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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 endedSeptember 30, 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 number1-10816
https://cdn.kscope.io/591934967079fcb885589565fae5b200-mtg-20200930_g1.jpg
MGIC Investment Corporation
(Exact name of registrant as specified in its charter)
Wisconsin39-1486475
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
  
250 E. Kilbourn Avenue53202
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 classTrading SymbolName of each exchange on which registered
Common stockMTGNew 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 October 30, 2020, there were 338,573,493 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 - Q2 2020 | 2


MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED September 30, 2020
Table of contents
Page
Consolidated Balance Sheets - September 30, 2020 (Unaudited) and December 31, 2019
Consolidated Statements of Operations (Unaudited) - Three and Nine Months Ended September 30, 2020 and 2019
Consolidated Statements of Comprehensive Income (Unaudited) - Three and Nine Months Ended September 30, 2020 and 2019
Consolidated Statements of Shareholders’ Equity (Unaudited) - Three and Nine Months Ended September 30, 2020 and 2019
Consolidated Statements of Cash Flows (Unaudited) - Three and Nine Months Ended September 30, 2020 and 2019
Item 2Unregistered Sales of Equity Securities and Use of Proceeds

MGIC Investment Corporation - Q3 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 covered under Accounting Standards Codification 326

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

Credit Union QSR Transaction
Quota share reinsurance transaction with an unaffiliated reinsurer to cede business from credit union institutions.
/ 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

Delinquent Loan
A loan that is past due on a mortgage payment. A delinquent loan is typically reported to us by servicers when the loan has missed two or more payments. A loan will continue to be reported as delinquent until it becomes current or a claim payment has been made. A delinquent loan is also referred to as a default

/ 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



MGIC Investment Corporation - Q3 2020 | 4


/ 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

/ I
IBNR Reserves
Loss reserves established on delinquent loans for which the delinquency has not been 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

5.25% Notes
5.25% Senior Notes due on August 15, 2028, 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


MGIC Investment Corporation - Q3 2020 | 5


/ 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

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


MGIC Investment Corporation - Q3 2020 | 6


/ 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 2020 | 7


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)NoteSeptember 30, 2020December 31, 2019
(Unaudited)
ASSETS
Investment portfolio:2 / 7 / 8
Fixed income, available-for-sale, at fair value (amortized cost 2020 - $6,037,701; 2019 - $5,562,550, allowance for expected credit loss, 2020- $362)$6,344,718 $5,737,892 
Equity securities, at fair value (cost 2020 - $17,486; 2019 - $17,188)18,060 17,328 
Other invested assets, at cost3,100 3,100 
Total investment portfolio6,365,878 5,758,320 
Cash and cash equivalents380,055 161,847 
Restricted cash and cash equivalents8,755 7,209 
Accrued investment income47,782 49,705 
Reinsurance recoverable on loss reserves
2/4
83,143 21,641 
Reinsurance recoverable on paid losses21,062 1,521 
Premiums receivable253,971 55,587 
Home office and equipment, net47,546 50,121 
Deferred insurance policy acquisition costs21,238 18,531 
Other assets140,080 105,089 
Total assets$7,149,510 $6,229,571 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Loss reserves$840,449 $555,334 
Unearned premiums315,071 380,302 
Federal Home Loan Bank advance155,000 155,000 
Senior notes878,838 420,867 
Convertible junior subordinated debentures208,814 256,872 
Other liabilities237,716 151,962 
Total liabilities2,635,888 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 - 338,573; 2019 - 347,308)371,353 371,353 
Paid-in capital1,856,570 1,869,719 
Treasury stock at cost (shares 2020 - 32,779; 2019 - 24,045)(393,326)(283,196)
Accumulated other comprehensive income, net of tax167,777 72,708 
Retained earnings2,511,248 2,278,650 
Total shareholders’ equity4,513,622 4,309,234 
Total liabilities and shareholders’ equity$7,149,510 $6,229,571 
See accompanying notes to consolidated financial statements.

MGIC Investment Corporation - Q3 2020 | 8




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)Note2020201920202019
Revenues:
Premiums written:
Direct$272,990 $286,059 $830,938 $843,145 
Assumed2,137 1,793 8,895 4,405 
Ceded(47,173)(28,438)(144,487)(100,257)
Net premiums written227,954 259,414 695,346 747,293 
Decrease in unearned premiums, net28,159 8,443 65,230 17,427 
Net premiums earned256,113 267,857 760,576 764,720 
Investment income, net of expenses37,252 42,715 118,278 125,723 
Net realized investment gains2,259 4,205 10,851 3,986 
Other revenue380 3,606 7,160 7,921 
Total revenues296,004 318,383 896,865 902,350 
Losses and expenses:
Losses incurred, net40,686 33,985 319,016 94,884 
Amortization of deferred policy acquisition costs3,278 3,142 8,697 8,380 
Other underwriting and operating expenses, net45,250 45,197 131,785 134,097 
Loss on debt extinguishment26,736  26,736  
Interest expense15,725 12,939 41,580 39,722 
Total losses and expenses131,675 95,263 527,814 277,083 
Income before tax164,329 223,120 369,051 625,267 
Provision for income taxes33,518 46,186 74,388 128,614 
Net income$130,811 $176,934 $294,663 $496,653 
Earnings per share:
Basic$0.39 $0.50 $0.87 $1.40 
Diluted$0.38 $0.49 $0.85 $1.36 
Weighted average common shares outstanding - basic338,598 351,475 340,408 354,272 
Weighted average common shares outstanding - diluted357,195 372,575 360,389 375,266 

See accompanying notes to consolidated financial statements.

MGIC Investment Corporation - Q3 2020 | 9




MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)Note2020201920202019
Net income$130,811 $176,934 $294,663 $496,653 
Other comprehensive (loss) income, net of tax:
Change in unrealized investment gains and losses33,712 31,372 104,308 183,197 
Benefit plan adjustments(11,347)1,600 (9,239)4,799 
Other comprehensive (loss) income, net of tax22,365 32,972 95,069 187,996 
Comprehensive income$153,176 $209,906 $389,732 $684,649 

See accompanying notes to consolidated financial statements.

MGIC Investment Corporation - Q3 2020 | 10




MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)Note2020201920202019
Common stock
Balance, beginning and end of period$371,353 $371,353 $371,353 $371,353 
Paid-in capital
Balance, beginning of period1,859,195 1,860,578 1,869,719 1,862,536 
Reacquisition of convertible junior subordinated debentures-equity component(2,673) (2,673) 
Reissuance of treasury stock, net under share-based compensation plans(140)(133)(18,807)(11,715)
Equity compensation188 4,528 8,331 14,152 
Balance, end of period1,856,570 1,864,973 1,856,570 1,864,973 
Treasury stock
Balance, beginning of period(393,425)(194,070)(283,196)(175,059)
Reissuance of treasury stock, net under share-based compensation plans99 59 9,867 5,989 
Repurchase of common stock (69,185)(119,997)(94,126)
Balance, end of period(393,326)(263,196)(393,326)(263,196)
Accumulated other comprehensive income (loss)
Balance, beginning of period145,412 30,810 72,708 (124,214)
Other comprehensive (loss) income, net of tax22,365 32,972 95,069 187,996 
Balance, end of period167,777 63,782 167,777 63,782 
Retained earnings
Balance, beginning of period2,400,820 1,966,994 2,278,650 1,647,275 
Net income130,811 176,934 294,663 496,653 
Cash dividends(20,383)(21,223)(62,065)(21,223)
Balance, end of period2,511,248 2,122,705 2,511,248 2,122,705 
Total shareholders’ equity$4,513,622 $4,159,617 $4,513,622 $4,159,617 

See accompanying notes to consolidated financial statements.

MGIC Investment Corporation - Q3 2020 | 11




MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30,
(In thousands)20202019
Cash flows from operating activities:
Net income$294,663 $496,653 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization40,660 35,778 
Deferred tax expense28,427 7,628 
Loss on debt extinguishment26,736  
Net realized investment (gains) losses(10,851)(3,986)
Change in certain assets and liabilities:
Accrued investment income1,923 (319)
Reinsurance recoverable on loss reserves(61,502)13,762 
Reinsurance recoverable on paid losses459 1,375 
Premium receivable1,616 3,286 
Deferred insurance policy acquisition costs(2,707)(122)
Profit commission receivable13,909 3,868 
Loss reserves285,115 (71,722)
Unearned premiums(65,231)(17,429)
Return premium accrual(300)(9,600)
Current income taxes(40,855)(8,765)
Other, net(3,209)7,756 
Net cash provided by operating activities508,853 458,163 
Cash flows from investing activities:
Purchases of investments(1,994,286)(1,043,003)
Proceeds from sales of investments741,732 201,369 
Proceeds from maturity of fixed income securities776,709 536,747 
Additions to property and equipment(2,214)(4,079)
Net cash used in investing activities(478,059)(308,966)
Cash flows from financing activities:
Proceeds from issuance of senior notes640,250  
Purchase of senior notes (179,735) 
Payment of original issue discount - senior notes(2,969) 
Purchase of convertible junior subordinated debentures(36,392) 
Payment of original issue discount - convertible junior subordinated debentures(15,049) 
Cash portion of loss on debt extinguishment(25,266) 
Payment of debt issuance costs(1,197) 
Repurchase of common stock(119,997)(105,766)
Dividends paid(61,745)(20,989)
Payment of withholding taxes related to share-based compensation net share settlement(8,940)(5,726)
Net cash provided by ( used in) financing activities188,960 (132,481)
Net increase in cash and cash equivalents and restricted cash and cash equivalents219,754 16,716 
Cash and cash equivalents and restricted cash and cash equivalents at beginning of period169,056 155,038 
Cash and cash equivalents and restricted cash and cash equivalents at end of period$388,810 $171,754 
See accompanying notes to consolidated financial statements.

MGIC Investment Corporation - Q3 2020 | 12


MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 three months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

The substantial majority of our NIW 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 September 30, 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
The COVID-19 pandemic had a material impact on our 2020 financial results. While uncertain, the future impact of the COVID-19 pandemic on the Company’s business, financial results, liquidity and/or financial condition may also be material. 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, negatively impacted our business. Among other things, the COVID-19 pandemic led to an increase in new defaults, which increased our capital requirements under PMIERs on those delinquent loans and increased our losses incurred. The magnitude of the future 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 past and future 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. In October, MGIC executed an insurance linked note transaction (see Note 4 - “Reinsurance”).


MGIC Investment Corporation - Q3 2020 | 13



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.

In evaluating whether a credit allowance should be established, we consider several factors including, but not limited to:

è
our intent to sell the security or whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis;
è
the present value of the discounted cash flows we expect to collect compared to the amortized cost basis of the security;
è
failure of the issuer to make scheduled interest or principal payments;
è
change in rating below investment grade; and
èadverse conditions specifically related to the security, an industry, or a geographic area.
Our determination of 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 assess the credit risk associated with our reinsurance recoverable. ASC 326 requires immediate recognition of estimated credit losses expected to occur over the remaining life of a reinsurance recoverable. In assessing whether a credit allowance should be established, we consider several factors including, but not limited to the credit ratings of individual reinsurers, investor reports for our 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 determining if a credit loss allowance is required for premium receivable, consideration is given to the life of the premium receivable asset, areas of potential credit loss, and forward-looking predictive indicators.

Income Taxes
The CARES Act provides financial relief to individuals and businesses in the form of loans, grants, and tax changes, among other types of assistance. 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 (“CECL”). 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. Applying ASC 326, we have determined that an allowance for credit losses related to our premium receivables and reinsurance recoverables was not necessary as of September 30, 2020. At September 30, 2020, we established an allowance for credit losses for available-for-sale securities of $0.4 million. We continue to apply the previous guidance to 2019 and prior periods.

Changes to the Disclosure Requirements for Fair Value Measurement: ASU 2018-13
Effective January 1, 2020, we adopted FASB guidance that changes the disclosure requirements for fair value measurements. The updated guidance removed the requirement to disclose the amount 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 requires 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.

MGIC Investment Corporation - Q3 2020 | 14



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 StandardsEffective date
ASC 321, 323, 815Investments
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 740Income Taxes
ASU 2019-12 - Simplifying the Accounting for Income TaxesJanuary 1, 2021
ASC 715Compensation - Retirement Benefits
ASU 2018-14 - Changes to the Disclosure Requirements for Defined Benefit PlansJanuary 1, 2021
ASC 470, 815Debt
ASU 2020-06 - Debt with conversion and other options (Topic 470), derivatives and hedging - contracts in entity’s own equity (Topic 815)January 1, 2022
ASC 310-20Receivables
ASU 2020-08 - Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other CostsJanuary 1, 2022

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: ASU 2019-12
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: ASU 2018-14
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.

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity: ASU 2020-06
In August 2020, the FASB issued guidance that simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. It also includes amendments to EPS guidance. The updated guidance reduces the number of accounting models for convertible debt instruments and convertible preferred stock. The ASU eliminated the cash conversion and the beneficial conversion model, which will make more instruments eligible for the fair value option. As a result of these changes, more convertible instruments will be reported as a single unit on the balance sheet. The updated guidance also includes updates to the EPS calculation. The ASU requires companies to use the if-converted method, assume share settlement when settlement can be in cash or in shares, use an average market price for the period if the number of shares is based on an entity’s share price, and use the weighted average shares from each quarter to calculate the year to date weighted average shares. The ASU also includes improvements to the disclosures for convertible instruments and EPS. The updated guidance is effective for annual periods beginning after December 15, 2021. Early adoption is permitted for fiscal years beginning after December 15, 2020. The ASU requires adoption to be applied retrospectively or using a modified retrospective basis. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statement disclosures and whether we would early adopt.
Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs: ASU 2020-08
In October 2020, the FASB issued amendments to the codification that clarifies the accounting guidance for Accounting Standards Update No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. FASB standard 2017-08 shortened the amortization period for certain purchased callable debt securities held at a premium

MGIC Investment Corporation - Q3 2020 | 15


by requiring that entities amortize the premium associated with those callable debt securities within the scope of paragraph 310-20-25-33 to the earliest call date and clarifies the FASB’s intent that an entity should reevaluate whether a callable debt security that has multiple call dates is within the scope of paragraph 310-20-35-33 for each reporting period. This guidance clarifies the issuer of a callable debt security should utilize the next call date versus the earliest call date in amortizing premium. The updated guidance is effective for annual periods beginning after December 15, 2020. Early adoption is not permitted. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statement disclosures.

Note 3. Debt
Debt obligations
The aggregate carrying values of our long-term debt obligations and their par values, if different, as of September 30, 2020 and December 31, 2019 are presented in table 3.1 below.
Long-term debt obligations
Table
3.1
(In millions)September 30, 2020December 31, 2019
FHLB Advance - 1.91%, due February 2023$155.0 $155.0 
5.75% Notes, due August 2023 (par value: $242.3 million)240.4 $420.8 
5.25% Notes, due August 2028 (par value: $650 million)638.5  
9% Debentures, due April 2063 (1)
208.8 256.9 
Long-term debt, carrying value$1,242.7 $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”), 5.25% Senior Notes (5.25% Notes) and 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.

5.25% Senior Notes
In August 2020, we issued $650 million aggregate principal amount of 5.25% Notes, which are due in 2028 and received net proceeds, after the deduction of underwriting fees, of $640.3 million. Interest on the 5.25% Notes is payable semi-annually on February 15 and August 15 of each year, commencing on February 15, 2021. Prior to August 15, 2023, we may redeem the 5.25% Notes at an amount equal to the sum of (a) the greater of: (i) the sum of the principal amount and the make-whole amount; and (ii) 102.625% of principal; and (b) accrued and unpaid interest. The make-whole amount is the excess of: (1) the present value of the remaining principal, premium and interest payments that would be payable with respect to the note if such note were redeemed on August 15, 2023 (at 102.625% of principal), computed using a discount rate equal to the treasury rate specified in the
notes, plus 50 basis points, over (2) the outstanding principal amount of such note.

On and after August 15, 2023, we may redeem the notes at 102.625% of principal; on or after August 15, 2024, we may redeem the notes at 101.313% of principal; and on or after August 15, 2025, we may redeem the notes at 100% of principal; in each case, plus accrued and unpaid interest.

In addition to underwriting fees, we incurred approximately $2.0 million of other expenses associated with the issuance of these notes.

The 5.25% Notes have covenants customary for securities of this nature, including customary events of default and further provide that the trustee or holders of at least 25% in aggregate principal amount of the outstanding 5.25% Notes may declare them immediately due and payable upon the occurrence of certain events of default after the expiration of the applicable grace period. In addition, in the case of an event of default arising from certain events of bankruptcy, insolvency or reorganization relating to the Company or any of its significant subsidiaries, the 5.25% Notes will become due and payable immediately. This description is not intended to be complete in all respects and is qualified in its entirety by the terms of the 5.25% Notes, including their covenants and events of default.

The net proceeds from the 5.25% Notes issuance were used, in part, as (i) cash consideration to purchase $182.7 million of our 5.75% Notes, and (ii) cash consideration to purchase $48.1 million of our 9% Debentures. The balance of the proceeds remains at the holding company.

5.75% notes
In August 2020, we repurchased $182.7 million in aggregate principal of our 5.75% notes at a purchase price of $197.8 million, plus accrued interest using proceeds from the 5.25% Note issuance. The excess of the purchase price over carrying value, plus the write-off of unamortized issuance costs on the par values, is reflected as a loss on debt extinguishment of $16.5 million on our consolidated statement of operations.

9% Debentures
In the third quarter of 2020, we repurchased $48.1 million in aggregate principal of our 9% Debentures at a purchase price of $61.6 million, plus accrued interest using proceeds from the 5.25% Notes issuance. The repurchase of the 9% Debentures resulted in a $10.2 million loss on debt extinguishment on our consolidated statement of operations; a reduction in our shareholder's equity of $2.7 million related to the reacquisition of the equity component of the 9% Debentures; and a reduction in our potentially dilutive shares by approximately 3.6 million shares.

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 September 30, 2020 we are in compliance with all of our debt covenants.

Interest payments
Interest payments for the nine months ended September 30, 2020 and 2019 were $44.2 million and $38.5 million, respectively.



MGIC Investment Corporation - Q3 2020 | 16


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)2020201920202019
Premiums earned:
Direct$300,557 $294,909 $896,346 $861,705 
Assumed 2,729 1,388 8,719 3,275 
Ceded (1)
(47,173)(28,440)(144,489)(100,260)
Net premiums earned$256,113 $267,857 $760,576 $764,720 
Losses incurred:
Direct$61,164 $36,755 $383,950 $102,835 
Assumed229 (34)528 (110)
Ceded(20,707)(2,736)(65,462)(7,841)
Losses incurred, net$40,686 $33,985 $319,016 $94,884 
(1)Ceded premiums earned on our quota share reinsurance agreements are net of profit commission. The profit commission varies directly and inversely with the level of ceded losses on a “dollar for dollar” basis and can be eliminated at ceded loss levels higher than we experienced in the first nine months of 2020. As a result, lower levels of losses result in a higher profit commission and less benefit from ceded losses; higher levels of losses result in more benefit from ceded losses and a lower profit commission.

Quota share reinsurance
Each of the reinsurers under our quota share reinsurance (“QSR”) 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 transaction 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 will cede losses 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 or full credit under applicable regulatory capital requirements 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, elected by us, 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 a profit commission provided the annual loss ratio on the loans covered under the transaction remains below 62%.

Credit Union Quota Share Program
We entered into a Credit Union QSR Transaction with an unaffiliated reinsurer which covers NIW on loans originated by credit unions from April 1, 2020 through December 31, 2025. Eligible credit union business written before 2020 was covered by our 2019 and prior QSR Transactions. Under the Credit Union QSR Transaction, we will cede losses and premiums on the covered NIW through December 31, 2039. Early termination of the agreement can be elected by us at any quarter-end if we will receive less than 80% of the full credit amount under the PMIERs for the risk ceded in any required calculation period or full credit under applicable regulatory capital requirements for the risk ceded in any required calculation period.

The structure of the Credit Union QSR Transaction is a 65% quota share, with a 20% ceding commission as well as a profit commission. Generally, we will receive a profit commission provided the annual loss ratio on the loans covered under the transaction remains below 50%.



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

Our QSR Transactions typically have annual loss ratio caps of 300% and lifetime loss ratio caps of 200%.

MGIC Investment Corporation - Q3 2020 | 17



Table 4.2 below provides a summary of our quota share reinsurance agreements, excluding captive agreements, for the three and nine months ended September 30, 2020 and 2019.
Quota Share Reinsurance
Table
4.2
 Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)2020201920202019
Ceded premiums written and earned, net of profit commission (1)
$43,448 $23,032 $131,651 $87,721 
Ceded losses incurred20,707 2,729 65,493 7,845 
Ceding commissions (2)
12,128 11,042 35,518 37,807 
Profit commission (3)
17,191 32,177 45,939 108,079 
(1)Under our QSR Transactions, premiums are ceded on an earned and received basis as defined in the agreements. The nine months ended September 30, 2019 include a $6.8 million termination fee related to our 2015 QSR Transaction.
(2)Ceding commissions are reported within Other underwriting and operating expenses, net on the consolidated statements of operations.
(3)The profit commission varies directly and inversely with the level of ceded losses on a “dollar for dollar” basis and can be eliminated at ceded loss levels higher than we experienced in the first nine months of 2020. As a result, lower levels of losses result in a higher profit commission and less benefit from ceded losses; higher levels of losses result in a lower profit commission and more benefit from ceded losses.

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 $83.1 million as of September 30, 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. An allowance for credit losses was not required for 2020.

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. For each of our 2018 and 2019 Home Re Transaction, a “Trigger Event” has occurred because the reinsured principal balance of loans that were reported 60 or more days delinquent exceeded 4% of the total reinsured principal balance of loans under each transaction. While the “Trigger Event” is in effect, payment of principal on the related notes will be suspended and the reinsurance coverage available to MGIC under the transactions will not be reduced by such principal payments.

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.



MGIC Investment Corporation - Q3 2020 | 18



Table 4.3 provides a summary of our excess of loss reinsurance agreements as of September 30, 2020 and December 31, 2019.
Excess of Loss Reinsurance
Table4.3
(In thousands)September 30, 2020December 31, 2019
Home Re Entity (Issue Date)Policy Inforce Dates
Termination Option Date (1)
Remaining First Layer RetentionRemaining Excess of Loss Reinsurance CoveragesRemaining First Layer RetentionRemaining Excess of Loss Reinsurance Coverages
Home Re 2018-1 Ltd. (Oct. - 2018)July 1, 2016 - December 31, 2017October 25, 2025$166,246 $218,343 $167,779 $260,957 
Home Re 2019-1 Ltd. (May - 2019)January 1, 2018 - March 31, 2019May 25, 2026184,797 208,146 185,636 271,021 
Total$351,043 $426,489 $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.

In October, MGIC entered into a $412.9 million excess of loss reinsurance agreement (executed through an insurance linked note transaction) that covers policies with inforce dates from January 1, 2020 through July 31, 2020.

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 remaining reinsurance coverage levels, and the investment income collected on the collateral assets held in a reinsurance trust account and used to collateralize the Home Re Entity’s reinsurance obligation to MGIC. 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 September 30, 2020, were not material to our consolidated balance sheet, and the change in fair value during the three and nine months ended September 30, 2020 was not material to our consolidated statements of operations. Total ceded premiums were $3.7 million and $12.8 million for the three and nine months ended September 30, 2020, respectively and $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 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 September 30, 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.


MGIC Investment Corporation - Q3 2020 | 19


Table 4.4 presents the total assets of the Home Re Entities as of September 30, 2020 and December 31, 2019.
Home Re total assets
Table4.4
(In thousands)
Home Re Entity (Issue date)Total VIE Assets
September 30, 2020
Home Re 2018-01 Ltd. (Oct - 2018)$218,343 
Home Re 2019-01 Ltd. (May - 2019)208,146 
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, subject to a modest reduction, 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.


MGIC Investment Corporation - Q3 2020 | 20


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 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 nine months of 2020, curtailments reduced our average claim paid by approximately 5.0% and 3.5%, respectively.

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

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

Under ASC 450-20, until a 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 as a component of our IBNR and other reserves. 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 $40 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. The determination of whether components are dilutive is calculated independently for each period. 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 2020 | 21



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)2020201920202019
Basic earnings per share:
Net income$130,811 $176,934 $294,663 $496,653 
Weighted average common shares outstanding - basic338,598 351,475 340,408 354,272 
Basic earnings per share$0.39 $0.50 $0.87 $1.40 
Diluted earnings per share:
Net income$130,811 $176,934 $294,663 $496,653 
Interest expense, net of tax:
9% Debentures4,161 4,566 13,293 13,698 
Diluted income available to common shareholders$134,972 $181,500 $307,956 $510,351 
Weighted average common shares outstanding - basic338,598 351,475 340,408 354,272 
Effect of dilutive securities:
Unvested RSUs1,377 2,072 1,492 1,966 
9% Debentures17,220 19,028 18,489 19,028 
Weighted average common shares outstanding - diluted357,195 372,575 360,389 375,266 
Diluted earnings per share$0.38 $0.49 $0.85 $1.36 

Note 7. Investments
Fixed income securities
The amortized cost, gross unrealized gains and losses, and fair value of investments in fixed income securities classified as available-for-sale at September 30, 2020 and December 31, 2019 are shown in tables 7.1a and 7.1b below.
Details of fixed income securities by category as of September 30, 2020
Table7.1a
(In thousands)Amortized CostAllowance for Expected Credit LossGross Unrealized GainsGross Unrealized (Losses)Fair Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies$347,249 $ $1,513 $(15)$348,747 
Obl