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FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
September 30, 2019
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
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13185886&doc=13
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)

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 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 No

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 No

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

Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)
Emerging growth company
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 NO x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 1, 2019, there were 348,709,277 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 - Q3 2019 | 2


MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2019
 
Table of contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds


MGIC Investment Corporation - Q3 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

CRT
Credit risk transfer

/ 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


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 Transactions
Excess-of-loss reinsurance transactions with unaffiliated special purpose insurers domiciled in Bermuda

HOPA
Homeowners Protection Act

HUD
Housing and Urban Development

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

ILN
Insurance-linked notes



MGIC Investment Corporation - Q3 2019 | 4


/ 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

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



MGIC Investment Corporation - Q3 2019 | 5


PMIERs
Private Mortgage Insurer Eligibility Requirements issued by each of Fannie Mae and Freddie Mac to set forth requirements that an approved insurer must meet and maintain to provide mortgage guaranty insurance on loans delivered to or acquired by Fannie Mae or Freddie Mac, as applicable.

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

/ Q
QSR Transaction
Quota share reinsurance transaction with a group of unaffiliated reinsurers

QM
A mortgage loan that satisfies the “qualified mortgage” loan characteristics pursuant to the CFPB’s ability-to-repay rule under TILA. Originating a QM loan may provide a lender with legal protection from lawsuits that claim the lender failed to verify a borrower’s ability to repay.

/ 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)

/ T
TILA
Truth in Lending 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 and operating expenses

USDA
U.S. Department of Agriculture

/ V
VA
U.S. Department of Veterans Affairs

VIE
Variable interest entity


MGIC Investment Corporation - Q3 2019 | 6


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
(In thousands)
 
Note
 
September 30,
2019
 
December 31,
2018
ASSETS
 
 
 
(Unaudited)
 
 
Investment portfolio:
 
7 / 8
 
 
 
 
Fixed income, available-for-sale, at fair value (amortized cost 2019 - $5,473,893; 2018 - $5,196,784)
 
 
 
$
5,660,992

 
$
5,151,987

Equity securities, at fair value (cost 2019 - $17,205; 2018 - $3,993)
 
2 / 7 / 8
 
17,360

 
3,932

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

 
3,100

Total investment portfolio
 
 
 
5,681,452

 
5,159,019

Cash and cash equivalents
 
 
 
165,425

 
151,892

Restricted cash and cash equivalents
 
 
 
6,329

 
3,146

Accrued investment income
 
 
 
48,320

 
48,001

Reinsurance recoverable on loss reserves
 
 
19,566

 
33,328

Reinsurance recoverable on paid losses
 
 
 
1,573

 
2,948

Premiums receivable
 
 
 
51,804

 
55,090

Home office and equipment, net
 
 
 
50,540

 
51,734

Deferred insurance policy acquisition costs
 
 
 
18,010

 
17,888

Deferred income taxes, net
 
 
 
11,583

 
69,184

Other assets
 
 
 
92,149

 
85,572

Total assets
 
 
 
$
6,146,751

 
$
5,677,802

 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Loss reserves
 
 
$
602,297

 
$
674,019

Unearned premiums
 
 
 
392,556

 
409,985

Federal Home Loan Bank advance
 
 
155,000

 
155,000

Senior notes
 
 
420,578

 
419,713

Convertible junior subordinated debentures
 
 
256,872

 
256,872

Other liabilities
 
 
 
159,831

 
180,322

Total liabilities
 
 
 
1,987,134

 
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 - 348,709; 2018 - 355,371)
 
 
 
371,353

 
371,353

Paid-in capital
 
 
 
1,864,973

 
1,862,536

Treasury stock at cost (shares 2019 - 22,644; 2018 - 15,982)
 
 
 
(263,196
)
 
(175,059
)
Accumulated other comprehensive income (loss), net of tax
 
 
 
63,782

 
(124,214
)
Retained earnings
 
 
 
2,122,705

 
1,647,275

Total shareholders’ equity
 
 
 
4,159,617

 
3,581,891

Total liabilities and shareholders’ equity
 
 
 
$
6,146,751

 
$
5,677,802

See accompanying notes to consolidated financial statements.


MGIC Investment Corporation - Q3 2019 | 7





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
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
 
 
 
Premiums written:
 
 
 
 
 
 
 
 
 
 
Direct
 
 
 
$
286,059

 
$
280,229

 
$
843,145

 
$
824,989

Assumed
 
 
 
1,793

 
(3,020
)
 
4,405

 
(843
)
Ceded
 
 
(28,438
)
 
(25,326
)
 
(100,257
)
 
(79,921
)
Net premiums written
 
 
 
259,414

 
251,883

 
747,293

 
744,225

Decrease (increase) in unearned premiums, net
 
 
 
8,443

 
(1,457
)
 
17,427

 
(14,728
)
Net premiums earned
 
 
 
267,857

 
250,426

 
764,720

 
729,497

Investment income, net of expenses
 
 
 
42,715

 
36,380

 
125,723

 
103,003

Net realized investment gains (losses)
 
 
4,205

 
1,114

 
3,986

 
(1,112
)
Other revenue
 
 
 
3,606

 
2,525

 
7,921

 
6,827

Total revenues
 
 
 
318,383

 
290,445

 
902,350

 
838,215

 
 
 
 
 
 
 
 
 
 
 
Losses and expenses:
 
 
 
 
 
 
 
 
 
 
Losses incurred, net
 
 
33,985

 
(1,518
)
 
94,884

 
8,877

Amortization of deferred policy acquisition costs
 
 
 
3,142

 
3,156

 
8,380

 
8,573

Other underwriting and operating expenses, net
 
 
 
45,197

 
43,655

 
134,097

 
131,587

Interest expense
 
 
 
12,939

 
13,258

 
39,722

 
39,737

Total losses and expenses
 
 
 
95,263

 
58,551

 
277,083

 
188,774

Income before tax
 
 
 
223,120

 
231,894

 
625,267

 
649,441

Provision for income taxes
 
 
 
46,186

 
49,994

 
128,614

 
137,090

Net income
 
 
 
$
176,934

 
$
181,900

 
$
496,653

 
$
512,351

 
 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
 
Basic
 
 
$
0.50

 
$
0.50

 
$
1.40

 
$
1.40

Diluted
 
 
$
0.49

 
$
0.49

 
$
1.36

 
$
1.36

 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
 
351,475

 
362,180

 
354,272

 
367,190

Weighted average common shares outstanding - diluted
 
 
372,575

 
382,905

 
375,266

 
387,765


See accompanying notes to consolidated financial statements.


MGIC Investment Corporation - Q3 2019 | 8





MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
 
 
 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
Note
 
2019
 
2018
 
2019
 
2018
Net income
 
 
 
$
176,934

 
$
181,900

 
$
496,653

 
$
512,351

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
Change in unrealized investment gains and losses
 
 
31,372

 
(12,077
)
 
183,197

 
(86,452
)
Benefit plan adjustments
 
 
 
1,600

 
440

 
4,799

 
1,322

Other comprehensive income (loss), net of tax
 
 
 
32,972

 
(11,637
)
 
187,996

 
(85,130
)
Comprehensive income
 
 
 
$
209,906

 
$
170,263

 
$
684,649

 
$
427,221


See accompanying notes to consolidated financial statements.


MGIC Investment Corporation - Q3 2019 | 9





MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
 
 
 
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
Note
 
2019
 
2018
 
2019
 
2018
Common stock
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
 
 
 
$
371,353

 
$
371,348

 
$
371,353

 
$
370,567

Net common stock issued under share-based compensation plans
 
 
 

 
5

 

 
786

Balance, end of period
 
 
 
371,353

 
371,353

 
371,353

 
371,353

 
 
 
 
 
 
 
 
 
 
 
Paid-in capital
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
 
 
 
1,860,578

 
1,852,251

 
1,862,536

 
1,850,582

Net common stock issued under share-based compensation plans
 
 
 

 
(63
)
 

 
(8,917
)
Reissuance of treasury stock, net under share-based compensation plans
 
 
 
(133
)
 

 
(11,715
)
 

Equity compensation
 
 
 
4,528

 
5,451

 
14,152

 
15,974

Balance, end of period
 
 
 
1,864,973

 
1,857,639

 
1,864,973

 
1,857,639

 
 
 
 
 
 
 
 
 
 
 
Treasury stock
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
 
 
 
(194,070
)
 
(100,059
)
 
(175,059
)
 

Reissuance of treasury stock, net under share-based compensation plans
 
 
 
59

 

 
5,989

 

Repurchase of common stock
 
 
(69,185
)
 

 
(94,126
)
 
(100,059
)
Balance, end of period
 
 
 
(263,196
)
 
(100,059
)
 
(263,196
)
 
(100,059
)
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
 
 
 
30,810

 
(117,294
)
 
(124,214
)
 
(43,801
)
Other comprehensive income (loss), net of tax
 
 
32,972

 
(11,637
)
 
187,996

 
(85,130
)
Balance, end of period
 
 
 
63,782

 
(128,931
)
 
63,782

 
(128,931
)
 
 
 
 
 
 
 
 
 
 
 
Retained earnings
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
 
 
 
1,966,994

 
1,307,629

 
1,647,275

 
977,178

Net income
 
 
 
176,934

 
181,900

 
496,653

 
512,351

Cash dividends
 
 
(21,223
)
 

 
(21,223
)
 

Balance, end of period
 
 
 
2,122,705

 
1,489,529

 
2,122,705

 
1,489,529

 
 
 
 
 
 
 
 
 
 
 
Total shareholders’ equity
 
 
 
$
4,159,617

 
$
3,489,531

 
$
4,159,617

 
$
3,489,531


See accompanying notes to consolidated financial statements.


MGIC Investment Corporation - Q3 2019 | 10





MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
 
 
Nine Months Ended September 30,
(In thousands)
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
496,653

 
$
512,351

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
35,778

 
45,267

Deferred tax expense
 
7,628

 
145,397

Net realized investment (gains) losses
 
(3,986
)
 
1,112

Change in certain assets and liabilities:
 
 
 
 
Accrued investment income
 
(319
)
 
694

Reinsurance recoverable on loss reserves
 
13,762

 
15,193

Reinsurance recoverable on paid losses
 
1,375

 
761

Premium receivable
 
3,286

 
2,405

Deferred insurance policy acquisition costs
 
(122
)
 
176

Profit commission receivable
 
3,868

 
(9,098
)
Loss reserves
 
(71,722
)
 
(264,589
)
Unearned premiums
 
(17,429
)
 
14,680

Return premium accrual
 
(9,600
)
 
(18,600
)
Current income taxes
 
(8,765
)
 
(75,393
)
Other, net
 
7,756

 
13,191

Net cash provided by operating activities
 
458,163

 
383,547

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of investments
 
(1,043,003
)
 
(1,074,849
)
Proceeds from sales of investments
 
201,369

 
338,939

Proceeds from maturity of fixed income securities
 
536,747

 
594,679

Net increase in payable for securities
 

 
43,679

Additions to property and equipment
 
(4,079
)
 
(10,659
)
Net cash used in investing activities
 
(308,966
)
 
(108,211
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Repurchase of common stock
 
(105,766
)
 
(100,059
)
Dividends paid
 
(20,989
)
 

Payment of withholding taxes related to share-based compensation net share settlement
 
(5,726
)
 
(8,131
)
Net cash used in financing activities
 
(132,481
)
 
(108,190
)
Net increase in cash and cash equivalents and restricted cash and cash equivalents
 
16,716

 
167,146

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
 
$
171,754

 
$
266,997

See accompanying notes to consolidated financial statements.


MGIC Investment Corporation - Q3 2019 | 11


MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 application of the more restrictive PMIERs, as of September 30, 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.

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. The first step applies a more-likely-than-not threshold for recognition and derecognition. The second step measures the tax position as the greatest amount of benefit that is cumulatively greater than 50% likely to be 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 that 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 non-interest-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 - Q3 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. 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. 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 September 30, 2019 totaled $2.0 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 incorporate 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. The allowance for current expected credit losses (“CECL”) generally reduces the amortized cost basis of the financial instrument to the amount an entity expects to collect, however, credit losses relating to available-for-sale fixed maturity securities are to be recorded through an allowance for credit losses, 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. In May 2019, the FASB amended this guidance to provide entities with an option to irrevocably elect the fair value option for eligible instruments in order to provide targeted transition relief that is intended to increase comparability of financial statement information for some entities that otherwise would have measured similar financial instruments using different measurement methodologies. The effective dates remain the same. 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 guidance will have on our consolidated financial statement disclosures, but do not expect it to have a material impact.


MGIC Investment Corporation - Q3 2019 | 13


Note 3. Debt
Debt obligations
The par value of our long-term debt obligations and their aggregate carrying values as of September 30, 2019 and December 31, 2018 are presented in table 3.1 below.
Long-term debt obligations
Table
3.1
 
 
 
 
(In millions)
 
September 30,
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)
 
420.6

 
419.7

9% Debentures, due April 2063 (1)
 
256.9

 
256.9

Long-term debt, carrying value
 
$
832.5

 
$
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. In the event of a cash dividend to all or substantially all holders of our common stock, the conversion rate shall be increased by multiplying the conversion rate in effect immediately prior to the ex-dividend date for such distribution by a fraction, (a) the numerator shall be the current market price of our common stock on the ex-dividend date; and (b) the denominator shall be the current market price of our common stock on the ex-dividend date less the amount by which the dividend per share exceeds $0.025. No adjustment in the conversion rate shall be required unless such adjustment would require an increase or decrease of at least one percent in such rate; provided that any such adjustments that are not required to be made shall be carried forward and such carry-forward adjustments shall be made, regardless of whether the aggregate adjustment is less than one percent at the end of each fiscal year, or in certain other circumstances. The conversion price per share is $1,000 divided by the conversion rate, and will change upon a change in the conversion rate. 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”) are obligations of our holding company, MGIC Investment Corporation, and not of its subsidiaries. The Federal Home Loan Bank Advance (the “FHLB Advance”) is an obligation of MGIC.

In May 2019, we terminated our $175 million unsecured revolving credit facility. At the time of termination there were no amounts drawn on the credit facility. The unused portion of our revolving credit facility was subject to recurring commitment fees, which are reflected in interest payments.

Interest payments
Interest payments for the nine months ended September 30, 2019 and 2018 were $38.5 million and $38.8 million, respectively.

 
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 September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2019
 
2018
 
2019
 
2018
Premiums earned:
 
 
 
 
 
 
 
 
Direct
 
$
294,909

 
$
275,044

 
$
861,705

 
$
808,531

Assumed
 
1,388

 
709

 
3,275

 
936

Ceded
 
(28,440
)
 
(25,327
)
 
(100,260
)
 
(79,970
)
Net premiums earned
 
$
267,857

 
$
250,426

 
$
764,720

 
$
729,497

 
 
 
 
 
 
 
 
 
Losses incurred:
 
 
 
 
 
 
 
 
Direct
 
$
36,755

 
$
(2,081
)
 
$
102,835

 
$
12,642

Assumed
 
(34
)
 
55

 
(110
)
 
45

Ceded
 
(2,736
)
 
508

 
(7,841
)
 
(3,810
)
Losses incurred, net
 
$
33,985

 
$
(1,518
)
 
$
94,884

 
$
8,877



Quota share reinsurance
We utilize quota share reinsurance transactions (“QSR Transactions”) 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 or full financial statement or full credit under applicable regulatory capital requirements 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%.



MGIC Investment Corporation - Q3 2019 | 14


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.

2015 QSR Transaction. We terminated a portion of our 2015 QSR Transaction effective June 30, 2019 and entered into 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. During the second quarter of 2019, we incurred a termination fee of $6.8 million, which was paid in July to participants of the reinsurance panel that are not participating in the amended 2015 QSR Transaction. Under the amended 2015 QSR Transaction we cede losses and premiums through December 31, 2031, at which time the agreement expires. Early termination of the amended agreement can be elected by us effective June 30, 2021 for no fee, or under specified scenarios, including if we will receive less than 90% of the full credit amount under the PMIERs or full financial statement or full credit under applicable regulatory capital requirements for the risk ceded in any required calculation period. Generally, under our amended 2015 QSR Transaction, we will 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 and nine months ended September 30, 2019 and 2018.
Quota Share Reinsurance
Table
4.2
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2019
 
2018
 
2019
 
2018
Ceded premiums written and earned, net of profit commission (1)
 
$
23,032

 
$
25,248

 
$
87,721

 
$
79,716

Ceded losses incurred
 
2,729

 
(522
)
 
7,845

 
3,531

Ceding commissions (2)
 
11,042

 
12,983

 
37,807

 
38,268

Profit commission
 
32,177

 
39,664

 
108,079

 
111,622


(1) 
Premiums are ceded on an earned and received basis as defined in the agreements. The nine months ended September 30, 2019 include the $6.8 million termination fee discussed in “2015 QSR Transaction” above.
(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 $19.5 million as of September 30, 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
We have aggregate excess of loss reinsurance agreements (“Home Re Transactions”) with unaffiliated special purpose insurers domiciled in Bermuda (“Home Re Entities”). For the reinsurance coverage periods, we retain the first layer of the respective aggregate losses, and a Home Re special purpose entity will then provide second layer coverage up to the outstanding reinsurance coverage amount. We retain losses in excess of the outstanding reinsurance coverage amount. The aggregate excess of loss reinsurance coverage decreases over a ten-year period, subject to certain conditions, as the underlying covered mortgages amortize or are repaid, or mortgage insurance losses are paid. MGIC has rights to terminate the Home Re Transactions under certain circumstances. The Home Re entities financed the coverages by issuing mortgage insurance-linked notes (“ILNs”) to unaffiliated investors in an aggregate amount equal to the initial reinsurance coverage amounts. The ILNs each have ten-year legal maturities and are non-recourse to any assets of MGIC or affiliates. The proceeds of the ILNs, which were deposited into reinsurance trusts for the benefit of MGIC, will be the source of reinsurance claim payments to MGIC and principal repayments on the ILNs.
Excess of Loss Reinsurance
Table
4.3
 
 
 
 
 
 
 
 
(In thousands)
 
 
 
 
 
As of September 30, 2019
Home Re Entity (Issue Date)
 
Policy Inforce Dates
 
Termination Option Date (1)
 
Remaining First Layer Retention
 
Remaining Excess of Loss Reinsurance Coverages
Home Re 2018-1 Ltd. (Oct. - 2018)
 
July 1, 2016 - December 31, 2017
 
October 25, 2025
 
$
168,112

 
$
288,852

Home Re 2019-1 Ltd. (May - 2019)
 
January 1, 2018 - March 31, 2019
 
May 25, 2026
 
185,714

 
315,739

Total
 
 
 
 
 
$
353,826

 
$
604,591

(1) 
We have the right to terminate the excess-of-loss reinsurance agreements under certain circumstances and on any payment date on or after the respective termination option date.


MGIC Investment Corporation - Q3 2019 | 15


The reinsurance premiums ceded to each Home Re Entity are composed of coverage, initial expense and supplemental premiums. The coverage premiums are generally calculated as the difference between the amount of interest payable by the Home Re Entity on the ILNs it issued to raise funds to collateralize its reinsurance obligations to us, and the investment income collected on the collateral assets. The amount of monthly reinsurance coverage premium ceded will fluctuate due to changes in one-month LIBOR and changes in money market rates that affect investment income collected on the assets in the reinsurance trust. As a result, we concluded that each reinsurance agreement contains an embedded derivative that is accounted for separately as a freestanding derivative. The fair values of the derivatives at September 30, 2019, were not material to our consolidated balance sheet, and the change in fair values during the three and nine months ended September 30, 2019 were not material to our consolidated statements of operations. Total ceded premiums were $5.4 million and $12.4 million for the three and nine months ended September 30, 2019, respectively.

At the time the Home Re Transactions were entered into, we assessed whether each Home Re Entity 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 each Home Re Entity is a VIE. However, given that MGIC (1) does not have the unilateral power to direct the activities that most significantly affect each Home Re Entity’s economic performance and (2) does not have the obligation to absorb losses or the right to receive benefits of each Home Re Entity, consolidation of neither Home Re Entity is required.

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 statements of operations, as a result of our involvement with the VIEs under our Home Re Transactions. As of September 30, 2019, and December 31, 2018, we did not have material exposure to the VIEs as we have no investment in the VIEs and had no reinsurance claim payments due from either VIE under our reinsurance agreements. We are unable to determine the timing or extent of claims from losses that are ceded under the reinsurance agreements. The VIE assets are deposited in reinsurance trusts for the benefit of MGIC that will be the source of reinsurance claim payments to MGIC. The purpose of the reinsurance trusts is to provide security to MGIC for the obligations of the VIEs under the reinsurance agreements. The trustee of the reinsurance trusts, a recognized provider of corporate trust services, has established segregated accounts within the reinsurance trusts for the benefit of MGIC, pursuant to the trust agreements. The trust agreements are governed by, and construed in accordance with, the laws of the State of New York. If the trustee of the reinsurance trusts failed to distribute claim payments to us as provided in the reinsurance trusts, we would incur a loss related to our losses ceded under the reinsurance agreements and deemed unrecoverable. We are also unable to determine the impact such possible failure by the trustee to perform pursuant to the reinsurance trust agreements 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 VIEs. MGIC has certain termination rights under the reinsurance agreements should its claims not be paid. We consider our exposure to loss from our reinsurance agreements with the VIEs to be remote.

Table 4.4 presents the total assets of the Home Re Entities as of September 30, 2019 and December 31, 2018.
Home Re total assets
Table
4.4
 
 
(In thousands)
 
 
Home Re Entity (Issue date)
 
Total VIE Assets
September 30, 2019
 
 
Home Re 2018-01 Ltd. (Oct - 2018)
 
$
299,655

Home Re 2019-01 Ltd. (May - 2019)
 
$
315,739

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



The assets of the Home Re Entities provide capital credit under the PMIERs financial requirements (see Note 1 - “Nature of Business and 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 nine months of 2019, curtailments reduced our average claim paid by approximately 5.8% and 4.7%, 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.



MGIC Investment Corporation - Q3 2019 | 16


Under ASC 450-20, until a loss 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; (including the receipt of any necessary GSE approvals), 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 $264.0 million more than the amount of probable loss we have recorded. This estimate of maximum exposure is based upon currently available information; is subject to significant judgment, numerous assumptions and known and unknown uncertainties; will include an amount for matters for which we have recorded a probable loss until such matters are concluded; will include different matters from time to time; and does not include interest or consequential or exemplary damages. In the third quarter of 2019, we entered into an agreement to settle a claims paying practices dispute for which we previously had recognized a probable loss. There was no additional loss recognized as a result of entering into the agreement, as the settlement amount was consistent with our original estimate of the probable loss. The agreement remains subject to GSE approval.

Mortgage insurers, including MGIC, have in the past been involved in litigation and regulatory actions related to alleged violations of the anti-referral fee provisions of the Real Estate Settlement Procedures Act (“RESPA”), and the notice provisions of the Fair Credit Reporting Act (“FCRA”). While these proceedings in the aggregate did not result 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. To the extent that we are construed to make independent credit decisions in connection with our contract underwriting activities, we also could be subject to increased regulatory requirements under the Equal Credit
 
Opportunity Act (“EOCA”), FCRA, and other laws. Under ECOA, examination may also be made of whether a mortgage insurer’s underwriting decisions have a disparate impact on persons belonging to a protected class in violation of the law.

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 nine 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 - Q3 2019 | 17


Table 6.1 reconciles the numerators and denominators used to calculate basic and diluted EPS.
Earnings per share
Table
6.1
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands, except per share data)
 
2019
 
2018
 
2019
 
2018
Basic earnings per share:
 
 
 
 
 
 
 
 
Net income
 
$
176,934

 
$
181,900

 
$
496,653