Document
 

FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended
March 31, 2018
 
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.
YES x
NO o

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).
YES x
NO o

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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company  o
(Do not check if a smaller reporting company)
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o
NO x

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
 
April 30, 2018
 
371,347,632
 



Forward Looking and Other Statements

All statements in this report that address events, developments or results that we expect or anticipate may occur in the future are “forward looking statements.” Forward looking statements consist of statements that relate to matters other than historical fact. In most cases, forward looking statements may be identified by words such as “believe,” “anticipate” or “expect,” or words of similar import. The risk factors referred to in “Forward Looking Statements and Risk Factors – Location of Risk Factors” in Management’s Discussion and Analysis of Financial Condition and Results of Operations below, may cause our actual results to differ materially from the results contemplated by forward looking statements that we may make. We are not undertaking any obligation to update any forward looking statements or other statements we may make in this document even though these statements may be affected by events or circumstances occurring after the forward looking statements or other statements were made. Therefore no reader of this document should rely on these statements being current as of any time other than the time at which this document was filed with the Securities and Exchange Commission.


Table of contents

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2018
 
 
Table of contents
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Table of contents

Glossary of terms and acronyms
/ A
ARMs
Adjustable rate mortgages

ABS
Asset-backed securities

ASC
Accounting Standards Codification

Available Assets
Assets, as designated under the PMIERs, that are readily available to pay claims, and include the most liquid investments

/ B
Book or book year
A group of loans insured in a particular calendar year

BPMI
Borrower-paid mortgage insurance

/ C
CECL
Current expected credit losses

CFPB
Consumer Financial Protection Bureau

CLO
Collateralized loan obligations

CMBS
Commercial mortgage-backed securities

/ D
DAC
Deferred insurance policy acquisition costs

Debt-to-income (“DTI”) ratio
The ratio, expressed as a percentage, of a borrowers’ total debt payments to gross income

Direct
When referring to insurance or risk written or in force, “direct” means before giving effect to reinsurance

 
/ F
Fannie Mae
Federal National Mortgage Association

FCRA
Fair Credit Reporting Act

FEMA
Federal Emergency Management Agency

FHA
Federal Housing Administration

FHFA
Federal Housing Finance Agency

FHLB
Federal Home Loan Bank of Chicago, of which MGIC is a member

FICO score
A measure of consumer credit risk provided by credit bureaus, typically produced from statistical models by Fair Isaac Corporation utilizing data collected by the credit bureaus

Freddie Mac
Federal Home Loan Mortgage Corporation

/ G
GAAP
Generally Accepted Accounting Principles in the United States

GSEs
Collectively, Fannie Mae and Freddie Mac

/ H
HAMP
Home Affordable Modification Program

HARP
Home Affordable Refinance Program

HOPA
Homeowners Protection Act

/ I
IADA
Individual Assistance Disaster Area


MGIC Investment Corporation - Q1 2018 | 4

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IBNR
Losses incurred but not reported

IIF
Insurance in force, which for loans insured by us, is equal to the unpaid principal balance, as reported to us

/ J
JCT
Joint Committee on Taxation

/ L
LAE
Loss adjustment expenses

Legacy book
Mortgage insurance policies written prior to 2009

Loan-to-value ("LTV") ratio
The ratio, expressed as a percentage, of the dollar amount of the first mortgage loan to the value of the property at the time the loan became insured and does not reflect subsequent housing price appreciation or depreciation. Subordinate mortgages may also be present.

Long-term debt:
5.75% Notes
5.75% Senior Notes due on August 15, 2023, with interest payable semi-annually on February 15 and August 15 of each year

9% Debentures
9% Convertible Junior Subordinated Debentures due on April 1, 2063, with interest payable semi-annually on April 1 and October 1 of each year

FHLB Advance or the Advance
1.91% Fixed rate advance from the FHLB due on February 10, 2023, with interest payable monthly

Loss ratio
The ratio, expressed as a percentage, of the sum of incurred losses and loss adjustment expenses to NPE

Low down payment loans or mortgages
Loans with less than 20% down payments
 

LPMI
Lender-paid mortgage insurance

/ M
MBS
Mortgage-backed securities

MD&A
Management's discussion and analysis of financial condition and results of operations

MGIC
Mortgage Guaranty Insurance Corporation, a subsidiary of MGIC Investment Corporation

MIC
MGIC Indemnity Corporation, a subsidiary of MGIC

Minimum Required Assets
The greater of $400 million or the total of the minimum amount of Available Assets that must be held under the PMIERs based upon a percentage of RIF weighted by certain risk attributes

MPP
Minimum Policyholder Position, as required under certain state requirements. The “policyholder position” of a mortgage insurer is its net worth or surplus, contingency reserve and a portion of the reserves for unearned premiums

/ N
N/A
Not applicable for the period presented

NAIC
The National Association of Insurance Commissioners

NIW
New Insurance Written, is the aggregate original principal amount of the mortgages that are insured during a period

N/M
Data, or calculation, deemed not meaningful for the period presented



MGIC Investment Corporation - Q1 2018 | 5

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NPE
The amount of premiums earned, net of premiums assumed and ceded under reinsurance agreements

NPL
Non-performing loan, which is a delinquent loan, at any stage in its delinquency

NPW
The amount of premiums written, net of premiums assumed and ceded under reinsurance agreements

/ O
OCI
Office of the Commissioner of Insurance of the State of Wisconsin

/ P
Persistency
The percentage of our insurance remaining in force from one year prior

PMI
Private Mortgage Insurance (as an industry or product type)

PMIERs
Private Mortgage Insurer Eligibility Requirements issued by the GSEs

Premium Yield
The ratio of NPE divided by the average IIF outstanding for the period measured

/ Q
QSR Transaction
Quota share reinsurance transaction

/ R
REMIC
Real Estate Mortgage Investment Conduit

RESPA
Real Estate Settlement Procedures Act

 
RIF
Risk in force, which for an individual loan insured by us, is equal to the unpaid loan principal balance, as reported to us, multiplied by the insurance coverage percentage. RIF is sometimes referred to as exposure

Risk-to-capital
Under certain state regulations, the ratio of RIF, net of reinsurance and exposure on policies currently in default and for which loss reserves have been established, to the level of statutory capital

RMBS
Residential mortgage-backed securities

/ S
State Capital Requirements
Under certain state regulations, the minimum amount of statutory capital relative to risk in force (or similar measure)

/ T
Tax Act
The U.S. tax reform enacted on December 22, 2017 and commonly referred to as the “Tax Cuts and Jobs Act”
/ U
Underwriting expense ratio
The ratio, expressed as a percentage, of the underwriting and operating expenses, net and amortization of DAC of our combined insurance operations (which excludes underwriting and operating expenses of our non-insurance subsidiaries) to NPW

Underwriting profit
NPE minus incurred losses and underwriting expenses

USDA
U.S. Department of Agriculture

/ V
VA
U.S. Department of Veterans Affairs



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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
 
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
 
(In thousands)
 
Note
 
March 31,
2018
 
December 31,
2017
 
ASSETS
 
 
 
(Unaudited)
 
 
 
Investment portfolio:
 
7 / 8
 
 
 
 
 
Fixed income, available for sale, at fair value (amortized cost, 2018 - $4,974,616; 2017 - $4,946,278)
 
 
 
$
4,930,063

 
$
4,983,315

 
Equity securities, at fair value (cost, 2018 - $4,143; 2017 - $7,223)
 
2 / 7 / 8
 
4,099

 
7,246

 
Other invested assets, at cost
 
2 / 7 / 8
 
3,100

 

 
Total investment portfolio
 
 
 
4,937,262

 
4,990,561

 
Cash and cash equivalents
 
 
 
177,488

 
99,851

 
Accrued investment income
 
 
 
45,123

 
46,060

 
Reinsurance recoverable on loss reserves
 
 
45,474

 
48,474

 
Reinsurance recoverable on paid losses
 
 
 
3,718

 
3,872

 
Premiums receivable
 
 
 
52,701

 
54,045

 
Home office and equipment, net
 
 
 
48,382

 
44,936

 
Deferred insurance policy acquisition costs
 
 
 
18,928

 
18,841

 
Deferred income taxes, net
 
 
211,994

 
234,381

 
Other assets
 
 
 
75,273

 
78,478

 
Total assets
 
 
 
$
5,616,343

 
$
5,619,499

 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Loss reserves
 
 
$
924,171

 
$
985,635

 
Unearned premiums
 
 
 
397,688

 
392,934

 
Federal Home Loan Bank advance
 
 
155,000

 
155,000

 
Senior notes
 
 
418,848

 
418,560

 
Convertible junior subordinated debentures
 
 
256,872

 
256,872

 
Other liabilities
 
 
 
232,361

 
255,972

 
Total liabilities
 
 
 
2,384,940

 
2,464,973

 
Contingencies
 
 


 


 
Shareholders’ equity:
 
 
 
 
 
 
Common stock (one dollar par value, shares authorized 1,000,000; shares issued 2018 - 371,348; 2017 - 370,567; shares outstanding 2018 - 371,348; 2017 - 370,567)
 
 
 
371,348

 
370,567

 
Paid-in capital
 
 
 
1,847,000

 
1,850,582

 
Accumulated other comprehensive loss, net of tax
 
 
 
(107,760
)
 
(43,783
)
 
Retained earnings
 
 
 
1,120,815

 
977,160

 
Total shareholders’ equity
 
 
 
3,231,403

 
3,154,526

 
Total liabilities and shareholders’ equity
 
 
 
$
5,616,343

 
$
5,619,499

See accompanying notes to consolidated financial statements.


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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
 
 
 
 
 
Three Months Ended March 31,
 
(In thousands, except per share data)
 
Note
 
2018
 
2017
 
Revenues:
 
 
 
 
 
 
 
Premiums written:
 
 
 
 
 
 
 
Direct
 
 
 
$
270,034

 
$
265,823

 
Assumed
 
 
 
92

 
1,288

 
Ceded
 
 
(33,220
)
 
(30,409
)
 
Net premiums written
 
 
 
236,906

 
236,702

 
Increase in unearned premiums, net
 
 
 
(4,799
)
 
(7,599
)
 
Net premiums earned
 
 
 
232,107

 
229,103

 
Investment income, net of expenses
 
 
 
32,121

 
29,477

 
Net realized investment losses
 
 
(329
)
 
(125
)
 
Other revenue
 
 
 
1,871

 
2,425

 
Total revenues
 
 
 
265,770

 
260,880

 
 
 
 
 
 
 
 
 
Losses and expenses:
 
 
 
 
 
 
 
Losses incurred, net
 
 
23,850

 
27,619

 
Amortization of deferred policy acquisition costs
 
 
 
2,572

 
2,230

 
Other underwriting and operating expenses, net
 
 
 
46,090

 
40,765

 
Interest expense
 
 
 
13,233

 
16,309

 
Total losses and expenses
 
 
 
85,745

 
86,923

 
Income before tax
 
 
 
180,025

 
173,957

 
Provision for income taxes
 
 
36,388

 
84,159

 
Net income
 
 
 
$
143,637

 
$
89,798

 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
 
 
$
0.39

 
$
0.26

 
Diluted
 
 
$
0.38

 
$
0.24

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
 
370,908

 
341,009

 
Weighted average common shares outstanding - diluted
 
 
391,562

 
402,175


See accompanying notes to consolidated financial statements.


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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
 
 
 
 
 
Three Months Ended March 31,
 
(In thousands)
 
Note
 
2018
 
2017
 
Net income
 
 
 
$
143,637

 
$
89,798

 
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
Change in unrealized investment gains and losses
 
 
(64,453
)
 
12,121

 
Benefit plan adjustments
 
 
 
494

 
(153
)
 
Foreign currency translation adjustment
 
 
 

 
31

 
Other comprehensive (loss) income, net of tax
 
 
 
(63,959
)
 
11,999

 
Comprehensive income
 
 
 
$
79,678

 
$
101,797


See accompanying notes to consolidated financial statements


MGIC Investment Corporation - Q1 2018 | 9

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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
 
 
 
 
 
 
Three Months Ended March 31,
 
(In thousands)
 
Note
 
2018
 
2017
 
Common stock
 
 
 
 
 
 
 
Balance, beginning of period
 
 
 
$
370,567

 
$
359,400

 
Net common stock issued under share-based compensation plans
 
 
 
781

 
771

 
Balance, end of period
 
 
 
371,348

 
360,171

 
 
 
 
 
 
 
 
 
Paid-in capital
 
 
 
 
 
 
 
Balance, beginning of period
 
 
 
1,850,582

 
1,782,337

 
Net common stock issued under share-based compensation plans
 
 
 
(8,854
)
 
(7,493
)
 
Equity compensation
 
 
 
5,272

 
3,461

 
Balance, end of period
 
 
 
1,847,000

 
1,778,305

 
 
 
 
 
 
 
 
 
Treasury stock
 
 
 
 
 
 
 
Balance, beginning of period
 
 
 

 
(150,359
)
 
Balance, end of period
 
 
 

 
(150,359
)
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive (loss) income
 
 
 
 
 
 
 
Balance, beginning of period
 
 
(43,801
)
 
(75,100
)
 
Other comprehensive income, net of tax
 
 
(63,959
)
 
11,999

 
Balance, end of period
 
 
 
(107,760
)
 
(63,101
)
 
 
 
 
 
 
 
 
 
Retained earnings
 
 
 
 
 
 
 
Balance, beginning of period
 
 
977,178

 
632,717

 
Net income
 
 
 
143,637

 
89,798

 
Balance, end of period
 
 
 
1,120,815

 
722,515

 
 
 
 
 
 
 
 
 
Total shareholders’ equity
 
 
 
$
3,231,403

 
$
2,647,531


See accompanying notes to consolidated financial statements.


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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
 
 
 
Three Months Ended March 31,
 
(In thousands)
 
2018
 
2017
 
Cash flows from operating activities:
 
 
 
 
 
Net income
 
$
143,637

 
$
89,798

 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
 
15,833

 
17,079

 
Deferred tax expense
 
39,388

 
48,932

 
Net realized investment losses
 
329

 
125

 
Change in certain assets and liabilities:
 
 
 
 
 
Accrued investment income
 
937

 
287

 
Reinsurance recoverable on loss reserves
 
3,000

 
3,835

 
Reinsurance recoverable on paid losses
 
154

 
(165
)
 
Premium receivable
 
1,344

 
485

 
Deferred insurance policy acquisition costs
 
(87
)
 
(477
)
 
Profit commission receivable
 
377

 
(3,395
)
 
Loss reserves
 
(61,464
)
 
(103,771
)
 
Unearned premiums
 
4,754

 
7,585

 
Return premium accrual
 
(5,500
)
 
(4,800
)
 
Income taxes payable - current
 
(3,117
)
 
34,654

 
Other, net
 
(5,619
)
 
(12,703
)
 
Net cash provided by operating activities
 
133,966

 
77,469

 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
Purchases of investments:
 
 
 
 
 
Fixed income securities
 
(209,477
)
 
(187,077
)
 
Equity securities
 
(20
)
 
(19
)
 
Proceeds from sales of fixed income securities
 
10,844

 
33,980

 
Proceeds from maturity of fixed income securities
 
155,605

 
199,234

 
Net increase in payable for securities
 

 
10,336

 
Additions to property and equipment
 
(5,208
)
 
(4,014
)
 
Net cash (used in) provided by investing activities
 
(48,256
)
 
52,440

 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
Proceeds from revolving credit facility
 

 
150,000

 
Payment of debt issuance costs
 

 
(1,523
)
 
Payment of withholding taxes related to share-based compensation net share settlement
 
(8,073
)
 
(6,722
)
 
Net cash (used in) provided by financing activities
 
(8,073
)
 
141,755

 
Net increase in cash and cash equivalents
 
77,637

 
271,664

 
Cash and cash equivalents at beginning of period
 
99,851

 
155,410

 
Cash and cash equivalents at end of period
 
$
177,488

 
$
427,074


See accompanying notes to consolidated financial statements.


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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited)

Note 1. Nature of Business and Basis of Presentation
MGIC Investment Corporation is a holding company which, through Mortgage Guaranty Insurance Corporation (“MGIC”) is principally engaged in the mortgage insurance business.  We provide mortgage insurance to lenders throughout the United States and to government sponsored entities to protect against loss from defaults on low down payment residential mortgage loans. An insurance subsidiary of MGIC provides credit insurance for certain mortgages under Fannie Mae and Freddie Mac (the “GSEs”) credit risk transfer programs.

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 (“GAAP”). These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2017 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 consolidated financial position and consolidated results of operations for the periods indicated. The consolidated results of operations for the interim period may not be indicative of the results that may be expected for the year ending December 31, 2018.

Substantially all of our insurance written since 2008 has been for loans purchased by the GSEs. We operate under the Private Mortgage Insurer Eligibility Requirements ("PMIERs") of the GSEs that became effective December 31, 2015 and which have been amended from time to time. The financial requirements of the PMIERs require a mortgage insurer’s "Available Assets" (generally only the most liquid assets of an insurer) to equal or exceed its "Minimum Required Assets" (which are based on an insurer's book of insurance in force, calculated from tables of factors with several risk dimensions and subject to a floor amount). Based on our interpretation of the PMIERs, as of March 31, 2018, MGIC’s Available Assets are in excess of its Minimum Required Assets; and MGIC is in compliance with the financial requirements of the PMIERs and eligible to insure loans purchased by the GSEs.

Reclassifications
Certain reclassifications to 2017 amounts have been made in the accompanying financial statements to conform to the 2018 presentation.

Subsequent events
We have considered subsequent events through the date of this filing.

Share repurchase program
On April 26, 2018, our Board of Directors authorized a share repurchase program under which we may repurchase up to $200 million of our common stock through the end of 2019. Repurchases may be made from time to time on the open market or through privately negotiated transactions. The repurchase program may be suspended for periods or discontinued at any time.



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Note 2. New Accounting Pronouncements
Accounting standards effective in 2018, or early adopted, and relevant to our financial statements
Table 2.1 shows the relevant amendments to accounting standards that have been implemented for the fiscal year beginning January 1, 2018; none had a material impact on our consolidated financial statements or disclosures.
 
Table
2.1
 
 
 
Standard / Interpretation
 
 
 
Effective date
Amended Standards
 
 
 
ASC 718
Compensation - Stock Compensation
 
 
 
ASU 2017-09 - Scope of Modification Accounting
January 1, 2018
 
ASC 310
Receivables - Nonrefundable Fees and Other Costs
 
 
 
ASU 2017-08 - Premium Amortization on Purchased Callable Debt Securities
January 1, 2019
 
ASC 715
Compensation - Retirement Benefits
 
 
 
ASU 2017-07 - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
January 1, 2018
 
ASC 825
Financial Instruments - Overall
 
 
 
ASU 2016-01 - Recognition and Measurement of Financial Assets and Financial Liabilities
January 1, 2018

Stock Compensation - Scope of Modification Accounting
In May 2017, the FASB issued updated guidance related to a change in the terms or conditions (modification) of a share-based award. The updated guidance provides that an entity should account for the effects of a modification unless the fair value and vesting conditions of the modified award and the classification of the award (equity or liability instrument) are the same as the original award immediately before the modification. The updated guidance addresses the current diversity in practice on applying modification accounting, as some entities evaluate whether changes to awards are substantive, which is not prescribed within the current accounting guidance. The updated guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted, including adoption in any interim period.

Adoption impact: The adoption of this guidance had no impact on our consolidated financial statements or disclosures.

Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued updated guidance to amend the amortization period for certain purchased callable debt securities held at a premium shortening the amortization period to the earliest call date. Under current GAAP, there is diversity in practice in the amortization period for premiums of callable debt securities and in how the potential for exercise of a call is factored into current impairment assessments. This updated guidance aligns with how callable debt securities, in the United States, are generally quoted, priced, and traded assuming a model that incorporates consideration of calls (also referred to as “yield-to-worst” pricing). The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods.

Adoption impact: We adopted this guidance as of January 1, 2018 with no impact to our consolidated financial statements or disclosures as our accounting practice adhered to the updated guidance.

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued updated guidance that improves the reporting of net benefit cost in the financial statements. The updated guidance requires that an employer report the service cost component in the same financial statement caption as other compensation costs arising from services rendered by employees during the period. The other components of net benefit cost are required to be presented in the statement of operations separately from the service cost component and outside a subtotal of income from operations, if one is presented. Current guidance does not prescribe where the amount of net benefit cost


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should be presented in an employer’s statement of operations and does not require entities to disclose by line item the amount of net benefit cost that is included in the statement of operations. The updated guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods.

Adoption impact: The adoption of this guidance had no impact on our consolidated financial statements or disclosures as the service cost component is reported in the same financial statement caption as other compensation costs and we do not present a subtotal of income outside of income from operations. The service cost component of our benefit plans is disclosed in Note 10 - “Benefit Plans” to our consolidated financial statements.

Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued updated guidance to address the recognition, measurement, presentation, and disclosure of certain financial instruments. The updated guidance requires equity investments, except those accounted for under the equity method of accounting, that have a readily determinable fair value to be measured at fair value with changes in fair value recognized in net income. Equity investments that do not have readily determinable fair values may be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. A qualitative assessment for impairment is required for equity investments without readily determinable fair values. The updated guidance also eliminates the requirement to disclose the method and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet. Further, the updated guidance clarifies that entities should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entities’ other deferred tax assets. The updated guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods and will require recognition of a cumulative effect adjustment at adoption.

Adoption impact: The adoption of this guidance resulted in an immaterial cumulative effect adjustment to our 2018 beginning accumulated other comprehensive (loss) income and retained earnings to recognize unrealized gains on equity investments. At December 31, 2017, equity investments were classified as available-for-sale on the consolidated balance sheet. Upon adoption the updated guidance eliminated the available-for-sale balance sheet classification for equity securities.

In February 2018, the FASB issued a separate update for technical corrections and improvements to clarify certain aspects of the guidance issued above. This update clarifies the presentation of investments in Federal Home Loan Bank stock and prohibits the investment from being shown with equity securities.

Adoption impact: As of March 31, 2018, the value of our investment in Federal Home Loan Bank of Chicago (“FHLB”) stock, which is carried at cost, is presented within “Other invested assets” on our consolidated balance sheet.

Prospective Accounting Standards
Table 2.2 shows the relevant new amendments to accounting standards, which are not yet effective or adopted.
 
Table
2.2
 
 
 
Standard / Interpretation
 
 
 
Effective date
Amended Standards
 
 
 
ASC 326
Financial Instruments - Credit Losses
 
 
 
ASU 2016-13 - Measurement of Credit Losses on Financial Instruments
January 1, 2020

Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued updated guidance that requires immediate recognition of estimated credit losses expected to occur over the remaining life of many financial instruments. Entities will be required to utilize a current expected credit losses (“CECL”) methodology that incorporates their forecasts of future economic conditions into their loss estimate unless such forecast is not reasonable and supportable, in which case the entity will revert to historical loss experience. Any allowance for CECL reduces the amortized cost


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basis of the financial instrument to the amount an entity expects to collect. Credit losses relating to available-for-sale fixed maturity securities are to be recorded through an allowance for credit losses, rather than a write-down of the asset, with the amount of the allowance limited to the amount by which fair value is less than amortized cost. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists. The updated guidance is not prescriptive about certain aspects of estimating expected credit losses, including the specific methodology to use, and therefore will require significant judgment in application. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted for annual and interim periods in fiscal years beginning after December 15, 2018. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statements, but do not expect it to have a material impact on our consolidated financial statements or disclosures.

Note 3. Debt
Debt obligations
The par value of our long-term debt obligations and their aggregate carrying values as of March 31, 2018 and December 31, 2017 are presented in table 3.1 below.
 
Table
3.1
 
 
 
 
Long-term debt obligations
(In millions)
 
March 31,
2018
 
December 31,
2017
 
FHLB Advance
 
$
155.0

 
$
155.0

 
5.75% Notes
 
425.0

 
425.0

 
9% Debentures (1)
 
256.9

 
256.9

 
Long-term debt, par value
 
836.9

 
836.9

 
Debt issuance costs
 
(6.2
)
 
(6.5
)
 
Long-term debt, carrying value
 
$
830.7

 
$
830.4

(1) 
Convertible at any time prior to maturity at the holder’s option, at an initial conversion rate, which is subject to adjustment, of 74.0741 shares per $1,000 principal amount, representing 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 lieu of issuing shares of common stock upon conversion of the debentures, we may, at our option, make a cash payment to converting holders for all or some of the shares of our common stock otherwise issuable upon conversion.

The 5.75% Notes, 9% Debentures, and any amounts drawn on our revolving credit facility, are obligations of our holding company, MGIC Investment Corporation, and not of its subsidiaries. In addition to interest on amounts drawn, the unused portion of our revolving credit facility is subject to recurring commitment fees, which is charged to interest expense. The Federal Home Loan Bank Advance (the “FHLB Advance”) is an obligation of MGIC.

Table 3.2 below presents interest payments on our debt obligations.
 
Table
3.2
 
 
 
 
Interest payments on debt obligations
 
 
Three Months Ended March 31,
(In millions)
 
2018
 
2017
Revolving credit facility
 
$
0.2

 
$

 
FHLB Advance
 
0.7

 
0.7

 
5.75% Notes
 
12.2

 
12.9

 
Total interest payments
 
$
13.1

 
$
13.6




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Note 4. Reinsurance
The reinsurance agreements we have entered into, excluding captive agreements (which were immaterial), are discussed below. The effect of all of our reinsurance agreements on premiums earned and losses incurred is shown in table 4.1 below.
 
Table
4.1
 
 
 
 
Reinsurance
 
 
 
Three Months Ended March 31,
 
(In thousands)
 
2018
 
2017
 
Premiums earned:
 
 
 
 
 
Direct
 
$
265,251

 
$
259,428

 
Assumed
 
121

 
98

 
Ceded
 
(33,265
)
 
(30,423
)
 
Net premiums earned
 
$
232,107

 
$
229,103

 
 
 
 
 
 
 
Losses incurred:
 
 
 
 
 
Direct
 
$
31,501

 
$
32,413

 
Assumed
 
90

 
105

 
Ceded
 
(7,741
)
 
(4,899
)
 
Losses incurred, net
 
$
23,850

 
$
27,619


Quota share reinsurance
We utilize quota share reinsurance to manage our exposure to losses resulting from our mortgage guaranty insurance policies and to provide reinsurance capital credit under the PMIERs. Each of the reinsurers under our QSR Transactions has an insurer financial strength rating of A- or better by Standard and Poor’s Rating Services, A.M. Best or both.

2018 QSR Transaction. We entered into a 2018 QSR Transaction with a group of unaffiliated reinsurers to manage our exposure to losses resulting from the covered mortgage guaranty insurance policies and to provide reinsurance capital credit under the PMIERs. The 2018 QSR Transaction has an effective date of January 1, 2018, and provides coverage on new business written in 2018 that meets certain eligibility requirements. Under the 2018 QSR Transaction, we will cede losses incurred and premiums on or after the effective date through December 31, 2029, at which time the agreement expires. Early termination of the agreement can be elected by us effective December 31, 2021, and annually thereafter, for a fee, or under specified scenarios for no fee upon prior written notice, including if we will receive less than 90% of the full credit amount under the PMIERs for the risk ceded in any required calculation period.

The structure of the 2018 QSR Transaction is a 30% quota share for all policies covered, with a 20% ceding commission as well as a profit commission. Generally, under the 2018 QSR Transaction, we will receive a profit commission provided that the loss ratio on the loans covered under the agreement remains below 62%.

2015 and 2017 QSR Transactions.
Our 2017 quota share reinsurance agreement (“2017 QSR Transaction”) provides coverage on new business written January 1, 2017 through December 29, 2017 that meets certain eligibility requirements. Under the agreement we cede losses incurred and premiums on or after the effective date through December 31, 2028, at which time the agreement expires. Early termination of the agreement can be elected by us effective December 31, 2021 for a fee, or under specified scenarios for no fee upon prior written notice including if we will receive less than 90% of the full credit amount under the PMIERs for the risk ceded in any required calculation period.

Our 2015 quota share reinsurance agreement (“2015 QSR Transaction”) covers eligible risk in force written before 2017. The 2015 QSR Transaction cedes losses incurred and premiums through December 31, 2024, at which time the agreement expires. Early termination of the agreement can be elected by us effective December 31, 2018 for a fee, or under specified scenarios for no fee upon prior written notice,


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including if we will receive less than 90% of the full credit amount under the PMIERs for the risk ceded in any required calculation period.

The structure of both the 2017 QSR Transaction and 2015 QSR Transaction is a 30% quota share for all policies covered, with a 20% ceding commission as well as a profit commission. Generally, under the QSR Transactions, we will receive a profit commission provided that the loss ratio on the loans covered under the agreement remains below 60%.

Table 4.2 below presents a summary of our quota share reinsurance agreements, excluding captive agreements (which were immaterial), for the three months ended March 31, 2018 and 2017.
 
Table
4.2
 
 
 
 
Quota share reinsurance
 
 
 
Three Months Ended March 31,
(In thousands)
 
2018
 
2017
 
Ceded premiums written and earned, net of profit commission (1)
 
$
33,036

 
$
28,895

 
Ceded losses incurred
 
7,788

 
4,687

 
Ceding commissions (2)
 
12,645

 
12,003

 
Profit commission
 
30,189

 
31,117

(1) 
Under our QSR Transactions, premiums are ceded on an earned and received basis as defined in the agreements.
(2) 
Ceding commissions are reported within Other underwriting and operating expenses, net on the consolidated statements of operations.

Under the terms of QSR Transactions, ceded premiums, ceding commission and profit commission are settled net on a quarterly basis. The ceded premium due after deducting the related ceding commission and profit commission is reported within “Other liabilities” on the consolidated balance sheets.

The reinsurance recoverable on loss reserves related to our QSR Transactions was $43.5 million as of March 31, 2018 and $39.3 million as of December 31, 2017. The reinsurance recoverable balance is secured by funds on deposit from the reinsurers which are based on the funding requirements of PMIERs that address ceded risk.

Note 5. Litigation and Contingencies
Before paying an insurance claim, we review the loan and servicing files to determine the appropriateness of the claim amount. When reviewing the files, we may determine that we have the right to rescind coverage on the loan. We refer to insurance rescissions and denials of claims collectively as “rescissions” and variations of that term. In addition, our insurance policies generally provide that we can reduce or deny a claim if the servicer did not comply with its obligations under our insurance policy. We call such reduction of claims “curtailments.” In recent quarters, an immaterial percentage of claims received in a quarter have been resolved by rescissions. In each of 2017 and the first quarter of 2018, curtailments reduced our average claim paid by approximately 5.6% and 7.3%, respectively.

Our loss reserving methodology incorporates our estimates of future rescissions, curtailments, and reversals of rescissions and curtailments. A variance between ultimate actual rescission, curtailment and reversal rates and our estimates, as a result of the outcome of litigation, settlements or other factors, could materially affect our losses.

When the insured disputes our right to rescind coverage or curtail claims, we generally engage in discussions in an attempt to settle the dispute. If we are unable to reach a settlement, the outcome of a dispute ultimately would be determined by legal proceedings.

Under ASC 450-20, until a liability associated with settlement discussions or legal proceedings becomes probable and can be reasonably estimated, we consider our claim payment or rescission resolved for financial reporting purposes and do not accrue an estimated loss. Where we have determined that a loss is probable and can be reasonably estimated, we have recorded our best estimate of our probable loss. If we are not able


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to implement settlements we consider probable, we intend to defend MGIC vigorously against any related legal proceedings.

In addition to matters for which we have recorded a probable loss, we are involved in other discussions and/or proceedings with insureds with respect to our claims paying practices. Although it is reasonably possible that when these matters are resolved we will not prevail in all cases, we are unable to make a reasonable estimate or range of estimates of the potential liability. We estimate the maximum exposure associated with matters where a loss is reasonably possible to be approximately $282 million, although we believe (but can give no assurance that) we will ultimately resolve these matters for significantly less than this amount. This estimate of our maximum exposure does not include interest or consequential or exemplary damages.
Mortgage insurers, including MGIC, have been involved in litigation and regulatory actions related to alleged 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. While these proceedings in the aggregate have not resulted in material liability for MGIC, there can be no assurance that the outcome of future proceedings, if any, under these laws would not have a material adverse affect on us. In addition, various regulators, including the CFPB, state insurance commissioners and state attorneys general may bring other actions seeking various forms of relief in connection with alleged violations 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 practices are in conformity with applicable laws and regulations, it is not possible to predict the eventual scope, duration or outcome of any such reviews or investigations nor is it possible to predict their effect on us or the mortgage insurance industry.

Through a non-insurance subsidiary, we utilize our underwriting skills to provide an outsourced underwriting service to our customers known as contract underwriting. As part of the contract underwriting activities, that subsidiary is responsible for the quality of the underwriting decisions in accordance with the terms of the contract underwriting agreements with customers. That subsidiary may be required to provide certain remedies to its customers if certain standards relating to the quality of our underwriting work are not met, and we have an established reserve for such future obligations. Claims for remedies may be made a number of years after the underwriting work was performed. The underwriting remedy expense for 2017 and the first three months of 2018 was immaterial to our consolidated financial statements.

In addition to the matters described above, 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 consolidated results of operations.

See Note 11 – “Income Taxes” for a description of federal income tax contingencies.

Note 6. Earnings per Share
Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of shares of common stock outstanding. Diluted EPS includes the components of basic EPS and also gives effect to dilutive common stock equivalents. We calculate diluted EPS using the treasury stock method and if-converted method. Under the if-converted method, diluted EPS reflects the potential dilution that could occur if our convertible debt instruments result in the issuance of common stock. The determination of potentially issuable shares does not consider the satisfaction of the conversion requirements and the shares are included in the determination of diluted EPS as of the beginning of the period, if dilutive. During the quarter ended March 31, 2018, we had 9% Debentures outstanding that could result in potentially issuable shares. For purposes of calculating basic and diluted EPS, vested restricted stock and restricted stock units ("RSUs") are considered outstanding.



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Table 6.1 reconciles the numerators and denominators used to calculate basic and diluted EPS.
 
Table
6.1
 
 
 
 
Earnings per share
 
 
 
Three Months Ended March 31,
(In thousands, except per share data)
 
2018
 
2017
 
Basic earnings per share:
 
 
 
 
 
Net income
 
$
143,637

 
$
89,798

 
Weighted average common shares outstanding - basic
 
370,908

 
341,009

 
Basic earnings per share
 
$
0.39

 
$
0.26

 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
Net income
 
$
143,637

 
$
89,798

 
Interest expense, net of tax (1):
 
 
 
 
 
2% Notes
 

 
823

 
5% Notes
 

 
1,282

 
9% Debentures
 
4,566

 
3,757

 
Diluted income available to common shareholders
 
$
148,203

 
$
95,660

 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
370,908

 
341,009

 
Effect of dilutive securities:
 
 
 
 
 
Unvested RSUs
 
1,626

 
1,488

 
2% Notes
 

 
29,859

 
5% Notes
 

 
10,791

 
9% Debentures
 
19,028

 
19,028

 
Weighted average common shares outstanding - diluted
 
391,562

 
402,175

 
Diluted earnings per share
 
$
0.38

 
$
0.24

 
 
 
 
 
 
 
(1) 
The three months ended March 31, 2018 and 2017 were tax effected at a rate of 21% and 35%, respectively.

Note 7. Investments
Fixed maturities
The amortized cost, gross unrealized gains and losses, and fair value of investments in fixed income securities classified as available-for-sale at March 31, 2018 and December 31, 2017 are shown in tables 7.1a and 7.1b below.
 
Table
7.1a
 
 
 
 
 
 
 
 
Details of fixed income investments by category - current year
 
 
 
March 31, 2018
(In thousands)
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses (1)
 
Fair Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies
 
$
191,018

 
$
256

 
$
(2,212
)
 
$
189,062

 
Obligations of U.S. states and political subdivisions
 
2,093,901

 
27,926

 
(19,130
)
 
2,102,697

 
Corporate debt securities
 
2,087,977

 
1,921

 
(33,819
)
 
2,056,079

 
Asset backed securities (“ABS”)
 
9,451

 

 
(29
)
 
9,422

 
Residential mortgage backed securities (“RMBS”)
 
182,050

 
48

 
(10,558
)
 
171,540

 
Commercial mortgage backed securities (“CMBS”)
 
302,434

 
722

 
(9,800
)
 
293,356

 
Collateralized loan obligations (“CLO”)
 
107,785

 
163

 
(41
)
 
107,907

 
Total fixed income securities
 
4,974,616

 
31,036

 
(75,589
)
 
4,930,063



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Table
7.1b
 
 
 
 
 
 
 
 
Details of fixed income investments by category - prior year-end
 
 
 
December 31, 2017
(In thousands)
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses (1)
 
Fair Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies
 
$
179,850

 
$
274

 
$
(1,278
)
 
$
178,846

 
Obligations of U.S. states and political subdivisions
 
2,105,063

 
56,210

 
(8,749
)
 
2,152,524

 
Corporate debt securities
 
2,065,475

 
10,532

 
(9,169
)
 
2,066,838

 
ABS
 
4,925

 

 
(2
)
 
4,923

 
RMBS
 
189,153

 
60

 
(7,364
)
 
181,849

 
CMBS
 
301,014

 
1,204

 
(4,906
)
 
297,312

 
CLOs
 
100,798

 
304

 
(79
)
 
101,023

 
Total fixed income securities
 
4,946,278

 
68,584

 
(31,547
)
 
4,983,315

(1) 
At March 31, 2018 and December 31, 2017, there were no other-than-temporary impairment losses recorded in other comprehensive income.

The amortized cost and fair values of fixed income securities at March 31, 2018, by contractual maturity, are shown in table 7.2 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 ABS, RMBS, CMBS, and CLOs provide for periodic payments throughout their lives, they are listed in separate categories.
 
Table
7.2
 
 
 
 
Fixed income securities maturity schedule
 
 
March 31, 2018
(In thousands)
 
Amortized Cost
 
Fair Value
 
Due in one year or less
 
$
650,415

 
$
649,088

 
Due after one year through five years
 
1,507,245

 
1,487,678

 
Due after five years through ten years
 
909,711

 
893,329

 
Due after ten years
 
1,305,525

 
1,317,743

 
 
 
$
4,372,896

 
$
4,347,838

 
 
 
 
 
 
 
ABS
 
9,451

 
9,422

 
RMBS
 
182,050

 
171,540

 
CMBS
 
302,434

 
293,356

 
CLOs
 
107,785

 
107,907

 
Total as of March 31, 2018
 
$
4,974,616

 
$
4,930,063


Proceeds from sales of fixed income securities classified as available-for-sale were $10.8 million and $34.0 million during the three months ended March 31, 2018 and 2017, respectively. Gross gains of $0.1 million and $0.2 million and gross losses of $0.3 million and $0.3 million were realized on those sales during the three months ended March 31, 2018 and 2017, respectively.



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Equity securities
The cost and fair value of investments in equity securities at March 31, 2018 and December 31, 2017 are shown in tables 7.3a and 7.3b below. As described in Note 2 - “New Accounting Pronouncements,” updated guidance regarding the “Recognition and Measurement of Financial Assets and Financial Liabilities” became effective on January 1, 2018, which prohibits our investment in FHLB stock from being presented with equity securities. The amount of our FHLB stock investment has been reclassified and presented in “Other invested assets” on our consolidated balance sheet as of March 31, 2018.
 
Table
7.3a
 
 
 
 
 
 
 
 
Details of equity security investments - current year
 
 
 
March 31, 2018
(In thousands)
 
Cost
 
Gross Gains
 
Gross Losses
 
Fair Value
Equity securities
 
$
4,143

 
$
8

 
$
(52
)
 
$
4,099

 
Table
7.3b
 
 
 
 
 
 
 
 
Details of equity security investments - prior year-end
 
 
 
December 31, 2017
(In thousands)
 
Cost
 
Gross Gains
 
Gross Losses
 
Fair Value
Equity securities
 
$
7,223

 
$
39

 
$
(16
)
 
$
7,246


For the three months ended March 31, 2018, we recognized $0.1 million of net losses on equity securities still held as of March 31, 2018.

Other invested assets
Other invested assets include an investment in FHLB stock that is carried at cost, which due to its nature approximates fair value. Ownership of FHLB stock provides access to a secured lending facility, and our current FHLB Advance amount is secured by eligible collateral whose fair value is maintained at least at 102% of the outstanding principal balance. As of March 31, 2018, that collateral consisting of fixed income securities is included in our total investment portfolio amount with a total fair value of $165.6 million.

Unrealized investment losses
Tables 7.4a and 7.4b below summarize, for all available-for-sale investments in an unrealized loss position at March 31, 2018 and December 31, 2017, the aggregate fair value and gross unrealized loss by the length of time those securities have been continuously in an unrealized loss position. The fair value amounts reported in tables 7.4a and 7.4b are estimated using the process described in Note 8 - “Fair Value Measurements” to these consolidated financial statements and in Note 3 - “Significant Accounting Policies” of the notes to the consolidated financial statements in our 2017 Annual Report on Form 10-K.
 
Table
7.4a
 
 
 
 
 
 
 
 
 
 
 
 
Investments unrealized losses - current year
 
 
 
March 31, 2018
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
(In thousands)
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
 
$
77,510

 
$
(1,532
)
 
$
31,491

 
$
(680
)
 
$
109,001

 
$
(2,212
)
 
Obligations of U.S. states and political subdivisions
 
905,755

 
(11,622
)
 
201,094

 
(7,508
)
 
1,106,849

 
(19,130
)
 
Corporate debt securities
 
1,743,627

 
(26,797
)
 
148,468

 
(7,022
)
 
1,892,095

 
(33,819
)
 
ABS
 
9,423

 
(29
)
 

 

 
9,423

 
(29
)
 
RMBS
 
14,226

 
(416
)
 
156,842

 
(10,142
)
 
171,068

 
(10,558
)
 
CMBS
 
114,206

 
(2,162
)
 
126,941

 
(7,638
)
 
241,147

 
(9,800
)
 
CLOs
 

 

 
1,936

 
(41
)
 
1,936

 
(41
)
 
Total
 
$
2,864,747

 
$
(42,558
)
 
$
666,772

 
$
(33,031
)
 
$
3,531,519

 
$
(75,589
)


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Table
7.4b
 
 
 
 
 
 
 
 
 
 
 
 
Investments unrealized losses - prior year-end
 
 
 
December 31, 2017
 
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
(In thousands)
 
Fair Value
 
Unrealized
 Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
 Losses
 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
 
$
144,042

 
$
(796
)
 
$
31,196

 
$
(482
)
 
$
175,238

 
$
(1,278
)
 
Obligations of U.S. states and political subdivisions
 
505,311

 
(3,624
)
 
211,684

 
(5,125
)
 
716,995

 
(8,749
)
 
Corporate debt securities
 
932,350

 
(4,288
)
 
200,716

 
(4,881
)
 
1,133,066

 
(9,169
)
 
ABS
 
4,923

 
(2
)
 

 

 
4,923

 
(2
)
 
RMBS
 
14,979

 
(280
)
 
166,329

 
(7,084
)
 
181,308

 
(7,364
)
 
CMBS
 
51,096

 
(358
)
 
138,769

 
(4,548
)
 
189,865

 
(4,906
)
 
CLOs
 
14,243

 
(7
)
 
3,568

 
(72
)
 
17,811

 
(79
)
 
Equity securities
 
226

 
(2
)
 
431

 
(14
)
 
657

 
(16
)
 
Total
 
$
1,667,170

 
$
(9,357
)
 
$
752,693

 
$
(22,206
)
 
$
2,419,863

 
$
(31,563
)
The unrealized losses in all categories of our investments at March 31, 2018 and December 31, 2017 were primarily caused by changes in interest rates between the time of purchase and the respective fair value measurement date. There were 788 and 586 securities in an unrealized loss position at March 31, 2018 and December 31, 2017, respectively. During each of the three months ended March 31, 2018 and 2017 there were no other-than-temporary impairments (“OTTI”) recognized. 

Note 8. Fair Value Measurements
Recurring fair value measurements
In accordance with fair value accounting guidance, we applied the following fair value hierarchy to measure fair value for assets and liabilities:

Level 1 - Quoted prices for identical instruments in active markets that we can access. Financial assets utilizing Level 1 inputs primarily include U.S. Treasury securities and equity securities.

Level 2 - Quoted prices for similar instruments in active markets that we can access; quoted prices for identical or similar instruments in markets that are not active; and inputs, other than quoted prices, that are observable in the marketplace for the instrument. The observable inputs are used in valuation models to calculate the fair value based on the type of instrument. Financial assets utilizing Level 2 inputs primarily include obligations of U.S. government corporations and agencies, corporate bonds, mortgage-backed securities, asset-backed securities, and most municipal bonds.

Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. The inputs used to derive the fair value of Level 3 securities reflect our own assumptions about the assumptions a market participant would use in pricing an asset or liability. Our non-financial assets that are classified as Level 3 securities consist of real estate acquired through claim settlement. The fair value of real estate acquired is the lower of our acquisition cost or a percentage of the appraised value. The percentage applied to the appraised value is based upon our historical sales experience adjusted for current trends.


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Assets measured at fair value, by hierarchy level, as of March 31, 2018 and December 31, 2017 as shown in tables 8.1a and 8.1b below are estimated using the process described above, and more fully in Note 3 - “Significant Accounting Policies” of the notes to the consolidated financial statements in our 2017 Annual Report on Form 10-K.
 
Table
8.1a
 
 
 
 
 
 
 
 
Fair value hierarchy - current year
 
 
March 31, 2018
(In thousands)
 
Total Fair Value
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
 
$
189,062

 
$
81,418

 
$
107,644

 
$

 
Obligations of U.S. states and political subdivisions
 
2,102,697

 

 
2,102,443

 
254

 
Corporate debt securities
 
2,056,079

 

 
2,056,079

 

 
ABS
 
9,422

 

 
9,422

 

 
RMBS
 
171,540

 

 
171,540

 

 
CMBS
 
293,356

 

 
293,356

 

 
CLOs
 
107,907

 

 
107,907

 

 
Total fixed income securities
 
4,930,063

 
81,418

 
4,848,391

 
254

 
Equity securities (1)
 
4,099

 
2,931

 

 
1,168

 
Total investments at fair value
 
$
4,934,162

 
$
84,349

 
$
4,848,391

 
$
1,422

 
Real estate acquired (2)
 
$
10,078

 
$

 
$

 
$
10,078

(1) 
Equity securities in Level 3 are carried at cost, which approximates fair value. See “Reconciliations of Level 3 assets” below for information regarding a change in presentation of amounts previously included in Level 3 Equity securities.
(2) 
Real estate acquired through claim settlement, which is held for sale, is reported in Other assets on the consolidated balance sheets.
 
Table
8.1b
 
 
 
 
 
 
 
 
Fair value hierarchy - prior year-end
 
 
December 31, 2017
(In thousands)
 
Total Fair Value
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
U.S. Treasury securities and obligations of U.S. government corporations and agencies
 
$
178,846

 
$
81,598

 
$
97,248

 
$

 
Obligations of U.S. states and political subdivisions
 
2,152,524

 

 
2,152,253

 
271

 
Corporate debt securities
 
2,066,838

 

 
2,066,838

 

 
ABS
 
4,923

 

 
4,923

 

 
RMBS
 
181,849

 

 
181,849

 

 
CMBS
 
297,312

 

 
297,312

 

 
CLOs
 
101,023

 

 
101,023

 

 
Total fixed income securities
 
4,983,315

 
81,598

 
4,901,446

 
271

 
Equity securities (1)
 
7,246

 
2,978

 

 
4,268

 
Total investments at fair value
 
$
4,990,561

 
$
84,576

 
$
4,901,446

 
$
4,539

 
Real estate acquired (2)
 
$
12,713

 
$

 
$

 
$
12,713

(1) 
Equity securities in Level 3 are carried at cost, which approximates fair value.
(2) 
Real estate acquired through claim settlement, which is held for sale, is reported in Other assets on the consolidated balance sheets.



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Reconciliations of Level 3 assets
For assets measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the three months ended March 31, 2018 and 2017 is shown in tables 8.2a and 8.2b below. As described in Note 2 - “New Accounting Pronouncements,” updated guidance regarding the Recognition and Measurement of Financial Assets and Financial Liabilities became effective on January 1, 2018, which requires that our investment in FHLB stock not be presented with equity securities. Prior to the updated guidance, our FHLB stock was included in our Level 3 equity securities. As shown in table 8.2a below, for the three months ended March 31, 2018, we have transferred our FHLB stock out of Level 3 assets, and they are carried at cost, which approximates fair value on our consolidated balance sheet as of March 31, 2018. The amount of FHLB stock is presented in “Other invested assets” as of March 31, 2018. There were no losses included in earnings for those periods attributable to the change in unrealized losses on assets still held at the end of the applicable period.
 
Table
8.2a