MGIC INVESTMENT CORP - FORM 10-Q

MGIC INVESTMENT CORP - FORM 10-Q - November 6, 2015

Attached files

Attached files

file	filename
EX-99 - EXHIBIT 99 - MGIC INVESTMENT CORP	exhibit99q3.htm
EX-32 - EXHIBIT 32 - MGIC INVESTMENT CORP	exhibit32q3.htm
EX-31.2 - EXHIBIT 31.2 - MGIC INVESTMENT CORP	exhibit312q3.htm
EX-31.1 - EXHIBIT 31.1 - MGIC INVESTMENT CORP	exhibit311q3.htm

FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended	September 30, 2015
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ______ to ______
	Commission file number 1-10816

MGIC INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)



WISCONSIN		39-1486475
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

250 E. KILBOURN AVENUE		53202
MILWAUKEE, WISCONSIN		(Zip Code)
(Address of principal executive offices)

(414) 347-6480

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



YES x	NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).



YES x	NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer x	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



YES o	NO x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

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 AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2015



TABLE OF CONTENTS
		Page
PART I — FINANCIAL INFORMATION

Item 1	Consolidated Financial Statements:
	Consolidated Balance Sheets - September 30, 2015 (Unaudited) and December 31, 2014	4
	Consolidated Statements of Operations (Unaudited) - Three Months and Nine Months Ended September 30, 2015 and 2014	5
	Consolidated Statements of Comprehensive Income (Unaudited) - Three Months and Nine Months Ended September 30, 2015 and 2014	6
	Consolidated Statements of Shareholders' Equity (Unaudited) - Nine Months Ended September 30, 2015 and 2014	7
	Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended September 30, 2015 and 2014	8
	Notes to Consolidated Financial Statements (Unaudited)	9

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3	Quantitative and Qualitative Disclosures about Market Risk	58

Item 4	Controls and Procedures	59

PART II — OTHER INFORMATION

Item 1A	Risk Factors	60

Item 6	Exhibits	63

SIGNATURES		64
INDEX TO EXHIBITS		65

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)



	September 30, 2015			December 31, 2014
ASSETS	(In thousands)
Investment Portfolio (notes 7 and 8):
Securities, available-for-sale, at fair value:
Fixed maturities (amortized cost, 2015 - $4,598,347; 2014 - $4,602,514)	$	4,588,331		$	4,609,614
Equity securities	5,634			3,055
Total investment portfolio	4,593,965			4,612,669
Cash and cash equivalents	384,536			197,882
Restricted cash and cash equivalents (note 1)	—			17,212
Accrued investment income	36,861			30,518
Prepaid reinsurance premiums	187			47,623
Reinsurance recoverable on loss reserves	38,748			57,841
Reinsurance recoverable on paid losses	4,275			6,424
Premiums receivable	51,579			57,442
Home office and equipment, net	29,265			28,693
Deferred insurance policy acquisition costs	14,997			12,240
Profit commission receivable (note 4)	—			91,500
Deferred income taxes, net (note 11)	758,851			—
Other assets	94,886			106,390
Total assets	$	6,008,150		$	5,266,434

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Loss reserves (note 12)	$	1,979,943		$	2,396,807
Premium deficiency reserve (note 13)	—			23,751
Unearned premiums	265,119			203,414
Senior notes (note 3)	61,953			61,918
Convertible senior notes (note 3)	845,000			845,000
Convertible junior debentures (note 3)	389,522			389,522
Other liabilities	318,094			309,119
Total liabilities	3,859,631			4,229,531
Contingencies (note 5)
Shareholders' equity (note 14):
Common stock (one dollar par value, shares authorized 1,000,000; shares issued 2015 - 340,091; 2014 - 340,047; shares outstanding 2015 - 339,651; 2014 - 338,560)	340,091			340,047
Paid-in capital	1,667,307			1,663,592
Treasury stock (shares at cost 2015 - 440; 2014 - 1,487)	(3,362		)	(32,937		)
Accumulated other comprehensive loss, net of tax (note 9)	(43,147		)	(81,341		)
Retained earnings (deficit)	187,630			(852,458		)
Total shareholders' equity	2,148,519			1,036,903
Total liabilities and shareholders' equity	$	6,008,150		$	5,266,434

See accompanying notes to consolidated financial statements.

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(In thousands, except per share data)
Revenues:
Premiums written:
Direct	$	273,803		$	255,041		$	800,619		$	740,479
Assumed	285			400			931			1,281
Ceded (note 4)	43,897			(32,536		)	(22,334		)	(87,450		)
Net premiums written	317,985			222,905			779,216			654,310
Increase in unearned premiums, net	(78,751		)	(13,870		)	(109,186		)	(23,528		)
Net premiums earned	239,234			209,035			670,030			630,782
Investment income, net of expenses	25,939			22,355			75,815			63,691
Net realized investment gains (losses):
Total other-than-temporary impairment losses	—			—			—			—
Portion of losses recognized in comprehensive income, before taxes	—			—			—			—
Net impairment losses recognized in earnings	—			—			—			—
Other realized investment gains	640			632			27,133			923
Net realized investment gains	640			632			27,133			923
Other revenue	3,698			3,093			9,877			6,037
Total revenues	269,511			235,115			782,855			701,433

Losses and expenses:
Losses incurred, net (note 12)	76,458			115,254			248,481			379,003
Change in premium deficiency reserve (note 13)	—			(6,744		)	(23,751		)	(19,750		)
Amortization of deferred policy acquisition costs	2,368			2,096			6,191			5,191
Other underwriting and operating expenses, net	46,075			34,882			121,152			105,101
Interest expense	17,362			17,361			52,097			52,274
Total losses and expenses	142,263			162,849			404,170			521,819

Income before tax	127,248			72,266			378,685			179,614
(Benefit from) provision for income taxes (note 11)	(695,604		)	249			(690,897		)	2,093

Net income	$	822,852		$	72,017		$	1,069,582		$	177,521

Income per share (note 6)
Basic	$	2.42		$	0.21		$	3.15		$	0.52
Diluted	$	1.78		$	0.18		$	2.35		$	0.45

Weighted average common shares outstanding - basic (note 6)	339,701			338,626			339,504			338,488
Weighted average common shares outstanding - diluted (note 6)	468,149			413,576			468,097			413,473

See accompanying notes to consolidated financial statements.

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(In thousands)
Net income	$	822,852		$	72,017		$	1,069,582		$	177,521

Other comprehensive income (loss), net of tax (note 9):

Change in unrealized investment gains and losses (note 7)	95,295			(17,301		)	51,212			66,798

Benefit plan adjustments	(7,355		)	(1,732		)	(8,447		)	(5,198		)

Foreign currency translation adjustment	(2,947		)	(2,490		)	(4,571		)	(650		)

Other comprehensive income (loss), net of tax	84,993			(21,523		)	38,194			60,950

Comprehensive income	$	907,845		$	50,494		$	1,107,776		$	238,471

See accompanying notes to consolidated financial statements

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)



	Nine Months Ended September 30,
	2015			2014
	(In thousands)
Common stock
Balance, beginning of period	$	340,047		$	340,047
Net common stock issued under share-based compensation plans	44			—
Balance, end of period	340,091			340,047

Paid-in capital
Balance, beginning of period	1,663,592			1,661,269
Net common stock issued under share-based compensation plans	(446		)	—
Reissuance of treasury stock, net	(6,894		)	(6,680		)
Tax benefit from share-based compensation	2,113			—
Equity compensation	8,942			6,472
Balance, end of period	1,667,307			1,661,061

Treasury stock
Balance, beginning of period	(32,937		)	(64,435		)
Reissuance of treasury stock, net	29,575			31,498
Balance, end of period	(3,362		)	(32,937		)

Accumulated other comprehensive income (loss)
Balance, beginning of period	(81,341		)	(117,726		)
Other comprehensive income	38,194			60,950
Balance, end of period	(43,147		)	(56,776		)

Retained earnings (deficit)
Balance, beginning of period	(852,458		)	(1,074,617		)
Net income	1,069,582			177,521
Reissuance of treasury stock, net	(29,494		)	(29,791		)
Balance, end of period	187,630			(926,887		)

Total shareholders' equity	$	2,148,519		$	984,508

See accompanying notes to consolidated financial statements.

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Nine Months Ended September 30,
	2015			2014
	(In thousands)
Cash flows from operating activities:
Net income	$	1,069,582		$	177,521
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	38,361			38,229
Deferred tax (benefit) expense	(698,177		)	336
Realized investment gains, net	(27,133		)	(923		)
Loss on repurchases of senior notes	—			837
Excess tax benefits related to share-based compensation	(2,113		)	—
Other	(21,795		)	19,845
Change in certain assets and liabilities:
Accrued investment income	(6,343		)	1,177
Prepaid insurance premium	47,436			(7,987		)
Reinsurance recoverable on loss reserves	19,093			6,187
Reinsurance recoverable on paid losses	2,149			3,975
Premium receivable	5,863			1,971
Deferred insurance policy acquisition costs	(2,757		)	(1,929		)
Profit commission receivable	91,500			(66,584		)
Real estate	2,574			(3,285		)
Loss reserves	(416,864		)	(533,819		)
Premium deficiency reserve	(23,751		)	(19,750		)
Unearned premiums	61,705			31,513
Return premium accrual	(6,400		)	16,200
Income taxes payable - current	2,101			(1,180		)
Net cash provided by (used in) operating activities	135,031			(337,666		)

Cash flows from investing activities:
Purchases of investments:
Fixed maturities	(1,970,402		)	(1,549,883		)
Equity securities	(2,593		)	(59		)
Proceeds from sales of fixed maturities	1,527,680			902,660
Proceeds from maturity of fixed maturities	432,328			914,465
Net increase in payable for securities	48,120			7,245
Net decrease in restricted cash	17,212			233
Additions to property and equipment	(2,835		)	(3,998		)
Net cash provided by investing activities	49,510			270,663

Cash flows from financing activities:
Repayment of long-term debt	—			(21,767		)
Excess tax benefits related to share-based compensation	2,113			—
Net cash provided by (used in) financing activities	2,113			(21,767		)

Net increase (decrease) in cash and cash equivalents	186,654			(88,770		)
Cash and cash equivalents at beginning of period	197,882			332,692
Cash and cash equivalents at end of period	$	384,536		$	243,922

See accompanying notes to consolidated financial statements.

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

(Unaudited)

Note 1 – Nature of Business and Basis of Presentation

MGIC Investment Corporation is a holding company which, through Mortgage Guaranty Insurance Corporation ("MGIC"), MGIC Indemnity Corporation (“MIC”) and several other subsidiaries, 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.

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, 2014 included in our 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 financial position and results of operations for the periods indicated. The results of operations for the interim period may not be indicative of the results that may be expected for the year ending December 31, 2015.

Capital - GSEs

Since 2008, substantially all of our insurance written has been for loans sold to Fannie Mae and Freddie Mac (the “GSEs”). In April 2015, the GSEs each released revised private mortgage insurer eligibility requirements (the “PMIERs”) that become effective December 31, 2015. The PMIERs include revised financial requirements for mortgage insurers under which a mortgage insurer’s “Available Assets” (generally only the most liquid assets of an insurer) must meet or exceed “Minimum Required Assets” (which are based on an insurer’s book and are calculated from tables of factors with several risk dimensions and are subject to a floor amount).

Based on our interpretation of the PMIERs, we expect that MGIC will be in compliance with the PMIERs when they become effective. This expectation reflects, among other things, that the GSEs have allowed full credit under the PMIERs for the risk ceded under our restructured quota share reinsurance transaction. In the third quarter of 2015, the restructured transaction became effective after being approved by each of the GSEs and the Office of the Commissioner of Insurance of the State of Wisconsin (“OCI”). The GSEs’ ongoing approval of the transaction is subject to several conditions and the transaction will be reviewed under the PMIERs at least annually by the GSEs.

We expect to increase our Available Assets in the future by repatriating to MGIC certain assets of MGIC's MIC subsidiary. If additional Available Assets are required in the future, we believe that a portion of our holding company’s cash and investments may be available for future contribution to MGIC.

Factors that may negatively impact MGIC’s ability to comply with the PMIERs after their effective date include the following:


•	The GSEs may reduce the amount of credit they allow under the PMIERs for the risk ceded under our quota share reinsurance transaction.


•	We may not obtain regulatory authorization to repatriate assets from MIC to MGIC to the extent we are assuming because regulators project higher losses than we project or require a level of capital be maintained in MIC higher than we are assuming.


•	MGIC may not receive additional capital contributions from our holding company due to competing demands on the holding company resources, including for repayment of debt.


•	Our future operating results may be negatively impacted by the matters discussed in the rest of these footnotes. Such matters could decrease our revenues, increase our losses or require the use of assets, thereby creating a shortfall in

Available Assets.

There can be no assurance that the GSEs will not make the PMIERs more onerous in the future; in this regard, the PMIERs provide that the tables of factors that determine Minimum Required Assets will be updated every two years and may be updated more frequently to reflect changes in macroeconomic conditions or loan performance. The GSEs will provide notice 180 days prior to the effective date of table updates. In addition, the GSEs may amend the PMIERs at any time. If MGIC ceases to be eligible to insure loans purchased by one or both of the GSEs, it would significantly reduce the volume of our new business writings.

While on an overall basis, the amount of Available Assets we must hold in order to continue to insure GSE loans has increased under the PMIERs over what state regulation currently provides, our reinsurance transaction mitigates the negative effect of the PMIERs on our returns. In this regard, see the first bullet point above.

See additional disclosure regarding statutory capital in Note 16 – “Statutory Capital.”

Reclassifications

Certain reclassifications have been made in the accompanying financial statements to 2014 amounts to conform to 2015 presentation. For the nine months ended September 30, 2014 cash used for additions to property and equipment was previously presented as “Other” within cash flows from operating activities and is presented separately as “Additions to property and equipment” within cash flows from investing activities as of September 30, 2015. This revision is not material to amounts reported or disclosed by us in prior periods.

Restricted cash and cash equivalents

During the second quarter of 2013, approximately $60.3 million was placed in escrow in connection with the two agreements we entered into to resolve our dispute with Countrywide Home Loans, Inc. (“CHL”) and its affiliate, Bank of America, N.A., as successor to Countrywide Home Loans Servicing LP (“BANA” and collectively with CHL, “Countrywide”) regarding rescissions. In the fourth quarter of 2013, approximately $42.9 million was released from escrow in connection with the BANA agreement. In the first quarter of 2015, the remaining escrow funds were disbursed to us pursuant to the amended and restated settlement agreement and release entered into with CHL on March 2, 2015. See additional discussion of these settlement agreements in Note 5 – “Litigation and Contingencies.”

Subsequent events

We have considered subsequent events through the date of this filing. As discussed in Note 3 – "Debt" we have repaid our Senior Notes that matured on November 1, 2015 in the amount of $61.9 million.

Note 2 – New Accounting Pronouncements

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board ("FASB") issued guidance to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, our fee income related to contract underwriting and other fee-based services provided to lenders will be subject to this guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. The guidance is effective for reporting periods beginning after December 15, 2017 with early adoption for reporting periods beginning after December 15, 2016 permitted. We are currently evaluating the impact of this update, but it is not expected to have a significant impact on our consolidated financial statements and disclosures.

Presentation of Debt Issuance Costs

In April 2015, the FASB amended existing guidance related to the presentation of debt issuance costs. The new standard requires the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on our consolidated financial statements.

Disclosures about Short-Duration Contracts

In May 2015, the FASB issued guidance requiring expanded disclosures for insurance entities that issue short-duration contracts. The expanded disclosures are designed to provide additional insight into an insurance entity's ability to underwrite and anticipate costs associated with claims. The disclosures include information about incurred and paid claims development by accident year, on a net of reinsurance basis, for the number of years claims incurred typically remain outstanding, not to exceed ten years. Each period presented in the disclosure about claims development that precedes the current reporting periods is considered supplementary information. The expanded disclosures also include more transparent information about significant changes in methodologies and assumptions used to estimate claims, and the timing, frequency, and severity of claims. The disclosures required by this update are effective for annual periods beginning after December 31, 2015, and interim periods within annual periods beginning after December 31, 2016, and is to be applied retrospectively. We are evaluating the impact, if any, of the new disclosure requirements.

Note 3 – Debt

Long-term debt as of September 30, 2015 and December 31, 2014 consists of the following obligations.



	September 30, 2015			December 31, 2014
	(In millions)
Senior Notes, interest at 5.375% per annum, due November 2015	$	61.9		$	61.9
Convertible Senior Notes, interest at 5% per annum, due May 2017 (1)	345.0			345.0
Convertible Senior Notes, interest at 2% per annum, due April 2020 (2) (3)	500.0			500.0
Convertible Junior Subordinated Debentures, interest at 9% per annum, due April 2063 (4)	389.5			389.5
Total debt	1,296.4			1,296.4
Less current portion of debt	(61.9		)	(61.9		)
Total long-term debt	$	1,234.5		$	1,234.5


(1)	Convertible at any time prior to maturity at the holder's option, at an initial conversion rate, which is subject to adjustment, of 74.4186 shares per $1,000 principal amount, representing an initial conversion price of approximately $13.44 per share.

(2)

Prior to January 1, 2020, the 2% Convertible Senior Notes are convertible only upon satisfaction of one or more conditions. One such condition is that during any calendar quarter commencing after March 31, 2014, the last reported sale price of our common stock for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter be greater than or equal to 130% of the applicable conversion price on each applicable trading day. The 2% Notes are convertible at an initial conversion rate, which is subject to adjustment, of 143.8332 shares per $1,000 principal amount, representing an initial conversion price of approximately $6.95 per share. 130% of such conversion price is $9.03. On or after January 1, 2020, holders may convert their notes irrespective of satisfaction of the conditions. Our common stock price was greater than or equal to 130% of the applicable conversion price for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, September 30, 2015.

(3)

Prior to April 10, 2017, the notes will not be redeemable. On any business day on or after April 10, 2017 we may redeem for cash all or part of the notes, at our option, at a redemption rate equal to 100% of the principal amount of the notes being redeemed, plus any accrued and unpaid interest, if the closing sale price of our common stock exceeds 130% of the then prevailing conversion price of the notes for each of at least 20 of the 30 consecutive trading days preceding notice of the redemption.

(4)

Convertible at any time prior to maturity at the holder's option, at an initial conversion rate, which is subject to adjustment, of 74.0741 shares per $1,000 principal amount, representing an initial conversion price of approximately $13.50 per share. If a holder elects to convert their debentures, deferred interest owed on the debentures being converted is also converted into shares of our common stock. The conversion rate for any deferred interest is based on the average price that our shares traded at during a 5-day period immediately prior to the election to convert. In lieu of issuing shares of common stock upon conversion of the debentures, we may, at our option, make a cash payment to converting holders for all or some of the shares of our common stock otherwise issuable upon conversion.

Interest payments on our existing debt obligations appear below.



	Nine Months Ended September 30,
	2015		2014
	(In millions)
Senior Notes, interest at 5.375% per annum, due November 2015	$	1.7	$	1.7
Convertible Senior Notes, interest at 5% per annum, due May 2017	8.6		8.6
Convertible Senior Notes, interest at 2% per annum, due April 2020	5.0		5.0
Convertible Junior Subordinated Debentures, interest at 9% per annum, due April 2063	17.5		17.5
Total interest payments	$	32.8	$	32.8

The Senior Notes, Convertible Senior Notes and Convertible Junior Subordinated Debentures are obligations of our holding company, MGIC Investment Corporation, and not of its subsidiaries. We repaid our Senior Notes on November 2, 2015 in the amount of $61.9 million with MGIC Investment Corporation cash on hand. The repayment of our Senior Notes had no significant impact on our liquidity or financial position. As of September 30, 2015, we had approximately $469 million in cash and investments at our holding company. The net unrealized losses on our holding company investment portfolio were approximately $0.4 million as of September 30, 2015. The modified duration of the holding company investment portfolio, excluding cash and cash equivalents, was 2.9 years at September 30, 2015.

Note 4 – Reinsurance

Effective July 1, 2015, we settled our 2013 quota share reinsurance agreement ("2013 QSR Transaction") by commutation. The settlement included any premiums, losses, and profit commission. The commutation resulted in an increase in net premiums written and earned of $69.4 million and $11.6 million, respectively, and a decrease in ceding commissions of $11.6 million in the third quarter of 2015. Receipt of our profit commission of $142.5 million, in addition to other premium and loss amounts, was also completed as part of the settlement.

Effective July 1, 2015, we entered into a quota share reinsurance agreement ("2015 QSR Transaction") with a group of unaffiliated reinsurers that are the same as our 2013 QSR Transaction. Each of the reinsurers has an insurer financial strength rating of A- or better by Standard and Poor’s Rating Services, A.M. Best or both. The 2015 QSR Transaction will provide coverage on policies that were in the 2013 QSR Transaction with some exclusions; additional qualifying in force policies as of the agreement effective date which either had no history of defaults, or where a single default has been cured for twelve or more months at the agreement effective date; and all qualifying new insurance written through December 31, 2016. The agreement will provide coverage on losses incurred on or after the effective date with renewal premium through December 31, 2024, at which time the agreement expires. The 2015 QSR Transaction increases the amount of our insurance in force covered by reinsurance and will result in an increase in the amount of premiums and losses ceded. Early termination of the agreement can be elected by us effective December 31, 2018 for a fee, or under specified scenarios for no fee upon prior written notice. Further, at our sole discretion we may elect to terminate the agreement if we will receive less than 90% of the full PMIERs credit amount for the risk ceded under the 2015 QSR Transaction in any required calculation period. The structure of the 2015 QSR Transaction is a 30% quota share for all policies covered, with a 20% ceding commission as well as a profit commission. Generally, under the 2015 QSR Transaction, we will receive a profit commission provided that the loss ratio on the loans covered under the agreement remains below 60%.

A summary of our quota share reinsurance agreements, excluding captive agreements, appears below.



	2013 QSR Transaction
	Three Months Ended September 30,					Nine months ended September 30,
	2015 (1)			2014		2015 (1)			2014
	(In thousands)
Ceded premiums written, net of profit commission	$	(69,410	)	$	27,725	$	(11,355	)	$	72,414

Ceded premiums earned, net of profit commission	(11,568		)	23,736		35,999			64,330

Ceded losses incurred	—			4,689		6,060			10,347



Ceding commissions (2)	(11,568	)	9,922	10,235	27,800

Ceded unearned premiums	—		39,946	—	43,935

Profit commission	11,568		21,887	62,525	66,584

(1) The three and nine months ended September 30, 2015 include the non-recurring impact of commuting our 2013 QSR Transaction in the third quarter. The commutation had no impact on ceded losses incurred.

(2) Ceding commissions are reported within Other underwriting and operating expenses, net on the consolidated statements of operations.



	2015 QSR Transaction
	Three and Nine Months Ended September 30,
	2015
	(In thousands)
Ceded premiums written, net of profit commission (1)	$	22,626

Ceded premiums earned, net of profit commission (1)	22,626

Ceded losses incurred	4,236

Ceding commissions (2)	9,195

Profit commission	23,347

(1) As of July 1, 2015 premiums are ceded on an earned and received basis as defined in our 2015 QSR Transaction.

(2) Ceding commissions are reported within Other underwriting and operating expenses, net on the consolidated statements of

operations.

Under the terms of 2015 QSR Transaction, reinsurance premiums, ceding commission and profit commission are settled net on a quarterly basis. The reinsurance premium due after deducting the related ceding commission and profit commission is reported within "Other liabilities" on the consolidated balance sheet. For periods ending June 30, 2015 and prior, the profit commission accrued has been reported separately on the consolidated balance sheet. As of December 31, 2014, we had accrued a profit commission receivable of $91.5 million.

In the past, MGIC also obtained captive reinsurance. In a captive reinsurance arrangement, the reinsurer is affiliated with the lender for whom MGIC provides mortgage insurance. As part of our settlement with the Consumer Financial Protection Bureau (“CFPB”) in 2013 and with the Minnesota Department of Commerce (the “MN Department”) in June 2015, discussed in Note 5 – “Litigation and Contingencies” MGIC has agreed to not enter into any new captive reinsurance agreement or reinsure any new loans under any existing captive reinsurance agreement for a period of ten years subsequent to the respective settlements. In accordance with the CFPB settlement, all of our active captive arrangements were placed into run-off. In addition, at the time PMIERs become effective on December 31, 2015 the GSEs will not approve any future reinsurance or risk sharing transaction with a mortgage enterprise or an affiliate of a mortgage enterprise.

Captive agreements were generally written on an annual book of business and each captive reinsurer is required to maintain a separate trust account to support its combined reinsured risk on all annual books. MGIC is the sole beneficiary of the trusts, and the trust accounts are made up of capital deposits by the captive reinsurers, premium deposits by MGIC, and investment income earned. These amounts are held in the trust account and are available to pay reinsured losses. The reinsurance recoverable on loss reserves related to captive agreements was $34 million at September 30, 2015 which was supported by $159 million of trust assets, while at December 31, 2014, the reinsurance recoverable on loss reserves related to captive agreements was $45 million, which was supported by $198 million of trust assets.

Note 5 – Litigation and Contingencies

Before paying a claim, we review the loan and servicing files to determine the appropriateness of the claim amount. All of our insurance policies provide that we can reduce or deny a claim if the servicer did not comply with its obligations under our insurance policy, including the requirement to mitigate our loss by performing reasonable loss mitigation efforts or, for example, diligently pursuing a foreclosure or bankruptcy relief in a timely manner. We call such reduction of claims submitted to us “curtailments.” In 2014 and the first three quarters of 2015, curtailments reduced our average claim paid by approximately 6.7% and 7.0%, respectively. After we pay a claim, servicers and insureds sometimes object to our curtailments and other adjustments. We review these objections if they are sent to us within 90 days after the claim was paid.

When reviewing the loan file associated with a claim, we may determine that we have the right to rescind coverage on the loan. (In our SEC reports, we refer to insurance rescissions and denials of claims collectively as "rescissions" and variations of that term.) In recent quarters, approximately 5% of claims received in a quarter have been resolved by rescissions, down from the peak of approximately 28% in the first half of 2009. We estimate rescissions mitigated our incurred losses by approximately $2.5 billion in 2009 and $0.2 billion in 2010 and have not significantly mitigated our incurred losses since then. Our loss reserving methodology incorporates our estimates of future rescissions and reversals of rescissions. Historically, reversals of rescissions have been immaterial. A variance between ultimate actual rescission and reversal rates and our estimates, as a result of the outcome of litigation, settlements or other factors, could materially affect our losses.

If the insured disputes our right to rescind coverage, we generally engage in discussions in an attempt to settle the dispute. As part of those discussions, we may voluntarily suspend rescissions we believe may be part of a settlement. Certain settlements require GSE approval. The GSEs consented to two settlement agreements we entered into with Countrywide Home Loans, Inc. (“CHL”) and its affiliate, Bank of America, N.A., as successor to Countrywide Home Loans Servicing LP (“BANA” and collectively with CHL, “Countrywide”), but there is no guarantee they will approve others. We have reached and implemented settlement agreements that do not require GSE approval, but they have not been material in the aggregate.

If we are unable to reach a settlement, the outcome of a dispute ultimately would be determined by legal proceedings. Under our policies in effect prior to October 1, 2014, legal proceedings disputing our right to rescind coverage may be brought up to three years after the lender has obtained title to the property (typically through a foreclosure) or the property was sold in a sale that we approved, whichever is applicable, and under our master policy effective October 1, 2014, such proceedings may be brought up to two years from the date of the notice of rescission. In a few jurisdictions there is a longer time to bring such proceedings.

Until a liability associated with a settlement agreement or litigation becomes probable and can be reasonably estimated, we consider our claim payment or rescission resolved for financial reporting purposes even though discussions and legal proceedings may have been initiated and are ongoing. Under ASC 450-20, an estimated loss from such discussions and proceedings is accrued for only if we determine that the loss is probable and can be reasonably estimated.

In December 2009, we entered into legal proceedings with Countrywide in which Countrywide alleged that MGIC denied valid mortgage insurance claims. In April 2013, MGIC entered into separate settlement agreements with CHL and BANA, pursuant to which the parties agreed to settle the Countrywide litigation as it relates to MGIC’s rescission practices (as amended from time to time, the “Agreements”). The Agreement with BANA covers loans purchased by the GSEs. That original Agreement was implemented beginning in November 2013 and we resolved all related suspended rescissions in November and December 2013 by paying the associated claim or processing the rescission.

On March 2, 2015, the parties to the Agreement with CHL amended and restated that Agreement. The Agreement with CHL covers loans that were purchased by non-GSE investors, including securitization trusts. The original Agreement addressed rescission and denial rights; the amended and restated Agreement also addressed curtailment rights. Implementation of that Agreement occurred in June 2015 with respect to loans for which consent to the Agreement was received.

The estimated impact of the Agreements has been recorded in our financial statements. The pending arbitration proceedings concerning the loans covered by the Agreements have been dismissed, the mutual releases regarding loans for which consent was received have become effective and the litigation between the parties regarding loans covered by the Agreements has been dismissed. Consent was received for approximately 89% of the dollar amount of exposure on loans covered by the Agreement with CHL; the holders of loans that did not consent retain their rights to assert claims with respect to such loans.

The estimated impact that we have recorded for probable settlements, including those that have been implemented, is our best estimate of our loss from these matters. We estimate that as of September 30, 2015, the maximum exposure above the best estimate

provision we recorded is $124.9 million. If we are not able to implement settlements we consider probable that have not yet been implemented, we intend to defend MGIC vigorously against any related legal proceedings.

The flow policies at issue with Countrywide are in the same form as the flow policies that we used with all of our customers during the period covered by the Agreements, and the bulk policies at issue vary from one another, but are generally similar to those used in the majority of our Wall Street bulk transactions.

In addition to the discussions and/or proceedings for which we have recorded a loss, we are involved in other discussions and/or proceedings with insureds with respect to our claims paying practices. In addition, holders of loans covered by our previously disclosed and implemented settlement agreement with CHL that did not consent to that agreement (approximately 11% of the dollar amount of exposure under that agreement) may bring legal proceedings against MGIC with respect to such loans. Although it is reasonably possible that when these matters are resolved we will not prevail in all cases, we are unable to make a reasonable estimate or range of estimates of the potential liability. We estimate the maximum exposure associated with these matters to be approximately $202.5 million, although we believe we will ultimately resolve these matters for significantly less than this amount.

The estimates of our maximum exposure referred to above do not include interest or consequential or exemplary damages.

Consumers continue to bring lawsuits against home mortgage lenders and settlement service providers. Mortgage insurers, including MGIC, have been involved in litigation alleging violations of the anti-referral fee provisions of the Real Estate Settlement Procedures Act, which is commonly known as RESPA, and the notice provisions of the Fair Credit Reporting Act, which is commonly known as FCRA. MGIC’s settlement of class action litigation against it under RESPA became final in October 2003. MGIC settled the named plaintiffs’ claims in litigation against it under FCRA in December 2004, following denial of class certification in June 2004. Since December 2006, class action litigation has been brought against a number of large lenders alleging that their captive mortgage reinsurance arrangements violated RESPA. Beginning in December 2011, MGIC, together with various mortgage lenders and other mortgage insurers, was named as a defendant in twelve lawsuits, alleged to be class actions, filed in various U.S. District Courts. The complaints in all of the cases alleged various causes of action related to the captive mortgage reinsurance arrangements of the mortgage lenders, including that the lenders’ captive reinsurers received excessive premiums in relation to the risk assumed by those captives, thereby violating RESPA. As of the end of the first quarter of 2015, MGIC has been dismissed from all twelve cases. There can be no assurance that we will not be subject to further litigation under RESPA (or FCRA) or that the outcome of any such litigation would not have a material adverse effect on us.

In 2013, the U.S. District Court for the Southern District of Florida approved a settlement with the CFPB that resolved a federal investigation of MGIC’s participation in captive reinsurance arrangements in the mortgage insurance industry. The settlement concluded the investigation with respect to MGIC without the CFPB or the court making any findings of wrongdoing. As part of the settlement, MGIC agreed that it would not enter into any new captive reinsurance agreement or reinsure any new loans under any existing captive reinsurance agreement for a period of ten years. MGIC had voluntarily suspended most of its captive arrangements in 2008 in response to market conditions and GSE requests. In connection with the settlement, MGIC paid a civil penalty of $2.65 million and the court issued an injunction prohibiting MGIC from violating any provisions of RESPA.

We received requests from the Minnesota Department of Commerce (the “MN Department”) beginning in February 2006 regarding captive mortgage reinsurance and certain other matters in response to which MGIC provided information on several occasions. In June 2015, MGIC executed a Consent Order with the MN Department that resolved the MN Department’s investigation of captive reinsurance matters without making any findings of wrongdoing. The Consent Order provided, among other things, that MGIC is prohibited from entering into any new captive reinsurance agreement or reinsuring any new loans under any existing captive reinsurance agreement for a period of ten years.

We also received a request in June 2005 from the New York Department of Financial Services for information regarding captive mortgage reinsurance arrangements and other types of arrangements in which lenders receive compensation.

Various regulators, including the CFPB, state insurance commissioners and state attorneys general may bring actions seeking various forms of relief in connection with alleged violations of RESPA. The insurance law provisions of many states prohibit paying for the referral of insurance business and provide various mechanisms to enforce this prohibition. While we believe our practices are in conformity with applicable laws and regulations, it is not possible to predict the eventual scope, duration or outcome of any such reviews or investigations nor is it possible to predict their effect on us or the mortgage insurance industry.

In December 2013, the U.S. Treasury Department’s Federal Insurance Office released a report that calls for federal standards and oversight for mortgage insurers to be developed and implemented. It is uncertain what form the standards and oversight will take and when they will become effective.

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 results of operations.

Through a non-insurance subsidiary, we utilize our underwriting skills to provide an outsourced underwriting service to our customers known as contract underwriting. As part of the contract underwriting activities, that subsidiary is responsible for the quality of the underwriting decisions in accordance with the terms of the contract underwriting agreements with customers. That subsidiary may be required to provide certain remedies to its customers if certain standards relating to the quality of our underwriting work are not met, and we have an established reserve for such future obligations. Claims for remedies may be made a number of years after the underwriting work was performed. Beginning in the second half of 2009, our subsidiary experienced an increase in claims for contract underwriting remedies, which continued throughout 2012. The underwriting remedy expense for 2014 and the first nine months of 2015 was approximately $4 million and $1 million, respectively, but may increase in the future.

See Note 11 – “Income Taxes” for a description of federal income tax contingencies.

Note 6 – Earnings per Share

Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted EPS includes the components of basic EPS and also gives effect to dilutive common equivalent shares outstanding during the reporting period. We calculate diluted EPS using the treasury stock method for unvested restricted stock, and the if-converted method for convertible debt instruments. For unvested restricted stock, assumed proceeds under the treasury stock method would include unamortized compensation expense and windfall tax benefits or shortfalls. The determination of potentially issuable shares from our convertible debt instruments does not consider 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. In addition, interest expense, net of tax, related to dilutive convertible debt instruments is added back to earnings in calculating diluted EPS.

The following table reconciles the numerators and denominators used to calculate basic and diluted EPS and also indicates the number of antidilutive securities.



	Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
	(In thousands, except per share data and as otherwise noted)
Basic earnings per share:

Net income	$	822,852	$	72,017	$	1,069,582	$	177,521

Weighted average common shares outstanding	339,701		338,626		339,504		338,488

Basic income per share	$	2.42	$	0.21	$	3.15	$	0.52

Diluted earnings per share:

Net income	$	822,852	$	72,017	$	1,069,582	$	177,521

Interest expense, net of tax (1):
2% Convertible Senior Notes due 2020	1,982		3,049		5,946		9,148
5% Convertible Senior Notes due 2017	3,050		—		9,150		—
9% Convertible Junior Subordinated Debentures due 2063	5,697		—		17,090		—

Diluted income available to common shareholders	$	833,581	$	75,066	$	1,101,768	$	186,669



Weighted average shares - basic	339,701		338,626		339,504		338,488

Effect of dilutive securities:
Unvested restricted stock units	1,983		3,008		2,128		3,043
2% Convertible Senior Notes due 2020	71,942		71,942		71,942		71,942
5% Convertible Senior Notes due 2017	25,670		—		25,670		—
9% Convertible Junior Subordinated Debentures due 2063	28,853		—		28,853		—

Weighted average shares - diluted	468,149		413,576		468,097		413,473

Diluted income per share	$	1.78	$	0.18	$	2.35	$	0.45

Antidilutive securities (in millions)	—		54.5		—		54.5

(1) Due to the valuation allowance recorded against deferred tax assets, the three and nine months ended September 30, 2014 were not tax effected. The three and nine months ended September 30, 2015 have been tax effected at a rate of 35%.

Note 7 – Investments

The amortized cost, gross unrealized gains and losses and fair value of the investment portfolio at September 30, 2015 and December 31, 2014 are shown below.



September 30, 2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses (1)			Fair Value
	(In thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	104,419	$	2,287	$	(1,740	)	$	104,966
Obligations of U.S. states and political subdivisions	1,595,458		24,306		(7,243		)	1,612,521
Corporate debt securities	2,142,500		7,722		(29,650		)	2,120,572
Asset-backed securities	132,271		346		(80		)	132,537
Residential mortgage-backed securities	278,737		275		(7,541		)	271,471
Commercial mortgage-backed securities	253,143		1,048		(1,504		)	252,687
Collateralized loan obligations	61,342		—		(1,056		)	60,286
Debt securities issued by foreign sovereign governments	30,477		2,876		(62		)	33,291
Total debt securities	4,598,347		38,860		(48,876		)	4,588,331
Equity securities	5,595		52		(13		)	5,634

Total investment portfolio	$	4,603,942	$	38,912	$	(48,889	)	$	4,593,965



December 31, 2014	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses (1)			Fair Value
	(In thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	349,153	$	2,752	$	(5,130	)	$	346,775
Obligations of U.S. states and political subdivisions	844,942		12,961		(2,761		)	855,142
Corporate debt securities	2,418,991		16,325		(10,035		)	2,425,281
Asset-backed securities	286,260		535		(140		)	286,655
Residential mortgage-backed securities	329,983		254		(9,000		)	321,237
Commercial mortgage-backed securities	276,215		1,221		(2,158		)	275,278
Collateralized loan obligations	61,340		—		(1,264		)	60,076
Debt securities issued by foreign sovereign governments	35,630		3,540		—			39,170
Total debt securities	4,602,514		37,588		(30,488		)	4,609,614
Equity securities	3,003		61		(9		)	3,055

Total investment portfolio	$	4,605,517	$	37,649	$	(30,497	)	$	4,612,669


(1)	At September 30, 2015 and December 31, 2014, there were no other-than-temporary impairment losses recorded in other comprehensive income.

Our foreign investments primarily consist of the investment portfolio supporting our Australian domiciled subsidiary. This portfolio is comprised of Australian government and semi government securities, representing 86% of the market value of our foreign investments with the remainder invested in corporate securities and cash equivalents with allocations of 10% and 4%, respectively. Eighty-seven percent of the Australian portfolio is rated AAA or its equivalent, by one or more of Moody’s, Standard & Poor’s and Fitch Ratings, and the remaining 13% is rated AA or its equivalent.

The amortized cost and fair values of debt securities at September 30, 2015, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most asset-backed and mortgage-backed securities and collateralized loan obligations provide for periodic payments throughout their lives, they are listed below in separate categories.



September 30, 2015	Amortized Cost		Fair Value
	(In thousands)
Due in one year or less	$	191,371	$	192,007
Due after one year through five years	1,611,819		1,622,178
Due after five years through ten years	1,130,625		1,113,217
Due after ten years	939,039		943,948

	$	3,872,854	$	3,871,350

Asset-backed securities	132,271		132,537
Residential mortgage-backed securities	278,737		271,471
Commercial mortgage-backed securities	253,143		252,687
Collateralized loan obligations	61,342		60,286

Total at September 30, 2015	$	4,598,347	$	4,588,331

At September 30, 2015 and December 31, 2014, the investment portfolio had gross unrealized losses of $48.9 million and $30.5 million, respectively. For those securities in an unrealized loss position, the length of time the securities were in such a position, as measured by their month-end fair values, is as follows:



	Less Than 12 Months				12 Months or Greater				Total
September 30, 2015	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	25,781	$	295	$	15,534	$	1,445	$	41,315	$	1,740
Obligations of U.S. states and political subdivisions	231,647		6,626		43,865		617		275,512		7,243
Corporate debt securities	1,045,477		27,190		140,995		2,460		1,186,472		29,650
Asset-backed securities	36,920		64		5,567		16		42,487		80
Residential mortgage-backed securities	39,870		414		201,435		7,127		241,305		7,541
Commercial mortgage-backed securities	74,403		698		79,411		806		153,814		1,504
Collateralized loan obligations	—		—		60,286		1,056		60,286		1,056
Foreign government securities	2,177		62		—		—		2,177		62
Equity securities	319		4		173		9		492		13

Total	$	1,456,594	$	35,353	$	547,266	$	13,536	$	2,003,860	$	48,889



	Less Than 12 Months				12 Months or Greater				Total
December 31, 2014	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	58,166	$	138	$	232,351	$	4,992	$	290,517	$	5,130
Obligations of U.S. states and political subdivisions	166,408		1,066		114,465		1,695		280,873		2,761
Corporate debt securities	816,555		5,259		243,208		4,776		1,059,763		10,035
Asset-backed securities	54,491		80		11,895		60		66,386		140
Residential mortgage-backed securities	24,168		34		263,002		8,966		287,170		9,000
Commercial mortgage-backed securities	89,301		810		110,652		1,348		199,953		2,158
Collateralized loan obligations	—		—		60,076		1,264		60,076		1,264
Equity securities	167		1		235		8		402		9

Total	$	1,209,256	$	7,388	$	1,035,884	$	23,109	$	2,245,140	$	30,497

The unrealized losses in all categories of our investments at September 30, 2015 and December 31, 2014 were primarily caused by the difference in interest rates at each respective period, compared to interest rates at the time of purchase. There were 369 and 423 securities in an unrealized loss position at September 30, 2015 and December 31, 2014, respectively.

During each of the three and nine months ended September 30, 2015 and 2014 there were no other-than-temporary impairments (“OTTI”) recognized. The net realized investment gains (losses) on the investment portfolio are as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(In thousands)

Realized investment gains (losses) on investments:
Fixed maturities	$	638	$	629	$	27,123	$	755
Equity securities	2		3		10		168
Net realized investment gains	$	640	$	632	$	27,133	$	923



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(In thousands)

Realized investment gains (losses) on investments:
Gains on sales	$	720		$	1,161		$	28,711		$	3,273
Losses on sales	(80		)	(529		)	(1,578		)	(2,350		)
Net realized investment gains	$	640		$	632		$	27,133		$	923

Note 8 – Fair Value Measurements

In accordance with fair value guidance, we applied the following fair value hierarchy in order to measure fair value for assets and liabilities:

Level 1 – Quoted prices for identical instruments in active markets that we can access. Financial assets utilizing Level 1 inputs primarily include U.S. Treasury securities, equity securities, and Australian government and semi government securities.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and inputs, other than quoted prices, that are observable in the marketplace for the financial instrument. The observable inputs are used in valuation models to calculate the fair value of the financial instruments. Financial assets utilizing Level 2 inputs primarily include obligations of U.S. government corporations and agencies and certain municipal and corporate bonds.

Level 3 – Valuations are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable or are par values for equity securities restricted in their ability to be redeemed or sold. Level 3 inputs reflect our own assumptions about the assumptions a market participant would use in pricing an asset or liability. Financial assets utilizing Level 3 inputs primarily include equity securities that can only be redeemed or sold at their par value and only to the security issuer and certain state premium tax credit investments. The state premium tax credit investments have an average maturity of less than 3 years, credit ratings of AA+ or higher, and their balance reflects their remaining scheduled payments discounted at an average annual rate of 7.2%. Our non-financial assets that are classified as Level 3 securities consist of real estate acquired through claim settlement. The fair value of real estate acquired is the lower of our acquisition cost or a percentage of the appraised value. The percentage applied to the appraised value is based upon our historical sales experience adjusted for current trends.

To determine the fair value of securities available-for-sale in Level 1 and Level 2 of the fair value hierarchy, independent pricing sources have been utilized. One price is provided per security based on observable market data. To ensure securities are appropriately classified in the fair value hierarchy, we review the pricing techniques and methodologies of the independent pricing sources and believe that their policies adequately consider market activity, either based on specific transactions for the issue valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. A variety of inputs are utilized by the independent pricing sources including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers and reference data including data published in market research publications. Inputs may be weighted differently for any security, and not all inputs are used for each security evaluation. Market indicators, industry and economic events are also considered. This information is evaluated using a multidimensional pricing model. Quality controls are performed by the independent pricing sources throughout this process, which include reviewing tolerance reports, trading information and data changes, and directional moves compared to market moves. This model combines all inputs to arrive at a value assigned to each security. In addition, on a quarterly basis, we perform quality controls over values

received from the pricing sources which include reviewing tolerance reports, trading information and data changes, and directional moves compared to market moves. We have not made any adjustments to the prices obtained from the independent pricing sources.

Fair value measurements for assets measured at fair value included the following as of September 30, 2015 and December 31, 2014:



September 30, 2015	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	104,966	$	18,418	$	86,548	$	—
Obligations of U.S. states and political subdivisions	1,612,521		—		1,611,134		1,387
Corporate debt securities	2,120,572		—		2,120,572		—
Asset-backed securities	132,537		—		132,537		—
Residential mortgage-backed securities	271,471		—		271,471		—
Commercial mortgage-backed securities	252,687		—		252,687		—
Collateralized loan obligations	60,286		—		60,286		—
Debt securities issued by foreign sovereign governments	33,291		33,291		—		—
Total debt securities	4,588,331		51,709		4,535,235		1,387
Equity securities (1)	5,634		2,778		—		2,856
Total investment portfolio	$	4,593,965	$	54,487	$	4,535,235	$	4,243
Real estate acquired (2)	$	10,084	$	—	$	—	$	10,084



December 31, 2014	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	346,775	$	188,824	$	157,951	$	—
Obligations of U.S. states and political subdivisions	855,142		—		853,296		1,846
Corporate debt securities	2,425,281		—		2,425,281		—
Asset-backed securities	286,655		—		286,655		—
Residential mortgage-backed securities	321,237		—		321,237		—
Commercial mortgage-backed securities	275,278		—		275,278		—
Collateralized loan obligations	60,076		—		60,076		—
Debt securities issued by foreign sovereign governments	39,170		39,170		—		—
Total debt securities	4,609,614		227,994		4,379,774		1,846
Equity securities (1)	3,055		2,734		—		321
Total investment portfolio	$	4,612,669	$	230,728	$	4,379,774	$	2,167
Real estate acquired (2)	$	12,658	$	—	$	—	$	12,658


(1)	Equity securities in Level 3 are carried at cost, which approximates fair value.


(2)	Real estate acquired through claim settlement, which is held for sale, is reported in Other assets on the consolidated balance sheets.

There were no transfers of securities between Level 1 and Level 2 during the first nine months of 2015.

For assets measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the three and nine months ended September 30, 2015 and 2014 is as follows:



	Debt Securities			Equity Securities		Total Investments			Real Estate Acquired
	(In thousands)
Balance at June 30, 2015	$	1,634		$	321	$	1,955		$	7,995
Total realized/unrealized gains (losses):
Included in earnings and reported as losses incurred, net	—			—		—			(1,031		)
Purchases	—			2,535		2,535			9,632
Sales	(247		)	—		(247		)	(6,512		)
Transfers into Level 3	—			—		—			—
Transfers out of Level 3	—			—		—			—
Balance at September 30, 2015	$	1,387		$	2,856	$	4,243		$	10,084

Amount of total losses included in earnings for the three months ended September 30, 2015 attributable to the change in unrealized losses on assets still held at September 30, 2015	$	—		$	—	$	—		$	—



	Debt Securities			Equity Securities		Total Investments			Real Estate Acquired
	(In thousands)
Balance at December 31, 2014	$	1,846		$	321	$	2,167		$	12,658
Total realized/unrealized gains (losses):
Included in earnings and reported as losses incurred, net	—			—		—			(1,503		)
Purchases	7			2,535		2,542			26,346
Sales	(466		)	—		(466		)	(27,417		)
Transfers into Level 3	—			—		—			—
Transfers out of Level 3	—			—		—			—
Balance at September 30, 2015	$	1,387		$	2,856	$	4,243		$	10,084

Amount of total losses included in earnings for the nine months ended September 30, 2015 attributable to the change in unrealized losses on assets still held at September 30, 2015	$	—		$	—	$	—		$	—



	Debt Securities			Equity Securities		Total Investments			Real Estate Acquired
	(In thousands)
Balance at June 30, 2014	$	2,231		$	321	$	2,552		$	10,804
Total realized/unrealized gains (losses):
Included in earnings and reported as losses incurred, net	—			—		—			(2,062		)
Purchases	—			—		—			14,107
Sales	(237		)	—		(237		)	(6,284		)
Transfers into Level 3	—			—		—			—
Transfers out of Level 3	—			—		—			—
Balance at September 30, 2014	$	1,994		$	321	$	2,315		$	16,565

Amount of total losses included in earnings for the three months ended September 30, 2014 attributable to the change in unrealized losses on assets still held at September 30, 2014	$	—		$	—	$	—		$	—



	Debt Securities			Equity Securities		Total Investments			Real Estate Acquired
	(In thousands)
Balance at December 31, 2013	$	2,423		$	321	$	2,744		$	13,280
Total realized/unrealized gains (losses):
Included in earnings and reported as losses incurred, net	—			—		—			(4,378		)
Purchases	30			—		30			33,484
Sales	(459		)	—		(459		)	(25,821		)
Transfers into Level 3	—			—		—			—
Transfers out of Level 3	—			—		—

CLASS OF STOCK

NUMBER OF SHARES

Common stock

October 30, 2015