MGIC INVESTMENT CORP - FORM 10-Q - November 7, 2016

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EX-99 - EXHIBIT 99 - MGIC INVESTMENT CORPexhibit99q3.htm
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FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended
September 30, 2016
 
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
 
investorlogoa03.jpg
(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.
CLASS OF STOCK
 
PAR VALUE
 
DATE
 
NUMBER OF SHARES
Common stock
 
$1.00
 
November 3, 2016
 
340,662,694
 


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, 2016
 
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




3 | MGIC Investment Corporation - Q3 2016

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
 
September 30,
2016
 
December 31,
2015
ASSETS
 
 
 
 
Investment portfolio (notes 7 and 8):
 
 
 
 
Securities, available-for-sale, at fair value:
 
 
 
 
Fixed maturities (amortized cost, 2016 - $4,602,457; 2015 - $4,684,148)
 
$
4,718,625

 
$
4,657,561

Equity securities
 
7,218

 
5,645

Total investment portfolio
 
4,725,843

 
4,663,206

Cash and cash equivalents
 
274,743

 
181,120

Accrued investment income
 
42,310

 
40,224

Reinsurance recoverable on loss reserves (note 4)
 
46,863

 
44,487

Reinsurance recoverable on paid losses
 
4,632

 
3,319

Premiums receivable
 
47,421

 
48,469

Home office and equipment, net
 
32,009

 
30,095

Deferred insurance policy acquisition costs
 
17,408

 
15,241

Deferred income taxes, net (note 11)
 
602,142

 
762,080

Other assets
 
79,678

 
80,102

Total assets
 
$
5,873,049

 
$
5,868,343

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Liabilities:
 
 
 
 
Loss reserves (note 12)
 
$
1,535,483

 
$
1,893,402

Unearned premiums
 
321,326

 
279,973

Federal Home Loan Bank advance (note 3)
 
155,000

 
—

Senior notes (note 3)
 
417,087

 
—

Convertible senior notes (note 3)
 
349,073

 
822,301

Convertible junior subordinated debentures (note 3)
 
256,872

 
389,522

Other liabilities
 
255,129

 
247,005

Total liabilities
 
3,289,970

 
3,632,203

Contingencies (note 5)
 


 


Shareholders’ equity (note 13):
 
 
 
 
Common stock (one dollar par value, shares authorized 1,000,000; shares issued 2016 - 359,395; 2015 - 340,097; shares outstanding 2016 - 345,474; 2015 - 339,657)
 
359,395

 
340,097

Paid-in capital
 
1,779,911

 
1,670,238

Treasury stock at cost (shares 2016 - 13,921; 2015 - 440)
 
(111,459
)
 
(3,362
)
Accumulated other comprehensive income (loss), net of tax (note 9)
 
30,155

 
(60,880
)
Retained earnings
 
525,077

 
290,047

Total shareholders’ equity
 
2,583,079

 
2,236,140

Total liabilities and shareholders’ equity
 
$
5,873,049

 
$
5,868,343

See accompanying notes to consolidated financial statements.


MGIC Investment Corporation - Q3 2016 | 4

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)
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
 
Premiums written:
 
 
 
 
 
 
 
 
Direct
 
$
283,618

 
$
273,803

 
$
831,022

 
$
800,619

Assumed
 
152

 
285

 
542

 
931

Ceded (note 4)
 
(33,446
)
 
43,897

 
(99,944
)
 
(22,334
)
Net premiums written
 
250,324

 
317,985

 
731,620

 
779,216

Increase in unearned premiums, net
 
(12,948
)
 
(78,751
)
 
(41,447
)
 
(109,186
)
Net premiums earned
 
237,376

 
239,234

 
690,173

 
670,030

Investment income, net of expenses
 
27,515

 
25,939

 
82,572

 
75,815

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
 
5,092

 
640

 
8,984

 
27,133

Net realized investment gains
 
5,092

 
640

 
8,984

 
27,133

Other revenue
 
3,867

 
3,698

 
14,234

 
9,877

Total revenues
 
273,850

 
269,511

 
795,963

 
782,855

 
 
 
 
 
 
 
 
 
Losses and expenses:
 
 
 
 
 
 
 
 
Losses incurred, net (note 12)
 
60,897

 
76,458

 
192,499

 
248,481

Change in premium deficiency reserve
 
—

 
—

 
—

 
(23,751
)
Amortization of deferred policy acquisition costs
 
2,575

 
2,368

 
6,781

 
6,191

Other underwriting and operating expenses, net
 
37,870

 
46,075

 
112,995

 
121,152

Interest expense
 
13,536

 
17,362

 
40,481

 
52,097

Loss on debt extinguishment (note 3)
 
75,223

 
—

 
90,531

 
—

Total losses and expenses
 
190,101

 
142,263

 
443,287

 
404,170

 
 
 
 
 
 
 
 
 
Income before tax
 
83,749

 
127,248

 
352,676

 
378,685

Provision for (benefit from) income taxes (note 11)
 
27,131

 
(695,604
)
 
117,646

 
(690,897
)
 
 
 
 
 
 
 
 
 
Net income
 
$
56,618

 
$
822,852

 
$
235,030

 
$
1,069,582

 
 
 
 
 
 
 
 
 
Income per share (note 6)
 
 
 
 
 
 
 
 
Basic
 
$
0.16

 
$
2.42

 
$
0.68

 
$
3.15

Diluted
 
$
0.14

 
$
1.78

 
$
0.58

 
$
2.35

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic (note 6)
 
349,376

 
339,701

 
343,403

 
339,504

Weighted average common shares outstanding - diluted (note 6)
 
406,050

 
468,128

 
421,423

 
468,076


See accompanying notes to consolidated financial statements.


5 | MGIC Investment Corporation - Q3 2016

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2016
 
2015
 
2016
 
2015
Net income
 
$
56,618

 
$
822,852

 
$
235,030

 
$
1,069,582

Other comprehensive (loss) income, net of tax (note 9):
 
 
 
 
 
 
 
 
Change in unrealized investment gains and losses (note 7)
 
(14,434
)
 
95,295

 
92,731

 
51,212

Benefit plan adjustments
 
(241
)
 
(7,355
)
 
(722
)
 
(8,447
)
Foreign currency translation adjustment
 
(10
)
 
(2,947
)
 
(974
)
 
(4,571
)
Other comprehensive (loss) income, net of tax
 
(14,685
)
 
84,993

 
91,035

 
38,194

Comprehensive income
 
$
41,933

 
$
907,845

 
$
326,065

 
$
1,107,776


See accompanying notes to consolidated financial statements


MGIC Investment Corporation - Q3 2016 | 6

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)

 
 
Nine Months Ended September 30,
(In thousands)
 
2016
 
2015
Common stock
 
 
 
 
Balance, beginning of period
 
$
340,097

 
$
340,047

Net common stock issued under share-based compensation plans
 
985

 
44

Issuance of common stock (note 13)
 
18,313

 
—

Balance, end of period
 
359,395

 
340,091

 
 
 
 
 
Paid-in capital
 
 
 
 
Balance, beginning of period
 
1,670,238

 
1,663,592

Net common stock issued under share-based compensation plans
 
(5,989
)
 
(446
)
Issuance of common stock (note 13)
 
113,146

 
—

Reissuance of treasury stock, net
 
—

 
(6,894
)
Tax benefit from share-based compensation
 
100

 
2,113

Equity compensation
 
8,753

 
8,942

Reacquisition of convertible junior subordinated debentures-equity component (note 3)
 
(6,337
)
 
—

Balance, end of period
 
1,779,911

 
1,667,307

 
 
 
 
 
Treasury stock
 
 
 
 
Balance, beginning of period
 
(3,362
)
 
(32,937
)
Purchases of common stock (note 13)
 
(108,097
)
 
—

Reissuance of treasury stock, net
 
—

 
29,575

Balance, end of period
 
(111,459
)
 
(3,362
)
 
 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
 
Balance, beginning of period
 
(60,880
)
 
(81,341
)
Other comprehensive income (loss), net of tax (note 9)
 
91,035

 
38,194

Balance, end of period
 
30,155

 
(43,147
)
 
 
 
 
 
Retained earnings (deficit)
 
 
 
 
Balance, beginning of period
 
290,047

 
(852,458
)
Net income
 
235,030

 
1,069,582

Reissuance of treasury stock, net
 
—

 
(29,494
)
Balance, end of period
 
525,077

 
187,630

 
 
 
 
 
Total shareholders’ equity
 
$
2,583,079

 
$
2,148,519


See accompanying notes to consolidated financial statements.


7 | MGIC Investment Corporation - Q3 2016

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine Months Ended September 30,
(In thousands)
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net income
 
$
235,030

 
$
1,069,582

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
44,324

 
38,361

Deferred tax expense (benefit)
 
111,191

 
(698,177
)
Realized investment gains, net
 
(8,984
)
 
(27,133
)
Excess tax benefits related to share-based compensation
 
(100
)
 
(2,113
)
Loss on debt extinguishment
 
31,071

 
—

Payment of original issue discount-convertible junior subordinated debentures
 
(41,540
)
 
—

Payment of original issue discount-convertible senior notes
 
(11,250
)
 
—

Change in certain assets and liabilities:
 
 
 
 
Accrued investment income
 
(2,086
)
 
(6,343
)
Prepaid insurance premium
 
95

 
47,436

Reinsurance recoverable on loss reserves
 
(2,376
)
 
19,093

Reinsurance recoverable on paid losses
 
(1,313
)
 
2,149

Premium receivable
 
1,048

 
5,863

Deferred insurance policy acquisition costs
 
(2,167
)
 
(2,757
)
Profit commission receivable
 
(2,005
)
 
91,500

Loss reserves
 
(357,919
)
 
(416,864
)
Premium deficiency reserve
 
—

 
(23,751
)
Unearned premiums
 
41,353

 
61,705

Return premium accrual
 
(12,800
)
 
(6,400
)
Income taxes payable - current
 
822

 
752

Other
 
9,235

 
(17,872
)
Net cash provided by operating activities
 
31,629

 
135,031

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of investments:
 
 
 
 
Fixed maturities
 
(1,105,995
)
 
(1,970,402
)
Equity securities
 
(4,315
)
 
(2,593
)
Proceeds from sales of fixed maturities
 
718,894

 
1,527,680

Proceeds from maturity of fixed maturities
 
432,557

 
432,328

Proceeds from sale of equity securities
 
6,425

 
—

Net increase in payable for securities
 
3,376

 
48,120

Net decrease in restricted cash
 
—

 
17,212

Additions to property and equipment
 
(4,969
)
 
(2,835
)
Net cash provided by investing activities
 
45,973

 
49,510

 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance of long-term debt
 
573,094

 
—

Purchase of convertible senior notes
 
(363,778
)
 
—

Purchase of convertible junior subordinated debentures-liability component
 
(91,110
)
 
—

Purchase of convertible junior subordinated debentures-equity component
 
(9,750
)
 
—

Purchase of common stock
 
(91,597
)
 
—

Payment of debt issuance costs
 
(938
)
 
—

Excess tax benefits related to share-based compensation
 
100

 
2,113

Net cash provided by financing activities
 
16,021

 
2,113

 
 
 
 
 
Net increase in cash and cash equivalents
 
93,623

 
186,654

Cash and cash equivalents at beginning of period
 
181,120

 
197,882

Cash and cash equivalents at end of period
 
$
274,743

 
$
384,536



MGIC Investment Corporation - Q3 2016 | 8

See accompanying notes to consolidated financial statements.


9 | MGIC Investment Corporation - Q3 2016

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(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.

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, 2015 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 consolidated financial position and consolidated results of operations for the periods indicated. The consolidated results of operations for the interim period may not be indicative of the results that may be expected for the year ending December 31, 2016.

Reclassifications

Certain reclassifications to 2015 amounts have been made in the accompanying financial statements to conform to the 2016 presentation. See Note 2 - “New Accounting Pronouncements” for a discussion of our adoption of accounting guidance related to the presentation of debt issuance costs in the first quarter of 2016, with retrospective application to prior periods.

Subsequent events

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

 
Note 2 – New Accounting Pronouncements
Adopted Accounting Standards
Presentation of Debt Issuance Costs
In April 2015, the Financial Accounting Standards Board (“FASB”) issued updated guidance related to the presentation of debt issuance costs. The updated guidance 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 as a deferred charge, consistent with the treatment of debt discounts. The updated guidance was effective for reporting periods beginning after December 15, 2015. The adoption of this guidance as of March 31, 2016 has been applied retrospectively to prior periods. See Note 3 - “Debt” for the reclassification made to our consolidated balance sheet as of December 31, 2015. The adoption of this guidance had no impact on our statements of operations or retained earnings.

Accounting for Share-Based Compensation When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period
In June 2014, the FASB issued updated guidance to resolve diversity in practice concerning employee share-based compensation that contains performance targets that could be achieved after the requisite service period. No explicit guidance on how to account for these types of performance share-based compensation awards existed prior to this update. The updated guidance requires that a performance target that affects vesting and that can be achieved after the requisite service period be treated as a performance condition. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which service has been rendered. If the performance target becomes probable of being achieved before the end of the service period, the remaining unrecognized compensation cost for which requisite service has not yet been rendered is recognized prospectively over the remaining service period. The total amount of compensation cost recognized during and after the service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The updated guidance was effective for reporting periods after December 15, 2015. The adoption of this guidance as of March 31, 2016, with application to awards granted in 2016, is not expected to have a material impact on our consolidated financial statements.




MGIC Investment Corporation - Q3 2016 | 10

Prospective Accounting Standards
Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued updated guidance that provides specific guidance on the presentation of certain cash flow items where there is currently diversity in practice, including, but not limited to, debt prepayment and debt issuance costs and proceeds from the settlement of insurance claims. The updated guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods and should be applied retrospectively unless impracticable. Early adoption is permitted including adoption in any interim period. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statements.

Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued updated guidance that requires immediate recognition of estimated credit losses expected to occur over the remaining life of many financial instruments. Entities will be required to utilize a current expected credit losses (“CECL”) methodology that incorporates their forecasts of future economic conditions into their loss estimate unless such forecast is not reasonable and supportable, in which case the entity will revert to historical loss experience. Any allowance for CECL reduces the amortized cost basis of the financial instrument to the amount an entity expects to collect. Credit losses relating to available-for-sale fixed maturity securities are to be recorded through an allowance for credit losses, rather than a write-down of the asset, with the amount of the allowance limited to the amount by which fair value is less than amortized cost. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists. The updated guidance is not prescriptive about certain aspects of estimating expected credit losses, including the specific methodology to use, and therefore will require significant judgment in application. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted for annual and interim periods in fiscal years beginning after December 15, 2018. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statements, but do not expect it to have a material impact on our consolidated financial statements or disclosures.

Improvements to Employee Share-Based Compensation Accounting
In March 2016, the FASB issued updated guidance that simplifies several aspects of the accounting for employee share-based compensation including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows. The updated guidance requires that, prospectively, all tax effects related to share-based compensation be made through the statement of operations at the time of settlement. In contrast the current guidance requires excess tax benefits to
 
be recognized in paid-in capital under the current guidance. The updated guidance also removes the requirement to delay recognition of a tax benefit until it reduces current taxes payable. This change is required to be applied on a modified retrospective basis, with a cumulative effect adjustment to opening retained earnings. Additionally, all tax related cash flows resulting from share-based compensation are to be reported as operating activities on the statement of cash flows, a change from the existing requirement to present tax benefits as an inflow from financing activities and an outflow from operating activities. Finally, for tax withholding purposes, entities will be allowed to withhold an amount of shares up to the employee’s maximum individual tax rate (as opposed to the minimum statutory tax rate) in the relevant jurisdiction without resulting in liability classification of the award. The change in withholding requirements will be applied on a modified retrospective approach. The updated guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statements.

Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued updated guidance to address the recognition, measurement, presentation, and disclosure of certain financial instruments. The updated guidance requires equity investments, except those accounted for under the equity method of accounting, that have a readily determinable fair value to be measured at fair value with changes in fair value recognized in net income. Equity investments that do not have readily determinable fair values may be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. A qualitative assessment for impairment is required for equity investments without readily determinable fair values. The updated guidance also eliminates the requirement to disclose the method and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet. The updated guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods and will require recognition of a cumulative effect adjustment at adoption. We do not currently expect the adoption of this guidance to impact our consolidated financial position or liquidity.

Disclosures about Short-Duration Contracts
In May 2015, the FASB issued updated 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, 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



11 | MGIC Investment Corporation - Q3 2016

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 applicability and impact, if any, of the new disclosure requirements.

Note 3 – Debt
2016 debt transactions
During the first nine months of 2016, we completed a series of transactions that repositioned the maturity profile of our debt and lowered the number of potentially dilutive securities. These transactions are discussed below.

5.75% Senior Notes
In August 2016, we issued $425 million aggregate principal amount of 5.75% Senior Notes (the “5.75% Notes”) due in 2023 and received net proceeds, after the deduction of underwriting fees, of $418.1 million. Interest on the 5.75% Notes is payable semi-annually on February 15 and August 15 of each year, commencing on February 15, 2017. We have the option to redeem these notes, in whole or in part, at any time or from time to time prior to maturity at a redemption price equal to the greater of (i) 100% of the aggregate principal amount of the notes to be redeemed and (ii) the make-whole amount, which is the sum of the present values of the remaining scheduled payments of principal and interest discounted at the treasury rate defined in the notes plus 50 basis points, plus, in each case, accrued interest thereon to, but excluding, the redemption date. In addition to underwriting fees, we incurred approximately $1.2 million of other expenses associated with the issuance of these notes.

The 5.75% 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 5.75% 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 5.75% 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 5.75% Notes, including their covenants and events of default.

The net proceeds from the 5.75% Notes issuance were primarily used as (i) cash consideration to purchase a portion of our 2% Notes, and (ii) to repurchase the shares issued as partial consideration in the purchases of our 2% Notes, as further
 
described below. The remaining proceeds are being held for general corporate purposes.

2% Convertible Senior Notes
In the third quarter of 2016, we entered into privately negotiated agreements to purchase $292.4 million in par value of our outstanding 2% Convertible Senior Notes (the “2% Notes”) due in 2020 at a purchase price of $362.1 million, plus accrued interest. We funded the purchases with $230.7 million in cash proceeds from the issuance of the 5.75% Notes and by issuing to certain sellers approximately 18.3 million shares of our common stock. The excess of the purchase price over carrying value is reflected as a loss on debt extinguishment on our consolidated statements of operations for the three and nine months ended September 30, 2016. The purchases of the 2% Notes reduced our potentially dilutive shares by approximately 42.1 million shares, without considering the shares issued in partial consideration in the purchase of the 2% Notes or the repurchase of shares to offset such shares issued. For more information about the share repurchases, see Note 13 - “Shareholders’ Equity.”

5% Convertible Senior Notes
During the first nine months of 2016, we purchased $188.5 million in par value of our 5% Convertible Senior Notes (the “5% Notes”) due in 2017 at a purchase price of $195.5 million, plus accrued interest using funds held at our holding company. The excess of the purchase price over carrying value is reflected as a loss on debt extinguishment on our consolidated statements of operations for the three and nine months ended September 30, 2016. The purchases of the 5% Notes reduced our potentially dilutive shares by approximately 14.0 million shares.

9% Convertible Junior Subordinated Debentures
In February 2016, MGIC purchased $132.7 million of par value of our 9% Convertible Junior Subordinated Debentures (the “9% Debentures”) due in 2063 at a purchase price of $150.7 million, plus accrued interest. The 9% Debentures include a conversion feature that allows us, at our option, to make a cash payment to converting holders in lieu of issuing shares of common stock upon conversion of the 9% Debentures. The accounting standards applicable to extinguishment of debt with a cash conversion feature require the consideration paid to be allocated between the extinguishment of the liability component and reacquisition of the equity component. The purchase of the 9% Debentures resulted in an $8.3 million loss on debt extinguishment on the consolidated statement of operations for the nine months ended September 30, 2016, which represents the difference between the fair value and the carrying value of the liability component on the purchase date. In addition, our shareholders’ equity was separately reduced by $6.3 million related to the reacquisition of the equity component. For GAAP accounting purposes, the 9% Debentures owned by MGIC are considered retired and are eliminated in our consolidated financial statements and the underlying common stock



MGIC Investment Corporation - Q3 2016 | 12

equivalents, approximately 9.8 million shares, are not included in the computation of diluted shares.

Federal Home Loan Bank Advance
In February 2016, MGIC borrowed $155.0 million in the form of a fixed rate advance from the Federal Home Loan Bank of Chicago (“FHLB”) (the “Advance”) to provide funds used to purchase the 9% Debentures. Interest on the Advance is payable monthly at an annual rate, fixed for the term of the Advance, of 1.91%. The principal of the Advance matures on February 10, 2023. MGIC may prepay the Advance at any time. Such prepayment would be below par if interest rates have risen after the Advance was originated, or above par if interest rates have declined. The Advance is secured by eligible collateral whose market value must be maintained at 102% of the principal balance of the Advance. MGIC provided eligible collateral from its investment portfolio.

Accounting standard update
As of March 31, 2016 we adopted the accounting update related to the presentation of debt issuance costs in the financial statements. The change in accounting guidance has been applied retrospectively to prior periods. As a result, a reclassification of approximately $11.2 million of debt issuance costs was made on our December 31, 2015 balance sheet, resulting in a reduction to other assets and a reduction to long-term debt; there was no impact on our consolidated statements of operations or retained earnings.

The impact of the reclassification of debt issuance costs on our outstanding debt obligations as of December 31, 2015 is as follows.
 
 
December 31, 2015
(In millions)
 
As previously reported
 
Adjustment
 
As Adjusted
5% Notes
 
$
333.5

 
$
(2.0
)
 
$
331.5

2% Notes
 
500.0

 
(9.2
)
 
490.8

9% Debentures
 
389.5

 
—

 
389.5

Total long-term debt
 
$
1,223.0

 
$
(11.2
)
 
$
1,211.8


 
Long-term debt obligations
The par value of our debt obligations and their aggregate carrying value as of September 30, 2016 and December 31, 2015 were as follows.
(In millions)
 
September 30,
2016
 
December 31,
2015
FHLB Advance
 
$
155.0

 
$
—

5% Notes(1)
 
145.0

 
333.5

2% Notes(2) (3)
 
207.6

 
500.0

5.75% Notes
 
425.0

 
—

9% Debentures(4)
 
256.9

 
389.5

Long-term debt, par value
 
1,189.5

 
1,223.0

Less: Debt issuance costs
 
(11.5
)
 
(11.2
)
Long-term debt, carrying value
 
$
1,178.0

 
$
1,211.8

(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% 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.
(3) 
Prior to April 10, 2017, the 2% 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.




13 | MGIC Investment Corporation - Q3 2016

The Convertible Senior Notes, Senior Notes and Convertible Junior Subordinated Debentures are obligations of our holding company, MGIC Investment Corporation, and not of its subsidiaries. As of September 30, 2016, we had approximately $329 million in cash and investments at our holding company. The modified duration of the holding company investment portfolio, excluding cash and cash equivalents, was 1.6 years at September 30, 2016.

Interest payments on our debt obligations appear below.
 
 
Nine Months Ended September 30,
(In millions)
 
2016
 
2015
FHLB Advance
 
$
1.7

 
$
—

Senior Notes, interest at 5.375% per annum, due November 2015
 
—

 
1.7

5% Notes
 
6.9

 
8.6

2% Notes
 
7.0

 
5.0

9% Debentures
 
15.9

 
17.5

Total interest payments
 
$
31.5

 
$
32.8

Note 4 – Reinsurance
The reinsurance agreements we have entered into are discussed below. The effect of all of our reinsurance agreements on premiums earned and losses incurred is as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2016
 
2015
 
2016
 
2015
Premiums earned:
 
 
 
 
 
 
 
 
Direct
 
$
270,718

 
$
252,951

 
$
789,671

 
$
738,870

Assumed
 
152

 
285

 
542

 
931

Ceded
 
(33,494
)
 
(14,002
)
 
(100,040
)
 
(69,771
)
Net premiums earned
 
$
237,376

 
$
239,234

 
$
690,173

 
$
670,030

 
 
 
 
 
 
 
 
 
Losses incurred:
 
 
 
 
 
 
 
 
Direct
 
$
69,579

 
$
81,699

 
$
216,874

 
$
265,445

Assumed
 
241

 
425

 
681

 
1,191

Ceded
 
(8,923
)
 
(5,666
)
 
(25,056
)
 
(18,155
)
Net losses incurred
 
$
60,897

 
$
76,458

 
$
192,499

 
$
248,481


Quota share reinsurance
Effective July 1, 2015, we entered into a quota share reinsurance agreement (“2015 QSR Transaction”) and commuted our prior 2013 quota share reinsurance agreement (“2013 QSR Transaction”). The group of unaffiliated reinsurers is the same under our 2015 QSR Transaction as our prior 2013 QSR Transaction and each 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 provides coverage on policies that were in the 2013 QSR Transaction; additional qualifying in force policies as of the agreement effective date which either had no history of defaults, or where a single default had been cured for twelve or more months at the agreement
 
effective date; and all qualifying new insurance written through December 31, 2016. The agreement cedes losses incurred and premiums on or after the effective date through December 31, 2024, at which time the agreement expires. 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, including if we will receive less than 90% of the full credit amount under the private mortgage insurer eligibility requirements (“PMIERs”) of Fannie Mae and Freddie Mac (collectively, the “GSEs”) for the risk ceded in any required calculation period.

The 2015 QSR Transaction increased the amount of our insurance in force covered by reinsurance and will result in an increase in the amount of premiums and losses ceded. A higher level of losses ceded, resulting from an increase in our loss ratio, will reduce our profit commission. 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%.

Following is a summary of our quota share reinsurance agreements, excluding captive agreements, for the three and nine months ended September 30, 2016 and 2015.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2016
 
2015
 
2016
 
2015
2013 QSR Transaction
 
 
 
 
 
 
 
 
Ceded premiums written, net of profit commission
 
n/a

 
$
(69,410
)
 
n/a

 
$
(11,355
)
Ceded premiums earned, net of profit commission
 
n/a

 
(11,568
)
 
n/a

 
35,999

Ceded losses incurred
 
n/a

 
—

 
n/a

 
6,060

Ceding commissions (1)
 
n/a

 
(11,568
)
 
n/a

 
10,235

Profit commission
 
n/a

 
11,568

 
n/a

 
62,525

 
 
 
 
 
 
 
 
 
2015 QSR Transaction (Effective July 1, 2015)
Ceded premiums written, net of profit commission (2)
 
31,707

 
22,626

 
93,334

 
22,626

Ceded premiums earned, net of profit commission (2)
 
31,707

 
22,626

 
93,334

 
22,626

Ceded losses incurred
 
7,432

 
4,236

 
22,015

 
4,236

Ceding commissions (1)
 
12,137

 
9,195

 
35,659

 
9,195

Profit commission
 
28,981

 
23,347

 
84,963

 
23,347

(1) 
Ceding commissions are reported within Other underwriting and operating expenses, net on the consolidated statements of operations.
(2) 
Effective July 1, 2015 premiums are ceded on an earned and received basis as defined in our 2015 QSR Transaction.

Under the terms of the 2015 QSR Transaction, ceded premiums, ceding commission and profit commission are settled net on a quarterly basis. The ceded premium due after deducting the related ceding commission and profit commission is reported within “Other liabilities” on the consolidated balance sheets.



MGIC Investment Corporation - Q3 2016 | 14


The reinsurance recoverable on loss reserves related to our 2015 QSR Transaction was $27 million as of September 30, 2016 and $11 million as of December 31, 2015. The reinsurance recoverable balance is secured by funds on deposit from the reinsurers which are based on the funding requirements of PMIERs that address ceded risk.

Captive reinsurance
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 2015, 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, the GSEs will not approve any future reinsurance or risk sharing transaction with a mortgage enterprise or an affiliate of a mortgage enterprise.

The reinsurance recoverable on loss reserves related to captive agreements was $20 million as of September 30, 2016, which was supported by $94 million of trust assets, while as of December 31, 2015, the reinsurance recoverable on loss reserves related to captive agreements was $34 million, which was supported by $137 million of trust assets. 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.

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. We call such reduction of claims “curtailments.” In 2015 and the first three quarters of 2016, curtailments reduced our average claim paid by approximately 6.7% and 5.4%, respectively.

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 4% of claims received in a quarter have been resolved by rescissions, down from the peak of approximately 28% in the first half of 2009. 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 curtail claims or rescind coverage, 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 would be determined by legal proceedings.

Until a liability associated with settlement discussions or legal proceedings becomes probable and can be reasonably estimated, we consider our claim payment or rescission resolved for financial reporting purposes. 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 such cases, we have recorded our best estimate of our probable loss. If we are not able to implement settlements we consider probable, we intend to defend MGIC vigorously against any related legal proceedings.

In addition to matters for which we have recorded a probable loss, we are involved in other discussions and/or proceedings with insureds with respect to our claims paying practices. Although it is reasonably possible that when these matters are resolved we will not prevail in all cases, we are unable to make a reasonable estimate or range of estimates of the potential liability. We estimate the maximum exposure associated with matters where a loss is reasonably possible to be approximately $281 million, although we believe (but can give no assurance that) we will ultimately resolve these matters for significantly less than this amount. This estimate of our maximum exposure does not include interest or consequential or exemplary damages.

Mortgage insurers, including MGIC, have been involved in litigation and regulatory actions related to alleged violations of the anti-referral fee provisions of the Real Estate Settlement Procedures Act, which is commonly known as RESPA, and the notice provisions of the Fair Credit Reporting Act, which is commonly known as FCRA.

For MGIC, while these proceedings in the aggregate have not resulted in material liability, were there to be future proceedings under these laws, there can be no assurance that the outcome would not have a material adverse effect on us. In addition, various regulators, including the CFPB, state insurance commissioners and state attorneys general may bring other actions seeking various forms of relief in connection with alleged violations of RESPA. The insurance law provisions of many states prohibit paying for the referral of insurance business and provide various mechanisms to enforce this prohibition. While we believe our practices are in conformity with applicable laws and regulations, it is not possible to predict the eventual scope, duration or outcome of any such reviews or investigations nor is it possible to predict their effect on us or the mortgage insurance industry.




15 | MGIC Investment Corporation - Q3 2016

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 2015 was approximately $1 million, but may increase in the future.

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.

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,
(In thousands, except per share data)
 
2016
 
2015
 
2016
 
2015
Basic earnings per share:
 
 
 
 
 
 
 
 
Net income
 
$
56,618

 
$
822,852

 
$
235,030

 
$
1,069,582

Weighted average common shares outstanding
 
349,376

 
339,701

 
343,403

 
339,504

Basic income per share
 
$
0.16

 
$
2.42

 
$
0.68

 
$
3.15

 
 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
Net income
 
$
56,618

 
$
822,852

 
$
235,030

 
$
1,069,582

Interest expense, net of tax (1):
 
 
 
 
 
 
 
 
2% Convertible Senior Notes due 2020
 
1,324

 
1,982

 
5,288

 
5,946

5% Convertible Senior Notes due 2017
 
673

 
3,050

 
5,080

 
9,150

9% Convertible Junior Subordinated Debentures due 2063
 
—

 
5,697

 
—

 
17,090

Diluted income available to common shareholders
 
$
58,615

 
$
833,581

 
$
245,398

 
$
1,101,768

 
 
 
 
 
 
 
 
 
Weighted average shares - basic
 
349,376

 
339,701

 
343,403

 
339,504

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Unvested restricted stock units
 
1,395

 
1,983

 
1,428

 
2,128

2% Convertible Senior Notes due 2020
 
44,488

 
71,917

 
62,707

 
71,917

5% Convertible Senior Notes due 2017
 
10,791

 
25,674

 
13,885

 
25,674

9% Convertible Junior Subordinated Debentures due 2063
 
—

 
28,853

 
—

 
28,853

Weighted average shares - diluted
 
406,050

 
468,128

 
421,423

 
468,076

Diluted income per share
 
$
0.14

 
$
1.78

 
$
0.58

 
$
2.35

 
 
 
 
 
 
 
 
 
Antidilutive securities (in millions)
 
19.0

 
—

 
20.4

 
—

(1) 
Tax effected at a rate of 35%.

 




MGIC Investment Corporation - Q3 2016 | 16

Note 7 – Investments
The amortized cost, gross unrealized gains and losses and fair value of the investment portfolio at September 30, 2016 and December 31, 2015 are shown below.
September 30, 2016
(In thousands)
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses (1)
 
Fair Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies
 
$
41,735

 
$
562

 
$
(41
)
 
$
42,256

Obligations of U.S. states and political subdivisions
 
2,046,199

 
87,592

 
(1,122
)
 
2,132,669

Corporate debt securities
 
1,720,839

 
33,409

 
(4,379
)
 
1,749,869

Asset-backed securities
 
79,032

 
182

 
(32
)
 
79,182

Residential mortgage-backed securities
 
245,876

 
616

 
(3,056
)
 
243,436

Commercial mortgage-backed securities
 
347,630

 
3,563

 
(980
)
 
350,213

Collateralized loan obligations
 
121,146

 
203

 
(349
)
 
121,000

Total debt securities
 
4,602,457

 
126,127

 
(9,959
)
 
4,718,625

Equity securities
 
7,094

 
127

 
(3
)
 
7,218

Total investment portfolio
 
$
4,609,551

 
$
126,254

 
$
(9,962
)
 
$
4,725,843


 


December 31, 2015
(In thousands)
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses (1)
 
Fair Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies
 
$
160,393

 
$
2,133

 
$
(1,942
)
 
$
160,584

Obligations of U.S. states and political subdivisions
 
1,766,407

 
33,410

 
(7,290
)
 
1,792,527

Corporate debt securities
 
2,046,697

 
2,836

 
(44,770
)
 
2,004,763

Asset-backed securities
 
116,764

 
56

 
(203
)
 
116,617

Residential mortgage-backed securities
 
265,879

 
161

 
(8,392
)
 
257,648

Commercial mortgage-backed securities
 
237,304

 
162

 
(3,975
)
 
233,491

Collateralized loan obligations
 
61,345

 
3

 
(1,148
)
 
60,200

Debt securities issued by foreign sovereign governments
 
29,359

 
2,474

 
(102
)
 
31,731

Total debt securities
 
4,684,148

 
41,235

 
(67,822
)
 
4,657,561

Equity securities
 
5,625

 
38

 
(18
)
 
5,645

Total investment portfolio
 
$
4,689,773

 
$
41,273

 
$
(67,840
)
 
$
4,663,206

(1) 
At September 30, 2016 and December 31, 2015, there were no other-than-temporary impairment losses recorded in other comprehensive income.

During the first quarter of 2016, we substantially liquidated our Australian entities and repatriated most assets, including proceeds from the monetization of our Australian investment portfolio. As of September 30, 2016 we held no investments in foreign sovereign governments.
 

As discussed in Note 3 - “Debt” we are required to maintain collateral of at least 102% of the outstanding principal balance of the FHLB Advance. As of September 30, 2016 that collateral is included in our total investment portfolio amount shown above with a total fair value of $167.4 million.




17 | MGIC Investment Corporation - Q3 2016

The amortized cost and fair values of debt securities at September 30, 2016, by contractual maturity, are shown in the following table. 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 in separate categories.
September 30, 2016
 
 
 
 
(In thousands)
 
Amortized Cost
 
Fair Value
Due in one year or less
 
$
350,683

 
$
351,117

Due after one year through five years
 
1,166,094

 
1,184,500

Due after five years through ten years
 
1,148,505

 
1,177,837

Due after ten years
 
1,143,491

 
1,211,340

 
 
$
3,808,773

 
$
3,924,794

 
 
 
 
 
Asset-backed securities
 
79,032

 
79,182

Residential mortgage-backed securities
 
245,876

 
243,436

Commercial mortgage-backed securities
 
347,630

 
350,213

Collateralized loan obligations
 
121,146

 
121,000

Total as of September 30, 2016
 
$
4,602,457

 
$
4,718,625



At September 30, 2016 and December 31, 2015, the investment portfolio had gross unrealized losses of $10.0 million and $67.8 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:
September 30, 2016
 
Less Than 12 Months
 
12 Months or Greater
 
Total
(In thousands)
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
U.S. Treasury securities and obligations of U.S. government corporations and  agencies
 
$
22,655

 
$
(41
)
 
$
—

 
$
—

 
$
22,655

 
$
(41
)
Obligations of U.S. states and political subdivisions
 
185,163

 
(815
)
 
13,942

 
(307
)
 
199,105

 
(1,122
)
Corporate debt securities
 
200,500

 
(2,843
)
 
41,424

 
(1,536
)
 
241,924

 
(4,379
)
Asset-backed securities
 
20

 
(32
)
 
4,102

 
—

 
4,122

 
(32
)
Residential mortgage-backed securities
 
3,204

 
(7
)
 
186,494

 
(3,049
)
 
189,698

 
(3,056
)
Commercial mortgage-backed securities
 
84,048

 
(632
)
 
38,992

 
(348
)
 
123,040

 
(980
)
Collateralized loan obligations
 
18,868

 
(186
)
 
52,570

 
(163
)
 
71,438

 
(349
)
Equity securities
 
32

 
—

 
144

 
(3
)
 
176

 
(3
)
Total
 
$
514,490

 
$
(4,556
)
 
$
337,668

 
$
(5,406
)
 
$
852,158

 
$
(9,962
)


December 31, 2015
 
Less Than 12 Months
 
12 Months or Greater
 
Total
(In thousands)
 
Fair Value
 
Unrealized
 Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
 Losses
U.S. Treasury securities and obligations of U.S. government corporations and agencies
 
$
60,548

 
$
(1,467
)
 
$
1,923

 
$
(475
)
 
$
62,471

 
$
(1,942
)
Obligations of U.S. states and political subdivisions
 
417,615

 
(6,404
)
 
37,014

 
(886
)
 
454,629

 
(7,290
)
Corporate debt securities
 
1,470,628

 
(38,519
)
 
114,982

 
(6,251
)
 
1,585,610

 
(44,770
)
Asset-backed securities
 
86,604

 
(173
)
 
5,546

 
(30
)
 
92,150

 
(203
)
Residential mortgage-backed securities
 
35,064

 
(312
)
 
209,882

 
(8,080
)
 
244,946

 
(8,392
)
Commercial mortgage-backed securities
 
134,488

 
(2,361
)
 
69,927

 
(1,614
)
 
204,415

 
(3,975
)
Collateralized loan obligations
 
—

 
—

 
51,750

 
(1,148
)
 
51,750

 
(1,148
)
Debt securities issued by foreign sovereign governments
 
4,463

 
(102
)
 
—

 
—

 
4,463

 
(102
)
Equity securities
 
355

 
(8
)
 
171

 
(10
)
 
526

 
(18
)
Total
 
$
2,209,765

 
$
(49,346
)
 
$
491,195

 
$
(18,494
)
 
$
2,700,960

 
$
(67,840
)


MGIC Investment Corporation - Q3 2016 | 18

The unrealized losses in all categories of our investments at September 30, 2016 and December 31, 2015 were primarily caused by the difference in interest rates at each respective period, compared to interest rates at the time of purchase. There were 268 and 303 securities in an unrealized loss position at September 30, 2016 and December 31, 2015, respectively.

During each of the three and nine months ended September 30, 2016 and 2015 there were no other-than-temporary impairments (“OTTI”) recognized.   The net realized investment gains on the investment portfolio are as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In thousands)
 
2016
 
2015
 
2016
 
2015
Realized investment gains (losses) on investments:
 
 
 
 
 
 
 
 
Fixed maturities
 
$
1,511

 
$
638

 
$
5,397

 
$
27,123

Equity securities
 
3,581

 
2

 
3,587

 
10

Net realized investment gains
 
$
5,092

 
$
640

 
$
8,984

 
$
27,133

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(In thousands)
 
2016
 
2015
 
2016
 
2015
Realized investment gains (losses) on investments:
 
 
 
 
 
 
 
 
Gains on sales
 
$
6,168

 
$
720