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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, 2019
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
https://cdn.kscope.io/a04177c240bf4e6da5961ae9f5dab980-mgiclogo.jpg
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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common stock
 
MTG
 
New York Stock Exchange

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of April 30, 2019, there were 355,985,627 shares of common stock of the registrant, par value $1.00 per share, outstanding.




 


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.



MGIC Investment Corporation - Q1 2019 | 2

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2019
 
Table of contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



MGIC Investment Corporation - Q1 2019 | 3

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 borrower’s 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

HUD
Housing and Urban Development

/ I
IADA
Individual Assistance Disaster Area

IBNR
Losses incurred but not reported




MGIC Investment Corporation - Q1 2019 | 4

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

/ 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

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

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




MGIC Investment Corporation - Q1 2019 | 5

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
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)

/ 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



MGIC Investment Corporation - Q1 2019 | 6

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
(In thousands)
 
Note
 
March 31,
2019
 
December 31,
2018
ASSETS
 
 
 
(Unaudited)
 
 
Investment portfolio:
 
7 / 8
 
 
 
 
Fixed income, available-for-sale, at fair value (amortized cost 2019 - $5,229,535; 2018 - $5,196,784)
 
 
 
$
5,287,360

 
$
5,151,987

Equity securities, at fair value (cost 2019 - $4,016; 2018 - $3,993)
 
2 / 7 / 8
 
4,057

 
3,932

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

 
3,100

Total investment portfolio
 
 
 
5,294,517

 
5,159,019

Cash and cash equivalents
 
 
 
259,351

 
151,892

Restricted cash and cash equivalents
 
 
 
3,161

 
3,146

Accrued investment income
 
 
 
46,699

 
48,001

Reinsurance recoverable on loss reserves
 
 
31,875

 
33,328

Reinsurance recoverable on paid losses
 
 
 
3,069

 
2,948

Premiums receivable
 
 
 
51,596

 
55,090

Home office and equipment, net
 
 
 
50,388

 
51,734

Deferred insurance policy acquisition costs
 
 
 
17,630

 
17,888

Deferred income taxes, net
 
 
 
39,440

 
69,184

Other assets
 
 
 
72,371

 
85,572

Total assets
 
 
 
$
5,870,097

 
$
5,677,802

 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Loss reserves
 
 
$
655,264

 
$
674,019

Unearned premiums
 
 
 
404,504

 
409,985

Federal Home Loan Bank advance
 
 
155,000

 
155,000

Senior notes
 
 
420,002

 
419,713

Convertible junior subordinated debentures
 
 
256,872

 
256,872

Other liabilities
 
 
 
162,272

 
180,322

Total liabilities
 
 
 
2,053,914

 
2,095,911

Contingencies
 
 


 


Shareholders’ equity:
 
 
 
 
 
Common stock (one dollar par value, shares authorized 1,000,000; shares issued 2019 - 371,353; 2018 - 371,353; shares outstanding 2019 - 355,986; 2018 - 355,371)
 
 
 
371,353

 
371,353

Paid-in capital
 
 
 
1,856,236

 
1,862,536

Treasury stock at cost (shares 2019 - 15,367; 2018 - 15,982)
 
 
 
(169,129
)
 
(175,059
)
Accumulated other comprehensive loss, net of tax
 
 
 
(41,493
)
 
(124,214
)
Retained earnings
 
 
 
1,799,216

 
1,647,275

Total shareholders’ equity
 
 
 
3,816,183

 
3,581,891

Total liabilities and shareholders’ equity
 
 
 
$
5,870,097

 
$
5,677,802

See accompanying notes to consolidated financial statements.



MGIC Investment Corporation - Q1 2019 | 7




MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
 
 
 
 
Three Months Ended March 31,
(In thousands, except per share data)
 
Note
 
2019
 
2018
Revenues:
 
 
 
 
 
 
Premiums written:
 
 
 
 
 
 
Direct
 
 
 
$
273,897

 
$
270,034

Assumed
 
 
 
1,107

 
92

Ceded
 
 
(30,723
)
 
(33,220
)
Net premiums written
 
 
 
244,281

 
236,906

Decrease (increase) in unearned premiums, net
 
 
 
5,480

 
(4,799
)
Net premiums earned
 
 
 
249,761

 
232,107

Investment income, net of expenses
 
 
 
40,585

 
32,121

Net realized investment losses
 
 
(526
)
 
(329
)
Other revenue
 
 
 
1,830

 
1,871

Total revenues
 
 
 
291,650

 
265,770

 
 
 
 
 
 
 
Losses and expenses:
 
 
 
 
 
 
Losses incurred, net
 
 
39,063

 
23,850

Amortization of deferred policy acquisition costs
 
 
 
2,478

 
2,572

Other underwriting and operating expenses, net
 
 
 
45,940

 
46,090

Interest expense
 
 
 
13,233

 
13,233

Total losses and expenses
 
 
 
100,714

 
85,745

Income before tax
 
 
 
190,936

 
180,025

Provision for income taxes
 
 
 
38,995

 
36,388

Net income
 
 
 
$
151,941

 
$
143,637

 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
Basic
 
 
$
0.43

 
$
0.39

Diluted
 
 
$
0.42

 
$
0.38

 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
 
355,653

 
370,908

Weighted average common shares outstanding - diluted
 
 
376,667

 
391,562


See accompanying notes to consolidated financial statements.



MGIC Investment Corporation - Q1 2019 | 8




MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
 
 
 
 
Three Months Ended March 31,
(In thousands)
 
Note
 
2019
 
2018
Net income
 
 
 
$
151,941

 
$
143,637

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Change in unrealized investment gains and losses
 
 
81,071

 
(64,453
)
Benefit plan adjustments
 
 
 
1,650

 
494

Other comprehensive income (loss), net of tax
 
 
 
82,721

 
(63,959
)
Comprehensive income
 
 
 
$
234,662

 
$
79,678


See accompanying notes to consolidated financial statements.



MGIC Investment Corporation - Q1 2019 | 9




MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
 
 
 
 
 
Three Months Ended March 31,
(In thousands)
 
Note
 
2019
 
2018
Common stock
 
 
 
 
 
 
Balance, beginning of period
 
 
 
$
371,353

 
$
370,567

Net common stock issued under share-based compensation plans
 
 
 
—

 
781

Balance, end of period
 
 
 
371,353

 
371,348

 
 
 
 
 
 
 
Paid-in capital
 
 
 
 
 
 
Balance, beginning of period
 
 
 
1,862,536

 
1,850,582

Net common stock issued under share-based compensation plans
 
 
 
—

 
(8,854
)
Reissuance of treasury stock, net under share-based compensation plans
 
 
 
(11,582
)
 
—

Equity compensation
 
 
 
5,282

 
5,272

Balance, end of period
 
 
 
1,856,236

 
1,847,000

 
 
 
 
 
 
 
Treasury stock
 
 
 
 
 
 
Balance, beginning of period
 
 
 
(175,059
)
 
—

Reissuance of treasury stock, net under share-based compensation plans
 
 
 
5,930

 
—

Balance, end of period
 
 
 
(169,129
)
 
—

 
 
 
 
 
 
 
Accumulated other comprehensive (loss) income
 
 
 
 
 
 
Balance, beginning of period
 
 
 
(124,214
)
 
(43,801
)
Other comprehensive income (loss), net of tax
 
 
82,721

 
(63,959
)
Balance, end of period
 
 
 
(41,493
)
 
(107,760
)
 
 
 
 
 
 
 
Retained earnings
 
 
 
 
 
 
Balance, beginning of period
 
 
 
1,647,275

 
977,178

Net income
 
 
 
151,941

 
143,637

Balance, end of period
 
 
 
1,799,216

 
1,120,815

 
 
 
 
 
 
 
Total shareholders’ equity
 
 
 
$
3,816,183

 
$
3,231,403


See accompanying notes to consolidated financial statements.



MGIC Investment Corporation - Q1 2019 | 10




MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
 
 
Three Months Ended March 31,
(In thousands)
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
151,941

 
$
143,637

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
11,908

 
15,833

Deferred tax expense
 
7,755

 
39,388

Net realized investment losses
 
526

 
329

Change in certain assets and liabilities:
 
 
 
 
Accrued investment income
 
1,302

 
937

Reinsurance recoverable on loss reserves
 
1,453

 
3,000

Reinsurance recoverable on paid losses
 
(121
)
 
154

Premium receivable
 
3,494

 
1,344

Deferred insurance policy acquisition costs
 
258

 
(87
)
Profit commission receivable
 
(2,836
)
 
377

Loss reserves
 
(18,755
)
 
(61,464
)
Unearned premiums
 
(5,481
)
 
4,754

Return premium accrual
 
(3,100
)
 
(5,500
)
Current income taxes
 
30,983

 
(3,149
)
Other, net
 
(14,446
)
 
(5,587
)
Net cash provided by operating activities
 
164,881

 
133,966

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of investments
 
(348,746
)
 
(209,497
)
Proceeds from sales of investments
 
106,010

 
10,844

Proceeds from maturity of fixed income securities
 
202,929

 
155,605

Additions to property and equipment
 
(308
)
 
(5,208
)
Net cash used in investing activities
 
(40,115
)
 
(48,256
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Repurchase of common stock
 
(11,640
)
 
—

Payment of withholding taxes related to share-based compensation net share settlement
 
(5,652
)
 
(8,073
)
Net cash used in financing activities
 
(17,292
)
 
(8,073
)
Net increase in cash and cash equivalents and restricted cash and cash equivalents
 
107,474

 
77,637

Cash and cash equivalents and restricted cash and cash equivalents at beginning of period
 
155,038

 
99,851

Cash and cash equivalents and restricted cash and cash equivalents at end of period
 
$
262,512

 
$
177,488

See accompanying notes to consolidated financial statements.



MGIC Investment Corporation - Q1 2019 | 11

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(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”) and MGIC Indemnity Corporation (“MIC”), insurance subsidiaries of MGIC, provide 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, 2018 included in our 2018 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, 2019.

Substantially all of our insurance written since 2008 has been for loans purchased by the GSEs. The current private mortgage insurer eligibility requirements ("PMIERs") of the GSEs include financial requirements, as well as business, quality control and certain transactional approval requirements. 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, 2019, 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 2018 amounts have been made in the accompanying financial statements to conform to the 2019 presentation.

Subsequent events
We have considered subsequent events through the date of this filing. Refer to Note 4 - “Reinsurance” for information regarding our notice of termination of our 2015 quota share reinsurance agreement (“2015 QSR Transaction”).

Note 2. Significant Accounting Policies
Income taxes
Deferred income taxes are provided under the liability method, which recognizes the future tax effects of temporary differences between amounts reported in the consolidated financial statements and the tax bases of these items. The estimated tax effects are computed at the enacted federal statutory income tax rate. Changes in tax laws, rates, regulations, and policies or the final determination of tax audits or examinations, could materially affect our estimates and can be significant to our operating results. We evaluate the realizability of the deferred tax assets based on the weight of all available positive and negative evidence. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that all or some portion of the deferred tax assets will not be realized.

The recognition of a tax position is determined using a two-step approach, a more-likely-than-not threshold for recognition and derecognition, and a measurement attribute that is the greatest amount of benefit that is cumulatively greater than 50% likely of being realized. When evaluating a tax position for recognition and measurement, we presume that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. We recognize interest accrued and penalties related to unrecognized tax benefits in our provision for income taxes.

Federal tax law permits mortgage guaranty insurance companies to deduct from taxable income, subject to certain limitations, the amounts added to contingency loss reserves, which are recorded for regulatory purposes. The amounts we deduct must generally be included in taxable income in the tenth subsequent year. The deduction is allowed only to the extent that we purchase and hold U.S. government noninterest bearing tax and loss bonds in an amount equal to the tax benefit attributable to the deduction. We account for these purchases as a payment of current federal income tax.



MGIC Investment Corporation - Q1 2019 | 12

Recent accounting and reporting developments
Accounting standards effective in 2019, or early adopted, and relevant to our financial statements
Accounting Standard Update (“ASU”) 2016-02 - Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) amended the previous leasing standard and created ASC 842, Leases. ASC 842 requires a lessee to recognize a right-of-use asset and lease liability for substantially all leases. Effective for the quarter ended March 31, 2019, we adopted the updated guidance for leases and also elected to apply all practical expedients applicable to us in the updated guidance for transition of leases in effect at adoption, including using hindsight to determine the lease term of existing leases, the option to not reassess whether an existing contract is a lease or contains a lease and whether the lease is an operating or finance lease. The adoption of the updated guidance resulted in the recognition of an immaterial right-of-use asset as part of other assets and a lease liability as part of other liabilities in the consolidated balance sheet as of March 31, 2019. The adoption of the updated guidance did not have a material effect on our consolidated results of operations or liquidity.

Our minimum future operating lease payments as of March 31, 2019 totaled $2.6 million.

Prospective Accounting Standards
Table 2.1 shows the relevant new amendments to accounting standards, which are not yet effective or adopted.
Standard / Interpretation
Table
2.1
 
 
 
 
 
 
Amended Standards
Effective date
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 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 and disclosures, but do not expect it to have a material impact.

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. 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



MGIC Investment Corporation - Q1 2019 | 13

guidance will have on our consolidated financial statement disclosures, but do not expect it to have a material impact.

Note 3. Debt
Debt obligations
The par value of our long-term debt obligations and their aggregate carrying values as of March 31, 2019 and December 31, 2018 are presented in table 3.1 below.
Long-term debt obligations
Table
3.1
 
 
 
 
(In millions)
 
March 31,
2019
 
December 31,
2018
FHLB Advance - 1.91%, due February 2023
 
$
155.0

 
$
155.0

5.75% Notes, due August 2023 (par value: $425 million)
 
420.0

 
419.7

9% Debentures, due April 2063 (1)
 
256.9

 
256.9

Long-term debt, carrying value
 
$
831.9

 
$
831.6

(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 (“5.75% Notes”), 9% Convertible Junior Subordinated Debentures (“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 are reflected in interest payments. The Federal Home Loan Bank Advance (the “FHLB Advance”) is an obligation of MGIC.

Interest payments
Interest payments for each of the three months ended March 31, 2019 and 2018 were $13.1 million.

 
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.
Reinsurance
Table
4.1
 
 
 
 
 
 
 
Three Months Ended March 31,
(In thousands)
 
2019
 
2018
Premiums earned:
 
 
 
 
Direct
 
$
279,613

 
$
265,251

Assumed
 
872

 
121

Ceded
 
(30,724
)
 
(33,265
)
Net premiums earned
 
$
249,761

 
$
232,107

 
 
 
 
 
Losses incurred:
 
 
 
 
Direct
 
$
40,804

 
$
31,501

Assumed
 
(67
)
 
90

Ceded
 
(1,674
)
 
(7,741
)
Losses incurred, net
 
$
39,063

 
$
23,850


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.

2019 QSR Transaction. We entered into a QSR transaction with a group of unaffiliated reinsurers with an effective date of January 1, 2019 (“2019 QSR Transaction”), which provides coverage on eligible new insurance written in 2019. Under the 2019 QSR Transaction, we will cede losses and premiums on or after the effective date through December 31, 2030, at which time the agreement expires. Early termination of the agreement can be elected by us effective December 31, 2021 or bi-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 2019 QSR Transaction is a 30% quota share, with a one-time option, elected by us, to reduce the cede rate to either 25% or 20% effective July 1, 2020, or bi-annually thereafter, for a fee, for all policies covered, with a 20% ceding commission as well as a profit commission. Generally, under the 2019 QSR Transaction, we will receive a profit commission provided that the loss ratio on the loans covered under the agreement remains below 62%.

2018 and prior QSR Transactions. See Note 9 of Notes to Consolidated Financial Statements in our 2018 Form 10-K for more information about our QSR Transactions entered into prior to 2019.




MGIC Investment Corporation - Q1 2019 | 14

2015 QSR Transaction. We have terminated a portion of our 2015 QSR Transaction effective June 30, 2019 and have agreed to terms on an amended quota share reinsurance agreement with certain participants from the existing reinsurance panel that effectively reduces the quota share cede rate from 30% to 15% on the remaining eligible insurance. The amended quota share reinsurance agreement is subject to GSE approval. When the amended terms are effective we will generally receive a profit commission provided that the loss ratio on the covered loans remains below 68%.

Table 4.2 below presents a summary of our quota share reinsurance agreements for the three months ended March 31, 2019 and 2018.
Quota Share Reinsurance
Table
4.2
 
 
 
 
 
 
 
Three Months Ended March 31,
(In thousands)
 
2019
 
2018
Ceded premiums written and earned, net of profit commission (1)
$
28,164

 
$
33,036

Ceded losses incurred
 
1,676

 
7,788

Ceding commissions (2)
 
13,409

 
12,645

Profit commission
 
38,881

 
30,189

(1) 
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 $31.8 million as of March 31, 2019 and $33.2 million as of December 31, 2018. 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
Home Re. We have entered into an aggregate excess of loss reinsurance agreement with Home Re. At the time the Home Re agreement was entered into, we assessed whether Home Re was a variable interest entity (“VIE”). A VIE is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support or is structured such that equity investors lack the ability to make sufficient decisions relating to the entity’s operations through voting rights or do not substantively participate in gains and losses of the entity. We concluded that Home Re is a VIE. However, given that MGIC (1) does not have the unilateral power to direct the activities that most significantly affect Home Re’s economic performance and (2) does not have the obligation to absorb losses or the right to receive benefits of Home Re, consolidation of Home Re is not required.

 
The amount of monthly reinsurance coverage premium ceded will fluctuate due to change in one-month LIBOR and changes in money market rates that affect investment income collected on the assets in the reinsurance trust. As the reinsurance premium will vary based on changes in these rates, we concluded that the reinsurance agreement contains an embedded derivative that is accounted for separately as a freestanding derivative. The fair value of the derivative at March 31, 2019, and the change in fair value from December 31, 2018, was not material to our consolidated balance sheet and consolidated statement of operations as of and for the three months ended March 31, 2019, respectively. Total ceded premiums were $2.5 million for the three months ended March 31, 2019.

We are required to disclose our maximum exposure to loss, which we consider to be an amount that we could be required to record in our statement of operations, as a result of our involvement with this VIE. As of March 31, 2019 and December 31, 2018, we did not have material exposure to the VIE as we have no investment in the VIE and had no reinsurance claim payments due from the VIE under our reinsurance agreement. We are unable to determine the timing or extent of claims from losses that are ceded under the reinsurance agreement. The VIE assets are deposited in a reinsurance trust for the benefit of MGIC that will be the source of reinsurance claim payments to MGIC. The purpose of the reinsurance trust is to provide security to MGIC for the obligations of the VIE under the reinsurance agreement. The trustee of the reinsurance trust, a recognized provider of corporate trust services, has established a segregated account within the reinsurance trust for the benefit of MGIC, pursuant to the trust agreement. The trust agreement is governed by, and construed in accordance with, the laws of the State of New York. If the trustee of the reinsurance trust failed to distribute claim payments to us as provided in the reinsurance trust, we would incur a loss related to our losses ceded under the reinsurance agreement and deemed unrecoverable. We are also unable to determine the impact such possible failure by the trustee to perform pursuant to the reinsurance trust agreement may have on our consolidated financial statements. As a result, we are unable to quantify our maximum exposure to loss related to our involvement with the VIE. MGIC has certain termination rights under the reinsurance agreement should its claims not be paid. We consider our exposure to loss from our reinsurance agreement with the VIE to be remote.

The following presents the total assets of Home Re as of March 31, 2019 and December 31, 2018.
Home Re total assets
Table
4.3
 
 
 
 
 
 
(In thousands)
 
 
Home Re entity (Issue date)
 
Total VIE Assets
March 31, 2019
 
 
Home Re 2018-01 Ltd. (Oct - 2018)
 
$
318,636

 
 
 
December 31, 2018
 
 
Home Re 2018-01 Ltd. (Oct - 2018)
 
$
318,636


The assets of Home Re provide capital credit under the PMIERs financial requirements (see Note 1 - Nature of Business and



MGIC Investment Corporation - Q1 2019 | 15

Basis of Presentation”). A decline in the assets available to pay claims would reduce the capital credit available to MGIC.

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 2018, and the first quarter of 2019, curtailments reduced our average claim paid by approximately 5.8% and 3.9%, 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.

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, including recording a probable loss of $23.5 million in the first quarter of 2019. Until settlement negotiations or legal proceedings for which we have recorded a probable loss are concluded, it is reasonably possible that we will record an additional 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 all of 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 $266.2 million more than the amount of probable loss we have recorded. This estimate of maximum exposure is based upon currently available information and is subject to significant judgment, numerous assumptions and known and unknown uncertainties, and will include an amount for matters for which we have recorded a probable loss until such matters are concluded. 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 effect 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 2018 and the first three months of 2019 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.

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 9% Debentures 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.



MGIC Investment Corporation - Q1 2019 | 16

Table 6.1 reconciles the numerators and denominators used to calculate basic and diluted EPS.
Earnings per share
Table
6.1
 
 
 
 
 
 
 
Three Months Ended March 31,
(In thousands, except per share data)
 
2019
 
2018
Basic earnings per share:
 
 
 
 
Net income
 
$
151,941

 
$
143,637

Weighted average common shares outstanding - basic
 
355,653

 
370,908

Basic earnings per share
 
$
0.43

 
$
0.39

 
 
 
 
 
Diluted earnings per share:
 
 
 
Net income
 
$
151,941

 
$
143,637

Interest expense, net of tax (1):
 
 
 
 
9% Debentures
 
4,566

 
4,566

Diluted income available to common shareholders
 
$
156,507

 
$
148,203

 
 
 
 
 
Weighted average common shares outstanding - basic
 
355,653

 
370,908

Effect of dilutive securities:
 
 
 
 
Unvested RSUs
 
1,986

 
1,626

9% Debentures
 
19,028

 
19,028

Weighted average common shares outstanding - diluted
 
376,667

 
391,562

Diluted earnings per share
 
$
0.42

 
$
0.38

(1) 
The periods ended March 31, 2019 and 2018 were tax-effected at a rate of 21%.

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 March 31, 2019 and December 31, 2018 are shown in tables 7.1a and 7.1b below.
Details of fixed income securities by category as of March 31, 2019
Table
7.1a
 
 
 
 
 
 
 
 
(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
 
$
167,821

 
$
910

 
$
(589
)
 
$
168,142

Obligations of U.S. states and political subdivisions
 
1,611,092

 
58,372

 
(2,226
)
 
1,667,238

Corporate debt securities
 
2,442,354

 
23,363

 
(9,648
)
 
2,456,069

Asset backed securities (“ABS”)
 
217,469

 
1,045

 
(33
)
 
218,481

Residential mortgage backed securities (“RMBS”)
 
188,201

 
143

 
(7,859
)
 
180,485

Commercial mortgage backed securities (“CMBS”)
 
272,074

 
1,808

 
(4,599
)
 
269,283

Collateralized loan obligations (“CLO”)
 
330,524

 
—

 
(2,862
)
 
327,662

Total fixed income securities
 
$
5,229,535

 
$
85,641

 
$
(27,816
)
 
$
5,287,360




MGIC Investment Corporation - Q1 2019 | 17

Details of fixed income securities by category as of December 31, 2018
Table
7.1b
 
 
 
 
 
 
 
 
(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
 
$
167,655

 
$
597

 
$
(1,076
)
 
$
167,176

Obligations of U.S. states and political subdivisions
 
1,701,826

 
29,259

 
(10,985
)
 
1,720,100

Corporate debt securities
 
2,439,173

 
2,103

 
(40,514
)
 
2,400,762

ABS
 
111,953

 
226

 
(146
)
 
112,033

RMBS
 
189,238

 
32

 
(10,309
)
 
178,961

CMBS
 
276,352

 
888

 
(9,580
)
 
267,660

CLOs
 
310,587

 
2

 
(5,294
)
 
305,295

Total fixed income securities
 
$
5,196,784

 
$
33,107

 
$
(77,904
)
 
$
5,151,987

(1) 
At March 31, 2019 and December 31, 2018, there were no other-than-temporary impairment losses recorded in other comprehensive income.

We had $13.6 million and $13.5 million of investments at fair value on deposit with various states as of March 31, 2019 and December 31, 2018, respectively, due to regulatory requirements of those state insurance departments.

The amortized cost and fair values of fixed income securities at March 31, 2019, by contractual maturity, are shown in table 7.2 below. Actual 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.
Fixed income securities maturity schedule
Table
7.2
 
 
 
 
 
 
March 31, 2019
(In thousands)
 
Amortized cost
 
Fair Value
Due in one year or less
 
$
375,772

 
$
375,241

Due after one year through five years
 
1,748,834

 
1,753,881

Due after five years through ten years
 
948,568

 
966,862

Due after ten years
 
1,148,093

 
1,195,465

 
 
4,221,267

 
4,291,449

 
 
 
 
 
ABS
 
217,469

 
218,481

RMBS
 
188,201

 
180,485

CMBS
 
272,074

 
269,283

CLOs
 
330,524

 
327,662

Total as of March 31, 2019
 
$
5,229,535

 
$
5,287,360


Proceeds from sales of fixed income securities classified as available-for-sale were $106.0 million and $10.8 million during the three months ended March 31, 2019 and 2018, respectively. Gross gains of $0.7 million and $0.1 million and gross losses of $1.3 million and $0.3 million were realized on those sales during the three months ended March 31, 2019 and 2018, respectively. During the three months ended March 31, 2019, we recorded other-than-temporary impairment (“OTTI”) losses of $0.1 million. During the three months ended March 31, 2018, there were no OTTI losses recognized.

Equity securities
The cost and fair value of investments in equity securities at March 31, 2019 and December 31, 2018 are shown in tables 7.3a and 7.3b below.
Details of equity security investments as of March 31, 2019
Table
7.3a
 
 
 
 
 
 
 
 
(In thousands)
 
Cost
 
Gross Gains
 
Gross Losses
 
Fair Value
Equity securities
 
$
4,016

 
$
60

 
$
(19
)
 
$
4,057




MGIC Investment Corporation - Q1 2019 | 18

Details of equity security investments as of December 31, 2018
Table
7.3b
 
 
 
 
 
 
 
 
(In thousands)
 
Cost
 
Gross Gains
 
Gross Losses
 
Fair Value
Equity securities
 
$
3,993

 
$
11

 
$
(72
)
 
$
3,932


For the three months ended March 31, 2019, we recognized $0.1 million of net gains on equity securities still held as of March 31, 2019. 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 Federal Home Loan Bank (“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 March 31, 2019, that collateral consisted of fixed income securities included in our total investment portfolio, and cash and cash equivalents, with a total fair value of $171.6 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, 2019 and December 31, 2018, 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 2018 Annual Report on Form 10-K.
Unrealized loss aging for securities by type and length of time as of March 31, 2019
Table
7.4a
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
$
—

 
$
—

 
$
68,951

 
$
(589
)
 
$
68,951

 
$
(589
)
Obligations of U.S. states and political subdivisions
 
17,518

 
(444
)
 
213,567

 
(1,782
)
 
231,085

 
(2,226
)
Corporate debt securities
 
149,625

 
(1,315
)
 
852,102

 
(8,333
)
 
1,001,727

 
(9,648
)
ABS
 
18,444

 
(33
)
 
—

 
—

 
18,444

 
(33
)
RMBS
 
—

 
—

 
175,437

 
(7,859
)
 
175,437

 
(7,859
)
CMBS
 
9,757

 
(94
)
 
189,785

 
(4,505
)
 
199,542

 
(4,599
)
CLOs
 
317,663

 
(2,862
)
 
—

 
—

 
317,663

 
(2,862
)
Total
 
$
513,007

 
$
(4,748
)
 
$
1,499,842

 
$
(23,068
)
 
$
2,012,849

 
$
(27,816
)
Unrealized loss aging for securities by type and length of time as of December 31, 2018
Table
7.4b
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
$
23,710

 
$
(15
)
 
$
69,146

 
$
(1,061
)
 
$
92,856

 
$
(1,076
)
Obligations of U.S. states and political subdivisions
 
316,655

 
(3,875
)
 
358,086

 
(7,110
)
 
674,741

 
(10,985
)
Corporate debt securities
 
1,272,279

 
(18,130
)
 
785,627

 
(22,384
)
 
2,057,906

 
(40,514
)
ABS
 
51,324

 
(146
)
 
—

 
—

 
51,324

 
(146
)
RMBS
 
24

 
—

 
178,573

 
(10,309
)
 
178,597

 
(10,309
)
CMBS
 
65,704

 
(1,060
)
 
163,272

 
(8,520
)
 
228,976

 
(9,580
)
CLOs
 
296,497

 
(5,294
)
 
—

 
—

 
296,497

 
(5,294
)
Total
 
$
2,026,193

 
$
(28,520
)
 
$
1,554,704

 
$
(49,384
)
 
$
3,580,897

 
$
(77,904
)




MGIC Investment Corporation - Q1 2019 | 19

The unrealized losses in all categories of our investments at March 31, 2019 and December 31, 2018 were primarily caused by changes in interest rates between the time of purchase and the respective fair value measurement date. There were 420 and 721 securities in an unrealized loss position at March 31, 2019 and December 31, 2018, respectively.  

Note 8. Fair Value Measurements
Recurring fair value measurements
The following describes the valuation methodologies generally used by the independent pricing sources, or by us, to measure financial instruments at fair value, including the general classification of such financial instruments pursuant to the valuation hierarchy.

Level 1 measurements
•
Fixed income securities: Consist of primarily U.S. Treasury securities with valuations derived from quoted prices for identical instruments in active markets that we can access.
•
Equity securities: Consist of actively traded, exchange-listed equity securities with valuations derived from quoted prices for identical assets in active markets that we can access.
•
Other: Consists of money market funds with valuations derived from quoted prices for identical assets in active markets that we can access.

Level 2 measurements
•
Fixed income securities:
Corporate Debt & U.S. Government and Agency Bonds are valued by surveying the dealer community, obtaining relevant trade data, benchmark quotes and spreads and incorporating this information into the valuation process.
Obligations of U.S. States & Political Subdivisions are valued by tracking, capturing, and analyzing quotes for active issues and trades reported via the Municipal Securities Rulemaking Board records. Daily briefings and reviews of current economic conditions, trading levels, spread relationships, and the slope of the yield curve provide further data for evaluation.
Residential Mortgage-Backed Securities ("RMBS") are valued by monitoring interest rate movements, and other pertinent data daily. Incoming market data is enriched to derive spread, yield and/or price data as appropriate, enabling known data points to be extrapolated for valuation application across a range of related securities.
Commercial Mortgage-Backed Securities ("CMBS") are valued using techniques that reflect market participants’ assumptions and maximize the use of relevant observable inputs including quoted prices for similar assets, benchmark yield curves and market corroborated inputs. Evaluation uses regular reviews of the inputs for securities covered, including executed trades, broker quotes, credit information, collateral attributes and/or cash flow waterfall as applicable.
Asset-Backed Securities ("ABS") are valued using spreads and other information solicited from market buy-and-sell-side sources, including primary and secondary dealers, portfolio managers, and research analysts. Cash flows are generated for each tranche, benchmark yields are determined, and deal collateral performance and tranche level attributes including trade activity, bids, and offers are applied, resulting in tranche specific prices.
Collateralized loan obligations ("CLO") are valued by evaluating manager rating, seniority in the capital structure, assumptions about prepayment, default and recovery and their impact on cash flow generation. Loan level net asset values are determined and aggregated for tranches and as a final step prices are checked against available recent trade activity.

Level 3 measurements
•
Real estate acquired is valued at 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.




MGIC Investment Corporation - Q1 2019 | 20

Assets measured at fair value, by hierarchy level, as of March 31, 2019 and December 31, 2018 are shown in tables 8.1a and 8.1b below. The fair value of the assets is 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 2018 Annual Report on Form 10-K.
Assets carried at fair value by hierarchy level as of March 31, 2019
Table
8.1a
 
 
 
 
 
 
 
 
(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
 
$
168,142

 
$
42,479

 
$
125,663

 
$
—

Obligations of U.S. states and political subdivisions
 
1,667,238

 
—

 
1,667,238

 
—

Corporate debt securities
 
2,456,069

 
—

 
2,456,069

 
—

ABS
 
218,481

 
—

 
218,481

 
—

RMBS
 
180,485

 
—

 
180,485

 
—

CMBS
 
269,283

 
—

 
269,283

 
—

CLOs
 
327,662

 
—

 
327,662

 
—

Total fixed income securities
 
5,287,360

 
42,479

 
5,244,881

 
—

Equity securities
 
4,057

 
4,057

 
—

 
—

Other (1)
 
205,444

 
205,444

 
—

 
—

Real estate acquired (2)
 
11,639

 
—

 
—

 
11,639

Total
 
$
5,508,500

 
$
251,980

 
$
5,244,881

 
$
11,639

Assets carried at fair value by hierarchy level as of December 31, 2018
Table
8.1b
 
 
 
 
 
 
 
 
(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
 
$
167,176

 
$
42,264

 
$
124,912

 
$
—

Obligations of U.S. states and political subdivisions
 
1,720,100

 
—

 
1,720,087

 
13

Corporate debt securities
 
2,400,762

 
—

 
2,400,762

 
—

ABS
 
112,033

 
—

 
112,033

 
—

RMBS
 
178,961

 
—

 
178,961

 
—

CMBS
 
267,660

 
—

 
267,660

 
—

CLOs
 
305,295

 
—

 
305,295

 
—

Total fixed income securities
 
5,151,987

 
42,264

 
5,109,710

 
13

Equity securities
 
3,932

 
3,932

 
—

 
—

Other (1)
 
96,403

 
96,403

 
—

 
—

Real estate acquired (2)
 
14,535

 
—

 
—

 
14,535

Total
 
$
5,266,857

 
$
142,599

 
$
5,109,710

 
$
14,548

(1) 
Consists of money market funds included in “Cash and Cash Equivalents” and “Restricted Cash and Cash Equivalents” on the consolidated balance sheets.
(2) 
Real estate acquired through claim settlement, which is held for sale, is reported in “Other assets” on the consolidated balance sheets.



MGIC Investment Corporation - Q1 2019 | 21

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, 2019 and 2018 is shown in tables 8.2a and 8.2b below. As shown in table 8.2b below, we transferred our FHLB stock out of Level 3 assets, and it is carried at cost, which approximates fair value, on our consolidated balance sheet in “Other invested assets.” 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.
Fair value roll-forward for financial instruments classified as Level 3 for the three months ended March 31, 2019
Table
8.2a
 
 
 
 
 
 
 
 
(In thousands)
 
Fixed income
 
Equity Securities
 
Total Investments
 
Real Estate Acquired
Balance at December 31, 2018
 
$
13

 
$
—

 
$
13

 
$
14,535

Purchases
 
—

 
—

 
—

 
8,084

Sales
 
(13
)
 
—

 
(13
)
 
(10,872
)
Included in earnings and reported as losses incurred, net
 
—

 
—

 
—

 
(108
)
Balance at March 31, 2019
 
$
—

 
$
—

 
$
—

 
$
11,639

Fair value roll-forward for financial instruments classified as Level 3 for the three months ended March 31, 2018
Table
8.2b
 
 
 
 
 
 
 
 
(In thousands)
 
Fixed income
 
Equity
Securities
 
Total
Investments
 
Real Estate
Acquired
Balance at December 31, 2017
 
271

 
4,268

 
4,539

 
12,713

Transfers out of Level 3
 
—

 
(3,100
)
 
(3,100
)
 
—

Purchases
 
—

 
—

 
—

 
5,894

Sales
 
(17
)
 
—

 
(17
)
 
(8,870
)
Included in earnings and reported as losses incurred, net
 
—

 
—

 
—

 
341

Balance at March 31, 2018
 
$
254

 
$
1,168

 
$
1,422

 
$
10,078

Certain financial instruments, including insurance contracts, are excluded from these fair value disclosure requirements. The carrying values of cash and cash equivalents (Level 1) and accrued investment income (Level 2) approximated their fair values. Additional fair value disclosures related to our investment portfolio are included in Note 7 – “Investments.”

Financial assets and liabilities not measured at fair value
Other invested assets include an investment in FHLB stock that is carried at cost, which due to restrictions that require it to be redeemed or sold only to the security issuer at par value, approximates fair value. The fair value of other invested assets is categorized as Level 2.
Financial liabilities include our outstanding debt obligations. The fair values of our 5.75% Notes and 9% Debentures were based on observable market prices. The fair value of the FHLB Advance was estimated using cash flows discounted at current incremental borrowing rates for similar borrowing arrangements. In all cases the fair values of the financial liabilities below are categorized as Level 2.
Table 8.3 presents the carrying value and fair value of our financial assets and liabilities disclosed, but not carried, at fair value at March 31, 2019 and December 31, 2018.
Financial assets and liabilities not measured at fair value
Table
8.3
 
 
 
 
 
 
 
 
 
 
March 31, 2019
 
December 31, 2018
(In thousands)
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Financial assets
 
 
 
 
 
 
 
 
Other invested assets
 
$
3,100

 
$
3,100

 
$
3,100

 
$
3,100

 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
FHLB Advance
 
$
155,000

 
$
153,133

 
$
155,000

 
$
150,551

5.75% Senior Notes
 
420,002

 
449,387

 
419,713

 
425,791

9% Convertible Junior Subordinated Debentures
 
256,872

 
332,580

 
256,872

 
338,069

Total financial liabilities
 
$
831,874

 
$
935,100

 
$
831,585

 
$
914,411




MGIC Investment Corporation - Q1 2019 | 22

Note 9. Other Comprehensive Income
The pretax and related income tax (expense) benefit components of our other comprehensive income (loss) for the three months ended March 31, 2019 and 2018 are included in table 9.1 below.
Components of other comprehensive income (loss)
Table
9.1
 
 
 
 
 
 
Three Months Ended March 31,
(In thousands)
 
2019
 
2018
Net unrealized investment gains (losses) arising during the period
 
$
102,621

 
$
(81,587
)
Income tax (expense) benefit
 
(21,550
)
 
17,134

Net of taxes
 
81,071