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
September 30, 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 every Interactive Data File required to be submitted 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 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
 
October 31, 2018
 
361,589,994
 



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 SEPTEMBER 30, 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

Home Re
Home Re 2018-1, Ltd., an unaffiliated special purpose insurer domiciled in Bermuda

HOPA
Homeowners Protection Act


MGIC Investment Corporation - Q3 2018 | 4

Table of contents

/ I
IADA
Individual Assistance Disaster Area

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

MAC
MGIC Assurance 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


MGIC Investment Corporation - Q3 2018 | 5

Table of contents

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

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

VIE
Variable interest entity


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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
 
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
 
(In thousands)
 
Note
 
September 30,
2018
 
December 31,
2017
 
ASSETS
 
 
 
(Unaudited)
 
 
 
Investment portfolio:
 
7 / 8
 
 
 
 
 
Fixed income, available for sale, at fair value (amortized cost, 2018 - $5,042,011; 2017 - $4,946,278)
 
 
 
$
4,969,612

 
$
4,983,315

 
Equity securities, at fair value (cost, 2018 - $4,134; 2017 - $7,223)
 
2 / 7 / 8
 
7,720

 
7,246

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

 

 
Total investment portfolio
 
 
 
4,980,432

 
4,990,561

 
Cash and cash equivalents
 
 
 
266,997

 
99,851

 
Accrued investment income
 
 
 
45,366

 
46,060

 
Reinsurance recoverable on loss reserves
 
 
33,281

 
48,474

 
Reinsurance recoverable on paid losses
 
 
 
3,111

 
3,872

 
Premiums receivable
 
 
 
51,640

 
54,045

 
Home office and equipment, net
 
 
 
50,055

 
44,936

 
Deferred insurance policy acquisition costs
 
 
 
18,665

 
18,841

 
Deferred income taxes, net
 
 
111,613

 
234,381

 
Other assets
 
 
 
95,948

 
78,478

 
Total assets
 
 
 
$
5,657,108

 
$
5,619,499

 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Loss reserves
 
 
$
721,046

 
$
985,635

 
Unearned premiums
 
 
 
407,614

 
392,934

 
Federal Home Loan Bank advance
 
 
155,000

 
155,000

 
Senior notes
 
 
419,425

 
418,560

 
Convertible junior subordinated debentures
 
 
256,872

 
256,872

 
Other liabilities
 
 
 
207,620

 
255,972

 
Total liabilities
 
 
 
2,167,577

 
2,464,973

 
Contingencies
 
 


 


 
Shareholders’ equity:
 
 
 
 
 
 
Common stock (one dollar par value, shares authorized 1,000,000; shares issued 2018 - 371,353; 2017 - 370,567; shares outstanding 2018 - 362,155; 2017 - 370,567)
 
 
 
371,353

 
370,567

 
Paid-in capital
 
 
 
1,857,639

 
1,850,582

 
Treasury stock at cost (shares 2018 - 9,198)
 
 
 
(100,059
)
 

 
Accumulated other comprehensive loss, net of tax
 
 
 
(128,931
)
 
(43,783
)
 
Retained earnings
 
 
 
1,489,529

 
977,160

 
Total shareholders’ equity
 
 
 
3,489,531

 
3,154,526

 
Total liabilities and shareholders’ equity
 
 
 
$
5,657,108

 
$
5,619,499

See accompanying notes to consolidated financial statements.


MGIC Investment Corporation - Q3 2018 | 7

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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
(In thousands, except per share data)
 
Note
 
2018
 
2017
 
2018
 
2017
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Premiums written:
 
 
 
 
 
 
 
 
 
 
 
Direct
 
 
 
$
280,229

 
$
287,918

 
$
824,989

 
$
828,986

 
Assumed
 
 
 
(3,020
)
 
(91
)
 
(843
)
 
1,882

 
Ceded
 
 
(25,326
)
 
(31,931
)
 
(79,921
)
 
(92,436
)
 
Net premiums written
 
 
 
251,883

 
255,896

 
744,225

 
738,432

 
Increase in unearned premiums, net
 
 
 
(1,457
)
 
(18,813
)
 
(14,728
)
 
(41,110
)
 
Net premiums earned
 
 
 
250,426

 
237,083

 
729,497

 
697,322

 
Investment income, net of expenses
 
 
 
36,380

 
30,402

 
103,003

 
89,595

 
Net realized investment gains (losses)
 
 
1,114

 
(50
)
 
(1,112
)
 
(227
)
 
Other revenue
 
 
 
2,525

 
2,925

 
6,827

 
7,862

 
Total revenues
 
 
 
290,445

 
270,360

 
838,215

 
794,552

 
 
 
 
 
 
 
 
 
 
 
 
 
Losses and expenses:
 
 
 
 
 
 
 
 
 
 
 
Losses incurred, net
 
 
(1,518
)
 
29,747

 
8,877

 
84,705

 
Amortization of deferred policy acquisition costs
 
 
 
3,156

 
2,985

 
8,573

 
7,799

 
Other underwriting and operating expenses, net
 
 
 
43,655

 
39,888

 
131,587

 
119,164

 
Interest expense
 
 
 
13,258

 
13,273

 
39,737

 
43,779

 
Loss on debt extinguishment
 
 
 

 

 

 
65

 
Total losses and expenses
 
 
 
58,551

 
85,893

 
188,774

 
255,512

 
Income before tax
 
 
 
231,894

 
184,467

 
649,441

 
539,040

 
Provision for income taxes
 
 
49,994

 
64,440

 
137,090

 
210,593

 
Net income
 
 
 
$
181,900

 
$
120,027

 
$
512,351

 
$
328,447

 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
$
0.50

 
$
0.32

 
$
1.40

 
$
0.91

 
Diluted
 
 
$
0.49

 
$
0.32

 
$
1.36

 
$
0.86

 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
 
362,180

 
370,586

 
367,190

 
359,613

 
Weighted average common shares outstanding - diluted
 
 
382,905

 
391,087

 
387,765

 
395,870


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 September 30,
 
Nine Months Ended September 30,
 
(In thousands)
 
Note
 
2018
 
2017
 
2018
 
2017
 
Net income
 
 
 
$
181,900

 
$
120,027

 
$
512,351

 
$
328,447

 
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
 
 
Change in unrealized investment gains and losses
 
 
(12,077
)
 
11,544

 
(86,452
)
 
49,414

 
Benefit plan adjustments
 
 
 
440

 
(147
)
 
1,322

 
(442
)
 
Foreign currency translation adjustment
 
 
 

 

 

 
31

 
Other comprehensive (loss) income, net of tax
 
 
 
(11,637
)
 
11,397

 
(85,130
)
 
49,003

 
Comprehensive income
 
 
 
$
170,263

 
$
131,424

 
$
427,221

 
$
377,450


See accompanying notes to consolidated financial statements.


MGIC Investment Corporation - Q3 2018 | 9

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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
 
 
 
 
 
 
Nine Months Ended September 30,
 
(In thousands)
 
Note
 
2018
 
2017
 
Common stock
 
 
 
 
 
 
 
Balance, beginning of period
 
 
 
$
370,567

 
$
359,400

 
Net common stock issued under share-based compensation plans
 
 
 
786

 
776

 
Issuance of common stock
 
 
 

 
10,386

 
Balance, end of period
 
 
 
371,353

 
370,562

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

 
1,782,337

 
Net common stock issued under share-based compensation plans
 
 
 
(8,917
)
 
(7,558
)
 
Issuance of common stock
 
 
 

 
60,903

 
Equity compensation
 
 
 
15,974

 
10,578

 
Balance, end of period
 
 
 
1,857,639

 
1,846,260

 
 
 
 
 
 
 
 
 
Treasury stock
 
 
 
 
 
 
 
Balance, beginning of period
 
 
 

 
(150,359
)
 
Repurchase of common stock
 
 
(100,059
)
 

 
Reissuance of treasury stock, net
 
 

 
150,359

 
Balance, end of period
 
 
 
(100,059
)
 

 
 
 
 
 
 
 
 
 
Accumulated other comprehensive (loss) income
 
 
 
 
 
 
 
Balance, beginning of period
 
 
(43,801
)
 
(75,100
)
 
Other comprehensive (loss) income, net of tax
 
 
(85,130
)
 
49,003

 
Balance, end of period
 
 
 
(128,931
)
 
(26,097
)
 
 
 
 
 
 
 
 
 
Retained earnings
 
 
 
 
 
 
 
Balance, beginning of period
 
 
977,178

 
632,717

 
Net income
 
 
 
512,351

 
328,447

 
Reissuance of treasury stock, net
 
 
 

 
(21,740
)
 
Balance, end of period
 
 
 
1,489,529

 
939,424

 
 
 
 
 
 
 
 
 
Total shareholders’ equity
 
 
 
$
3,489,531

 
$
3,130,149


See accompanying notes to consolidated financial statements.


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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
 
 
 
Nine Months Ended September 30,
 
(In thousands)
 
2018
 
2017
 
Cash flows from operating activities:
 
 
 
 
 
Net income
 
$
512,351

 
$
328,447

 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
 
45,267

 
48,882

 
Deferred tax expense
 
145,397

 
165,250

 
Net realized investment losses
 
1,112

 
227

 
Loss on debt extinguishment
 

 
65

 
Change in certain assets and liabilities:
 
 
 
 
 
Accrued investment income
 
694

 
1,145

 
Reinsurance recoverable on loss reserves
 
15,193

 
4,615

 
Reinsurance recoverable on paid losses
 
761

 
326

 
Premium receivable
 
2,405

 
(1,546
)
 
Deferred insurance policy acquisition costs
 
176

 
(1,265
)
 
Profit commission receivable
 
(9,098
)
 
(3,899
)
 
Loss reserves
 
(264,589
)
 
(333,662
)
 
Unearned premiums
 
14,680

 
41,079

 
Return premium accrual
 
(18,600
)
 
(18,000
)
 
Current income taxes
 
(75,393
)
 
34,974

 
Other, net
 
13,191

 
(10,282
)
 
Net cash provided by operating activities
 
383,547

 
256,356

 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
Purchases of investments
 
(1,074,849
)
 
(775,043
)
 
Proceeds from sales of investments
 
338,939

 
233,198

 
Proceeds from maturity of fixed income securities
 
594,679

 
547,699

 
Net increase in payable for securities
 
43,679

 
3,738

 
Additions to property and equipment
 
(10,659
)
 
(12,121
)
 
Net cash used in investing activities
 
(108,211
)
 
(2,529
)
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
Proceeds from revolving credit facility
 

 
150,000

 
Repayment of revolving credit facility
 

 
(150,000
)
 
Purchase or repayment of convertible senior notes
 

 
(145,620
)
 
Payment of original issue discount - convertible senior notes
 

 
(4,504
)
 
Repurchase of common stock
 
(100,059
)
 

 
Payment of debt issuance costs
 

 
(1,630
)
 
Payment of withholding taxes related to share-based compensation net share settlement
 
(8,131
)
 
(6,782
)
 
Net cash used in financing activities
 
(108,190
)
 
(158,536
)
 
Net increase in cash and cash equivalents
 
167,146

 
95,291

 
Cash and cash equivalents at beginning of period
 
99,851

 
155,410

 
Cash and cash equivalents at end of period
 
$
266,997

 
$
250,701

See accompanying notes to consolidated financial statements.


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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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. MGIC Assurance Corporation (“MAC”), an insurance subsidiary of MGIC, provides insurance for certain mortgages under Fannie Mae and Freddie Mac (the “GSEs”) credit risk transfer programs and is a participant in the Fannie Mae Enterprise-Paid Mortgage Insurance pilot.

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 2017 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 September 30, 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. Refer to Note 16 - “Subsequent Events” for information regarding MGIC’s execution of a fully collateralized excess of loss reinsurance agreement.



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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 we implemented for the year beginning January 1, 2018; none had a material impact on our consolidated financial statements or disclosures.
 
Table
2.1
 
 
 
Standard / Interpretation
 
 
 
 
Amended Standards
 
Effective date
 
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 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.

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. This updated guidance aligns with how callable debt securities, in the United States, are generally quoted, priced, and traded, which 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, but allows for early adoption.

Adoption impact: We adopted this guidance as of January 1, 2018 with no impact to our consolidated financial statements or disclosures as our accounting policy 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 intended to improve the reporting of net benefit cost in the financial statements. The updated guidance requires that an employer report the service cost component of pension and post-retirement benefit costs 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. Previous guidance did not prescribe where the amount of net benefit cost should be presented in an employer’s statement of operations and did 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.



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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 requires 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 described above. This update clarifies the presentation of investments in, among other things, Federal Home Loan Bank stock and prohibits those investments from being shown with equity securities.

Adoption impact: At March 31, 2018, and periods subsequent, 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
 
ASC 820
Fair Value Measurement
 
 
 
ASU 2018-13 - Changes to the Disclosure Requirements for Fair Value Measurements
January 1, 2020
 
ASC 715
Compensation - Retirement Benefits
 
 
 
ASU 2018-14 - Changes to the Disclosure Requirements for Defined Benefit Plans
January 1, 2021

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 forecast of future


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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 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.

Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued updated guidance that changes the disclosure requirements for fair value measurements. The updated guidance removed the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The updated guidance clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurements as of the reporting date. Further, the updated guidance will require disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption was permitted upon issuance of this update. An entity is permitted to early adopt any guidance that removed or modified disclosures upon issuance of this update and to delay adoption of the additional disclosures until its effective date. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statement disclosures, but do not expect it to have a material impact.

Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued amendments to modify the disclosure requirements for defined benefit plans. The updated guidance removed the requirements to identify amounts that are expected to be reclassified out of accumulated other comprehensive income and recognized as components of net periodic benefit cost in the coming year and the effects of a one-percentage-point change in assumed health care cost trend rates on service and interest cost and on the postretirement benefit obligation. The updated guidance added disclosures for the weighted-average interest crediting rates for cash balance plans and other plans with interest crediting rates and explanations for significant gains and losses related to changes in the benefit obligation for the period. The updated guidance is effective for annual periods beginning after December 15, 2020. Early adoption is permitted. An entity should apply the amendments on a retrospective basis to all periods presented. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statement disclosures, but do not expect it to have a material impact.



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Note 3. Debt
Debt obligations
The par value of our long-term debt obligations and their aggregate carrying values as of September 30, 2018 and December 31, 2017 are presented in table 3.1 below.
 
Table
3.1
 
 
 
 
Long-term debt obligations
(In millions)
 
September 30,
2018
 
December 31,
2017
 
FHLB Advance
 
$
155.0

 
$
155.0

 
5.75% Senior Notes
 
425.0

 
425.0

 
9% Convertible Junior Subordinated Debentures (1)
 
256.9

 
256.9

 
Long-term debt, par value
 
836.9

 
836.9

 
Debt issuance costs
 
(5.6
)
 
(6.5
)
 
Long-term debt, carrying value
 
$
831.3

 
$
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 its 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% Senior Notes, 9% Convertible Junior Subordinated 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 are reflected in interest payments. 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
 
 
Nine Months Ended September 30,
(In millions)
 
2018
 
2017
Revolving credit facility
 
$
0.5

 
$
0.5

 
FHLB Advance
 
2.3

 
2.2

 
5% Convertible Senior Notes
 

 
3.6

 
2% Convertible Senior Notes
 

 
2.1

 
5.75% Senior Notes
 
24.4

 
25.1

 
9% Convertible Junior Subordinated Debentures
 
11.6

 
11.6

 
Total interest payments
 
$
38.8

 
$
45.1




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Note 4. Reinsurance
The reinsurance agreements to which we are a party, 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
 
 
 
 
 
 
 
 
Effect of Reinsurance
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
(In thousands)
 
2018
 
2017
 
2018
 
2017
 
Premiums earned:
 
 
 
 
 
 
 
 
 
Direct
 
$
275,044

 
$
268,709

 
$
808,531

 
$
789,317

 
Assumed
 
709

 
312

 
936

 
472

 
Ceded
 
(25,327
)
 
(31,938
)
 
(79,970
)
 
(92,467
)
 
Net premiums earned
 
$
250,426

 
$
237,083

 
$
729,497

 
$
697,322

 
 
 
 
 
 
 
 
 
 
 
Losses incurred:
 
 
 
 
 
 
 
 
 
Direct
 
$
(2,081
)
 
$
35,313

 
$
12,642

 
$
99,122

 
Assumed
 
55

 
(97
)
 
45

 
69

 
Ceded
 
508

 
(5,469
)
 
(3,810
)
 
(14,486
)
 
Losses incurred, net
 
$
(1,518
)
 
$
29,747

 
$
8,877

 
$
84,705


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 QSR transaction with a group of unaffiliated reinsurers with an effective date of January 1, 2018 (“2018 QSR Transaction”), which provides coverage on eligible new business written in 2018. 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%.

2017 and 2015 QSR Transactions.
Our 2017 quota share reinsurance agreement (“2017 QSR Transaction”) provides coverage on eligible new business written January 1, 2017 through December 29, 2017. Under the 2017 QSR Transaction 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”) provides coverage on eligible business written before 2017. Under 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 bi-annually thereafter, 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.



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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 2017 and 2015 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 and nine months ended September 30, 2018 and 2017.
 
Table
4.2
 
 
 
 
 
 
 
 
Quota share reinsurance
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2018
 
2017
 
2018
 
2017
 
Ceded premiums written and earned, net of profit commission (1)
 
$
25,248

 
$
30,880

 
$
79,716

 
$
88,692

 
Ceded losses incurred
 
(522
)
 
5,879

 
3,531

 
14,990

 
Ceding commissions (2)
 
12,983

 
12,500

 
38,268

 
36,751

 
Profit commission
 
39,664

 
31,621

 
111,622

 
95,063

(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 the QSR Transactions, ceded premiums, ceding commission and profit commission are settled net on a quarterly basis. The ceded premiums 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 $33.1 million as of September 30, 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.

Excess of Loss reinsurance
Refer to Note 16 - “Subsequent Events,” for further information about our excess of loss reinsurance agreement entered into in October 2018. The excess of loss reinsurance agreement covers losses beginning August 1, 2018, but had no material impact on our consolidated financial statements as of and for the three and nine months ended September 30, 2018.

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 nine months of 2018, curtailments reduced our average claim paid by approximately 5.6% and 6.3%, 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 may be determined by legal proceedings.



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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.

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 $286 million. This estimate of maximum exposure is based upon currently available information and is subject to significant judgment, numerous assumptions and known and unknown uncertainties. The matters underlying the estimate of maximum exposure will change from time to time. 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 nine 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.



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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. For purposes of calculating basic EPS, vested restricted stock and restricted stock units (“RSUs”) are considered 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 treasury stock method, diluted EPS reflects the potential dilution that could occur if unvested RSUs result in the issuance of common stock. 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 three and nine months ended September 30, 2018, we had 9% Debentures outstanding that could result in potentially issuable shares.

Table 6.1 reconciles the numerators and denominators used to calculate basic and diluted EPS.
 
Table
6.1
 
 
 
 
 
 
 
 
Earnings per share
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands, except per share data)
 
2018
 
2017
 
2018
 
2017
 
Basic earnings per share:
 
 
 
 
 
 
 
 
 
Net income
 
$
181,900

 
$
120,027

 
$
512,351

 
$
328,447

 
Weighted average common shares outstanding - basic
 
362,180

 
370,586

 
367,190

 
359,613

 
Basic earnings per share
 
$
0.50

 
$
0.32

 
$
1.40

 
$
0.91

 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
Net income
 
$
181,900

 
$
120,027

 
$
512,351

 
$
328,447

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

 

 

 
907

 
5% Convertible Senior Notes
 

 

 

 
1,709

 
9% Convertible Junior Subordinated Debentures
 
4,566

 
3,757

 
13,698

 
11,270

 
Diluted income available to common shareholders
 
$
186,466

 
$
123,784

 
$
526,049

 
$
342,333

 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
362,180

 
370,586

 
367,190

 
359,613

 
Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
Unvested RSUs
 
1,697

 
1,473

 
1,547

 
1,367

 
2% Convertible Senior Notes
 

 

 

 
11,119

 
5% Convertible Senior Notes
 

 

 

 
4,743

 
9% Convertible Junior Subordinated Debentures
 
19,028

 
19,028

 
19,028

 
19,028

 
Weighted average common shares outstanding - diluted
 
382,905

 
391,087

 
387,765

 
395,870

 
Diluted earnings per share
 
$
0.49

 
$
0.32

 
$
1.36

 
$
0.86

 
 
 
 
 
 
 
 
 
 
 
(1) 
The periods ended September 30, 2018 and 2017 were tax-effected at a rate of 21% and 35%, respectively.



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Note 7. Investments
Fixed income securities
The amortized cost, gross unrealized gains and losses, and fair value of investments in fixed income securities classified as available-for-sale at September 30, 2018 and December 31, 2017 are shown in tables 7.1a and 7.1b below.
 
Table
7.1a
 
 
 
 
 
 
 
 
Details of fixed income securities by category - current year
 
 
 
September 30, 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
 
$
179,395

 
$
174

 
$
(3,353
)
 
$
176,216

 
Obligations of U.S. states and political subdivisions
 
1,738,417

 
17,797

 
(21,608
)
 
1,734,606

 
Corporate debt securities
 
2,296,218

 
1,152

 
(42,305
)
 
2,255,065

 
Asset backed securities (“ABS”)
 
71,481

 

 
(546
)
 
70,935

 
Residential mortgage backed securities (“RMBS”)
 
166,522

 
35

 
(11,594
)
 
154,963

 
Commercial mortgage backed securities (“CMBS”)
 
281,980

 
214

 
(11,974
)
 
270,220

 
Collateralized loan obligations (“CLO”)
 
307,998

 
67

 
(458
)
 
307,607

 
Total fixed income securities
 
5,042,011

 
19,439

 
(91,838
)
 
4,969,612

 
Table
7.1b
 
 
 
 
 
 
 
 
Details of fixed income securities 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 September 30, 2018 and December 31, 2017, there were no other-than-temporary impairment losses recorded in other comprehensive income.

We had $13.4 million and $13.6 million of investments at fair value on deposit with various states as of September 30, 2018 and December 31, 2017, respectively, due to regulatory requirements of those state insurance departments.



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The amortized cost and fair values of fixed income securities at September 30, 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
 
 
September 30, 2018
(In thousands)
 
Amortized Cost
 
Fair Value
 
Due in one year or less
 
$
511,087

 
$
509,952

 
Due after one year through five years
 
1,552,123

 
1,526,802

 
Due after five years through ten years
 
940,185

 
918,757

 
Due after ten years
 
1,210,635

 
1,210,376

 
 
 
$
4,214,030

 
$
4,165,887

 
 
 
 
 
 
 
ABS
 
71,481

 
70,935

 
RMBS
 
166,522

 
154,963

 
CMBS
 
281,980

 
270,220

 
CLOs
 
307,998

 
307,607

 
Total as of September 30, 2018
 
$
5,042,011

 
$
4,969,612


Proceeds from sales of fixed income securities classified as available-for-sale were $338.9 million and $233.2 million during the nine months ended September 30, 2018 and 2017, respectively. Gross gains of $0.4 million and $0.9 million and gross losses of $3.3 million and $1.1 million were realized on those sales during the nine months ended September 30, 2018 and 2017, respectively.

During the three and nine months ended September 30, 2018, we recorded other-than-temporary impairment (“OTTI”) losses of $0.5 million and $1.8 million, respectively, due to our intent to sell certain investments. During each of the three and nine months ended September 30, 2017, there were no OTTI losses recognized.

Equity securities
The cost and fair value of investments in equity securities at September 30, 2018 and December 31, 2017 are shown in tables 7.3a and 7.3b below. As described in Note 2 - “New Accounting Pronouncements,” under updated guidance regarding the “Recognition and Measurement of Financial Assets and Financial Liabilities” which became effective on January 1, 2018, the amount of our FHLB stock investment has been reclassified and presented in “Other invested assets” on our consolidated balance sheet as of September 30, 2018.
 
Table
7.3a
 
 
 
 
 
 
 
 
Details of equity security investments - current year
 
 
 
September 30, 2018
(In thousands)
 
Cost
 
Gross Gains
 
Gross Losses
 
Fair Value
Equity securities
 
$
4,134

 
$
3,667

 
$
(81
)
 
$
7,720

 
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 nine months ended September 30, 2018, we recognized $3.6 million of net gains on equity securities still held as of September 30, 2018. The net gains reflect the fair value increase in certain equity securities of a privately held entity that were re-valued in the third quarter by independent parties and subsequently sold in a transaction completed in October 2018. The net gains are reported in Net realized investment gains (losses) on our consolidated statement of operations for the three and nine months ended September 30, 2018.



MGIC Investment Corporation - Q3 2018 | 22

Table of contents

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 a minimum of 102% of the outstanding principal balance. As of September 30, 2018, that collateral consisted of fixed income securities included in our total investment portfolio, and cash and cash equivalents, with a total fair value of $166.1 million.

Unrealized investment losses
Tables 7.4a and 7.4b below summarize, for all available-for-sale investments in an unrealized loss position at September 30, 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
 
 
 
September 30, 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
 
$
89,759

 
$
(583
)
 
$
78,769

 
$
(2,770
)
 
$
168,528

 
$
(3,353
)
 
Obligations of U.S. states and political subdivisions
 
643,147

 
(12,356
)
 
245,763

 
(9,252
)
 
888,910

 
(21,608
)
 
Corporate debt securities
 
1,782,640

 
(29,184
)
 
299,549

 
(13,121
)
 
2,082,189

 
(42,305
)
 
ABS
 
70,935

 
(546
)
 

 

 
70,935

 
(546
)
 
RMBS
 
4,930

 
(183
)
 
149,648

 
(11,411
)
 
154,578

 
(11,594
)
 
CMBS
 
81,972

 
(1,763
)
 
160,039

 
(10,211
)
 
242,011

 
(11,974
)
 
CLOs
 
201,700

 
(458
)
 

 

 
201,700

 
(458
)
 
Total
 
$
2,875,083

 
$
(45,073
)
 
$
933,768

 
$
(46,765
)
 
$
3,808,851

 
$
(91,838
)
 
Table
7.4b