and
strategy. We maintain direct management of the remainder of our investment portfolio.
25
Our current policies emphasize preservation of capital, as well as total return.
Therefore, our investment portfolio consists almost entirely of high-quality, fixed-income
investments. We seek liquidity through diversification and investment in publicly traded
securities. We attempt to maintain a level of liquidity commensurate with our perceived business
outlook and the expected timing, direction and degree of changes in interest rates. Our investment
policies in effect at December 31, 2008 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(1) |
U.S. government agencies (in total)(2)
|
|
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 |
|
|
|
(1) |
|
No limit subject to liquidity considerations. |
|
(2) |
|
As used with respect to our investment portfolio, U.S.
government agencies include GSEs (which, in the sector table
below are included as part of U.S. Treasuries), Federal Home
Loan Banks and the Tennessee Valley Authority. |
At December 31, 2008, based on amortized cost, approximately 94.4% of our total fixed
income investment portfolio was invested in securities rated A or better, with 56.7% rated AAA
and 23.9% rated AA, in each case by at least one nationally recognized securities rating
organization. For information related to the portion of our investment portfolio that is insured
by financial guarantors, see Managements Discussion and Analysis of Financial Condition and
Results of Operations Financial Condition in Item 7.
Our investment policies and strategies are subject to change depending upon regulatory,
economic and market conditions and our existing or anticipated financial condition and operating
requirements, including our tax position.
Investment Operations
At December 31, 2008, municipal securities represented 89.5% of the fair value of our
total investment portfolio and derivative financial instruments in our investment portfolio were
immaterial. Securities due within one year, within one to five years, within five to ten years, and
after ten years, represented 6.2%, 23.1%, 18.2% and 43.1%,
respectively, of the total fair value of
our investment in debt securities. Auction rate and mortgage-backed
securities represented 7.4% and 2.0%, respectively, of the total fair
value of our investment in debt securities. Our after-tax yield for 2008 was 3.5%, compared to after-tax
yields of 4.2% and 4.0% in 2007 and 2006, respectively.
26
Our ten largest holdings at December 31, 2008 appear in the table below:
|
|
|
|
|
|
|
Market Value |
|
|
|
(in thousands |
|
|
|
of dollars) |
|
1. Illinois State General Obligations |
|
$ |
150,245 |
|
2. Montana St. Higher Student Asst |
|
|
62,500 |
|
3. Harris St. Higher Student Asst |
|
|
59,260 |
|
4. New York Sales Tax Asset Receivable |
|
|
55,237 |
|
5. Penn State Higher Educ Asst |
|
|
54,700 |
|
6. Florida St. Brd Ed Lottery Rev |
|
|
54,607 |
|
7. San Joaquin Hills California |
|
|
51,963 |
|
8. California St. Economic Recovery |
|
|
49,671 |
|
9. North Carolina Municipal Power |
|
|
48,920 |
|
10. Brazos Texas Higher Education |
|
|
48,100 |
|
|
|
|
|
|
|
$ |
635,203 |
|
|
|
|
|
Note: This table excludes securities issued by U.S. government,
U.S. government agencies, GSEs, Federal Home Loan Banks and the
Tennessee Valley Authority.
The sectors of our investment portfolio at December 31, 2008 appear in the table below:
|
|
|
|
|
|
|
Percentage of |
|
|
Portfolios Market Value |
1. Municipal |
|
|
87.1 |
% |
2. Asset Backed |
|
|
3.4 |
|
3. Corporate |
|
|
3.3 |
|
4. U.S. Treasuries |
|
|
2.5 |
|
5. Foreign |
|
|
2.2 |
|
6. Preferred Stock |
|
|
1.3 |
|
7. Other Taxable |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
100.0 |
% |
|
|
|
|
|
For further information concerning investment operations, see Note 4 to our consolidated
financial statements in Item 8.
E. Regulation
Direct Regulation
We and our insurance subsidiaries, including MGIC, are subject to regulation by the
insurance departments of the various states in which each insurance subsidiary is licensed to do
business. The nature and extent of that regulation varies, but generally depends on statutes which
delegate regulatory, supervisory and administrative powers to state insurance commissioners.
In general, regulation of our subsidiaries business relates to:
|
|
|
licenses to transact business; |
|
|
|
|
policy forms; |
|
|
|
|
premium rates; |
|
|
|
|
insurable loans; |
27
|
|
|
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 New York
Insurance Department and a January 31, 2000 letter from the Illinois Department of Insurance, see
The MGIC BookTypes of ProductPool Insurance and We are 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 13 to our consolidated financial statements 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. See Managements Discussion and Analysis Liquidity
and Capital Resources Capital in Item 7 for information about regulations governing our capital
adequacy, information about our current capital and our expectations regarding our future capital
position.
We are required to establish a contingency loss reserve in an amount equal to 50% of
earned premiums. These amounts cannot be withdrawn for a period of 10 years, except under certain
circumstances. For further information, see Note 2 to our consolidated financial statements in
Item 8.
Mortgage insurers are generally single-line companies, restricted to writing residential
mortgage insurance business only. Although we, as an insurance holding company, are prohibited from
engaging in certain transactions with MGIC without submission to and, in some instances, prior
approval of applicable insurance departments, we are not subject to insurance company regulation on
our non-insurance businesses.
Wisconsins insurance regulations generally provide that no person may acquire control of
us 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. In
addition, the insurance regulations of other states in which MGIC is a licensed insurer require
notification to the states insurance
28
department a specified time before a person acquires control of us. If regulators in these states
disapprove the change of control, our licenses to conduct business in the disapproving states could
be terminated. For further information about regulatory proceedings applicable to us and our
industry, see We are subject to the risk of private litigation and regulatory proceedings in Item
1A.
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 them to be eligible to insure loans sold to the GSEs. These
requirements are subject to change from time to time. Currently, we are an approved mortgage
insurer for both Freddie Mac and Fannie Mae but our longer term eligibility could be negatively
affected as discussed under Our financial strength rating has been downgraded below Aa3/AA-,
which could reduce the volume of our new business writings in Item 1A. In September 2008, the
FHFA was appointed as the conservator of both of the GSEs. It is uncertain what impact the
appointment of the FHFA as the GSEs conservator may have on the GSEs operations and activities.
For additional information about the potential impact that any such changes may have on us, see the
risk factor titled Changes in the business practices of Fannie Mae and Freddie Mac could reduce
our revenues or increase our losses. in Item 1A and Managements Discussion and Analysis of
Financial Condition and Results of Operations Overview Future of the Domestic Residential
Housing Finance System in Item 7.
The
GSEs have approved the terms of our master policy. Any new master
policy, or material changes to our existing master policy, would be
subject to approval by the GSEs
For information about the importance of our ratings, see
the risk factor titled Our financial strength rating has been downgraded below Aa3/AA-, which
could reduce the volume of our new business writings in
Item 1A.
Indirect Regulation
We 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 the Veterans Administration, 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 We are subject to the risk of private litigation and regulatory proceedings in
Item 1A.
The Office of Thrift Supervision, the Office of the Comptroller of the Currency, 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 a loan-to-value ratio 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
29
create incentives for increased lending to low and moderate income persons, or in targeted areas.
There can be no assurance that other federal laws and regulations affecting these
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 risk factor titled Changes in the business practices of Fannie Mae and Freddie Mac could
reduce our revenues or increase our losses in Item 1A.
F. Employees
At December 31, 2008, we had approximately 1,160 full- and part-time employees, of whom
approximately 30% were assigned to our 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. In recent years, the number of
on-call employees has ranged from fewer than 200 to as
many as 500.
G. Website Access
We make available, free of charge, through our Internet website our Annual Reports 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 we electronically file these materials with the
Securities and Exchange Commission. The address of our website is http://mtg.mgic.com, and such
reports and amendments are accessible through the Investor
Information and Stockholder Information links at
such address.
Item 1A. Risk Factors.
Forward-Looking Statements and Risk Factors
Our revenues and losses may be affected by the risk factors discussed below. These risk factors are an integral part of this annual report.
These factors may also cause actual results to differ materially from the results
contemplated by forward looking statements that we may make. Forward looking statements consist of
statements which relate to matters other than historical fact, including matters that inherently
refer to future events. Among others, statements that include words such as we believe,
anticipate, or expect, or words of similar import, are forward looking statements. We are not
undertaking any obligation to update any forward looking statements or other statements we may make
even though these statements may be affected by events or circumstances occurring after the forward
looking statements or other statements were made. No reader of this
annual report should rely on the fact that such
statements are current at any time other than the time at which this annual report was filed with
the Securities and Exchange Commission.
Because our policyholders position could decline and our risk-to-capital could increase beyond the
levels necessary to meet regulatory requirements we are considering options to obtain additional
capital.
The Office of the Commissioner of Insurance of Wisconsin is our principal insurance
regulator. To assess a mortgage guaranty insurers capital adequacy, Wisconsins insurance
regulations require that a mortgage guaranty insurance company maintain policyholders position of
not less than a minimum computed under a prescribed formula. If a mortgage guaranty insurer does
not meet the minimum required by the formula it cannot write new business until its policyholders
position meets the minimum. Some other states that regulate our mortgage guaranty insurance
companies have similar regulations.
30
Some states that regulate us have provisions that limit the risk-to-capital ratio of a
mortgage guaranty insurance company to 25:1. If an insurance companys risk-to-capital ratio
exceeds the limit applicable in a state, it may be prohibited from writing new business in that
state until its risk-to-capital ratio falls below the limit.
The mortgage insurance industry is
experiencing material losses, especially on the 2006 and 2007
books. The ultimate amount of these losses will depend in part on
general economic conditions, including unemployment, and
the direction of home prices in California, Florida and other distressed markets, which in turn
will be influenced by general economic conditions and other factors. Because we cannot predict
future home prices or general economic conditions with confidence,
there is significant uncertainty surrounding what our ultimate losses will be on our 2006 and 2007 books. Our current expectation,
however, is that these books will continue to generate material incurred and paid losses for a
number of years. Our view of potential losses on these books has trended upward since the first
quarter of 2008, including since the time at which we finalized our
Quarterly Report on Form 10-Q for the third quarter
of 2008. Unless recent loss trends materially mitigate, MGICs policyholders position could decline
and its risk-to-capital could increase beyond the levels necessary to meet regulatory
requirements to write new business and this could occur before the end of 2009. As a result, we are considering options
to obtain capital to write new business, which could occur through the sale of equity or debt
securities, from reinsurance and/or through the use of claims paying resources that should not be needed to cover obligations on
our existing insurance in force. While we have not pursued raising capital from private sources, we
initiated discussions with the US Treasury late in October 2008 to seek a capital investment and/or
reinsurance under the Troubled Assets Relief Program (TARP). We understand there is intense
competition for TARP and other government assistance. We cannot predict whether we will be
successful in obtaining capital from any source but any sale of additional securities could dilute
substantially the interest of existing shareholders and other forms
of capital relief could also
result in additional costs.
Changes in the business practices of Fannie Mae and Freddie Mac could reduce our revenues or
increase our losses.
The majority of our insurance written is for loans sold to Fannie Mae and Freddie Mac,
each of which is a government sponsored entity, or GSE. As a result, the business practices of the
GSEs affect the entire relationship between them and mortgage insurers and include:
|
|
|
the level of private mortgage insurance coverage, subject to the limitations of
Fannie Mae and Freddie Macs charters
(which may be changed by federal legislation)
when private mortgage insurance is used as the
required credit enhancement on low down payment mortgages, |
|
|
|
|
the amount of loan level delivery fees
(which result in higher costs to borrowers) that Fannie Mae or
Freddie Mac assess on loans that require mortgage insurance, |
|
|
|
|
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, |
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the underwriting standards that determine what loans are eligible for purchase by
Fannie Mae or Freddie Mac, which can affect the quality of the risk insured by the
mortgage insurer and the availability of mortgage loans, |
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the terms on which mortgage insurance coverage can be canceled before reaching the
cancellation thresholds established by law, and |
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the circumstances in which mortgage servicers must perform activities intended to
avoid or mitigate loss on insured mortgages that are delinquent. |
In September 2008,
the Federal Housing Finance Agency (FHFA) was appointed as the
conservator of Fannie Mae and Freddie Mac. As their conservator, FHFA controls and directs the
operations of Fannie Mae and Freddie Mac. The appointment of FHFA as
conservator,
the increasing role that the federal government has assumed in the
residential mortgage market, our industrys
inability, due to capital constraints, to write sufficient business to meet the needs of Fannie Mae
and Freddie Mac or other factors may increase the likelihood that the business practices of Fannie Mae and Freddie
Mac change in ways that
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may have a material adverse effect on us. In addition, these factors may increase the likelihood
that the charters of Fannie Mae and Freddie Mac are changed by new federal legislation. Such
changes may allow Fannie Mae and Freddie Mac to reduce or eliminate the level of private mortgage
insurance coverage that they use as credit enhancement.
In addition, both Fannie Mae and Freddie Mac have policies which provide guidelines on
terms under which they can conduct business with mortgage insurers with financial strength ratings
below Aa3/AA-. For information about how these policies could affect us, see the risk factor titled
Our financial strength rating has been downgraded below Aa3/AA-, which could reduce the volume of
our new business writings.
A downturn in the domestic economy or a decline in the value of borrowers homes from their value
at the time their loans closed may result in more homeowners defaulting and our 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.
In general, favorable economic conditions 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, which in turn can influence the willingness
of borrowers with sufficient resources to make mortgage payments to do so when the mortgage balance
exceeds the value of the home. Housing values may decline even absent a deterioration in economic
conditions due to declines in demand for homes, which in turn may result from changes in buyers
perceptions of the potential for future appreciation, restrictions on mortgage credit due to more
stringent underwriting standards, liquidity issues affecting lenders or other factors. The
residential mortgage market in the United States has for some time experienced a variety of
worsening economic conditions and housing values in many areas continue to decline. The credit
crisis that began in September 2008 may result in further deterioration in economic conditions and
home values.
The mix of business we write also affects the likelihood of losses occurring.
Even when housing values are stable or rising, certain types of mortgages have higher
probabilities of claims. These segments include loans with loan-to-value ratios over 95% (including
loans with 100% loan-to-value ratios or in certain markets that have experienced declining housing
values, over 90%), 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. As of December 31, 2008,
approximately 60% of our primary
risk in force consisted of loans with loan-to-value ratios equal to or greater than 95%, 9.3% had
FICO credit scores below 620, and 13.7% had limited underwriting, including limited borrower
documentation. A material portion of these loans were written in 2005 2007 and through the first
quarter of 2008. (In accordance with industry practice, loans
approved by GSEs and other automated underwriting systems under doc waiver programs that do not require
verification of borrower income are classified by us as full documentation. For additional
information about such loans, see footnote (3) to the table
titled Default Statistics for the MGIC Book in Item 1.)
Beginning in the fourth quarter of 2007 we made a series of changes to our underwriting
guidelines in an effort to improve the risk profile of our new
business. Requirements
imposed by new guidelines, however, only affect business written under commitments to insure loans
that are issued after
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those guidelines become effective. Business for which commitments are issued after new guidelines
are announced and before they become effective is insured by us in accordance with the guidelines
in effect at time of the commitment even if that business would not meet the new guidelines. For
commitments we issue for loans that close and are insured by us, a period longer than a calendar
quarter can elapse between the time we issue a commitment to insure a loan and the time we receive
the payment of the first premium and report the loan in our risk in force, although this period is
generally shorter.
As of December 31, 2008, approximately 3.7% of our primary risk in force written through
the flow channel, and 46.0% of our primary risk in force written through the bulk channel,
consisted of adjustable rate mortgages in which the initial interest rate may be adjusted during
the five years after the mortgage closing (ARMs). We classify as fixed rate loans adjustable rate
mortgages in which the initial interest rate is fixed during the five years after the mortgage
closing. We believe that when the reset interest rate significantly exceeds the interest rate at
loan origination, claims on ARMs would be substantially higher than for fixed rate loans. Moreover,
even if interest rates remain unchanged, claims on ARMs with a teaser rate (an initial interest
rate that does not fully reflect the index which determines subsequent rates) may also be
substantially higher because of the increase in the mortgage payment that will occur when the fully
indexed rate becomes effective. In addition, we believe the volume of interest-only loans, which
may also be ARMs, and loans with negative amortization features, such as pay option ARMs, increased
in 2005 and 2006 and remained at these levels during the first half of 2007, before beginning to
decline in the second half of 2007. We believe claim rates on certain of these loans will be
substantially higher than on loans without scheduled payment increases that are made to borrowers
of comparable credit quality.
Although we attempt to incorporate these higher expected claim rates into our
underwriting and pricing models, there can be no assurance that the premiums earned and the
associated investment income will prove adequate to compensate for actual losses even under our
current underwriting guidelines. We do, however, believe that given the various changes in our
underwriting guidelines that are effective in 2008, our 2008 book (which consists of loans we
committed to insure in 2008 that closed and become insured by us) will generate underwriting
profit, although as economic conditions have continued to deteriorate the amount of such profit has
declined over the amount we were expecting at the end of the third quarter of 2008.
Because we establish loss reserves only upon a loan default rather than based on estimates of our
ultimate losses, our earnings may be adversely affected by losses disproportionately in certain
periods.
In accordance with GAAP for the mortgage insurance industry, we establish loss reserves
only for loans in default. 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 that have not yet
been reported to us by the servicers (this is what is referred to as IBNR in the mortgage
insurance industry). We establish reserves using estimated claims rates and claims amounts in
estimating the ultimate loss. Because our reserving method does not take account of the impact of
future losses that could occur from loans that are not delinquent, our obligation for ultimate
losses that we expect to occur under our policies in force at any period end is not reflected in
our financial statements, except in the case where a premium deficiency exists. As a result, future
losses may have a material impact on future results as losses emerge.
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Because loss reserve estimates are subject to uncertainties and are based on assumptions that are
currently very volatile, paid claims may be substantially different than our loss reserves.
We establish reserves using estimated claim rates and claim amounts in estimating the
ultimate loss on delinquent loans. The estimated claim rates and claim amounts represent what we
believe best reflect the estimate of what will actually be paid on the loans in default as of the
reserve date.
The establishment of loss reserves is subject to inherent uncertainty and requires
judgment by management. Current conditions in the housing and mortgage industries make the
assumptions that we use to establish loss reserves more volatile than they would otherwise be. The
actual amount of the claim payments may be substantially different than our loss reserve estimates.
Our estimates could be adversely affected by several factors, including a deterioration of regional
or national economic conditions leading to a reduction in borrowers income and thus their ability
to make mortgage payments, and a drop in housing values that could materially reduce our ability to
mitigate potential loss through property acquisition and resale or expose us to greater loss on
resale of properties obtained through the claim settlement process. Changes to our estimates could
result in material impact to our results of operations, even in a stable economic environment, and
there can be no assurance that actual claims paid by us will not be substantially different than
our loss reserves.
The premiums we charge may not be adequate to compensate us for our liabilities for losses and as a
result any inadequacy could materially affect our financial condition and results of operations.
We set premiums at the time a policy is issued based on our expectations regarding likely
performance over the long-term. Generally, we cannot cancel the mortgage insurance coverage or
adjust renewal premiums during the life of a mortgage insurance policy. As a result, higher than
anticipated claims generally cannot be offset by premium increases on policies in force or
mitigated by our non-renewal or cancellation of insurance coverage. The premiums we charge, and the
associated investment income, may not be adequate to compensate us for the risks and costs
associated with the insurance coverage provided to customers. An increase in the number or size of
claims, compared to what we anticipate, could adversely affect our results of operations or
financial condition.
In January 2008, we announced that we had decided to stop writing the portion of our
bulk business that insures loans which are included in Wall Street securitizations because the
performance of loans included in such securitizations deteriorated materially in the fourth quarter
of 2007 and this deterioration was materially worse than we experienced for loans insured through
the flow channel or loans insured through the remainder of our bulk channel. As of December 31,
2007 we established a premium deficiency reserve of approximately $1.2 billion. As of December 31,
2008, the premium deficiency reserve was $454 million. At each date, the premium deficiency reserve
is the present value of expected future losses and expenses that exceeded the present value of
expected future premium and already established loss reserves on these bulk transactions.
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The mortgage insurance industry is experiencing material
losses, especially on the 2006 and 2007
books. The ultimate amount of these losses will depend in part on
general economic conditions, including unemployment, and
the direction of home prices in California, Florida and other distressed markets, which in turn
will be influenced by general economic conditions and other factors. Because we cannot predict
future home prices or general economic conditions with confidence, there is significant uncertainty surrounding what our ultimate losses will be on our 2006 and 2007 books. Our current expectation,
however, is that these books will continue to generate material incurred and paid losses for a
number of years. Our view of potential losses on these books has trended upward since the first
quarter of 2008, including since the time at which we finalized our
Quarterly Report on Form 10-Q for the third quarter
of 2008. There can be no assurance that additional premium deficiency reserves on Wall Street Bulk
or on other portions of our insurance portfolio will not be required.
The amounts that we owe under our revolving credit facility and Senior Notes could be accelerated.
We have a $300 million bank revolving credit facility that matures in March 2010 under
which $200 million is currently outstanding, $200 million of Senior Notes due in September 2011 and
$300 million of Senior Notes due in November 2015.
Our revolving credit facility includes three financial covenants. First, it requires that
we maintain Consolidated Net Worth of no less than $2.00 billion at all times. However, if as of
June 30, 2009, our Consolidated Net Worth equals or exceeds $2.75 billion, then the minimum
Consolidated Net Worth under the facility will be increased to $2.25 billion at all times from and
after June 30, 2009. Consolidated Net Worth is generally defined in our credit agreement as the sum
of our consolidated stockholders equity (determined in accordance with GAAP) plus the
aggregate outstanding principal amount of our 9% Convertible Junior Subordinated Debentures due
2063. The current aggregate outstanding principal amount of our 9% Convertible Junior Subordinated
Debentures due 2063 is $390 million.
At December 31, 2008, our Consolidated Net Worth was approximately $2.7 billion. We
expect we will have a net loss in 2009, with the result that we expect our Consolidated Net Worth
to decline. There can be no assurance that losses in or after 2009 will not reduce our Consolidated
Net Worth below the minimum amount required.
In addition, regardless of our results of operations, our Consolidated Net Worth would be
reduced to the extent the carrying value of our investment portfolio declines from its carrying
value at December 31, 2008 due to market value adjustments. At December 31, 2008, the modified duration of our fixed income portfolio was
4.3 years, which means that an instantaneous parallel upward shift in the yield curve of 100 basis
points would result in a decline of 4.3% (approximately $340 million) in the market value of this
portfolio. Market value adjustments could also occur as a result of changes in credit spreads.
The other two financial covenants require that MGICs risk-to-capital ratio not exceed
22:1 and that MGIC maintain policyholders position of not less than the amount required by
Wisconsin insurance regulations. We discuss MGICs risk-to-capital ratio and its policyholders
position in the risk factor titled Because our policyholders position could decline and our
risk-to-capital could increase beyond the levels necessary to meet regulatory requirements we are
exploring options to obtain additional capital.
Covenants in the Senior Notes include the requirement that there be no liens on the stock
of the designated subsidiaries unless the Senior Notes are equally and ratably secured; that there
be no disposition of the stock of designated subsidiaries unless all of the stock is disposed of
for consideration equal to the fair market value of the stock; and that we and the designated
subsidiaries preserve their
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corporate existence, rights and franchises unless we or such subsidiary determines that such
preservation is no longer necessary in the conduct of its business and that the loss thereof is not
disadvantageous to the Senior Notes. A designated subsidiary is any of our consolidated
subsidiaries which has shareholders equity of at least 15% of our consolidated shareholders
equity.
We currently have sufficient liquidity at our holding company to repay the amounts owed
under our revolving credit facility. If (i) we fail to maintain any of the requirements under the
credit facility discussed above, (ii) we fail to make a payment of principal when due under the
credit facility or a payment of interest within five days after due under the credit facility,
(iii) we fail to make an interest payment when due under either series of our Senior Notes or
(iv) our payment obligations under our Senior Notes are declared due and payable (including for one
of the reasons noted in the following paragraph) and we are not successful in obtaining an
agreement from banks holding a majority of the debt outstanding under the facility to change (or
waive) the applicable requirement, then banks holding a majority of the debt outstanding under the
facility would have the right to declare the entire amount of the outstanding debt due and payable.
If (i) we fail to meet any of the covenants of the Senior Notes discussed above, (ii) we
fail to make a payment of principal of the Senior Notes when due or a payment of interest on the
Senior Notes within thirty days after due or (iii) the debt under our bank facility is declared due
and payable (including for one of the reasons noted in the previous paragraph) and we are not
successful in obtaining an agreement from holders of a majority of the applicable series of Senior
Notes to change (or waive) the applicable requirement or payment default, then the holders of 25%
or more of either series of our Senior Notes each would have the right to accelerate the maturity
of that debt. In addition, the Trustee of these two issues of Senior Notes, which is also a lender
under our bank credit facility, could, independent of any action by holders of Senior Notes,
accelerate the maturity of the Senior Notes.
In the event the amounts owing under our credit facility or Senior Notes are accelerated,
we may not have sufficient funds to repay such amounts.
Our financial strength rating has been downgraded below Aa3/AA-, which could reduce the volume of
our new business writings.
The financial strength of MGIC, our principal mortgage insurance subsidiary, is rated Ba2
by Moodys Investors Service and the outlook for this rating is considered, by Moodys, to be
developing. Standard & Poors Rating Services insurer financial strength rating of MGIC is A-
with a negative outlook. The financial strength of MGIC is rated A- by Fitch Ratings with a
negative outlook.
The mortgage insurance industry historically viewed a financial strength rating of
Aa3/AA- as critical to writing new business. In part this view has resulted from the mortgage
insurer eligibility requirements of the GSEs, which each year purchase the majority of loans
insured by us and the rest of the mortgage insurance industry, along with the risk-based capital
stress test for the GSEs which provided incentives for the GSEs to use private mortgage insurance
provided by insurers with the highest ratings.
At the beginning of 2007, all of the eight private mortgage insurers then writing new
insurance had ratings of at least Aa3/AA- and all of them were treated the same under the
risk-based capital stress test applicable to the GSEs. Since then, one of the eight private
mortgage insurers ceased writing new insurance and six of the other seven private mortgage insurers
have been downgraded below Aa3/AA-. The only private mortgage insurer that has maintained a rating
of at least Aa3/AA- has an insignificant market share.
In February 2008, after several private mortgage insurers were downgraded below Aa3/AA-,
Freddie Mac and Fannie Mae announced that they were temporarily suspending the portion of their
eligibility requirements that impose additional restrictions on a mortgage insurer that is
downgraded below Aa3/AA- if the affected insurer commits to submitting a written remediation plan
for their approval. After Freddie Mac and Fannie Mae suspended this portion of their eligibility
requirements, we were downgraded below Aa3/AA-. We have submitted written remediation plans to
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both Freddie Mac and Fannie Mae. We believe that both Freddie Mac and Fannie Mae view their
processes of reviewing remediation plans as continuing processes that should continue until the
party submitting the remediation plan has regained a rating of at least Aa3/AA-. Our remediation
plans include projections of our future financial performance. There can be no assurance that we
will be able to successfully complete our remediation plans. In addition, there can be no assurance
that Freddie Mac and Fannie Mae will continue the positions described above with respect to
mortgage insurers that have been downgraded below Aa3/AA-.
Apart from the effect of the eligibility requirements of the GSEs, we believe lenders who
hold mortgages in portfolio and choose to obtain mortgage insurance on the loans assess a mortgage
insurers financial strength rating as one element of the process through which they select
mortgage insurers. As a result of these considerations, including MGICs ratings downgrades since
the beginning of 2008, MGIC may be competitively disadvantaged.
Loan modification and other similar programs may not provide material benefits to us.
Beginning
in the fourth quarter of 2008, the federal government, including through the FDIC and the GSEs, and several
lenders have adopted programs to modify loans to make them more affordable to borrowers with the
goal of reducing the number of foreclosures. All of these programs are being rolled out or in their
early stages and it is unclear whether they will result in a significant number of loan
modifications. In February 2009, the Obama Administration announced the Homeowner Affordability and Stability Plan
that has the intent of helping millions of homeowners receive more favorable mortgage terms. Full
details of the plan were not available at the time this annual report was finalized.
One or more of these programs may be implemented in a manner that eliminates the
need for mortgage insurance for groups of loans that our industry has traditionally insured. Even
if a loan is modified, we do not know how many modified loans will subsequently re-default,
resulting in losses for us that could be greater than we would have paid had the loan not been
modified. As a result, we cannot ascertain with confidence whether these programs will provide
material benefits to us. In addition, because we do not have information in our database for all of
the parameters used to determine which loans are eligible for modification programs, our estimates
of the number of qualifying loans are inherently uncertain. If legislation is enacted to permit a
mortgage balance to be reduced in bankruptcy, we would still be responsible to pay the original
balance if the borrower re-defaulted on that mortgage after its balance had been reduced. Various
government entities and private parties have enacted foreclosure moratoriums. A moratorium does not
affect the accrual of interest and other expenses on a loan. Unless a loan is modified during a
moratorium to cure the default, at the expiration of the moratorium additional interest and
expenses would be due which could result on our losses on loans subject to the moratorium being
higher than if there had been no moratorium.
If interest rates decline, house prices appreciate or mortgage insurance cancellation requirements
change, the length of time that our policies remain in force could decline and result in declines
in our revenue.
In each year, most of our 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 a significant determinant of our revenues. The factors affecting the length
of time our insurance remains in force include:
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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 |
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mortgage insurance cancellation policies of mortgage investors along with the current
value of the homes underlying the mortgages in the insurance in force. |
During the 1990s, our year-end persistency ranged from a high of 87.4% at December 31,
1990 to a low of 68.1% at December 31, 1998. At December 31, 2008 persistency was at 84.4%,
compared to the
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record low of 44.9% at September 30, 2003. Since the 1990s, refinancing has become easier to
accomplish and less costly for many consumers. Hence, even in an interest rate and house price
environment favorable to persistency improvement, persistency may not reach its December 31, 1990
level. Recently, mortgage interest rates have reached historic lows by some measures, and we expect
to see an increase in the portion of our business attributable to refinances.
The amount of insurance we write could be adversely affected if lenders and investors select
alternatives to private mortgage insurance.
These alternatives to private mortgage insurance include:
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lenders using government mortgage insurance programs, including those of the Federal
Housing Administration and the Veterans Administration, |
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lenders and other investors holding mortgages in portfolio and self-insuring, |
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investors using credit enhancements other than private mortgage insurance, using
other credit enhancements in conjunction with reduced levels of private mortgage insurance
coverage, or accepting credit risk without credit enhancement, and |
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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 that has private mortgage insurance. |
We believe the Federal Housing Administration, which until 2008 was not viewed by us as a
significant competitor, substantially increased its market share in 2008.
Competition or changes in our relationships with our customers could reduce our revenues or
increase our 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 We
are subject to risk from private litigation and regulatory proceedings below, we provided
information to the New York Insurance Department and the Minnesota Department of Commerce about
captive mortgage reinsurance arrangements and the Department of Housing and Urban Development,
commonly referred to as HUD, issued a subpoena covering similar information. Other
insurance departments or other officials, including attorneys general, may also seek information
about or investigate captive mortgage reinsurance.
In recent years, the level of competition within the private mortgage insurance industry
has been intense as many large mortgage lenders reduced the number of private mortgage insurers
with whom they do business. At the same time, consolidation among mortgage lenders has increased
the share of the mortgage lending market held by large lenders. Our private mortgage insurance
competitors include:
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PMI Mortgage Insurance Company, |
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Genworth Mortgage Insurance Corporation, |
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United Guaranty Residential Insurance Company, |
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Radian Guaranty Inc., |
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Republic Mortgage Insurance Company, whose parent, based on information filed with
the SEC through February 20, 2009, is our largest shareholder, and |
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CMG Mortgage Insurance Company. |
Our relationships with our customers could be adversely affected by a variety of factors,
including continued tightening of our underwriting guidelines, which have resulted in our declining
to insure some of the loans originated by our customers, and our decision to discontinue ceding new
business under excess of loss reinsurance programs. We believe the Federal Housing Administration,
which in recent years was not viewed by us as a significant competitor, substantially increased its
market share in 2008.
While the mortgage insurance industry has not had new entrants in many years,
the perceived increase in credit quality of loans that are being insured today
combined with the deterioration of the financial strength ratings of the existing mortgage
insurance companies could encourage new entrants.
Our common stock could be delisted from the NYSE.
The listing of our common stock on the NYSE is subject to compliance with NYSEs continued
listing standards, including that the average closing price of our common stock during any 30
trading day period equal or exceed $1.00 and that our average market capitalization for any such
period equal or exceed $25 million. The NYSE can also, in its discretion, discontinue listing a
companys common stock if the company discontinues a substantial portion of its operations. If we
do not satisfy any of NYSEs continued listing standards or if we cease writing new insurance, our
common stock could be delisted from the NYSE unless we cure the deficiency during the time provided
by the NYSE. If the NYSE were to delist our common stock, it likely would result in a significant decline in the
trading price, trading volume and liquidity of our common stock. We also expect that the
suspension and delisting of our common stock would lead to decreases in analyst coverage and
market-making activity relating to our common stock, as well as reduced information about trading
prices and volume. As a result, it could become significantly more difficult for our shareholders
to sell their shares of our common stock at prices comparable to those in effect prior to delisting
or at all.
If the volume of low down payment home mortgage originations declines, the amount of insurance that
we write could decline, which would reduce our revenues.
The factors that affect the volume of low-down-payment mortgage originations include:
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restrictions on mortgage credit due to more stringent underwriting standards and
liquidity issues affecting lenders, |
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the level of home mortgage interest rates, |
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the health of the domestic economy as well as conditions in regional and local economies, |
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housing affordability, |
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population trends, including the rate of household formation, |
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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 |
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government housing policy encouraging loans to first-time homebuyers. |
We are 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. 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. Since December 2006, class action litigation was separately brought against a number of
large lenders alleging that their captive mortgage reinsurance arrangements violated RESPA. While
we are not a defendant in any of these cases, there can be no assurance that we 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 us.
In June 2005, in response to a letter from the New York Insurance Department, we provided
information regarding captive mortgage reinsurance arrangements and other types of arrangements in
which lenders receive compensation. In February 2006, the New York Insurance Department requested
MGIC to review its premium rates in New York and to file adjusted rates based on recent years
experience or to explain why such experience would not alter rates. In March 2006, MGIC advised the
New York Insurance Department that it believes its premium rates are reasonable and that, given the
nature of mortgage insurance risk, premium rates should not be determined only by the experience of
recent years. In February 2006, in response to an administrative subpoena from the Minnesota
Department of Commerce, which regulates insurance, we provided the Department with information
about captive mortgage reinsurance and certain other matters. We subsequently provided additional
information to the Minnesota Department of Commerce, and beginning in March 2008 that Department
has sought additional information as well as answers to questions regarding captive mortgage
reinsurance on several occasions. In June 2008, we received a subpoena from the Department of
Housing and Urban Development, commonly referred to as HUD, seeking information about captive
mortgage reinsurance similar to that requested by the Minnesota Department of Commerce, but not
limited in scope to the state of Minnesota. Other insurance departments or other officials,
including attorneys general, may also seek information about or investigate captive mortgage
reinsurance.
The anti-referral fee provisions of RESPA provide that the Department of Housing and
Urban Development 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 prohibit paying for the referral of insurance business and provide various mechanisms to
enforce this prohibition. While we believe our 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 us or the mortgage insurance
industry.
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In October 2007, the Division of Enforcement of the Securities and Exchange Commission
requested that we voluntarily furnish documents and information primarily relating to C-BASS, the
now-terminated merger with Radian and the subprime mortgage assets in the Companys various lines
of business. We are providing responsive documents and/or other information to the
Securities and Exchange Commission. As part of its initial information request, the SEC staff
informed us that this investigation should not be construed as an indication by the SEC or its
staff that any violation of the securities laws has occurred, or as a reflection upon any person,
entity or security.
In 2008, complaints in five separate purported
stockholder class action lawsuits were filed against us, several of our officers and an officer of
C-BASS. The allegations in the complaints are generally that through these individuals we violated
the federal securities laws by failing to disclose or misrepresenting C-BASSs liquidity, the
impairment of our investment in C-BASS, the inadequacy of our loss reserves and that we were not
adequately capitalized. The collective time period covered by these lawsuits begins on October 12,
2006 and ends on February 12, 2008. The complaints seek damages based on purchases of our stock
during this time period at prices that were allegedly inflated as a result of the purported
misstatements and omissions. With limited exceptions, our bylaws provide that our officers are
entitled to indemnification from us for claims against them of the type alleged in the complaints.
We believe, among other things, that the allegations in the complaints are not sufficient to
prevent their dismissal and intend to defend against them vigorously. However, we are unable to
predict the outcome of these cases or estimate our associated expenses or possible losses.
Other lawsuits alleging violations of the securities laws could be brought against us. In
December 2008, a holder of a class of certificates in a publicly offered securitization for which
C-BASS was the sponsor brought a purported class action under the federal securities laws against
C-BASS; the issuer of such securitization, which was an affiliate of a major Wall Street
underwriter; and the underwriters alleging material misstatements in the offering documents. The
complaint describes C-BASS as a venture of MGIC, Radian Group and the management of C-BASS and
refers to Doe defendants who are unknown to the plaintiff but who the complaint says are legally
responsible for the events described in the complaint. The complaint also says that the plaintiff
will seek to amend the complaint when the identities of these additional defendants have been
ascertained.
Two law firms have issued press releases to the effect that they are investigating
whether the fiduciaries of our 401(k) plan breached their fiduciary duties regarding the plans
investment in or holding of our common stock. With limited exceptions, our bylaws provide that the
plan fiduciaries are entitled to indemnification from us for claims against them. We intend to
defend vigorously any proceedings that may result from these investigations.
The Internal Revenue Service has proposed significant adjustments to our taxable income for 2000
through 2004.
The Internal Revenue Service conducted an examination of our federal income tax returns
for taxable years 2000 though 2004. On June 1, 2007, as a result of this examination, we received a
revenue agent report. The adjustments reported on the revenue agent report would substantially
increase taxable income for those tax years and resulted in the issuance of an assessment for
unpaid taxes totaling $189.5 million in taxes and accuracy related penalties, plus applicable
interest. We have agreed with the Internal Revenue Service on certain issues and paid $10.5 million
in additional taxes and interest. The remaining open issue relates to our treatment of the flow
through income and loss from an investment in a portfolio of residual interests of Real Estate
Mortgage Investment Conduits, or REMICs. This portfolio has been managed and maintained during
years prior to, during and subsequent to the examination period. The Internal Revenue Service has
indicated that it does not believe, for various reasons, that we have established sufficient tax
basis in the REMIC residual interests to deduct the losses from taxable income.
41
We disagree with this conclusion and believe that the flow through income and loss from these
investments was properly reported on our federal income tax returns in accordance with applicable
tax laws and regulations in effect during the periods involved and have appealed these adjustments.
The appeals process may take some time and a final resolution may not be reached until a date many
months or years into the future. In July 2007, we made a payment on account of $65.2 million with
the United States Department of the Treasury to eliminate the further accrual of interest. We
believe, after discussions with outside counsel about the issues raised in the revenue agent report
and the procedures for resolution of the disputed adjustments, that an adequate provision for
income taxes has been made for potential liabilities that may result from these notices. If the
outcome of this matter results in payments that differ materially from our expectations, it could
have a material impact on our effective tax rate, results of operations and cash flows.
We could be adversely affected if personal information on consumers that we maintain is improperly
disclosed.
As part of our business, we maintain large amounts of personal information on consumers.
While we believe we have appropriate information security policies and systems to prevent
unauthorized disclosure, there can be no assurance that unauthorized disclosure, either through the
actions of third parties or employees, will not occur. Unauthorized disclosure could adversely
affect our reputation and expose us to material claims for damages.
The implementation of the Basel II capital accord may discourage the use of mortgage insurance.
In 1988, the Basel Committee on Banking Supervision developed the Basel Capital Accord
(the Basel I), which set out international benchmarks for assessing banks capital adequacy
requirements. In June 2005, the Basel Committee issued an update to Basel I (as revised in
November 2005, Basel II). Basel II was implemented by many banks in the United States and many
other countries in 2008 and may be implemented by the remaining banks in the United States and many
other countries in 2009. Basel II affects the capital treatment provided to mortgage insurance by
domestic and international banks in both their origination and securitization activities.
The Basel II provisions related to residential mortgages and mortgage insurance may
provide incentives to certain of our bank customers not to insure mortgages having a lower risk of
claim and to insure mortgages having a higher risk of claim. The Basel II provisions may also alter
the competitive positions and financial performance of mortgage insurers in other ways, including
reducing our ability to successfully establish or operate our planned international operations.
We may not be able to recover the capital we invested in our Australian operations for many years
and may not recover all of such capital.
We have committed significant resources to begin international operations, primarily in
Australia, where we started to write business in June 2007. In view of our need to dedicate capital
to our domestic mortgage insurance operations, we have been exploring alternatives for our
Australian activities which may include a sale of our Australian operations. As a result, we have
reduced our Australian headcount and suspended writing new business in Australia. Unless we are
successful in a sale in the first half of 2009, we may place our existing Australian book of
business into runoff. In addition to the general economic and insurance business-related factors
discussed above, we are subject to a number of other risks from having deployed capital in
Australia, including foreign currency exchange rate fluctuations and interest-rate volatility
particular to Australia.
42
We are susceptible to disruptions in the servicing of mortgage loans that we insure.
We depend on reliable, consistent third-party servicing of the loans that we insure. A
recent trend in the mortgage lending and mortgage loan servicing industry has been towards
consolidation of loan servicers. This reduction in the number of servicers could lead to
disruptions in the servicing of mortgage loans covered by our insurance policies. In addition,
current housing market trends have led to significant increases in the number of delinquent
mortgage loans requiring servicing. These increases have strained the resources of servicers,
reducing their ability to undertake mitigation efforts that could help limit our losses. Future
housing market conditions could lead to additional such increases. Managing a substantially higher
volume of non-performing loans could lead to disruptions in the servicing of mortgage loans covered
by our insurance policies. Disruptions in servicing, in turn, could contribute to a rise in
delinquencies among those loans and could have a material adverse effect on our business, financial
condition and operating results.
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Properties.
At December 31, 2008, we leased office space in various cities throughout the United
States under leases expiring between 2009 and 2015 and which required annual rentals of $2.8
million in 2008.
We own our 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.
Complaints in five purported stockholder class action lawsuits have been filed against us
and several of our officers. Wayne County Employees Retirement System v. MGIC Investment
Corporation was filed in May 2008, Plumbers & Pipefitters Local #562 Pension Fund v. MGIC
Investment Corporation was filed in May 2008, Teamsters Local 456 Annuity Fund v. MGIC Investment
Corporation was filed in June 2008, Minneapolis Firefighters Relief Association v. MGIC Investment
Corporation was filed in July 2008 and Fulton County Employees Retirement System v. MGIC
Investment Corporation was filed in October 2008. With the exception of Wayne County Employees
Retirement System, which was filed in the U.S. District Court for the Eastern District of Michigan,
all of these lawsuits were filed in the U.S. District Court for the Eastern District of Wisconsin.
The allegations in the complaints are generally that through the officers named in the
complaints, we violated the federal securities laws by failing to disclose or misrepresenting
C-BASSs liquidity, the impairment of our investment in C-BASS, the inadequacy of our loss reserves
and that we were not adequately capitalized. The collective time period covered by these lawsuits
begins on October 12, 2006 and ends on February 12, 2008. The complaints seek damages based on
purchases of our stock during this time period at prices that were allegedly inflated as a result
of the purported misstatements and omissions. With limited exceptions, our bylaws provide that our
officers are entitled to indemnification from us for claims against them of the type alleged in the
complaints. We believe, among other things, that the allegations in the complaints are not
sufficient to prevent their dismissal and intend to defend against them vigorously. However, we are
unable to predict the outcome of these cases or estimate our associated expenses or possible
losses.
In addition, we are involved in other 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
our financial position or results of operations.
43
For information about the risk of certain legal proceedings, see the text under We are
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.
Executive Officers
Certain information with respect to our executive officers as of March 1, 2009 is set
forth below:
|
|
|
Name and Age |
|
Title |
Curt S. Culver, 56
|
|
Chairman of the Board and Chief Executive
Officer of MGIC Investment Corporation and MGIC;
Director of MGIC Investment Corporation and MGIC |
|
|
|
Patrick Sinks, 52
|
|
President and Chief Operating Officer of MGIC
Investment Corporation and MGIC |
|
|
|
J. Michael Lauer, 64
|
|
Executive Vice President and Chief Financial
Officer of MGIC Investment Corporation and MGIC |
|
|
|
Lawrence J. Pierzchalski, 56
|
|
Executive Vice President- Risk Management of MGIC |
|
|
|
Jeffrey H. Lane, 59
|
|
Executive Vice President, General Counsel and
Secretary of MGIC Investment Corporation and
MGIC |
|
|
|
James A. Karpowicz, 61
|
|
Senior Vice President-Chief Investment Officer
and Treasurer of MGIC Investment Corporation and
MGIC |
|
|
|
Michael G. Meade, 59
|
|
Senior Vice President-Information Services and
Chief Information Officer of MGIC |
Mr. Culver has served as our Chief Executive Officer since January 2000 and as our
Chairman of the Board since January 2005. He was our President 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 our and MGICs President and Chief Operating Officer 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 our and MGICs Executive Vice President and Chief Financial
Officer since March 1989.
44
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 to May 1996. From March 1985 to April 1990, he held various
management positions with MGIC in the areas of market research, corporate planning and risk
management.
Mr. Lane has served as our and MGICs Executive Vice President, General Counsel and
Secretary since January 2008 and prior thereto as our Senior Vice President, General Counsel and
Secretary from August 1996 to January 2008. For more than five years prior to his joining us, Mr.
Lane was a partner of Foley & Lardner, a law firm headquartered in Milwaukee, Wisconsin.
Mr. Karpowicz has served as our and MGICs Senior Vice President-Chief Investment Officer
and Treasurer 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. Meade has served as MGICs Senior Vice President-Information 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 President-Information Services.
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters.
(a) Our Common Stock is listed on the New York Stock Exchange under the symbol MTG. The
following table sets forth for 2007 and 2008 by calendar quarter the high and low sales prices of
our Common Stock on the New York Stock Exchange.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2008 |
Quarter |
|
High |
|
Low |
|
High |
|
Low |
First |
|
$ |
68.96 |
|
|
$ |
53.90 |
|
|
$ |
22.72 |
|
|
$ |
9.60 |
|
Second |
|
|
66.46 |
|
|
|
53.61 |
|
|
|
14.14 |
|
|
|
5.41 |
|
Third |
|
|
57.94 |
|
|
|
27.28 |
|
|
|
12.50 |
|
|
|
3.51 |
|
Fourth |
|
|
36.71 |
|
|
|
16.18 |
|
|
|
8.91 |
|
|
|
1.58 |
|
In 2007 and 2008, we declared and paid the following cash dividends:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2008 |
|
Quarter |
|
|
|
|
|
|
|
|
First |
|
$ |
.250 |
|
|
$ |
.025 |
|
Second |
|
|
.250 |
|
|
|
.025 |
|
Third |
|
|
.250 |
|
|
|
.025 |
|
Fourth |
|
|
.025 |
|
|
|
.000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.775 |
|
|
$ |
0.075 |
|
|
|
|
|
|
|
|
In October 2008, the Board discontinued payment of our dividend. The payment of future
dividends is subject to the discretion of our Board and will depend on many factors, including our
operating results, financial condition and capital position. We are a holding company and the
payment of dividends from our insurance subsidiaries is restricted by insurance regulation. For a
discussion of these restrictions, see Managements Discussion and Analysis Liquidity and Capital
Resources in Item 7 of this annual report and Note 11 to our consolidated financial statements in
Item 8, which are incorporated by reference.
As of February 15, 2009, the number of shareholders of record was 140. In addition, we
estimate there
45
are more than 60,000 beneficial owners of shares held by brokers and fiduciaries.
Information regarding equity compensation plans is contained in Item 12.
(b) Not applicable.
(c) We did not repurchase any shares of Common Stock during the fourth quarter of 2008.
46
Item 6. Selected Financial Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands of dollars, except per share data) |
|
Summary of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written |
|
$ |
1,466,047 |
|
|
|
1,345,794 |
|
|
$ |
1,217,236 |
|
|
$ |
1,252,310 |
|
|
$ |
1,305,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
1,393,180 |
|
|
|
1,262,390 |
|
|
$ |
1,187,409 |
|
|
$ |
1,238,692 |
|
|
$ |
1,329,428 |
|
Investment income, net |
|
|
308,517 |
|
|
|
259,828 |
|
|
|
240,621 |
|
|
|
228,854 |
|
|
|
215,053 |
|
Realized investment (losses) gains, net |
|
|
(12,486 |
) |
|
|
142,195 |
|
|
|
(4,264 |
) |
|
|
14,857 |
|
|
|
17,242 |
|
Other revenue |
|
|
32,315 |
|
|
|
28,793 |
|
|
|
45,403 |
|
|
|
44,127 |
|
|
|
50,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,721,526 |
|
|
|
1,693,206 |
|
|
|
1,469,169 |
|
|
|
1,526,530 |
|
|
|
1,612,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses incurred, net |
|
|
3,071,501 |
|
|
|
2,365,423 |
|
|
|
613,635 |
|
|
|
553,530 |
|
|
|
700,999 |
|
Change in premium deficiency reserves |
|
|
(756,505 |
) |
|
|
1,210,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting and other expenses |
|
|
271,314 |
|
|
|
309,610 |
|
|
|
290,858 |
|
|
|
275,416 |
|
|
|
278,786 |
|
Reinsurance fee |
|
|
1,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
71,164 |
|
|
|
41,986 |
|
|
|
39,348 |
|
|
|
41,091 |
|
|
|
41,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses |
|
|
2,659,255 |
|
|
|
3,927,860 |
|
|
|
943,841 |
|
|
|
870,037 |
|
|
|
1,020,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before tax and joint ventures |
|
|
(937,729 |
) |
|
|
(2,234,654 |
) |
|
|
525,328 |
|
|
|
656,493 |
|
|
|
591,777 |
|
(Credit) provision for income tax |
|
|
(394,329 |
) |
|
|
(833,977 |
) |
|
|
130,097 |
|
|
|
176,932 |
|
|
|
159,348 |
|
Income (loss) from joint ventures, net of tax |
|
|
24,486 |
|
|
|
(269,341 |
) |
|
|
169,508 |
|
|
|
147,312 |
|
|
|
120,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(518,914 |
) |
|
|
(1,670,018 |
) |
|
$ |
564,739 |
|
|
$ |
626,873 |
|
|
$ |
553,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
(in thousands) |
|
|
113,962 |
|
|
|
81,294 |
|
|
|
84,950 |
|
|
|
92,443 |
|
|
|
98,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share |
|
$ |
(4.55 |
) |
|
|
(20.54 |
) |
|
$ |
6.65 |
|
|
$ |
6.78 |
|
|
$ |
5.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
0.075 |
|
|
|
0.775 |
|
|
$ |
1.00 |
|
|
$ |
0.525 |
|
|
$ |
0.225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
7,045,536 |
|
|
|
5,896,233 |
|
|
$ |
5,252,422 |
|
|
$ |
5,295,430 |
|
|
$ |
5,418,988 |
|
Total assets |
|
|
9,182,829 |
|
|
|
7,716,361 |
|
|
|
6,621,671 |
|
|
|
6,357,569 |
|
|
|
6,380,691 |
|
Loss reserves |
|
|
4,775,552 |
|
|
|
2,642,479 |
|
|
|
1,125,715 |
|
|
|
1,124,454 |
|
|
|
1,185,594 |
|
Premium deficiency reserves |
|
|
454,336 |
|
|
|
1,210,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Short- and long-term debt |
|
|
698,446 |
|
|
|
798,250 |
|
|
|
781,277 |
|
|
|
685,163 |
|
|
|
639,303 |
|
Convertible debentures |
|
|
375,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
2,367,200 |
|
|
|
2,594,343 |
|
|
|
4,295,877 |
|
|
|
4,165,055 |
|
|
|
4,143,639 |
|
Book value per share |
|
|
18.93 |
|
|
|
31.72 |
|
|
|
51.88 |
|
|
|
47.31 |
|
|
|
43.05 |
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
New primary insurance written ($ millions)
|
|
$ |
48,230 |
|
|
$ |
76,806 |
|
|
$ |
58,242 |
|
|
$ |
61,503 |
|
|
$ |
62,902 |
|
New primary risk written ($ millions)
|
|
|
11,669 |
|
|
|
19,632 |
|
|
|
15,937 |
|
|
|
16,836 |
|
|
|
16,792 |
|
New pool risk written ($ millions)(1)
|
|
|
145 |
|
|
|
211 |
|
|
|
240 |
|
|
|
358 |
|
|
|
208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance in force (at year-end) ($ millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct primary insurance
|
|
|
226,955 |
|
|
|
211,745 |
|
|
|
176,531 |
|
|
|
170,029 |
|
|
|
177,091 |
|
Direct primary risk
|
|
|
58,981 |
|
|
|
55,794 |
|
|
|
47,079 |
|
|
|
44,860 |
|
|
|
45,981 |
|
Direct pool risk(1)
|
|
|
1,902 |
|
|
|
2,800 |
|
|
|
3,063 |
|
|
|
2,909 |
|
|
|
3,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary loans in default ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policies in force
|
|
|
1,472,757 |
|
|
|
1,437,432 |
|
|
|
1,283,174 |
|
|
|
1,303,084 |
|
|
|
1,413,678 |
|
Loans in default
|
|
|
182,188 |
|
|
|
107,120 |
|
|
|
78,628 |
|
|
|
85,788 |
|
|
|
85,487 |
|
Percentage of loans in default
|
|
|
12.37 |
% |
|
|
7.45 |
% |
|
|
6.13 |
% |
|
|
6.58 |
% |
|
|
6.05 |
% |
Percentage of loans in default bulk
|
|
|
32.64 |
% |
|
|
21.91 |
% |
|
|
14.87 |
% |
|
|
14.72 |
% |
|
|
14.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance operating ratios (GAAP) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
220.4 |
% |
|
|
187.3 |
% |
|
|
51.7 |
% |
|
|
44.7 |
% |
|
|
52.7 |
% |
Expense ratio(2)
|
|
|
14.2 |
% |
|
|
15.8 |
% |
|
|
17.0 |
% |
|
|
15.9 |
% |
|
|
14.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
234.6 |
% |
|
|
203.1 |
% |
|
|
68.7 |
% |
|
|
60.6 |
% |
|
|
67.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-to-capital ratio (statutory) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined insurance companies
|
|
|
14.7:1 |
|
|
|
11.9:1 |
|
|
|
7.5:1 |
|
|
|
7.4:1 |
|
|
|
7.9:1 |
|
|
|
|
(1) |
|
Represents contractual aggregate loss limits and, for the
years ended December 31, 2008, 2007, 2006, 2005 and 2004,
for $2.5 billion, $4.1 billion, $4.4 billion,
$5.0 billion and $4.9 billion, respectively, of risk
without such limits, risk is calculated at $1 million, $2
million, $4 million, $51 million and $65 million,
respectively, for new risk written and $150 million, $475
million, $473 million, $469 million and $418 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 is the ratio, expressed as a percentage,
of the sum of incurred losses and loss adjustment
expenses to net premiums earned.
As calculated, the loss ratio does not reflect any effects due to
premium deficiency.
The expense ratio is the
ratio, expressed as a percentage, of the combined
insurance operations underwriting expenses to net
premiums written. |
48
|
|
|
ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
Through our subsidiary MGIC, we are the leading provider of private mortgage insurance in the
United States to the home mortgage lending industry. Our principal product is primary 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. Prior to 2008, we wrote significant volume through the bulk channel,
substantially all of which was Wall Street bulk business, which we discontinued writing in 2007.
We expect any future business written through the bulk channel will be insignificant to us. Prior
to 2009, we also wrote pool mortgage insurance. We do not expect we will write any significant
pool mortgage insurance in the future.
As used below, we and our refer to MGIC Investment Corporations consolidated operations.
In the discussion below, we classify, in accordance with industry practice, as full documentation
loans approved by GSE and other automated underwriting systems under doc waiver programs that do
not require verification of borrower income. For additional information about such loans, see
footnote (3) to the delinquency table under Results of Consolidated Operations-Losses-Losses
Incurred. The discussion of our business in this document generally does not apply to our
Australian operations which are immaterial. The results of our operations in Australia are
included in the consolidated results disclosed. For additional information about our Australian
operations, see Australia below.
Forward Looking Statements
As
discussed under Forward Looking Statements and Risk
Factors in Item 1A of Part 1 of this annual report to which readers of this annual report should refer because
such risk factors are an integral part of the discussion below, actual results may differ materially from the results contemplated by forward looking
statements. We are not undertaking any obligation to update any forward looking statements or other
statements we may make in the following discussion or elsewhere in
this annual report even though these
statements may be affected by events or circumstances occurring after the forward looking
statements or other statements were made. Therefore no reader of this
annual report should rely on these
statements being accurate as of any time other than the time at which this document was filed with
the Securities and Exchange Commission.
49
Outlook
At this time, we are facing two particularly significant challenges, which we believe are
shared by the other participants in our industry:
|
|
|
Whether we will have access to sufficient capital to continue to write new
business. This challenge is discussed under Capital below. |
|
|
|
|
Whether private mortgage insurance will remain a significant credit enhancement
alternative for low down payment single family mortgages. This challenge is discussed
under Future of the Domestic Residential Housing Finance System below. |
Capital
The mortgage insurance industry is experiencing material losses, especially on the 2006 and
2007 books. The ultimate amount of these losses will depend in part on general economic
conditions, including unemployment, and the direction of home prices in California, Florida and
other distressed markets, which in turn will be influenced by general economic conditions and other
factors. Because we cannot predict future home prices or general economic conditions with
confidence, there is significant uncertainty surrounding what our ultimate losses will be on our 2006 and 2007
books. Our current expectation, however, is that these books will continue to generate material
incurred and paid losses for a number of years. Our view of potential losses on these books has
trended upward since the first quarter of 2008, including since the time at which we finalized our
Quarterly Report on Form 10-Q for the third quarter of 2008.
The Office of the Commissioner of Insurance of Wisconsin (OCI) is MGICs principal insurance
regulator. To assess a mortgage guaranty insurers capital adequacy, Wisconsins insurance
regulations require that a mortgage guaranty insurance company maintain policyholders position of
not less than a minimum computed under a prescribed formula. Policyholders position is the
insurers net worth, contingency reserve and a portion of the reserves for unearned premiums, with
credit given for authorized reinsurance. The minimum policyholders position (MPP) required by the
formula depends on the insurance in force and whether the loans insured are primary insurance or
pool insurance and further depends on the LTV ratio of the individual loans and their coverage
percentage (and in the case of pool insurance, the amount of any deductible). If a mortgage
guaranty insurer does not meet MPP it cannot write new business until its policyholders position
meets the minimum.
In February 2009, we received clarification from the OCI regarding the methodology used in
calculating the excess of our policyholders position over the MPP. The clarification effectively
reduces the required MPP by our reserves
50
established for delinquent loans, beginning with our December 31, 2008 calculations.
At December 31, 2008, MGICs policyholders position exceeded the required minimum by more than
$1.5 billion, and we exceeded the required minimum by $1.6 billion on a combined statutory basis.
(The combined figures give effect to reinsurance with subsidiaries of our holding company.)
Some states that regulate us have provisions that limit the risk-to-capital ratio (see
Liquidity and Capital ResourcesRisk to Capital) of a mortgage guaranty insurance company to
25:1. If an insurance companys risk-to-capital ratio exceeds the limit applicable in a state, it
may be prohibited from writing new business in that state until its risk-to-capital ratio falls
below the limit. It is also our understanding that certain states have clarified their calculation
of risk-to-capital to reduce risk in force for established loss reserves. We have used this
methodology beginning with our December 31, 2008 calculations.
At December 31, 2008 MGICs risk-to-capital was 12.9:1 and was 14.7:1 on a combined statutory
basis.
In
addition to the uncertainties that could result in increased losses,
there are other items that could favorably impact our future losses.
For example, our estimated loss reserves reflect loss mitigation from rescissions using only the rate at
which we have rescinded claims during recent periods, as discussed under Results of Consolidated
OperationsLossesLosses Incurred. In light of the number of claims investigations we are pursuing
and our perception that books of insurance we wrote before 2008 contain a significant number of
loans involving fraud, we expect our rescission rate during future periods to increase. The insured
can dispute our right to rescind coverage, and whether the requirements to rescind are met
ultimately would be determined by arbitration or judicial
proceedings. Also, our estimated loss reserves
do not take account of the effect of potential benefits that might be realized from third
party and governmental loan modification programs.
Because these and other factors that will affect our future losses are subject to significant
uncertainty, there is significant uncertainty regarding the level of our future losses. However, unless
recent loss trends materially mitigate, MGICs policyholders position could decline and its
risk-to-capital could increase beyond the levels necessary to meet regulatory requirements and this
could occur before the end of 2009.
An inability to write new business does not mean that we do not have sufficient resources to
pay claims. We believe we have more than adequate resources to pay claims on our insurance in
force, even in scenarios in which losses materially exceed those that would result in not meeting
MPP and risk-to-capital requirements. Our claims paying resources principally consist of our
investment portfolio, captive reinsurance trust funds and future premiums on our insurance in
force, net of premiums ceded to captive and other reinsurers.
We are considering options to obtain capital to write new business, which could occur through the
sale of equity or debt securities, from reinsurance and/or through the use of claims paying
resources that should not be needed to cover obligations on our existing insurance in force. While
we have not pursued raising capital from private sources, we initiated discussions with the US
Treasury late in October 2008 to seek a capital investment and/or reinsurance under the Troubled
Assets Relief Program (TARP). We understand there is intense competition for TARP and other
government assistance. We cannot predict whether we will be successful in obtaining capital from
any source but any sale of additional securities could dilute substantially the interest of
existing shareholders and other forms of capital relief could also result in additional costs.
Our
senior management believes that one of the capital generating options
referred to above will be feasible or that the uncertainties described above will develop in a manner such that we will be able to continue to write new business
through the end of 2009. We can, however, give no assurance in this regard, and higher losses,
adverse changes in our relationship with the GSEs, or reduced benefits from loss mitigation, among
other factors, could result in senior managements belief not being realized. In addition, to the
extent this belief of senior management is a forward-looking statement under Section 21E(c) of
the Securities Exchange Act of 1934, as amended (and without thereby suggesting that other
forward-looking statements we make in this annual report are not accompanied by meaningful
cautionary statements because the reference to such cautionary statements does not appear in
immediate proximity to such other forward-looking statements), the statements under Item 1.A. Risk
Factors are intended to provide additional meaningful cautionary statements that identify
additional material factors that could cause actual results to differ materially from those in this
forward-looking statement of senior management.
51
Future of the Domestic Housing Finance System
For decades, Fannie Mae and Freddie Mac have been the principal factor in determining the
availability of single-family mortgages in the United States for conforming loans. From the summer
of 2007 to the summer of 2008, the combined common and preferred equity market capitalization of
the GSEs declined on the order of $140 billion, the FHFA was appointed conservator of each GSE and
their most senior management was replaced by executives designated by the federal government. As
their conservator, FHFA controls and directs the operations of Fannie Mae and Freddie Mac. In
connection with the conservatorship, the United States Treasury has committed a $200 billion
facility to each GSE to support its capital,
which is a $100 billion increase from the original facility
established for each GSE at
the time the conservatorship began.
Both GSEs have either drawn or announced their
intention to draw material amounts under their respective facilities to cure deficiencies in their
regulatory capital as of September 30, 2008, which is the last period end reported on prior to
finalization of this annual report.
Under the charters of the GSEs, which are contained in federal statutes subject to amendment
by legislation, the GSEs must obtain credit enhancement on single-family mortgages that they
purchase when the LTV ratio exceeds 80%. Such low down payment mortgages form the foundation of our
business. For decades private mortgage insurance has been the mortgage markets preferred form of
credit enhancement for conforming loans. (For a few years that ended in 2007, piggyback loans,
which are loans comprised of both a first and second mortgage, with the LTV ratio of the first
mortgage below what investors require for mortgage insurance, took substantial market share from
private mortgage insurance. As shown by their recent performance in declining housing markets, we
believe piggybacks cannot be fairly viewed as credit enhancements.)
As a result of the conservatorship of the GSEs and the mortgage insurance programs of the FHA
and other federal agencies, the federal government has assumed the leading role in the residential
mortgage market. These circumstances could lead Congress to undertake a wide ranging review of the
system of residential mortgage finance in the United States, including what role the government
should play. We believe there are strong policy reasons that
52
favor the continuation of private mortgage insurance as the preferred credit enhancement for
conforming loans. We cannot predict, however, the scope of any changes that may be made to the
housing finance system as a result of such review or the effect such changes would have on our
industry.
Debt
at our
Holding Company and Holding Company Capital Resources
At December 31, 2008, we had approximately $394 million in short-term investments at our
holding company. These investments were virtually all of our holding
companys liquid assets. Our holding companys obligations include
$1.090 billion in indebtedness, $400 million of which is
scheduled to mature before the end of 2011 and must be serviced pending
scheduled maturity. See
Notes 6 and 7 to our consolidated financial statements contained in Item 8 for additional information about this indebtedness. See Liquidity and Capital
Resources Debt at our Holding Company and Holding Company Capital Resources for information about restrictions on MGICs payment
of dividends to our holding company and our expectation that we will not be seeking additional
dividends that would increase our holding companys cash resources in 2009. Historically,
dividends from MGIC have been the principal source of our holding companys cash inflow.
Private and Public Efforts to Modify Mortgage Loans and Reduce Foreclosure
In September the Emergency Economic Stabilization Act of 2008 was enacted. Included
in this legislation is the TARP which, among other provisions, allows mortgage assets to be
purchased by the federal government from financial institutions. To the extent assets are acquired
or controlled by a government agency such agency must implement a plan that seeks to maximize
assistance to homeowners to minimize foreclosures. In February 2009, the Obama Administration
announced the Homeowner Affordability and Stability Plan that has the intent of helping millions of
homeowners receive more favorable mortgage terms. Full details of the plan were not available at
the time this annual report was finalized.
In the fourth quarter of 2008, the Federal Deposit Insurance Corporation, in its capacity as a
receiver for troubled banks, the GSEs and several lenders adopted programs to modify loans to make
them more affordable to borrowers with the goal of reducing the number of foreclosures. Similarly,
various state and local governments have enacted foreclosure moratoriums, many with the stated
goal of reducing foreclosures by giving lenders and borrowers additional time to modify loans to
make them more affordable to borrowers.
53
There can be no assurance that foreclosure avoidance or modification plans will materially
reduce the level of delinquencies and claims we are currently experiencing or could experience in
the future. For additional information about the potential impact that any plans and programs
enacted by legislation may have on us, see the risk factor titled Loan modification and other
similar programs may not provide material benefits to us in Item 1A.
Factors Affecting Our Results
Our results of operations are affected by:
|
|
|
Premiums written and earned |
|
|
|
|
Premiums written and earned in a year are influenced by: |
|
|
|
New insurance written, which increases the size of the in force book of insurance,
is the aggregate principal amount of the mortgages that are insured during a period.
Many factors affect new insurance written, 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. |
|
|
|
|
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. Refinancings are also affected by current home values compared to
values when the loans in the in force book became insured and the terms on which
mortgage credit is available. |
|
|
|
|
Rescissions, which require us to return any premiums received related to the
rescinded policy. |
|
|
|
|
Premium rates, which are affected by the risk characteristics of the loans insured
and the percentage of coverage on the loans. |
|
|
|
|
Premiums ceded to reinsurance subsidiaries of certain mortgage lenders (captives)
and risk sharing arrangements with the GSEs. |
Premiums are generated by the insurance that is in force during all or a portion of the
period. Hence, changes in the average insurance in force in the current period compared to an
earlier period is a factor that will increase (when the average in force is higher) or reduce (when
it is lower) premiums written and earned in the current period, although this effect may be
enhanced (or mitigated)
54
by differences in the average premium rate between the two periods as well as by premiums that
are ceded to captives. Also, new insurance written 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.
Our investment portfolio is comprised almost entirely of fixed income securities rated A or
higher. The 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 is mainly a function of cash
generated from (or used in) operations, such as net premiums received, investment earnings, net
claim payments and expenses, less cash provided by (or used for) non-operating activities, such as
debt or stock issuance or dividend payments. Realized gains and losses are a function of the
difference between the amount received on sale of a security and the securitys amortized cost, as
well as any other than temporary impairments. The amount received on sale of fixed income
securities is affected by the coupon rate of the security compared to the yield of comparable
securities at the time of sale.
Losses incurred are the current expense that reflects estimated payments that will ultimately
be made as a result of delinquencies on insured loans. As explained under Critical Accounting
Policies, except in the case of premium deficiency reserves, we recognize an estimate of this
expense only for delinquent loans. Losses incurred are generally affected by:
|
|
|
The state of the economy and housing values, each of which affects the likelihood
that loans will become delinquent and whether loans that are delinquent cure their
delinquency. The level of new delinquencies has historically followed a seasonal
pattern, with new delinquencies in the first part of the year lower than new
delinquencies in the latter part of the year. |
|
|
|
|
The product mix of the in force book, with loans having higher risk characteristics
generally resulting in higher delinquencies and claims. |
|
|
|
|
The size of loans insured. Higher average loan amounts tend to increase losses
incurred. |
|
|
|
|
The percentage of coverage on insured loans. Deeper average coverage tends to
increase incurred losses. |
55
|
|
|
Changes in housing values, which affect our ability to mitigate our losses through
sales of properties with delinquent mortgages as well as borrower willingness to
continue to make mortgage payments when the value of the home is below the mortgage
balance. |
|
|
|
|
Rescission rates. Our estimated loss reserves reflect mitigation from rescissions
of coverage using only the rate at which we have rescinded claims during recent
periods. As we continue to investigate more claims for misrepresentation, we expect
the number of rescissions to increase. The rate of rescissions may also continue to
increase as fraud may be more prevalent in our insurance in force, which could
ultimately decrease our losses incurred from what they would have been had our
rescission rate been lower. |
|
|
|
|
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, the condition of the economy and other factors can affect this pattern.
For example, a weak economy can lead to claims from older books continuing at stable
levels or experiencing a lower rate of decline. We are currently seeing such
performance as it relates to delinquencies from our older books and, to the extent we
were notified of such delinquencies as of December 31, 2008,
such performance is reflected in our loss
reserves. |
|
|
|
Changes in premium deficiency reserves |
Each quarter, we re-estimate the premium deficiency reserve on the remaining Wall Street bulk
insurance in force. The premium deficiency reserve primarily changes from quarter to quarter as a
result of two factors. First, it changes as the actual premiums, losses and expenses that were
previously estimated are recognized. Each period such items are reflected in our financial
statements as earned premium, losses incurred and expenses. The difference between the amount and
timing of actual earned premiums, losses incurred and expenses and our previous estimates used to
establish the premium deficiency reserves has an effect (either positive or negative) on that
periods results. Second, the premium deficiency reserve changes as our assumptions relating to
the present value of expected future premiums, losses and expenses on the remaining Wall Street
bulk insurance in force change. Changes to these assumptions also have an effect on that periods
results.
|
|
|
Underwriting and other expenses |
The majority of our operating expenses are fixed, with some variability due to contract
underwriting volume. Contract underwriting generates fee income included in Other revenue.
56
Interest expense reflects the interest associated with our debt obligations. Our long-term
debt obligations at December 31, 2008 include our $300 million of 5.375% Senior Notes due in
November 2015, $200 million of 5.625% Senior Notes due in September 2011, $200 million outstanding
under a credit facility expiring in March 2010 and $390 million in convertible debentures due in
2063, as discussed in Notes 6 and 7 to our consolidated financial statements in
Item 8 and under Liquidity and Capital Resources below.
|
|
|
Income (loss) from joint ventures |
Our results of operations have also been affected by the results of our joint ventures, which
are accounted for under the equity method. Historically, joint venture income principally consisted
of the aggregate results of our 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, a limited liability company, is an unconsolidated, less than 50%-owned joint venture
investment of ours that is not controlled by us. Historically, C-BASS was principally engaged in
the business of investing in the credit risk of subprime single-family residential mortgages. In
the third quarter of 2007, as a result of margin calls from lenders that C-BASS was unable to meet,
C-BASSs purchases of mortgages and mortgage securities and its securitization activities ceased.
C-BASS is managing its portfolio pursuant to a consensual, non-bankruptcy restructuring, under
which its assets are to be paid out over time to its secured and unsecured creditors.
In 2007, joint venture losses included an impairment charge equal to our entire equity
interest in C-BASS, as well as the reduction of the carrying value of our $50 million note from
C-BASS to zero, which was due to equity losses incurred by C-BASS in the fourth quarter of 2007.
Sherman
During the period in which we held an equity interest in Sherman, Sherman was 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 factors
that affect Shermans consolidated results of operations are discussed in our Quarterly Report on
Form 10-Q for the Quarter Ended June 30, 2008, to which you should refer.
57
Beginning in the first quarter of 2008, our joint venture income principally consisted of
income from Sherman. In the third quarter of 2008, we sold our entire interest in Sherman to
Sherman. As a result, beginning in the fourth quarter of 2008, our results of operations are no
longer affected by any joint venture results. See Results of Consolidated Operations Joint
Ventures Sherman for discussion of our sale of interest in Sherman and related note receivable.
Mortgage Insurance Earnings and Cash Flow Cycle
In our industry, a book is the group of loans that a mortgage insurer insures in a
particular calendar year. In general, the majority of any underwriting profit (premium revenue
minus losses) that a book generates occurs in the early years of the book, with the largest portion
of any 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 typically occurs
because relatively few of the claims that a book will ultimately experience typically occur in the
first few years of the book, when premium revenue is highest, while subsequent years are affected
by declining premium revenues, as the number of insured loans decreases (primarily due to loan
prepayments), and losses increase.
Australia
In 2007, we began providing mortgage insurance to lenders in Australia. At December 31, 2008
the equity value of our Australian operations was approximately $100 million and our risk in force
in Australia was approximately $1.0 billion. In Australia, mortgage insurance is a single premium
product that covers the entire loan balance. As a result, our Australian risk in force represents
the entire amount of the loans that we have insured. However, the mortgage insurance we provide
only covers the unpaid loan balance after the sale of the underlying property. In view of our need
to dedicate capital to our domestic mortgage insurance operations, we have been exploring
alternatives for our Australian activities which may include a sale of our Australian operations.
As a result, we have reduced our Australian headcount and suspended writing new business in
Australia. We do not expect to write new business in Australia unless required in connection with
an agreed upon sale of this business.
58
Summary of 2008 Results
Our results of operations in 2008 were principally affected by:
|
|
Premiums written and earned |
Premiums written and earned during 2008 increased compared to 2007. The increase in premiums
resulted from the continued increase in the average insurance in force; however the effect of the
higher in force has been somewhat offset by lower average premium yields due to a shift in the mix
of new writings to loans with lower loan-to-value ratios, higher FICO scores and full
documentation, which carry lower premium rates.
Investment income in 2008 was higher when compared to 2007 due to an increase in the average
amortized cost of invested assets, offset by a decrease in the pre-tax yield.
|
|
Realized (losses) gains |
Realized losses for 2008 included other than temporary impairments on our investment
portfolio of approximately $62.5 million and realized losses on the sales of investments of
approximately $12.8 million, offset by a $62.8 million gain from the sale of our remaining interest
in Sherman. Realized gains in 2007 included a $162.9 million pre-tax gain on the sale of a portion
our interest in Sherman.
Losses incurred for 2008 significantly increased compared to 2007 primarily due to a
significant increase in the default inventory, offset by a smaller increase in the estimates
regarding how much will be paid on claims, or severity, and a slight decrease in the estimates regarding
how many delinquencies will result in a claim, or claim rate, when compared to 2007. The default
inventory increased by 75,068 delinquencies in 2008, compared to an increase of 28,492 in 2007. The
continued increase in estimated severity was primarily the result of the default inventory
containing higher loan exposures with expected higher average claim payments as well as our
inability to mitigate losses through the sale of properties due to home price declines. The
decrease in estimated claim rate for 2008 was primarily due to an increase in our loss mitigation
efforts that resulted in an increased number of rescissions and claim denials for
misrepresentation, ineligibility and policy exclusions.
59
During 2008 the premium deficiency reserve on Wall Street bulk transactions declined by $757
million from $1,211 million, as of December 31, 2007, to $454 million as of December 31, 2008. The
$454 million premium deficiency reserve as of December 31, 2008 reflects the present value of
expected future losses and expenses that exceeded the present value of expected future premium and
already established loss reserves.
|
|
Underwriting and other expenses |
Underwriting and other expenses for 2008 decreased when compared to 2007. The decrease
reflects our lower volumes of new insurance written as well as a focus on expenses in difficult
market conditions. Also, 2007 included $12.3 million in one-time expenses associated with a
terminated merger.
Interest expense for 2008 increased when compared to 2007. The increase primarily reflects the
issuance of our convertible debentures in March and April of 2008.
|
|
Income from joint ventures |
Income from joint ventures, net of tax, was $24.5 million in 2008 compared to a loss from
joint ventures, net of tax, of $269.3 million for 2007. The income from joint ventures in 2008 is
related to our remaining interest in Sherman that was sold in the third quarter of 2008. The gain
on the sale of our interest is included in realized gains on our statements of operations. The loss
from joint venture in 2007 was due primarily to the impairment of our investment in C-BASS.
|
|
(Credit) provision for income tax |
The
effective tax rate credit on our pre-tax loss was (42.1%) in 2008,
compared to (37.3%) in
2007. During those periods, the rate reflected the benefits recognized from tax-preferenced
investments. Our tax-preferenced investments that impact the effective tax rate consist almost
entirely of tax-exempt municipal bonds. The difference in the rate was primarily the result of a
smaller loss from underwriting operations during 2008, compared to 2007.
60
Results of Consolidated Operations
New insurance written
The amount of our primary new insurance written during the years ended December 31, 2008, 2007
and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
($ billions) |
|
NIW Flow Channel |
|
$ |
46.6 |
|
|
$ |
69.0 |
|
|
$ |
39.3 |
|
NIW Bulk Channel |
|
|
1.6 |
|
|
|
7.8 |
|
|
|
18.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Primary NIW |
|
$ |
48.2 |
|
|
$ |
76.8 |
|
|
$ |
58.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refinance volume as a % of primary
flow NIW |
|
|
26 |
% |
|
|
24 |
% |
|
|
23 |
% |
The decrease in new insurance written on a flow basis in 2008, compared to 2007, was primarily
due to changes in our underwriting guidelines discussed below, as well as a decrease in the total
mortgage origination market and greater usage of FHA insurance programs as an alternative to
mortgage insurance. For a discussion of new insurance written through the bulk channel, see Bulk
transactions below.
We anticipate our flow new insurance written for 2009 will be significantly below the level
written in 2008, due to changes in our underwriting guidelines discussed below as well as premium
rate increases implemented during 2008, neither of which were fully implemented at the beginning of
2008. We believe our changes in guidelines and premium rates have led to greater usage of FHA
insurance programs as an alternative to private mortgage insurance. Additionally, both GSEs have
implemented adverse market charges on all loans and credit risk-based loan level price adjustments
on loans with certain risk characteristics which include loans that qualify for private mortgage
insurance. The application of these loan level price adjustments results in a materially higher
monthly payment for the borrower, which we also believe has led to greater usage of FHA insurance
programs as an alternative to private mortgage insurance. Our level of new insurance written could
also be affected by other items, as noted in our risk factors in
Item 1A, which are an integral part of this
Managements Discussion and Analysis.
61
The percentage of our volume written on a flow basis that includes segments we view as having
a higher probability of claim continued to increase through 2007. In particular, the percentage of
our flow new insurance written with loan-to-value ratios greater than 95% grew to 42% in 2007,
compared to 34% in 2006. For 2008 the percentage of our flow new insurance written with
loan-to-value ratios greater than 95% declined to 18%, and was only 3% for the fourth quarter of
2008.
We have implemented a series of changes to our underwriting guidelines that are designed to
improve the credit risk profile of our new insurance written. The changes primarily affect
borrowers who have multiple risk factors such as a high loan-to-value ratio, a lower FICO score and
limited documentation or are financing a home in a market we categorize as higher risk. We also
implemented premium rate increases. Several underwriting guidelines and premium rate changes were
implemented during 2008, although a significant portion of our new business in the first quarter of
2008 was committed to prior to the effective date of these changes. The chart below shows, for the
years ended December 31, 2007 and 2008, as well as each quarter ended in 2008, our flow new
insurance written and the percentage of our flow new insurance written that would have qualified
with our underwriting guidelines in place as of December 31, 2008.
Flow NIW ($ in billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Quarter ended |
|
Year ended |
Dec. 31, 2007 |
|
March 31, 2008 |
|
June 30, 2008 |
|
Sept. 30, 2008 |
|
Dec. 31, 2008 |
|
Dec. 31, 2008 |
$69.0
|
|
$ |
18.1 |
|
|
$ |
13.4 |
|
|
$ |
9.7 |
|
|
$ |
5.4 |
|
|
$ |
46.6 |
|
Percentage of Flow NIW that Qualified with our Underwriting Guidelines in Place as of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Quarter ended |
|
Year ended |
Dec. 31, 2007 |
|
March 31, 2008 |
|
June 30, 2008 |
|
Sept. 30, 2008 |
|
Dec. 31, 2008 |
|
Dec. 31, 2008 |
21.1%
|
|
|
31.8 |
% |
|
|
59.1 |
% |
|
|
80.1 |
% |
|
|
89.1 |
% |
|
|
55.9 |
% |
We
regularly review our underwriting guidelines. Additional changes to
our guidelines, which include further limitations on the types of
refinance loans we will insure, have
been announced and will be effective in the first quarter of 2009.
62
Cancellations and insurance in force
New insurance written and cancellations of primary insurance in force during the years ended
December 31, 2008, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
($ billions) |
|
NIW |
|
$ |
48.2 |
|
|
$ |
76.8 |
|
|
$ |
58.2 |
|
Cancellations |
|
|
(32.9 |
) |
|
|
(41.6 |
) |
|
|
(51.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in primary insurance
in force |
|
$ |
15.3 |
|
|
$ |
35.2 |
|
|
$ |
6.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct primary insurance in force
as of December 31, |
|
$ |
227.0 |
|
|
$ |
211.7 |
|
|
$ |
176.5 |
|
|
|
|
|
|
|
|
|
|
|
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. Our persistency
rate (percentage of insurance remaining in force from one year prior) was 84.4% at December 31,
2008, an increase from 76.4% at December 31, 2007 and 69.6% at December 31, 2006. These persistency
rate improvements reflect the more restrictive credit policies of lenders (which make it more
difficult for homeowners to refinance loans), as well as declines in housing values.
Bulk transactions
New insurance written for bulk transactions was $1.6 billion for 2008 compared to $7.8 billion
for 2007 and $18.9 billion for 2006. The decrease in bulk writings was primarily due to our
decision in the fourth quarter of 2007 to stop insuring Wall Street bulk transactions. The majority
of the bulk business in 2008 was lender paid transactions that included a higher percentage of
prime loans (we have consistently classified as prime all loans with FICO scores of 620 and
above) than was typically present in Wall Street bulk transactions and the remainder was bulk
business with the GSEs, which also included a similar percentage of prime loans. Wall Street bulk
transactions represented approximately 41%, 66% and 89% of our new insurance written for bulk
transactions during 2007, 2006 and 2005, respectively, and at December 31, 2008 included
approximately 118,000 loans with insurance in force of
63
approximately $19.8 billion and risk in force of approximately $5.8 billion, which is
approximately 72% of our bulk risk in force.
We wrote no new business through the bulk channel during the second half of 2008. We expect
the volume of any future business written through the bulk channel will be insignificant.
Pool insurance
In
addition to providing primary insurance coverage, we have also insured pools of mortgage loans.
New pool risk written during 2008, 2007 and 2006 was $145 million, $211 million and $240 million,
respectively. Our direct pool risk in force was $1.9 billion, $2.8 billion and $3.1 billion at
December 31, 2008, 2007 and 2006, respectively. These risk amounts represent pools of loans with
contractual aggregate loss limits and in some cases those without these limits. For pools of loans
without these 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, 2008,
2007 and 2006 for $2.5 billion, $4.1 billion and $4.4 billion, respectively, of risk without these
limits, risk in force is calculated at $150 million, $475 million and $473 million, respectively.
For the years ended December 31, 2008, 2007 and 2006 for $23 million, $32 million and $56 million,
respectively, of risk without contractual aggregate loss limits, new risk written under this model
was $1 million, $2 million and $4 million, respectively.
We are currently not issuing new commitments for pool insurance and expect that the volume of
any future pool business will be insignificant.
Net premiums written and earned
Net premiums written and earned during 2008 increased compared to 2007. The average insurance
in force continued to increase; however the effect of the higher in force has been somewhat offset
by lower average premium yields due to a shift in the mix of new writings to loans with lower
loan-to-value ratios, higher FICO scores and full documentation, which carry lower premium rates.
We expect our average insurance in force to continue to be higher in 2009, compared to 2008, with
our insurance in force balance stabilizing or decreasing slightly throughout 2009.
We expect our premium yields (net premiums written or earned, expressed on an annual basis,
divided by the average insurance in force) to continue at approximately the level experienced
during 2008. We expect a reduction in business in 2009 that has higher premiums (we are no longer
insuring new Wall Street Bulk transactions; as a result of our underwriting changes, our future
64
volume of loans with loan-to-value ratios greater than 95%, loans classified as A-minus and
reduced documentation loans, which carry higher premium rates should be insignificant), will be
offset by lower ceded premium due to captive terminations and run-offs. In a termination, the
arrangement is cancelled, with no future premium ceded and funds for any incurred but unpaid losses
transferred to us. In a run-off, no new loans are reinsured by the captive but loans previously
reinsured continue to be covered, with premium and losses continuing to be ceded on those loans.
Net premium written and earned during 2007 increased compared to 2006 due to a higher average
insurance in force, offset by lower average premium yields.
Risk sharing arrangements
For
the nine months ended September 30, 2008, approximately 34.4% of our flow new insurance
written was subject to arrangements with captives or risk sharing arrangements with the GSEs
compared to 47.7% for the year ended December 31, 2007 and 47.5% for the year ended December 31,
2006. We expect the percentage of new insurance written subject to risk sharing arrangements to
continue to decline in 2009 for the reasons discussed below. The percentage of new insurance
written covered by these arrangements is shown only for the nine months ended September 30, 2008
because this percentage normally increases after the end of a quarter. Such increases can be
caused by, among other things, the transfer of a loan in the secondary market, which can result in
a mortgage insured during a quarter becoming part of a risk sharing arrangement in a subsequent
quarter. New insurance written through the bulk channel is not subject to risk sharing
arrangements. Premiums ceded in these arrangements are reported in the period in which they are
ceded regardless of when the mortgage was insured.
Effective on and after June 1, 2008, Freddie Mac-approved private mortgage insurers, including
MGIC, may not cede new risk if the gross risk or gross premium ceded to captive reinsurers is
greater than 25%. Freddie Mac stated that it made this change to allow mortgage insurers to retain
more insurance premiums to pay current claims and rebuild their capital bases. Fannie Mae made
similar changes to its requirements. Effective June 1, 2008, we made appropriate changes to the
terms of our arrangements with those captives that had exceeded the 25% limit.
Effective January 1, 2009 we are no longer ceding new business under excess of loss
reinsurance treaties with lender captive reinsurers. Loans reinsured through December 31, 2008 will
run off pursuant to the terms of the particular captive arrangement. New business will continue to
be ceded under quota share reinsurance arrangements. During 2008, many of our captive arrangements
were either terminated or placed into run-off.
65
We anticipate that our ceded premiums related to risk sharing agreements will be significantly
less in 2009 compared to amounts ceded in 2008.
See discussion under -Losses regarding losses assumed by captives.
In June 2008 we entered into a reinsurance agreement with an affiliate of HCC Insurance
Holdings, Inc. The reinsurance agreement is effective on the risk associated with up to $50 billion
of qualifying new insurance written each calendar year. The term of the reinsurance agreement began
on April 1, 2008 and ends on December 31, 2010, subject to two one-year extensions that may be
exercised by HCC. We believe that substantially all of our insurance committed to subsequent to
April 1, 2008 will qualify under the reinsurance agreement. The reinsurance agreement is expected
to provide additional claims-paying resources when loss ratios exceed 100% for insurance written
beginning April 1, 2008.
The agreement is accounted for under deposit accounting rather than reinsurance accounting,
because under the guidance of SFAS 113 Accounting for Reinsurance Contracts, we concluded that
the reinsurance agreement does not result in the reasonable possibility that the reinsurer will
suffer a significant loss.
When our financial strength rating as determined by two rating agencies is in the A category
or higher the agreement provides for a 20% quota share agreement, but allows us to retain 80% of
the ceded premium (profit commission). The profit commission is used to cover losses that
otherwise would be ceded to the reinsurer until the profit commission is exhausted. The premium
ceded to the reinsurer and the brokerage commission paid to an affiliate of the reinsurer, net of a
profit commission retained by us, is recorded as reinsurance fee expense on our statement of
operations. In loss environments where loss ratios are less than 80% for the insurance covered by
this agreement we expect the net expense will be approximately 5% of net premiums earned on
business covered by the agreement. Under the terms of the agreement, if our financial strength
rating as determined by two rating agencies falls below the A category, we are no longer entitled
to the profit commission and our net expense will increase to reflect we no longer receive this
profit commission, but this increase will be partially offset by an increase of reinsured losses. In February
2009, Moodys Investors Service reduced MGICs financial strength rating to Ba2 with a developing
outlook. The financial strength of MGIC is rated A-, with a negative outlook, by both Standard and
Poors Rating Services and Fitch Ratings. The reinsurance fee for the year ended December 31, 2008
is separately shown in the statements of operations.
Investment income
Investment income for 2008 increased when compared to 2007 due to an increase in the average
amortized cost of invested assets, offset by a decrease in the average investment yield. The
decrease in the average investment yield
66
was caused both by decreases in prevailing interest rates and a decrease in the average
maturity of our investments. The portfolios average pre-tax investment yield was 3.87% at December
31, 2008 and 4.69% at December 31, 2007. The portfolios average after-tax investment yield was
3.49% at December 31, 2008 and 4.18% at December 31, 2007. Assuming shorter-term yields remain at
their current levels, we expect the investment yield on our portfolio as a whole will continue to
decline because we are investing available funds in shorter maturities so that they will be
available for claim payments without the need to obtain the necessary funds through sales of our
fixed income investments.
Investment income for 2007 increased when compared to 2006 due to an increase in the average
investment yield, as well as an increase in the average amortized cost of invested assets.
Realized (losses) gains
Realized losses for 2008 included other than temporary impairments on our investment
portfolio of approximately $62.5 million on our fixed income investments including debt instruments
issued by Fannie Mae, Freddie Mac, Lehman Brothers and AIG, and realized losses on the sales of
investments of approximately $12.8 million, offset by a $62.8 million gain from the sale of our
remaining interest in Sherman. Realized gains in 2007 included a $162.9 million pre-tax gain on the
sale of a portion our interest in Sherman. There were no other than temporary impairments in 2007
or 2006.
Other revenue
Other revenue for 2008 increased when compared to 2007. The increase in other revenue was
primarily the result of other non-insurance operations.
Other revenue for 2007 decreased when compared to 2006. The decrease was primarily the results
of other non-insurance operations and a decrease in revenue from contract underwriting.
Losses
As discussed in Critical Accounting Policies, and consistent with industry practices, we
establish loss reserves for future claims only for loans that are currently delinquent. The terms
delinquent and default are used interchangeably by us and are defined as an insured loan with a
mortgage payment that is 45 days or more past due. Loss reserves are established based on our
estimate of the number of loans in our inventory of delinquent loans that will not cure their
delinquency and thus result in a claim, which is referred to as
67
the claim rate (historically, a substantial majority of delinquent loans have eventually
cured), and further estimating the amount that we will pay in claims on the loans that do not cure,
which is referred to as claim severity.
Estimation of losses that we 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. Current conditions in the
housing and mortgage industries make these assumptions more volatile than they would otherwise be.
The actual amount of the claim payments may be substantially different than our loss reserve
estimates. Our estimates could be adversely affected by several factors, including a deterioration
of regional or national economic conditions leading to a reduction in borrowers income and thus
their ability to make mortgage payments, and a drop in housing values that could materially reduce
our ability to mitigate potential losses through property acquisition and resale or expose us to
greater losses on resale of properties obtained through the claim settlement process. Changes to
our estimates could result in a material impact to our results of operations, even in a stable
economic environment.
Our estimates could also be positively affected by government efforts to assist current
borrowers in refinancing to new loan instruments, assisting delinquent borrowers and lenders in
modifying their mortgage notes into something more affordable, and forestalling foreclosures. In
addition private company efforts may have a positive impact on our loss development. However, all
of these efforts are in their early stages and therefore we are unsure of their magnitude or the
benefit to us or our industry, and as a result are not factored into our current reserving. For
additional information about the potential impact that any plans and programs enacted by
legislation may have on us, see the risk factor titled Loan modification and other similar
programs may not provide material benefits to us in Item 1A.
Our estimates could also be positively affected by the extent of fraud that we uncover in the
loans we have insured; higher rates of fraud should lead to higher rates of rescission, although
the relationship may not be linear. Rescissions and denials totaled $85 million in the fourth
quarter of 2008 and $171 million for the year ending
December 31, 2008. Rescissions and denials totaled only
$7 million in the fourth quarter of 2007 and totaled only $28 million for the year ended December
31, 2007.
Losses incurred
In 2008, net losses incurred were $3,071 million, of which $2,684 million related to current
year loss development and $387 million related to unfavorable prior years loss development. In
2007, net losses incurred were $2,365 million, of which $1,846 million related to current year loss
development and $519 million
68
related to
unfavorable prior years loss development. See Note 8 to our consolidated
financial statements in Item 8.
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 increased in 2008, compared to 2007, primarily due to a
significant increase in the default inventory offset by a smaller increase in estimated severity,
as well as a slight decrease in estimated claim rate, when each are compared to the same period in 2007.
The default inventory increased by 75,068 delinquencies in 2008, compared to an increase of 28,492
in 2007. The continued increase in estimated severity was primarily the result of the default
inventory containing higher loan exposures with expected higher average claim payments as well as
our inability to mitigate losses through the sale of properties due to home price declines. The
increase in estimated severity was less substantial than the increase experienced during 2007. The
slight decrease in estimated claim rate for 2008 was primarily due to an increase in our loss mitigation
efforts that resulted in an increased number of rescissions and claim denials for
misrepresentation, ineligibility and policy exclusions. The estimated claim rate is based on recent
historical experience and does not take into account any potential benefits of third party and
governmental mitigation programs that are in their early stages for which we have no data on
historical performance. Losses incurred pertaining to the current year increased in 2007, compared
to 2006, primarily due to significant increases in the default inventory and estimated severity and
claim rate, when each are compared to 2006.
Our loss estimates are established based upon historical experience. We continue to experience
increases in delinquencies in certain markets with higher than average loan balances, such as
Florida and California. In California we have experienced an increase in delinquencies, from 6,900
as of December 31, 2007 to 14,960 as of December 31, 2008. Our Florida delinquencies increased from
12,500 as of December 31, 2007 to 29,380 as December 31, 2008. The average claim paid on California
loans in 2008 was more than twice as high as the average claim paid for the remainder of the
country.
The amount of losses incurred relating to prior year loss development represents actual claim
payments that were higher or lower than what was estimated by us at the end of the prior year as
well as a re-estimation of amounts to be ultimately paid on defaults remaining in our default
inventory from the end of the prior year. This re-estimation is the result of our 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. The $387 million addition to losses incurred relating to prior years in 2008 was due
primarily to the significant increases in severity during the year, as compared to our estimates
when originally establishing the reserves at December 31, 2007. The increase in losses incurred in
2008 related to prior years
69
is also a result of more defaults remaining in inventory at December 31, 2008 from a year
prior. These defaults have a higher estimated claim rate when compared to a year prior. The $518.9
million increase in losses incurred in 2007 related to prior years was due primarily to the
significant increases in severity and the significant deterioration in cure rates experienced
during the year, as compared to our estimates when originally establishing the reserves at December
31, 2006.
We believe that the foregoing trends will likely continue into 2009. These trends may also
continue beyond 2009.
As discussed under Risk Sharing Arrangements, a portion of our flow new insurance written
is subject to reinsurance arrangements with lender captives. The majority of these reinsurance
arrangements are aggregate excess of loss reinsurance agreements, and the remainder are quota share
agreements. As discussed under Risk Sharing Arrangements effective January 1, 2009 we will no
longer cede new business under excess of loss reinsurance treaties with lender captive reinsurers.
Loans reinsured through December 31, 2008 will run off pursuant to the terms of the particular
captive arrangement. Under the aggregate excess of loss agreements, we are responsible for the
first aggregate layer of loss, which is typically between 4% and 5%, the captives are responsible
for the second aggregate layer of loss, which is typically 5% or 10%, and we are responsible for
any remaining loss. The layers are typically expressed as a percentage of the original risk on an
annual book of business reinsured by the captive. The premium cessions on these agreements
typically ranged from 25% to 40% of the direct premium. Under a quota share arrangement premiums
and losses are shared on a pro-rata basis between us and the captives, with the captives portion
of both premiums and losses typically ranging from 25% to 50%. As noted under Risk Sharing
Arrangements based on changes to the GSE requirements, beginning June 1, 2008 our captive
arrangements, both aggregate excess of loss and quota share, are limited to a 25% cede rate.
Under these agreements the captives are required to maintain a separate trust account, of
which we are the sole beneficiary. Premiums ceded to a captive are deposited into the applicable
trust account to support the captives layer of insured risk. These amounts are held in the trust
account and are available to pay reinsured losses. The captives ultimate liability is limited to
the assets in the trust account. When specific time periods are met and the individual trust
account balance has reached a required level, then the individual captive may make authorized
withdrawals from its applicable trust account. In most cases, the captives are also allowed to
withdraw funds from the trust account to pay verifiable federal income taxes and operational
expenses. Conversely, if the account balance falls below certain thresholds, the individual captive
may be required to contribute funds to the trust account. However, in most cases, our sole remedy
if a captive does not contribute such funds is to put the captive into run-off, in which case no
new business would be ceded to the captive. In the event that the captives incurred but unpaid
losses exceed the funds in the trust
70
account, and the captive does not deposit adequate funds, we may also be allowed to terminate the
captive agreement, assume the captives obligations, transfer the assets in the trust accounts to
us, and retain all future premium payments. We intend to exercise this additional remedy when it is
available to us. However, if the captive would challenge our right to do so, the matter would be
determined by arbitration. The total fair value of the trust fund assets under these agreements at
December 31, 2008 was approximately $582 million. During 2008, $265 million of trust fund assets
were transferred to us as a result of captive terminations. There were no material captive
terminations in 2007. The transferred funds resulted in an increase in our investment portfolio
(including cash and cash equivalents) and there was a corresponding decrease in our reinsurance
recoverable on loss reserves, which is
offset by a decrease in our net losses paid.
In 2008 the captive arrangements reduced our losses incurred by approximately $476 million. We
anticipate that the reduction in losses incurred will be lower in 2009, compared to 2008, as some
of our captive arrangements have been terminated.
Information about the composition of the primary insurance default inventory at December 31,
2008, 2007 and 2006 appears in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
Total loans delinquent (1) |
|
|
182,188 |
|
|
|
107,120 |
|
|
|
78,628 |
|
Percentage of loans delinquent (default rate) |
|
|
12.37 |
% |
|
|
7.45 |
% |
|
|
6.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime loans delinquent (2) |
|
|
95,672 |
|
|
|
49,333 |
|
|
|
36,727 |
|
Percentage of prime loans delinquent (default rate) |
|
|
7.90 |
% |
|
|
4.33 |
% |
|
|
3.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
A-minus loans delinquent (2) |
|
|
31,907 |
|
|
|
22,863 |
|
|
|
18,182 |
|
Percentage of A-minus loans delinquent (default rate) |
|
|
30.19 |
% |
|
|
19.20 |
% |
|
|
16.81 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime credit loans delinquent (2) |
|
|
13,300 |
|
|
|
12,915 |
|
|
|
12,227 |
|
Percentage of subprime credit loans delinquent
(default rate) |
|
|
43.30 |
% |
|
|
34.08 |
% |
|
|
26.79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduced documentation loans delinquent (3) |
|
|
41,309 |
|
|
|
22,009 |
|
|
|
11,492 |
|
Percentage of reduced doc loans delinquent (default
rate) |
|
|
32.88 |
% |
|
|
15.48 |
% |
|
|
8.19 |
% |
|
|
|
(1) |
|
At December 31, 2008 and 2007, 45,482 and 39,704 loans in default, respectively, related to
Wall Street bulk transactions. |
|
(2) |
|
We define prime loans as those having FICO credit scores of 620 or greater, A-minus loans as
those having FICO credit scores of 575-619, and subprime credit loans as those having FICO |
71
|
|
|
|
|
credit scores of less than 575, all as reported to us at the time a commitment to insure is issued.
Most A-minus and subprime credit loans were written through the bulk channel. |
|
(3) |
|
In accordance with industry practice, loans approved by GSE and other automated underwriting
(AU) systems under doc waiver programs that do not require verification of borrower income are
classified by us as full documentation. Based in part on information provided by the GSEs, we
estimate full documentation loans of this type were approximately 4% of 2007 NIW. Information for
other periods is not available. We understand these AU systems grant such doc waivers for loans
they judge to have higher credit quality. We also understand that the GSEs terminated their doc
waiver programs, with respect to new commitments, in the second half of 2008. |
The pool notice inventory increased from 25,224 at December 31, 2007 to 33,884 at December 31,
2008; the pool notice inventory was 20,458 at December 31, 2006.
The average primary claim paid for 2008 was $52,239 compared to $37,165 for 2007 and $28,228
for 2006. We expect the average primary claim paid to continue to increase in 2009, although we do
not expect the increase in 2009 to be as sizeable as the increase experienced during 2008. We
expect these increases will be driven by our higher average insured loan sizes as well as decreases
in our ability to mitigate losses through the sale of properties in some geographical regions, as
certain housing markets, like California and Florida, continue to be weak.
The average claim paid for the top 5 states (based on 2008 losses paid) for the years ended
December 31, 2008, 2007 and 2006 appears in the table below.
Average claim paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
California |
|
$ |
115,409 |
|
|
$ |
96,196 |
|
|
$ |
55,540 |
|
Florida |
|
|
69,061 |
|
|
|
56,846 |
|
|
|
23,158 |
|
Michigan |
|
|
37,020 |
|
|
|
35,607 |
|
|
|
31,181 |
|
Arizona |
|
|
67,058 |
|
|
|
58,211 |
|
|
|
19,048 |
|
Ohio |
|
|
32,638 |
|
|
|
31,859 |
|
|
|
29,172 |
|
Other states |
|
|
42,985 |
|
|
|
33,651 |
|
|
|
27,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All states |
|
$ |
52,239 |
|
|
$ |
37,165 |
|
|
$ |
28,228 |
|
72
The average loan size of our insurance in force at December 31, 2008, 2007 and 2006 appears in
the table below.
Average loan size
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
Total insurance in force |
|
$ |
154,100 |
|
|
$ |
147,308 |
|
|
$ |
137,574 |
|
Prime (FICO 620 & >) |
|
|
151,240 |
|
|
|
141,690 |
|
|
|
129,696 |
|
A-Minus (FICO 575-619) |
|
|
132,380 |
|
|
|
133,460 |
|
|
|
129,116 |
|
Subprime (FICO < 575) |
|
|
121,230 |
|
|
|
124,530 |
|
|
|
127,298 |
|
Reduced doc (All FICOs) |
|
|
208,020 |
|
|
|
209,990 |
|
|
|
202,984 |
|
The average loan size of our insurance in force at December 31, 2008, 2007 and 2006 for the
top 5 states (based on 2008 losses paid) appears in the table below.
Average loan size
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
California |
|
$ |
293,442 |
|
|
$ |
291,578 |
|
|
$ |
274,984 |
|
Florida |
|
|
180,261 |
|
|
|
178,063 |
|
|
|
163,573 |
|
Michigan |
|
|
121,001 |
|
|
|
119,428 |
|
|
|
117,126 |
|
Arizona |
|
|
190,339 |
|
|
|
185,518 |
|
|
|
163,619 |
|
Ohio |
|
|
116,046 |
|
|
|
113,276 |
|
|
|
110,162 |
|
All other states |
|
|
148,523 |
|
|
|
141,297 |
|
|
|
131,247 |
|
73
Information about net paid claims during the years ended December 31, 2008, 2007 and 2006
appears in the table below.
Net paid claims ($ millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Prime (FICO 620 & >) |
|
$ |
547 |
|
|
$ |
332 |
|
|
$ |
251 |
|
A-Minus (FICO 575-619) |
|
|
250 |
|
|
|
161 |
|
|
|
125 |
|
Subprime (FICO < 575) |
|
|
132 |
|
|
|
101 |
|
|
|
68 |
|
Reduced doc (All FICOs) |
|
|
395 |
|
|
|
190 |
|
|
|
81 |
|
Other |
|
|
48 |
|
|
|
45 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
Direct losses paid |
|
|
1,372 |
|
|
|
829 |
|
|
|
575 |
|
Reinsurance |
|
|
(19 |
) |
|
|
(12 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
Net losses paid |
|
$ |
1,353 |
|
|
$ |
817 |
|
|
$ |
567 |
|
|
|
|
|
|
|
|
|
|
|
LAE |
|
|
48 |
|
|
|
53 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
Net losses and LAE paid
before terminations |
|
$ |
1,401 |
|
|
$ |
870 |
|
|
$ |
611 |
|
|
|
|
|
|
|
|
|
|
|
Reinsurance terminations |
|
|
(265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and LAE paid |
|
$ |
1,136 |
|
|
$ |
870 |
|
|
$ |
611 |
|
|
|
|
|
|
|
|
|
|
|
74
Primary claims paid for the top 15 states (based on 2008 losses paid) and all other states for
the years ended December 31, 2008, 2007 and 2006 appear in the table below.
Primary paid claims by state ($ millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
California |
|
$ |
315.8 |
|
|
$ |
81.7 |
|
|
$ |
2.8 |
|
Florida |
|
|
129.3 |
|
|
|
37.6 |
|
|
|
4.4 |
|
Michigan |
|
|
98.9 |
|
|
|
98.0 |
|
|
|
73.8 |
|
Arizona |
|
|
60.8 |
|
|
|
10.5 |
|
|
|
0.7 |
|
Ohio |
|
|
58.3 |
|
|
|
73.2 |
|
|
|
71.5 |
|
Illinois |
|
|
52.0 |
|
|
|
34.9 |
|
|
|
20.5 |
|
Georgia |
|
|
50.4 |
|
|
|
35.4 |
|
|
|
39.6 |
|
Texas |
|
|
47.7 |
|
|
|
51.1 |
|
|
|
48.9 |
|
Nevada |
|
|
45.1 |
|
|
|
12.3 |
|
|
|
1.4 |
|
Minnesota |
|
|
43.2 |
|
|
|
33.6 |
|
|
|
16.0 |
|
Colorado |
|
|
32.5 |
|
|
|
31.6 |
|
|
|
30.1 |
|
Virginia |
|
|
32.3 |
|
|
|
12.7 |
|
|
|
1.8 |
|
Massachusetts |
|
|
28.9 |
|
|
|
24.3 |
|
|
|
6.5 |
|
Indiana |
|
|
26.0 |
|
|
|
33.3 |
|
|
|
34.8 |
|
New York |
|
|
23.9 |
|
|
|
13.2 |
|
|
|
9.2 |
|
Other states |
|
|
278.8 |
|
|
|
201.0 |
|
|
|
162.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,323.9 |
|
|
$ |
784.4 |
|
|
$ |
524.6 |
|
|
|
|
|
|
|
|
|
|
|
75
The default inventory in those same states at December 31, 2008, 2007 and 2006 appears in the
table below.
Default inventory by state
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
California |
|
|
14,960 |
|
|
|
6,925 |
|
|
|
3,000 |
|
Florida |
|
|
29,384 |
|
|
|
12,548 |
|
|
|
4,526 |
|
Michigan |
|
|
9,853 |
|
|
|
7,304 |
|
|
|
6,522 |
|
Arizona |
|
|
6,338 |
|
|
|
2,169 |
|
|
|
800 |
|
Ohio |
|
|
8,555 |
|
|
|
6,901 |
|
|
|
6,395 |
|
Illinois |
|
|
9,130 |
|
|
|
5,435 |
|
|
|
4,092 |
|
Georgia |
|
|
7,622 |
|
|
|
4,623 |
|
|
|
3,492 |
|
Texas |
|
|
10,540 |
|
|
|
7,103 |
|
|
|
6,490 |
|
Nevada |
|
|
3,916 |
|
|
|
1,337 |
|
|
|
530 |
|
Minnesota |
|
|
3,642 |
|
|
|
2,478 |
|
|
|
1,820 |
|
Colorado |
|
|
2,328 |
|
|
|
1,534 |
|
|
|
1,354 |
|
Virginia |
|
|
3,360 |
|
|
|
1,761 |
|
|
|
981 |
|
Massachusetts |
|
|
2,634 |
|
|
|
1,596 |
|
|
|
1,027 |
|
Indiana |
|
|
5,497 |
|
|
|
3,763 |
|
|
|
3,392 |
|
New York |
|
|
4,493 |
|
|
|
3,153 |
|
|
|
2,458 |
|
Other states |
|
|
59,936 |
|
|
|
38,490 |
|
|
|
31,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182,188 |
|
|
|
107,120 |
|
|
|
78,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our 2008 paid claims were lower than we anticipated at the beginning of the year due to a
combination of reasons that have slowed the rate at which claims are received and paid, including
foreclosure moratoriums, servicing delays, court delays, loan modifications, our fraud
investigations and our claim rescissions and denials. Due to the uncertainty regarding how these
and other factors will affect our net paid claims in 2009, it is difficult to estimate our 2009
claims paid. However, we believe that paid claims in 2009 will exceed, perhaps significantly, the
$1.4 billion paid in 2008. See Contractual Obligations below.
As of December 31, 2008, 66% of our primary insurance in force was written subsequent to
December 31, 2005. On our 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 and deteriorating economic conditions.
Low persistency can have the effect of accelerating the period in the life of a book during which
the highest claim frequency occurs. Deteriorating economic conditions can result in increasing
claims following a period of declining claims. On our bulk business, the period of highest claims
frequency has generally occurred earlier than in the historical pattern on our flow business.
76
Premium deficiency
Historically all of our insurance risks were included in a single grouping and the
calculations to determine if a premium deficiency existed were performed on our entire in force
book. As of September 30, 2007, based on these calculations there was no premium deficiency on our
total in force book. During the fourth quarter of 2007, we experienced significant increases in our
default inventory, and severities and claim rates on loans in default. We further examined the
performance of our in force book and determined that the performance of loans included in Wall
Street bulk transactions was significantly worse than we experienced for loans insured through the
flow channel or loans insured through the remainder of our bulk channel. As a result we began
separately measuring the performance of Wall Street bulk transactions and decided to stop writing
this business. Consequently, as of December 31, 2007, we performed separate premium deficiency
calculations on the Wall Street bulk transactions and on the remainder of our in force book to
determine if premium deficiencies existed. As a result of those calculations, we recorded a
premium deficiency reserve of $1,211 million in the fourth quarter of 2007 to reflect the present
value of expected future losses and expenses that exceeded the present value of expected future
premium and already established loss reserves on the Wall Street bulk transactions. The discount
rate used in the calculation of the premium deficiency reserve, 4.70%, was based upon our pre-tax
investment yield at December 31, 2007. As of December 31, 2007 there was no premium deficiency
related to the remainder of our in force business.
During 2008 the premium deficiency reserve on Wall Street bulk transactions declined by $757
million from $1,211 million, as of December 31, 2007, to $454 million as of December 31, 2008. The
$454 million premium deficiency reserve as of December 31, 2008 reflects the present value of
expected future losses and expenses that exceeded the present value of expected future premium and
already established loss reserves. The discount rate used in the calculation of the premium
deficiency reserve at December 31, 2008 was 4.0%.
77
The components of the premium deficiency reserve at December 31, 2008 and 2007 appears in the
table below.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
($ millions) |
|
Present value of expected future premium |
|
$ |
712 |
|
|
$ |
901 |
|
|
|
|
|
|
|
|
|
|
Present value of expected future paid losses
and expenses |
|
|
(3,063 |
) |
|
|
(3,561 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net present value of future cash flows |
|
|
(2,351 |
) |
|
|
(2,660 |
) |
|
|
|
|
|
|
|
|
|
Established loss reserves |
|
|
1,897 |
|
|
|
1,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deficiency |
|
$ |
(454 |
) |
|
$ |
(1,211 |
) |
|
|
|
|
|
|
|
Each quarter, we re-estimate the premium deficiency reserve on the remaining Wall Street bulk
insurance in force. The premium deficiency reserve primarily changes from quarter to quarter as a
result of two factors. First, it changes as the actual premiums, losses and expenses that were
previously estimated are recognized. Each period such items are reflected in our financial
statements as earned premium, losses incurred and expenses. The difference between the amount and
timing of actual earned premiums, losses incurred and expenses and our previous estimates used to
establish the premium deficiency reserves has an effect (either positive or negative) on that
periods results. Second, the premium deficiency reserve changes as our assumptions relating to
the present value of expected future premiums, losses and expenses on the remaining Wall Street
bulk insurance in force change. Changes to these assumptions also have an effect on that periods
results. The decrease in the premium deficiency reserve for the year ended December 31, 2008 was
$757 million, as shown in the chart below, which represents the net result of actual premiums,
losses and expenses offset by $134 million change in assumptions primarily related to higher
estimated ultimate losses.
78
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
Premium Deficiency Reserve at December 31, 2007 |
|
|
|
|
|
$ |
(1,211 |
) |
|
|
|
|
|
|
|
|
|
Paid Claims and LAE |
|
|
770 |
|
|
|
|
|
Increase in loss reserves |
|
|
448 |
|
|
|
|
|
Premium earned |
|
|
(234 |
) |
|
|
|
|
Effects of present valuing on future premiums, losses and expenses |
|
|
(93 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in premium deficiency reserve to reflect
actual premium, losses and expenses recognized |
|
|
|
|
|
|
891 |
|
|
|
|
|
|
|
|
|
|
Change in premium deficiency reserve to reflect change in
assumptions relating to premiums, losses, expenses and discount rate (1) |
|
|
|
|
|
|
(134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium Deficiency Reserve at December 31, 2008 |
|
|
|
|
|
$ |
(454 |
) |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A negative number for changes in assumptions relating to premiums, losses, expenses and
discount rate indicates a deficiency of prior premium deficiency reserves. |
At the end of 2008, we performed a premium deficiency analysis on the portion of our book of
business not covered by the premium deficiency described above. That analysis concluded that, as of
December 31, 2008, there was no premium deficiency on such portion of our book of business. For the
reasons discussed below, our analysis of any potential deficiency reserve is subject to inherent
uncertainty and requires significant judgment by management. To the extent, in a future period,
expected losses are higher or expected premiums are lower than the assumptions we used in our
analysis, we could be required to record a premium deficiency reserve on this portion of our book
of business in such period.
The calculation of premium deficiency reserves requires the use of significant judgments and
estimates to determine the present value of future premium and present value of expected losses and
expenses on our business. The present value of future premium relies on, among other things,
assumptions about persistency and repayment patterns on underlying loans. The present value of
expected losses and expenses depends on assumptions relating to severity of claims and claim rates
on current defaults, and expected defaults in future periods. Similar to our loss reserve
estimates, our estimates for premium deficiency reserves could be adversely affected by several
factors, including a deterioration of regional or economic conditions leading to a reduction in
borrowers income and thus their ability to make mortgage payments, and a drop in housing values
that could expose us to greater losses. Assumptions used in calculating the deficiency reserves can
also be affected by volatility in the current housing and mortgage lending industries. To the
extent premium patterns and
79
actual loss experience differ from the assumptions used in calculating the premium deficiency
reserves, the differences between the actual results and our estimate will affect future period
earnings and could be material.
Underwriting and other expenses
Underwriting and other expenses for 2008 decreased when compared to 2007. The decrease
reflects our lower volumes of new insurance written as well as a focus on expenses in difficult
market conditions. Also, 2007 included $12.3 million in one-time expenses associated with a
terminated merger.
Underwriting
and other expenses for 2007 increased when compared to 2006 primarily
due to one-time expenses associated with a terminated merger, as well
as international expansion.
Ratios
The table below presents our loss, expense and combined ratios for our combined insurance
operations for the years ended December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Loss ratio |
|
|
220.4 |
% |
|
|
187.3 |
% |
|
|
51.7 |
% |
Expense ratio |
|
|
14.2 |
% |
|
|
15.8 |
% |
|
|
17.0 |
% |
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
234.6 |
% |
|
|
203.1 |
% |
|
|
68.7 |
% |
|
|
|
|
|
|
|
|
|
|
The loss ratio is the ratio, expressed as a percentage, of the sum of incurred losses and loss
adjustment expenses to net premiums earned. The loss ratio does not reflect any effects due to
premium deficiency. The increase in the loss ratio in 2008, compared to 2007, is due to an increase
in losses incurred, partially offset by an increase in premiums earned. The expense ratio is the
ratio, expressed as a percentage, of underwriting expenses to net premiums written. The decrease in
2008, compared to 2007, is due to a decrease in underwriting and other expenses as well as an
increase in premiums written. The combined ratio is the sum of the loss ratio and the expense
ratio.
Interest expense
Interest expense for 2008 increased compared to 2007. The increase primarily reflects the
issuance of the $390 million of convertible debentures in March and April of 2008.
See discussion of our future interest expense as it relates to our
convertible debentures in Note 2 to our consolidated financial
statements in Item 8.
Interest
expense for 2007 increased slightly when compared to 2006 due to
higher average amounts outstanding under our commercial paper program
and credit facility.
80
Income taxes
The
effective tax rate credit on our pre-tax loss was (42.1%) in 2008,
compared to (37.3%) in
2007. During those periods, the rate reflected the benefits recognized from tax-preferenced
investments. Our tax-preferenced investments that impact the effective tax rate consist almost
entirely of tax-exempt municipal bonds. The difference in the rate was primarily the result of a
smaller loss from underwriting operations during 2008, compared to 2007.
The
effective tax rate credit on our pre-tax loss was (37.3%) in 2007, compared to an effective tax
rate on our pre-tax income of 24.8% in 2006. During those periods, the rate reflected the benefits
recognized from tax-preferenced investments. Our tax-preferenced investments that impact the
effective tax rate consist almost entirely of tax-exempt municipal bonds. The difference in the
rate was primarily the result of a pre-tax loss during 2007, compared to pre-tax income during
2006.
At December 31, 2008 we had net deferred tax assets of $307 million and made an assessment of the
need to establish a valuation allowance for these assets. In periods prior to 2008, we deducted
significant amounts of statutory contingency reserves on our federal income tax returns. The
reserves were deducted to the extent we purchased tax and loss bonds in an amount equal to the tax
benefit of the deduction. The reserves are included in taxable income in future years when they are
released for statutory accounting purposes (see Liquidity and Capital Resources
Risk-to-Capital) or when the taxpayer elects to redeem the tax and loss bonds that were purchased
in connection with the deduction for the reserves. Since the tax effect on these reserves exceeds
the gross deferred tax assets less deferred tax liabilities, we believe that all gross deferred tax
assets at December 31, 2008 are fully realizable. Therefore, we established no valuation reserve.
In 2009, since we have redeemed the remaining balance of our tax and loss bonds the remaining
contingency reserves will be released and will no longer be available to support any net deferred
tax assets. Therefore, any credit for income taxes, relating to future operating losses, will be
reduced or eliminated by the establishment of a valuation allowance. We estimate that the total
amount of tax benefits we will be able to recognize in 2009 will be limited to between $50 million
and $100 million.
Joint ventures
Our equity in the earnings from Sherman and C-BASS and certain other joint ventures and
investments, accounted for in accordance with the equity method of accounting, is shown separately,
net of tax, on our consolidated statement of operations. Income from joint ventures, net of tax,
was $24.5 million in 2008 compared to a loss from joint ventures, net of tax, of $269.3 million for
2007. The loss from joint venture in 2007 was due primarily to the impairment of our investment in
C-BASS, which is discussed below. In the third quarter of 2008, we
81
sold our remaining interest in
Sherman to Sherman. As a result, beginning in the fourth quarter of 2008, we
no longer have income
or loss from joint ventures.
C-BASS
Beginning in February 2007 and continuing through approximately the end of March 2007, the
subprime mortgage market experienced significant turmoil. After a period of relative stability that
persisted during April, May and through approximately late June, market dislocations recurred and
then accelerated to unprecedented levels beginning in approximately mid-July 2007. As described in
Note 10 to our consolidated financial statements in Item 8, in the third quarter of 2007,
we concluded that our total equity interest in C-BASS was impaired. In addition, during the fourth
quarter of 2007 due to additional losses incurred by C-BASS, we reduced the carrying value of our
$50 million note from C-BASS to zero under equity method accounting.
Sherman
In August 2008 we sold our entire interest in Sherman to Sherman. Our interest sold
represented approximately 24.25% of Shermans equity. The sale price was paid $124.5 million in
cash and by delivery of Shermans unsecured promissory note in the principal amount of $85 million.
The scheduled maturity of the Note is February 13, 2011 and it bears interest, payable monthly, at
the annual rate equal to three-month LIBOR plus 500 basis points. The Note is issued under a
Credit Agreement, dated August 13, 2008, between Sherman and MGIC.
At the time of sale the Note had a fair value of $69.5 million (18.25% discount to par). The
fair value was determined by comparing the terms of the note to the discounts and yields on
comparable bonds. The value was also discounted for illiquidity and lack of ratings. The discount
will be amortized to interest income over the life of the note. The gain recognized on the sale was
$62.8 million, and is included in realized investment gains on the statement of operations for the
year ended December 31, 2008.
The sale of our interest in Sherman was effected as a repurchase of our interest by Sherman.
We believe that Sherman will repay the Note in accordance with its terms. If in the future Sherman
were to experience financial distress, there is a risk that Sherman would be unable to meet its
obligations under the Note or, if Sherman were unable to meet its obligations generally, that
creditors of Sherman would seek to set aside the entire transaction and obtain the return to
Sherman of the consideration received by us in the transaction. We cannot predict Shermans future
performance but its business is sensitive to its ability to purchase receivable portfolios on
favorable terms and to service those receivables such that it meets its return targets. In
addition, the volume of credit
82
card originations and the related returns on the credit card
portfolio are impacted
by general economic conditions and consumer behavior. Shermans operations are principally
financed with debt under credit facilities.
For some time there has been significant tightening in credit markets, which have become even
tighter beginning in September 2008 with the onset of the credit
crisis, with the result that lenders are generally becoming more
restrictive in the amount of credit they are willing to provide and in the terms of credit that is
provided. Credit tightening could adversely impact Shermans ability to obtain sufficient funding
to maintain or expand its business and could increase the cost of funding that is obtained.
For additional information regarding the sale of our interest please refer to our Current
Report on Form 8-K filed with the Securities and Exchange Commission on August 14, 2008.
Summary Sherman income statements for the periods indicated appear below. The year ended
December 31, 2008 only reflects Shermans results and our share of income from Sherman through July
31, 2008 as a result of the sale of our interest in August 2008. Prior to the sale of our interest,
we did not consolidate Sherman with us for financial reporting purposes, and we did not control
Sherman. Shermans internal controls over its financial reporting were not part of our internal
controls over our financial reporting. However, our internal controls over our financial reporting
include processes to assess the effectiveness of our financial reporting as it pertains to Sherman.
We believe those processes are effective in the context of our overall internal controls.
83
Sherman Summary Income Statement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31,
($
in millions) |
|
|
|
2008* |
|
|
2007 |
|
|
2006 |
|
Revenues from receivable portfolios |
|
$ |
660.3 |
|
|
$ |
994.3 |
|
|
$ |
1,031.6 |
|
Portfolio amortization |
|
|
264.8 |
|
|
|
488.1 |
|
|
|
373.0 |
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of amortization |
|
|
395.5 |
|
|
|
506.2 |
|
|
|
658.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card interest income and fees |
|
|
475.6 |
|
|
|
692.9 |
|
|
|
357.3 |
|
Other revenue |
|
|
35.3 |
|
|
|
60.8 |
|
|
|
35.6 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
906.4 |
|
|
|
1,259.9 |
|
|
|
1,051.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
740.1 |
|
|
|
991.5 |
|
|
|
702.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax |
|
$ |
166.3 |
|
|
$ |
268.4 |
|
|
$ |
349.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys income from Sherman |
|
$ |
35.6 |
|
|
$ |
81.6 |
|
|
$ |
121.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The year ended December 31, 2008 only reflects Shermans results and our income from Sherman
through July 31, 2008 as a result of the sale of our remaining interest in August 2008. |
The Companys income from Sherman line item in the table above includes $3.6 million, $15.6
million and $12.0 million of additional amortization expense in 2008, 2007 and 2006, respectively,
above Shermans actual amortization expense, related to additional interests in Sherman that we
purchased during the third quarter of 2006 at a price in excess of book value.
In September 2007 we sold a portion of our interest in Sherman to an entity owned by Shermans
senior management. The interest sold by us represented approximately 16% of Shermans equity. We
received a cash payment of $240.8 million in the sale and recorded a $162.9 million pre-tax gain,
which is reflected in our results of operations for 2007 as a realized gain.
Financial Condition
As of December 31, 2008, 81% of our investment portfolio was invested in tax-preferenced
securities. In addition, at December 31, 2008, based on book value, approximately 94% of our fixed
income securities were invested in A rated and above, readily marketable securities, concentrated
in maturities of less than 15 years. Approximately 24% of our investment portfolio is covered by
the financial
84
guaranty industry. We evaluate the credit risk of securities through analysis of the
underlying fundamentals of each issuer. A breakdown of the portion of our
investment portfolio covered by the financial guaranty industry by credit rating, including
the rating without the guarantee is shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ millions)
Guarantor Rating |
Underlying Rating |
|
AAA |
|
BBB+ |
|
B |
|
Caa1 |
|
All |
|
|
|
AAA |
|
$ |
2 |
|
|
$ |
27 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
29 |
|
AA |
|
|
278 |
|
|
|
627 |
|
|
|
3 |
|
|
|
2 |
|
|
|
910 |
|
A |
|
|
166 |
|
|
|
523 |
|
|
|
4 |
|
|
|
12 |
|
|
|
705 |
|
BBB |
|
|
9 |
|
|
|
57 |
|
|
|
15 |
|
|
|
|
|
|
|
81 |
|
|
|
|
|
|
$ |
455 |
|
|
$ |
1,234 |
|
|
$ |
22 |
|
|
$ |
14 |
|
|
$ |
1,725 |
|
If all of the companies in the financial guaranty industry lose their AAA ratings, the
percentage of our fixed income portfolio rated A or
better will decline by 1% to 93% A or
better. Our maximum exposure to any individual financial guarantor is 11%.
At December 31, 2008, derivative financial instruments in our investment portfolio were
immaterial. We primarily place our investments in instruments that meet high credit quality
standards, as specified in our investment policy guidelines. The policy also limits the amount of
our credit exposure to any one issue, issuer and type of instrument. At December 31, 2008, the
modified duration of our fixed income investment portfolio was 4.3 years, which means that an
instantaneous parallel shift in the yield curve of 100 basis points would result in a change of
4.3% in the fair value of our fixed income portfolio. For an upward shift in the yield curve, the
fair value of our portfolio would decrease and for a downward shift in the yield curve, the market
value would increase.
At December 31, 2008, the investment portfolio had gross unrealized losses of $256.6
million. For those securities in an unrealized loss position, the length of time the
securities were in such a position, as measured by their month-end fair values, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
December 31, 2008 |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
($ thousands) |
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies |
|
$ |
13,106 |
|
|
$ |
245 |
|
|
$ |
1,242 |
|
|
$ |
160 |
|
|
$ |
14,348 |
|
|
$ |
405 |
|
Obligations of U.S. states
and political subdivisions |
|
|
1,640,406 |
|
|
|
102,437 |
|
|
|
552,191 |
|
|
|
135,138 |
|
|
|
2,192,597 |
|
|
|
237,575 |
|
Corporate debt securities |
|
|
72,711 |
|
|
|
4,127 |
|
|
|
1,677 |
|
|
|
126 |
|
|
|
74,388 |
|
|
|
4,253 |
|
Mortgage-backed securities |
|
|
41,867 |
|
|
|
14,251 |
|
|
|
|
|
|
|
|
|
|
|
41,867 |
|
|
|
14,251 |
|
Debt issued by foreign
sovereign governments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
227 |
|
|
|
10 |
|
|
|
2,062 |
|
|
|
135 |
|
|
|
2,289 |
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio |
|
$ |
1,768,317 |
|
|
$ |
121,070 |
|
|
$ |
557,172 |
|
|
$ |
135,559 |
|
|
$ |
2,325,489 |
|
|
$ |
256,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2008, the municipal bond market experienced historically poor performance, and
resulted in approximately one-third of our securities (580 issues) being in an unrealized
loss position as of December 31, 2008. The unrealized losses in all categories of our
investments were primarily caused by widening spreads. Of those securities in an unrealized
loss position greater than 12 months, 101 securities had a fair value greater than 80% of
amortized cost and 65 securities had a fair value less than 80% of amortized cost. We do
not believe the unrealized losses are related to specific issuer defaults and because we
have the ability and intent to hold those investments until a recovery of fair value, which
may be maturity, we do not consider those investments to be other-than-temporarily impaired
at December 31, 2008.
We held approximately $524 million in auction rate securities (ARS) backed by student
loans at December 31, 2008. ARS are intended to behave like short-term debt instruments
because their interest rates are reset periodically through an auction process, most
commonly at intervals of 7, 28 and 35 days. The same auction process has historically
provided a means by which we may rollover the investment or sell these securities at par in
order to provide us with liquidity as needed. The ARS we hold are collateralized by
portfolios of student loans, all of which are ultimately guaranteed by the United States
Department of Education. At December 31, 2008, our ARS portfolio was 100% AAA/Aaa-rated by
one or more of the following major rating agencies: Moodys, Standard & Poors and Fitch
Ratings. We carry our ARS portfolio at par. For additional information on our investment
portfolio and our ARS portfolio see
Notes 4 and 5 to our consolidated financial statements in Item 8.
At December 31, 2008, our total assets included $1.1 billion of cash and cash equivalents as
shown on our consolidated balance sheet in Item 8. In addition, included in Other assets on our
consolidated balance sheet at December 31, 2008 is $32.9 million in real estate acquired as part of
the claim settlement process. The properties, which are held for sale, are carried at fair value.
Also included in Other assets is $72.1 million of principal and interest receivable related to
the sale of our remaining interest in Sherman.
At December 31, 2008 we had $200 million, 5.625% Senior Notes due in September 2011 and $300
million, 5.375% Senior Notes due in November 2015,
85
as well as $200 million outstanding under a
credit facility, with a total fair value of
$538.3 million. The credit facility is scheduled to expire in March 2010. This credit
facility is discussed under Liquidity and Capital Resources below.
At December 31, 2008, we also had $390 million principal amount of 9% Convertible Junior
Subordinated Debentures due in 2063. At issuance, within the $390 million principal amount was an
embedded derivative with a value of $16.9 million. The amount of the derivative is treated as a
discount on issuance and is being amortized over the expected life of five years to interest
expense. The fair value of the convertible debentures was approximately $145.7 million at December
31, 2008.
In February 2009, the Internal Revenue Service informed us that it plans to conduct an
examination of our federal income tax returns for 2005 through 2007. We believe that income taxes
related to these years have been properly provided for in our financial statements.
On June 1, 2007, as a result of an examination by the Internal Revenue Service (IRS) for
taxable years 2000 through 2004, we received a Revenue Agent Report (RAR). The adjustments
reported on the RAR substantially increase taxable income for those tax years and resulted in the
issuance of an assessment for unpaid taxes totaling $189.5 million in taxes and accuracy-related
penalties, plus applicable interest. We have agreed with the IRS on certain issues and paid $10.5
million in additional taxes and interest. The remaining open issue relates to our treatment of the
flow through income and loss from an investment in a portfolio of residual interests of Real Estate
Mortgage Investment Conduits (REMICS). The IRS has indicated that it does not believe that, for
various reasons, we have established sufficient tax basis in the REMIC residual interests to deduct
the losses from taxable income. We disagree with this conclusion and believe that the flow through
income and loss from these investments was properly reported on our federal income tax returns in
accordance with applicable tax laws and regulations in effect during the periods involved and have
appealed these adjustments. The appeals process may take some time and a final resolution may not
be reached until a date many months or years into the future. On July 2, 2007, we made a payment of
$65.2 million with the United States Department of the Treasury to eliminate the further accrual of
interest. Although the resolution of this issue is uncertain, we believe that sufficient
provisions for income taxes have been made for potential liabilities that may result. If the
resolution of this matter differs materially from our estimates, it could have a material impact on
our effective tax rate, results of operations and cash flows.
The total amount of unrecognized tax benefits as of December 31, 2008 is $87.9 million.
Included in that total are $76.0 million in benefits that would affect our effective tax rate. We
recognize interest accrued and penalties related to unrecognized tax benefits in income taxes. We
have accrued $21.4 million for
86
the payment of interest as of December 31, 2008. The establishment
of this
liability required estimates of potential outcomes of various issues and required significant
judgment. Although the resolutions of these issues are uncertain, we believe that sufficient
provisions for income taxes have been made for potential liabilities that may result. If the
resolutions of these matters differ materially from these estimates, it could have a material
impact on our effective tax rate, results of operations and cash flows.
Our principal exposure to loss is our obligation to pay claims under MGICs mortgage guaranty
insurance policies. At December 31, 2008, MGICs direct (before any reinsurance) primary and pool
risk in force, which is the unpaid principal balance of insured loans as reflected in our records
multiplied by the coverage percentage, and taking account of any loss limit, was approximately
$63.2 billion. In addition, as part of our contract underwriting activities, we are responsible for
the quality of our underwriting decisions in accordance with the terms of the contract underwriting
agreements with customers. Through December 31, 2008, the cost of remedies provided by us to
customers for failing to meet the standards of the contracts has not been material. However, a
generally positive economic environment for residential real estate
that continued through a portion of 2007 may
have mitigated the effect of some of these costs, the claims for which may lag, by as much as
several years, deterioration in the economic environment for residential real estate. There can be
no assurance that contract underwriting remedies will not be material in the future.
Liquidity and Capital Resources
Overview
Our sources of funds consist primarily of:
|
|
|
our investment portfolio (which is discussed in Financial Condition above), and
interest income on the portfolio, |
|
|
|
|
premiums that we will receive from our existing insurance in force as well as
policies that we write in the future, |
|
|
|
|
amounts, if any, remaining available under our credit facility expiring in March
2010, |
|
|
|
|
amounts received from the redemption of U.S. government non-interest bearing tax
and loss bonds (which are discussed below), |
|
|
|
|
amounts that we expect to recover from captives (which are discussed in Results of
Consolidated Operations Risk-Sharing Arrangements |
87
|
|
|
and Results of Consolidated Operations Losses Losses Incurred above) and |
|
|
|
|
amounts we may recover under our reinsurance agreement with
HCC (which are discussed
in Results of Consolidated Operations Risk-Sharing Arrangements above). |
Our obligations consist primarily of:
|
|
|
claims payments under MGICs mortgage guaranty insurance policies, |
|
|
|
|
the amount outstanding under our credit facility that expires in March 2010, |
|
|
|
|
our $200 million of 5.625% Senior Notes due in September 2011, |
|
|
|
|
our $300 million of 5.375% Senior Notes due in November 2015, |
|
|
|
|
our $390 million of convertible debentures due in 2063, |
|
|
|
|
interest on the foregoing debt instruments and |
|
|
|
|
the other costs and operating expenses of our business. |
Historically cash inflows from premiums have exceeded claim payments. When this is the case,
we invest positive cash flows pending future payments of claims and other expenses. However, we
anticipate that in the full year 2009, and in accordance with the
assumptions underlying the table under Contractual
obligations below, also in 2010, claim payments will exceed premiums
received. As discussed under Losses incurred above, due to the uncertainty regarding how
certain factors, such as foreclosure moratoriums, servicing and court delays, loan modifications,
fraud investigations and claim rescissions and denials, will affect our future paid claims it has
become even more difficult to estimate the amount and timing of future claim payments. When we
experience cash shortfalls, we can fund them 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 an entity other than the seller. Substantially
all of the investment portfolio securities are held by our insurance subsidiaries.
During 2008, we redeemed in exchange for cash from the US Treasury approximately $972 million
of tax and loss bonds. In January of 2009, we redeemed $398 million of tax and loss bonds. We
plan to redeem an additional $34 million in the first quarter of 2009. After the first quarter
redemption, we will no longer hold any tax and loss bonds. Tax and loss bonds that we purchased
were not assets on our balance sheet but were recorded as payments of current
88
federal
taxes. For further information about tax and loss bonds, see Note 2 to our consolidated financial statements in Item 8.
To increase our capital position, late in the first quarter and early in the second quarter of
2008, we raised net proceeds of approximately $840 million through the sale of our common stock and
junior convertible debentures. In the second quarter of 2008, we further enhanced our claims paying
resources by entering into the reinsurance agreement with HCC discussed under Results of
Consolidated Operations-Risk sharing arrangements. In the third quarter of 2008 we sold our
remaining interest in Sherman and recognized a gain of
$62.8 million. As discussed under
OverviewOutlookCapital, we may need additional capital in 2009 to
continue to write new business.
Debt at Our Holding Company and Holding Company Capital Resources
For
information about debt at our holding company, see Notes 6 and 7 to
our consolidated financial statements in Item 8. You should also
review OverviewDebt at our Holding Company and Holding
Company Capital Resources above.
The
credit facility, senior notes and convertible debentures described in
these notes are obligations of MGIC
Investment Corporation and not of its subsidiaries. We are a holding company and the payment of
dividends from our insurance subsidiaries, which historically has been the principal source of our
holding company cash inflow, is restricted by insurance regulation. MGIC is the principal source of
dividend-paying capacity. During 2008, MGIC paid three quarterly dividends of $15 million each to
our holding company, which increased the cash resources of our holding company. As has been the
case for the past several years, as a result of extraordinary dividends paid, MGIC cannot currently
pay any dividends without regulatory approval. In light of the matters discussed under
OverviewOutlookCapital, we do not anticipate
seeking approval in 2009 for any additional dividends from MGIC
that would increase our cash resources at the holding company.
The credit facility requires us to maintain Consolidated Net Worth of no less than $2.00
billion at all times. However, if as of June 30, 2009, Consolidated Net Worth equals or exceeds
$2.75 billion, then the minimum Consolidated Net Worth under the facility will be increased to
$2.25 billion at all times from and after June 30, 2009. Consolidated Net Worth is generally
defined in our credit agreement as the sum of our consolidated shareholders equity plus the
aggregate outstanding principal amount of our 9% Convertible Junior Subordinated Debentures due
2063, currently $390 million. The credit facility also requires MGIC to maintain a statutory
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 regulations. At December 31, 2008, these requirements were met. Our
Consolidated Net Worth at December 31, 2008 was approximately $2.7 billion. At December 31, 2008
MGICs risk-to-capital was 12.9:1 and MGIC exceeded MPP by more than $1.5 billion. See additional
discussion of risk-to-capital and MPP under OverviewOutlookCapital. You should also review
our risk factor titled The amounts that we owe under our revolving credit facility and Senior
Notes could be accelerated in Item 1A.
89
As of December 31, 2008, we had a total of approximately $394 million in short-term
investments at our holding company. These investments are virtually
all of our holding companys liquid assets. Our holding
companys obligations include $400 million of debt which is
scheduled to mature before the end of 2011. Our use of funds at the holding company includes interest
payments on our Senior Notes, credit facility and junior convertible debentures. On an annual
basis, in aggregate, these uses total approximately $74 million, based on the current rate in
effect on our credit facility and assuming a full year of interest on the entire $390 million of
debentures. In October 2008 we eliminated the dividend on our
common stock. See Note 7 to our consolidated financial statements in Item 8 for a
discussion of our rights to defer payment of interest on our junior convertible debentures. The
annual interest payments on these debentures approximate $35 million.
We may from time to time seek to acquire our debt obligations through cash purchases and/or
exchanges for other securities. We may do this in open market purchases, privately negotiated
acquisitions or other transactions. The amounts involved may be material.
Risk-to-Capital
We consider our risk-to-capital ratio an important indicator of our financial strength and our
ability to write new business. Some states that regulate us have provisions that limit the
risk-to-capital ratio of a mortgage guaranty insurance company to 25:1 (see OutlookCapital).
If an insurance companys risk-to-capital ratio exceeds the limit applicable in a state, it may be
prohibited from writing new business in that state until its risk-to-capital ratio falls below the
limit.
This ratio is computed on a statutory basis for our combined insurance operations and is our
net risk in force divided by our policyholders position. Our net risk in force included both
primary and pool risk in force. The risk amount represents pools of loans or bulk deals with
contractual aggregate loss limits and in some cases without these 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. Policyholders position consists primarily
of statutory policyholders surplus (which increases as a result of statutory net income and
decreases as a result of statutory net loss and dividends paid), plus the statutory contingency
reserve. The statutory contingency reserve is reported as a liability on the statutory balance
sheet. A mortgage insurance company is required to make annual contributions to the contingency
reserve of approximately 50% of net earned premiums. These contributions must generally be
maintained for a period of ten years. However, with regulatory approval a mortgage insurance
company may make early withdrawals from the contingency reserve when incurred losses exceed 35% of
net earned premium in a calendar year.
90
The premium deficiency reserve discussed under Results of Operations Losses Premium
deficiency above is not recorded as a liability on the statutory balance sheet and is not a
component of statutory net income. The present value of expected future premiums and already
established loss reserves and statutory contingency reserves exceeds the present value of expected
future losses and expenses, so no deficiency is recorded on a statutory basis.
Our combined insurance companies risk-to-capital calculation appears in the table below.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
($ in millions) |
|
Risk in force net (1) |
|
$ |
54,496 |
|
|
$ |
57,527 |
|
|
|
|
|
|
|
|
|
|
Statutory policyholders surplus |
|
$ |
1,613 |
|
|
$ |
1,351 |
|
Statutory contingency reserve |
|
|
2,086 |
|
|
|
3,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory policyholders position |
|
$ |
3,699 |
|
|
$ |
4,815 |
|
|
|
|
|
|
|
|
|
|
Risk-to-capital: |
|
|
14.7:1 |
|
|
|
11.9:1 |
|
|
|
|
(1) |
|
Risk in force net at December 31, 2008, as shown in the table above, is net of
reinsurance and established loss reserves as discussed under Capital above. Risk in force net
at December 31, 2007 is net of reinsurance. |
The increase in risk-to-capital during 2008 is the result of a decrease in statutory policyholders position. Statutory policyholders position decreased in 2008, primarily due
to losses incurred, offset by a capital contribution to our subsidiary, MGIC, from the proceeds
raised by the sale of our common stock and convertible debentures. If our insurance in force
continues to grow, our risk in force would also grow. To the extent our statutory policyholders
position does not increase at the same rate as our growth in risk in force, our risk-to-capital
ratio will increase. Similarly, if our statutory policyholders position decreases at a greater
rate than our risk in force, then our risk-to-capital ratio will increase.
We expect that our risk-to-capital ratio will increase above its level at December 31, 2008.
See further discussion under Overview-Capital above as well
as our risk factor titled Because our policyholders position could decline and our risk-to-capital
could increase beyond the levels necessary to meet regulatory requirements we are considering
options to obtain additional capital in Item 1A.
91
Financial Strength Ratings
At
the time this annual report was finalized, the financial strength of MGIC, our principal
mortgage insurance subsidiary, was rated Ba2 by Moodys Investors Service and the outlook
of this rating was considered, by Moodys, to be developing; Standard and Poors Rating
Services insurer financial strength rating of MGIC was A- with a negative outlook; and the
financial strength of MGIC was rated A- by Fitch Ratings with a negative outlook.
For further information about the importance of MGICs ratings, see our Risk Factor titled
Our financial strength rating has been downgraded below Aa3/AA-, which could reduce the volume of
our new business writings in Item 1A.
Contractual Obligations
At December 31, 2008, the approximate future payments under our contractual obligations of the
type described in the table below are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
Contractual Obligations ($ millions): |
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
3-5 years |
|
|
5 years |
|
Long-term debt
obligations |
|
$ |
3,148 |
|
|
$ |
74 |
|
|
$ |
524 |
|
|
$ |
102 |
|
|
$ |
2,448 |
|
Operating lease
obligations |
|
|
16 |
|
|
|
6 |
|
|
|
7 |
|
|
|
3 |
|
|
|
|
|
Purchase obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension, SERP and
other
post-retirement
benefit plans |
|
|
141 |
|
|
|
8 |
|
|
|
19 |
|
|
|
25 |
|
|
|
89 |
|
Other long-term
liabilities |
|
|
4,776 |
|
|
|
2,436 |
|
|
|
2,245 |
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,081 |
|
|
$ |
2,524 |
|
|
$ |
2,795 |
|
|
$ |
225 |
|
|
$ |
2,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our long-term debt obligations at December 31, 2008 include our $300 million of 5.375% Senior
Notes due in November 2015, $200 million of 5.625% Senior Notes due in September 2011, $200 million
outstanding under a credit facility expiring in March 2010 and $390 million in convertible
debentures due in 2063, including related interest, as discussed in
Notes 6 and 7 to our consolidated financial
statements in Item 8 and under Liquidity and Capital Resources above. For discussions related
to our debt covenants see -Liquidity and Capital
Resources and our risk factor titled The amounts that we
owe under our revolving credit facility and Senior Notes could be
accelerated In Item 1A. Our
operating lease obligations include operating leases on certain office space, data processing
equipment and autos, as discussed in Note 14 to our consolidated financial statements in Item 8.
See Note 11 to our consolidated financial statement in Item 8 for discussion of expected benefit
payments under our benefit plans.
92
Our 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. We
are including these liabilities because we agreed to do so in 2005 to resolve a comment from the
staff of the SEC. The timing of the future claim payments associated with the established loss
reserves was determined primarily based on two key assumptions: the length of time it takes for a
notice of default to develop into a received claim and the length of time it takes for a received
claim to be ultimately paid. The future claim payment periods are estimated based on historical
experience, and could emerge significantly different than this estimate. As discussed under
Losses incurred above, due to the uncertainty regarding how certain factors, such as
foreclosure moratoriums, servicing and court delays, loan modifications, fraud investigations and
claim rescissions and denials will affect our future paid claims it has become even more difficult
to estimate the amount and timing of future claim payments. Current conditions in the housing and
mortgage industries make all of the assumptions discussed in this paragraph more volatile than they
would otherwise be. See Note 8 to our consolidated financial statements in Item 8
and -Critical Accounting Policies below. In accordance with GAAP for the mortgage insurance
industry, we establish loss reserves only for loans in default. Because our reserving method does
not take account of the impact of future losses that could occur from loans that are not
delinquent, our obligation for ultimate losses that we expect to occur under our policies in force
at any period end is not reflected in our financial statements or in the table above.
The table above does not reflect the liability for unrecognized tax benefits due to
uncertainties in the timing of the effective settlement of tax positions. We can not make a
reasonably reliable estimate of the timing of payment for the liability for unrecognized tax
benefits, net of payments on account, of $19.7 million. See Note 12 to our consolidated financial
statement in Item 8 for additional discussion on unrecognized tax benefits.
Critical Accounting Policies
We believe that the accounting policies described below involved significant judgments and
estimates used in the preparation of our consolidated financial statements.
Loss reserves and premium deficiency reserves
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
93
incurred on notices of
default not yet reported. In accordance with GAAP for the mortgage insurance industry, we do not
establish loss reserves for future claims on insured loans which are not currently in default.
We establish reserves 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. The liability for reinsurance assumed is based on information provided by the ceding
companies.
The incurred but not reported, or IBNR, reserves referred to above result from defaults
occurring prior to the close of an accounting period, but which have not been reported to us.
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, 2008 and 2007, we had IBNR reserves of $480 million and $368 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.
The estimated claims rates and claims amounts represent what we believe best reflect the
estimate of what will actually be paid on the loans in default as of the reserve date. The estimate
of claims rates and claims amounts are based on our review of recent trends in the default
inventory. We review recent trends in the rate at which defaults resulted in a claim, or the claim
rate, the amount of the claim, or severity, the change in the level of defaults by geography and
the change in average loan exposure. As a result, the process to determine reserves does not
include quantitative ranges of outcomes that are reasonably likely to occur.
The claims rate and claim amounts are likely to be affected by external events, including
actual economic conditions such as changes in unemployment rate, interest rate or housing value.
Our estimation process does not include a correlation between claims rate and claims amounts to
projected economic conditions such as changes in unemployment rate, interest rate or housing value.
Our experience is that analysis of that nature would not produce reliable results. The results
would not be reliable as the change in one economic condition can not be isolated to determine its
sole effect on our ultimate paid losses as our ultimate paid losses are also influenced at the same
time by other economic conditions. Additionally, the changes and interaction of these economic
conditions are not likely homogeneous throughout the regions in which we conduct business. Each
economic environment influences our ultimate paid losses differently, even if apparently similar in
nature. Furthermore, changes in economic conditions may not necessarily be reflected in our loss
development in
the quarter or year in which the changes occur. Typically, actual claim results often lag
changes in economic conditions by at least nine to twelve months.
94
In considering the potential sensitivity of the factors underlying our best estimate of loss
reserves, it is possible that even a relatively small change in estimated claim rate or a
relatively small percentage change in estimated claim amount could have a significant impact on
reserves and, correspondingly, on results of operations. For example, a $1,000 change in the
average severity reserve factor combined with a 1% change in the average claim rate reserve factor
would change the reserve amount by approximately $184 million as of December 31, 2008.
Historically, it has not been uncommon for us to experience variability in the development of the
loss reserves through the end of the following year at this level or higher, as shown by the
historical development of our loss reserves in the table below:
|
|
|
|
|
|
|
|
|
|
|
Losses incurred |
|
Reserve at |
|
|
related to |
|
end of |
|
|
prior years (1) |
|
prior year |
2008 |
|
$ |
(387,104 |
) |
|
$ |
2,642,479 |
|
2007 |
|
|
(518,950 |
) |
|
|
1,125,715 |
|
2006 |
|
|
90,079 |
|
|
|
1,124,454 |
|
2005 |
|
|
126,167 |
|
|
|
1,185,594 |
|
2004 |
|
|
13,451 |
|
|
|
1,061,788 |
|
|
|
|
(1) |
|
A positive number for a prior year indicates a redundancy of loss reserves,
and a negative number for a prior year indicates a deficiency of loss reserves. |
Estimation of losses that we 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. Current conditions in the
housing and mortgage industries make these assumptions more volatile than they would otherwise be.
The actual amount of the claim payments may be substantially different than our loss reserve
estimates. Our estimates could be adversely affected by several factors, including a deterioration
of regional or national economic conditions leading to a reduction in borrowers income and thus
their ability to make mortgage payments, and a drop in housing values that could materially reduce
our ability to mitigate potential losses through property acquisition and resale or expose us to
greater losses on resale of properties obtained through the claim settlement process. Changes to
our estimates could result in a material impact to our results of operations, even in a stable
economic environment.
Our estimates could also be positively affected by government efforts to assist current
borrowers in refinancing to new loan instruments, assisting delinquent borrowers and lenders in
modifying their mortgage notes into something more affordable, and forestalling foreclosures. In
addition private
95
company efforts may have a positive impact on our loss development. However, all
of these efforts are in their early stages and therefore we are unsure of their magnitude or the
benefit to us or our industry, and as a result are not factored into our current reserving.
Our estimates could also be positively affected by the extent of fraud that we uncover in the
loans we have insured; higher rates of fraud should lead to higher rates of rescission, although
the relationship may not be linear. Rescissions and denials totaled $85 million in the fourth
quarter of 2008 and $171 million for the year ending December 31, 2008. In the fourth quarter of
2007 rescissions and denials totaled only $7 million and totaled
only $28 million for the year ended December
31, 2007.
Loss reserves in the most recent years contain a greater degree of uncertainty, even though
the estimates are based on the best available data.
Premium deficiency reserve
After our reserves are established, we perform premium deficiency calculations using best
estimate assumptions as of the testing date. The calculation of premium deficiency reserves
requires the use of significant judgments and estimates to determine the present value of future
premium and present value of expected losses and expenses on our business. The present value of
future premium relies on, among other things, assumptions about persistency and repayment patterns
on underlying loans. The present value of expected losses and expenses depends on assumptions
relating to severity of claims and claim rates on current defaults, and expected defaults in future
periods. Assumptions used in calculating the deficiency reserves can be affected by volatility in
the current housing and mortgage lending industries. To the extent premium patterns and actual
loss experience differ from the assumptions used in calculating the premium deficiency reserves,
the differences between the actual results and our estimate will affect future period earnings.
The establishment of premium deficiency reserves is subject to inherent uncertainty and
requires judgment by management. The actual amount of claim payments and premium collections may
vary significantly from the premium deficiency reserve estimates. Similar to our loss reserve
estimates, our estimates for premium deficiency reserves could be adversely affected by several
factors, including a deterioration of regional or economic conditions leading to a reduction in
borrowers income and thus their ability to make
mortgage payments, and a drop in housing values that could expose us to greater losses.
Changes to our estimates could result in material changes in our operations, even in a stable
economic environment. Adjustments to premium deficiency reserves estimates are reflected in the
financial statements in the years in which the adjustments are made.
96
As is the case with our loss reserves, as discussed above, the severity of claims and claim
rates, as well as persistency for the premium deficiency calculation, are likely to be affected by
external events, including actual economic conditions. However, our estimation process does not
include a correlation between these economic conditions and our assumptions because it is our
experience that an analysis of that nature would not produce reliable results. In considering the
potential sensitivity of the factors underlying managements best estimate of premium deficiency
reserves, it is possible that even a relatively small change in estimated claim rate or a
relatively small percentage change in estimated claim amount could have a significant impact on the
premium deficiency reserve and, correspondingly, on our results of operations. For example, a
$1,000 change in the average severity combined with a 1% change in the average claim rate could
change the Wall Street bulk premium deficiency reserve amount by approximately $125 million.
Additionally, a 5% change in the persistency of the underlying loans could change the Wall Street
bulk premium deficiency reserve amount by approximately $22 million. We do not anticipate changes
in the discount rate will be significant enough as to result in material changes in the
calculation.
Revenue recognition
When a policy term ends, the primary mortgage insurance written by us 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. We have 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 our non-insurance subsidiaries is earned and recognized as the services are
provided and the customer is obligated to pay.
97
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. Deferred insurance policy acquisition
costs 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 deferred insurance policy acquisition costs.
Because our insurance premiums are earned over time, changes in persistency result in deferred
insurance policy acquisition costs being amortized against revenue over a comparable period of
time. At December 31, 2008, the persistency rate of our primary mortgage insurance was 84.4%,
compared to 76.4% at December 31, 2007. This change did not significantly affect the amortization
of deferred insurance policy acquisition costs for the period ended December 31, 2008. A 10%
change in persistency would not have a material effect on the amortization of deferred insurance
policy acquisition costs in the subsequent year.
If a premium deficiency exists, we reduce the related deferred insurance policy acquisition
costs by the amount of the deficiency or to zero through a charge to current period earnings. If
the deficiency is more than the deferred insurance policy acquisition costs balance, we then
establish a premium deficiency reserve equal to the excess, by means of a charge to current period
earnings.
Fair Value Measurements
Effective January 1, 2008, we adopted the fair value measurement provisions of SFAS No. 157,
Fair Value Measurements. SFAS No. 157 provides enhanced guidance for using fair value to measure
assets and liabilities. This statement defines fair value, expands disclosure requirements about
fair value and specifies a hierarchy of valuation techniques based on whether the inputs to those
valuation techniques are observable or unobservable. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect a companys market
assumptions. Fair value is used on a recurring basis for assets and liabilities in which fair
value is the primary basis of
accounting (i.e., available-for-sale securities). Additionally, fair value is used on a
nonrecurring basis to evaluate assets or liabilities for impairment or for disclosure purposes.
98
Fair value is defined as the price that would be received in a sale of an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date.
Depending on the nature of the asset or liability, we use various valuation techniques and
assumptions when estimating fair value. In accordance with SFAS No. 157, we applied the following
fair value hierarchy in order to measure fair value for assets and liabilities:
Level 1 Quoted prices for identical instruments in active markets that we have
the ability to access. Financial assets utilizing Level 1 inputs include certain
U.S. Treasury securities and obligations of the U.S. government.
Level 2 Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and inputs,
other than quoted prices, that are observable in the marketplace for the financial
instrument. The observable inputs are used in valuation models to calculate the fair
value of the financial instruments. Financial assets utilizing Level 2 inputs
include certain municipal and corporate bonds.
Level 3 Valuations derived from valuation techniques in which one or more
significant inputs or value drivers are unobservable. Level 3 inputs reflect our own
assumptions about the assumptions a market participant would use in pricing an asset
or liability. Financial assets utilizing Level 3 inputs include certain state,
corporate, auction rate (backed by student loans) and mortgage-backed securities.
Non-financial assets which utilize Level 3 inputs include real estate acquired
through claim settlement. Additionally, financial liabilities utilizing Level 3
inputs consist of derivative financial instruments.
To determine the fair value of securities available-for-sale in Level 1 and Level 2 of the
fair value hierarchy a variety of inputs are utilized including benchmark yields, reported trades,
broker/dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers and
reference data including market research publications. Inputs may be weighted differently for any
security, and not all inputs are used for each security evaluation. Market indicators, industry and
economic events are also considered. This information is evaluated using a multidimensional pricing
model. Quality controls are performed throughout this process which includes reviewing tolerance
reports, trading information and data changes, and directional moves compared to market moves. This
model combines all inputs to arrive at a value assigned to each security.
The values generated by this model are also reviewed for reasonableness and, in some cases,
further analyzed for accuracy, which includes the review of other publicly available information.
Securities whose fair value is primarily
99
based on the use of our multidimensional pricing model are
classified in Level 2 and include certain municipal and corporate bonds.
Assets and liabilities
classified as Level 3 are as follows:
|
|
Securities available-for-sale classified in Level 3 are not readily marketable and are
valued using internally developed models based on the present value of expected cash flows.
Our Level 3 securities primarily consist of auction rate securities. Our investments in
auction-rate securities were classified as Level 3 beginning in the fourth quarter of 2008 as
quoted prices were unavailable due to events described in Note 4 to our consolidated financial
statements and as there became increased doubt as to the liquidity of the securities. In
particular, announced settlements in the fourth quarter of 2008 specified that re-marketers of
the ARS provide liquidity to retail investors prior to providing liquidity to institutional
investors and we did not observe a majority of issuers replacing these securities with another
form of financing. Due to limited market information, we utilized a discounted cash flow
(DCF) model to derive an estimate of fair value at December 31, 2008. The assumptions used
in preparing the DCF model included estimates with respect to the amount and timing of future
interest and principal payments, forward projections of the interest rate benchmarks, the
probability of full repayment of the principal considering the credit quality and guarantees
in place, and the rate of return required by investors to own such securities given the
current liquidity risk associated with auction-rate securities. The DCF model is based on the
following key assumptions: |
|
o |
|
Nominal credit risk as the securities are ultimately guaranteed by
the United States Department of Education |
|
|
o |
|
Five years to liquidity |
|
|
o |
|
Continued receipt of contractual interest; and |
|
|
o |
|
Discount rates incorporating a 1.50% spread for liquidity risk |
A 1.00% change in the discount rate would change the value of our ARS by approximately $17 million.
A two year change to the years to liquidity assumption would change the value of our ARS by
approximately $1 million. The remainder of our level 3 securities are valued based on the present
value of expected cash flows utilizing data provided by the trustees.
|
|
Real estate acquired through claim settlement is fair valued at the lower of our
acquisition cost or a percentage of appraised value. The percentage applied to appraised value
is based upon our historical sales experience adjusted for current trends. |
|
|
As discussed in Note 7 to our consolidated financial statements in Item 8 the derivative
related to the outstanding debentures was valued using the Black- |
100
Scholes model. Remaining
derivatives were valued internally, based on the present value of expected cash flows
utilizing data provided by the trustees.
Investment Portfolio
We categorize our investment portfolio according to our ability and intent to hold the
investments to maturity. Investments which we do 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. Our 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.
We complete 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
collectibility of previously accrued income is made. Factors used in determining investments whose
value decline may be considered other than temporary include, among others, 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 and ability to hold fixed income securities to recovery
|
|
|
|
Length of time in a unrealized loss position |
For the year ended December 31, 2008 we recognized other than temporary impairment charges
of approximately $63 million on our fixed income investments, including Fannie Mae, Freddie Mac,
Lehman Brothers and AIG. There were no other than temporary asset impairment charges on our
investment portfolio for the years ending December 31, 2007 and 2006.
101
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
At December 31, 2008, the derivative financial instruments in our investment portfolio were
immaterial. We place our investments in instruments that meet high credit quality standards, as
specified in our investment policy guidelines; the policy also limits the amount of credit exposure
to any one issue, issuer and type of instrument. At December 31, 2008, the modified duration of our
fixed income investment portfolio was 4.3 years, which means that an instantaneous parallel shift
in the yield curve of 100 basis points would result in a change of 4.3% in the market value of our
fixed income portfolio. For an upward shift in the yield curve, the market value of our portfolio
would decrease and for a downward shift in the yield curve, the market value would increase.
The interest rate on our $300 million credit facility is variable and is based on, at our
option, LIBOR plus a margin that varies with MGICs financial strength rating or a base rate
specified in the credit agreement. For each 100 basis point change in LIBOR or the base rate, our
interest cost, expressed on an annual basis, would change by 1%. Based on the amount outstanding
under our credit facility as of December 31, 2008, this would result in a change of $2 million.
102
Item 8. Financial Statements and Supplementary Data.
The following consolidated financial statements 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, 2008 |
|
|
104 |
|
Consolidated balance sheets at December 31, 2008 and 2007 |
|
|
105 |
|
Consolidated statements of shareholders equity for each of the
three years in the period ended
December 31, 2008 |
|
|
106 |
|
Consolidated statements of cash flows for each of the three years
in the period ended
December 31, 2008 |
|
|
107 |
|
Notes to consolidated financial statements |
|
|
108 |
|
Report of independent registered public accounting firm |
|
|
170 |
|
103
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2008, 2007 and 2006
(Audited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands of dollars, except per share data) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written: |
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
1,661,544 |
|
|
$ |
1,513,395 |
|
|
$ |
1,357,107 |
|
Assumed |
|
|
12,221 |
|
|
|
3,288 |
|
|
|
2,052 |
|
Ceded (note 9) |
|
|
(207,718 |
) |
|
|
(170,889 |
) |
|
|
(141,923 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written |
|
|
1,466,047 |
|
|
|
1,345,794 |
|
|
|
1,217,236 |
|
Increase in unearned premiums |
|
|
(72,867 |
) |
|
|
(83,404 |
) |
|
|
(29,827 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned (note 9) |
|
|
1,393,180 |
|
|
|
1,262,390 |
|
|
|
1,187,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of expenses (note 4) |
|
|
308,517 |
|
|
|
259,828 |
|
|
|
240,621 |
|
Realized investment (losses) gains, net (note 4) |
|
|
(12,486 |
) |
|
|
142,195 |
|
|
|
(4,264 |
) |
Other revenue |
|
|
32,315 |
|
|
|
28,793 |
|
|
|
45,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,721,526 |
|
|
|
1,693,206 |
|
|
|
1,469,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses incurred, net (notes 8 and 9) |
|
|
3,071,501 |
|
|
|
2,365,423 |
|
|
|
613,635 |
|
Change in premium deficiency reserves (note 8) |
|
|
(756,505 |
) |
|
|
1,210,841 |
|
|
|
|
|
Underwriting and other expenses |
|
|
271,314 |
|
|
|
309,610 |
|
|
|
290,858 |
|
Reinsurance fee (note 9) |
|
|
1,781 |
|
|
|
|
|
|
|
|
|
Interest expense (notes 6 and 7) |
|
|
71,164 |
|
|
|
41,986 |
|
|
|
39,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses |
|
|
2,659,255 |
|
|
|
3,927,860 |
|
|
|
943,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before tax and joint ventures |
|
|
(937,729 |
) |
|
|
(2,234,654 |
) |
|
|
525,328 |
|
(Credit) provision for income tax (note 12) |
|
|
(394,329 |
) |
|
|
(833,977 |
) |
|
|
130,097 |
|
Income (loss) from joint ventures, net of tax (note 10) |
|
|
24,486 |
|
|
|
(269,341 |
) |
|
|
169,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(518,914 |
) |
|
$ |
(1,670,018 |
) |
|
$ |
564,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share (note 13): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(4.55 |
) |
|
$ |
(20.54 |
) |
|
$ |
6.70 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
(4.55 |
) |
|
$ |
(20.54 |
) |
|
$ |
6.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
- basic (shares in thousands, note 2) |
|
|
113,962 |
|
|
|
81,294 |
|
|
|
84,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
- diluted (shares in thousands, note 2) |
|
|
113,962 |
|
|
|
81,294 |
|
|
|
84,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share |
|
$ |
0.075 |
|
|
$ |
0.775 |
|
|
$ |
1.000 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
to consolidated financial statements.
104
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2008 and 2007
(Audited)
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands of dollars) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment portfolio (note 4): |
|
|
|
|
|
|
|
|
Securities, available-for-sale, at fair value: |
|
|
|
|
|
|
|
|
Fixed maturities (amortized cost, 2008-$7,120,690; 2007-$5,791,562) |
|
$ |
7,042,903 |
|
|
$ |
5,893,591 |
|
Equity securities (cost, 2008-$2,778; 2007-$2,689) |
|
|
2,633 |
|
|
|
2,642 |
|
|
|
|
|
|
|
|
Total investment portfolio |
|
|
7,045,536 |
|
|
|
5,896,233 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
1,097,334 |
|
|
|
288,933 |
|
Accrued investment income |
|
|
90,856 |
|
|
|
72,829 |
|
Reinsurance recoverable on loss reserves (note 9) |
|
|
232,988 |
|
|
|
35,244 |
|
Prepaid reinsurance premiums (note 9) |
|
|
4,416 |
|
|
|
8,715 |
|
Premiums receivable |
|
|
97,601 |
|
|
|
107,333 |
|
Home office and equipment, net |
|
|
32,255 |
|
|
|
34,603 |
|
Deferred insurance policy acquisition costs |
|
|
11,504 |
|
|
|
11,168 |
|
Investments in joint ventures (note 10) |
|
|
|
|
|
|
143,694 |
|
Income taxes recoverable |
|
|
406,568 |
|
|
|
865,665 |
|
Other assets |
|
|
163,771 |
|
|
|
251,944 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
9,182,829 |
|
|
$ |
7,716,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Loss reserves (notes 8 and 9) |
|
$ |
4,775,552 |
|
|
$ |
2,642,479 |
|
Premium deficiency reserves (note 8) |
|
|
454,336 |
|
|
|
1,210,841 |
|
Unearned premiums (note 9) |
|
|
336,098 |
|
|
|
272,233 |
|
Short- and long-term debt (note 6) |
|
|
698,446 |
|
|
|
798,250 |
|
Convertible debentures (note 7) |
|
|
375,593 |
|
|
|
|
|
Other liabilities |
|
|
175,604 |
|
|
|
198,215 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
6,815,629 |
|
|
|
5,122,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingencies (note 15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity (note 13): |
|
|
|
|
|
|
|
|
Common stock, $1 par value, shares authorized
460,000,000; shares issued 2008 - 130,118,744; 2007 - 123,067,426
outstanding 2008 - 125,068,350; 2007 - 81,793,185 |
|
|
130,119 |
|
|
|
123,067 |
|
Paid-in capital |
|
|
367,067 |
|
|
|
316,649 |
|
Treasury
stock (shares at cost 2008 - 5,050,394;
2007 - 41,274,241) |
|
|
(276,873 |
) |
|
|
(2,266,364 |
) |
Accumulated other comprehensive (loss) income, net of tax (note 2) |
|
|
(106,789 |
) |
|
|
70,675 |
|
Retained earnings |
|
|
2,253,676 |
|
|
|
4,350,316 |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
2,367,200 |
|
|
|
2,594,343 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
9,182,829 |
|
|
$ |
7,716,361 |
|
|
|
|
|
|
|
|
See accompanying notes
to consolidated financial statements.
105
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Years Ended December 31, 2008, 2007 and 2006
(Audited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other |
|
|
|
|
|
|
|
|
|
Common |
|
|
Paid-in |
|
|
Treasury |
|
|
comprehensive |
|
|
Retained |
|
|
Comprehensive |
|
|
|
stock |
|
|
capital |
|
|
stock |
|
|
income (loss) (note 2) |
|
|
earnings |
|
|
income (loss) |
|
|
|
(In thousands of dollars) |
|
Balance, December 31, 2005 |
|
$ |
122,549 |
|
|
$ |
280,052 |
|
|
$ |
(1,834,434 |
) |
|
$ |
77,499 |
|
|
$ |
5,519,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
564,739 |
|
|
$ |
564,739 |
|
Change in unrealized investment gains and losses, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,796 |
|
|
|
|
|
|
|
5,796 |
|
Unrealized gain (loss) on derivatives, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
777 |
|
|
|
|
|
|
|
777 |
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85,497 |
) |
|
|
|
|
Common stock shares issued |
|
|
480 |
|
|
|
24,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of outstanding common shares |
|
|
|
|
|
|
|
|
|
|
(385,629 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Reissuance of treasury stock |
|
|
|
|
|
|
(25,074 |
) |
|
|
18,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation |
|
|
|
|
|
|
31,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit plan adjustments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,786 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(497 |
) |
|
|
|
|
|
|
(497 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
570,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
$ |
123,029 |
|
|
$ |
310,394 |
|
|
$ |
(2,201,966 |
) |
|
$ |
65,789 |
|
|
$ |
5,998,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,670,018 |
) |
|
$ |
(1,670,018 |
) |
Change in unrealized investment gains and losses, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,767 |
) |
|
|
|
|
|
|
(17,767 |
) |
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63,819 |
) |
|
|
|
|
Common stock shares issued |
|
|
38 |
|
|
|
2,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of outstanding common shares |
|
|
|
|
|
|
|
|
|
|
(75,659 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Reissuance of treasury stock |
|
|
|
|
|
|
(14,187 |
) |
|
|
11,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation |
|
|
|
|
|
|
18,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit plan adjustments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,561 |
|
|
|
|
|
|
|
14,561 |
|
Change in the liability for unrecognized tax benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,522 |
|
|
|
|
|
Unrealized foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,456 |
|
|
|
|
|
|
|
8,456 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(364 |
) |
|
|
|
|
|
|
(364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,665,132 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
$ |
123,067 |
|
|
$ |
316,649 |
|
|
$ |
(2,266,364 |
) |
|
$ |
70,675 |
|
|
$ |
4,350,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(518,914 |
) |
|
|
(518,914 |
) |
Change in unrealized investment gains and losses, net (note 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(116,939 |
) |
|
|
|
|
|
|
(116,939 |
) |
Dividends declared (note 13) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,159 |
) |
|
|
|
|
Common stock shares issued (13) |
|
|
7,052 |
|
|
|
68,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reissuance of treasury stock (13) |
|
|
|
|
|
|
(41,686 |
) |
|
|
1,989,491 |
|
|
|
|
|
|
|
(1,569,567 |
) |
|
|
|
|
Equity compensation (note 13) |
|
|
|
|
|
|
20,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit plan adjustments, net (note 11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,649 |
) |
|
|
|
|
|
|
(44,649 |
) |
Unrealized foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,354 |
) |
|
|
|
|
|
|
(16,354 |
) |
Other |
|
|
|
|
|
|
2,836 |
|
|
|
|
|
|
|
478 |
|
|
|
|
|
|
|
478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(696,378 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
$ |
130,119 |
|
|
$ |
367,067 |
|
|
$ |
(276,873 |
) |
|
$ |
(106,789 |
) |
|
$ |
2,253,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
to consolidated financial statements.
106
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2008, 2007 and 2006
(Audited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands of dollars) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(518,914 |
) |
|
$ |
(1,670,018 |
) |
|
$ |
564,739 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred insurance policy
acquisition costs |
|
|
10,024 |
|
|
|
12,922 |
|
|
|
14,202 |
|
Capitalized deferred insurance policy
acquisition costs |
|
|
(10,360 |
) |
|
|
(11,321 |
) |
|
|
(8,555 |
) |
Depreciation and other amortization |
|
|
34,304 |
|
|
|
25,177 |
|
|
|
22,317 |
|
(Increase) decrease in accrued investment income |
|
|
(18,027 |
) |
|
|
(8,183 |
) |
|
|
1,723 |
|
(Increase) decrease in reinsurance recoverable
on loss reserves |
|
|
(197,744 |
) |
|
|
(21,827 |
) |
|
|
1,370 |
|
Decrease (increase) in prepaid reinsurance premiums |
|
|
4,299 |
|
|
|
905 |
|
|
|
(12 |
) |
Decrease (increase) in premium receivable |
|
|
9,732 |
|
|
|
(19,262 |
) |
|
|
3,476 |
|
Decrease (increase) in real estate aquired |
|
|
112,340 |
|
|
|
(25,992 |
) |
|
|
(44,652 |
) |
Increase in loss reserves |
|
|
2,133,073 |
|
|
|
1,516,764 |
|
|
|
1,261 |
|
(Decrease) increase in premium deficiency reserve |
|
|
(756,505 |
) |
|
|
1,210,841 |
|
|
|
|
|
Increase in unearned premiums |
|
|
63,865 |
|
|
|
82,572 |
|
|
|
29,838 |
|
Decrease (increase) in income taxes recoverable |
|
|
459,097 |
|
|
|
(814,624 |
) |
|
|
(32,465 |
) |
Equity (earnings) losses from joint ventures |
|
|
(33,794 |
) |
|
|
424,346 |
|
|
|
(249,473 |
) |
Distributions from joint ventures |
|
|
22,195 |
|
|
|
51,512 |
|
|
|
150,549 |
|
Realized loss (gain) |
|
|
12,486 |
|
|
|
(142,195 |
) |
|
|
4,264 |
|
Other |
|
|
38,837 |
|
|
|
20,354 |
|
|
|
37,215 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
1,364,908 |
|
|
|
631,971 |
|
|
|
495,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equity securities |
|
|
(89 |
) |
|
|
(95 |
) |
|
|
(90 |
) |
Purchase of fixed maturities |
|
|
(3,592,600 |
) |
|
|
(2,721,294 |
) |
|
|
(1,841,293 |
) |
Additional investment in joint ventures |
|
|
(546 |
) |
|
|
(3,903 |
) |
|
|
(75,948 |
) |
Sale of investment in joint ventures |
|
|
150,316 |
|
|
|
240,800 |
|
|
|
|
|
Note receivable from joint ventures |
|
|
|
|
|
|
(50,000 |
) |
|
|
|
|
Proceeds from sale of fixed maturities |
|
|
1,724,780 |
|
|
|
1,690,557 |
|
|
|
1,563,889 |
|
Proceeds from maturity of fixed maturities |
|
|
413,328 |
|
|
|
331,427 |
|
|
|
311,604 |
|
Other |
|
|
19,547 |
|
|
|
(1,262 |
) |
|
|
1,881 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,285,264 |
) |
|
|
(513,770 |
) |
|
|
(39,957 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid to shareholders |
|
|
(8,159 |
) |
|
|
(63,819 |
) |
|
|
(85,495 |
) |
(Repayment of) proceeds from note payable |
|
|
(100,000 |
) |
|
|
300,000 |
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
|
|
|
|
|
|
|
|
|
199,958 |
|
Repayment of long-term debt |
|
|
|
|
|
|
(200,000 |
) |
|
|
|
|
Repayment of short-term debt |
|
|
|
|
|
|
(87,110 |
) |
|
|
(110,908 |
) |
Net proceeds from convertible debentures |
|
|
377,199 |
|
|
|
|
|
|
|
|
|
Proceeds from reissuance of treasury stock |
|
|
383,959 |
|
|
|
1,484 |
|
|
|
1,677 |
|
Payments for repurchase of common stock |
|
|
|
|
|
|
(75,659 |
) |
|
|
(385,629 |
) |
Common stock shares issued |
|
|
75,758 |
|
|
|
2,098 |
|
|
|
18,100 |
|
Excess tax benefits from share-based payment arrangements |
|
|
|
|
|
|
|
|
|
|
4,939 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
728,757 |
|
|
|
(123,006 |
) |
|
|
(357,358 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
808,401 |
|
|
|
(4,805 |
) |
|
|
98,482 |
|
Cash and cash equivalents at beginning of year |
|
|
288,933 |
|
|
|
293,738 |
|
|
|
195,256 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
1,097,334 |
|
|
$ |
288,933 |
|
|
$ |
293,738 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
107
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007 and 2006
1. |
|
Nature of business |
|
|
|
MGIC Investment Corporation is a holding company which, through Mortgage Guaranty Insurance
Corporation (MGIC) and several other subsidiaries, is principally engaged in the mortgage
insurance business. We provide 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. In 2007, we began providing mortgage insurance to
lenders in Australia. Our Australian operations are included in our consolidated financial
statements; however they are not material to our consolidated results. Through certain other
non-insurance subsidiaries, we also provide various services for the mortgage finance
industry, such as contract underwriting and portfolio analysis and retention. Our principal
product is primary 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. Prior to 2008, we
wrote significant volume through the bulk channel, substantially all of which was Wall
Street bulk business, which we discontinued writing in 2007. We expect any future business
written through the bulk channel will be insignificant to us. Prior to 2009, we also wrote
pool mortgage insurance. We do not expect we will write any significant pool mortgage
insurance in the future. |
|
|
|
At December 31, 2008, our direct domestic primary insurance in force (representing the
principal balance in our records of all mortgage loans that we insure) and direct domestic
primary risk in force (representing the insurance in force multiplied by the insurance
coverage percentage) was approximately $227.0 billion and $59.0 billion, respectively. Our direct pool risk in force at December 31, 2008 was approximately $1.9 billion.
Our risk in force in Australia at December 31, 2008 was
approximately $1.0 billion; this
represents the risk associated with 100% coverage on the insurance in force. However the
mortgage insurance we provide in Australia only covers the unpaid loan balance after the
sale of the underlying property. In view of our need to dedicate capital to our domestic
mortgage insurance operations, we have been exploring alternatives for our Australian
activities which may include a sale of our Australian operations. As a result, we have
reduced our Australian headcount and suspended writing new business in Australia. We do not
expect to write new business in Australia unless required in connection with an agreed upon
sale of this business. |
108
|
|
Historically a significant portion of the mortgage insurance provided by us through the bulk
channel has been used as a credit enhancement for securitizations. During the fourth quarter
of 2007, the performance of loans included in Wall Street bulk transactions deteriorated
materially and this deterioration was materially worse than we experienced for loans insured
through the flow channel or loans insured through the remainder of our bulk channel.
Therefore, during the fourth quarter of 2007, we decided to stop writing that portion of our
bulk business. A Wall Street bulk transaction is any bulk transaction where we had
knowledge that the loans would serve as collateral in a home equity securitization. In
general, loans included in Wall Street bulk transactions had lower average FICO scores and a
higher percentage of ARMs or adjustable rate mortgages, compared to our remaining business.
We continue to provide mortgage insurance on bulk transactions with the GSEs or for
portfolio transactions where the lender will hold the loans. |
|
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, we are 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.
Historically, our investments in joint ventures and related loss or income from joint
ventures principally consisted of our investment and related earnings in two less than
majority owned joint ventures, Credit-Based Asset Servicing and Securitization LLC (C-BASS),
and Sherman Financial Group LLC (Sherman). In 2007, joint venture losses included an
impairment charge equal to our entire equity interest in C-BASS, as well as equity losses
incurred by C-BASS in the fourth quarter that reduced the carrying value of our $50 million
note from C-BASS to zero. As a result, beginning in 2008, our joint venture income
principally consisted of income from Sherman. In August of 2008, we sold our entire interest
in Sherman to Sherman. We review our 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 equity investment impairment charges for the years ending December 31, 2008
and 2006. Our equity in the earnings of joint ventures is shown separately, net of tax, on
the statement of operations. (See note 10.) |
109
|
|
Fair Value Measurements |
|
|
|
Effective January 1, 2008, we adopted the fair value measurement provisions of SFAS No. 157,
Fair Value Measurements. SFAS No. 157 provides enhanced guidance for using fair value to
measure assets and liabilities. This statement defines fair value, expands disclosure
requirements about fair value and specifies a hierarchy of valuation techniques based on
whether the inputs to those valuation techniques are observable or unobservable. Observable
inputs reflect market data obtained from independent sources, while unobservable inputs
reflect a companys market assumptions. Fair value is used on a recurring basis for assets
and liabilities in which fair value is the primary basis of accounting (i.e.,
available-for-sale securities). Additionally, fair value is used on a nonrecurring basis to
evaluate assets or liabilities for impairment or for disclosure purposes. |
|
|
|
Fair value is defined as the price that would be received in a sale of an asset or paid to
transfer a liability in an orderly transaction between market participants at the
measurement date. Depending on the nature of the asset or liability, we use various
valuation techniques and assumptions when estimating fair value. In accordance with SFAS
No. 157, we applied the following fair value hierarchy in order to measure fair value for
assets and liabilities: |
|
|
|
Level 1 Quoted prices for identical instruments in active markets that we have the
ability to access. Financial assets utilizing Level 1 inputs include certain U.S.
Treasury securities and obligations of the U.S. government. |
|
|
|
Level 2 Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and inputs, other
than quoted prices, that are observable in the marketplace for the financial
instrument. The observable inputs are used in valuation models to calculate the fair
value of the financial instruments. Financial assets utilizing Level 2 inputs
include certain municipal and corporate bonds. |
|
|
|
Level 3 Valuations derived from valuation techniques in which one or more
significant inputs or value drivers are unobservable. Level 3 inputs reflect our own
assumptions about the assumptions a market participant would use in pricing an asset
or liability. Financial assets utilizing Level 3 inputs include certain state,
corporate, auction rate (backed by student loans) and mortgage-backed securities.
Non-financial assets which utilize Level 3 inputs include real estate acquired
through claim settlement. Additionally, financial liabilities utilizing Level 3
inputs consist of derivative financial instruments. |
|
|
|
The adoption of SFAS No. 157 resulted in no changes to January 1, 2008 retained earnings.
(See note 5.) |
110
|
|
Investments |
|
|
|
We categorize our investment portfolio according to our ability and intent to hold the
investments to maturity. Investments which we do 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. Our 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.) |
|
|
|
We complete 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. Factors used in determining
investments whose value decline may be considered other than temporary include, among
others, the following: |
|
|
|
Investments with a fair 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 and ability to hold fixed income securities to recovery |
|
|
|
|
Length of time in an unrealized loss position |
|
|
Fair Value Option |
|
|
|
In conjunction with the adoption of SFAS No. 157, we have adopted SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities. This statement provides
companies with an option to report selected financial assets and liabilities at fair value
on an instrument-by-instrument basis. After the initial adoption, the election to report a
financial asset or liability at fair value is made at the time of acquisition and it
generally may not be revoked. The objective of this statement is to reduce both complexity
in accounting for financial instruments and the volatility in earnings caused by measuring
related assets and liabilities differently. The adoption of SFAS No. 159 resulted in no
changes to January 1, 2008 retained earnings as we elected not to apply the fair value
option to financial instruments not currently carried at fair value. |
|
|
|
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, we use accelerated depreciation methods. |
|
|
|
Home office and equipment is shown net of accumulated depreciation of $56.3 million, $51.7
million and $47.6 million at December 31, 2008, 2007 and 2006, |
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|
|
respectively. Depreciation expense for the years ended December 31, 2008, 2007 and 2006 was $4.5 million, $4.4 million
and $4.4 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). For each underwriting year
book of business, these costs are amortized to income in proportion to estimated gross
profits over the estimated life of the policies. We utilize anticipated investment income
in our calculation. 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. If a premium deficiency exists, we reduce the related DAC by the amount of the
deficiency or to zero through a charge to current period earnings. If the deficiency is more
than the related DAC balance, we then establish a premium deficiency reserve equal to the
excess, by means of a charge to current period earnings. |
|
|
|
During 2008, 2007 and 2006, we amortized $10.0 million, $12.9 million and $14.2 million,
respectively, of deferred insurance policy acquisition costs. |
|
|
|
Loss reserves |
|
|
|
Reserves are established for reported insurance losses and loss adjustment expenses based on
when we receive notices of default on insured mortgage loans. 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 to us. In
accordance with GAAP for the mortgage insurance industry, we do not establish loss reserves
for future claims on insured loans which are not currently in default. Loss reserves are
established by our estimate of the number of loans in our inventory of delinquent loans that
will not cure their delinquency and thus result in a claim, which is referred to as the
claim rate, and further estimating the amount that we will pay in claims on the loans that
do not cure, which is referred to as claim severity. Our loss estimates are established
based upon historical experience. 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 us. 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. |
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|
|
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 8.) |
|
|
|
Premium deficiency reserves |
|
|
|
After our loss reserves are initially established, we perform premium deficiency tests using
our best estimate assumptions as of the testing date. Premium deficiency reserves are
established, if necessary, when the present value of expected future losses and expenses
exceeds the present value of expected future premium and already established reserves. The
discount rate used in the calculation of the premium deficiency reserve was based upon our
pre-tax investment yield at December 31, 2008 and 2007, respectively. Products are grouped
for premium deficiency purposes based on similarities in the way the products are acquired,
serviced and measured for profitability. |
|
|
|
Calculations of premium deficiency reserves requires the use of significant judgments and
estimates to determine the present value of future premium and present value of expected
losses and expenses on our business. The present value of future premium relies on, among
other factors, assumptions about persistency and repayment patterns on underlying loans.
The present value of expected losses and expenses depends on assumptions relating to
severity of claims and claim rates on current defaults, and expected defaults in future
periods. Assumptions used in calculating the deficiency reserves can be affected by
volatility in the current housing and mortgage lending industries and these affects could be
material. To the extent premium patterns and actual loss experience differ from the
assumptions used in calculating the premium deficiency reserves, the differences between the
actual results and our estimate will affect future period earnings. (See note 8.) |
|
|
|
Revenue recognition |
|
|
|
Our 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 insurance
policy acquisition costs. |
113
|
|
Fee income of our 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 |
|
|
|
We file a consolidated federal income tax return with our domestic subsidiaries. Our foreign
subsidiaries file separate tax returns in their respective jurisdictions. A formal tax
sharing agreement exists between us and our domestic 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, which are
recorded for regulatory purposes. Generally, the amounts so deducted must be included in
taxable income in the tenth subsequent year. However, to the extent incurred losses exceed
35% of net premiums earned in a calendar year, early withdrawals may be made from the
contingency reserves with regulatory approval, which would lead to amounts being included in
taxable income earlier than the tenth 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. We account 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. |
|
|
|
We provide for uncertain tax positions and the related interest and penalties based on our
assessment of whether a tax benefit is more likely than not to be sustained upon examination
of taxing authorities. (See note 12.) |
|
|
|
Benefit plans |
|
|
|
We have a non-contributory defined benefit pension plan covering substantially all domestic
employees, as well as a supplemental executive retirement plan. Retirement benefits are
based on compensation and years of service. We recognize these retirement benefit costs
over the period during which employees render the service that qualifies them for benefits.
Our policy is to fund pension cost as required under the Employee Retirement Income Security
Act of 1974. |
114
|
|
We offer both medical and dental benefits for retired domestic employees and their spouses.
Under the plan retirees pay a premium for these benefits. In October 2008 we amended our
postretirement benefit plan. The amendment, which is effective January 1, 2009, terminates
the benefits provided to retirees once they reach the age of 65. This amendment reduces our
accumulated postretirement benefit obligation by $59.2 million as of December 31, 2008. The
amendment will also reduce our net periodic benefit cost in future periods beginning with
calendar year 2009. We accrue the estimated costs of retiree medical and life benefits over
the period during which employees render the service that qualifies them for benefits.
Historically benefits were generally funded as they were due. The cost to us has not been
significant. In 2008, approximately $1.3 million benefits were paid from the fund, and
approximately $0.5 million were funded by us. (See note 11.) |
|
|
|
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.
We remain liable for all reinsurance ceded. (See note 9.) |
|
|
|
Foreign Currency Translation |
|
|
|
Assets and liabilities denominated in a foreign currency are translated at the year-end
exchange rates. Operating results are translated at average rates of exchange prevailing
during the year. Unrealized gains and losses, net of deferred taxes, resulting from
translation are included in accumulated other comprehensive income in stockholders equity.
Gains and losses resulting from transactions in a foreign currency are recorded in current
period net income at the rate on the transaction date. |
|
|
|
Share-Based Compensation |
|
|
|
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No.
123R, Share-Based Payment, under the modified prospective method. 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 us in 2003 prospectively
to all employee awards granted or modified on or after January 1, 2003. Under SFAS 123R, we
are required to record compensation expense for all awards granted after the date of
adoption and for all the unvested portion of previously granted awards that remained
outstanding at the date of adoption. 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 our plans
generally vest over periods ranging from one to five years. (See note 13.) |
|
|
|
Earnings per share |
|
|
|
Our basic and diluted earnings per share (EPS) have been calculated in accordance with
SFAS No. 128, Earnings Per Share. Basic EPS is based on the weighted |
115
|
|
average number of
common shares outstanding. Typically, diluted EPS is based on the weighted average number
of common shares outstanding plus common stock equivalents which include stock awards, stock
options and the dilutive effect of our convertible debentures. In accordance with SFAS 128,
if we report a net loss from continuing operations then our diluted EPS is computed in the
same manner as the basic EPS. For the years ended December 31, 2008, 2007 and 2006 our net
loss (income) is the same for both basic and diluted EPS. The following is a reconciliation
of the weighted average number of shares; however for the years ended December 31, 2008 and
2007 common stock equivalents of 23.1 million and 0.3 million, respectively, were not
included because they were anti-dilutive. For 2008 the 23.1 million of common stock
equivalents includes 22.7 million share equivalents related to our convertible debentures
and 0.4 million related to restricted shares or share units. For 2007 the 0.3 million of
common stock equivalents related to restricted shares or share units. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(shares in thousands) |
|
Weighted-average shares -
Basic |
|
|
113,692 |
|
|
|
81,294 |
|
|
|
84,332 |
|
Common stock equivalents |
|
|
|
|
|
|
|
|
|
|
618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares -
Diluted |
|
|
113,692 |
|
|
|
81,294 |
|
|
|
84,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2008 and 2007, 2.5 million shares and 2.6 million shares,
respectively, attributable to outstanding stock options were excluded from the calculation
of diluted earnings per share because their inclusion would have been anti-dilutive. For
the year ended December 31, 2006, 1.3 million shares 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 and 0.4 million
shares 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. (See note 13.) |
116
|
|
Comprehensive income |
|
|
|
Our total comprehensive income, as calculated per SFAS No. 130, Reporting Comprehensive
Income, was as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands of dollars) |
|
Net (loss) income |
|
$ |
(518,914 |
) |
|
$ |
(1,670,018 |
) |
|
$ |
564,739 |
|
Other comprehensive (loss) income |
|
|
(177,464 |
) |
|
|
4,886 |
|
|
|
6,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss) income |
|
$ |
(696,378 |
) |
|
$ |
(1,665,132 |
) |
|
$ |
570,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income (net of tax): |
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized net derivative gains and losses |
|
$ |
|
|
|
$ |
|
|
|
$ |
777 |
|
Change in unrealized gains and losses on investments |
|
|
(116,939 |
) |
|
|
(17,767 |
) |
|
|
5,796 |
|
Change related to benefit plans |
|
|
(44,649 |
) |
|
|
14,561 |
|
|
|
|
|
Unrealized foreign currency translation adjustment |
|
|
(16,354 |
) |
|
|
8,456 |
|
|
|
|
|
Other |
|
|
478 |
|
|
|
(364 |
) |
|
|
(497 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income |
|
$ |
(177,464 |
) |
|
$ |
4,886 |
|
|
$ |
6,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, accumulated other comprehensive loss of ($106.8) million
included ($51.0) million of net unrealized losses on investments, ($47.9) million
relating to defined benefit plans and ($7.9) million related to foreign currency
translation adjustment. At December 31, 2007, accumulated other comprehensive income of
$70.7 million included $65.9 million of net unrealized gains on investments, ($3.2)
million relating to defined benefit plans, $8.5 million related to foreign currency
translation adjustment and ($0.5) million relating to the accumulated other
comprehensive loss of our joint venture investment. (See notes 4 and 11.) |
|
|
|
Recent accounting pronouncements |
|
|
|
In December 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) 132R-1 which amends FASB Statement No. 132R, Employers Disclosures about Pensions and Other Postretirement Benefits, to provide
guidance on an employers disclosures about plan assets of a defined benefit pension or
other postretirement plan. The FSP is effective for fiscal years ending after December 15,
2009. We are currently evaluating the provisions of this statement and the impact, if any,
this statement will have on our disclosures. |
|
|
|
In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset is Not Active. The FSP clarifies the application of
FASB Statement No. 157, Fair Value Measurements in a market that is not active and
provides an example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial |
117
|
|
asset is not active. Our fair value
policies are consistent with the guidance in this FSP. |
|
|
|
In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities. This FSP clarifies that
share-based payment awards that entitle holders to receive nonforfeitable dividends before
vesting should be considered participating securities. As participating securities, these
instruments should be included in the calculation of basic earnings per share. The FSP is
effective for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those years. We are currently evaluating the provisions of
this FSP and do not believe it will have a material impact on our calculations of basic and
diluted earnings per share. |
|
|
|
In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That
May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1
requires the issuer of certain convertible debt instruments that may be settled in cash (or
other assets) on conversion to separately account for the liability (debt) and equity
(conversion option) components of the instrument in a manner that reflects the issuers
non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning
after December 15, 2008 on a retroactive basis. The adoption will result in a net-of-tax
increase to our shareholders equity of approximately $63 million on January 1, 2009 and
will result in a net-of-tax increase to interest expense of approximately $11 million for
the year ended December 31, 2008 and $15 million annually thereafter, through April 1, 2013.
These increases result from our Convertible Junior Subordinated Debentures discussed in Note
7. |
|
|
|
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities. The new standard is intended to improve financial reporting about
derivative instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entitys financial position, financial
performance, and cash flows. It is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. We are currently evaluating the
provisions of this statement and the impact, if any, this statement will have on our
disclosures. |
|
|
|
In February 2008, the FASB issued FSP FAS 157-2, Effective date of FASB Statement No. 157.
This statement defers the effective date of FAS 157 for all non-financial assets and
non-financial liabilities measured on a non-recurring basis to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years. We are currently
evaluating the requirements of this statement and the impact, if any, this statement will
have on our financial position and results of operations. |
118
|
|
Cash and cash equivalents |
|
|
|
We consider cash equivalents to be money market funds and investments with original
maturities of three months or less. |
|
|
|
Reclassifications |
|
|
|
Certain reclassifications have been made in the accompanying financial statements to 2007
and 2006 amounts to allow for consistent financial reporting. |
|
3. |
|
Related party transactions |
|
|
|
We provided certain services to C-BASS and Sherman in 2007 and 2006 in exchange for fees.
In addition, C-BASS provided certain services to us during 2008, 2007 and 2006 in exchange
for fees. The net impact of these transactions was not material to us. |
|
4. |
|
Investments |
|
|
|
The amortized cost, gross unrealized gains and losses and fair value of the investment
portfolio at December 31, 2008 and 2007 are shown below. Debt securities consist of fixed
maturities and short-term investments. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
December 31, 2008: |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
|
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies |
|
$ |
168,917 |
|
|
$ |
21,297 |
|
|
$ |
(405 |
) |
|
$ |
189,809 |
|
Obligations of U.S. states and
political subdivisions |
|
|
6,401,903 |
|
|
|
141,612 |
|
|
|
(237,575 |
) |
|
|
6,305,940 |
|
Corporate debt securities |
|
|
314,648 |
|
|
|
6,278 |
|
|
|
(4,253 |
) |
|
|
316,673 |
|
Mortgage-backed securities |
|
|
151,774 |
|
|
|
3,307 |
|
|
|
(14,251 |
) |
|
|
140,830 |
|
Debt securities issued
by foreign sovereign
governments |
|
|
83,448 |
|
|
|
6,203 |
|
|
|
|
|
|
|
89,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
7,120,690 |
|
|
|
178,697 |
|
|
|
(256,484 |
) |
|
|
7,042,903 |
|
Equity securities |
|
|
2,778 |
|
|
|
|
|
|
|
(145 |
) |
|
|
2,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio |
|
$ |
7,123,468 |
|
|
$ |
178,697 |
|
|
$ |
(256,629 |
) |
|
$ |
7,045,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
December 31, 2007: |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
|
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies |
|
$ |
128,708 |
|
|
$ |
3,462 |
|
|
$ |
(804 |
) |
|
$ |
131,366 |
|
Obligations of U.S. states and
political subdivisions |
|
|
4,958,994 |
|
|
|
132,094 |
|
|
|
(26,109 |
) |
|
|
5,064,979 |
|
Corporate debt securities |
|
|
449,380 |
|
|
|
4,625 |
|
|
|
(8,206 |
) |
|
|
445,799 |
|
Mortgage-backed securities |
|
|
164,974 |
|
|
|
1,118 |
|
|
|
(1,486 |
) |
|
|
164,606 |
|
Debt securities issued
by foreign sovereign
governments |
|
|
89,506 |
|
|
|
57 |
|
|
|
(2,722 |
) |
|
|
86,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities |
|
|
5,791,562 |
|
|
|
141,356 |
|
|
|
(39,327 |
) |
|
|
5,893,591 |
|
Equity securities |
|
|
2,689 |
|
|
|
1 |
|
|
|
(48 |
) |
|
|
2,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio |
|
$ |
5,794,251 |
|
|
$ |
141,357 |
|
|
$ |
(39,375 |
) |
|
$ |
5,896,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair values of debt securities at December 31, 2008, 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 auction rate and mortgage-backed securities provide for
periodic payments throughout their lives, they are listed below in separate categories. |
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
|
(In thousands of dollars) |
|
Due in one year or less |
|
$ |
432,727 |
|
|
$ |
435,045 |
|
Due after one year through
five years |
|
|
1,606,915 |
|
|
|
1,630,086 |
|
Due after five years through
ten years |
|
|
1,230,379 |
|
|
|
1,283,317 |
|
Due after ten years |
|
|
3,174,995 |
|
|
|
3,029,725 |
|
|
|
|
|
|
|
|
|
|
|
6,445,016 |
|
|
|
6,378,173 |
|
|
|
|
|
|
|
|
|
|
Auction rate securities |
|
|
523,900 |
|
|
|
523,900 |
|
Mortgage-backed securities |
|
|
151,774 |
|
|
|
140,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total at December 31, 2008 |
|
$ |
7,120,690 |
|
|
$ |
7,042,903 |
|
|
|
|
|
|
|
|
120
|
|
At December 31, 2008 and 2007, the investment portfolio had gross unrealized losses of
$256.6 million and $39.4 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, 2008 |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies |
|
$ |
13,106 |
|
|
$ |
245 |
|
|
$ |
1,242 |
|
|
$ |
160 |
|
|
$ |
14,348 |
|
|
$ |
405 |
|
Obligations of U.S. states
and political subdivisions |
|
|
1,640,406 |
|
|
|
102,437 |
|
|
|
552,191 |
|
|
|
135,138 |
|
|
|
2,192,597 |
|
|
|
237,575 |
|
Corporate debt securities |
|
|
72,711 |
|
|
|
4,127 |
|
|
|
1,677 |
|
|
|
126 |
|
|
|
74,388 |
|
|
|
4,253 |
|
Mortgage-backed securities |
|
|
41,867 |
|
|
|
14,251 |
|
|
|
|
|
|
|
|
|
|
|
41,867 |
|
|
|
14,251 |
|
Debt issued by foreign
sovereign governments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
227 |
|
|
|
10 |
|
|
|
2,062 |
|
|
|
135 |
|
|
|
2,289 |
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio |
|
$ |
1,768,317 |
|
|
$ |
121,070 |
|
|
$ |
557,172 |
|
|
$ |
135,559 |
|
|
$ |
2,325,489 |
|
|
$ |
256,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
December 31, 2007 |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies |
|
$ |
14,453 |
|
|
$ |
569 |
|
|
$ |
24,937 |
|
|
$ |
235 |
|
|
$ |
39,390 |
|
|
$ |
804 |
|
Obligations of U.S. states
and political subdivisions |
|
|
829,595 |
|
|
|
23,368 |
|
|
|
206,723 |
|
|
|
2,741 |
|
|
|
1,036,318 |
|
|
|
26,109 |
|
Corporate debt securities |
|
|
70,347 |
|
|
|
8,197 |
|
|
|
2,701 |
|
|
|
9 |
|
|
|
73,048 |
|
|
|
8,206 |
|
Mortgage-backed securities |
|
|
15,401 |
|
|
|
64 |
|
|
|
96,167 |
|
|
|
1,422 |
|
|
|
111,568 |
|
|
|
1,486 |
|
Debt issued by foreign
sovereign governments |
|
|
82,835 |
|
|
|
2,722 |
|
|
|
|
|
|
|
|
|
|
|
82,835 |
|
|
|
2,722 |
|
Equity securities |
|
|
110 |
|
|
|
1 |
|
|
|
2,166 |
|
|
|
47 |
|
|
|
2,276 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio |
|
$ |
1,012,741 |
|
|
$ |
34,921 |
|
|
$ |
332,694 |
|
|
$ |
4,454 |
|
|
$ |
1,345,435 |
|
|
$ |
39,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our investment portfolio consists primarily of tax-exempt municipal bonds. During 2008, the
municipal bond market experienced historically poor performance, and resulted in
approximately one-third of our securities (580 issues) being in an unrealized loss position
as of December 31, 2008. The unrealized losses in all categories of our investments were
primarily caused by widening spreads. Of those securities in an unrealized loss position
greater than 12 months, 101 securities had |
121
|
|
a fair value greater than 80% of amortized cost and 65 securities had a fair value less than
80% of amortized cost. We do not believe the unrealized losses are
related to specific issuer defaults and
because we have the ability and intent to hold those investments until a recovery of fair
value, which may be maturity, we do not consider those investments to be
other-than-temporarily impaired at December 31, 2008. |
|
|
|
For the year ended December 31, 2008 we recognized other than temporary impairment charges
of approximately $63 million on our fixed income investments, including debt instruments
issued by Fannie Mae, Freddie Mac, Lehman Brothers and AIG. There were no other than
temporary asset impairment charges on our investment portfolio for the years ending
December 31, 2007 and 2006. |
|
|
|
We held approximately $524 million in auction rate securities (ARS) backed by student loans
at December 31, 2008. ARS are intended to behave like short-term debt instruments because
their interest rates are reset periodically through an auction process, most commonly at
intervals of 7, 28 and 35 days. The same auction process has historically provided a means
by which we may rollover the investment or sell these securities at par in order to provide
us with liquidity as needed. The ARS we hold are collateralized by portfolios of student
loans, all of which are ultimately guaranteed by the United States Department of Education.
At December 31, 2008, our ARS portfolio was 100% AAA/Aaa-rated by one or more of the
following major rating agencies: Moodys, Standard & Poors and Fitch Ratings. |
|
|
|
In mid-February 2008, auctions began to fail due to insufficient buyers, as the amount of
securities submitted for sale in auctions exceeded the aggregate amount of the bids. For
each failed auction, the interest rate on the security moves to a maximum rate specified for
each security, and generally resets at a level higher than specified short-term interest
rate benchmarks. At December 31, 2008, our entire ARS portfolio, consisting of 47
investments in ARS, was subject to failed auctions; however, we had redeemed at par $16.7
million in ARS from the period when the auctions began to fail through the end of 2008.
Subsequent to December 31, 2008, and through January 27, 2009, we redeemed an additional
$2.0 million in ARS at par. To date, we have collected all interest due on our ARS and
expect to continue to do so in the future. |
|
|
|
As a result of the persistent failed auctions, and the uncertainty of when these investments
could be liquidated at par, the investment principal associated with failed auctions will
not be accessible until successful auctions occur, a buyer is found outside of the auction
process, the issuers establish a different form of financing to replace these securities, or
final payments come due according to the contractual maturities of the debt issues. We
believe that issuers and financial markets are exploring alternatives that may improve
liquidity, although it is not yet clear when or if such efforts will be successful. We
intend to hold our ARS until we can recover the full principal amount through one of the
means described above, and have the ability to do so based on our other sources of
liquidity. |
122
|
|
We evaluated our entire ARS portfolio for temporary or other-than-temporary impairment at
December 31, 2008. As a result of this review, we determined that the fair value of our ARS
portfolio at December 31, 2008, approximates par value, and accordingly, we have not
recorded any impairment. Since the estimated fair values could change significantly based
on future market conditions, we will continue to assess the fair value of our ARS for
substantive changes in relevant market conditions or other changes that may alter our
estimates described above. We may be required to record an unrealized holding loss or an
impairment charge to earnings if we determine that our investment portfolio has incurred a
decline in fair value that is temporary or other-than-temporary, respectively. |
|
|
|
Net investment income is comprised of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands of dollars) |
|
Fixed maturities |
|
$ |
287,869 |
|
|
$ |
244,126 |
|
|
$ |
228,805 |
|
Equity securities |
|
|
2,162 |
|
|
|
391 |
|
|
|
1,598 |
|
Cash equivalents |
|
|
15,487 |
|
|
|
15,900 |
|
|
|
11,535 |
|
Other |
|
|
6,552 |
|
|
|
2,675 |
|
|
|
1,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
312,070 |
|
|
|
263,092 |
|
|
|
243,810 |
|
Investment expenses |
|
|
(3,553 |
) |
|
|
(3,264 |
) |
|
|
(3,189 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
308,517 |
|
|
$ |
259,828 |
|
|
$ |
240,621 |
|
|
|
|
|
|
|
|
|
|
|
123
|
|
The net realized investment gains (losses) and change in net unrealized appreciation
(depreciation) of investments are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands of dollars) |
|
Net realized investment gains
(losses) on investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
(76,397 |
) |
|
$ |
(18,575 |
) |
|
$ |
(5,526 |
) |
Equity securities |
|
|
107 |
|
|
|
(820 |
) |
|
|
1,262 |
|
Joint ventures |
|
|
61,877 |
|
|
|
162,860 |
|
|
|
|
|
Other |
|
|
1,927 |
|
|
|
(1,270 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(12,486 |
) |
|
$ |
142,195 |
|
|
$ |
(4,264 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized
appreciation (depreciation): |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
(179,816 |
) |
|
$ |
(26,751 |
) |
|
$ |
8,929 |
|
Equity securities |
|
|
(98 |
) |
|
|
(21 |
) |
|
|
(10 |
) |
Other |
|
|
(710 |
) |
|
|
(254 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(180,624 |
) |
|
$ |
(27,026 |
) |
|
$ |
8,919 |
|
|
|
|
|
|
|
|
|
|
|
The reclassification adjustment relating to the change in investment gains and losses is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands of dollars) |
|
Unrealized holding (losses) gains arising during
the period, net of tax |
|
$ |
(75,464 |
) |
|
$ |
(4,633 |
) |
|
$ |
8,833 |
|
Less: reclassification adjustment for net gains
included in net income, net of tax |
|
|
(41,475 |
) |
|
|
(13,134 |
) |
|
|
(3,037 |
) |
|
|
|
|
|
|
|
|
|
|
Change in unrealized investment gains
and losses, net of tax |
|
$ |
(116,939 |
) |
|
$ |
(17,767 |
) |
|
$ |
5,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross realized gains and the gross realized losses on securities were $22.5 million and
$96.9 million, respectively, in 2008, $7.1 million and $27.8 million, respectively, in 2007
and $2.9 million and $7.2 million, respectively, in 2006. |
|
|
|
The tax (benefit) expense related to the changes in net unrealized (depreciation)
appreciation was ($63.7) million, ($9.3) million and $3.1 million for 2008, 2007 and 2006,
respectively. |
124
|
|
We had $22.9 million and $21.5 million of investments on deposit with various states at
December 31, 2008 and 2007, respectively, due to regulatory requirements of those state
insurance departments. |
|
5. |
|
Fair value measurements |
|
|
|
As discussed in Note 2, we adopted SFAS No. 157 and SFAS No. 159 effective January 1, 2008.
Both standards address aspects of the expanding application of fair-value accounting. SFAS
No. 157 defines fair value, establishes a consistent framework for measuring fair value and
expands disclosure requirements regarding fair-value measurements. SFAS No. 159 provides
companies with an option to report selected financial assets and liabilities at fair value
with changes in fair value reported in earnings. The option to account for selected
financial assets and liabilities at fair value is made on an instrument-by-instrument basis
at the time of acquisition. For the year ended December 31, 2008, we did not elect the fair
value option for any financial instruments acquired for which the primary basis of
accounting is not fair value. |
|
|
|
In accordance with SFAS No. 157, we applied the following fair value hierarchy in order to
measure fair value for assets and liabilities: |
|
|
|
Level 1 Quoted prices for identical instruments in active markets that we have the
ability to access. Financial assets utilizing Level 1 inputs include certain U.S.
Treasury securities and obligations of the U.S. government. |
|
|
|
Level 2 Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and inputs, other
than quoted prices, that are observable in the marketplace for the financial
instrument. The observable inputs are used in valuation models to calculate the fair
value of the financial instruments. Financial assets utilizing Level 2 inputs
include certain municipal and corporate bonds. |
|
|
|
Level 3 Valuations derived from valuation techniques in which one or more
significant inputs or value drivers are unobservable. Level 3 inputs reflect our own
assumptions about the assumptions a market participant would use in pricing an asset
or liability. Financial assets utilizing Level 3 inputs include certain state,
corporate, auction rate (backed by student loans) and mortgage-backed securities.
Non-financial assets which utilize Level 3 inputs include real estate acquired
through claim settlement. Additionally, financial liabilities utilizing Level 3
inputs consisted of derivative financial instruments. |
|
|
|
To determine the fair value of securities available-for-sale in Level 1 and Level 2 of the
fair value hierarchy a variety of inputs are utilized including benchmark yields, reported
trades, broker/dealer quotes, issuer spreads, two sided markets, benchmark securities, bids,
offers and reference data including market research publications. Inputs may be weighted
differently for any security, and not all inputs are used for each security evaluation.
Market indicators, industry and economic |
125
|
|
events are also considered. This information is evaluated using a multidimensional pricing
model. Quality controls are performed throughout this process which includes reviewing
tolerance reports, trading information and data changes, and directional moves compared to
market moves. This model combines all inputs to arrive at a value assigned to each security. |
|
|
|
The values generated by this model are also reviewed for reasonableness and, in some cases,
further analyzed for accuracy, which includes the review of other publicly available
information. Securities whose fair value is primarily based on the use of our
multidimensional pricing model are classified in Level 2 and include certain municipal and
corporate bonds. |
|
|
|
Assets and liabilities classified as Level 3 are as follows: |
|
|
|
Securities available-for-sale classified in Level 3 are not readily marketable and are
valued using internally developed models based on the present value of expected cash flows.
Our Level 3 securities primarily consist of auction rate securities. Our investments in
auction rate securities were classified as Level 3 beginning in the fourth quarter of 2008
as quoted prices were unavailable due to events described in Note 4 and as there became
increased doubt as to the liquidity of the securities. In particular, announced
settlements in the fourth quarter of 2008 specified that re-marketers of the ARS provide
liquidity to retail investors prior to providing liquidity to institutional investors and
we did not observe a majority of issuers replacing these securities with another form of
financing. Due to limited market information, we utilized a discounted cash flow (DCF)
model to derive an estimate of fair value at December 31, 2008. The assumptions used in
preparing the DCF model included estimates with respect to the amount and timing of future
interest and principal payments, the probability of full repayment of the principal
considering the credit quality and guarantees in place, and the rate of return required by
investors to own such securities given the current liquidity risk associated with auction
rate securities. The DCF model is based on the following key assumptions. |
|
o |
|
Nominal credit risk as securities are ultimately guaranteed by the United States Department of Education |
|
|
o |
|
5 years to liquidity |
|
|
o |
|
Continued receipt of contractual interest; and |
|
|
o |
|
Discount rates incorporating a 1.50% spread for liquidity risk |
|
|
The remainder of our level 3 securities are valued based on the present value of expected
cash flows utilizing data provided by the trustees. |
|
|
|
Real estate acquired through claim settlement is fair valued at the lower of our
acquisition cost or a percentage of appraised value. The percentage applied to appraised
value is based upon our historical sales experience adjusted for current trends. |
|
|
|
As discussed in Note 7 the derivative related to the outstanding debentures was valued
using the Black-Scholes model. Remaining derivatives were valued |
126
|
|
internally, based on the present value of expected cash flows utilizing data provided by the
trustees. |
|
|
|
Fair value measurements for items measured at fair value included the following as of
December 31, 2008 (in thousands of dollars): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
Significant |
|
|
|
|
|
|
Active Markets for |
|
Significant Other |
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
Observable Inputs |
|
Inputs |
|
|
Total |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale |
|
$ |
7,045,536 |
|
|
$ |
281,248 |
|
|
$ |
6,218,338 |
|
|
$ |
545,950 |
|
Real estate acquired (1) |
|
|
32,858 |
|
|
|
|
|
|
|
|
|
|
|
32,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities (derivatives) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
(1) |
|
Real estate acquired through claim settlement, which is held
for sale, is reported in Other Assets on the consolidated balance sheet. |
127
|
|
For assets and liabilities measured at fair value using significant unobservable inputs
(Level 3), a reconciliation of the beginning and ending balances for the year ended December
31, 2008 is as follows (in thousands of dollars): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
Available- |
|
Real Estate |
|
Other |
|
|
for-Sale |
|
Acquired |
|
Liabilities |
|
|
|
Balance at January 1, 2008 |
|
$ |
37,195 |
|
|
$ |
145,198 |
|
|
$ |
(12,132 |
) |
Total realized/unrealized gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings and reported as
realized investment gains (losses), net |
|
|
(20,226 |
) |
|
|
|
|
|
|
|
|
Included in earnings and reported as
other revenue |
|
|
|
|
|
|
|
|
|
|
(6,823 |
) |
Included in earnings and reported as
losses incurred, net |
|
|
|
|
|
|
(19,126 |
) |
|
|
|
|
Included in other comprehensive income |
|
|
2,455 |
|
|
|
|
|
|
|
|
|
Purchases, issuances and settlements |
|
|
2,626 |
|
|
|
(93,214 |
) |
|
|
18,955 |
|
Transfers in/and or out of Level 3 |
|
|
523,900 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
545,950 |
|
|
$ |
32,858 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of total gains (losses) included in
earnings for the year ended December 31,
2008 attributable to the change in
unrealized gains (losses) on assets
(liabilities) still held at December 31,
2008 |
|
$ |
(16,838 |
) |
|
$ |
(8,011 |
) |
|
$ |
|
|
|
|
|
|
|
Additional fair value disclosures related to our investment portfolio are included in Note
4. Fair value disclosures related to our debt are included in Notes 6 and 7. |
|
6. |
|
Short- and long-term debt, excluding convertible debentures discussed in Note 7. |
|
|
|
We have a $300 million bank revolving credit facility, expiring in March 2010 that was
amended most recently in June 2008. In 2007, we drew the entire amount available under this
facility. In July 2008, we repaid $100 million borrowed under this facility. The amount that
we repaid remains available for re-borrowing pursuant to the terms of our credit agreement.
At December 31, 2008 and 2007, $200 million and $300 million, respectively, was outstanding
under this facility. |
|
|
|
The credit facility requires us to
maintain Consolidated Net Worth of no less than $2.00 billion at all times. However, if as
of June 30, 2009, Consolidated Net Worth equals or exceeds $2.75 billion, then the minimum
Consolidated Net Worth under the facility will be increased to $2.25 billion at all times
from and after June 30, 2009. Consolidated Net Worth is generally defined in our credit
agreement as the sum of our |
128
|
|
consolidated shareholders equity plus the aggregate outstanding principal amount of our 9%
Convertible Junior Subordinated Debentures due 2063, currently $390 million. The credit
facility also requires Mortgage Guaranty Insurance Corporation (MGIC) to maintain a
statutory 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 regulations (MPP). At December 31, 2008, these
requirements were met. Our Consolidated Net Worth at December 31, 2008 was approximately
$2.7 billion. At December 31, 2008 MGICs
risk-to-capital was 12.9:1 and MGIC exceeded MPP
by more than $1.5 billion. (See note 13 Statutory Capital.) |
|
|
At December 31, 2008 and 2007 we had $200 million, 5.625% Senior Notes due in September 2011
and $300 million, 5.375% Senior Notes due in November 2015. Covenants in the Senior Notes
include the requirement that there be no liens on the stock of the designated subsidiaries
unless the Senior Notes are equally and ratably secured; that there be no disposition of the
stock of designated subsidiaries unless all of the stock is disposed of for consideration
equal to the fair market value of the stock; and that we and the designated subsidiaries
preserve our corporate existence, rights and franchises unless we or such subsidiary
determines that such preservation is no longer necessary in the conduct of its business and
that the loss thereof is not disadvantageous to the Senior Notes. A designated subsidiary
is any of our consolidated subsidiaries which has shareholders equity of at least 15% of
our consolidated shareholders equity. |
|
|
|
The credit facility is filed as an exhibit to our March 31, 2005 Quarterly Report on Form
10-Q and the Indenture governing the Senior Notes is filed as an exhibit to our Current
Report on Form 8-K filed on October 19, 2000. Amendments to our credit facility were filed
as exhibits to our December 31, 2007 10-K/A and to our Current Report on Form 8-K filed on
June 25, 2008. At December 31, 2008 and 2007, the fair value of the amount outstanding under
the credit facility and Senior Notes was $538.3 million and $772.0 million, respectively.
The fair value of our credit facility was approximated at par and the fair value of our
Senior Notes was determined using publicly available trade information. |
|
|
|
Interest payments on all long-term and short-term debt,
excluding convertible debentures, were $40.7 million, $42.6 million and
$36.5 million for the years ended December 31, 2008, 2007 and 2006, respectively. |
|
|
|
If (i) we fail to maintain any of the requirements under the credit facility discussed
above, (ii) we fail to make a payment of principal when due under the credit facility or a
payment of interest within five days after due under the credit facility or (iii) our
payment obligations under our Senior Notes are declared due and payable (including for one
of the reasons noted in the following paragraph) and we are not successful in obtaining an
agreement from banks holding a majority of the debt outstanding under the facility to change
(or waive) the applicable requirement, then banks holding a majority of the debt outstanding
under the facility would have the right to declare the entire amount of the outstanding debt
due and payable. |
129
|
|
If (i) we fail to meet any of the covenants of the Senior Notes discussed above, (ii) we
fail to make a payment of principal of the Senior Notes when due or a payment of interest on
the Senior Notes within thirty days after due or (iii) the debt under our bank facility is
declared due and payable (including for one of the reasons noted in the previous paragraph)
and we are not successful in obtaining an agreement from holders of a majority of the
applicable series of Senior Notes to change (or waive) the applicable requirement or payment
default, then the holders of 25% or more of either series of our Senior Notes each would
have the right to accelerate the maturity of that debt. In addition, the Trustee of these
two issues of Senior Notes, which is also a lender under our bank credit facility, could,
independent of any action by holders of Senior Notes, accelerate the maturity of the Senior
Notes. |
|
7. |
|
Convertible debentures and related derivatives |
|
|
|
In March 2008 we completed the sale of $365 million principal amount of 9% Convertible
Junior Subordinated Debentures due in 2063. The debentures have an
effective interest rate of 19% after consideration of the value
associated with the convertible feature. In April
2008, the initial purchasers exercised an option to purchase an additional $25 million
aggregate principal amount of these debentures. The debentures were sold in private
placements to qualified institutional buyers pursuant to Rule 144A under the Securities Act
of 1933, as amended. Interest on the debentures is payable semi-annually in arrears on April
1 and October 1 of each year, beginning on October 1, 2008. As long as no event of default
with respect to the debentures has occurred and is continuing, we may defer interest, under
an optional deferral provision, for one or more consecutive interest periods up to ten years
without giving rise to an event of default. Deferred interest will accrue additional
interest at the rate then applicable to the debentures. Violations of the covenants under
the Indenture governing the debentures, including covenants to provide certain documents to
the trustee, are not events of default under the Indenture and would not allow the
acceleration of amounts that we owe under the debentures. Similarly, events of default
under, or acceleration of, any of our other obligations, including
those described in Note 6 would not allow the acceleration of amounts that we owe under
the debentures. However, violations of the events of default under the Indenture, including
a failure to pay principal when due under the debentures and certain events of bankruptcy,
insolvency or receivership involving our holding company would allow acceleration of amounts
that we owe under the debentures. |
|
|
|
The debentures rank junior to all of our existing and future senior indebtedness. The net
proceeds of the debentures were approximately $377 million. A portion of the net proceeds of
the debentures and a concurrent offering of common stock (see Note 13) was used to increase
the capital of MGIC, our principal insurance subsidiary, in order to enable us to expand the
volume of our new insurance written, and a portion is available for our general
corporate purposes. Debt issuance costs are being amortized over the expected life of five
years to interest expense. |
|
|
|
We may redeem the debentures prior to April 6, 2013, in whole but not in part, only in the
event of a specified tax or rating agency event, as defined in the Indenture. |
130
|
|
In any such
event, the redemption price will be equal to the greater of (1) 100% of the principal amount
of the debentures being redeemed and (2) the applicable make-whole amount, as defined in the
Indenture, in each case plus any accrued but unpaid interest. On or after April 6, 2013, we
may redeem the debentures in whole or in part from time to time, at our option, at a
redemption price equal to 100% of the principal amount of the debentures being redeemed plus
any accrued and unpaid interest if the closing sale price of our common stock exceeds 130%
of the then prevailing conversion price of the debentures for at least 20 of the 30 trading
days preceding notice of the redemption. We will not be able to redeem the debentures, other
than in the event of a specified tax event or rating agency event, during an optional
deferral period. |
|
|
|
Interest payments on the convertible debentures were $17.8 million for the year ended
December 31, 2008 |
|
|
|
The debentures are currently convertible, at the holders option, at an initial conversion
rate, which is subject to adjustment, of 74.0741 common shares per $1,000 principal amount
of debentures at any time prior to the maturity date. This represents an initial conversion
price of approximately $13.50 per share. The initial conversion price represents a 20%
conversion premium based on the $11.25 per share price to the public in our concurrent
common stock offering. (See Note 13.) |
|
|
|
In lieu of issuing shares of common stock upon conversion of the debentures occurring after
April 6, 2013, we may, at our option, make a cash payment to converting holders equal to the
value of all or some of the shares of our common stock otherwise issuable upon conversion. |
|
|
|
Our common stock is listed on the New York Stock Exchange, or NYSE. One of the NYSEs rules
limits the number of shares of our common stock that the convertible debentures may be
converted into to less than 20% of the number of shares outstanding immediately before the
issuance of the convertible debentures unless shareholders approve the issuance of the
shares that would exceed the limit. We closed a sale of our common stock immediately prior
to the sale of the convertible debentures, which resulted in approximately 124.9 million
shares of our common stock outstanding prior to the debentures being issued. At the initial
conversion rate the outstanding debentures are convertible into approximately 23.1% of our
common stock outstanding, 3.9 million shares above the NYSE limit. At a special
shareholders meeting held in June 2008, we received shareholder approval on the issuance of
shares of our common stock sufficient to convert all of the convertible debentures. |
|
|
|
At issuance approximately $52.8 million in face value of the convertible debentures could
not be settled in our common shares without prior shareholder approval and thus required
bifurcation of the embedded derivative related to those convertible debentures. The
derivative value of $16.9 million was determined using the Black-Scholes model, and is
treated as a discount on issuance of the convertible debentures and amortized over the
expected life of five years to interest expense. Prior to shareholder approval, changes in
the fair value of the derivative were reflected in our results of operations. Since the
changes in fair value corresponded |
131
|
|
to changes in our stock price, a decrease in our stock price resulted in a decrease in the
derivative liability. On the date of shareholder approval, June 27, 2008, the value of the
derivative had decreased to $5.9 million. On this date the amount was re-classified from a
liability to shareholders equity on the consolidated balance sheet, and subsequent changes
in the fair value of the derivative will not be reflected on our financial statements. The
change in fair value of the derivative from issuance to shareholder approval of
approximately $11.0 million is included in other revenue on our statement of operations for
the year ended December 31, 2008. |
|
|
|
The Indenture governing the Convertible Debentures is filed as an exhibit to our March 31,
2008 Quarterly Report on Form 10-Q. The fair value of the convertible debentures was
approximately $145.7 million at December 31, 2008, as determined using available pricing for
these debentures or similar instruments. |
|
8. |
|
Loss reserves and premium deficiency reserves |
|
|
|
Loss reserves |
|
|
|
As described in Note 2, we establish reserves to recognize the estimated liability for
losses and loss adjustment expenses related to defaults on insured mortgage loans. Loss
reserves are established by our estimate of the number of loans in our inventory of
delinquent loans that will not cure their delinquency and thus result in a claim, which is
referred to as the claim rate, and further estimating the amount that we will pay in claims
on the loans that do not cure, which is referred to as claim severity. Estimation of losses
that we 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. Current conditions in the
housing and mortgage industries make these assumptions more volatile than they would
otherwise be. The actual amount of the claim payments may be substantially different than
our loss reserve estimates. Our estimates could be adversely affected by several factors,
including a deterioration of regional or national economic conditions leading to a reduction
in borrowers income and thus their ability to make mortgage payments, and a drop in housing
values that could materially reduce our ability to mitigate potential losses through
property acquisition and resale or expose us to greater losses on resale of properties
obtained through the claim settlement process. Changes to our estimates could result in a
material impact to our results of operations, even in a stable economic environment. |
|
|
|
Our estimates could also be positively affected by government efforts to assist current
borrowers in refinancing to new loan instruments, assisting delinquent borrowers and lenders
in modifying their mortgage notes into something more affordable, and forestalling
foreclosures. In addition private company efforts may have a positive impact on our loss
development. However, all of these efforts are in their early stages and therefore we are
unsure of their magnitude or the benefit to us or our industry, and as a result are not
factored into our current reserving. |
132
|
|
Our estimates could also be positively affected by the extent of fraud that we uncover in
the loans we have insured; higher rates of fraud should lead to higher rates of rescissions,
although the relationship may not be linear. Rescissions and denials totaled $85 million in
the fourth quarter of 2008 and $171 million for the year ending
December 31, 2008. Rescissions and denials totaled only
$7 million in the fourth quarter of 2007 and totaled only $28 million for
the year ended December 31, 2007. |
|
|
|
The following table provides a reconciliation of beginning and ending loss reserves for each
of the past three years: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands of dollars) |
|
Reserve at beginning of year |
|
$ |
2,642,479 |
|
|
$ |
1,125,715 |
|
|
$ |
1,124,454 |
|
Less reinsurance recoverable |
|
|
35,244 |
|
|
|
13,417 |
|
|
|
14,787 |
|
|
|
|
|
|
|
|
|
|
|
Net reserve at beginning of year |
|
|
2,607,235 |
|
|
|
1,112,298 |
|
|
|
1,109,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses incurred: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE incurred in respect
of default notices received in: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
2,684,397 |
|
|
|
1,846,473 |
|
|
|
703,714 |
|
Prior years (1) |
|
|
387,104 |
|
|
|
518,950 |
|
|
|
(90,079 |
) |
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
3,071,501 |
|
|
|
2,365,423 |
|
|
|
613,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses paid: |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE paid in respect
of default notices received in: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
68,397 |
|
|
|
51,535 |
|
|
|
27,114 |
|
Prior years |
|
|
1,332,579 |
|
|
|
818,951 |
|
|
|
583,890 |
|
Reinsurance terminations (2) |
|
|
(264,804 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
1,136,172 |
|
|
|
870,486 |
|
|
|
611,004 |
|
|
|
|
|
|
|
|
|
|
|
Net reserve at end of year |
|
|
4,542,564 |
|
|
|
2,607,235 |
|
|
|
1,112,298 |
|
Plus reinsurance recoverables |
|
|
232,988 |
|
|
|
35,244 |
|
|
|
13,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve at end of year |
|
$ |
4,775,552 |
|
|
$ |
2,642,479 |
|
|
$ |
1,125,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A negative number for prior year losses incurred indicates a redundancy of
prior year loss reserves, and a positive number for prior year losses incurred
indicates a deficiency of prior year loss reserves. |
|
(2) |
|
In a termination, the reinsurance agreement is cancelled, with no future
premium ceded and funds for any incurred but unpaid losses transferred to us. The
transferred funds result in an increase in our investment portfolio (including cash and
cash equivalents) and there is a corresponding decrease in reinsurance recoverable on
loss reserves,
which is offset by a decrease in net losses paid. (See note 9.) |
133
|
|
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 we estimated 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 our review of current trends in default inventory, such
as percentages of defaults that have resulted in a claim, the amount of the claims, changes
in the relative level of defaults by geography and changes in average loan exposure. |
|
|
|
Current year losses incurred significantly increased in 2008 compared to 2007 primarily due
to significant increases in the default inventory, offset by a smaller increase in estimated
severity and a slight decrease in the estimated claim rate. The continued increase in
estimated severity was primarily the result of the default inventory containing higher loan
exposures with expected higher average claim payments as well as our inability to mitigate
losses through the sale of properties due to home price declines. The increase was less
substantial than the increase experienced during 2007. The slight decrease in estimated
claim rate for the year was in part due to an increase in our mitigation efforts, including
rescissions and denials for misrepresentation, ineligibility and policy exclusions. This
decrease in estimated claim rate is based on recent historical experience and does not take
into account any potential benefits of third party and governmental mitigation programs that
are in their early stages for which we have no data on historical performance. Current year
losses incurred significantly increased in 2007 compared to 2006 primarily due to
significant increases in the default inventory and estimated severity and claim rate, when
each are compared to the same period in 2006. The primary insurance notice inventory
increased from 107,120 at December 31, 2007 to 182,188 at December 31, 2008. The primary
insurance notice inventory was 78,628 at December 31, 2006. Pool insurance notice inventory
increased from 25,224 at December 31, 2007 to 33,884 at December 31, 2008. The pool
insurance notice inventory was 20,458 at December 31, 2006. The average primary claim paid
for 2008 was $52,239, compared to $37,165 in 2007 and $28,228 in 2006. |
|
|
|
The development of the reserves in 2008, 2007 and 2006 is reflected in the prior year line.
The $387.1 million increase in losses incurred in 2008 related to prior years was primarily
related to the significant increase in severity during the year, as compared to our
estimates when originally establishing the reserves at December 31, 2007. The increase in
losses incurred in 2008 related to prior years is also a result of more defaults remaining
in inventory at December 31, 2008 from a year prior. These defaults have a higher estimated
claim rate when compared to a year prior. The $518.9 million increase in losses incurred in
2007 related to prior years was due primarily to the significant increases in severity and
the significant deterioration in cure rates experienced during the year, as compared to our
estimates when originally establishing the reserves at December 31, 2006. The $90.1 million
reduction in losses incurred related to prior years in 2006 was due primarily to more
favorable loss trends |
134
|
|
experienced during that year, when compared to our estimates when originally establishing
the reserves at December 31, 2005. |
|
|
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
historically it has taken, 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. Due to a combination of reasons that have slowed the rate at which claims are
received and paid, including foreclosure moratoriums, servicing delays, court delays, loan
modifications, our fraud investigations and our claim rescissions and denials for
misrepresentation there is increased uncertainty regarding how long it may take for current
and future defaults that do not cure to develop into a paid claim. The lower portion of the
table also includes a decrease in losses paid related to terminated reinsurance agreements
as noted in footnote (2) of the table above. |
|
|
|
Information about the composition of the primary insurance default inventory at December 31,
2008 and 2007 appears in the table below. |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2008 |
|
2007 |
Total loans delinquent |
|
|
182,188 |
|
|
|
107,120 |
|
Percentage of loans delinquent (default rate) |
|
|
12.37 |
% |
|
|
7.45 |
% |
|
|
|
|
|
|
|
|
|
Prime loans delinquent* |
|
|
95,672 |
|
|
|
49,333 |
|
Percentage
of prime loans delinquent (default rate) |
|
|
7.90 |
% |
|
|
4.33 |
% |
|
|
|
|
|
|
|
|
|
A-minus loans delinquent* |
|
|
31,907 |
|
|
|
22,863 |
|
Percent of
A-minus loans delinquent (default rate) |
|
|
30.19 |
% |
|
|
19.20 |
% |
|
|
|
|
|
|
|
|
|
Subprime credit loans delinquent* |
|
|
13,300 |
|
|
|
12,915 |
|
Percentage
of subprime credit loans delinquent (default rate) |
|
|
43.30 |
% |
|
|
34.08 |
% |
|
|
|
|
|
|
|
|
|
Reduced documentation loans delinquent** |
|
|
41,309 |
|
|
|
22,009 |
|
Percentage of reduced documentation loans
delinquent (default rate) |
|
|
32.88 |
% |
|
|
15.48 |
% |
|
|
|
* |
|
We define prime loans as those having FICO credit scores of 620 or greater, A-minus loans
as those having FICO credit scores of 575-619, and subprime credit loans as those having
FICO credit scores of less than 575, all as reported to us at the time a commitment to
insure is issued. Most A-minus and subprime credit loans were written through the bulk
channel. However, we classify all loans without complete documentation as reduced
documentation loans regardless of FICO score rather than as a prime, A-minus or
subprime loan.
|
|
** |
|
In accordance with industry practice, loans approved by GSE and other automated
underwriting (AU) systems under doc waiver programs that do not require verification of
borrower income are classified by MGIC as full documentation. Based in part on
information provided by the GSEs, we estimate full documentation loans of this type were
approximately 4% of 2007 NIW. Information |
135
|
|
|
|
|
for other periods is not available. We understand
these AU systems grant such doc waivers for loans they judge to have higher credit quality.
We also understand that the GSEs terminated their doc waiver programs, with respect to new
commitments, in the second half of 2008. |
|
|
Premium deficiency reserves |
|
|
|
Historically all of our insurance risks were included in a single grouping and the
calculations to determine if a premium deficiency existed were performed on our entire in
force book. As of September 30, 2007, based on these calculations there was no premium
deficiency on our total in force book. During the fourth quarter of 2007, we experienced
significant increases in our default inventory, and severities and claim rates on loans in
default. We further examined the performance of our in force book and determined that the
performance of loans included in Wall Street bulk transactions was significantly worse than
we experienced for loans insured through the flow channel or loans insured through the
remainder of our bulk channel. As a result we began separately measuring the performance of
Wall Street bulk transactions and decided to stop writing this business. Consequently, as of
December 31, 2007, we performed separate premium deficiency calculations on the Wall Street
bulk transactions and on the remainder of our in force book to determine if premium
deficiencies existed. As a result of those calculations, we recorded premium deficiency
reserves of $1,211 million in the fourth quarter of 2007 to reflect the present value of
expected future losses and expenses that exceeded the present value of expected future
premium and already established loss reserves on the Wall Street bulk transactions. The
discount rate used in the calculation of the premium deficiency reserve, 4.70%, was based
upon our pre-tax investment yield at December 31, 2007. As of December 31, 2007 there was no
premium deficiency related to the remainder of our in force business. |
|
|
|
During 2008 the premium deficiency reserve on Wall Street bulk transactions declined by $757
million from $1,211 million, as of December 31, 2007, to $454 million as of December 31,
2008. The $454 million premium deficiency reserve as of December 31, 2008 reflects the
present value of expected future losses and expenses that exceeded the present value of
expected future premium and already established loss reserves. The discount rate used in the
calculation of the premium deficiency reserve at December 31, 2008 was 4.0%. |
136
|
|
The components of the premium deficiency reserve at December 31, 2008
and 2007 appears in the table below. |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
($ millions) |
|
Present value of expected future premium |
|
$ |
712 |
|
|
$ |
901 |
|
|
|
|
|
|
|
|
|
|
Present value of expected future paid losses
and expenses |
|
|
(3,063 |
) |
|
|
(3,561 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net present value of future cash flows |
|
|
(2,351 |
) |
|
|
(2,660 |
) |
|
|
|
|
|
|
|
|
|
Established loss reserves |
|
|
1,897 |
|
|
|
1,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deficiency |
|
$ |
(454 |
) |
|
$ |
(1,211 |
) |
|
|
|
|
|
|
|
|
|
Each quarter, we re-estimate the premium deficiency reserve on the remaining Wall Street
bulk insurance in force. The premium deficiency reserve primarily changes from quarter to
quarter as a result of two factors. First, it changes as the actual premiums, losses and
expenses that were previously estimated are recognized. Each period such items are reflected
in our financial statements as earned premium, losses incurred and expenses. The difference
between the amount and timing of actual earned premiums, losses incurred and expenses and
our previous estimates used to establish the premium deficiency reserves has an effect
(either positive or negative) on that periods results. Second, the premium deficiency
reserve changes as our assumptions relating to the present value of expected future
premiums, losses and expenses on the remaining Wall Street bulk insurance in force change.
Changes to these assumptions also have an effect on that periods results. The decrease in
the premium deficiency reserve for the year ended December 31, 2008 was $757 million, as
shown in the chart below, which represents the net result of actual premiums, losses and
expenses offset by $134 million change in assumptions primarily related to higher estimated
ultimate losses. |
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
Premium Deficiency Reserve at December 31, 2007 |
|
|
|
|
|
$ |
(1,211 |
) |
|
|
|
|
|
|
|
|
|
Paid claims and LAE |
|
|
770 |
|
|
|
|
|
Increase in loss reserves |
|
|
448 |
|
|
|
|
|
Premium earned |
|
|
(234 |
) |
|
|
|
|
Effects of present valuing on future premiums, losses and expenses |
|
|
(93 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in premium deficiency reserve to reflect
actual premium, losses and expenses recognized |
|
|
|
|
|
|
891 |
|
|
|
|
|
|
|
|
|
|
Change in premium deficiency reserve to reflect change in
assumptions relating to premiums, losses, expenses and discount rate
(1)
|
|
|
|
|
|
|
(134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium Deficiency Reserve at December 31, 2008 |
|
|
|
|
|
$ |
(454 |
) |
|
|
|
|
|
|
|
|
(1) |
|
A negative number for changes in assumptions relating to premiums,
losses, expenses and discount rate indicates a deficiency of prior
premium deficiency reserves.
|
|
|
At the end of 2008 we performed a premium deficiency analysis
on the portion of our book of business not covered by the premium deficiency described
above. That analysis concluded that, as of December 31, 2008, there was no premium
deficiency on such portion of our book of business. For the reasons discussed below, our
analysis of any potential deficiency reserve is subject to inherent uncertainty and requires
significant judgment by management. To the extent, in a future period, expected losses are
higher or expected premiums are lower than the assumptions we used in our analysis, we could
be required to record a premium deficiency reserve on this portion of our book of business
in such period. |
|
|
|
The calculation of premium deficiency reserves requires the use of significant judgments and
estimates to determine the present value of future premium and present value of expected
losses and expenses on our business. The present value of future premium relies on, among
other things, assumptions about persistency and repayment patterns on underlying loans. The
present value of expected losses and expenses depends on assumptions relating to severity of
claims and claim rates on current defaults, and expected defaults in future periods. Similar
to our loss reserve estimates, our estimates for premium deficiency reserves could be
adversely affected by several factors, including a deterioration of regional or economic
conditions leading to a reduction in borrowers income and thus their ability to make
mortgage payments, and a drop in housing values that could expose us to greater losses.
Assumptions used in calculating the deficiency reserves can also be affected by volatility
in the current housing and mortgage lending industries. To the extent premium patterns and
actual loss experience differ from the assumptions used in calculating the premium
deficiency reserves, the differences between the actual results and our estimates will
affect future period earnings and could be material. |
138
9. |
|
Reinsurance |
|
|
|
We cede a portion of our business to reinsurers and record assets for reinsurance
recoverable on loss reserves and prepaid reinsurance premiums. We cede primary business to
reinsurance subsidiaries of certain mortgage lenders (captives). The majority of ceded
premiums relates to these agreements. Historically, most of these reinsurance arrangements
are aggregate excess of loss reinsurance agreements, and the remainder have been quota share
agreements. Under the aggregate excess of loss agreements, we are responsible for the first
aggregate layer of loss (typically 4% or 5%), the captives are responsible for the second
aggregate layer of loss (typically 5% or 10%) and we are responsible for any remaining loss.
The layers are typically expressed as a percentage of the original risk on an annual book of
business reinsured by the captive. The premium cessions on these agreements typically range
from 25% to 40% of the direct premium. Under a quota share arrangement premiums and losses
are shared on a pro-rata basis between us and the captives, with the captives portion of
both premiums and losses typically ranging from 25% to 50%. Beginning June 1, 2008 our
captive arrangements, both aggregate excess of loss and quota share, are limited to a 25%
cede rate. |
|
|
|
Under these agreements the captives are required to maintain a separate trust account, of
which we are the sole beneficiary. Premiums ceded to a captive are deposited into the
applicable trust account to support the captives layer of insured risk. These amounts are
held in the trust account and are available to pay reinsured losses. The captives ultimate
liability is limited to the assets in the trust account. When specific time periods are met
and the individual trust account balance has reached a required level, then the individual
captive may make authorized withdrawals from its applicable trust account. In most cases,
the captives are also allowed to withdraw funds from the trust account to pay verifiable
federal income taxes and operational expenses. Conversely, if the account balance falls
below certain thresholds, the individual captive may be required to contribute funds to the
trust account. However, in most cases, our sole remedy if a captive does not contribute
such funds is to put the captive into run-off (in a run-off, no new loans are reinsured by
the captive but loans previously reinsured continue to be covered, with premium and losses
continuing to be ceded on those loans). In the event that the captives incurred but unpaid
losses exceed the funds in the trust account, and the captive does not deposit adequate
funds, we may also be allowed to terminate the captive agreement, assume the captives
obligations, transfer the assets in the trust accounts to us, and retain all future premium
payments. We intend to exercise this additional remedy when it is available to us. The total
fair value of the trust fund assets under these agreements at December 31, 2008 approximated
$582 million. During 2008, $265 million of trust fund assets were transferred to us as a
result of captive terminations. There were no material captive terminations in 2007. The
transferred funds resulted in an increase in our investment portfolio (including cash and
cash equivalents) and there was a corresponding decrease in our reinsurance recoverable on
loss reserves, which is offset by a decrease in our net losses paid. |
139
|
|
Effective January 1, 2009 we are no longer ceding new business under excess of loss
reinsurance treaties with lender captive reinsurers. Loans reinsured through December 31,
2008 will run off pursuant to the terms of the particular captive
arrangement. New business will continue to be ceded under quota share
reinsurance arrangements. During 2008, many of our
captive arrangements have either been terminated or placed into run-off. |
|
|
|
Since 2005, we have entered into three separate aggregate excess of loss reinsurance
agreements under which we ceded approximately $130 million of risk in force in the aggregate
to three special purpose reinsurance companies. In 2008, we terminated one of these excess
of loss reinsurance agreements. The remaining amount of ceded risk in force at December 31,
2008 was approximately $50.6 million. Additionally, certain pool polices written by us have
been reinsured with one domestic reinsurer. We receive a ceding commission under certain
reinsurance agreements. |
|
|
|
Generally, reinsurance recoverables on primary loss reserves and prepaid reinsurance
premiums are supported by trust funds or letters of credit. As such we have not established
an allowance against these recoverables. |
|
|
|
The effect of these agreements on premiums earned and losses incurred is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands of dollars) |
|
Premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
1,601,610 |
|
|
$ |
1,430,964 |
|
|
$ |
1,327,270 |
|
Assumed |
|
|
3,588 |
|
|
|
3,220 |
|
|
|
2,049 |
|
Ceded |
|
|
(212,018 |
) |
|
|
(171,794 |
) |
|
|
(141,910 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
$ |
1,393,180 |
|
|
$ |
1,262,390 |
|
|
$ |
1,187,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses incurred: |
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
3,553,029 |
|
|
$ |
2,399,233 |
|
|
$ |
621,298 |
|
Assumed |
|
|
1,456 |
|
|
|
517 |
|
|
|
203 |
|
Ceded |
|
|
(482,984 |
) |
|
|
(34,327 |
) |
|
|
(7,866 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses incurred |
|
$ |
3,071,501 |
|
|
$ |
2,365,423 |
|
|
$ |
613,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
In June 2008 we entered into a reinsurance agreement with an affiliate of HCC Insurance
Holdings, Inc. (HCC). The reinsurance agreement is effective on the risk associated with
up to $50 billion of qualifying new insurance written each calendar year. The term of the
reinsurance agreement began April 1, 2008 and ends on December 31, 2010, subject to two
one-year extensions that may be exercised by HCC. |
|
|
|
The reinsurance agreement is expected to provide additional claims-paying resources when
loss ratios exceed 100% for new insurance written beginning April 1, 2008. |
140
|
|
The agreement is accounted for under deposit accounting rather than reinsurance accounting,
because under the guidance of SFAS 113 Accounting for Reinsurance Contracts, we concluded
that the reinsurance agreement does not result in the reasonable possibility that the
reinsurer will suffer a significant loss.
When our financial strength rating as determined by two rating agencies is in the A category or
higher the agreement provides for a 20% quota share agreement, but allows us to retain 80% of the
ceded premium (profit commission). The profit commission is used to cover losses that otherwise
would be ceded to the reinsurer until the profit commission is exhausted. The premium ceded to the
reinsurer and the brokerage commission paid to an affiliate of the reinsurer, net of a profit
commission retained by us, is recorded as reinsurance fee expense on our statement of operations.
In loss environments where loss ratios are less than 80% for the insurance covered by this
agreement, we expect the net expense will be approximately 5% of net premiums earned on business
covered by the agreement. Under the terms of the agreement, if our financial strength rating as
determined by two rating agencies falls below the A category, we are no longer entitled to the
profit commission and our net expense will increase to reflect we no longer receive this profit
commission, but will be partially offset by an increase of reinsured losses. In February 2009,
Moodys Investors Service reduced MGICs financial strength rating to Ba2 with a developing
outlook. The financial strength of MGIC is rated A-, with a negative outlook, by both Standard and
Poors Rating Services and Fitch Ratings. The reinsurance fee for the year ended December 31, 2008
was approximately $1.8 million.
|
|
10. |
|
Investments in joint ventures |
|
|
|
C-BASS |
|
|
|
C-BASS, a limited liability company, is an unconsolidated, less than 50%-owned investment of
ours that is not controlled by us. Historically, C-BASS was principally engaged in the
business of investing in the credit risk of subprime single-family residential mortgages. In
2007, C-BASS ceased its operations and is managing its portfolio pursuant to a consensual,
non-bankruptcy restructuring, under which its assets are to be paid out over time to its
secured and unsecured creditors. As discussed below, in the third quarter of 2007, we
concluded that our total equity interest in C-BASS was impaired. In addition, during the
fourth quarter of 2007 due to additional losses incurred by C-BASS, we reduced the carrying
value of our $50 million note from C-BASS to zero under equity method accounting. At
December 31, 2008 our current book value of C-BASS, including our note receivable from
C-BASS, remains at zero. |
|
|
|
Beginning in February 2007 and continuing through approximately the end of March 2007, the
subprime mortgage market experienced significant turmoil. After a period of relative
stability that persisted during April, May and through approximately late June, market
dislocations recurred and then accelerated to unprecedented levels beginning in
approximately mid-July 2007. As a result of margin calls from lenders that C-BASS was not
able to meet, C-BASSs purchases of mortgages and mortgage securities and its securitization
activities ceased. |
141
|
|
On July 30, 2007, we announced that we had concluded that the value of our investment in
C-BASS had been materially impaired and that the amount of the impairment could be our
entire investment. In connection with the determination of our results of operations for the
quarter ended September 30, 2007, we wrote down our entire equity investment in C-BASS
through an impairment charge of $466 million. This impairment charge is reflected in our
results of operations for year ended December 31, 2007. |
|
|
|
We measured the value of our investment based upon the potential market for the equity
interest in C-BASS and expected future cash flows of C-BASS, including a consensual,
non-bankruptcy restructuring, which, subsequently occurred on November 16, 2007 through an
override agreement with C-BASSs creditors. The override agreement provides that C-BASSs
assets are to be paid out over time to its secured and unsecured creditors. The information
used in our valuation was provided by C-BASS. We believe there is a high degree of
uncertainty surrounding the amounts and timing of C-BASSs cash flows and our analysis of
them involved significant management judgment based upon currently available facts and
circumstances, which are subject to change. The market analysis as well as our analysis of
the cash flow projections reflected little or no value for our equity interest in C-BASS.
Based on these analyses our entire equity interest in C-BASS was written down through an
impairment charge under the guidance of APB 18 Equity Method of Accounting. |
|
|
|
In mid-July 2007 we lent C-BASS $50 million under an unsecured credit facility. At September
30, 2007 this note was carried at face value on our consolidated balance sheet. During the
fourth quarter of 2007 C-BASS incurred additional losses that caused us to reduce the
carrying value of the note to zero under equity method accounting. A third party has an
option that expires in December 2014 to purchase 22.5% of C-BASS equity from us for an
exercise price of $2.5 million. |
|
|
|
A summary C-BASS balance sheet and income statements at the date and for the periods
indicated appear below. |
C-BASS Summary Balance Sheet:
|
|
|
|
|
|
|
December 31, |
|
|
2007 |
|
|
(in millions of dollars) |
Total assets |
|
$ |
5,833 |
|
|
|
|
|
|
Debt |
|
$ |
2,468 |
|
|
|
|
|
|
Total liabilities |
|
$ |
6,761 |
|
|
|
|
|
|
Owners
deficit |
|
$ |
(928 |
) |
142
C-BASS Summary Income Statement:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In millions of dollars) |
|
Total net revenue |
|
$ |
(1,647.8 |
) |
|
$ |
572.9 |
|
|
|
|
|
|
|
|
|
|
Total expense |
|
|
259.3 |
|
|
|
282.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
income |
|
$ |
(1,907.1 |
) |
|
$ |
290.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys (loss) income from C-BASS |
|
$ |
(499.6 |
) |
|
$ |
133.7 |
|
|
|
|
|
|
|
|
|
|
Sherman |
|
|
|
During the period in which we held an equity interest in
Sherman, Sherman was principally engaged in the business of purchasing and collecting for its own
account delinquent consumer assets 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. A substantial portion of Shermans consolidated
assets are investments in consumer receivable portfolios that do not have readily
ascertainable market values. Shermans results of operations are sensitive to estimates by
Shermans management of ultimate collections on these portfolios. |
|
|
|
In August 2008 we sold our entire interest in Sherman to Sherman. Our interest sold
represented approximately 24.25% of Shermans equity. The sale price paid was $124.5 million
in cash and by delivery of Shermans unsecured promissory note in the principal amount of
$85 million (the Note). The scheduled maturity of the Note is February 13, 2011 and it
bears interest, payable monthly, at the annual rate equal to three-month LIBOR plus 500
basis points. The Note is issued under a Credit Agreement, dated August 13, 2008, between
Sherman and MGIC. |
|
|
|
At the time of sale the note had a fair value of $69.5 million (18.25% discount to par). The
fair value was determined by comparing the terms of the Note to the discounts and yields on
comparable bonds. The fair value was also discounted for illiquidity and lack of ratings.
The discount will be amortized to interest income over the life of the Note. The gain
recognized on the sale was $62.8 million, and is included in realized investment gains
(losses) on the statement of operations for the year ended December 31, 2008. |
|
|
|
As a result of the sale we are entitled to an additional cash payment if by approximately
early March 2009 Sherman or certain of its management affiliates enter into a definitive
agreement covering a transaction involving the sale or |
143
|
|
purchase of interests in Sherman in which the fair value of the consideration reflects a
value of Sherman over $1 billion plus an additional amount. The
additional amount was $33
million if a definitive agreement had been entered into by early September 2008 and
increases by $11 million for each monthly period that elapses after early September 2008
until a monthly period beginning in early February 2009, when the additional amount is $100
million. A qualifying purchase or sale transaction must close for us to be entitled to an
additional payment. |
|
|
|
In connection with the sale we waived, effective at the time at which the Note is paid in
full, our right to any contingent consideration for the sale of the interests in Sherman
that we sold in September 2007 to an entity owned by the management of Sherman. Under that
sale, we are entitled to an additional cash payment if the purchasers after-tax rate of
return on the interests purchased exceeds a threshold that equates to an annual return of
16%. |
|
|
|
For additional information regarding the sale of our interest please refer to our Current
Report on Form 8-K filed on August 14, 2008. Our investment in Sherman on an equity basis at
December 31, 2008 and 2007 was zero and $115.3 million, respectively. |
Sherman Summary Balance Sheet:
|
|
|
|
|
|
|
December 31, |
|
|
2007 |
|
|
(in
million of dollars) |
Total assets |
|
$ |
2,242 |
|
|
|
|
|
|
Debt |
|
$ |
1,611 |
|
|
|
|
|
|
Total liabilities |
|
$ |
1,821 |
|
|
|
|
|
|
Members equity |
|
$ |
421 |
|
144
Sherman Summary Income Statement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008* |
|
|
2007 |
|
|
2006 |
|
|
|
(In millions of dollars) |
|
Revenues from receivable portfolios |
|
$ |
660.3 |
|
|
$ |
994.3 |
|
|
$ |
1,031.6 |
|
Portfolio amortization |
|
|
264.8 |
|
|
|
488.1 |
|
|
|
373.0 |
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of amortization |
|
|
395.5 |
|
|
|
506.2 |
|
|
|
658.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card interest income and fees |
|
|
475.6 |
|
|
|
692.9 |
|
|
|
357.3 |
|
Other revenue |
|
|
35.3 |
|
|
|
60.8 |
|
|
|
35.6 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
906.4 |
|
|
|
1,259.9 |
|
|
|
1,051.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
740.1 |
|
|
|
991.5 |
|
|
|
702.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax |
|
$ |
166.3 |
|
|
$ |
268.4 |
|
|
$ |
349.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys income from Sherman |
|
$ |
35.6 |
|
|
$ |
81.6 |
|
|
$ |
121.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The year ended December 31, 2008 only reflects Shermans results and our income from
Sherman through July 31, 2008 as a result of the sale of our remaining interest in August
2008. |
|
|
The Companys income from Sherman line item in the table above includes $3.6 million,
$15.6 million and $12.0 million of additional amortization expense in 2008, 2007 and 2006,
respectively, above Shermans actual amortization expense, related to additional interests
in Sherman that we purchased during the third quarter of 2006 at a price in excess of book
value. |
|
|
|
In September 2007, we sold a portion of our interest in Sherman to an entity owned by
Shermans senior management. The interest sold by us represented approximately 16% of
Shermans equity. We received a cash payment of $240.8 million in the sale. We recorded a
$162.9 million pre-tax gain on this sale, which is reflected in our results of operations
for the year ended December 31, 2007 as a realized gain. |
|
11. |
|
Benefit plans |
|
|
|
We have a non-contributory defined benefit pension plan covering substantially all domestic
employees, as well as a supplemental executive retirement plan. We also offer both medical
and dental benefits for retired domestic employees and their spouses under a postretirement
benefit plan. In October 2008 we amended our postretirement benefit plan. The amendment,
which is effective January 1, 2009, terminates the benefits provided to retirees once they
reach the age of 65. This amendment reduces our accumulated postretirement benefit
obligation as of December 31, 2008 as shown in the charts below. The amendment will also
reduce our net periodic benefit cost in future periods beginning with calendar year |
145
|
|
2009. The following tables provide the components of aggregate annual net periodic
benefit cost, the amounts recognized in the consolidated balance sheet, changes in the
benefit obligation and the funded status of the pension, supplemental executive retirement
and other postretirement benefit plans: |
Components of Net Periodic Benefit Cost for fiscal year ending
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Supplemental |
|
Other Postretirement |
|
|
Executive Retirement Plans |
|
Benefits |
|
|
12/31/2008 |
|
12/31/2007 |
|
12/31/2008 |
|
12/31/2007 |
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
1. Company Service Cost |
|
$ |
8,677 |
|
|
$ |
10,047 |
|
|
$ |
3,886 |
|
|
$ |
3,377 |
|
2. Interest Cost |
|
|
13,950 |
|
|
|
12,225 |
|
|
|
4,966 |
|
|
|
3,874 |
|
3. Expected Return on Assets |
|
|
(19,348 |
) |
|
|
(17,625 |
) |
|
|
(3,766 |
) |
|
|
(3,269 |
) |
4. Other Adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
3,279 |
|
|
|
4,647 |
|
|
|
5,086 |
|
|
|
3,982 |
|
5. Amortization of : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a. Net Transition Obligation/(Asset) |
|
|
|
|
|
|
|
|
|
|
283 |
|
|
|
283 |
|
b. Net Prior Service Cost/(Credit) |
|
|
684 |
|
|
|
564 |
|
|
|
|
|
|
|
|
|
c. Net Losses/(Gains) |
|
|
510 |
|
|
|
552 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Amortization |
|
|
1,194 |
|
|
|
1,116 |
|
|
|
283 |
|
|
|
283 |
|
6. Net Periodic Benefit Cost |
|
|
4,473 |
|
|
|
5,763 |
|
|
|
5,369 |
|
|
|
4,265 |
|
7. Cost of SFAS 88 Events |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Total Expense for Year |
|
$ |
4,473 |
|
|
$ |
5,763 |
|
|
$ |
5,369 |
|
|
$ |
4,265 |
|
|
Reconciliation of Net Balance Sheet (Liability)/Asset |
|
|
|
12/31/2008 |
|
12/31/2007 |
|
12/31/2008 |
|
12/31/2007 |
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
1. Net Balance Sheet (Liability)/Asset at End of Prior Year |
|
|
51,106 |
|
|
|
31,918 |
|
|
|
(23,143 |
) |
|
|
(31,218 |
) |
2. Amount Recognized in AOCI at End of Prior Year |
|
|
2,247 |
|
|
|
16,667 |
|
|
|
2,737 |
|
|
|
10,696 |
|
|
|
|
|
|
3. (Accrued)/Prepaid
Benefit Cost (before Adjustment) at End of Prior Year |
|
|
53,353 |
|
|
|
48,585 |
|
|
|
(20,406 |
) |
|
|
(20,522 |
) |
4. Net Periodic Benefit (Cost)/Income for Fiscal Year |
|
|
(4,473 |
) |
|
|
(5,762 |
) |
|
|
(5,369 |
) |
|
|
(4,267 |
) |
5. (Cost)/Income of SFAS 88 Events |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Employer Contributions |
|
|
33,000 |
|
|
|
10,300 |
|
|
|
|
|
|
|
3,400 |
|
7. Benefits Paid Directly by Company |
|
|
230 |
|
|
|
230 |
|
|
|
(43 |
) |
|
|
983 |
|
8. Other Adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. (Accrued)/Prepaid Benefit Cost (before Adjustment)
at End of Year |
|
|
82,110 |
|
|
|
53,353 |
|
|
|
(25,818 |
) |
|
|
(20,406 |
) |
10. Amount Recognized in AOCI at End of Year |
|
|
(104,420 |
) |
|
|
(2,247 |
) |
|
|
30,726 |
|
|
|
(2,737 |
) |
|
|
|
|
|
11. Net Balance Sheet (Liability)/Asset at End of Year |
|
|
(22,310 |
) |
|
|
51,106 |
|
|
|
4,908 |
|
|
|
(23,143 |
) |
|
Development of Funded Status |
|
|
|
Pension and Supplemental |
|
Other Postretirement |
|
|
Executive Retirement Plans |
|
Benefits |
|
|
12/31/2008 |
|
12/31/2007 |
|
12/31/2008 |
|
12/31/2007 |
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
Actuarial Value of Benefit Obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. Measurement Date |
|
|
12/31/2008 |
|
|
|
12/31/2007 |
|
|
|
12/31/2008 |
|
|
|
12/31/2007 |
|
2. Accumulated Benefit Obligation |
|
|
202,475 |
|
|
|
177,285 |
|
|
|
25,282 |
|
|
|
73,358 |
|
3. Projected Benefit Obligation |
|
|
229,039 |
|
|
|
207,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Status |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. Projected Accumulated Benefit Obligation |
|
|
(229,039 |
) |
|
|
(207,431 |
) |
|
|
(25,282 |
) |
|
|
(73,358 |
) |
2. Plan Assets at Fair Value |
|
|
206,729 |
|
|
|
258,536 |
|
|
|
30,190 |
|
|
|
50,215 |
|
|
|
|
3. Funded Status Overfunded |
|
|
N/A |
|
|
|
51,105 |
|
|
|
4,908 |
|
|
|
N/A |
|
4. Funded Status Underfunded |
|
|
(22,310 |
) |
|
|
N/A |
|
|
|
N/A |
|
|
|
(23,143 |
) |
146
Accumulated Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2008 |
|
12/31/2007 |
|
12/31/2008 |
|
12/31/2007 |
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
1. Net Actuarial (Gain)/Loss |
|
$ |
101,646 |
|
|
$ |
(1,210 |
) |
|
$ |
27,319 |
|
|
$ |
1,320 |
|
2. Net Prior Service Cost/(Credit) |
|
|
2,774 |
|
|
|
3,457 |
|
|
|
(58,045 |
) |
|
|
|
|
3. Net Transition Obligation/(Asset) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,417 |
|
|
|
|
4. Total at Year End |
|
|
104,420 |
|
|
|
2,247 |
|
|
|
(30,726 |
) |
|
|
2,737 |
|
|
Information for Plans with PBO / APBO in Excess of Plan Assets |
|
|
|
12/31/2008 |
|
12/31/2007 |
|
12/31/2008 |
|
12/31/2007 |
|
|
(In thousands of dollars) |
1. Projected Benefit Obligation/
Accumulated Postretirement Benefit Obligation |
|
$ |
229,039 |
|
|
$ |
13,375 |
|
|
$ |
|
|
|
$ |
|
|
2. Accumulated Benefit Obligation /
Accumulated Postretirement Benefit Obligation |
|
|
202,475 |
|
|
|
5,675 |
|
|
|
|
|
|
|
73,358 |
|
3. Fair Value of Plan Assets |
|
|
206,729 |
|
|
|
|
|
|
|
|
|
|
|
50,215 |
|
|
Information for Plans with PBO / APBO Less Than Plan Assets |
|
|
|
12/31/2008 |
|
12/31/2007 |
|
12/31/2008 |
|
12/31/2007 |
|
|
(In thousands of dollars) |
1. Projected Benefit Obligation/
Accumulated Postretirement Benefit Obligation |
|
$ |
|
|
|
$ |
194,056 |
|
|
$ |
|
|
|
$ |
|
|
2. Accumulated Benefit Obligation /
Accumulated Postretirement Benefit Obligation |
|
|
|
|
|
|
171,610 |
|
|
|
25,282 |
|
|
|
|
|
3. Fair Value of Plan Assets |
|
|
|
|
|
|
258,536 |
|
|
|
30,190 |
|
|
|
|
|
147
The changes in the projected benefit obligation are as follows:
Change in Projected Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Supplemental |
|
Other Postretirement |
|
|
Executive Retirement Plans |
|
Benefits |
|
|
12/31/2008 |
|
12/31/2007 |
|
12/31/2008 |
|
12/31/2007 |
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
1. Benefit Obligation at Beginning of Year |
|
$ |
207,431 |
|
|
$ |
202,950 |
|
|
$ |
73,357 |
|
|
$ |
74,807 |
|
2. Company Service Cost |
|
|
8,677 |
|
|
|
10,047 |
|
|
|
3,886 |
|
|
|
3,377 |
|
3. Interest Cost |
|
|
13,950 |
|
|
|
12,225 |
|
|
|
4,966 |
|
|
|
3,875 |
|
4. Plan Participants Contributions |
|
|
|
|
|
|
|
|
|
|
539 |
|
|
|
495 |
|
5. Net Actuarial (Gain)/Loss due to Assumption Changes |
|
|
(7,725 |
) |
|
|
(14,922 |
) |
|
|
3,523 |
|
|
|
(4,644 |
) |
6. Net Actuarial (Gain)/Loss due to Plan Experience |
|
|
11,317 |
|
|
|
2,816 |
|
|
|
(49 |
) |
|
|
(3,074 |
) |
7. Benefit Payments from Fund |
|
|
(4,381 |
) |
|
|
(5,455 |
) |
|
|
(1,265 |
) |
|
|
|
|
8. Benefit Payments Directly by Company |
|
|
(230 |
) |
|
|
(230 |
) |
|
|
(496 |
) |
|
|
(1,479 |
) |
9. Plan Amendments |
|
|
|
|
|
|
|
|
|
|
(59,179 |
) |
|
|
|
|
10. Benefit Obligation at End of Year |
|
$ |
229,039 |
|
|
$ |
207,431 |
|
|
$ |
25,282 |
|
|
$ |
73,357 |
|
|
The changes in the fair value of the net assets available for plan benefits are as follows: |
|
Change in Plan Assets |
|
|
|
12/31/2008 |
|
12/31/2007 |
|
12/31/2008 |
|
12/31/2007 |
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
1. Fair Value of Plan Assets at Beginning of Year |
|
$ |
258,536 |
|
|
$ |
234,868 |
|
|
$ |
50,215 |
|
|
$ |
43,590 |
|
2. Company Contributions |
|
|
33,230 |
|
|
|
10,530 |
|
|
|
|
|
|
|
4,383 |
|
3. Plan Participants Contributions |
|
|
|
|
|
|
|
|
|
|
539 |
|
|
|
495 |
|
4. Benefit Payments from Fund |
|
|
(4,381 |
) |
|
|
(5,455 |
) |
|
|
(1,265 |
) |
|
|
|
|
5. Benefit Payments paid directly by Company |
|
|
(230 |
) |
|
|
(230 |
) |
|
|
(496 |
) |
|
|
(1,479 |
) |
6. Actual Return on Assets |
|
|
(80,426 |
) |
|
|
18,823 |
|
|
|
(18,760 |
) |
|
|
3,226 |
|
7. Adjustment |
|
|
|
|
|
|
|
|
|
|
(43 |
) |
|
|
|
|
8. Fair Value of Plan Assets at End of Year |
|
|
206,729 |
|
|
|
258,536 |
|
|
|
30,190 |
|
|
|
50,215 |
|
148
Change in Net Actuarial Loss/(Gain)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Supplemental |
|
Other Postretirement |
|
|
Executive Retirement Plans |
|
Benefits |
|
|
12/31/2008 |
|
12/31/2007 |
|
12/31/2008 |
|
12/31/2007 |
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
1. Net Actuarial Loss/(Gain) at end of prior year |
|
$ |
(1,211 |
) |
|
$ |
12,645 |
|
|
$ |
1,320 |
|
|
$ |
8,995 |
|
2. Amortization Credit/(Cost) For Year |
|
|
(510 |
) |
|
|
(552 |
) |
|
|
|
|
|
|
|
|
3. Liability Loss/(Gain) |
|
|
3,593 |
|
|
|
(12,106 |
) |
|
|
3,473 |
|
|
|
(7,718 |
) |
4. Asset Loss/(Gain) |
|
|
99,774 |
|
|
|
(1,198 |
) |
|
|
22,526 |
|
|
|
43 |
|
5. Net Actuarial Loss/(Gain) at year end |
|
$ |
101,646 |
|
|
$ |
(1,211 |
) |
|
$ |
27,319 |
|
|
$ |
1,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Accumulated Other Comprehensive Income (AOCI) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. AOCI in Prior Year |
|
$ |
2,247 |
|
|
$ |
16,667 |
|
|
$ |
2,737 |
|
|
$ |
10,696 |
|
2. Increase/(Decrease) in AOCI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a. Recognized during year Net Recognized Transition
Transition (Obligation)/Asset |
|
|
|
|
|
|
|
|
|
|
(283 |
) |
|
|
(283 |
) |
b. Recognized during year Prior Service (Cost)/Credit |
|
|
(683 |
) |
|
|
(564 |
) |
|
|
|
|
|
|
|
|
c. Recognized during year Net Actuarial (Losses)/Gains |
|
|
(510 |
) |
|
|
(552 |
) |
|
|
|
|
|
|
|
|
d. Occurring during year Prior Service Cost |
|
|
|
|
|
|
|
|
|
|
(59,179 |
) |
|
|
|
|
e. Occurring during year Net Actuarial Losses/(Gains) |
|
|
103,366 |
|
|
|
(13,304 |
) |
|
|
25,999 |
|
|
|
(7,676 |
) |
f. Increase (decrease) due to adoption of SFAS 158 |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
g. Other adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. AOCI in Current Year |
|
$ |
104,420 |
|
|
$ |
2,247 |
|
|
$ |
(30,726 |
) |
|
$ |
2,737 |
|
|
Amortizations Expected to be Recognized During Next Fiscal Year |
|
|
|
12/31/2008 |
|
12/31/2007 |
|
12/31/2008 |
|
12/31/2007 |
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
1. Amortization of Net Transition
Obligation/(Asset) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
283 |
|
2. Amortization of Prior Service Cost/(Credit) |
|
|
632 |
|
|
|
684 |
|
|
|
(6,509 |
) |
|
|
|
|
3. Amortization of Net Losses/(Gains) |
|
|
6,876 |
|
|
|
456 |
|
|
|
1,888 |
|
|
|
|
|
149
The projected benefit obligations, net periodic benefit costs and accumulated postretirement
benefit obligation for the plans were determined using the following weighted average
assumptions.
Actuarial Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Supplemental |
|
Other Postretirement |
|
|
Executive Retirement Plans |
|
Benefits |
|
|
12/31/2008 |
|
12/31/2007 |
|
12/31/2008 |
|
12/31/2007 |
Weighted-Average Assumptions Used to Determine |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Obligations at year end |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. Discount Rate |
|
|
6.50 |
% |
|
|
6.50 |
% |
|
|
6.50 |
% |
|
|
6.50 |
% |
2. Rate of Compensation Increase |
|
|
3.00 |
% |
|
|
4.50 |
% |
|
|
N/A |
|
|
|
N/A |
|
3. Social Security Increase |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
4. Pension Increases for Participants In-Payment Status |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Assumptions Used to Determine |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Cost for Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. Discount Rate |
|
|
6.50 |
% |
|
|
6.00 |
% |
|
|
6.50 |
% |
|
|
6.00 |
% |
2. Expected Long-term Return on Plan Assets |
|
|
7.50 |
% |
|
|
7.50 |
% |
|
|
7.50 |
% |
|
|
7.50 |
% |
3. Rate of Compensation Increase |
|
|
4.50 |
% |
|
|
4.50 |
% |
|
|
N/A |
|
|
|
N/A |
|
4. Social Security Increase |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
5. Pension Increases for Participants In-Payment Status |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
Assumed Health Care Cost Trend Rates at year end |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. Health Care Cost Trend Rate Assumed for Next Year |
|
|
N/A |
|
|
|
N/A |
|
|
|
8.00 |
% |
|
|
8.50 |
% |
2. Rate to Which the Cost Trend Rate is Assumed to Decline (Ultimate Trend Rate) |
|
|
N/A |
|
|
|
N/A |
|
|
|
5.00 |
% |
|
|
5.00 |
% |
3. Year That the Rate Reaches the Ultimate Trend Rate |
|
|
N/A |
|
|
|
N/A |
|
|
|
2015 |
|
|
|
2015 |
|
In selecting a discount rate, we performed a hypothetical cash flow bond matching exercise,
matching our 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,
we 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.
150
The weighted-average asset allocations of the plans are as follows:
Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement |
|
|
|
Pension Plan |
|
|
Benefits |
|
|
|
12/31/2008 |
|
|
12/31/2007 |
|
|
12/31/2008 |
|
|
12/31/2007 |
|
Allocation of Assets at year end |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. Equity Securities |
|
|
70 |
% |
|
|
77 |
% |
|
|
100 |
% |
|
|
100 |
% |
2. Debt Securities |
|
|
19 |
% |
|
|
20 |
% |
|
|
0 |
% |
|
|
0 |
% |
3. Real Estate |
|
|
2 |
% |
|
|
3 |
% |
|
|
0 |
% |
|
|
0 |
% |
4. Other |
|
|
9 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Allocation of Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. Equity Securities |
|
|
77 |
% |
|
|
80 |
% |
|
|
100 |
% |
|
|
100 |
% |
2. Debt Securities |
|
|
20 |
% |
|
|
17 |
% |
|
|
0 |
% |
|
|
0 |
% |
3. Real Estate |
|
|
3 |
% |
|
|
3 |
% |
|
|
0 |
% |
|
|
0 |
% |
4. Other |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Our 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 the Consumer Price Index |
|
|
|
|
Achieve competitive investment results |
|
|
|
|
Provide consistent investment returns |
|
|
|
|
Meet or exceed the actuarial return assumption |
The
primary focus in developing asset allocation ranges for the portfolio is the assessment of
the portfolios 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 was, as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
Minimum |
|
Maximum |
Fixed Income |
|
|
0 |
% |
|
|
30 |
% |
Equity |
|
|
70 |
% |
|
|
100 |
% |
Cash equivalents |
|
|
0 |
% |
|
|
10 |
% |
Investment in international oriented funds is limited to a maximum of 20% of the equity
range.
In
2009, we decided to substantially increase the allocation range for
fixed income securities.
Our 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 |
|
|
|
|
Achieve competitive investment results |
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
151
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 Income |
|
|
0 |
% |
|
|
10 |
% |
Equity |
|
|
90 |
% |
|
|
100 |
% |
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 18% of the portfolio.
152
The following tables show the actual and estimated future contributions and actual and
estimated future benefit payments.
Company Contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Supplemental |
|
Other Postretirement |
|
|
Executive Retirement Plans |
|
Benefits |
|
|
12/31/2008 |
|
12/31/2007 |
|
12/31/2008 |
|
12/31/2007 |
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
Company Contributions
for the Year Ending: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. Current - 1 |
|
$ |
10,530 |
|
|
$ |
10,036 |
|
|
$ |
4,383 |
|
|
$ |
4,379 |
|
2. Current |
|
|
33,230 |
|
|
|
10,530 |
|
|
|
|
|
|
|
4,383 |
|
3. Current + 1 |
|
|
10,000 |
|
|
|
9,262 |
|
|
|
|
|
|
|
3,000 |
|
|
Benefits Paid Directly by the Company |
|
|
|
12/31/2008 |
|
12/31/2007 |
|
12/31/2008 |
|
12/31/2007 |
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
Benefits Paid Directly
by the Company for the Year Ending: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. Current - 1 |
|
$ |
230 |
|
|
$ |
36 |
|
|
$ |
1,478 |
|
|
$ |
1,440 |
|
2. Current |
|
|
230 |
|
|
|
230 |
|
|
|
1,761 |
|
|
|
1,479 |
|
3. Current + 1 |
|
|
284 |
|
|
|
262 |
|
|
|
1,817 |
|
|
|
2,114 |
|
|
Plan Participants Contributions |
|
|
|
12/31/2008 |
|
12/31/2007 |
|
12/31/2008 |
|
12/31/2007 |
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
Plan Participants Contributions
for the Year Ending: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. Current - 1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
495 |
|
|
$ |
361 |
|
2. Current |
|
|
|
|
|
|
|
|
|
|
539 |
|
|
|
495 |
|
3. Current + 1 |
|
|
|
|
|
|
|
|
|
|
436 |
|
|
|
533 |
|
|
Benefit Payments (Total) |
|
|
|
12/31/2008 |
|
12/31/2007 |
|
12/31/2008 |
|
12/31/2007 |
|
|
(In thousands of dollars) |
Actual Benefit Payments
for the Year Ending: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. Current - 1 |
|
$ |
5,685 |
|
|
$ |
2,869 |
|
|
$ |
983 |
|
|
$ |
1,440 |
|
2. Current |
|
|
4,611 |
|
|
|
5,685 |
|
|
|
1,222 |
|
|
|
1,479 |
|
Expected Benefit Payments for
the Year Ending: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. Current + 1 |
|
|
6,169 |
|
|
|
4,761 |
|
|
|
1,380 |
|
|
|
1,581 |
|
4. Current + 2 |
|
|
7,256 |
|
|
|
5,530 |
|
|
|
1,608 |
|
|
|
1,851 |
|
5. Current + 3 |
|
|
8,444 |
|
|
|
6,603 |
|
|
|
1,920 |
|
|
|
2,167 |
|
6. Current + 4 |
|
|
9,655 |
|
|
|
7,567 |
|
|
|
2,140 |
|
|
|
2,548 |
|
7. Current + 5 |
|
|
10,895 |
|
|
|
8,892 |
|
|
|
2,224 |
|
|
|
2,890 |
|
8. Current + 6 - 10 |
|
|
75,028 |
|
|
|
66,628 |
|
|
|
14,354 |
|
|
|
20,177 |
|
153
The following other postretirement benefit payments, which reflect future service, are
expected to be paid in the following fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement |
|
|
Benefits |
|
|
Gross |
|
Medicare Part |
|
Net |
|
|
Benefits |
|
D Subsidy |
|
Benefits |
|
|
(In thousands of dollars) |
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
1,380 |
|
|
|
|
|
|
|
1,380 |
|
2010 |
|
|
1,608 |
|
|
|
|
|
|
|
1,608 |
|
2011 |
|
|
1,920 |
|
|
|
|
|
|
|
1,920 |
|
2012 |
|
|
2,140 |
|
|
|
|
|
|
|
2,140 |
|
2013 |
|
|
2,224 |
|
|
|
|
|
|
|
2,224 |
|
Years 2014 - 2018 |
|
|
14,354 |
|
|
|
|
|
|
|
14,354 |
|
Health care sensitivities
For measurement purposes, an 8.5% health care trend rate was used for pre-65 benefits for
2008. In 2009, the rate is assumed to be 8.0%, decreasing to 5.0% by 2015 and remaining at
this level beyond.
Assumed health care cost trend rates have a significant effect on the amounts reported for
the health care plan. 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 |
|
$ |
1,920 |
|
|
$ |
(1,500 |
) |
Effect on postretirement benefit obligation |
|
|
2,608 |
|
|
|
(2,295 |
) |
We have a profit sharing and 401(k) savings plan for employees. At the discretion of the
Board of Directors, we may make a profit sharing contribution of up to 5% of each
participants eligible compensation. We provide a matching 401(k) savings contribution on
employees before-tax contributions at a rate of 80% of the first $1,000 contributed and 40%
of the next $2,000 contributed. We recognized profit sharing expense and 401(k) savings
plan expense of $4.5 million, $2.7 million and $5.6 million in 2008, 2007 and 2006,
respectively.
154
12. Income taxes
Net deferred tax assets and liabilities as of December 31, 2008 and
2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands of dollars) |
|
Deferred tax assets |
|
$ |
396,024 |
|
|
$ |
681,858 |
|
Deferred tax liabilities |
|
|
(88,808 |
) |
|
|
(56,008 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
307,216 |
|
|
$ |
625,850 |
|
|
|
|
|
|
|
|
We
have deducted contingency reserves on our federal income tax returns
in prior periods and purchased tax and loss bonds, which we account
for as a payment of federal income tax.
These reserves can be released into taxable income in future years. Since the tax effect on
these reserves exceeds the gross deferred tax assets less deferred tax liabilities, we
believe that all gross deferred tax assets at December 31, 2008 are fully realizable and no
valuation reserve was established. In 2009, the remainder of these reserves will be released
and will no longer be available to support any net deferred tax assets. This would likely have a material impact on our results
from operations in future periods, as any credit for income taxes, relating to
future operating losses, will be reduced or eliminated by the valuation allowance.
The components of the net deferred tax asset as of December 31, 2008 and 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands of dollars) |
|
Unearned premium reserves |
|
$ |
32,769 |
|
|
$ |
25,951 |
|
Deferred policy acquisition costs |
|
|
(3,763 |
) |
|
|
(3,775 |
) |
Loss reserves |
|
|
69,875 |
|
|
|
54,399 |
|
Unrealized depreciation (appreciation) in investments |
|
|
27,521 |
|
|
|
(35,547 |
) |
Alternative minimum tax credit carryforward |
|
|
27,719 |
|
|
|
|
|
Mortgage investments |
|
|
17,765 |
|
|
|
31,391 |
|
Benefit plans |
|
|
8,606 |
|
|
|
(6,794 |
) |
Deferred compensation |
|
|
18,605 |
|
|
|
21,858 |
|
Investments in joint ventures |
|
|
(74,560 |
) |
|
|
114,522 |
|
Premium deficiency reserves |
|
|
159,018 |
|
|
|
423,794 |
|
Loss due to other than temporary impairments |
|
|
16,669 |
|
|
|
|
|
Other, net |
|
|
6,992 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
307,216 |
|
|
$ |
625,850 |
|
|
|
|
|
|
|
|
155
The following summarizes the components of the
(credit) provision for income tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands of dollars) |
|
Current |
|
$ |
(654,245 |
) |
|
$ |
(369,507 |
) |
|
$ |
133,998 |
|
Deferred |
|
|
254,409 |
|
|
|
(465,580 |
) |
|
|
(6,784 |
) |
Other |
|
|
5,507 |
|
|
|
1,110 |
|
|
|
2,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Credit) provision for income tax |
|
$ |
(394,329 |
) |
|
$ |
(833,977 |
) |
|
$ |
130,097 |
|
|
|
|
|
|
|
|
|
|
|
We (received) paid ($938.1) million, ($176.3) million and $227.3 million in federal income
tax in 2008, 2007 and 2006, respectively. At December 31, 2008, 2007 and 2006, we owned
$431.5 million, $1,319.6 million and $1,686.5 million, respectively, of tax and loss bonds.
The reconciliation of the federal statutory income tax
(credit) rate to the effective income
tax (credit) rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Federal
statutory income tax (credit) rate |
|
|
(35.0 |
)% |
|
|
(35.0 |
)% |
|
|
35.0 |
% |
Tax exempt municipal bond interest |
|
|
(7.5 |
) |
|
|
(2.6 |
) |
|
|
(10.7 |
) |
Other, net |
|
|
0.4 |
|
|
|
0.3 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax (credit) rate |
|
|
(42.1 |
)% |
|
|
(37.3 |
)% |
|
|
24.8 |
% |
|
|
|
|
|
|
|
|
|
|
On June 1, 2007, as a result of an examination by the Internal Revenue Service (IRS) for
taxable years 2000 through 2004, we received a Revenue Agent Report (RAR). The adjustments
reported on the RAR substantially increase taxable income for those tax years and resulted
in the issuance of an assessment for unpaid taxes totaling $189.5 million in taxes and
accuracy-related penalties, plus applicable interest. We have agreed with the IRS on certain
issues and paid $10.5 million in additional taxes and interest. The remaining open issue
relates to our treatment of the flow through income and loss from an investment in a
portfolio of residual interests of Real Estate Mortgage Investment Conduits (REMICS). The
IRS has indicated that it does not believe that, for various reasons, we have established
sufficient tax basis in the REMIC residual interests to deduct the losses from taxable
income. We disagree with this conclusion and believe that the flow through income and loss
from these investments was properly reported on our federal income tax returns in accordance
with applicable tax laws and regulations in effect during the periods involved and have
appealed these adjustments. The appeals process may take some time and a final resolution
may not be reached until a date many months or years into the future. On July 2, 2007, we
made a payment of $65.2 million with the United States Department of the Treasury to
156
eliminate the further accrual of interest. Although the resolution of this issue is
uncertain, we believe that sufficient provisions for income taxes have been made for
potential liabilities that may result. If the resolution of this matter differs materially
from our estimates, it could have a material impact on our effective tax rate, results of
operations and cash flows.
In February 2009, the Internal Revenue Service informed us that it plans to conduct an
examination of our federal income tax returns for 2005 through 2007. We believe that income
taxes related to these years have been properly provided for in the financial statements.
Effective January 1, 2007, we adopted FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes. The Interpretation seeks to reduce the significant diversity
in practice associated with recognition and measurement in the accounting for income taxes.
The interpretation applies 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 shall presume that the tax position will be examined by the relevant
taxing authority that has full knowledge of all relevant information. The interpretation
adopts a benefit recognition model with a two-step approach, a more-likely-than-not
threshold for recognition and derecognition, and a measurement attribute that is the
greatest amount of benefit that is cumulatively greater than 50% likely of being realized.
As a result of the adoption, we recognized a decrease of $85.5 million in the liability for
unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007
balance of retained earnings. A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
Unrecognized tax benefits |
|
|
|
(in millions of dollars) |
|
Balance at December 31, 2007 |
|
$ |
86.1 |
|
Additions based on tax positions related to the current year |
|
|
0.7 |
|
Additions for tax positions of prior years |
|
|
1.1 |
|
Reductions for tax positions of prior years |
|
|
|
|
Settlements |
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
87.9 |
|
|
|
|
|
The total amount of unrecognized tax benefits that would affect our effective tax rate is
$76.0 million and $74.8 million as of December 31, 2008 and 2007, respectively. We recognize
interest accrued and penalties related to unrecognized tax benefits in income taxes. During
2008, we recognized $1.1 million in interest. As of December 31, 2008 and 2007 we had $21.4
million and $20.3 million of accrued interest related to uncertain tax positions,
respectively. The statute of limitations related to the consolidated federal income tax
return is closed for all tax years prior to 2000.
157
The establishment of this liability requires estimates of potential outcomes of various
issues and requires significant judgment. Although the resolutions of these issues are
uncertain, we believe that sufficient provisions for income taxes have been made for
potential liabilities that may result. If the resolutions of these matters differ materially
from our estimates, it could have a material impact on our effective tax rate, results of
operations and cash flows.
13.
Shareholders equity, dividend restrictions and statutory capital
In
March 2008 we completed the public offering and sale of 42.9
million shares of our common
stock at a price of $11.25 per share. We received net proceeds of approximately $460
million, after deducting underwriting discount and offering expenses. Of the 42.9 million shares of common stock sold, 7.1 million were
newly issued shares and 35.8 million were common shares issued out of treasury. The cost of
the treasury shares issued exceeded the proceeds from the sale by approximately $1.6
billion, which resulted in a deficiency. The deficiency was charged to paid-in capital
related to previous treasury share transactions, and the remainder was charged to retained
earnings.
A portion of the net proceeds of the offering along with the net proceeds of the debentures
(See Note 7.) was used to increase the capital of MGIC, our principal insurance subsidiary,
in order to enable us to expand the volume of our new insurance
written and a portion is available for our general corporate purposes.
In June 2008 our shareholders approved an amendment to our Articles of Incorporation that
increased the number of authorized shares of common stock from
300 million to 460 million.
We have 28.9 million authorized shares reserved for conversion under
our convertible debentures. (See Note 7.)
Dividends
Our insurance subsidiaries are subject to statutory regulations as to maintenance of
policyholders surplus and payment of dividends. The maximum amount of dividends that the
insurance subsidiaries may pay in any twelve-month period without regulatory approval by the
Office of the Commissioner of Insurance of the State of Wisconsin (OCI) is the lesser of
adjusted statutory net income or 10% of statutory policyholders surplus as of the preceding
calendar year end. Adjusted statutory net income is defined for this purpose to be the
greater of statutory net income, net of realized investment gains, for the calendar year
preceding the date of the dividend or statutory net income, net of realized investment
gains, for the three calendar years preceding the date of the dividend less dividends paid
within the first two of the preceding three calendar years.
The credit facility, senior notes and convertible debentures, discussed in Notes 6 and 7,
are obligations of MGIC Investment Corporation and not of its subsidiaries. We are a holding
company and the payment of dividends from our insurance
subsidiaries, which historically has been the principal source of our holding
158
company cash
inflow, is restricted by insurance regulation. MGIC is the principal source of
dividend-paying capacity. During 2008, MGIC paid three quarterly dividends of $15 million
each to our holding company, which increased the cash resources of our holding company. As
has been the case for the past several years, as a result of extraordinary dividends paid,
MGIC cannot currently pay any dividends without regulatory approval. We do not anticipate
seeking approval in 2009 for any additional dividends from MGIC that would
increase our cash resources at the holding
company. Our other insurance subsidiaries can pay $3.6 million of dividends to us
without such regulatory approval.
Certain of our non-insurance subsidiaries also have requirements as to maintenance of net
worth.
In 2008, 2007 and 2006, we paid dividends of $8.2 million, $63.8 million and $85.5 million,
respectively, or $0.075 per share in 2008, $0.775 per share in 2007 and $1.00 per share in
2006. In the fourth quarter of 2008, we suspended the payment of dividends.
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. With
regulatory approval a mortgage guaranty insurance company may make early
withdrawals from the contingency reserve when incurred losses exceed 35%
of net premiums earned in a calendar year. 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. A premium
deficiency reserve that may be recorded on a GAAP basis when present
value of expected future losses and expenses exceeds the present value
of expected future premiums and already established loss reserves, may
not be recorded on a statutory basis if the present value of expected
future premiums and already established loss reserves and
statutory contingency reserves, exceeds the present value of expected
future losses and expenses.
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.
159
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, changes in deferred tax assets and
liabilities are recognized as a separate component of gains and losses
in statutory surplus. Under GAAP, changes in deferred tax assets and
liabilities are recorded on the statement of operations as a component
of the (credit) provision for income tax.
Under statutory accounting practices, fixed maturity investments are
generally valued at amortized cost. Under GAAP, those investments which
we do 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, our share of the net income or
loss of our investments in joint ventures is credited directly to
statutory surplus. Under GAAP, income from joint ventures is shown
separately, net of tax, on the statement of operations.
The statutory net income, surplus and the contingency reserve liability of the insurance
subsidiaries (excluding the non-insurance companies), as well as the surplus contributions
made to MGIC and other insurance subsidiaries and dividends paid by MGIC to us, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Net (loss) |
|
|
|
|
|
Contingency |
December 31, |
|
Income |
|
Surplus |
|
Reserve (1) |
|
|
(In thousands of dollars) |
2008 |
|
$ |
(172,196 |
) |
|
$ |
1,612,953 |
|
|
$ |
2,087,265 |
|
2007 |
|
$ |
467,928 |
|
|
$ |
1,352,455 |
|
|
$ |
3,465,428 |
|
2006 |
|
$ |
398,059 |
|
|
$ |
1,592,040 |
|
|
$ |
4,851,083 |
|
|
|
|
(1) |
|
Decreases in contingency reserves in 2007 and 2008 reflect early withdrawals for incurred
losses that exceeded 35% of net premiums earned in a calendar year, in accordance with insurance regulations. |
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surplus contributions |
|
|
|
|
Surplus contributions |
|
made to other insurance |
|
|
Year Ended |
|
made to MGIC |
|
subsidiaries |
|
Dividends paid by MGIC |
December 31, |
|
by the parent company |
|
by the parent company |
|
to the parent company |
|
|
|
|
|
|
(In thousands of dollars) |
|
|
|
|
2008 |
|
$ |
550,000 |
|
|
$ |
175,000 |
|
|
$ |
170,000 |
|
2007 |
|
|
|
|
|
|
35,000 |
|
|
|
320,000 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
570,001 |
|
Statutory capital
The mortgage insurance industry is experiencing material losses, especially on the 2006 and
2007 books. The ultimate amount of these losses will depend in part on general economic
conditions, including unemployment, and the direction of home prices in California, Florida
and other distressed markets, which in turn will be influenced by general economic
conditions and other factors. Because we cannot predict future home prices or general
economic conditions with confidence, there is significant uncertainty
surrounding what our ultimate
losses will be on our 2006 and 2007 books. Our current expectation, however, is that these
books will continue to generate material incurred and paid losses for a number of years. Our
view of potential losses on these books has trended upward since the first quarter of 2008,
including since the time at which we finalized our Quarterly Report on Form 10-Q for the
third quarter of 2008.
The Office of the Commissioner of Insurance of Wisconsin is MGICs principal insurance
regulator. To assess a mortgage guaranty insurers capital adequacy, Wisconsins insurance
regulations require that a mortgage guaranty insurance company maintain policyholders
position of not less than a minimum computed under a formula. Policyholders position is
the insurers net worth or surplus, contingency reserve and a portion of the reserves for
unearned premiums, with credit given for authorized reinsurance. The minimum required by the
formula (MPP) depends on the insurance in force and whether the loans insured are primary
insurance or pool insurance and further depends on the LTV ratio of the individual loans and
their coverage percentage (and in the case of pool insurance, the amount of any deductible).
If a mortgage guaranty insurer does not meet MPP it cannot write new business until its
policyholders position meets the minimum.
Some states that regulate us have provisions that limit the risk-to-capital ratio of a
mortgage guaranty insurance company to 25:1. This ratio is computed on a statutory basis for
our combined insurance operations and is our net risk in force divided by our policyholders
position. Policyholders position consists primarily of statutory policyholders surplus,
plus the statutory contingency reserve. The statutory contingency reserve is reported as a
liability on the statutory balance sheet. A mortgage insurance company is required to make
annual contributions to the contingency reserve of approximately 50% of net earned premiums.
These
contributions must generally be maintained for a period of ten years. However, with
regulatory approval a mortgage insurance company may make early
161
withdrawals from the contingency reserve when incurred losses exceed 35% of net earned
premium in a calendar year. If an insurance companys risk-to-capital ratio exceeds the
limit applicable in a state, it may be prohibited from writing new business in that state
until its risk-to-capital ratio falls below the limit.
In February 2009, we received clarification from the OCI regarding the methodology used in
calculating the excess of our policyholders position over the MPP. The clarification
effectively reduces the required MPP by our reserves established for delinquent loans,
beginning with our December 31, 2008 calculations. It is also our understanding that certain
states have clarified their calculation of risk-to-capital to reduce risk in force for
established loss reserves. We have used this methodology beginning with our December 31,
2008 calculations.
At December 31, 2008, MGIC exceeded MPP by more than $1.5 billion, and we exceeded MPP by
$1.6 billion on a combined basis. At December 31, 2008 MGICs risk-to-capital was 12.9:1 and
was 14.7:1 on a combined basis.
In
addition to the uncertainties that could result in increased losses,
there are other items that could favorably impact our future losses.
For example, our estimated loss reserves reflect loss mitigation from rescissions using only the rate at
which we have rescinded claims during recent periods, as discussed in Note 8. In light of
the number of claims investigations we are pursuing and our perception that books of
insurance we wrote before 2008 contain a significant number of loans involving fraud, we
expect our rescission rate during future periods to increase. The insured can dispute our
right to rescind coverage, and whether the requirements to rescind are met ultimately would
be determined by arbitration or judicial proceedings. Also, our estimated loss reserves do
not take account of the effect of potential benefits that might be realized from third party
and governmental loan modification programs.
Because the factors that will affect our future losses are subject to significant
uncertainty, there is significant uncertainty regarding the level of our future losses. However, if
recent loss trends continue MGICs policyholders position would decline and its
risk-to-capital would increase beyond the levels necessary to meet regulatory requirements.
Depending on the level of future losses, this could occur before the end of 2009.
An inability to write new business does not mean that we do not have sufficient resources to
pay claims. We believe we have more than adequate resources to pay claims on our insurance
in force, even in scenarios in which losses materially exceed those that would result in not
meeting MPP and risk-to-capital requirements. Our claims paying resources principally
consist of our investment portfolio, captive reinsurance trust funds and future premiums on
our insurance in force, net of premiums ceded to captive and other reinsurers.
We are considering options to obtain capital to write new business, which could occur through the
sale of equity or debt securities, from reinsurance and/or through the use of claims paying
resources that should not be needed to cover obligations on our existing insurance in force. While
we have not pursued raising capital from private sources, we initiated discussions with the US
Treasury late in October 2008 to seek a capital investment and/or reinsurance under the Troubled
Assets Relief Program (TARP). We understand there is intense competition for TARP and other
government assistance. We cannot predict whether we will be successful in obtaining capital from
any source but any sale of additional securities could dilute substantially the interest of
existing shareholders and other forms of capital relief could also result in additional costs.
Our
senior management believes that one of the capital generating options referred to above will be feasible or that
the uncertainties described above will develop in a manner such that we will be able to continue to write new
business through the end of 2009. We can, however, give no assurance in this regard, and higher
losses, adverse changes in our relationship with the GSEs, or reduced benefits from loss
mitigation, among other factors, could result in senior managements belief not being realized.
162
Share-based compensation plans
We have certain share-based compensation plans. 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 our
plans generally vest over periods ranging from one to five years.
The compensation cost that has been charged against income for the share-based plans was
$17.4 million, $19.3 million and $33.4 million for the years ended December 31, 2008, 2007
and 2006, respectively. The related income tax benefit recognized for the share-based
compensation plans was $6.1 million, $6.8 million and $11.7 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
We have stock incentive plans that were adopted in 1991 and 2002. When the 2002 plan was
adopted, 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. 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, restricted stock and restricted stock units are determined at the
time of grant. Newly issued shares are used for exercises under the 1991 plan and treasury
shares are used for exercises under the 2002 plan. Directors may receive awards under the
2002 plan and were eligible for awards of restricted stock under the 1991 plan.
163
A summary of option activity in the stock incentive plans during 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
Shares |
|
|
|
Exercise |
|
|
Subject |
|
|
|
Price |
|
|
to Option |
|
Outstanding, December 31, 2007 |
|
$ |
56.26 |
|
|
|
2,587,880 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
64.26 |
|
|
|
(73,730 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2008 |
|
$ |
56.03 |
|
|
|
2,514,150 |
|
|
|
|
|
|
|
|
There were no options granted in 2008, 2007 or 2006. For the years ended December 31, 2007
and 2006, the total intrinsic value of options exercised (i.e., the difference in the market
price at exercise and the price paid by the employee to exercise the option) was $0.7
million and $13.1 million, respectively. The total amount of value received from exercise
of options was $2.9 million and $24.5 million, and the related net tax benefit realized from
the exercise of those stock options was $0.3 million and $4.6 million for the years ended
December 31, 2007 and 2006, respectively. There were no options exercised in 2008.
164
The following is a summary of stock options outstanding at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
Weighted |
Exercise |
|
|
|
|
|
Remaining |
|
Average |
|
|
|
|
|
Remaining |
|
Average |
Price |
|
|
|
|
|
Average |
|
Exercise |
|
|
|
|
|
Average |
|
Exercise |
Range |
|
Shares |
|
Life (years) |
|
Price |
|
Shares |
|
Life (years) |
|
Price |
$35.75 - 47.31 |
|
|
1,062,100 |
|
|
|
1.9 |
|
|
$ |
44.80 |
|
|
|
747,370 |
|
|
|
2.3 |
|
|
$ |
44.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$53.70 - 68.20 |
|
|
1,452,050 |
|
|
|
3.5 |
|
|
$ |
64.24 |
|
|
|
1,341,400 |
|
|
|
3.4 |
|
|
$ |
63.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,514,150 |
|
|
|
2.8 |
|
|
$ |
56.03 |
|
|
|
2,088,770 |
|
|
|
3.0 |
|
|
$ |
56.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of options outstanding and options exercisable at December 31,
2008 was zero. The aggregate intrinsic value represents the total pre-tax intrinsic value
based on our closing stock price of $3.48 as of December 31, 2008 which would have been
received by the option holders had all option holders exercised their options on that date.
Because our closing stock price at December 31, 2008 was below all exercise prices, none of
the outstanding options had any intrinsic value.
A summary of restricted stock or restricted stock units during 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date |
|
|
|
|
|
|
Fair Market |
|
|
|
|
|
|
Value |
|
|
Shares |
|
Restricted stock outstanding at December 31, 2007 |
|
$ |
62.74 |
|
|
|
1,415,970 |
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
15.38 |
|
|
|
1,258,315 |
|
Vested |
|
|
63.40 |
|
|
|
(204,102 |
) |
Forfeited |
|
|
51.69 |
|
|
|
(99,253 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock outstanding at December 31, 2008 |
|
$ |
37.89 |
|
|
|
2,370,930 |
|
|
|
|
|
|
|
|
At December 31, 2008, the 2.4 million shares of restricted stock outstanding consisted of
1.4 million shares that are subject to performance conditions (performance shares) and 1.0
million shares that are subject only to service conditions (time vested shares). The
weighted-average grant date fair value of restricted stock granted during 2007 and 2006 was
$62.17 and $64.67, respectively. The fair value of restricted stock granted is the closing
price of the common stock on the New York Stock Exchange on the date of grant. At December
31, 2008,
165
3,004,229 shares were available for future grant under the 2002 stock incentive plan.
Of the shares available for future grant, 2,905,609 are available for restricted stock
awards. The total fair value of restricted stock vested during 2008, 2007 and 2006 was $3.3
million, $20.7 million and $17.4 million, respectively.
As of December 31, 2008, there was $49.0 million of total unrecognized compensation cost
related to nonvested share-based compensation agreements granted under the Plan. Of this
total, $33.8 million of unrecognized compensation costs relate to performance shares and
$15.2 million relates to time vested shares. The unrecognized costs associated with the
performance shares may or may not be recognized in future periods, depending upon whether or
not the performance conditions are met. The cost associated with the time vested shares is
expected to be recognized over a weighted-average period of 1.4 years.
Under terms of our Shareholder Rights Agreement each outstanding share of our 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 our 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 our 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 our shares of Common Stock (or if after the Shares
Acquisition Date, we are 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.
14. Leases
We lease certain office space as well as data processing equipment and
autos under operating leases that expire during the next six years.
Generally, rental payments are fixed.
Total rental expense under operating leases was $8.1 million, $7.7
million and $6.9 million in 2008, 2007 and 2006, respectively.
At December 31, 2008, minimum future operating lease payments are as follows (in thousands
of dollars):
|
|
|
|
|
2009 |
|
$ |
6,054 |
|
2010 |
|
|
4,830 |
|
2011 |
|
|
2,277 |
|
2012 |
|
|
1,448 |
|
2013 and thereafter |
|
|
1,054 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
15,663 |
|
|
|
|
|
15. Litigation and contingencies
We are involved in litigation in the ordinary course of business. In our opinion, the
ultimate resolution of this pending litigation will not have a material adverse effect on
our financial position or results of operations.
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
166
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. Since December 2006, class action litigation was
separately brought against a number of large lenders alleging that their captive mortgage
reinsurance arrangements violated RESPA. While we are not a defendant in any of these cases,
there can be no assurance that we 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
us.
In June 2005, in response to a letter from the New York Insurance Department, we provided
information regarding captive mortgage reinsurance arrangements and other types of
arrangements in which lenders receive compensation. In February 2006, the New York Insurance
Department requested MGIC to review its premium rates in New York and to file adjusted rates
based on recent years experience or to explain why such experience would not alter rates.
In March 2006, MGIC advised the New York Insurance Department that it believes its premium
rates are reasonable and that, given the nature of mortgage insurance risk, premium rates
should not be determined only by the experience of recent years. In February 2006, in
response to an administrative subpoena from the Minnesota Department of Commerce, which
regulates insurance, we provided the Department with information about captive mortgage
reinsurance and certain other matters. We subsequently provided additional information to
the Minnesota Department of Commerce, and beginning in March 2008 that Department has sought
additional information as well as answers to questions regarding captive mortgage
reinsurance on several occasions. In June 2008, we received a subpoena from the Department
of Housing and Urban Development, commonly referred to as HUD, seeking information about
captive mortgage reinsurance similar to that requested by the Minnesota Department of
Commerce, but not limited in scope to the state of Minnesota. Other insurance departments or
other officials, including attorneys general, may also seek information about or investigate
captive mortgage reinsurance.
The anti-referral fee provisions of RESPA provide that the Department of Housing and Urban
Development 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 prohibit paying for the referral of insurance business and provide various
mechanisms to enforce this prohibition. While we believe our 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 us or the mortgage insurance industry.
In October 2007, the Division of Enforcement of the Securities and Exchange Commission
requested that we voluntarily furnish documents and information primarily relating to
C-BASS, the now-terminated merger with Radian and the subprime mortgage assets in the
Companys various lines of business. We are in the process of providing responsive
documents and information to the Securities and Exchange Commission. As part of its initial
information request, the SEC staff
167
informed us that this investigation should not be construed as an indication by the SEC or
its staff that any violation of the securities laws has occurred, or as a reflection upon
any person, entity or security.
In 2008, complaints in five separate purported
stockholder class action lawsuits were filed against us, several of our officers and an
officer of C-BASS. The allegations in the complaints are generally that through these
individuals we violated the federal securities laws by failing to disclose or
misrepresenting C-BASSs liquidity, the impairment of our investment in C-BASS, the
inadequacy of our loss reserves and that we were not adequately capitalized. The collective
time period covered by these lawsuits begins on October 12, 2006 and ends on February 12,
2008. The complaints seek damages based on purchases of our stock during this time period at
prices that were allegedly inflated as a result of the purported misstatements and
omissions. With limited exceptions, our bylaws provide that our officers are entitled to
indemnification from us for claims against them of the type alleged in the complaints. We
believe, among other things, that the allegations in the complaints are not sufficient to
prevent their dismissal and intend to defend against them vigorously. However, we are
unable to predict the outcome of these cases or estimate our associated expenses or possible
losses.
Other lawsuits alleging violations of the securities laws could be brought against us. In
December 2008, a holder of a class of certificates in a publicly offered securitization for
which C-BASS was the sponsor brought a purported class action under the federal securities
laws against C-BASS; the issuer of such securitization, which was an affiliate of a major
Wall Street underwriter; and the underwriters alleging material misstatements in the
offering documents. The complaint describes C-BASS as a venture of MGIC, Radian Group and
the management of C-BASS and refers to Doe defendants who are unknown to the plaintiff but
who the complaint says are legally responsible for the events described in the complaint.
Two law firms have issued press releases to the effect that they are investigating whether
the fiduciaries of our 401(k) plan breached their fiduciary duties regarding the plans
investment in or holding of our common stock. With limited exceptions, our bylaws provide
that the plan fiduciaries are entitled to indemnification from us for claims against them.
We intend to defend vigorously any proceedings that may result from these investigations.
Under our contract underwriting agreements, we may be required to provide certain remedies
to our customers if certain standards relating to the quality of our underwriting work are
not met. The cost of remedies provided by us to customers for failing to meet these
standards has not been material to our financial position or results of operations for the
years ended December 31, 2008, 2007 and 2006.
See
Note 12 for a description of federal income tax contingencies.
168
16. Unaudited quarterly financial data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
2008 |
2008 |
|
First |
|
Second |
|
Third |
|
Fourth |
|
Year |
|
|
(In thousands of dollars, except per share data) |
Net premiums written |
|
$ |
368,454 |
|
|
$ |
371,797 |
|
|
$ |
365,042 |
|
|
$ |
360,754 |
|
|
$ |
1,466,047 |
|
Net premiums earned |
|
|
345,488 |
|
|
|
350,292 |
|
|
|
342,312 |
|
|
|
355,088 |
|
|
|
1,393,180 |
|
Investment income, net of expenses |
|
|
72,482 |
|
|
|
76,982 |
|
|
|
78,612 |
|
|
|
80,441 |
|
|
|
308,517 |
|
Losses incurred, net (a) |
|
|
691,648 |
|
|
|
688,143 |
|
|
|
788,272 |
|
|
|
903,438 |
|
|
|
3,071,501 |
|
Change in premium deficiency reserves |
|
|
(263,781 |
) |
|
|
(158,898 |
) |
|
|
(204,240 |
) |
|
|
(129,586 |
) |
|
|
(756,505 |
) |
Underwriting and other expenses |
|
|
76,986 |
|
|
|
68,236 |
|
|
|
62,424 |
|
|
|
63,668 |
|
|
|
271,314 |
|
Net loss |
|
|
(34,394 |
) |
|
|
(97,899 |
) |
|
|
(113,274 |
) |
|
|
(273,347 |
) |
|
|
(518,914 |
) |
Loss per share (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
(0.41 |
) |
|
|
(0.79 |
) |
|
|
(0.91 |
) |
|
|
(2.21 |
) |
|
|
(4.55 |
) |
Diluted |
|
|
(0.41 |
) |
|
|
(0.79 |
) |
|
|
(0.91 |
) |
|
|
(2.21 |
) |
|
|
(4.55 |
) |
|
|
|
(a) Our
view of potential losses on the 2006 and 2007 books of business has
trended upward since the first quarter of 2008. |
|
|
|
Quarter |
|
2007 |
2007 |
|
First |
|
Second |
|
Third(b) |
|
Fourth(c)(d) |
|
Year |
|
|
(In thousands of dollars, except per share data) |
|
Net premiums written |
|
$ |
304,034 |
|
|
$ |
320,988 |
|
|
$ |
340,244 |
|
|
$ |
380,528 |
|
|
$ |
1,345,794 |
|
Net premiums earned |
|
|
299,021 |
|
|
|
306,451 |
|
|
|
320,966 |
|
|
|
335,952 |
|
|
|
1,262,390 |
|
Investment income, net of expenses |
|
|
62,970 |
|
|
|
61,927 |
|
|
|
64,777 |
|
|
|
70,154 |
|
|
|
259,828 |
|
Losses incurred, net |
|
|
181,758 |
|
|
|
235,226 |
|
|
|
602,274 |
|
|
|
1,346,165 |
|
|
|
2,365,423 |
|
Change in premium deficiency reserves |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,210,841 |
|
|
|
1,210,841 |
|
Underwriting and other expenses |
|
|
75,072 |
|
|
|
75,330 |
|
|
|
86,325 |
|
|
|
72,883 |
|
|
|
309,610 |
|
Net income (loss) |
|
|
92,363 |
|
|
|
76,715 |
|
|
|
(372,469 |
) |
|
|
(1,466,627 |
) |
|
|
(1,670,018 |
) |
Earnings (loss) per share (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
1.13 |
|
|
|
0.94 |
|
|
|
(4.61 |
) |
|
|
(18.17 |
) |
|
|
(20.54 |
) |
Diluted |
|
|
1.12 |
|
|
|
0.93 |
|
|
|
(4.61 |
) |
|
|
(18.17 |
) |
|
|
(20.54 |
) |
|
|
|
(a) |
|
Due to the use of weighted average shares outstanding when calculating earnings
per share, the sum of the quarterly per share data may not equal the per share data for
the year. |
|
(b) |
|
The third quarter results included a net-of-tax impairment charge of $303
million related to our investment in C-BASS. (See Note 10.) |
|
(c) |
|
The fourth quarter results included the establishment of premium deficiency
reserves related to our Wall Street bulk business. (See Notes 1 and 8.) |
|
(d) |
|
The fourth quarter results reflect the significant deterioration in the
performance of loans insured experienced during that quarter, as reported under losses
incurred. |
169
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
MGIC Investment Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations, shareholders equity and of cash flows present fairly, in all material
respects, the financial position of MGIC Investment Corporation and its subsidiaries (the
Company) at December 31, 2008 and 2007, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2008 in conformity with accounting
principles generally accepted in the United States of America. In addition, in our opinion, the
financial statement schedules listed in the index appearing under Item 15(a)(2), present
fairly, in all material respects, the information set forth therein when read in conjunction with
the related consolidated financial statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is
responsible for these financial statements and financial statement schedules, for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Managements Report on
Internal Control over Financial Reporting. Our responsibility is to express opinions on these
financial statements, on the financial statement schedules, and on the Companys internal control
over financial reporting based on our integrated audits. We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective internal control
over financial reporting was maintained in all material respects. Our audits of the financial
statements included 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. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide 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.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
February 27, 2009
170
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
Our management, with the participation of our principal executive officer and principal
financial officer, has evaluated our 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. Based on such evaluation, our 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
Our management is responsible for establishing and maintaining adequate internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f)). Our 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.
Our management, with the participation of our principal executive officer and principal
financial officer, has evaluated the effectiveness of our internal control over financial reporting
using the framework in Internal Control Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on such evaluation, our management concluded that
our internal control over financial reporting was effective as of December 31, 2008.
The effectiveness of our internal control over financial reporting, as of December 31,
2008, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting
firm, as stated in their report which appears herein.
Changes in Internal Control during the Fourth Quarter
There was no change in our internal control over financial reporting that occurred during
the fourth quarter of 2008 that materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
Item 9B. Other Information.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
This information (other than on the executive officers) will be included in our Proxy
Statement for the 2009 Annual Meeting of Shareholders, and is hereby incorporated by reference. The
information on the
171
executive officers appears at the end of Part I of this Form 10-K.
We intend to disclose on our website any waivers and amendments to our 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 our Proxy Statement for the 2009 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 our Proxy Statement for the 2009 Annual Meeting of Shareholders, and is hereby
incorporated by reference.
The table below sets forth certain information, as of December 31, 2008, about options
outstanding under our 1991 Stock Incentive Plan (the 1991 Plan) and our 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 with us. We have no
compensation plan under which our 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 |
|
|
2,514,150 |
|
|
$ |
56.03 |
|
|
|
3,004,229* |
|
|
Equity compensation plans not approved by security
holders |
|
|
|
|
|
|
- 0 - |
|
|
|
- 0 - |
|
|
Total |
|
|
2,514,150 |
|
|
$ |
56.03 |
|
|
|
3,004,229* |
|
|
|
|
|
* |
|
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 2,905,609 shares remained available at December
31, 2008. |
Item 13. Certain Relationships and Related Transactions.
To the extent applicable, this information will be included in our Proxy Statement for
the 2009 Annual Meeting of Shareholders, and is hereby incorporated by reference.
Item 14. Principal Accountant Fees and Services.
This information will be included in our Proxy Statement for the 2009 Annual Meeting of
Shareholders, and is hereby incorporated by reference.
172
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a)
|
1. |
|
Financial statements. The following financial statements are filed in Item 8 of this
annual report: |
Consolidated statements of operations for each of the three years in the period
ended December 31, 2008
Consolidated balance sheets at December 31, 2008 and 2007
Consolidated statements of shareholders equity for each of the three years in
the period ended December 31, 2008
Consolidated statements of cash flows for each of the three years in the period
ended December 31, 2008
Notes to consolidated financial statements
Report of independent registered public accounting firm
|
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, 2008:
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.
|
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. |
173
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 2, 2009.
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/ 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
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 |
|
|
|
|
|
/s/ Donald T. Nicolaisen
Donald T. Nicolaisen, Director |
|
|
MGIC INVESTMENT CORPORATION
SCHEDULE I SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
168,917 |
|
|
$ |
189,809 |
|
|
$ |
189,809 |
|
States, municipalities and political subdivisions |
|
|
6,401,903 |
|
|
|
6,305,940 |
|
|
|
6,305,940 |
|
Foreign governments |
|
|
83,448 |
|
|
|
89,651 |
|
|
|
89,651 |
|
Public utilities |
|
|
|
|
|
|
|
|
|
|
|
|
All other corporate bonds |
|
|
466,422 |
|
|
|
457,503 |
|
|
|
457,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
7,120,690 |
|
|
|
7,042,903 |
|
|
|
7,042,903 |
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks: |
|
|
|
|
|
|
|
|
|
|
|
|
Industrial, miscellaneous and all other |
|
|
2,778 |
|
|
|
2,633 |
|
|
|
2,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
|
2,778 |
|
|
|
2,633 |
|
|
|
2,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
7,123,468 |
|
|
$ |
7,045,536 |
|
|
$ |
7,045,536 |
|
|
|
|
|
|
|
|
|
|
|
MGIC INVESTMENT CORPORATION
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
PARENT COMPANY ONLY
December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands of dollars) |
|
ASSETS |
|
|
|
|
|
|
|
|
Fixed maturities (amortized cost, 2008-$1,032; 2007-$262,445) |
|
$ |
1,032 |
|
|
$ |
262,871 |
|
Cash and cash equivalents |
|
|
393,851 |
|
|
|
26,266 |
|
Investment in subsidiaries, at equity in net assets |
|
|
3,038,012 |
|
|
|
3,085,810 |
|
Accounts receivable affiliates |
|
|
1,303 |
|
|
|
1,799 |
|
Income taxes receivable affiliates |
|
|
9,082 |
|
|
|
10,845 |
|
Accrued investment income |
|
|
403 |
|
|
|
963 |
|
Other assets |
|
|
13,676 |
|
|
|
12,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,457,359 |
|
|
$ |
3,400,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Short and long-term debt |
|
$ |
698,446 |
|
|
$ |
798,211 |
|
Convertible debentures |
|
|
375,593 |
|
|
|
|
|
Other liabilities |
|
|
16,120 |
|
|
|
8,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,090,159 |
|
|
|
806,448 |
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
Common stock, $1 par value, shares authorized
460,000,000; shares issued 2008 - 130,118,744;
2007 - 123,067,426; outstanding 2008 -
125,068,350 ; 2007 - 81,793,185 |
|
|
130,119 |
|
|
|
123,067 |
|
Paid-in capital |
|
|
367,067 |
|
|
|
316,649 |
|
Treasury stock (shares at cost, 2008 - 5,050,394;
2007 - 41,274,241) |
|
|
(276,873 |
) |
|
|
(2,266,364 |
) |
Accumulated other comprehensive income, net of tax |
|
|
(106,789 |
) |
|
|
70,675 |
|
Retained earnings |
|
|
2,253,676 |
|
|
|
4,350,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
2,367,200 |
|
|
|
2,594,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
3,457,359 |
|
|
$ |
3,400,791 |
|
|
|
|
|
|
|
|
See
accompanying supplementary notes to Parent Company condensed
financial statements
MGIC INVESTMENT CORPORATION
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
PARENT COMPANY ONLY
For the Years Ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands of dollars) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net (loss) income of subsidiaries |
|
$ |
(617,813 |
) |
|
$ |
(1,967,700 |
) |
|
$ |
18,850 |
|
Dividends received from subsidiaries |
|
|
170,000 |
|
|
|
320,000 |
|
|
|
570,001 |
|
Investment income, net of expenses |
|
|
10,136 |
|
|
|
7,596 |
|
|
|
2,521 |
|
Realized investment gains, net |
|
|
113 |
|
|
|
|
|
|
|
|
|
Other income |
|
|
1,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (losses) revenues |
|
|
(435,824 |
) |
|
|
(1,640,104 |
) |
|
|
591,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
515 |
|
|
|
300 |
|
|
|
268 |
|
Interest expense |
|
|
71,164 |
|
|
|
41,986 |
|
|
|
39,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
71,679 |
|
|
|
42,286 |
|
|
|
39,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before tax |
|
|
(507,503 |
) |
|
|
(1,682,390 |
) |
|
|
551,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (credit) for income tax |
|
|
11,411 |
|
|
|
(12,372 |
) |
|
|
(12,983 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
(518,914 |
) |
|
|
(1,670,018 |
) |
|
|
564,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income, net |
|
|
(177,464 |
) |
|
|
4,886 |
|
|
|
(11,710 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
$ |
(696,378 |
) |
|
$ |
(1,665,132 |
) |
|
$ |
553,029 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying supplementary notes to Parent Company condensed financial statements.
MGIC INVESTMENT CORPORATION
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
PARENT COMPANY ONLY
For the Years Ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands of dollars) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(518,914 |
) |
|
$ |
(1,670,018 |
) |
|
$ |
564,739 |
|
Adjustments to reconcile net (loss) income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net loss (income) of subsidiaries |
|
|
617,813 |
|
|
|
1,967,700 |
|
|
|
(18,850 |
) |
Decrease (increase) in accounts receivable affiliates |
|
|
496 |
|
|
|
59 |
|
|
|
(907 |
) |
Decrease (increase) in income taxes receivable |
|
|
1,763 |
|
|
|
(4,504 |
) |
|
|
994 |
|
Decrease (increase) in accrued investment income |
|
|
560 |
|
|
|
(450 |
) |
|
|
(493 |
) |
(Increase) decrease in other assets |
|
|
(1,439 |
) |
|
|
620 |
|
|
|
(562 |
) |
Increase (decrease) in other liabilities |
|
|
7,883 |
|
|
|
(1,138 |
) |
|
|
299 |
|
Other |
|
|
14,612 |
|
|
|
17,779 |
|
|
|
31,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
122,774 |
|
|
|
310,048 |
|
|
|
576,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Transactions with subsidiaries |
|
|
(745,784 |
) |
|
|
(87,500 |
) |
|
|
(27,500 |
) |
Purchase of fixed maturities |
|
|
(37,200 |
) |
|
|
(274,177 |
) |
|
|
(25,000 |
) |
Sale of fixed maturities |
|
|
299,038 |
|
|
|
38,703 |
|
|
|
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(483,946 |
) |
|
|
(322,974 |
) |
|
|
(52,304 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid to shareholders |
|
|
(8,159 |
) |
|
|
(63,819 |
) |
|
|
(85,495 |
) |
Proceeds from note payable |
|
|
|
|
|
|
300,000 |
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
|
|
|
|
|
|
|
|
|
199,958 |
|
Repayment of long-term debt |
|
|
(100,000 |
) |
|
|
(200,000 |
) |
|
|
|
|
Repayment of short-term debt |
|
|
|
|
|
|
(87,110 |
) |
|
|
(110,908 |
) |
Net proceeds from convertible debentures |
|
|
377,199 |
|
|
|
|
|
|
|
|
|
Proceeds from reissuance of treasury stock |
|
|
383,959 |
|
|
|
1,484 |
|
|
|
1,677 |
|
Payments for repurchase of common stock |
|
|
|
|
|
|
(75,659 |
) |
|
|
(385,629 |
) |
Common stock shares issued |
|
|
75,758 |
|
|
|
2,098 |
|
|
|
18,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
728,757 |
|
|
|
(123,006 |
) |
|
|
(362,297 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
367,585 |
|
|
|
(135,932 |
) |
|
|
161,987 |
|
Cash and cash equivalents at beginning of year |
|
|
26,266 |
|
|
|
162,198 |
|
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
393,851 |
|
|
$ |
26,266 |
|
|
$ |
162,198 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying supplementary notes to Parent Company condensed financial statements.
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.
Note B
Our insurance subsidiaries are subject to statutory regulations as to maintenance of
policyholders surplus and payment of dividends. The maximum amount of dividends that our 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. Our other insurance subsidiaries can pay $3.6 million of dividends without such
regulatory approval.
In
2008, 2007 and 2006, we paid dividends of $8.2 million, $63.8 million and
$85.5 million, respectively, or $0.075 per share in 2008, $0.775 per share in 2007 and $1.00 per
share in 2006. In the fourth quarter of 2008, we suspended the payment of dividends.
MGIC INVESTMENT CORPORATION
SCHEDULE IV REINSURANCE
MORTGAGE INSURANCE PREMIUMS EARNED
Years Ended December 31, 2008, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed |
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
|
Ceded to |
|
|
From |
|
|
|
|
|
|
of Amount |
|
|
|
Gross |
|
|
Other |
|
|
Other |
|
|
Net |
|
|
Assumed to |
|
|
|
Amount |
|
|
Companies |
|
|
Companies |
|
|
Amount |
|
|
Net |
|
|
|
(In thousands of dollars) |
|
2008 |
|
$ |
1,601,610 |
|
|
$ |
212,018 |
|
|
$ |
3,588 |
|
|
$ |
1,393,180 |
|
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
$ |
1,430,964 |
|
|
$ |
171,794 |
|
|
$ |
3,220 |
|
|
$ |
1,262,390 |
|
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
$ |
1,327,270 |
|
|
$ |
141,910 |
|
|
$ |
2,049 |
|
|
$ |
1,187,409 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INDEX TO EXHIBITS
[Item 15(a)3]
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
|
|
2.1
|
|
Securities Purchase Agreement, dated as of September 14, 2007, by and among, Mortgage Guaranty
Insurance Corporation, Radian Guaranty Inc. and Sherman Capital LLC(1) |
|
|
|
2.2
|
|
Securities Repurchase Agreement, between Sherman Financial Group LLC and Mortgage Guaranty Insurance
Corporation, dated as of August 13, 2008.(2) |
|
|
|
2.3
|
|
Credit Agreement, between Sherman Financial Group LLC and Mortgage Guaranty Insurance Corporation,
dated as of August 13, 2008.(3) |
|
|
|
3.1
|
|
Articles of Incorporation, as amended.(4) |
|
|
|
3.2
|
|
Amended and Restated Bylaws(5) |
|
|
|
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(6) |
|
|
|
4.3.1
|
|
First Amendment to Rights Agreement, dated as of October 28, 2002, between MGIC Investment Corporation
and U.S. Bank National Association(7) |
|
|
|
4.3.2
|
|
Second Amendment to Rights Agreement, dated as of October 28, 2002, between MGIC Investment
Corporation and Wells Fargo Bank Minnesota, National Association (as successor Rights Agent to U.S.
Bank National Association)(8) |
|
|
|
4.3.3
|
|
Third Amendment to Rights Agreement, dated as of May 14, 2004, between MGIC Investment Corporation and
Wells Fargo Bank Minnesota, National Association(9) |
|
|
|
4.4
|
|
Indenture, dated as of October 15, 2000, between the MGIC Investment Corporation and Bank One Trust
Company, National Association, as Trustee(10) |
|
|
|
4.5
|
|
Five-Year Credit Agreement, dated as of March 31, 2005, between MGIC Investment Corporation and the
lenders named therein(11) |
|
|
|
4.5.1
|
|
Amendment No. 1 to Five-Year Credit Agreement, dated as of March 14, 2008, between MGIC Investment
Corporation and the lenders named therein.(12) |
|
|
|
4.5.2
|
|
Amendment No. 2 to Five-Year Credit Agreement, dated as of June 23, 2008, between MGIC Investment
Corporation and the lenders named therein.(13) |
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
|
|
4.6
|
|
Indenture, dated as of March 28, 2008 between U.S. Bank National Association, as trustee, and MGIC
Investment Corporation.(14) |
|
|
|
|
|
[We are a party to various other agreements with respect to our long-term debt. These agreements are
not being filed pursuant to Reg. S-K Item 602(b) (4) (iii) (A). We hereby agree 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(15) |
|
|
|
10.1.1
|
|
Form of Incorporated Terms to Stock Option Agreement under 2002 Stock Incentive Plan(16) |
|
|
|
10.2
|
|
Form of Restricted Stock Agreement under 2002 Stock Incentive Plan(17) |
|
|
|
10.2.1
|
|
Form of Incorporated Terms to Restricted Stock Agreement under 2002 Stock Incentive Plan(18) |
|
|
|
10.2.2
|
|
Form of Restricted Stock and Restricted Stock Unit Agreement under 2002 Stock Incentive
Plan(19) |
|
|
|
10.2.3
|
|
Form of Incorporated Terms to Restricted Stock and Restricted Stock Unit Agreement under 2002 Stock
Incentive Plan(20) |
|
|
|
10.2.4
|
|
Form of Restricted Stock and Restricted Stock Unit Agreement under 2002 Stock Incentive
Plan(21) |
|
|
|
10.2.5
|
|
Form of Incorporated Terms to Restricted Stock and Restricted Stock Unit Agreement under 2002 Stock
Incentive Plan(22) |
|
|
|
10.2.6
|
|
Form of Restricted Stock and Restricted Stock Unit Agreement (for Directors)(23) |
|
|
|
10.2.7
|
|
Form of Incorporated Terms to Restricted Stock and Restricted Stock Unit Agreement(24) |
|
|
|
10.2.8
|
|
Form of Restricted Stock and Restricted Stock Unit Agreement under 2002 Stock Incentive Plan (Adopted
February 2008).(25) |
|
|
|
10.2.9
|
|
Form of Incorporated Terms to Restricted Stock and Restricted Stock Unit Agreement under 2002 Stock
Incentive Plan (Adopted February 2008).(26) |
|
|
|
10.2.10
|
|
Form of Restricted Stock and Restricted Stock Unit Agreement under 2002 Stock Incentive Plan (for
Directors) (Adopted April 2008).(27) |
|
|
|
10.2.11
|
|
Form of Incorporated Terms to Restricted Stock and Restricted Stock Unit Agreement under 2002 Stock
Incentive Plan (for Directors) (Adopted April 2008).(28) |
|
|
|
10.2.12
|
|
Amendment to Restricted Stock and Restricted Stock Unit Agreement, dated as of December 8, 2008,
between MGIC Investment Corporation and Curt S. Culver |
|
|
|
10.2.13
|
|
Form of Amendment to Certain Restricted Stock and Restricted Stock Unit Agreements, dated as of
December 2, 2008, between MGIC Investment Corporation and Certain of its Officers |
|
|
|
10.2.14
|
|
Form of Amendment to Certain Restricted Stock and Restricted Stock Unit Agreements, dated as of
December 2, 2008, between MGIC Investment Corporation and its Directors |
|
|
|
10.2.15
|
|
Form of Restricted Stock and Restricted Stock Unit Agreement under
2002 Stock Incentive Plan (Adopted January 2009). |
|
|
|
10.2.16
|
|
Form of Incorporated Terms to Restricted Stock and Restricted
Stock Unit Agreement under 2002 Stock Incentive Plan (Adopted
January 2009). |
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
|
|
10.3
|
|
MGIC Investment Corporation 1991 Stock Incentive Plan(29) |
|
|
|
10.3.1
|
|
MGIC Investment Corporation 2002 Stock Incentive Plan, as amended(30) |
|
|
|
10.4
|
|
Two Forms of Stock Option Agreement under 1991 Stock Incentive Plan.(31) |
|
|
|
10.4.1
|
|
Form of Stock Option Agreement under 1991 Stock Incentive Plan(32) |
|
|
|
10.4.2
|
|
Form of Incorporated Terms to Stock Option Agreement under 1991 Stock Incentive Plan(33) |
|
|
|
10.5
|
|
Two Forms of Restricted Stock Award Agreement under 1991 Stock Incentive Plan(34) |
|
|
|
10.5.1
|
|
Form of Restricted Stock Agreement under 1991 Stock Incentive Plan(35) |
|
|
|
10.5.2
|
|
Form of Incorporated Terms to Restricted Stock Agreement under 1991 Stock Incentive Plan(36) |
|
|
|
10.6
|
|
Executive Bonus Plan |
|
|
|
10.7
|
|
Supplemental Executive Retirement
Plan(37) |
|
|
|
10.8
|
|
MGIC Investment Corporation Deferred Compensation Plan for Non-Employee Directors (As Amended in
February 2009) |
|
|
|
10.9
|
|
MGIC Investment Corporation 1993
Restricted Stock Plan for Non-Employee
Directors(38) |
|
|
|
10.10
|
|
Two Forms of Award Agreement under MGIC Investment Corporation 1993 Restricted Stock Plan for
Non-Employee
Directors(39) |
|
|
|
10.11.1
|
|
Form of Key Executive Employment and Severance Agreement |
|
|
|
10.11.2
|
|
Form of Incorporated Terms to Key Executive Employment and Severance Agreement |
|
|
|
10.12
|
|
Form of Agreement Not to
Compete(40) |
|
|
|
10.13
|
|
Amended and Restated Call Option Agreement, dated as of September 13, 2006, by and among the Company,
Radian Guaranty, Inc., and Sherman Capital,
L.L.C.(41) |
|
|
|
11
|
|
Statement re: computation of per share earnings |
|
|
|
21
|
|
Direct and Indirect Subsidiaries and Joint Venture |
|
|
|
23
|
|
Consent of Independent Registered Public Accounting Firm |
|
|
|
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 |
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
|
|
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). |
|
|
|
99.1
|
|
Mortgage Guaranty Insurance
Corporations Flow Master Insurance Policy and Declaration Page,
Restated to Include
Selected Endorsements. |
|
|
|
99.2 |
|
Endorsement to Mortgage Guaranty
Insurance Corporations Flow Master Insurance
Policy Applicable to Lenders with Delegated Underwriting Authority. |
The following documents, identified in the footnote references above, are incorporated by
reference, as indicated, to: our Annual Reports on Form 10-K for the years ended December 31, 1993,
1994, 1997, 1999, 2001, 2002, 2003, 2004, 2005 or 2006 (the 1993 10-K, 1994 10-K, 1997 10-K,
1999 10-K, 2001 10-K, 2002 10-K, 2004 10-K, 2005 10-K, and 2006 10-K respectively); our
Annual Report on Form 10-K/A for the year ended December 31, 2008 (the 2008 10-K/A); our
Quarterly Reports on Form 10-Q for the Quarters ended March 31, 2005 or 2008, June 30, 1994, 1998,
2007 or 2008 or September 30, 2004 (the March 31, 2005 10-Q, March 31, 2008 10-Q, June 30,
1994 10-Q, June 30, 1998 10-Q, June 30, 2007 10-Q, June 30, 2008 10-Q, and September 30,
2004 10-Q, respectively); our 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); our Current Reports on Form 8-K dated October 17, 2000 (the
October 2000 8-K), February 1, 2005 (the February 2005 8-K), January 31, 2006 (the January 2006
8-K), September 15, 2006 (the September 2006 8-K) December 18, 2006 (the December 2006 8-K),
September 20, 2007 (the September 2007 8-K), June 23, 2008
(the June 2008 8-K), August 13, 2008 (the August 2008 8-K); or to our Proxy Statement for our
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 2.1 to the September 2007 8-K. |
|
(2) |
|
Exhibit 2.1 to the August 2008 8-K. |
|
(3) |
|
Exhibit 2.2 to the August 2008 8-K. |
|
(4) |
|
Exhibit 3.1 to the June 30, 2008 10-Q. |
|
(5) |
|
Exhibit 3 to the December 2006 8-K. |
|
(6) |
|
Exhibit 4.1 to the 8-A. |
|
(7) |
|
Exhibit 4.2 to the 8-A/A-No. 1. |
|
(8) |
|
Exhibit 4.3 to the 8-A/A-No. 1. |
|
(9) |
|
Exhibit 4.4 to the 8-A/A-No. 2. |
|
(10) |
|
Exhibit 4.1 to the October 2000 8-K. |
|
(11) |
|
Exhibit 4.2 to the March 31, 2005 10-Q. |
|
(12) |
|
Exhibit 4.5.1 to the 2008 10-K/A. |
|
|
|
(13) |
|
Exhibit 4.5.2 to the June 2008 8-K. |
|
(14) |
|
Exhibit 4.6 to the March 31, 2008 10-Q. |
|
(15) |
|
Exhibit 10.1 to the 2002 10-K. |
|
(16) |
|
Exhibit 10.1.1 to the 2002 10-K. |
|
(17) |
|
Exhibit 10.2 to the 2002 10-K. |
|
(18) |
|
Exhibit 10.2.1 to the 2002 10-K. |
|
(19) |
|
Exhibit 10.2.1 to the 2005 10-K. |
|
(20) |
|
Exhibit 10.2.2 to the 2005 10-K. |
|
(21) |
|
Exhibit 10.2.4 to the 2006 10-K. |
|
(22) |
|
Exhibit 10.2.5 to the 2006 10-K. |
|
(23) |
|
Exhibit 10.2.4 to the 2004 10-K |
|
(24) |
|
Exhibit 10.2.5 to the 2004 10-K. |
|
(25) |
|
Exhibit 10.2.8 to the March 31, 2008 10-Q. |
|
(26) |
|
Exhibit 10.2.9 to the March 31, 2008 10-Q. |
|
(27) |
|
Exhibit 10.2.10 to the March 31, 2008 10-Q. |
|
(28) |
|
Exhibit 10.2.11 to the March 31, 2008 10-Q. |
|
(29) |
|
Exhibit 10.7 to the 1999 10-K. |
|
(30) |
|
Exhibit B to the 2005 Proxy Statement. |
|
(31) |
|
Exhibit 10.9 to the 1999 10-K. |
|
(32) |
|
Exhibit 10.4.1 to the 2001 10-K. |
|
(33) |
|
Exhibit 10.4.2 to the 2001 10-K. |
|
(34) |
|
Exhibit 10.10 to the 1999 10-K. |
|
(35) |
|
Exhibit 10.5.1 to the 2001 10-K. |
|
(36) |
|
Exhibit 10.5.2 to the 2001 10-K. |
|
|
|
|
(37) |
|
Exhibit 10.7 to the June 30, 2007 10-Q. |
|
(38) |
|
Exhibit 10.24 to the 1993 10-K. |
|
(39) |
|
Exhibits 10.27 and 10.28 to the June 30, 1994 10-Q. |
|
(40) |
|
Exhibit 10.3 to the February 2005 8-K. |
|
(41) |
|
Exhibit 1.2 to the September 2006 8-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 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 under 2002 Stock Incentive
Plan |
|
10.2.5 |
|
Form of Incorporated Terms to Restricted Stock and Restricted Stock Unit Agreement
under 2002 Stock Incentive Plan |
|
10.2.6 |
|
Form of Restricted Stock and Restricted Stock Unit Agreement (for Directors) |
|
10.2.7 |
|
Form of Incorporated Terms to Restricted Stock and Restricted Stock Unit Agreement |
|
10.2.8 |
|
Form of Restricted Stock and Restricted Stock Unit Agreement under 2002 Stock Incentive
Plan (Adopted February 2008) |
|
10.2.9 |
|
Form of Incorporated Terms to Restricted Stock and Restricted Stock Unit Agreement
under 2002 Stock Incentive Plan (Adopted February 2008) |
|
10.2.10 |
|
Form of Restricted Stock and Restricted Stock Unit Agreement under 2002 Stock Incentive
Plan (for Directors) (Adopted
April 2008) |
|
10.2.11 |
|
Form of Incorporated Terms to Restricted Stock and Restricted Stock Unit Agreement
under 2002 Stock Incentive Plan (for Directors) (Adopted April 2008) |
|
10.2.12 |
|
Amendment to Restricted Stock and Restricted Stock Unit Agreement, dated as of December
8, 2008, between MGIC Investment Corporation and Curt S. Culver |
10.2.13 |
|
Form of Amendment to Certain Restricted Stock and Restricted Stock Unit Agreements,
dated as of December 2, 2008, between MGIC Investment Corporation and Certain of its
Officers |
|
10.2.14 |
|
Form of Amendment to Certain Restricted Stock and Restricted Stock Unit Agreements,
dated as of December 2, 2008, between MGIC Investment Corporation and its Directors |
|
|
|
10.2.15
|
|
Form of Restricted Stock and Restricted Stock Unit Agreement under
2002 Stock Incentive Plan (Adopted January 2009) |
|
|
|
10.2.16
|
|
Form of Incorporated Terms to Restricted Stock and Restricted
Stock Unit Agreement under 2002 Stock Incentive Plan (Adopted
January 2009) |
|
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 Plan |
|
10.7 |
|
Supplemental Executive Retirement Plan |
|
10.8 |
|
MGIC Investment Corporation Deferred Compensation Plan for Non-Employee Directors |
|
10.9 |
|
MGIC Investment Corporation 1993 Restricted Stock Plan for Non-Employee Directors |
|
10.10 |
|
Two Forms of Award Agreement under MGIC Investment Corporation 1993 Restricted Stock
Plan for Non-Employee Directors |
|
10.11.1 |
|
Form of Key Executive Employment and Severance Agreement |
|
10.11.2 |
|
Form of Incorporated Terms to Key Executive Employment and Severance Agreement |
|
10.12 |
|
Form of Agreement Not to Compete |