MGIC Investment Corp.

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MGIC Investment Corp.

270 E. Kilbourn Avenue
Milwaukee, Wisconsin 53202
Telephone: (414) 347-6480
Toll Free: (800) 558-9900
Fax: (414) 347-6696
Web site:

Public Company
Employees: 1,149
Total Assets: $4.56 billion (2001)
Stock Exchanges: New York
Ticker Symbol: MTG
NAIC: 524130 Reinsurance Carriers, 524126 Direct Property and Casualty Insurance Carriers, 551112 Offices of Other Holding Companies

MGIC Investment Corp. (MGIC) is a holding company whose chief subsidiary is Mortgage Guaranty Insurance Corp., a provider of private mortgage insurance coverage to the home mortgage lending industry in the United States and Puerto Rico. Most of MGIC s sales come from insurance premiums, although the company also offers its in-house payment and default predictive tools to other lenders. MGIC also invests in troubled mortgages through its interest in Credit-Based Asset Servicing and Se-curization (C-BASS) and provides property valuation services.

Birth of a New Industry: 1957-69

In 1957 Max Karl, a 47-year-old former real estate attorney and the son of Jewish Russian immigrants, scraped together $250,000 from investors and founded MGIC (Mortgage Guaranty Insurance Corp.), a company that insured low down payment mortgages against foreclosure. With the formation of MGIC, Karl also created a new industry, the private mortgage insurance industry, which took on the Federal Housing Administration (FHA) in providing loans to low-income homebuyers. Private mortgage insurance was a financial guaranty business in which an insurer assumed a portion of a lenders risk in making a mortgage loan. The risk was that a borrower would default on a loan and the insurer would have to pay a claim. For this risk, the insurer collected a premium from the lender, which typically recovered the cost of the premium from the borrower. Until the formation of MGIC, the FHA had been the only mortgage insurer to work with homebuyers who put up less than 20 percent of the down payment on their purchase.

As a real estate lawyer in Milwaukee, Karl was familiar with the private mortgage insurance fiascos of the pre-Depression years and the expanded role of the FHA afterward in providing mortgage insurance. By 1956 Karl had come up with the idea for his company, in response to the increasing red tape involved in closing loans with 100 percent government guarantees and FHA-imposed ceilingswhich were often below the yield from conventional mortgageson mortgage interest rates.

Karl believed a private company that insured only the top portion25 to 30 percent after the homebuyers 5 percent down paymentpresented lenders with a less costly and easier way to provide low down payment financing to borrowers unable to provide a 20 percent or larger down payment. Regardless of his backers lack of enthusiasm, Karl persevered. Almost everyone who knew much about stocks thought [the] company would never make it, he commented in a 1973 Wall Street Journal article. They thought we were too big a risk.

Karl, however, felt confident his idea was sound. [The] only thing that would hurt us would be a depression, which seemed remote. Putting his trust in the low rate of foreclosures since World War II, Karl got MGIC s license to operate in Wisconsin in February 1957, and the next month, the company insured four home mortgages. MGIC, which went public in 1961, provided speedy service using the information collected by the lending institution and approved insurance applications within a day or two of filing. This compared to the FHAs four-to six-week waiting period on approval. It also insured low down payment mortgages at about half the cost to the homebuyer of FHA insurance. Karls idea caught on, and beginning in 1958, the companys profits increased every year. In 1961, he took his company public.

From 1967 to 1973 profits for MGIC more than quadrupled every year. This explosive growth was, in part, the result of changes in federal regulations. In 1971 regulatory authorities expanded lending limits, to permit savings and loan associations to make mortgages up to 95 percent of appraised value (compared to 90 percent before) as long as loans were insured. Limits on the dollar value of mortgages were also raised. MGIC more than doubled the volume of its home loan insurance from $2.8 billion in 1971 to $7.5 billion in 1972 to top the FHAs loan volume; about 40 percent of this increase occurred in the 95 percent loan category. Karl was quoted in the Wall Street Journal in 1973 as saying, Ive always felt the proper role for the government was helping lower income groups acquire housing which would be unsound for us to insure anyway. Most of the business, it seems to me, would be better served by private companies.

Diversification in the 1970s

Having succeeded in the home mortgage field, MGIC moved to diversify its business by making more services available to lenders. In 1967 the companys first move had been to form a unit to insure mortgages on commercial buildings, which it marketed as a tool to enable builders and developers to get financing on more liberal terms. It made sense to me that if mortgage insurance improved the ability of buyers to finance homes, it could do the same thing for owners of factories, warehouses, apartments and other commercial buildings, Karl said in the 1973 Wall Street Journal article. Soon thereafter, MGIC extended the concept of private insurance to mobile homes.

Another move toward diversification occurred in 1970 when MGIC acquired two homebuilding and land development companies in Florida, Janis Properties Inc. and LaMonte-Shimberg Corp., and added a unit to provide temporary construction financing to builders whose projects were a potential source of home mortgage insurance. In a more radical move in 1971, the company introduced American Municipal Bond Insurance Corp. (AMBAC) to insure the principal and interest of municipal bonds against default. MGIC formed another unit in 1972 to provide the first nonfederal secondary market for buying and selling conventional mortgages, allowing lenders to free funds tied up in mortgages for further lending. This unit augmented activities of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac). In 1973 the company introduced a program to insure the principal and interest of subordinated debentures issued by savings and loan associations, and began to offer directors and officers liability insurance.

With growth came competition, and there were ten rivals by 1973. Yet MGIC remained at the forefront of its field. Of approximately $11 billion in private residential mortgage insurance written in 1972, MGIC wrote $7.5 billion, and the number of claims it had to pay annuallyforeclosure on lossesremained a negligible $2 million or less annually. Then suddenly in 1974, problems began to surface. First, its mobile home mortgage and commercial property mortgage ventures began to sour. MGIC also found itself borrowing short-term to finance its secondary mortgage market inventory. After a $1.9 million net loss in 1974, MGIC engaged in a major reorganization. Karl became chairman and Gerald Friedman, his nephew, assumed charge of operations as president. The company stopped writing insurance on mobile homes and closed down its secondary market operation.

The private mortgage insurance industry continued to grow. By 1977 private mortgage insurers were responsible for 12 percent of all new mortgagesup from 3.7 percent in 1970and were writing some $21 billion in new coverage. Mortgage-backed pass-throughs or certificatesa security built on pools of mortgages with monthly payments passed on to investorswere gaining ground in the industry, and Bank of America turned to MGIC for insurance when it became the first private lender to package such a certificate. This move as well as MGIC s longstanding position at the head of its industry attracted much positive attention to the company and made it ripe for a takeover.

In 1981, Baldwin-United Corp., a multibillion-dollar asset holding company with subsidiaries in life, property, and casualty insurance, and savings and loans, bought MGIC for $1.2 billion. Baldwin-United had been in the business of manufacturing pianos until 1968, when a series of acquisitions built it into a financial services conglomerate specializing in insurance with 250 subsidiaries. In addition to insurance, the company was best known for annuities and S&H Green Stamps. Friedman resigned his presidency in opposition to the merger. Baldwin-United took MGIC off the New York Stock Exchange.

On the Rebound: 1980s and 1990s

Although MGIC continued to perform well, its acquisition contributed to the downfall of Baldwin-United because Baldwin became unable to service the debt it took on to purchase MGIC. In May 1983 corporate turnaround expert Victor H. Palmieri took over the beleaguered Baldwin-United and put MGIC and its major subsidiariesMortgage Guaranty Insurance Corporation, American Municipal Bond Assurance Corporation, and MGIC Indemnity Corporationon the auction block, forced to do so by the state insurance commissions of Arkansas, Indiana, and Wisconsin. The next year, Baldwin-United filed for bankruptcy.

MGIC operated under the supervision of the Wisconsin Office of the Commissioner of Insurance from 1983 to 1985. In 1985 the Northwestern Mutual Life Insurance Company (NML) and Management Financing Corp., an acquisition vehicle created by MGIC s management, bought MGIC Investment Corp. for $255 million. The new MGIC served as an autonomous subsidiary of NML with John J. McCormack as chief executive officer.

Company Perspectives:

MGIC does not make home loans. MGIC makes home loans possible. We do this through PrivateMI and a multitude of products and services that make lenders more efficient and more responsive to consumers needs and, as a result, more profitable. Thats a formula that has worked since Max Karl unveiled the MGIC name in 1957.

The 1980s were a tumultuous period in the home mortgage finance industry, a period marked by home price stagnation and depreciation. During the housing boom of the 1970s and early 1980s, MGIC had slashed prices and slacked off on standards in an effort to retain market dominance. By the mid-1980s these practices had come back to haunt it as economic troubles and deflated property values in the oil-producing regions of the country in the early 1980s led to increased mortgage loan defaults by late 1986. Losses piled up and the number of private mortgage insurers dwindled from 14 to seven in the late 1980s. In 1987, the year William Lacy took over as president and chief executive officer of MGIC, the company had a net loss of $32 million. Although MGIC remained the market leader (followed closely by General Electric Mortgage Insurance Company), it was worth little more than its value when NML acquired it.

Earnings grew at a very slow pace throughout 1988. Then, in 1989, the year Karl retired, the company began to show signs of rebounding. Once again in the 1990s, industry growth was rapid as more people used mortgage insurance to buy a home. In 1991, increased demand for insurance, lower house prices, changes in regulations, financial support, and tax relief led to a marked increase in the number of transactions for private mortgage insurers. Mortgage bankers who had historically used government programs became more comfortable working with private insurers in the wake of rules that limited the amount of closing costs homeowners could finance and required a higher up-front payment for mortgage insurance than had been standard on conventional mortgages. For its part, MGIC stepped up marketing efforts in hopes of improving its 29 percent market share. NMLs confidence in MGIC prompted them to take the company public in 1991; so many investors wanted MGIC stock that underwriters added 1.5 million shares to the initial public offering. Four years later, NML put half of its 20 percent stake up for sale.

By 1996, MGIC had grown 25 percent since going public. Earnings for 1991 had been $75 million, increased to $102.3 million the following year, and up to $207 million in 1995. The driving force behind MGIC s growth was a sizable increase in new business. Low interest rates had helped create an environment conducive to MGIC s continued growth, and the company had invested heavily in technologyfor electronic underwriting, processing of insurance certificates, and renewal billing.

As part of MGIC s ongoing move to diversification, it joined with Enhance Financial Services Group to form C-BASS, short for Credit-Based Asset Servicing and Securitization LLC, to provide reinsurance for municipal bond insurers in 1997. The company also joined with Freddie Mac to create a new default management system for mortgage insurers, Early Indicator. Later MGIC began to offer home warranty contracts to lenders in a move to attract business and to package a group of support products, called CRM Strategies. These included a direct mail program to customers; Defender, an interactive voice-response telephone program to take information from customers and calculate the likelihood of refinancing; and Customers Forever, an Internet program to apply for a loan jointly owned with M&I Data Services. In 2000, MGIC formed, a subsidiary to incorporate the companys web site.

During 2001, MGIC enjoyed a record volume of new insurance which resulted in high earnings of $639 million. Premiums exceeded $1 billion for the first time. Amid signs that loans were starting to perform poorly in a deteriorating economy, MGIC raised its loss reserves. Looking ahead, Curt Culver, who had replaced Lacy as chief executive and president of MGIC Investment in 2000, expected the companys growth prospects to be strong. Favorable demographic trends, an increasing homeownership rate among immigrants and minorities (who represented a disproportionately large segment of the nations population growth), and high housing affordability, all boded well for the future of MGIC.

Principal Subsidiaries

Mortgage Guaranty Insurance Corp.;, LLC; Credit-Based Asset Servicing and Securization, LLC; Customers Forever, LLC.

Principal Competitors

CMI; GC Capital Mortgage Insurance Corp.; PMI Mortgage Insurance Co.; Radian Group; Ticor; Triad Guaranty Insurance; United Guaranty Residential Insurance Corp.

Key Dates:

Max Karl founds MGIC (Mortgage Guaranty Insurance Corp.).
Karl takes MGIC public.
MGIC acquires Janis Properties Inc. and LaMonte-Shimberg Corp.
The company introduces American Municipal Bond Insurance Corp. (AMBAC).
Karl becomes chairman and Gerald Friedman assumes charge of operations.
Baldwin-United Corp. buys MGIC.
Baldwin-United files for Chapter 11.
Northwestern Mutual Life Insurance Company makes a $250 million investment in MGIC and founds the new MGIC.
MGIC Investment Corp. becomes a publicly traded company.

Further Reading

Bergquist, Erick, Mortgage Insurer Woes a Bad Omen?, American Banker, October 29, 2001, p. 1.

Byrne, Harlan S., Magic Max: How Mr. Karl Created a Booming Industry from a Little Company, Wall Street Journal, March 14, 1973.

, Not Running Scared, Barrons, March 28, 1994, p. 16.

Cooper, Geoff, Big Investment, Big Headache, Big Offering, Business Journal Milwaukee, June 24, 1991, p. 1.

, New MGIC, a Different Kind of Magic, Business Journal Milwaukee, May 9, 1992, p. 1.

The Magic Returns for Mortgage Insurers, Business Week, December 5, 1977, p. 104.

MGIC, Business Journal Milwaukee, May 25, 1996, p. 21.

Mullins, Robert, Culver Dishes Up Consistency for MGIC, Business Journal Milwaukee, February 19, 1999, p. 25.

Weiner, Lisabeth, and Lynn Bremer, Northwestern Mutual Purchases 90 Percent of MGIC, Largest U.S. Mortgage Insurer, American Banker, March 7, 1985, p. 2.

Carrie Rothburd