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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
March 31, 2020
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/290382e1cd7d976e6e969960515d1bdb-mgiclogoa05.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)

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 May 1, 2020, there were 338,567,022 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 2020 | 2


MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2020
 
Table of contents
 
 
Page
 
 
Consolidated Balance Sheets - March 31, 2020 (Unaudited) and December 31, 2019
 
Consolidated Statements of Operations (Unaudited) - Three Months Ended March 31, 2020 and 2019
 
Consolidated Statements of Comprehensive Income (Unaudited) - Three Months Ended March 31, 2020 and 2019
 
Consolidated Statements of Shareholders’ Equity (Unaudited) - Three Months Ended March 31, 2020 and 2019
 
Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended March 31, 2020 and 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds


MGIC Investment Corporation - Q1 2020 | 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
CARES Act
The Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020

CECL
Current expected credit losses

CFPB
Consumer Financial Protection Bureau

CLO
Collateralized loan obligations

CMBS
Commercial mortgage-backed securities

COVID-19 Pandemic
An outbreak of the novel coronavirus disease, later named COVID-19, that has spread globally, causing significant adverse effects on populations and economies. The outbreak of COVID-19 was declared a pandemic by the World Health Organization and a national emergency in the United States in March 2020.

CRT
Credit risk transfer. The transfer of a portion of mortgage credit risk to the private sector through different forms of transactions and structures

/ 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
Direct means before giving effect to reinsurance

/ E
EPS
Earnings per share

/ 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



MGIC Investment Corporation - Q1 2020 | 4


HOPA
Homeowners Protection Act

HUD
Housing and Urban Development

/ I
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

/ L
LAE
Loss adjustment expenses

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

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

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

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

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

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

LPMI
Lender-paid mortgage insurance

 
/ M
MBS
Mortgage-backed securities

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

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

MAC
MGIC Assurance Corporation, a subsidiary of MGIC

Minimum Required Assets
The minimum amount of Available Assets that must be held under the PMIERs which is based on an insurer’s book of IIF and is calculated from tables of factors with several risk dimensions, reduced for credit given for risk ceded under reinsurance transactions, and subject to a floor of $400 million.

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




MGIC Investment Corporation - Q1 2020 | 5


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

OTTI
Other than temporary impairment

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

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

PMIERs
Private Mortgage Insurer Eligibility Requirements issued by 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

Premium Rate
The contractual rate charged for coverage under our insurance policies.

Primary Insurance
Insurance that provides mortgage default protection on individual loans. Primary insurance may be written on a "flow" basis, in which loans are insured in individual, loan-by-loan transactions, or on a "bulk" basis, in which each loan in a portfolio of loans is individually insured in a single bulk transaction

/ 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 Consumer Financial Protection Bureau’s ability-to-repay under the Truth in Lending Act. 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 - Q1 2020 | 6


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
(In thousands)
 
Note
 
March 31,
2020
 
December 31,
2019
ASSETS
 
 
 
 
 
 
Investment portfolio:
 
7 / 8
 
 
 
 
Fixed income, available-for-sale, at fair value (amortized cost 2020 - $5,375,382; 2019 - $5,562,550)
 
 
 
$
5,458,846

 
$
5,737,892

Equity securities, at fair value (cost 2020 - $29,559; 2019 - $17,188)
 
2 / 7 / 8
 
28,892

 
17,328

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

 
3,100

Total investment portfolio
 
 
 
5,490,838

 
5,758,320

Cash and cash equivalents
 
 
 
365,303

 
161,847

Restricted cash and cash equivalents
 
 
 
4,223

 
7,209

Accrued investment income
 
 
 
46,942

 
49,705

Reinsurance recoverable on loss reserves
 
2/4
 
25,756

 
21,641

Reinsurance recoverable on paid losses
 
2
 
1,691

 
1,521

Premiums receivable
 
2
 
53,440

 
55,587

Home office and equipment, net
 
 
 
49,010

 
50,121

Deferred insurance policy acquisition costs
 
 
 
19,514

 
18,531

Deferred income taxes, net
 
 
 
8,867

 
5,742

Other assets
 
 
 
89,703

 
99,347

Total assets
 
 
 
$
6,155,287

 
$
6,229,571

 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Loss reserves
 
 
$
574,753

 
$
555,334

Unearned premiums
 
 
 
365,408

 
380,302

Federal Home Loan Bank advance
 
 
155,000

 
155,000

Senior notes
 
 
421,155

 
420,867

Convertible junior subordinated debentures
 
 
256,872

 
256,872

Other liabilities
 
 
 
140,271

 
151,962

Total liabilities
 
 
 
1,913,459

 
1,920,337

Contingencies
 
 


 


Shareholders’ equity:
 
 
 
 
 
Common stock (one dollar par value, shares authorized 1,000,000; shares issued 2020 - 371,353; 2019 - 371,353; shares outstanding 2020 - 338,567; 2019 - 347,308)
 
 
 
371,353

 
371,353

Paid-in capital
 
 
 
1,855,371

 
1,869,719

Treasury stock at cost (shares 2020 - 32,786; 2019 - 24,045)
 
 
 
(393,425
)
 
(283,196
)
Accumulated other comprehensive income, net of tax
 
 
 
1,224

 
72,708

Retained earnings
 
 
 
2,407,305

 
2,278,650

Total shareholders’ equity
 
 
 
4,241,828

 
4,309,234

Total liabilities and shareholders’ equity
 
 
 
$
6,155,287

 
$
6,229,571

See accompanying notes to consolidated financial statements.


MGIC Investment Corporation - Q1 2020 | 7





MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
 
 
 
 
Three Months Ended March 31,
(In thousands, except per share data)
 
Note
 
2020
 
2019
Revenues:
 
 
 
 
 
 
Premiums written:
 
 
 
 
 
 
Direct
 
 
 
$
274,724

 
$
273,897

Assumed
 
 
 
2,859

 
1,107

Ceded
 
 
(31,576
)
 
(30,723
)
Net premiums written
 
 
 
246,007

 
244,281

Decrease in unearned premiums, net
 
 
 
14,894

 
5,480

Net premiums earned
 
 
 
260,901

 
249,761

Investment income, net of expenses
 
 
 
41,347

 
40,585

Net realized investment gains (losses)
 
 
1,891

 
(526
)
Other revenue
 
 
 
2,754

 
1,830

Total revenues
 
 
 
306,893

 
291,650

 
 
 
 
 
 
 
Losses and expenses:
 
 
 
 
 
 
Losses incurred, net
 
 
60,956

 
39,063

Amortization of deferred policy acquisition costs
 
 
 
2,510

 
2,478

Other underwriting and operating expenses, net
 
 
 
42,262

 
45,940

Interest expense
 
 
 
12,926

 
13,233

Total losses and expenses
 
 
 
118,654

 
100,714

Income before tax
 
 
 
188,239

 
190,936

Provision for income taxes
 
 
 
38,434

 
38,995

Net income
 
 
 
$
149,805

 
$
151,941

 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
Basic
 
 
$
0.44

 
$
0.43

Diluted
 
 
$
0.42

 
$
0.42

 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
 
344,053

 
355,653

Weighted average common shares outstanding - diluted
 
 
365,216

 
376,667


See accompanying notes to consolidated financial statements.


MGIC Investment Corporation - Q1 2020 | 8





MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 
 
 
 
 
Three Months Ended March 31,
(In thousands)
 
Note
 
2020
 
2019
Net income
 
 
 
$
149,805

 
$
151,941

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
Change in unrealized investment gains and losses
 
 
(72,585
)
 
81,071

Benefit plan adjustments
 
 
 
1,101

 
1,650

Other comprehensive (loss) income, net of tax
 
 
 
(71,484
)
 
82,721

Comprehensive income
 
 
 
$
78,321

 
$
234,662


See accompanying notes to consolidated financial statements.


MGIC Investment Corporation - Q1 2020 | 9





MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
 
 
 
 
 
Three Months Ended March 31,
(In thousands)
 
Note
 
2020
 
2019
Common stock
 
 
 
 
 
 
Balance, beginning and end of period
 
 
 
$
371,353

 
$
371,353

 
 
 
 
 
 
 
Paid-in capital
 
 
 
 
 
 
Balance, beginning of period
 
 
 
1,869,719

 
1,862,536

Reissuance of treasury stock, net under share-based compensation plans
 
 
 
(18,667
)
 
(11,582
)
Equity compensation
 
 
 
4,319

 
5,282

Balance, end of period
 
 
 
1,855,371

 
1,856,236

 
 
 
 
 
 
 
Treasury stock
 
 
 
 
 
 
Balance, beginning of period
 
 
 
(283,196
)
 
(175,059
)
Reissuance of treasury stock, net under share-based compensation plans
 
 
 
9,768

 
5,930

Repurchase of common stock
 
 
(119,997
)
 

Balance, end of period
 
 
 
(393,425
)
 
(169,129
)
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
 
 
 
Balance, beginning of period
 
 
 
72,708

 
(124,214
)
Other comprehensive (loss) income, net of tax
 
 
(71,484
)
 
82,721

Balance, end of period
 
 
 
1,224

 
(41,493
)
 
 
 
 
 
 
 
Retained earnings
 
 
 
 
 
 
Balance, beginning of period
 
 
 
2,278,650

 
1,647,275

Net income
 
 
 
149,805

 
151,941

Cash dividends
 
 
(21,150
)
 

Balance, end of period
 
 
 
2,407,305

 
1,799,216

 
 
 
 
 
 
 
Total shareholders’ equity
 
 
 
$
4,241,828

 
$
3,816,183


See accompanying notes to consolidated financial statements.


MGIC Investment Corporation - Q1 2020 | 10





MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
 
 
Three Months Ended March 31,
(In thousands)
 
2020
 
2019
Cash flows from operating activities:
 
 
 
 
Net income
 
$
149,805

 
$
151,941

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
13,052

 
11,908

Deferred tax expense
 
15,877

 
7,755

Net realized investment (gains) losses
 
(1,891
)
 
526

Change in certain assets and liabilities:
 
 
 
 
Accrued investment income
 
2,763

 
1,302

Reinsurance recoverable on loss reserves
 
(4,115
)
 
1,453

Reinsurance recoverable on paid losses
 
(170
)
 
(121
)
Premium receivable
 
2,147

 
3,494

Deferred insurance policy acquisition costs
 
(983
)
 
258

Profit commission receivable
 
1,121

 
(2,836
)
Loss reserves
 
19,419

 
(18,755
)
Unearned premiums
 
(14,894
)
 
(5,481
)
Return premium accrual
 
(400
)
 
(3,100
)
Current income taxes
 
22,527

 
30,983

Other, net
 
(19,934
)
 
(14,446
)
Net cash provided by operating activities
 
184,324

 
164,881

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of investments
 
(280,614
)
 
(348,746
)
Proceeds from sales of investments
 
224,803

 
106,010

Proceeds from maturity of fixed income securities
 
222,544

 
202,929

Additions to property and equipment
 
(580
)
 
(308
)
Net cash provided by (used in) investing activities
 
166,153

 
(40,115
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Repurchase of common stock
 
(119,997
)
 
(11,640
)
Dividends paid
 
(21,111
)
 

Payment of withholding taxes related to share-based compensation net share settlement
 
(8,899
)
 
(5,652
)
Net cash used in financing activities
 
(150,007
)
 
(17,292
)
Net increase in cash and cash equivalents and restricted cash and cash equivalents
 
200,470

 
107,474

Cash and cash equivalents and restricted cash and cash equivalents at beginning of period
 
169,056

 
155,038

Cash and cash equivalents and restricted cash and cash equivalents at end of period
 
$
369,526

 
$
262,512

See accompanying notes to consolidated financial statements.


MGIC Investment Corporation - Q1 2020 | 11


MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(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, 2019 included in our 2019 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, 2020.

The vast majority 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). Based on our application of PMIERs, as of March 31, 2020, 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 2019 amounts have been made in the accompanying financial statements to conform to the 2020 presentation.
 

Recent Developments
While uncertain, the impact of the COVID-19 pandemic on the Company’s business, financial results, liquidity and/or financial condition may be material. We expect that the increase in unemployment and economic uncertainty resulting from initiatives to reduce the transmission of COVID-19 (including “shelter-in-place” restrictions), as well as COVID-19-related illnesses and deaths, will negatively impact our business. Among other things, the negative impact is expected to include an increase in new defaults, which will increase our capital requirements under PMIERs and increase losses incurred, which will negatively affect our financial results. The magnitude of the impact will be influenced by various factors, including the length and severity of the pandemic in the United States, the length of time that measures intended to reduce the transmission of COVID-19 remain in place, the resulting level of unemployment, and the impact of various government initiatives (including the enactment of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act")) and actions taken by the GSEs (including implementation of mortgage forbearance and modification programs) to mitigate the economic harm caused by the COVID-19 pandemic and efforts to reduce its transmission.

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

Note 2. Significant Accounting Policies
Investments
Each quarter we perform reviews of our investments to assess declines in the fair value of available-for-sale securities. Effective January 1, 2020, we adopted Accounting Standards Board (FASB) ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and related amendments, which created a new comprehensive credit loss standard, FASB Accounting Standards Codification (ASC) 326, Financial Instruments - Credit Losses. Upon adoption of ASC 326, any impairment losses on available-for-sale securities are recorded as an allowance, subject to reversal, rather than as a reduction to amortized cost, as was required under the previous other-than-temporary impairment (OTTI) model. Our evaluation of determining whether a decline below fair value requires an allowance does not consider the duration of the decline as was considered under the previous OTTI review. In accordance with the ASU, prior periods have not been restated.

Reinsurance Recoverables
Each quarter, we perform a review of our reinsurance recoverable to assess collectability. ASC 326 requires immediate recognition of estimated credit losses expected to occur over the remaining life of a reinsurance recoverable. Upon adoption of ASC 326, our analysis of the collectability included, at least quarterly, reviewing the credit ratings of individual reinsurers of the QSR transactions, investor reports


MGIC Investment Corporation - Q1 2020 | 12


for both Home Re Transactions, collateral held in trust accounts in which MGIC is the sole beneficiary, and aging of outstanding reinsurance recoverable balances.

Premium Receivable
ASC 326 requires immediate recognition of estimated credit losses expected to occur over the remaining life of premium receivable. In applying the CECL requirement to premium receivable, consideration is given to the life of the premium receivable asset, areas of potential credit loss, and incorporating forward-looking predictive indicators.

Income Taxes
The CARES Act became law on March 27, 2020. It was a response to the market volatility and instability resulting from the coronavirus pandemic, and includes individuals and businesses in the form of loans, grants, and tax changes, among other types of relief. The tax changes in the CARES
Act do not materially impact our financial results.

Recent accounting and reporting developments
Accounting standards effective in 2020, or early adopted, and relevant to our financial statements

Measurement of Credit Losses on Financial Instruments: ASU 2016-13
Effective January 1, 2020, we adopted ASC 326, Financial Instruments - Credit Losses. This new standard replaced the incurred loss impairment methodology with a methodology that reflects lifetime expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Under CECL, allowances are established by incorporating the forecast of future economic conditions into our loss estimate unless such forecast is not reasonable and supportable, in which case we revert to historical loss experience. Application of the CECL model impacts our reinsurance recoverables and premium receivable. ASC 326 also replaced the OTTI model with an impairment allowance model, subject to reversal, for available-for-sale investments, which are measured at fair value. Our mortgage insurance policies are outside the scope of ASC 326. The new guidance is not prescriptive about certain aspects of estimating expected credit losses, including the specific methodology to use, and therefore requires significant judgment in application. As a result of adopting ASC 326 we have determined that an allowance for credit losses related to our premium receivables, reinsurance recoverables, or available-for-sale securities was not necessary as of March 31, 2020. We continue to apply the previous guidance to 2019 and prior periods.

Changes to the Disclosure Requirements for Fair Value Measurement: ASU 2018-13
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 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 adoption of the updated guidance did not have a material effect on our consolidated results of operations or liquidity.

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 321, 323, 815
Investments
 
 
ASU 2020-01 - Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)
January 1, 2021
ASC 740
Income Taxes
 
 
ASU 2019-12 - Simplifying the Accounting for Income Taxes
January 1, 2021
ASC 715
Compensation - Retirement Benefits
 
 
ASU 2018-14 - Changes to the Disclosure Requirements for Defined Benefit Plans
January 1, 2021
ASC 848
Reference Rate
 
 
ASU 2020-04 - Reference Rate Reform
March 12, 2020



MGIC Investment Corporation - Q1 2020 | 13


Reference Rate Reform: ASU 2020-04
In March 2020, the FASB issued guidance which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting over concerns of the cessation of LIBOR. The updated guidance is effective for all entities as of March 12 2020 through December 31, 2022, as applicable, for contracts that are expected to be discontinued due to reference rate reform. We are currently evaluating the impacts the adoption of this guidance would have on our consolidated financial statement disclosures, but do not expect it to have a material impact.

Clarification of Accounting for Equity Securities: ASU 2020-01
In January 2020, the FASB issued guidance which clarifies certain interactions of accounting for equity securities under Topic 321, under the equity method of accounting in Topic 323, and accounting of certain forward contracts and purchased options in Topic 815. The amendment clarifies the consideration of observable transactions before applying or discounting the equity method of accounting. 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.

Simplifying the Accounting for Income Taxes

In December 2019, the FASB issued guidance which simplifies Accounting for Income Taxes (Topic 740). The ASU intends to reduce complexity through clarification and amendments of existing guidance. The updated guidance is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted in any interim periods for which financial statements have not been issued. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statements, but do not expect it to have a material impact.

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.

 

Note 3. Debt
Debt obligations
The par value of our long-term debt obligations and their aggregate carrying values as of March 31, 2020 and December 31, 2019 are presented in table 3.1 below.
Long-term debt obligations
Table
3.1
 
 
 
 
(In millions)
 
March 31,
2020
 
December 31,
2019
FHLB Advance - 1.91%, due February 2023
 
$
155.0

 
$
155.0

5.75% Notes, due August 2023 (par value: $425 million)
 
421.2

 
420.8

9% Debentures, due April 2063 (1)
 
256.9

 
256.9

Long-term debt, carrying value
 
$
833.1

 
$
832.7


(1) 
Convertible at any time prior to maturity at the holder’s option, at a conversion rate, which is subject to adjustment, of 74.4718 shares per $1,000 principal amount, representing a conversion price of approximately $13.43 per share.

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.

Interest payments
Interest payments for the three months ended March 31, 2020 and 2019 were $13.0 million and $13.1 million, respectively.

See Note 7 “Debt” in our Annual Report on Form 10-K for the year ended December 31, 2019 for additional information pertaining to our debt obligations. As of March 31, 2020 we are in compliance with all of our debt covenants.




MGIC Investment Corporation - Q1 2020 | 14


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)
 
2020
 
2019
Premiums earned:
 
 
 
 
Direct
 
$
289,868

 
$
279,613

Assumed
 
2,609

 
872

Ceded
 
(31,576
)
 
(30,724
)
Net premiums earned
 
$
260,901

 
$
249,761

 
 
 
 
 
Losses incurred:
 
 
 
 
Direct
 
$
66,562

 
$
40,804

Assumed
 
166

 
(67
)
Ceded
 
(5,772
)
 
(1,674
)
Losses incurred, net
 
$
60,956

 
$
39,063




Quota share reinsurance
Each of the reinsurers under our quota share reinsurance agreements described below has an insurer financial strength rating of A- or better (or a comparable rating) by Standard and Poor's Rating Services, A.M. Best, Moody's, or a combination of the three.

2020 QSR Coverage. We entered into QSR agreements with a group of unaffiliated reinsurers with an effective date of January 1, 2020 (“2020 QSR Transaction”), which provides coverage on eligible NIW in 2020. Under the 2020 QSR Transaction, we will cede losses and premiums on or after the effective date through December 31, 2031, at which time the agreement expires. Early termination of the agreement can be elected by us effective December 31, 2022 and 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 full financial statement credit or full credit under applicable regulatory capital requirements for the risk ceded in any required calculation period.

The structure of the 2020 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, 2021, 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 2020 QSR Transaction, we will receive an annual profit commission provided the annual loss ratio on the loans covered under the transactions remains below 62%.

 
2021 QSR Coverage. In addition, one of the 2020 agreements also provides coverage on eligible NIW in 2021. ("2021 QSR Transaction").

Under the 2021 QSR Transaction, we cede losses incurred and premiums on or after the effective date through December 31, 2032 for 2021 NIW, at which time the agreement expires. Early termination of the agreement can be elected by us effective December 31, 2023, and 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 2021 QSR Transaction is a 17.5% quota share on 2021 NIW, with an option to reduce the cede rate to either 14.5% or 12% effective July 1, 2022 or semiannually thereafter. Generally, under the 2021 QSR Transaction, we will receive an annual profit commission provided the annual loss ratio on the loans covered under the transactions remains below 62%.

2019 and prior QSR Transactions. See Note 9 of Notes to Consolidated Financial Statements in our 2019 Form 10-K for more information about our QSR Transactions entered into prior to 2020.

Our quota share reinsurance transactions typically have annual loss ratio caps of 300% and lifetime loss ratio caps of 200%.




MGIC Investment Corporation - Q1 2020 | 15




Table 4.2 below provides a summary of our quota share reinsurance agreements, excluding captive agreements, for the three months ended March 31, 2020 and 2019.
Quota Share Reinsurance
Table
4.2
 
 
 
 
 
 
 
Three Months Ended March 31,
(In thousands)
 
2020
 
2019
Ceded premiums written and earned, net of profit commission (1)
 
$
26,846

 
$
28,164

Ceded losses incurred
 
5,804

 
1,676

Ceding commissions (2)
 
11,365

 
13,409

Profit commission
 
29,979

 
38,881


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

Under the terms of our QSR Transactions, currently in effect, reinsurance 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 $25.8 million as of March 31, 2020 and $21.6 million as of December 31, 2019. The reinsurance recoverable balance is secured by funds on deposit from the reinsurers, the amount of which is based on the funding requirements of PMIERs.

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.

Table 4.3 provides a summary of our excess of loss reinsurance agreements as of March 31, 2020 and December 31, 2019.
Excess of Loss Reinsurance
 
 
 
Table
4.3
 
 
 
 
 
 
 
 
 
 
(In thousands)
 
 
 
 
 
March 31, 2020
 
December 31, 2019
Home Re Entity (Issue Date)
 
Policy Inforce Dates
 
Termination Option Date (1)
 
Remaining First Layer Retention
Remaining Excess of Loss Reinsurance Coverages
 
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
 
$
167,328

$
233,626

 
$
167,779

$
260,957

Home Re 2019-1 Ltd. (May - 2019)
 
January 1, 2018 - March 31, 2019
 
May 25, 2026
 
185,297

229,649

 
185,636

271,021

Total
 
 
 
 
 
$
352,625

$
463,275

 
$
353,415

$
531,978

(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 - Q1 2020 | 16



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 unpaid portion of 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, (or the fallback reference rate, as applicable) 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 March 31, 2020, were not material to our consolidated balance sheet, and the change in fair value during the three months ended March 31, 2020 was not material to our consolidated statements of operations. Total ceded premiums were $4.7 million and $2.5 million for the three months ended March 31, 2020 and March 31, 2019, respectively.

At the time the Home Re Transactions were entered into, we concluded that each Home Re Entity is 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. 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 March 31, 2020, and December 31, 2019, 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 March 31, 2020 and December 31, 2019.
Home Re total assets
Table
4.4
 
 
(In thousands)
 
 
Home Re Entity (Issue date)
 
Total VIE Assets
March 31, 2020
 
 
Home Re 2018-01 Ltd. (Oct - 2018)
 
$
245,314

Home Re 2019-01 Ltd. (May - 2019)
 
247,276

 
 
 
December 31, 2019
 
 
Home Re 2018-01 Ltd. (Oct - 2018)
 
$
269,451

Home Re 2019-01 Ltd. (May - 2019)
 
283,150



The reinsurance trust agreements provide that the trust assets may generally only be invested in certain money market funds that (i) invest at least 99.5% of their total assets in cash or direct U.S. federal government obligations, such as U.S. Treasury bills, as well as other short-term securities backed by the full faith and credit of the U.S. federal government or issued by an agency of the U.S. federal government, (ii) have a principal stability fund rating of “AAAm” by S&P or a money market fund rating of “Aaa-mf” by Moody’s as of the Closing Date and thereafter maintain any rating with either S&P or Moody’s, and (iii) are permitted investments under the applicable credit for reinsurance laws and applicable PMIERs credit for reinsurance requirements.

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 and principal repayments reduces 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 2019, and the first three months of 2020, curtailments reduced our average claim paid by approximately 5.0% and 4.4%, 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.


MGIC Investment Corporation - Q1 2020 | 17



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 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. When we determine that a loss is probable and can be reasonably estimated, we record our best estimate of our probable loss. In those cases, until settlement negotiations or legal proceedings are concluded; (including the receipt of any necessary GSE approvals), it is reasonably possible that we will record an additional loss. We are currently involved in discussions and/or proceedings with respect to our claims paying practices. Although it is reasonably possible that when resolved we will not prevail on all matters, we are unable to make a reasonable estimate or range of estimates of the potential liability. We estimate the maximum exposure where a loss is reasonably possible to be approximately $47 million. 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 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.
 

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)
 
2020
 
2019
Basic earnings per share:
 
 
 
 
Net income
 
$
149,805

 
$
151,941

Weighted average common shares outstanding - basic
 
344,053

 
355,653

Basic earnings per share
 
$
0.44

 
$
0.43

 
 
 
 
 
Diluted earnings per share:
 
 
 
Net income
 
$
149,805

 
$
151,941

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

 
4,566

Diluted income available to common shareholders
 
$
154,371

 
$
156,507

 
 
 
 
 
Weighted average common shares outstanding - basic
 
344,053

 
355,653

Effect of dilutive securities:
 
 
 
 
Unvested RSUs
 
2,033

 
1,986

9% Debentures
 
19,130

 
19,028

Weighted average common shares outstanding - diluted
 
365,216

 
376,667

Diluted earnings per share
 
$
0.42

 
$
0.42


(1) 
The periods ended March 31, 2020 and 2019 were tax-effected at a rate of 21%.



MGIC Investment Corporation - Q1 2020 | 18


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, 2020 and December 31, 2019 are shown in tables 7.1a and 7.1b below.
Details of fixed income securities by category as of March 31, 2020
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
 
$
197,330

 
$
2,408

 
$
(21
)
 
$
199,717

Obligations of U.S. states and political subdivisions
 
1,614,562

 
99,532

 
(3,258
)
 
1,710,836

Corporate debt securities
 
2,508,051

 
44,386

 
(41,335
)
 
2,511,102

Asset backed securities (“ABS”)
 
210,930

 
2,031

 
(6,311
)
 
206,650

Residential mortgage backed securities (“RMBS”)
 
259,641

 
6,032

 
(758
)
 
264,915

Commercial mortgage backed securities (“CMBS”)
 
268,598

 
3,161

 
(3,172
)
 
268,587

Collateralized loan obligations (“CLOs”)
 
316,270

 

 
(19,231
)
 
297,039

Total fixed income securities
 
$
5,375,382

 
$
157,550

 
$
(74,086
)
 
$
5,458,846

Details of fixed income securities by category as of December 31, 2019
Table
7.1b
 
 
 
 
 
 
 
 
(In thousands)
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized (Losses) (2)
 
Fair Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies
 
$
195,176

 
$
1,237

 
$
(210
)
 
$
196,203

Obligations of U.S. states and political subdivisions
 
1,555,394

 
99,328

 
(857
)
 
1,653,865

Corporate debt securities
 
2,711,910

 
76,220

 
(3,008
)
 
2,785,122

ABS
 
227,376

 
2,466

 
(178
)
 
229,664

RMBS
 
271,384

 
429

 
(3,227
)
 
268,586

CMBS
 
274,234

 
5,531

 
(779
)
 
278,986

CLOs
 
327,076

 
33

 
(1,643
)
 
325,466

Total fixed income securities
 
$
5,562,550

 
$
185,244

 
$
(9,902
)
 
$
5,737,892

(1) 
At March 31, 2020 there was no allowance established on available-for-sale securities.
(2) 
At December 31, 2019 there was no other-than-temporary impairment losses recorded in other comprehensive income.

We had $14.2 million and $13.9 million of investments at fair value on deposit with various states as of March 31, 2020 and December 31, 2019, respectively, due to regulatory requirements of those state insurance departments.



MGIC Investment Corporation - Q1 2020 | 19


The amortized cost and fair values of fixed income securities at March 31, 2020, 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, 2020
(In thousands)
 
Amortized cost
 
Fair Value
Due in one year or less
 
$
421,097

 
$
421,290

Due after one year through five years
 
1,774,678

 
1,782,206

Due after five years through ten years
 
994,134

 
1,021,561

Due after ten years
 
1,130,034

 
1,196,598

 
 
4,319,943

 
4,421,655

 
 
 
 
 
ABS
 
210,930

 
206,650

RMBS
 
259,641

 
264,915

CMBS
 
268,598

 
268,587

CLOs
 
316,270

 
297,039

Total as of March 31, 2020
 
$
5,375,382

 
$
5,458,846



Proceeds from sales of fixed income securities classified as available-for-sale were $212.8 million and $106.0 million during the three months ended March 31, 2020 and 2019, respectively. During the three months ended March 31, 2020, gross gains and gross losses of $5.1 million and $1.3 million, respectively, were realized on those sales, and we recorded realized losses of $0.3 million related to our intent to sell certain securities. During the three months ended March 31, 2019, gross gains and gross losses of $0.7 million and gross losses of $1.3 million were realized on those sales, and we recorded OTTI losses of $0.1 million.

Equity securities
The cost and fair value of investments in equity securities at March 31, 2020 and December 31, 2019 are shown in tables 7.3a and 7.3b below.
Details of equity security investments as of March 31, 2020
Table
7.3a
 
 
 
 
 
 
 
 
(In thousands)
 
Cost
 
Gross Gains
 
Gross Losses
 
Fair Value
Equity securities
 
$
29,559

 
$
99

 
$
(766
)
 
$
28,892

Details of equity security investments as of December 31, 2019
Table
7.3b
 
 
 
 
 
 
 
 
(In thousands)
 
Cost
 
Gross Gains
 
Gross Losses
 
Fair Value
Equity securities
 
$
17,188

 
$
154

 
$
(14
)
 
$
17,328



For the three months ended March 31, 2020, we recognized $(0.8) million of net losses on equity securities still held as of March 31, 2020. 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.

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 of the FHLB Advance. As of March 31, 2020, that collateral consisted of fixed income securities included in our total investment portfolio, and cash and cash equivalents, with a total fair value of $164.9 million.




MGIC Investment Corporation - Q1 2020 | 20


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, 2020 and December 31, 2019, 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 2019 Annual Report on Form 10-K.
Unrealized loss aging for securities by type and length of time as of March 31, 2020
Table
7.4a
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less Than 12 Months
 
12 Months or Greater
 
Total
(In thousands)
 
Fair Value
 
Unrealized Losses