Chairman's Message
April 11, 2008
This past year will not soon be forgotten. It was a difficult year for the company financially and tested each of us individually, as shareholders and co-workers.
2007 marked our fiftieth year in business and began on a positive note with our announcement that we had agreed to merge with Radian. However, as spring moved to summer a massive destabilization of the mortgage markets created an unprecedented lack of liquidity, causing us to announce the impairment of our investment in C-BASS. Market conditions continued to deteriorate through the summer to the point where both Radian and we decided to mutually terminate the merger agreement. Meanwhile, the subprime and reduced documentation markets, as well as many other credit markets, were being decimated, and liquidity was increasingly difficult to obtain, forcing a number of our customers out of business. Major write-downs occurred globally, and businesses associated with mortgage lending lost tremendous value. At the same time, home values started declining nationally at a pace not seen previously. These declines, coupled with the weaker underwriting guidelines which had evolved over the past several years, are now impacting our business written in 2006 and 2007.
Our financial results, in a word, were unacceptable. We have taken numerous steps to improve these results, which I will cover shortly, but first let me recap 2007 from a financial perspective. We strengthened loss reserves by $1.5 billion, the majority in the fourth quarter, resulting from increasing delinquencies, declining cure rates, increased severities and the rapid deterioration of the Wall Street bulk transactions. The deterioration also caused us to record a $1.2 billion premium deficiency charge on these transactions and separately we decided to no longer write such business. As I mentioned earlier, we took a charge of $516 million related to C-BASS. On the positive side, we sold a portion of our stake in Sherman Financial for a gain of $163 million. After accounting for these unique events we reported an after-tax loss of $1.67 billion. Insurance-in-force grew 20%, to $211.7 billion; persistency improved to 76% from 69% with net premiums earned gaining 6% to $1.3 billion.
Lessons learned from the events of last year will improve our financial results going forward. Most importantly, we have strengthened our underwriting standards on all our business. In summary, we have raised down payment requirements in all markets with more equity being required in markets where real estate values are weak. Likewise, we have raised credit score requirements in all markets with stronger credit required in weaker real estate markets. Finally, we have virtually eliminated all business classified as A-, Reduced Documentation (Alt A), as well as equity refinances. We believe that these changes will significantly improve the credit quality of the 2008 book of business. We are also being more proactive than usual with our loss mitigation efforts, and although we are not counting on it, we could get some benefit if some of the various government proposals are successful.
While we believe that we have more than adequate resources to pay our claims obligations on our insurance-in-force even in high loss scenarios, we needed to increase our capital position to take full advantage of some of the most positive business fundamentals I have seen in my 30 years in the business. In the last few weeks we issued more common stock and sold a junior subordinated convertible debenture, raising approximately $835 million in net proceeds. This added capital, coupled with MGIC’s industry leading position in new insurance written and insurance-in-force, as well as being the industry’s most efficient company, bodes well for our future. Our company’s strength, coupled with the return in industry penetration and persistency, as well as the strengthening of underwriting guidelines and pricing, will be important contributors to our long-term success.
I have said in the past that with leadership comes responsibility. As CEO, I have the final responsibility for the financial results of 2007. The actions we have taken with regards to the underwriting and pricing changes were difficult decisions to make, but ultimately the right thing to do. These decisions should not only help return the company to profitability but will also help first time homebuyers maintain ownership over the long haul.
Over the past 50 years our company has been tested many times. In each case, the true strength of our company shines through — that being our people, our spirit, our culture — and leads us to prosperity. I expect no less this time.
Respectfully,
Curt S. Culver
Chairman and Chief Executive Officer
Curt Culver, Chairman & CEO