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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
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Date of Report
(Date of earliest
event reported): October 23, 2002
MGIC Investment Corporation
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(Exact name of registrant as specified in its charter)
Wisconsin 1-10816 39-1486475
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(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
MGIC Plaza, 250 East Kilbourn Avenue
Milwaukee, Wisconsin 53202
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(Address of principal executive offices including zip code)
(414) 347-6480
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(Registrant's telephone number)
Item 9. Regulation FD Disclosure.
The Company has advised customers that effective March 31, 2003 it will not
participate in excess of loss risk sharing arrangements with premium cessions in
excess of 25%.
The Company is not changing the range of its prior earnings guidance for
2003, which is that it expects diluted earnings per share, excluding realized
gains, to be in a range of $6.05 to $6.20. The Company's earnings expectation
for 2003 is built on assumptions that include (all comparisons are between 2003
and 2002):
-- a decline of approximately $600 billion in refinance
volume in the mortgage origination market, with purchase
money volume continuing to remain strong;
-- improving persistency due to lower refinances;
-- lower growth in earned premiums;
-- lower underwriting expenses due to lower refinances; and
-- higher incurred losses.
Forward-Looking Statements and Risk Factors:
The statements contained in Item 9 regarding the Company's expectations for
earnings for 2003 are forward-looking statements. Actual results may differ
materially from those projected in such forward-looking statements. Factors that
could cause actual results to differ materially from those projected in the
forward-looking statements are that the assumptions, including those set forth
above, may not be realized, including for reasons discussed in more detail
below, and that expenses may not decline to the extent assumed. Other factors
that could cause actual results to differ materially from those projected in the
forward-looking statements include the risks noted below.
As the domestic economy deteriorates, more homeowners may default and the
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Company's losses may increase by a greater amount than assumed.
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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.
Competition or changes in the Company's relationships with its customers could
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reduce the Company's revenues or increase its losses.
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Competition for private mortgage insurance premiums occurs not only among
private mortgage insurers but increasingly with mortgage lenders through captive
mortgage reinsurance transactions. In these transactions, a lender's affiliate
reinsures a portion of the insurance written by a private mortgage insurer on
mortgages originated by the lender. In 1996, the Company shared risk under risk
sharing arrangements with respect to virtually none of its new insurance
written. During the nine months ended September 30, 2002, about 54% of the
Company's new insurance written on a flow basis was subject to risk sharing
arrangements. The level of competition within the private mortgage insurance
industry has also increased as many large mortgage lenders have reduced the
number of private mortgage insurers with whom they do business. At the same
time, consolidation among mortgage lenders has increased the share of the
mortgage lending market held by large lenders. The Company's top ten customers
generated 27.0% of the new primary insurance that it wrote on a flow basis in
1997 compared to 38.4% in 2001.
Persistency may not improve as assumed.
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In each year, most of the Company's premiums are from insurance that has been
written in prior years. As a result, the length of time insurance remains in
force (which is also generally referred to as persistency) is an important
determinant of revenues. The factors affecting the length of time the Company's
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.
The volume of low down payment home mortgage originations that are purchase
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transactions could be less than assumed, with the result that the amount of
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insurance the Company writes could be less than assumed.
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The factors that affect the volume of low down payment mortgage originations
include:
-- the level of home mortgage interest rates,
-- the health of the domestic economy as well as conditions
in regional and local economies,
-- housing affordability,
-- population trends, including the rate of household
formation,
-- the rate of home price appreciation, which in times of
heavy refinancing can affect whether refinance loans have
loan-to-value ratios that require private mortgage
insurance, and
-- government housing policy encouraging loans to first-time
homebuyers.
Even if the Company's low down payment mortgage origination assumption is
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realized, the amount of insurance that the Company writes could be less than
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assumed if lenders and investors select alternatives to private mortgage
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insurance.
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These alternatives to private mortgage insurance include:
-- lenders using government mortgage insurance programs,
including those of the Federal Housing Administration and
the Veterans Administration,
-- investors holding mortgages in portfolio and
self-insuring,
-- investors using credit enhancements other than private
mortgage insurance or using other credit enhancements in
conjunction with reduced levels of private mortgage
insurance coverage, and
-- lenders structuring mortgage originations to avoid
private mortgage insurance, such as a first mortgage with
an 80% loan-to-value ratio and a second mortgage with a
10% loan-to-value ratio (referred to as an 80-10-10 loan)
rather than a first mortgage with a 90% loan-to-value
ratio. While no data is publicly available, the Company
believes lenders and investors are making more 80-10-10
loans than they did in the past.
Changes in the business practices of Fannie Mae and Freddie Mac could reduce the
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Company's revenues or increase its losses.
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The business practices of Fannie Mae and Freddie Mac 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,
-- whether Fannie Mae or Freddie Mac will give mortgage
lenders an incentive, such as a reduced guaranty fee, to
select a mortgage insurer that has a "AAA" claims-paying
ability rating to benefit from the lower capital
requirements for Fannie Mae and Freddie Mac when a
mortgage is insured by a company with that rating,
-- the underwriting standards that determine what loans are
eligible for purchase by Fannie Mae or Freddie Mac, which
thereby affect the quality of the risk insured by the
mortgage insurer and the availability of mortgage loans,
-- the terms on which mortgage insurance coverage can be
canceled before reaching the cancellation thresholds
established by law, and
-- the circumstances in which mortgage servicers must
perform activities intended to avoid or mitigate loss on
insured mortgages that are delinquent.
Net premiums written could be adversely affected if a proposed regulation by the
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Department of Housing and Urban Development under the Real Estate Settlement
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Procedures Act is adopted.
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The regulations of the Department of Housing and Urban Development under the
Real Estate Settlement Procedures Act prohibit paying lenders for the referral
of settlement services, including mortgage insurance, and prohibit lenders from
receiving such payments. In July 2002, the Department of Housing and Urban
Development 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. If mortgage insurance is required
on the 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, adoption of this regulation by the Department of
Housing and Urban Development could adversely affect the Company's revenues to
the extent that lenders offered such packages and received value from the
Company in excess of what they could have received were the anti-referral fee
provisions of the Real Estate Settlement Procedures Act to apply and if such
state regulations were not applied to prohibit such payments.
The mortgage insurance industry is subject to litigation risk.
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In recent years, consumers have brought a growing number of lawsuits against
home mortgage lenders and settlement service providers. As of the end of
September 2002, seven mortgage insurers, including the Company's MGIC
subsidiary, were involved in litigation alleging violations of the Real Estate
Settlement Procedures Act. MGIC and two other mortgage insurers entered into an
agreement to settle the cases against them in December 2000, and another
mortgage insurer entered into a comparable settlement agreement in February
2002. In June 2001, the Court entered a final order approving the settlement to
which MGIC and the other two insurers are parties, although due to appeals
challenging certain aspects of this settlement, the final implementation of the
settlement will not occur until the appeals are resolved. The Company took a
$23.2 million pretax charge in 2000 to cover MGIC's share of the estimated costs
of the settlement. While MGIC's settlement includes an injunction that prohibits
certain practices and specifies the basis on which other practices may be done
in compliance with the Real Estate Settlement Procedures Act, MGIC may still be
subject to future litigation under the Real Estate Settlement Procedures Act.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MGIC INVESTMENT CORPORATION
Date: October 23, 2002 By: \s\ J. Michael Lauer
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J. Michael Lauer
Executive Vice President and Chief
Financial Officer