MILWAUKEE, Oct. 16 /PRNewswire-FirstCall/ -- MGIC Investment Corporation
(NYSE: MTG) today reported a net loss for the quarter ended September 30, 2008
of $113.3 million, compared with net loss of $372.5 million for the same
quarter a year ago. Diluted loss per share was $0.91 for the quarter ending
September 30, 2008, compared to diluted loss per share of $4.61 for the same
quarter a year ago.
The net loss for the first nine months of 2008 was $245.6 million,
compared with a net loss of $203.4 million for the same period last year. For
the first nine months of 2008, diluted loss per share was $2.22 compared with
diluted loss per share of $2.50 for the same period last year.
Curt S. Culver, chairman and chief executive officer of MGIC Investment
Corporation and Mortgage Guaranty Insurance Corporation (MGIC), said that the
company's results continue to be negatively impacted by increased
delinquencies and foreclosures that have resulted from deteriorating home
prices, especially in California and Florida, as well as a weakening economy.
Total revenues for the third quarter were $461.6 million, down 16.9
percent from $555.4 million in the third quarter of 2007. The decrease in
revenues resulted primarily from an 83.1 percent decrease in realized gains to
$27.9 million. Included in realized gains, for the third quarter of 2008, is a
gain of $62.8 million from the sale of the remaining interest in the Sherman
joint venture which was offset by realized losses and impairment charges of
$34.9 million which includes losses and impairments from the fixed income
investments in Fannie Mae, Freddie Mac, Lehman Brothers and AIG. Realized
gains were $165.0 million for the same period last year and included a gain of
$162.9 million from the partial sale of the Sherman joint venture and realized
gains of $2.1 million. Net premiums written for the quarter were $365.0
million, compared with $340.2 million in the third quarter last year, an
increase of 7.3 percent.
New insurance written in the third quarter was $9.7 billion, compared to
$21.1 billion in the third quarter of 2007. New insurance written for the
first nine months of 2008 was $42.8 billion compared to $52.8 billion for the
same period last year.
Persistency, or the percentage of insurance remaining in force from one
year prior, was 82.1 percent at September 30, 2008, compared with 76.4 percent
at December 31, 2007, and 74.0 percent at September 30, 2007.
As of September 30, 2008, MGIC's primary insurance in force was $228.2
billion, compared with $211.7 billion at December 31, 2007, and $196.6 billion
at September 30, 2007. The book value of MGIC Investment Corporation's
investment portfolio, cash and cash equivalents was $7.7 billion at September
30, 2008, compared with $6.2 billion at December 31, 2007, and $5.8 billion at
September 30, 2007.
At September 30, 2008, the percentage of loans that were delinquent,
excluding bulk loans, was 7.54 percent, compared with 4.99 percent at December
31, 2007, and 4.33 percent at September 30, 2007. Including bulk loans, the
percentage of loans that were delinquent at September 30, 2008 was 10.20
percent, compared to 7.45 percent at December 31, 2007, and 6.63 percent at
September 30, 2007.
Income from joint ventures, net of tax, was $3.3 million compared to a
loss from joint ventures, net of tax, of $290.6 million for the same period
last year. The loss from joint ventures, net of tax, in the third quarter
2007 was due primarily to the impairment of our investment of C-BASS.
Losses incurred in the third quarter were $788.3 million, up from $602.3
million reported for the same period last year. Underwriting expenses were
$64.6 million in the third quarter down from $87.6 million reported for the
same period last year. The 2007 third quarter expenses included one-time
charges of $11.3 million.
Wall Street Bulk transactions, as of September 30, 2008, included
approximately 122,700 loans with insurance in force of approximately $20.7
billion and risk in force of approximately $6.1 billion. During the quarter
the premium deficiency reserve declined by $204 million from $788 million, as
of June 30, 2008, to $584 million as of September 30, 2008. The $584 million
premium deficiency reserve as of September 30, 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. Within the
premium deficiency calculation, our expected present value of expected future
paid losses and expenses was $3,116 million, offset by the present value of
expected future premium of $724 million and already established loss reserves
of $1,808 million. The premium deficiency reserves as of June 30, 2008
reflected expected present value of expected future paid losses and expenses
of $3,263 million, offset by the present value of expected future premium of
$829 million and already established loss reserves of $1,646 million. During
the first nine months of the year the premium deficiency reserve declined by
$627 million from $1,211 million, as of December 31, 2007, to $584 million as
of September 30, 2008.
About MGIC
MGIC (http://www.mgic.com), the principal subsidiary of MGIC Investment
Corporation, is the nation's leading provider of private mortgage insurance
coverage with $228.2 billion primary insurance in force covering 1.49 million
mortgages as of September 30, 2008. MGIC serves 3,300 lenders with locations
across the country and in Puerto Rico, Guam and Australia, helping families
achieve homeownership sooner by making affordable low-down-payment mortgages a
reality.
Webcast Details
As previously announced, MGIC Investment Corporation will hold a webcast
tomorrow at 10 a.m. ET to allow securities analysts and shareholders the
opportunity to hear management discuss the company's quarterly results. The
call is being webcast and can be accessed at the company's website at
http://mtg.mgic.com. The webcast is also being distributed over CCBN's
Investor Distribution Network to both institutional and individual investors.
Investors can listen to the call through CCBN's individual investor center at
http://www.companyboardroom.com or by visiting any of the investor sites in
CCBN's Individual Investor Network. The webcast will be available for replay
on the company's website through November 17, 2008 under Investor Information.
This press release, which includes certain additional statistical and
other information, including non-GAAP financial information and a supplement
that contains various portfolio statistics are both available on the Company's
website at http://mtg.mgic.com under Investor Information.
Safe Harbor Statement
Forward Looking Statements and Risk Factors:
--------------------------------------------
Our revenues and losses could be affected by the risk factors below. These
risk factors should be reviewed in connection with this press release and our
periodic reports to the Securities and Exchange Commission. 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.
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 we
may make even though these statements may be affected by events or
circumstances occurring after the forward looking 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 press release was issued.
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 borrower's ability to continue to
make mortgage payments, such as unemployment, and whether the home of a
borrower who defaults on his mortgage can be sold for an amount that will
cover unpaid principal and interest and the expenses of the sale. Favorable
economic conditions generally reduce the likelihood that borrowers will lack
sufficient income to pay their mortgages and also favorably affect the value
of homes, thereby reducing and in some cases even eliminating a loss from a
mortgage default. A 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. Recently, the residential
mortgage market in the United States has experienced a variety of worsening
economic conditions and housing prices in many areas have declined or stopped
appreciating after extended periods of significant appreciation. A significant
deterioration in economic conditions or an extended period of flat or
declining housing values may result in increased losses which would materially
affect our results of operations and financial condition.
The mix of business we write also affects the likelihood of losses
-------------------------------------------------------------------
occurring.
----------
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 September 30, 2008, approximately 59.5% of our
primary risk in force consisted of loans with loan-to-value ratios equal to or
greater than 95%, 9.6% had FICO credit scores below 620, and 14.0% had limited
underwriting, including limited borrower documentation. (In accordance with
industry practice, loans approved by Government Sponsored Enterprise 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 (1) to the
Additional Information contained elsewhere in this press release.)
A material portion of these loans were written in 2005 - 2007 and through
the first quarter of 2008. 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 the business we are writing, including guideline changes that
have not yet become effective. Requirements imposed by new guidelines,
however, only affect business written under commitments to insure loans that
are issued after 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 September 30, 2008, approximately 3.8% of our primary risk in force
written through the flow channel, and 46.2% 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. Because interest-only loans and pay option ARMs are a relatively recent
development, we have no meaningful data on their historical performance. 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 will generate
underwriting profit.
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.
Because loss reserve estimates are subject to uncertainties and 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. 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.
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 insurer's capital adequacy,
Wisconsin's insurance regulations require that a mortgage guaranty insurance
company maintain "policyholders position" of not less than a minimum computed
under a 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.
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 company's 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.
We believe that our 2006 and 2007 books of business will continue to
generate material incurred and paid losses for a number of years. The
ultimate amount of these losses will depend in part on 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, we cannot predict with confidence what our ultimate losses will be
on our 2006 and 2007 books. Depending on the extent of future losses, MGIC's
policyholders position could decline and its risk-to-capital could increase
beyond the levels necessary to meet these regulatory requirements and this
could occur before the end of 2009. As a result, we are considering options to
obtain additional capital, which could occur through the sale of equity or
debt securities and/or reinsurance.
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.
On January 22, 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. On February 13, 2008, we announced that we had established a premium
deficiency reserve of approximately $1.2 billion. As of September 30, 2008,
the premium deficiency reserve was $584 million. This amount 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.
We believe the mortgage insurance industry will experience material losses
on the 2006 and 2007 books. The ultimate amount of these losses will depend in
part on 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, we cannot predict with confidence
what our ultimate losses will be on our 2006 and 2007 books. 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.
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 through the flow channel 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 Mac's charters, when private mortgage
insurance is used as the required credit enhancement on low down payment
mortgages,
-- whether Fannie Mae or Freddie Mac influence the mortgage lender's
selection of the mortgage insurer providing coverage and, if so, any
transactions that are related to that selection,
-- the underwriting standards that determine what loans are eligible for
purchase by Fannie Mae or Freddie Mac, which thereby affect the quality of the
risk insured by the mortgage insurer and the availability of mortgage loans,
-- the terms on which mortgage insurance coverage can be canceled before
reaching the cancellation thresholds established by law, and
-- the circumstances in which mortgage servicers must perform activities
intended to avoid or mitigate loss on insured mortgages that are delinquent.
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 a conservator may increase the likelihood
that the business practices of Fannie Mae and Freddie Mac change in ways that
may have a material adverse effect on us. In addition, the appointment of a
conservator 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."
Our failure to comply with the financial covenants in our bank revolving
-------------------------------------------------------------------------
credit facility could lead to the acceleration of the debt under this facility
------------------------------------------------------------------------------
as well as our other debt.
--------------------------
We have a $300 million bank revolving credit facility which matures in
March 2010 and under which $200 million is currently outstanding. This
facility includes three financial covenants.
First, our revolving credit facility 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 September 30, 2008, our Consolidated Net Worth was approximately $3.0
billion. We expect we will have a net loss in the remainder of 2008, with the
result that we expect our Consolidated Net Worth to decline. Our current
forecast of our 2008 net loss would result in our forecasted Consolidated Net
Worth at December 31, 2008 being materially above the $2.0 billion minimum.
There can be no assurance that our actual results will not be materially worse
than our forecast or that losses in periods after 2008 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 September 30, 2008 due to market
value adjustments and to the extent we pay dividends to our shareholders. At
September 30, 2008, the modified duration of our fixed income portfolio was
4.6 years, which means that an instantaneous parallel upward shift in the
yield curve of 100 basis points would result in a decline of 4.6%
(approximately $344 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 MGIC's 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
MGIC's 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 considering options to obtain additional capital."
While we currently have sufficient liquidity at our holding company to
repay the amounts owed under our revolving credit facility, if we breach any
of the facility's financial covenants but did not have sufficient funds to
repay amounts owed thereunder and are not successful obtaining an agreement
from banks holding a majority of the debt outstanding under the facility to
change (or waive) these requirements, 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 the debt under our facility
were accelerated in this manner, the holders of 25% or more of our publicly
traded $200 million 5.625% senior notes due in September 2011, and the holders
of 25% or more of our publicly traded $300 million 5.375% senior notes due in
November 2015, 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 revolving 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 these obligations is accelerated,
we may not have sufficient funds to repay such amounts.
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:
-- lenders and other investors holding mortgages in portfolio and self-
insuring,
-- 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,
-- lenders using government mortgage insurance programs, including those
of the Federal Housing Administration and the Veterans Administration, and
-- 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.
Our financial strength rating has been downgraded below Aa3/AA-, which
-----------------------------------------------------------------------
could reduce the volume of our new business writings.
-----------------------------------------------------
Standard & Poor's Rating Services' insurer financial strength rating of
MGIC, our principal mortgage insurance subsidiary, is A with a negative
outlook. The financial strength of MGIC is rated A1 by Moody's Investors
Service and is under review for a potential downgrade. The financial strength
of MGIC is rated A+ by Fitch Ratings and is on rating watch negative.
The private mortgage insurance industry has historically viewed a
financial strength rating of at least 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 private mortgage insurance industry. The
eligibility requirements define the standards under which the GSEs will accept
mortgage insurance as a credit enhancement on mortgages they acquire. These
standards impose additional restrictions on insurers that do not have a
financial strength rating of at least Aa3/AA-. These restrictions include not
permitting such insurers to engage in captive reinsurance transactions with
lenders. For many years, captive reinsurance has been an important means
through which mortgage insurers compete for business from lenders, including
lenders who sell a large volume of mortgages to the GSEs. In February 2008
Freddie Mac announced that it was temporarily suspending the portion of its
eligibility requirements that impose additional restrictions on a mortgage
insurer that is downgraded below Aa3/AA- if the affected insurer commits to
submitting a complete remediation plan for its approval. In February 2008
Fannie Mae advised us that it would not automatically impose additional
restrictions on a mortgage insurer that is downgraded below Aa3/AA- if the
affected insurer submits a written remediation plan.
We have submitted written remediation plans to both Freddie Mac and Fannie
Mae. Freddie Mac has publicly announced that our remediation plan is
acceptable to it. We believe that Fannie Mae views its process of reviewing
remediation plans as a process 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 a timely manner. 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 insurer's financial strength rating
as one element of the process through which they select mortgage insurers. As
a result of these considerations, including MGIC's recent ratings downgrades,
MGIC may be competitively disadvantaged.
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 lender's 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, has
recently 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:
-- PMI Mortgage Insurance Company,
-- Genworth Mortgage Insurance Corporation,
-- United Guaranty Residential Insurance Company,
-- Radian Guaranty Inc.,
-- Republic Mortgage Insurance Company, whose parent, based on
information filed with the SEC through October 1, 2008, is our largest
shareholder, and
-- 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 announcement that we plan to discontinue
ceding new business under excess of loss reinsurance programs. We believe the
Federal Housing Administration, which until recently was not viewed by us as a
significant competitor, has substantially increased its market share,
including insuring a number of loans that would meet our current underwriting
guidelines at a cost to the borrower that is lower than the cost of our
insurance.
While the mortgage insurance industry has not had new entrants in many
years, it is possible that positive business fundamentals combined with the
deterioration of the financial strength ratings of the existing mortgage
insurance companies could encourage the formation of start-up mortgage
insurers.
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:
-- the level of current mortgage interest rates compared to the mortgage
coupon rates on the insurance in force, which affects the vulnerability of the
insurance in force to refinancings, and
-- mortgage insurance cancellation policies of mortgage investors along
with the rate of home price appreciation experienced by the homes underlying
the mortgages in the insurance in force.
During the 1990s, 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 September 30,
2008 persistency was at 82.1%, compared to the record low of 44.9% at
September 30, 2003. Over the past several years, refinancing has become easier
to accomplish and less costly for many consumers. Hence, even in an interest
rate and house price environment favorable to persistency improvement,
persistency may not reach its December 31, 1990 level.
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:
-- restrictions on mortgage credit due to more stringent underwriting
standards and liquidity issues affecting lenders,
-- the level of home mortgage interest rates,
-- the health of the domestic economy as well as conditions in regional
and local economies,
-- housing affordability,
-- population trends, including the rate of household formation,
-- the rate of home price appreciation, which in times of heavy
refinancing can affect whether refinance loans have loan-to-value
ratios that require private mortgage insurance, and
-- government housing policy encouraging loans to first-time homebuyers.
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. 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. MGIC's 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
interrogatories 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 Company's 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 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 the second and third quarters of 2008, complaints in four separate
purported stockholder class action lawsuits were filed against us and several
of our officers. The allegations in the complaints are generally that through
these officers we violated the federal securities laws by failing to disclose
or misrepresenting C-BASS's 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.
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 plan's 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. 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.
Net premiums written could be adversely affected if the Department of
----------------------------------------------------------------------
Housing and Urban Development reproposes and adopts a regulation under the
---------------------------------------------------------------------------
Real Estate Settlement Procedures Act that is equivalent to a proposed
-----------------------------------------------------------------------
regulation that was withdrawn in 2004.
--------------------------------------
Department of Housing and Urban Development, or HUD, regulations under
RESPA prohibit paying lenders for the referral of settlement services,
including mortgage insurance, and prohibit lenders from receiving such
payments. In July 2002, HUD proposed a regulation that would exclude from
these anti-referral fee provisions settlement services included in a package
of settlement services offered to a borrower at a guaranteed price. HUD
withdrew this proposed regulation in March 2004. Under the proposed
regulation, if mortgage insurance were required on a loan, the package must
include any mortgage insurance premium paid at settlement. Although certain
state insurance regulations prohibit an insurer's payment of referral fees,
had this regulation been adopted in this form, our revenues could have been
adversely affected to the extent that lenders offered such packages and
received value from us in excess of what they could have received were the
anti-referral fee provisions of RESPA to apply and if such state regulations
were not applied to prohibit such payments.
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, which is scheduled to become effective in the United States and many
other countries in 2008, 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 realize benefits from our international initiative.
-------------------------------------------------------------------------
We have committed significant resources to begin international operations,
primarily in Australia, where we started to write business in June 2007, and
also in Canada, where we previously expected to begin writing business in
2008. 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 or
reinsurance. Because these efforts have not been successful to date, we have
reduced our Australian headcount and we expect our Australian volume to
decline materially. 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. In addition, we have ceased our efforts to expand our business into
the Canadian market and eliminated our Canadian staff.
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.
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
(Unaudited)
(in thousands of dollars, except per share data)
Net premiums
written $365,042 $340,244 $1,105,293 $965,266
Net premiums
earned $342,312 $320,966 $1,038,092 $926,438
Investment income 78,612 64,777 228,076 189,674
Realized gains 27,913 164,995 16,456 152,156
Other revenue 12,795 4,702 27,416 25,853
Total revenues 461,632 555,440 1,310,040 1,294,121
Losses and
expenses:
Losses incurred 788,272 602,274 2,168,063 1,019,258
Change in
premium
deficiency
reserves (204,240) - (626,919) -
Underwriting,
other expenses 64,599 87,571 214,434 240,036
Reinsurance fee 607 - 970 -
Interest expense 20,119 10,926 50,924 30,479
Ceding
commission (2,175) (1,246) (6,788) (3,309)
Total losses
and expenses 667,182 699,525 1,800,684 1,286,464
(Loss) income
before tax and
joint ventures (205,550) (144,085) (490,644) 7,657
Credit for income
tax (88,924) (62,235) (220,591) (33,619)
Income (loss)
from joint
ventures, net of
tax (1) 3,352 (290,619) 24,486 (244,667)
Net loss $(113,274) $(372,469) $(245,567) $(203,391)
Diluted weighted
average common
shares
outstanding
(Shares in
thousands) 123,834 80,786 110,647 81,480
Diluted loss per
share $(0.91) $(4.61) $(2.22) $(2.50)
(1) Diluted EPS
contribution
from C-BASS $- $(3.75) $- $(3.59)
Diluted EPS
contribution
from Sherman $0.02 $0.15 $0.21 $0.57
NOTE: See "Certain Non-GAAP Financial Measures" for diluted earnings per
share contribution from realized gains.
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET AS OF
September 30, December 31, September 30,
2008 2007 2007
(Unaudited) (Audited) (Unaudited)
(in thousands of dollars, except share data)
ASSETS
Investments (1) $6,639,843 $5,896,233 $5,409,635
Cash and cash equivalents 1,088,034 288,933 417,802
Reinsurance recoverable on
loss reserves (2) 324,373 35,244 16,204
Prepaid reinsurance
premiums 7,550 8,715 8,556
Home office and equipment,
net 32,417 34,603 34,380
Deferred insurance policy
acquisition costs 12,451 11,168 11,775
Other assets 848,457 1,441,465 940,037
$8,953,125 $7,716,361 $6,838,389
LIABILITIES AND
SHAREHOLDERS' EQUITY
Liabilities:
Loss reserves (2) 4,013,251 2,642,479 1,561,611
Premium deficiency
reserves 583,922 1,210,841 -
Unearned premiums 336,084 272,233 227,660
Short- and long-term
debt 698,427 798,250 803,191
Convertible debentures 374,746 - -
Other liabilities 318,069 198,215 213,639
Total liabilities 6,324,499 5,122,018 2,806,101
Shareholders' equity 2,628,626 2,594,343 4,032,288
$8,953,125 $7,716,361 $6,838,389
Book value per share (3) $21.02 $31.72 $49.30
(1) Investments include
unrealized (losses) gains on
securities (173,044) 101,982 83,806
(2) Loss reserves, net of
reinsurance recoverable on
loss reserves 3,688,878 2,607,235 1,545,407
(3) Shares outstanding 125,068 81,793 81,793
CERTAIN NON-GAAP FINANCIAL MEASURES
Three Months Ended Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
Diluted earnings per
share contribution from
realized gains:
Realized gains $27,913 $164,995 $16,456 $152,156
Income taxes at 35% 9,770 57,748 5,760 53,255
After tax realized
gains 18,143 107,247 10,696 98,901
Weighted average
shares 123,834 80,786 110,647 81,480
Diluted EPS
contribution from
realized gains $0.15 $1.33 $0.10 $1.21
Management believes the diluted earnings per share contribution from
realized gains provides useful information to investors because it shows
the after-tax effect of these items, which can be discretionary.
OTHER INFORMATION
New primary insurance written
("NIW") ($ millions) $9,710 $21,075 $42,761 $52,775
New risk written ($ millions):
Primary $2,342 $5,361 $10,429 $13,350
Pool (1) $41 $64 $142 $151
Product mix as a % of primary flow
NIW
> 95% LTVs 7% 44% 20% 43%
ARMs 1% 3% 1% 3%
Refinances 12% 21% 27% 23%
(1) Represents contractual aggregate loss limits and, for the three and
nine months ended September 30, 2008 and 2007, for $1 million and $23
million, $9 million and $24 million, respectively, of risk without
such limits, risk is calculated at $0.1 million and $1 million, $0.5
million and $1 million, respectively, the estimated amount that would
credit enhance these loans to a 'AA' level based on a rating agency
model.
The results of our operations in Australia are included in the financial
statements in this document but the other information in this document
does not include our Australian operations, which are immaterial.
Additional Information
Q2 2007 Q3 2007 Q4 2007
New insurance written (billions)
Total $19.0 $21.1 $24.0
Flow $17.3 $19.7 $21.6
Bulk $1.7 $1.4 $2.4
Insurance in force (billions)
Total $186.1 $196.6 $211.7
Flow $147.2 $159.6 $174.7
Bulk $38.9 $37.0 $37.0
Annual Persistency 72.0% 74.0% 76.4%
Primary IIF (billions) (1) $186.1 $196.6 $211.7
Prime (620 & >) $137.2 $146.8 $161.3
A minus (575 - 619) $14.5 $15.1 $15.9
Sub-Prime (< 575) $5.3 $5.0 $4.7
Reduced Doc (All FICOs) $29.1 $29.8 $29.9
Primary RIF (billions) (1) $49.2 $51.8 $55.8
Prime (620 & >) $35.5 $38.0 $41.9
A minus (575 - 619) $4.1 $4.2 $4.4
Sub-Prime (< 575) $1.5 $1.4 $1.4
Reduced Doc (All FICOs) $8.1 $8.2 $8.2
Risk in force by FICO
% (FICO 620 & >) 86.7% 87.5% 88.4%
% (FICO 575 - 619) 9.7% 9.3% 8.8%
% (FICO < 575) 3.6% 3.2% 2.8%
Average Coverage Ratio (RIF/IIF) (1)
Total 26.4% 26.4% 26.3%
Prime (620 & >) 25.9% 25.9% 26.0%
A minus (575 - 619) 28.1% 27.8% 27.4%
Sub-Prime (< 575) 28.3% 29.1% 28.9%
Reduced Doc (All FICOs) 27.9% 27.6% 27.4%
Average Loan Size (thousands) (1)
Total IIF $141.16 $143.46 $147.31
Flow $134.17 $137.74 $142.26
Bulk $175.57 $174.82 $177.00
Prime (620 & >) $133.79 $136.74 $141.69
A minus (575 - 619) $130.78 $131.58 $133.46
Sub-Prime (< 575) $127.21 $125.03 $124.53
Reduced Doc (All FICOs) $207.53 $208.69 $209.99
Primary IIF - # of loans (1) 1,318,318 1,370,426 1,437,432
Prime (620 & >) 1,025,658 1,073,219 1,138,300
A minus (575 - 619) 110,905 114,792 119,057
Sub-Prime (< 575) 41,665 39,754 37,894
Reduced Doc (All FICOs) 140,090 142,661 142,181
Primary IIF - # of Delinquent Loans (1) 80,588 90,829 107,120
Flow 43,328 50,124 61,352
Bulk 37,260 40,705 45,768
Prime (620 & >) 36,712 41,412 49,333
A minus (575 - 619) 17,943 19,918 22,863
Sub-Prime (< 575) 11,679 12,186 12,915
Reduced Doc (All FICOs) 14,254 17,313 22,009
Q1 2008 Q2 2008 Q3 2008
New insurance written (billions)
Total $19.1 $14.0 $9.7
Flow $18.1 $13.4 $9.7
Bulk $1.0 $0.6 $-
Insurance in force (billions)
Total $221.4 $226.4 $228.2
Flow $185.4 $191.5 $194.9
Bulk $36.0 $34.9 $33.3
Annual Persistency 77.5% 79.7% 82.1%
Primary IIF (billions) (1) $221.4 $226.4 $228.2
Prime (620 & >) $171.7 $178.7 $182.7
A minus (575 - 619) $15.9 $15.2 $14.5
Sub-Prime (< 575) $4.4 $4.2 $3.9
Reduced Doc (All FICOs) $29.4 $28.3 $27.1
Primary RIF (billions) (1) $58.0 $59.1 $59.4
Prime (620 & >) $44.4 $46.1 $47.0
A minus (575 - 619) $4.3 $4.1 $3.9
Sub-Prime (< 575) $1.3 $1.2 $1.1
Reduced Doc (All FICOs) $8.0 $7.7 $7.4
Risk in force by FICO
% (FICO 620 & >) 89.1% 89.8% 90.4%
% (FICO 575 - 619) 8.4% 7.9% 7.4%
% (FICO < 575) 2.5% 2.3% 2.2%
Average Coverage Ratio (RIF/IIF) (1)
Total 26.2% 26.1% 26.0%
Prime (620 & >) 25.9% 25.8% 25.7%
A minus (575 - 619) 27.2% 27.2% 27.2%
Sub-Prime (< 575) 28.9% 28.9% 28.9%
Reduced Doc (All FICOs) 27.3% 27.3% 27.2%
Average Loan Size (thousands) (1)
Total IIF $149.79 $151.77 $153.29
Flow $145.58 $148.03 $149.97
Bulk $175.71 $176.22 $176.23
Prime (620 & >) $145.05 $147.88 $150.04
A minus (575 - 619) $133.89 $133.41 $133.09
Sub-Prime (< 575) $123.57 $122.75 $121.99
Reduced Doc (All FICOs) $209.54 $209.38 $208.66
Primary IIF - # of loans (1) 1,478,336 1,491,897 1,488,676
Prime (620 & >) 1,184,006 1,208,711 1,217,403
A minus (575 - 619) 118,353 114,010 109,475
Sub-Prime (< 575) 35,729 33,955 32,067
Reduced Doc (All FICOs) 140,248 135,221 129,731
Primary IIF - # of Delinquent Loans (1) 113,589 128,231 151,908
Flow 66,055 77,903 98,023
Bulk 47,534 50,328 53,885
Prime (620 & >) 52,571 60,505 76,110
A minus (575 - 619) 22,748 24,859 28,384
Sub-Prime (< 575) 12,267 12,425 12,705
Reduced Doc (All FICOs) 26,003 30,442 34,709
Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008
Primary IIF Delinquency
Rates (1) 6.11% 6.63% 7.45% 7.68% 8.60% 10.20%
Flow 3.95% 4.33% 4.99% 5.19% 6.02% 7.54%
Bulk 16.80% 19.25% 21.91% 23.19% 25.38% 28.53%
Prime (620 & >) 3.58% 3.86% 4.33% 4.44% 5.01% 6.25%
A minus (575 - 619) 16.18% 17.35% 19.20% 19.22% 21.80% 25.93%
Sub-Prime (< 575) 28.03% 30.65% 34.08% 34.33% 36.59% 39.62%
Reduced Doc (All
FICOs) 10.17% 12.14% 15.48% 18.54% 22.51% 26.75%
Net Paid Claims
(millions) (1) $188 $232 $284 $371 $385 $330
Flow $82 $89 $108 $141 $149 $127
Bulk $84 $121 $154 $210 $221 $184
Other $22 $22 $22 $20 $15 $19
Prime (620 & >) $75 $87 $103 $137 $144 $131
A minus (575 - 619) $36 $43 $48 $68 $73 $54
Sub-Prime (< 575) $23 $26 $33 $39 $37 $32
Reduced Doc (All
FICOs) $32 $54 $78 $107 $116 $94
Primary Average Claim
Payment (thousands) (1) $33.2 $39.0 $43.8 $51.2 $53.3 $53.9
Flow $30.1 $31.8 $34.6 $37.8 $39.8 $39.1
Bulk $36.9 $46.9 $53.8 $67.1 $69.1 $73.4
Prime (620 & >) $30.6 $34.1 $36.5 $42.2 $44.2 $46.4
A minus (575 - 619) $33.5 $37.5 $40.1 $48.4 $52.3 $50.4
Sub-Prime (< 575) $31.3 $35.7 $40.2 $49.4 $47.3 $49.1
Reduced Doc (All
FICOs) $43.4 $56.6 $67.8 $75.5 $76.8 $77.0
Risk sharing
Arrangements -
Flow Only
% insurance inforce
subject to risk
sharing (2) 46.7% 46.9% 46.9% 46.8% 46.1%
% Quarterly NIW
subject to risk
sharing (2) 49.7% 47.3% 47.6% 44.7% 34.3%
Premium ceded
(millions) $36.6 $43.4 $47.6 $53.6 $54.2 $53.7
Captive trust fund
assets (millions) $637 $687 $731 $796
Captive Reinsurance
Ceded Losses - Flow
Only (millions) $85.0 $150.6
Excess of Loss
Book Year 2005 $0.8 $2.0
Book Year 2006 $55.5 $48.3
Book Year 2007 $12.2 $77.1
Quota Share
Book Year 2005 $1.9 $2.9
Book Year 2006 $2.6 $5.1
Book Year 2007 $12.0 $15.2
Other:
Direct Pool Risk in
Force (millions) (3) $3,029 $3,036 $2,800 $2,727 $2,419 $2,206
Mortgage Guaranty
Insurance Corporation -
Risk to Capital 6.7:1 7.9:1 10.3:1 10.1:1 11.2:1 12.3:1
Combined Insurance
Companies - Risk to
Capital 7.7:1 9.1:1 11.9:1 11.7:1 12.7:1 13.9:1
Shares repurchased
# of shares
(thousands) 1,115.1 150.0 - - - -
Average price $60.67 $53.40 $- $- $- $-
C-BASS Investment
(millions) (4) $466.0 $- $- $- $- $-
Sherman Investment
(millions) (4) $164.6 $104.1 $115.3 $129.2 $124.3 $-
GAAP loss ratio
(insurance operations
only) (5) 76.7% 187.6% 400.6% 200.2% 196.4% 230.3%
GAAP expense ratio
(insurance operations
only) 16.7% 15.4% 13.6% 16.0% 14.0% 13.5%
(1) 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 doc." Based in part on information provided by the GSEs,
MGIC estimates full doc loans of this type were approximately 4% of
2007 NIW. Information for other periods is not available. MGIC
understands these AU systems grant such doc waivers for loans they
judge to have higher credit quality. To the extent the percentage of
loans judged to have higher credit quality increases, the percentage
of such doc waivers would also be expected to increase.
(2) Latest Quarter data not available due to lag in reporting
(3) Represents contractual aggregate loss limits and, at September 30,
2008, December 31, 2007 and September 30, 2007, respectively, for $2.7
billion, $4.1 billion and $4.2 billion of risk without such limits,
risk is calculated at $306 million, $475 million and $474 million,
the estimated amounts that would credit enhance these loans to a 'AA'
level based on a rating agency model.
(4) Investments in joint ventures are included in Other assets on the
Consolidated Balance Sheet.
(5) As calculated, does not reflect any effects due to premium deficiency.
SOURCE MGIC Investment Corporation
investors, Michael J. Zimmerman, Investor Relations, +1-414-347-6596,
mike_zimmerman@mgic.com, or media, Katie Monfre, Corporate Communications,
+1-414-347-2650, katie_monfre@mgic.com, both of MGIC Investment Corporation
