form10q.htm
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
T
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended September 30, 2010
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from to ______
Commission file number 1-10816
MGIC INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
WISCONSIN
|
39-1486475
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification No.)
|
|
|
250 E. KILBOURN AVENUE
|
53202
|
MILWAUKEE, WISCONSIN
|
(Zip Code)
|
(Address of principal executive offices)
|
|
(414) 347-6480
(Registrant's telephone number, including area code)
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.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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):
Large accelerated filer T
|
Accelerated filer o
|
Non-accelerated filer o
|
Smaller reporting company o
|
|
(Do not check if a smaller reporting company)
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
CLASS OF STOCK
|
PAR VALUE
|
DATE
|
NUMBER OF SHARES
|
Common stock
|
$1.00
|
10/25/10
|
200,449,588
|
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2010 (Unaudited) and December 31, 2009
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
ASSETS
|
|
(In thousands of dollars)
|
|
Investment portfolio (notes 7 and 8):
|
|
|
|
|
|
|
Securities, available-for-sale, at fair value:
|
|
|
|
|
|
|
Fixed maturities (amortized cost, 2010 - $6,848,738; 2009 - $7,091,840)
|
|
$ |
7,119,905 |
|
|
$ |
7,251,574 |
|
Equity securities
|
|
|
3,126 |
|
|
|
2,891 |
|
Total investment portfolio
|
|
|
7,123,031 |
|
|
|
7,254,465 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
2,166,101 |
|
|
|
1,185,739 |
|
Accrued investment income
|
|
|
68,427 |
|
|
|
79,828 |
|
Reinsurance recoverable on loss reserves (note 4)
|
|
|
299,239 |
|
|
|
332,227 |
|
Prepaid reinsurance premiums
|
|
|
2,924 |
|
|
|
3,554 |
|
Premium receivable
|
|
|
87,313 |
|
|
|
90,139 |
|
Home office and equipment, net
|
|
|
28,046 |
|
|
|
29,556 |
|
Deferred insurance policy acquisition costs
|
|
|
8,172 |
|
|
|
9,022 |
|
Income taxes recoverable (note 11)
|
|
|
- |
|
|
|
275,187 |
|
Other assets
|
|
|
203,510 |
|
|
|
144,702 |
|
Total assets
|
|
$ |
9,986,763 |
|
|
$ |
9,404,419 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Loss reserves (note 12)
|
|
$ |
6,179,092 |
|
|
$ |
6,704,990 |
|
Premium deficiency reserve (note 13)
|
|
|
160,114 |
|
|
|
193,186 |
|
Unearned premiums
|
|
|
234,178 |
|
|
|
280,738 |
|
Senior notes (note 3)
|
|
|
377,271 |
|
|
|
377,098 |
|
Convertible senior notes (note 3)
|
|
|
345,000 |
|
|
|
- |
|
Convertible junior debentures (note 3)
|
|
|
309,227 |
|
|
|
291,785 |
|
Other liabilities
|
|
|
398,436 |
|
|
|
254,041 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,003,318 |
|
|
|
8,101,838 |
|
|
|
|
|
|
|
|
|
|
Contingencies (note 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity (note 14):
|
|
|
|
|
|
|
|
|
Common stock, $1 par value, shares authorized 460,000,000; shares issued, 2010 - 205,046,780; 2009 - 130,163,060; shares outstanding, 2010 - 200,449,588; 2009 - 125,101,057
|
|
|
205,047 |
|
|
|
130,163 |
|
Paid-in capital
|
|
|
1,135,572 |
|
|
|
443,294 |
|
Treasury stock (shares at cost, 2010 - 4,597,192; 2009 - 5,062,003)
|
|
|
(222,632 |
) |
|
|
(269,738 |
) |
Accumulated other comprehensive income, net of tax (note 9)
|
|
|
153,228 |
|
|
|
74,155 |
|
Retained earnings
|
|
|
712,230 |
|
|
|
924,707 |
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
1,983,445 |
|
|
|
1,302,581 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$ |
9,986,763 |
|
|
$ |
9,404,419 |
|
See accompanying notes to consolidated financial statements.
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and Nine Months Ended September 30, 2010 and 2009
(Unaudited)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands of dollars, except per share data)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$ |
294,478 |
|
|
$ |
301,747 |
|
|
$ |
883,922 |
|
|
$ |
1,039,482 |
|
Assumed
|
|
|
764 |
|
|
|
826 |
|
|
|
2,340 |
|
|
|
3,133 |
|
Ceded
|
|
|
(16,260 |
) |
|
|
(24,319 |
) |
|
|
(55,876 |
) |
|
|
(86,465 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
|
278,982 |
|
|
|
278,254 |
|
|
|
830,386 |
|
|
|
956,150 |
|
Decrease in unearned premiums, net
|
|
|
17,514 |
|
|
|
15,261 |
|
|
|
47,236 |
|
|
|
40,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
|
296,496 |
|
|
|
293,515 |
|
|
|
877,622 |
|
|
|
996,477 |
|
Investment income, net of expenses
|
|
|
58,465 |
|
|
|
75,528 |
|
|
|
190,192 |
|
|
|
230,737 |
|
Realized investment gains, net
|
|
|
24,524 |
|
|
|
33,483 |
|
|
|
89,180 |
|
|
|
65,844 |
|
Total other-than-temporary impairment losses
|
|
|
- |
|
|
|
- |
|
|
|
(6,052 |
) |
|
|
(35,103 |
) |
Portion of losses recognized in other comprehensive income, before taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net impairment losses recognized in earnings
|
|
|
- |
|
|
|
- |
|
|
|
(6,052 |
) |
|
|
(35,103 |
) |
Other revenue
|
|
|
2,840 |
|
|
|
10,811 |
|
|
|
8,508 |
|
|
|
45,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
382,325 |
|
|
|
413,337 |
|
|
|
1,159,450 |
|
|
|
1,303,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses incurred, net (note 12)
|
|
|
384,578 |
|
|
|
971,043 |
|
|
|
1,159,166 |
|
|
|
2,498,567 |
|
Change in premium deficiency reserve (note 13)
|
|
|
(8,887 |
) |
|
|
(19,346 |
) |
|
|
(33,072 |
) |
|
|
(246,533 |
) |
Amortization of deferred policy acquisition costs
|
|
|
1,750 |
|
|
|
2,013 |
|
|
|
5,243 |
|
|
|
5,974 |
|
Other underwriting and operating expenses, net
|
|
|
55,856 |
|
|
|
57,120 |
|
|
|
166,358 |
|
|
|
177,429 |
|
Reinsurance fee
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
26,407 |
|
Interest expense
|
|
|
26,702 |
|
|
|
20,586 |
|
|
|
72,819 |
|
|
|
68,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses
|
|
|
459,999 |
|
|
|
1,031,416 |
|
|
|
1,370,514 |
|
|
|
2,530,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before tax
|
|
|
(77,674 |
) |
|
|
(618,079 |
) |
|
|
(211,064 |
) |
|
|
(1,227,283 |
) |
Benefit from income taxes (note 11)
|
|
|
(26,146 |
) |
|
|
(100,311 |
) |
|
|
(33,996 |
) |
|
|
(185,120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(51,528 |
) |
|
$ |
(517,768 |
) |
|
$ |
(177,068 |
) |
|
$ |
(1,042,163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share (note 6):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.26 |
) |
|
$ |
(4.17 |
) |
|
$ |
(1.05 |
) |
|
$ |
(8.39 |
) |
Diluted
|
|
$ |
(0.26 |
) |
|
$ |
(4.17 |
) |
|
$ |
(1.05 |
) |
|
$ |
(8.39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - diluted (shares in thousands, note 6)
|
|
|
200,077 |
|
|
|
124,296 |
|
|
|
168,429 |
|
|
|
124,180 |
|
See accompanying notes to consolidated financial statements.
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Year Ended December 31, 2009 and Nine Months Ended September 30, 2010 (unaudited)
|
|
Common stock
|
|
|
Paid-in capital
|
|
|
Treasury stock
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
Retained earnings
|
|
|
Comprehensive (loss) income
|
|
|
|
(In thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$ |
130,119 |
|
|
$ |
440,542 |
|
|
$ |
(276,873 |
) |
|
$ |
(106,789 |
) |
|
$ |
2,247,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,322,277 |
) |
|
$ |
(1,322,277 |
) |
Change in unrealized investment gains and losses, net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
154,358 |
|
|
|
- |
|
|
|
154,358 |
|
Noncredit component of impairment losses, net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,764 |
) |
|
|
- |
|
|
|
(1,764 |
) |
Common stock shares issued upon debt conversion
|
|
|
44 |
|
|
|
263 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Reissuance of treasury stock, net
|
|
|
- |
|
|
|
(11,613 |
) |
|
|
7,135 |
|
|
|
- |
|
|
|
(545 |
) |
|
|
|
|
Equity compensation
|
|
|
- |
|
|
|
14,102 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Defined benefit plan adjustments, net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10,704 |
|
|
|
- |
|
|
|
10,704 |
|
Unrealized foreign currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
17,646 |
|
|
|
- |
|
|
|
17,646 |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
295 |
|
|
|
|
|
Comprehensive loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
(1,141,333 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$ |
130,163 |
|
|
$ |
443,294 |
|
|
$ |
(269,738 |
) |
|
$ |
74,155 |
|
|
$ |
924,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(177,068 |
) |
|
$ |
(177,068 |
) |
Change in unrealized investment gains and losses, net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
74,931 |
|
|
|
- |
|
|
|
74,931 |
|
Common stock shares issued (note 14)
|
|
|
74,884 |
|
|
|
697,492 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Reissuance of treasury stock, net
|
|
|
- |
|
|
|
(14,425 |
) |
|
|
47,106 |
|
|
|
- |
|
|
|
(35,409 |
) |
|
|
|
|
Equity compensation
|
|
|
- |
|
|
|
9,211 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Unrealized foreign currency translation adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,142 |
|
|
|
- |
|
|
|
4,142 |
|
Comprehensive loss (note 9)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
(97,995 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010
|
|
$ |
205,047 |
|
|
$ |
1,135,572 |
|
|
$ |
(222,632 |
) |
|
$ |
153,228 |
|
|
$ |
712,230 |
|
|
|
|
|
See accompanying notes to consolidated financial statements
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2010 and 2009
(Unaudited)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands of dollars)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$ |
(177,068 |
) |
|
$ |
(1,042,163 |
) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Amortization of deferred insurance policy acquisition costs
|
|
|
5,243 |
|
|
|
5,974 |
|
Capitalized deferred insurance policy acquisition costs
|
|
|
(4,393 |
) |
|
|
(3,773 |
) |
Depreciation and amortization
|
|
|
43,569 |
|
|
|
47,376 |
|
Decrease in accrued investment income
|
|
|
11,401 |
|
|
|
409 |
|
Decrease (increase) in reinsurance recoverable on loss reserves
|
|
|
32,988 |
|
|
|
(151,412 |
) |
Decrease in prepaid reinsurance premiums
|
|
|
630 |
|
|
|
634 |
|
Decrease in premium receivable
|
|
|
2,826 |
|
|
|
2,289 |
|
(Increase) decrease in real estate acquired
|
|
|
(3,033 |
) |
|
|
29,595 |
|
(Decrease) increase in loss reserves
|
|
|
(525,898 |
) |
|
|
1,538,893 |
|
Decrease in premium deficiency reserve
|
|
|
(33,072 |
) |
|
|
(246,533 |
) |
Decrease in unearned premiums
|
|
|
(46,560 |
) |
|
|
(36,507 |
) |
Deferred tax (benefit) provision
|
|
|
(38,152 |
) |
|
|
146,217 |
|
Decrease in income taxes recoverable (current)
|
|
|
293,723 |
|
|
|
108,785 |
|
Realized investment gains, excluding impairment losses
|
|
|
(89,180 |
) |
|
|
(65,844 |
) |
Net investment impairment losses
|
|
|
6,052 |
|
|
|
35,103 |
|
Other
|
|
|
67,516 |
|
|
|
48,156 |
|
Net cash (used in) provided by operating activities
|
|
|
(453,408 |
) |
|
|
417,199 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of fixed maturities
|
|
|
(3,544,492 |
) |
|
|
(3,362,579 |
) |
Purchase of equity securities
|
|
|
(82 |
) |
|
|
(1,356 |
) |
Proceeds from sale of equity securities
|
|
|
- |
|
|
|
1,273 |
|
Proceeds from sale of fixed maturities
|
|
|
3,213,002 |
|
|
|
2,525,731 |
|
Proceeds from maturity of fixed maturities
|
|
|
644,028 |
|
|
|
411,445 |
|
Net increase in payable for securities
|
|
|
14,565 |
|
|
|
68,334 |
|
Net cash provided by (used in) investing activities
|
|
|
327,021 |
|
|
|
(357,152 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net proceeds from convertible senior notes
|
|
|
334,373 |
|
|
|
- |
|
Common stock shares issued
|
|
|
772,376 |
|
|
|
- |
|
Repayment of note payable
|
|
|
- |
|
|
|
(200,000 |
) |
Repayment of long-term debt
|
|
|
- |
|
|
|
(87,659 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
1,106,749 |
|
|
|
(287,659 |
) |
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
980,362 |
|
|
|
(227,612 |
) |
Cash and cash equivalents at beginning of period
|
|
|
1,185,739 |
|
|
|
1,097,334 |
|
Cash and cash equivalents at end of period
|
|
$ |
2,166,101 |
|
|
$ |
869,722 |
|
See accompanying notes to consolidated financial statements.
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
Note 1 - Basis of presentation
The accompanying unaudited consolidated financial statements of MGIC Investment Corporation and its wholly-owned subsidiaries have been prepared in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission (“SEC”) for interim reporting and do not include all of the other information and disclosures required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2009 included in our Annual Report on Form 10-K. As used below, “we”, “our” and “us” refer to MGIC Investment Corporation’s consolidated operations or to MGIC Investment Corporation, as the context requires.
In the opinion of management the accompanying financial statements include all adjustments, consisting primarily of normal recurring accruals, necessary to fairly state our financial position and results of operations for the periods indicated. The results of operations for the interim periods may not be indicative of the results that may be expected for the year ending December 31, 2010.
Capital
At September 30, 2010, Mortgage Guaranty Insurance Corporation’s (“MGIC”) policyholders position exceeded the required regulatory minimum by approximately $382 million, and we exceeded the required minimum by approximately $452 million on a combined statutory basis. (The combined figures give effect to reinsurance with subsidiaries of our holding company.) At September 30, 2010 MGIC’s risk-to-capital ratio was 17.7:1 and was 20.6:1 on a combined statutory basis.
The insurance laws or regulations of 17 jurisdictions, including Wisconsin, require a mortgage insurer to maintain a minimum amount of statutory capital relative to the risk in force (or a similar measure) in order for the mortgage insurer to continue to write new business. We refer to these requirements as the risk-to-capital requirement. While formulations of minimum capital may vary in certain jurisdictions, the most common measure applied allows for a maximum permitted risk-to-capital ratio of 25 to 1. Based upon internal company estimates, MGIC’s risk-to-capital ratio over the next few years, after giving effect to any contribution to MGIC of the proceeds from our April 2010 common stock and convertible notes offerings beyond the contribution already made, could reach 40 to 1 or even higher under a stress loss scenario.
In December 2009, the Office of the Commissioner of Insurance for the State of Wisconsin (“OCI”) issued an order waiving, until December 31, 2011, its risk-to-capital requirement. MGIC has also applied for waivers in all other jurisdictions that have risk-to-capital requirements. MGIC has received waivers from some of these jurisdictions. These waivers expire at various times, with the earliest expiration being December 31, 2010. Some jurisdictions have denied the request and others may deny the request. The OCI and other insurance departments of other jurisdictions, in their sole discretion, may modify, terminate or extend their waivers. If the OCI or another insurance department modifies or terminates its waiver, or if it fails to renew its waiver after expiration, MGIC would be prevented from writing new business anywhere, in the case of the waiver from the OCI, or in the particular jurisdiction, in the case of the other waivers, if MGIC’s risk-to-capital ratio exceeds 25 to 1 unless MGIC obtained additional capital to enable it to comply with the risk-to-capital requirement. New insurance written in the jurisdictions that have risk-to-capital requirements represented approximately 50% of new insurance written in the first three quarters of 2010. If MGIC were prevented from writing new business in all jurisdictions, our insurance operations in MGIC would be in run-off (meaning no new loans would be insured but loans previously insured would continue to be covered, with premiums continuing to be received and losses continuing to be paid, on those loans) until MGIC either met the applicable risk-to-capital requirement or obtained a necessary waiver to allow it to once again write new business.
We cannot assure you that the OCI or any other jurisdiction that has granted a waiver of its risk-to-capital requirements will not modify or revoke the waiver, that it will renew the waiver when it expires or that MGIC could obtain the additional capital necessary to comply with the risk-to-capital requirement.
We have implemented a plan to write new mortgage insurance in MGIC Indemnity Corporation (“MIC”), a subsidiary of MGIC, in selected jurisdictions in order to address the likelihood that in the future MGIC will not meet the minimum regulatory capital requirements discussed above and may not be able to obtain appropriate waivers of these requirements in all jurisdictions in which minimum requirements are present. MIC has received the necessary approvals, including from the OCI, to write business in all of the jurisdictions in which MGIC would be prohibited from continuing to write new business in the event of MGIC’s failure to meet applicable regulatory capital requirements and obtain waivers of those requirements.
In October 2009, we, MGIC and MIC entered into an agreement with Fannie Mae (the “Fannie Mae Agreement”) under which MGIC agreed to contribute $200 million to MIC (which MGIC has done) and Fannie Mae approved MIC as an eligible mortgage insurer through December 31, 2011 subject to the terms of the Fannie Mae Agreement. Under the Fannie Mae Agreement, MIC will be eligible to write mortgage insurance only in those jurisdictions (other than Wisconsin) in which MGIC cannot write new insurance due to MGIC’s failure to meet regulatory capital requirements and if MGIC fails to obtain relief from those requirements or a specified waiver of them.
On February 11, 2010, Freddie Mac notified MGIC that it may utilize MIC to write new business in jurisdictions in which MGIC does not meet minimum regulatory capital requirements to write new business and does not obtain appropriate waivers of those requirements. This conditional approval to use MIC as a “Limited Insurer” (the “Freddie Mac Notification”) will expire December 31, 2012. This conditional approval includes terms substantially similar to those in the Fannie Mae Agreement.
Under the Fannie Mae Agreement, Fannie Mae approved MIC as an eligible mortgage insurer only through December 31, 2011. Freddie Mac (together with Fannie Mae, referred to as “GSEs”) has approved MIC as a “Limited Insurer” only through December 31, 2012. Whether MIC will continue as an eligible mortgage insurer after these dates will be determined by the applicable GSE’s mortgage insurer eligibility requirements then in effect. Further, under the Fannie Mae Agreement and the Freddie Mac Notification, MGIC cannot capitalize MIC with more than the $200 million contribution already made without prior approval from each GSE, which limits the amount of business MIC can write. We believe that the amount of capital that MGIC has contributed to MIC will be sufficient to write business for the term of the Fannie Mae Agreement and the Freddie Mac Notification in the jurisdictions in which MIC is eligible to do so. Depending on the level of losses that MGIC experiences in the future, however, it is possible that regulatory action by one or more jurisdictions, including those that do not have specific regulatory capital requirements applicable to mortgage insurers, may prevent MGIC from continuing to write new insurance in some or all of the jurisdictions in which MIC is not eligible to write business.
A failure to meet the specific minimum regulatory capital requirements to insure new business does not necessarily mean that MGIC does not have sufficient resources to pay claims on its insurance liabilities. While we believe that MGIC has sufficient claims paying resources to meet its claim obligations on its insurance in force, even in scenarios in which it fails to meet regulatory capital requirements, we cannot assure you that the events that led to MGIC failing to meet regulatory capital requirements would not also result in it not having sufficient claims paying resources. Furthermore, our estimates of MGIC’s claims paying resources and claim obligations are based on various assumptions. These assumptions include our anticipated rescission activity, future housing values and future unemployment rates. These assumptions are subject to inherent uncertainty and require judgment by management. Current conditions in the domestic economy make the assumptions about housing values and unemployment rates highly volatile in the sense that there is a wide range of reasonably possible outcomes. Our anticipated rescission activity is also subject to inherent uncertainty due to the difficulty of predicting the amount of claims that will be rescinded and the outcome of any dispute resolution proceedings related to rescissions that we make.
Historically, rescissions of policies for which claims have been submitted to us were not a material portion of our claims resolved during a year. However, beginning in 2008, our rescissions of policies have materially mitigated our paid and incurred losses. In 2009, rescissions mitigated our paid losses by $1.2 billion and in the first nine months of 2010, rescissions mitigated our paid losses by $903 million (both of these figures include amounts that would have resulted in either a claim payment or been charged to a deductible under a bulk or pool policy, and may have been charged to a captive reinsurer). While we have a substantial pipeline of claims investigations that we expect will eventually result in future rescissions, we expect that rescissions will not continue to mitigate paid losses at the same level we have recently experienced.
Our loss reserving methodology incorporates the effects rescission activity is expected to have on the losses we will pay on our delinquent inventory. A variance between ultimate actual rescission rates and these estimates, as a result of the outcome of claims investigations, litigation, settlements or other factors, could materially affect our losses. We estimate rescissions mitigated our incurred losses by approximately $2.5 billion in calendar year 2009, compared to a net $0.5 billion in the first three quarters of 2010, with all of the mitigation of incurred losses for 2010 being realized in the first quarter. Both of these figures include the benefit of claims not paid in the period as well as the impact of changes in our estimated expected rescission activity on our loss reserves in the period. Our loss reserves continue to be significantly mitigated by expected rescission activity. In recent quarters, between 25% and 30% of claims received in a quarter have been resolved by rescissions. At September 30, 2010, we had 223,373 loans in our primary delinquency inventory; the resolution of a significant portion of these loans will not involve paid claims.
In addition, if MGIC’s right to rescind coverage is disputed, the outcome of the dispute ultimately would be determined by legal proceedings. Objections to rescission may be made several years after we have rescinded an insurance policy. Countrywide Home Loans, Inc. and an affiliate (“Countrywide”) have filed a lawsuit against MGIC alleging that MGIC has denied, and continues to deny, valid mortgage insurance claims. MGIC has filed an arbitration case against Countrywide regarding rescissions and Countrywide has responded seeking damages of at least $150 million, exclusive of interest and costs. For more information about this lawsuit and arbitration case, see Note 5.
In the second quarter of 2010, we entered into a settlement agreement with a lender-customer regarding our rescission practices. Loans covered by this settlement agreement represented fewer than 10% of our policies in force as well as our delinquent inventory. Under this agreement, we waived certain of our rescission rights on loans subject to the agreement and the customer agreed to contribute to the cost of claims that we pay on these loans. The rescission rights we waived are for matters related to loan origination, which historically have been the basis of substantially all of our rescissions. In addition, under the agreement we reversed certain rescissions and the customer waived claims regarding certain other past rescissions. We continue to discuss with other lenders their objections to material rescissions and/or the possibility of entering into a settlement agreement. In addition to the proceedings involving Countrywide, we are involved in litigation and arbitration proceedings with respect to rescissions that we do not consider to be collectively material in amount.
Reclassifications
Certain reclassifications have been made in the accompanying financial statements to 2009 amounts to conform to 2010 presentation.
Note 2 - New Accounting Guidance
In January 2010 new accounting guidance was issued that expanded the required disclosures on fair value measurements. The guidance will require the disclosure of transfers in and out of Levels 1 and 2 of the fair value hierarchy and the reasons for those transfers and separate presentation of purchases, sales, issuances and settlements for Level 3 securities, on a gross basis rather than as one net number. The new guidance also clarifies the level of disaggregation required to be disclosed for each class of assets and liabilities and provides clarification on the appropriate disclosures of inputs and valuation techniques used to measure fair value for both recurring and non recurring measurements in Levels 2 and 3. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements for the Level 3 securities. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We have evaluated the provisions of this guidance and there is no significant impact on our financial statement disclosures.
Note 3 – Debt
Senior Notes
At September 30, 2010 and December 31, 2009 we had outstanding $78.4 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 shareholder’s equity of at least 15% of our consolidated shareholders equity. We were in compliance with all covenants at September 30, 2010.
If we fail to meet any of the covenants of the Senior Notes discussed above; there is a failure to pay when due at maturity, or a default results in the acceleration of maturity of, any of our other debt in an aggregate amount of $40 million or more; or 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 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 series. In addition, the Trustee of these two issues of Senior Notes could, independent of any action by holders of Senior Notes, accelerate the maturity of the Senior Notes.
At September 30, 2010 and December 31, 2009, the fair value of the amount outstanding under our Senior Notes was $348.5 million and $293.2 million, respectively. The fair value was determined using publicly available trade information.
Interest payments on the Senior Notes were $12.5 million and $16.3 million for the nine months ended September 30, 2010 and 2009, respectively.
Convertible Senior Notes
In April 2010 we completed the sale of $345 million principal amount of 5% Convertible Senior Notes due in 2017. We received net proceeds of approximately $334.4 million after deducting underwriting discount and offering expenses. Interest on the Convertible Senior Notes will be payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2010. We do not have the right to defer interest payments on the Convertible Senior Notes. The Convertible Senior Notes will mature on May 1, 2017, unless earlier converted by the holders or repurchased by us. Covenants in the Convertible Senior Notes include a requirement to notify holders in advance of certain events and that we and the designated subsidiaries (defined above) 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 Convertible Senior Notes.
If we fail to meet any of the covenants of the Convertible Senior Notes; there is a failure to pay when due at maturity, or a default results in the acceleration of maturity of, any of our other debt in an aggregate amount of $40 million or more; a final judgment for the payment of $40 million or more (excluding any amounts covered by insurance) is rendered against us or any of our subsidiaries which judgment is not discharged or stayed within certain time limits; or we fail to make a payment of principal of the Convertible Senior Notes when due or a payment of interest on the Convertible Senior Notes within thirty days after due and we are not successful in obtaining an agreement from holders of a majority of the Convertible Senior Notes to change (or waive) the applicable requirement or payment default, then the holders of 25% or more of the Convertible Senior Notes would have the right to accelerate the maturity of those notes. In addition, the Trustee of the Convertible Senior Notes could, independent of any action by holders, accelerate the maturity of the Convertible Senior Notes.
The Convertible Senior Notes are convertible, at the holder's option, at an initial conversion rate, which is subject to adjustment, of 74.4186 shares per $1,000 principal amount at any time prior to the maturity date. This represents an initial conversion price of approximately $13.44 per share. The initial conversion price represents a 25% conversion premium based on the $10.75 per share price to the public in our concurrent common stock offering as discussed in Note 14. These Convertible Senior Notes will be equal in right of payment to our existing Senior Notes, discussed above, and will be senior in right of payment to our existing Convertible Junior Debentures, discussed below. Debt issuance costs will be amortized to interest expense over the contractual life of the Convertible Senior Notes. The provisions of the Convertible Senior Notes are complex. The description above is not intended to be complete in all respects. Moreover, that description is qualified in its entirety by the terms of the notes, which are contained in the Supplemental Indenture, dated as of April 26, 2010, between us and U.S. Bank National Association, as Trustee (the “Trustee”), and the Indenture dated as of October 15, 2000, between us and the Trustee.
We intend to use the net proceeds from the offering to provide funds to repay at maturity or repurchase prior to maturity the $78.4 million outstanding principal amount of our 5.625% Senior Notes due in September 2011 and for our general corporate purposes, which may include improving liquidity by providing funds for debt service and increasing the capital of MGIC and other subsidiaries.
At September 30, 2010, the fair value of the amount outstanding under our Convertible Senior Notes was $365.7 million. The fair value was determined using publicly available trade information.
Convertible Junior Subordinated Debentures
At September 30, 2010 and December 31, 2009 we had outstanding $389.5 million principal amount of 9% Convertible Junior Subordinated Debentures due in 2063 (the “debentures”). The debentures have an effective interest rate of 19% that reflects our non-convertible debt borrowing rate at the time of issuance. At September 30, 2010 and December 31, 2009 the amortized value of the principal amount of the debentures is reflected as a liability on our consolidated balance sheet of $309.2 million and $291.8 million, respectively, with the unamortized discount reflected in equity. At September 30, 2010 and December 31, 2009 we also had $57.5 million and $35.8 million, respectively, of deferred interest outstanding on the debentures which is included in other liabilities on the consolidated balance sheet. The debentures rank junior to all of our existing and future senior indebtedness.
Interest on the debentures is payable semi-annually in arrears on April 1 and October 1 of each year. 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 above, 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.
Interest on the debentures that would have been payable on the scheduled interest payment dates of April 1, 2009, October 1, 2009 and April 1, 2010 had been deferred for up to 10 years past the scheduled payment date. During this deferral period the deferred interest continued to accrue and compound semi-annually to the extent permitted by applicable law at an annual rate of 9%.
On October 1, 2010 we paid each of those deferred interest payments, including the compound interest on each. The interest payments, totaling approximately $57.5 million, were made from the net proceeds of our April 2010 common stock offering. We also paid the regular October 1, 2010 interest payment due on the debentures of approximately $17.5 million. We continue to have the right to defer interest that is payable on subsequent scheduled interest payment dates if we give the required 15 day notice. Any deferral of such interest would be on terms equivalent to those described above.
When interest on the debentures is deferred, we are required, not later than a specified time, to use reasonable commercial efforts to begin selling qualifying securities to persons who are not our affiliates. The specified time is one business day after we pay interest on the debentures that was not deferred, or if earlier, the fifth anniversary of the scheduled interest payment date on which the deferral started. Qualifying securities are common stock, certain warrants and certain non-cumulative perpetual preferred stock. The requirement to use such efforts to sell such securities is called the Alternative Payment Mechanism. Although there was no requirement to begin the Alternative Payment Mechanism, with respect to the deferral of interest described above, the common shares issued in April 2010, discussed in Note 14, were qualifying securities. We had 180 days from the date of issuance of those shares to elect to use the proceeds to pay deferred interest and we elected to do so as described above.
The net proceeds of Alternative Payment Mechanism sales are to be applied to the payment of deferred interest, including the compound portion. We cannot pay deferred interest other than from the net proceeds of Alternative Payment Mechanism sales, except at the final maturity of the debentures or at the tenth anniversary of the start of the interest deferral. The Alternative Payment Mechanism does not require us to sell common stock or warrants before the fifth anniversary of the interest payment date on which that deferral started if the net proceeds (counting any net proceeds of those securities previously sold under the Alternative Payment Mechanism) would exceed the 2% cap. The 2% cap is 2% of the average closing price of our common stock times the number of our outstanding shares of common stock. The average price is determined over a specified period ending before the issuance of the common stock or warrants being sold, and the number of outstanding shares is determined as of the date of our most recent publicly released financial statements.
We are not required to issue under the Alternative Payment Mechanism a total of more than 10 million shares of common stock, including shares underlying qualifying warrants. In addition, we may not issue under the Alternative Payment Mechanism qualifying preferred stock if the total net proceeds of all issuances would exceed 25% of the aggregate principal amount of the debentures.
The Alternative Payment Mechanism does not apply during any period between scheduled interest payment dates if there is a “market disruption event” that occurs over a specified portion of such period. Market disruption events include any material adverse change in domestic or international economic or financial conditions.
The provisions of the Alternative Payment Mechanism are complex. The description above is not intended to be complete in all respects. Moreover, that description is qualified in its entirety by the terms of the debentures, which are contained in the Indenture, dated as of March 28, 2008, between us and U.S. Bank National Association, as trustee.
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. 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.
The debentures are currently convertible, at the holder's 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. If a holder elects to convert their debentures, deferred interest owed on the debentures being converted is also converted into shares of our common stock. The conversion rate for any deferred interest is based on the average price that our shares traded at during a 5-day period immediately prior to the election to convert. In 2009, we issued 44,316 shares of our common stock on conversion of $478,000 principal amount of our convertible debentures and related deferred interest. 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.
The fair value of the debentures was approximately $402.2 million and $254.3 million, respectively, at September 30, 2010 and December 31, 2009, as determined using available pricing for these debentures or similar instruments.
Note 4 – Reinsurance
The reinsurance recoverable on loss reserves as of September 30, 2010 and December 31, 2009 was $299.2 million and $332.2 million, respectively. Within those amounts, the reinsurance recoverable on loss reserves related to captive agreements was approximately $264 million at September 30, 2010 and $297 million at December 31, 2009. The total fair value of the trust fund assets under our captive agreements at September 30, 2010 was $540 million, compared to $547 million at December 31, 2009. Trust fund assets of $35 million and $41 million were transferred to us as a result of captive terminations during the first nine months of 2010 and 2009, respectively.
Note 5 – Litigation and contingencies
In addition to the matters described below, we are involved in other legal proceedings in the ordinary course of business. In our opinion, based on the facts known at this time, the ultimate resolution of these ordinary course legal proceedings will not have a material adverse effect on our financial position or results of operations. The assessment of materiality underlying this conclusion does not take account of whether the resolution of such proceedings would cause income from operations to become a loss from operations.
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. 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.
We are subject to comprehensive, detailed regulation by state insurance departments. These regulations are principally designed for the protection of our insured policyholders, rather than for the benefit of investors. Although their scope varies, state insurance laws generally grant broad supervisory powers to agencies or officials to examine insurance companies and enforce rules or exercise discretion affecting almost every significant aspect of the insurance business. Given the recent significant losses incurred by many insurers in the mortgage and financial guaranty industries, our insurance subsidiaries have been subject to heightened scrutiny by insurance regulators. State insurance regulatory authorities could take actions, including changes in capital requirements or termination of waivers of capital requirements, that could have a material adverse effect on us. In addition, the Dodd-Frank Act, the financial reform legislation that was passed in July 2010, establishes the Bureau of Consumer Financial Protection to regulate the offering and provision of consumer financial products or services under federal law. We are uncertain whether this Bureau will issue any rules or regulations that affect our business. Such rules and regulations could 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 (the “MN Department”), which regulates insurance, we provided the MN Department with information about captive mortgage reinsurance and certain other matters. We subsequently provided additional information to the MN Department, and beginning in March 2008 the MN Department has sought additional information as well as answers to questions regarding captive mortgage reinsurance on several occasions. In addition, beginning in June 2008, we have received subpoenas 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 MN Department, 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 HUD as well as the insurance commissioner or attorney general of any state may bring an action to enjoin violations of these provisions of RESPA. The insurance law provisions of many states 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.
Since October 2007 we have been involved in an investigation conducted by the Division of Enforcement of the SEC. The investigation has focused on disclosure and financial reporting by us and by a co-investor in 2007 regarding our respective investments in our C-BASS joint venture. We have provided documents to the SEC and a number of our executive officers, as well as other employees, have testified and we have had discussions with the SEC staff. This matter is ongoing and no assurance can be given that the SEC staff will not recommend an enforcement action against our company or one or more of our executive officers or other employees.
Five previously-filed purported class action complaints filed against us and several of our executive officers were consolidated in March 2009 in the United States District Court for the Eastern District of Wisconsin and Fulton County Employees’ Retirement System was appointed as the lead plaintiff. The lead plaintiff filed a Consolidated Class Action Complaint (the “Complaint”) on June 22, 2009. Due in part to its length and structure, it is difficult to summarize briefly the allegations in the Complaint but it appears the allegations are that we and our officers named in the Complaint violated the federal securities laws by misrepresenting or failing to disclose material information about (i) loss development in our insurance in force, and (ii) C-BASS, including its liquidity. Our motion to dismiss the Complaint was granted on February 18, 2010. On March 18, 2010, plaintiffs filed a motion for leave to file an amended complaint. Attached to this motion was a proposed Amended Complaint (the “Amended Complaint”). The Amended Complaint alleges that we and two of our officers named in the Amended Complaint violated the federal securities laws by misrepresenting or failing to disclose material information about C-BASS, including its liquidity, and by failing to properly account for our investment in C-BASS. The Amended Complaint also names two officers of C-BASS with respect to the Amended Complaint’s allegations regarding C-BASS. The purported class period covered by the Amended Complaint begins on February 6, 2007 and ends on August 13, 2007. The Amended Complaint seeks damages based on purchases of our stock during this time period at prices that were allegedly inflated as a result of the purported violations of federal securities laws. On April 12, 2010, we filed a motion in opposition to Plaintiff’s motion for leave to amend its complaint. We are unable to predict the outcome of these consolidated cases or estimate our associated expenses or possible losses. Other lawsuits alleging violations of the securities laws could be brought against us.
Several law firms have issued press releases to the effect that they are investigating us, including whether the fiduciaries of our 401(k) plan breached their fiduciary duties regarding the plan’s investment in or holding of our common stock or whether we breached other legal or fiduciary obligations to our shareholders. We intend to defend vigorously any proceedings that may result from these investigations.
With limited exceptions, our bylaws provide that our officers and 401(k) plan fiduciaries are entitled to indemnification from us for claims against them.
On December 17, 2009, Countrywide filed a complaint for declaratory relief in the Superior Court of the State of California in San Francisco (the “California State Court”) against MGIC. This complaint alleges that MGIC has denied, and continues to deny, valid mortgage insurance claims submitted by Countrywide and says it seeks declaratory relief regarding the proper interpretation of the flow insurance policies at issue, which are in the same form as the flow policies that we use with all of our customers. On January 19, 2010, we removed this case to the United States District Court for the Northern District of California (the “District Court”). On March 30, 2010, the District Court ordered the case remanded to the California State Court. We have appealed this decision to the United States Court of Appeals for the Ninth Circuit (the “Court of Appeals”) and asked the Court of Appeals to vacate the remand and stay proceedings in the District Court. On May 17, 2010, the Court of Appeals denied a stay of the District Court’s remand order. On May 28, 2010, Countrywide filed an amended complaint substantially similar to the original complaint in the California State Court. On July 2, 2010, we filed a petition in the California State Court to compel arbitration and stay the litigation in that court. On August 26, 2010, Countrywide filed an opposition to our petition. Countrywide’s opposition states that there are thousands of loans for which it disputes MGIC’s interpretation of the flow insurance policies at issue. On September 16, 2010, we filed a reply to Countrywide’s opposition. On October 1, 2010, the California State Court stayed the litigation in that court pending a final ruling on our appeal.
In connection with the Countrywide dispute discussed above, on February 24, 2010, we commenced an arbitration action against Countrywide seeking a determination that MGIC was entitled to deny and/or rescind coverage on the loans involved in the arbitration action, which were insured through the flow channel and numbered more than 1,400 loans as of the filing of the action. Since we commenced the arbitration action, we have rescinded insurance coverage on more than one thousand additional Countrywide loans insured through the flow channel. On March 16, 2010, Countrywide filed a response to our arbitration action objecting to the arbitrator’s jurisdiction in view of the case initiated by Countrywide in the California State Court and asserting various defenses to the relief sought by MGIC in the arbitration. The response also seeks damages of at least $150 million, exclusive of interest and costs, as a result of purported breaches of flow insurance policies issued by MGIC and additional damages, including exemplary damages, on account of MGIC’s purported breach of an implied covenant of good faith and fair dealing. In October 2010, Countrywide informed us that it intended to amend its response to include loans insured through the bulk channel, which we believe will add more than one thousand loans to the arbitration action. As a result of additional flow rescissions since Countrywide’s arbitration response and its statement regarding inclusion of bulk loans in the arbitration, the damages Countrywide is seeking may increase materially. At September 30, 2010, Countrywide loans represent approximately 24% of our primary delinquency inventory. We intend to defend MGIC against Countrywide’s complaint and arbitration response, and to pursue MGIC’s claims in the arbitration, vigorously. However, we are unable to predict the outcome of these proceedings or their effect on us.
In addition to the rescissions at issue with Countrywide, we have a substantial pipeline of claims investigations (including investigations involving loans related to Countrywide) that we expect will eventually result in future rescissions. In the second quarter of 2010, we entered into a settlement agreement with a lender-customer regarding our rescission practices. See Note 1, above, for information about the settlement agreement.
We provide an outsourced underwriting service to our customers known as contract underwriting. 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. We have an established reserve for such obligations. 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 nine months ended September 30, 2010 and 2009. A generally positive economic environment for residential real estate that continued until approximately 2007 may have mitigated the effect of some of these costs, and claims for remedies may be submitted a number of years after the underwriting work was performed. A material portion of our new insurance written through the flow channel in recent years, including for 2006 and 2007, involved loans for which we provided contract underwriting services. We believe the rescission of mortgage insurance coverage on loans for which we provided contract underwriting services may make a claim for a contract underwriting remedy more likely to occur. Beginning in the second half 2009, we experienced an increase in claims for contract underwriting remedies, which continued into 2010.
See note 11 – “Income taxes” for a description of federal income tax contingencies.
Note 6 – Earnings (loss) per share
Our basic EPS is based on the weighted average number of common shares outstanding, which excludes participating securities of 1.8 million for the three months ended September 30, 2010 and 2009 and 1.8 million and 1.9 million, respectively for the nine months ended September 30, 2010 and 2009 because they were anti-dilutive due to our reported net loss. Typically, diluted EPS is based on the weighted average number of common shares outstanding plus common stock equivalents which include certain stock awards, stock options and the dilutive effect of our convertible debt. In accordance with accounting guidance, if we report a net loss from continuing operations then our diluted EPS is computed in the same manner as the basic EPS. In addition if any common stock equivalents are anti-dilutive they are always excluded from the calculation. The following includes a reconciliation of the weighted average number of shares; however for the three months ended September 30, 2010 and 2009 common stock equivalents of 62.3 million and 32.1 million, respectively, and for the nine months ended September 30, 2010 and 2009 common stock equivalents of 51.3 million and 33.5 million, respectively, were not included because they were anti-dilutive.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding
|
|
|
200,077 |
|
|
|
124,296 |
|
|
|
168,429 |
|
|
|
124,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(51,528 |
) |
|
$ |
(517,768 |
) |
|
$ |
(177,068 |
) |
|
$ |
(1,042,163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$ |
(0.26 |
) |
|
$ |
(4.17 |
) |
|
$ |
(1.05 |
) |
|
$ |
(8.39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares - Basic
|
|
|
200,077 |
|
|
|
124,296 |
|
|
|
168,429 |
|
|
|
124,180 |
|
Common stock equivalents
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares - Diluted
|
|
|
200,077 |
|
|
|
124,296 |
|
|
|
168,429 |
|
|
|
124,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(51,528 |
) |
|
$ |
(517,768 |
) |
|
$ |
(177,068 |
) |
|
$ |
(1,042,163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$ |
(0.26 |
) |
|
$ |
(4.17 |
) |
|
$ |
(1.05 |
) |
|
$ |
(8.39 |
) |
See Note 14 for information related to our sale of common stock and Note 3 for information related to our issuance of convertible senior notes, both in April 2010.
Note 7 – Investments
The amortized cost, gross unrealized gains and losses and fair value of the investment portfolio at September 30, 2010 and December 31, 2009 are shown below. Debt securities consist of fixed maturities and short-term investments.
September 30, 2010
|
|
Amortized Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses (1)
|
|
|
Fair Value
|
|
|
|
(In thousands of dollars)
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
|
$ |
1,174,828 |
|
|
$ |
27,139 |
|
|
$ |
(100 |
) |
|
$ |
1,201,867 |
|
Obligations of U.S. states and political subdivisions
|
|
|
3,357,532 |
|
|
|
172,171 |
|
|
|
(16,681 |
) |
|
|
3,513,022 |
|
Corporate debt securities
|
|
|
2,127,325 |
|
|
|
85,527 |
|
|
|
(4,436 |
) |
|
|
2,208,416 |
|
Residential mortgage-backed securities
|
|
|
55,603 |
|
|
|
3,672 |
|
|
|
- |
|
|
|
59,275 |
|
Debt securities issued by foreign sovereign governments
|
|
|
133,450 |
|
|
|
4,152 |
|
|
|
(277 |
) |
|
|
137,325 |
|
Total debt securities
|
|
$ |
6,848,738 |
|
|
$ |
292,661 |
|
|
$ |
(21,494 |
) |
|
$ |
7,119,905 |
|
Equity securities
|
|
|
2,975 |
|
|
|
151 |
|
|
|
- |
|
|
|
3,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio
|
|
$ |
6,851,713 |
|
|
$ |
292,812 |
|
|
$ |
(21,494 |
) |
|
$ |
7,123,031 |
|
December 31, 2009
|
|
Amortized Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses (1)
|
|
|
Fair Value
|
|
|
|
(In thousands of dollars)
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
|
$ |
736,668 |
|
|
$ |
4,877 |
|
|
$ |
(6,357 |
) |
|
$ |
735,188 |
|
Obligations of U.S. states and political subdivisions
|
|
|
4,607,936 |
|
|
|
187,540 |
|
|
|
(59,875 |
) |
|
|
4,735,601 |
|
Corporate debt securities
|
|
|
1,532,571 |
|
|
|
40,328 |
|
|
|
(9,158 |
) |
|
|
1,563,741 |
|
Residential mortgage-backed securities
|
|
|
102,062 |
|
|
|
3,976 |
|
|
|
(1,986 |
) |
|
|
104,052 |
|
Debt securities issued by foreign sovereign governments
|
|
|
112,603 |
|
|
|
1,447 |
|
|
|
(1,058 |
) |
|
|
112,992 |
|
Total debt securities
|
|
$ |
7,091,840 |
|
|
$ |
238,168 |
|
|
$ |
(78,434 |
) |
|
$ |
7,251,574 |
|
Equity securities
|
|
|
2,892 |
|
|
|
3 |
|
|
|
(4 |
) |
|
|
2,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio
|
|
$ |
7,094,732 |
|
|
$ |
238,171 |
|
|
$ |
(78,438 |
) |
|
$ |
7,254,465 |
|
(1) At September 30, 2010 and December 31, 2009, gross unrealized losses for residential mortgage-backed securities include $0 million and $1.8 million, respectively, in other-than-temporary impairment losses recorded in other comprehensive income, since the adoption of new guidance on other-than-temporary impairments.
The amortized cost and fair values of debt securities at September 30, 2010, 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.
September 30, 2010
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
(In thousands of dollars)
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$ |
61,221 |
|
|
$ |
61,939 |
|
Due after one year through five years
|
|
|
3,439,181 |
|
|
|
3,533,562 |
|
Due after five years through ten years
|
|
|
1,256,435 |
|
|
|
1,328,778 |
|
Due after ten years
|
|
|
1,634,673 |
|
|
|
1,752,475 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,391,510 |
|
|
$ |
6,676,754 |
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
|
55,603 |
|
|
|
59,275 |
|
Auction rate securities (1)
|
|
|
401,625 |
|
|
|
383,876 |
|
|
|
|
|
|
|
|
|
|
Total at September 30, 2010
|
|
$ |
6,848,738 |
|
|
$ |
7,119,905 |
|
(1) At September 30, 2010, approximately 98% of auction rate securities had a contractual maturity greater than 10 years.
At September 30, 2010 and December 31, 2009, the investment portfolio had gross unrealized losses of $21.5 million and $78.4 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
|
|
September 30, 2010
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
|
(In thousands of dollars)
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
|
$ |
44,166 |
|
|
$ |
100 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
44,166 |
|
|
$ |
100 |
|
Obligations of U.S. states and political subdivisions
|
|
|
146,297 |
|
|
|
423 |
|
|
|
414,163 |
|
|
|
16,258 |
|
|
|
560,460 |
|
|
|
16,681 |
|
Corporate debt securities
|
|
|
141,661 |
|
|
|
576 |
|
|
|
80,769 |
|
|
|
3,860 |
|
|
|
222,430 |
|
|
|
4,436 |
|
Residential mortgage- backed securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Debt issued by foreign sovereign governments
|
|
|
23,164 |
|
|
|
88 |
|
|
|
4,398 |
|
|
|
189 |
|
|
|
27,562 |
|
|
|
277 |
|
Equity securities
|
|
|
6 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6 |
|
|
|
- |
|
Total investment portfolio
|
|
$ |
355,294 |
|
|
$ |
1,187 |
|
|
$ |
499,330 |
|
|
$ |
20,307 |
|
|
$ |
854,624 |
|
|
$ |
21,494 |
|
|
|
Less Than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
December 31, 2009
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
Fair Value
|
|
|
Unrealized Losses
|
|
|
|
(In thousands of dollars)
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
|
$ |
434,362 |
|
|
$ |
6,357 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
434,362 |
|
|
$ |
6,357 |
|
Obligations of U.S. states and political subdivisions
|
|
|
926,860 |
|
|
|
29,390 |
|
|
|
398,859 |
|
|
|
30,485 |
|
|
|
1,325,719 |
|
|
|
59,875 |
|
Corporate debt securities
|
|
|
453,804 |
|
|
|
9,158 |
|
|
|
- |
|
|
|
- |
|
|
|
453,804 |
|
|
|
9,158 |
|
Residential mortgage- backed securities
|
|
|
8,743 |
|
|
|
1,764 |
|
|
|
870 |
|
|
|
222 |
|
|
|
9,613 |
|
|
|
1,986 |
|
Debt issued by foreign sovereign governments
|
|
|
56,122 |
|
|
|
1,058 |
|
|
|
- |
|
|
|
- |
|
|
|
56,122 |
|
|
|
1,058 |
|
Equity securities
|
|
|
2,398 |
|
|
|
4 |
|
|
|
- |
|
|
|
- |
|
|
|
2,398 |
|
|
|
4 |
|
Total investment portfolio
|
|
$ |
1,882,289 |
|
|
$ |
47,731 |
|
|
$ |
399,729 |
|
|
$ |
30,707 |
|
|
$ |
2,282,018 |
|
|
$ |
78,438 |
|
There were 135 securities in an unrealized loss position at September 30, 2010. The unrealized losses in all categories of our investments were primarily caused by the difference in interest rates at September 30, 2010 and December 31, 2009, compared to the interest rates at the time of purchase as well as the illiquidity premium applied in our auction rate securities discounted cash flow model. All of the securities in an unrealized loss position greater than 12 months at September 30, 2010 had a fair value greater than 80% of amortized cost.
Under the current guidance a debt security impairment is deemed other than temporary if we either intend to sell the security, or it is more likely than not that we will be required to sell the security before recovery or we do not expect to collect cash flows sufficient to recover the amortized cost basis of the security. During the third quarter and first nine months of 2010 we recognized other-than-temporary impairments (“OTTI”) in earnings of $0 and $6.1 million, respectively, compared to $0 and $35.1 million, respectively, during the third quarter and first nine months of 2009. Our OTTI during these periods in 2010 and 2009 was primarily related to securities for which we had the intent to sell.
The following table provides a rollforward of the amount related to credit losses recognized in earnings for which a portion of an OTTI was recognized in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2010.
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30, 2010
|
|
|
|
(In thousands of dollars)
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$ |
- |
|
|
$ |
1,021 |
|
Addition for the amount related to the credit loss for which an OTTI was not previously recognized
|
|
|
- |
|
|
|
- |
|
Additional increases to the amount related to the credit loss for which an OTTI was previously recognized
|
|
|
- |
|
|
|
- |
|
Reductions for securities sold during the period (realized)
|
|
|
- |
|
|
|
(1,021 |
) |
Ending balance
|
|
$ |
- |
|
|
$ |
- |
|
We held $383.9 million in auction rate securities (ARS) backed by student loans at September 30, 2010. 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, substantially all of which are ultimately 97% guaranteed by the United States Department of Education. At September 30, 2010, approximately 91% of our ARS portfolio was AAA/Aaa-rated by one or more of the following major rating agencies: Moody’s, Standard & Poor’s 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 September 30, 2010, our entire ARS portfolio, consisting of 36 investments, was subject to failed auctions, however, from the period when the auctions began to fail through September 30, 2010, $138.9 million in par value of ARS was either sold or called, with the average amount we received being 98% of par. To date, we have collected all interest due on our ARS.
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.
The net realized investment gains (losses) and OTTI on the investment portfolio are as follows:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
(In thousands of dollars)
|
|
Net realized investment gains (losses) and OTTI on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$ |
24,503 |
|
|
$ |
33,074 |
|
|
$ |
82,819 |
|
|
$ |
30,035 |
|
Equity securities
|
|
|
15 |
|
|
|
40 |
|
|
|
72 |
|
|
|
181 |
|
Other
|
|
|
6 |
|
|
|
369 |
|
|
|
237 |
|
|
|
525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,524 |
|
|
$ |
33,483 |
|
|
$ |
83,128 |
|
|
$ |
30,741 |
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
(In thousands of dollars)
|
|
Net realized investment gains (losses) and OTTI on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains on sales
|
|
$ |
26,305 |
|
|
$ |
36,601 |
|
|
$ |
98,893 |
|
|
$ |
90,532 |
|
Losses on sales
|
|
|
(1,781 |
) |
|
|
(3,118 |
) |
|
|
(9,713 |
) |
|
|
(24,688 |
) |
Impairment losses
|
|
|
- |
|
|
|
- |
|
|
|
(6,052 |
) |
|
|
(35,103 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,524 |
|
|
$ |
33,483 |
|
|
$ |
83,128 |
|
|
$ |
30,741 |
|
The net realized gains on investments during 2010 and 2009 primarily resulted from sales of tax-exempt municipal securities. Such sales were made to reduce the proportion of our investment portfolio held in tax-exempt municipal securities and to increase the proportion held in taxable securities principally since the tax benefits of holding tax exempt municipal securities are no longer available based on our recent net operating losses and to shorten the duration of the portfolio to provide cash to meet our anticipated claim payment obligations.
Note 8 – Fair value measurements
Fair value measurements for items measured at fair value included the following as of September 30, 2010 and December 31, 2009:
|
|
Fair Value
|
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant Other Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
|
(in thousands of dollars)
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
|
$ |
1,201,867 |
|
|
$ |
1,201,867 |
|
|
$ |
- |
|
|
$ |
- |
|
Obligations of U.S. states and political subdivisions
|
|
|
3,513,022 |
|
|
|
- |
|
|
|
3,201,326 |
|
|
|
311,696 |
|
Corporate debt securities
|
|
|
2,208,416 |
|
|
|
2,618 |
|
|
|
2,125,556 |
|
|
|
80,242 |
|
Residential mortgage-backed securities
|
|
|
59,275 |
|
|
|
- |
|
|
|
59,275 |
|
|
|
- |
|
Debt securities issued by foreign sovereign governments
|
|
|
137,325 |
|
|
|
127,905 |
|
|
|
9,420 |
|
|
|
- |
|
Total debt securities
|
|
|
7,119,905 |
|
|
|
1,332,390 |
|
|
|
5,395,577 |
|
|
|
391,938 |
|
Equity securities
|
|
|
3,126 |
|
|
|
2,805 |
|
|
|
- |
|
|
|
321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$ |
7,123,031 |
|
|
$ |
1,335,195 |
|
|
$ |
5,395,577 |
|
|
$ |
392,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate acquired (1)
|
|
$ |
6,863 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
6,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
|
$ |
735,188 |
|
|
$ |
735,188 |
|
|
$ |
- |
|
|
$ |
- |
|
Obligations of U.S. states and political subdivisions
|
|
|
4,735,601 |
|
|
|
- |
|
|
|
4,365,260 |
|
|
|
370,341 |
|
Corporate debt securities
|
|
|
1,563,741 |
|
|
|
2,559 |
|
|
|
1,431,844 |
|
|
|
129,338 |
|
Residential mortgage-backed securities
|
|
|
104,052 |
|
|
|
23,613 |
|
|
|
80,439 |
|
|
|
- |
|
Debt securities issued by foreign sovereign governments
|
|
|
112,992 |
|
|
|
101,983 |
|
|
|
11,009 |
|
|
|
- |
|
Total debt securities
|
|
|
7,251,574 |
|
|
|
863,343 |
|
|
|
5,888,552 |
|
|
|
499,679 |
|
Equity securities
|
|
|
2,891 |
|
|
|
2,570 |
|
|
|
- |
|
|
|
321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$ |
7,254,465 |
|
|
$ |
865,913 |
|
|
$ |
5,888,552 |
|
|
$ |
500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate acquired (1)
|
|
$ |
3,830 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,830 |
|
(1)
|
Real estate acquired through claim settlement, which is held for sale, is reported in Other Assets on the consolidated balance sheet.
|
There were no transfers of securities between Level 1 and Level 2 during the first nine months of 2010.
For assets and liabilities measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the three and nine months ended September 30, 2010 and 2009 is as follows:
|
|
Obligations of U.S. States and Political Subdivisions
|
|
|
Corporate Debt Securities
|
|
|
Equity Securities
|
|
|
Total Investments
|
|
|
Real Estate Acquired
|
|
|
|
(in thousands of dollars)
|
|
Balance at June 30, 2010
|
|
$ |
321,050 |
|
|
$ |
94,564 |
|
|
$ |
321 |
|
|
$ |
415,935 |
|
|
$ |
5,671 |
|
Total realized/unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings and reported as realized investment losses, net
|
|
|
- |
|
|
|
(1,057 |
) |
|
|
- |
|
|
|
(1,057 |
) |
|
|
- |
|
Included in earnings and reported as losses incurred, net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(701 |
) |
Included in other comprehensive income
|
|
|
3,504 |
|
|
|
2,528 |
|
|
|
- |
|
|
|
6,032 |
|
|
|
- |
|
Purchases, issuances and settlements
|
|
|
(12,858 |
) |
|
|
(15,793 |
) |
|
|
- |
|
|
|
(28,651 |
) |
|
|
1,893 |
|
Transfers in and/or out of Level 3
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010
|
|
$ |
311,696 |
|
|
$ |
80,242 |
|
|
$ |
321 |
|
|
$ |
392,259 |
|
|
$ |
6,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of total losses included in earnings for the three months ended September 30, 2010 attributable to the change in unrealized losses on assets still held at September 30, 2010
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
Obligations of U.S. States and Political Subdivisions
|
|
|
Corporate Debt Securities
|
|
|
Equity Securities
|
|
|
Total Investments
|
|
|
Real Estate Acquired
|
|
|
|
(in thousands of dollars)
|
|
Balance at December 31, 2009
|
|
$ |
370,341 |
|
|
$ |
129,338 |
|
|
$ |
321 |
|
|
$ |
500,000 |
|
|
$ |
3,830 |
|
Total realized/unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings and reported as realized investment losses, net
|
|
|
- |
|
|
|
(2,455 |
) |
|
|
- |
|
|
|
(2,455 |
) |
|
|
- |
|
Included in earnings and reported as losses incurred, net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,635 |
) |
Included in other comprehensive income
|
|
|
3,547 |
|
|
|
2,854 |
|
|
|
- |
|
|
|
6,401 |
|
|
|
- |
|
Purchases, issuances and settlements
|
|
|
(62,192 |
) |
|
|
(49,495 |
) |
|
|
- |
|
|
|
(111,687 |
) |
|
|
4,668 |
|
Transfers in and/or out of Level 3
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010
|
|
$ |
311,696 |
|
|
$ |
80,242 |
|
|
$ |
321 |
|
|
$ |
392,259 |
|
|
$ |
6,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of total losses included in earnings for the nine months ended September 30, 2010 attributable to the change in unrealized losses on assets still held at September 30, 2010
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
Obligations of U.S. States and Political Subdivisions
|
|
|
Corporate Debt Securities
|
|
|
Equity Securities
|
|
|
Total Investments
|
|
|
Real Estate Acquired
|
|
|
|
(in thousand of dollars)
|
|
Balance at June 30, 2009
|
|
$ |
386,338 |
|
|
$ |
134,070 |
|
|
$ |
321 |
|
|
$ |
520,729 |
|
|
$ |
7,858 |
|
Total realized/unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings and reported as losses incurred, net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
585 |
|
Included in other comprehensive income
|
|
|
(5,674 |
) |
|
|
(2,038 |
) |
|
|
- |
|
|
|
(7,712 |
) |
|
|
- |
|
Purchases, issuances and settlements
|
|
|
(2,163 |
) |
|
|
(200 |
) |
|
|
- |
|
|
|
(2,363 |
) |
|
|
(5,180 |
) |
Transfers in and/or out of Level 3
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009
|
|
$ |
378,501 |
|
|
$ |
131,832 |
|
|
$ |
321 |
|
|
$ |
510,654 |
|
|
$ |
3,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of total losses included in earnings for the three months ended September 30, 2009 attributable to the change in unrealized losses on assets still held at September 30, 2009
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
Obligations of U.S. States and Political Subdivisions
|
|
|
Corporate Debt Securities
|
|
|
Equity Securities
|
|
|
Total Investments
|
|
|
Real Estate Acquired
|
|
|
|
(in thousands of dollars)
|
|
Balance at December 31, 2008
|
|
$ |
395,388 |
|
|
$ |
150,241 |
|
|
$ |
321 |
|
|
$ |
545,950 |
|
|
$ |
32,858 |
|
Total realized/unrealized losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings and reported as realized investment losses, net
|
|
|
- |
|
|
|
(10,107 |
) |
|
|
- |
|
|
|
(10,107 |
) |
|
|
- |
|
Included in earnings and reported as losses incurred, net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,304 |
) |
Included in other comprehensive income
|
|
|
(11,777 |
) |
|
|
(3,467 |
) |
|
|
- |
|
|
|
(15,244 |
) |
|
|
- |
|
Purchases, issuances and settlements
|
|
|
(5,110 |
) |
|
|
(4,835 |
) |
|
|
- |
|
|
|
(9,945 |
) |
|
|
(28,291 |
) |
Transfers in and/or out of Level 3
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009
|
|
$ |
378,501 |
|
|
$ |
131,832 |
|
|
$ |
321 |
|
|
$ |
510,654 |
|
|
$ |
3,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of total losses included in earnings for the nine months ended September 30, 2009 attributable to the change in unrealized losses on assets still held at September 30, 2009
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Additional fair value disclosures related to our investment portfolio are included in Note 7. Fair value disclosures related to our debt are included in Note 3.
Note 9 - Comprehensive income
Our total comprehensive income was as follows:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(51,528 |
) |
|
$ |
(517,768 |
) |
|
$ |
(177,068 |
) |
|
$ |
(1,042,163 |
) |
Other comprehensive income
|
|
|
58,899 |
|
|
|
146,004 |
|
|
|
79,073 |
|
|
|
251,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$ |
7,371 |
|
|
$ |
(371,764 |
) |
|
$ |
(97,995 |
) |
|
$ |
(790,829 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains and losses on investments
|
|
$ |
47,607 |
|
|
$ |
140,193 |
|
|
$ |
74,931 |
|
|
$ |
230,870 |
|
Noncredit component of impairment loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Unrealized foreign currency translation adjustment
|
|
|
11,292 |
|
|
|
5,811 |
|
|
|
4,142 |
|
|
|
20,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
$ |
58,899 |
|
|
$ |
146,004 |
|
|
$ |
79,073 |
|
|
$ |
251,334 |
|
At September 30, 2010, accumulated other comprehensive income of $153.2 million included $176.5 million of net unrealized gains on investments, ($37.2) million relating to defined benefit plans and $13.9 million related to foreign currency translation adjustment. At December 31, 2009, accumulated other comprehensive income of $74.2 million included $101.6 million of net unrealized gains on investments, ($37.2) million relating to defined benefit plans and $9.8 million related to foreign currency translation adjustment.
Note 10 - Benefit Plans
The following table provides the components of net periodic benefit cost for the pension, supplemental executive retirement and other postretirement benefit plans:
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
Pension and Supplemental Executive Retirement Plans
|
|
|
Other Postretirement Benefits
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
2,133 |
|
|
$ |
2,039 |
|
|
$ |
281 |
|
|
$ |
320 |
|
Interest cost
|
|
|
3,885 |
|
|
|
3,575 |
|
|
|
295 |
|
|
|
366 |
|
Expected return on plan assets
|
|
|
(3,626 |
) |
|
|
(3,835 |
) |
|
|
(722 |
) |
|
|
(558 |
) |
Recognized net actuarial loss
|
|
|
1,481 |
|
|
|
1,583 |
|
|
|
191 |
|
|
|
426 |
|
Amortization of prior service cost
|
|
|
162 |
|
|
|
180 |
|
|
|
(1,534 |
) |
|
|
(1,515 |
) |
|
|
|
|
|
|
|
|
|
|
|
|