MGIC INVESTMENT CORP - FORM 10-Q

MGIC INVESTMENT CORP - FORM 10-Q - May 5, 2017

Attached files

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - MGIC INVESTMENT CORP	exhibit311q1_2017.htm
EX-99.27 - EXHIBIT 99.27 - MGIC INVESTMENT CORP	exhibit9927.htm
EX-99 - EXHIBIT 99 - MGIC INVESTMENT CORP	exhibit99q1_2017.htm
EX-32 - EXHIBIT 32 - MGIC INVESTMENT CORP	exhibit32q1_2017.htm
EX-31.2 - EXHIBIT 31.2 - MGIC INVESTMENT CORP	exhibit312q1_2017.htm
EX-12 - EXHIBIT 12 - MGIC INVESTMENT CORP	exhibit12q1_2017.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	March 31, 2017
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

(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,” “smaller reporting company,” and “emerging growth 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)
Emerging growth company o	If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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



YES 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.

Table of contents

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2017



TABLE OF CONTENTS
		Page
PART I — FINANCIAL INFORMATION
Item 1	Financial Statements:
	Consolidated Balance Sheets (Unaudited) - March 31, 2017 and December 31, 2016	7
	Consolidated Statements of Operations (Unaudited) - Three Months Ended March 31, 2017 and 2016	8
	Consolidated Statements of Comprehensive Income (Unaudited) - Three Months Ended March 31, 2017 and 2016	9
	Consolidated Statements of Shareholders’ Equity (Unaudited) - Three Months Ended March 31, 2017 and 2016	10
	Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended March 31, 2017 and 2016	11
	Notes to Consolidated Financial Statements (Unaudited)	12
	Note 1 - Nature of Business and Basis of Presentation	12
	Note 2 - New Accounting Pronouncements	12
	Note 3 - Debt	14
	Note 4 - Reinsurance	15
	Note 5 - Litigation and Contingencies	16
	Note 6 - Earnings Per Share	17
	Note 7 - Investments	18
	Note 8 - Fair Value Measurements	20
	Note 9 - Other Comprehensive Income	24
	Note 10 - Benefit Plans	24
	Note 11 - Income Taxes	24
	Note 12 - Loss Reserves	25
	Note 13 - Shareholders’ Equity	28
	Note 14 - Stock-Based Compensation	28
	Note 15 - Statutory Information	28

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3	Quantitative and Qualitative Disclosures about Market Risk	53
Item 4	Controls and Procedures	53

PART II — OTHER INFORMATION
Item 1A	Risk Factors	54
Item 6	Exhibits	56

SIGNATURES		57
INDEX TO EXHIBITS		58

Table of contents

GLOSSARY OF TERMS AND ACRONYMS

/ A

ARMs

Adjustable rate mortgages

ABS

Asset-backed securities

ASC

Accounting Standards Codification

Available Assets

Assets, as designated under the PMIERs, that are readily available to pay claims, and include the most liquid investments

/ B

Book or book year

A group of loans insured in a particular calendar year

BPMI

Borrower-paid mortgage insurance

/ C

CFPB

Consumer Financial Protection Bureau

CLO

Collateralized loan obligations

CMBS

Commercial mortgage-backed securities

/ D

DAC

Deferred insurance policy acquisition costs

/ F

Fannie Mae

Federal National Mortgage Association

FCRA

Fair Credit Reporting Act

FHA

Federal Housing Administration

FHFA

Federal Housing Finance Agency

FHLB

Federal Home Loan Bank of Chicago, of which MGIC is a member

FICO score

A measure of consumer credit risk provided by credit bureaus, typically produced from statistical models by Fair Isaac Corporation utilizing data collected by the credit bureaus

Freddie Mac

Federal Home Loan Mortgage Corporation

/ G

GAAP

Generally Accepted Accounting Principles in the United States

GSEs

Collectively, Fannie Mae and Freddie Mac

/ H

HAMP

Home Affordable Modification Program

HARP

Home Affordable Refinance Program

HOPA

Homeowners Protection Act

/ I

IBNR

Losses incurred but not reported

IIF

Insurance in force, which for loans insured by us, is equal to the unpaid principal balance, as reported to us

/ J

JCT

Joint Committee on Taxation

/ L

LAE

Loss adjustment expenses

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Legacy book

Mortgage insurance policies written prior to 2009

Loan-to-value ("LTV") ratio

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

Long-term debt:

5% Notes

5% Convertible Senior Notes due May 1, 2017, with interest payable semi-annually on May 1 and November 1 of each year

2% Notes

2% Convertible Senior Notes due on April 1, 2020, with interest payable semi-annually on April 1 and October 1 of each year

5.75% Notes

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

9% Debentures

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

FHLB Advance or the Advance

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

Loss ratio

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

Low down payment loans or mortgages

Loans with less than 20% down payments

LPMI

Lender-paid mortgage insurance

/ M

MBS

Mortgage-backed securities

MD&A

Management's discussion and analysis

MGIC

Mortgage Guaranty Insurance Corporation, a subsidiary of MGIC Investment Corporation

MIC

MGIC Indemnity Corporation, a subsidiary of MGIC

Minimum Required Assets

The minimum amount of Available Assets that must be held under the PMIERs, which is generally the greater of $400 million or an amount based upon a percentage of RIF weighted by certain risk attributes

MPP

Minimum Policyholder Position, as required under certain state requirements. The “policyholder position” of a mortgage insurer is its net worth or surplus, contingency reserve and a portion of the reserves for unearned premiums

/ N

N/A

Not applicable for the period presented

NAIC

The National Association of Insurance Commissioners

NIW

New Insurance Written

N/M

Data, or calculation, deemed not meaningful for the period presented

NPE

The amount of premiums earned, net of premiums assumed and ceded under reinsurance agreements

NPL

Non-performing loan, which is a delinquent loan, at any stage in its delinquency

NPW

The amount of premiums written, net of premiums assumed and ceded under reinsurance agreements

/ O

OCI

Office of the Commissioner of Insurance of the State of Wisconsin

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/ P

Persistency

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

PMI

Private Mortgage Insurance (as an industry or product type)

PMIERs

Private Mortgage Insurer Eligibility Requirements issued by the GSEs

Premium Yield

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

/ Q

QSR Transaction

Quota share reinsurance transaction

/ R

REMIC

Real Estate Mortgage Investment Conduit

RESPA

Real Estate Settlement Procedures Act

RIF

Risk in force, which for an individual loan insured by us, is equal to the unpaid loan principal balance, as reported to us, multiplied by the insurance coverage percentage. RIF is sometimes referred to as exposure

Risk-to-capital

The ratio of RIF, net of reinsurance and exposure on policies currently in default and for which loss reserves have been established, to the level of statutory capital

RMBS

Residential mortgage-backed securities

/ U

Underwriting Expense ratio

The ratio, expressed as a percentage, of the underwriting and operating expenses, net and amortization of DAC of our combined insurance operations (which excludes underwriting and operating expenses of our non-insurance operations) to NPW

Underwriting profit

NPE minus incurred losses

/ V

U.S. Department of Veterans Affairs

MGIC Investment Corporation - Q1 2017 | 6

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)



(In thousands)	Note	March 31, 2017			December 31, 2016
ASSETS
Investment portfolio:	7 / 8
Securities, available-for-sale, at fair value:
Fixed income (amortized cost, 2017 - $4,655,457; 2016 - $4,717,211)		$	4,642,119		$	4,685,222
Equity securities		7,162			7,128
Total investment portfolio		4,649,281			4,692,350
Cash and cash equivalents		427,074			155,410
Accrued investment income		43,786			44,073
Reinsurance recoverable on loss reserves	4	46,658			50,493
Reinsurance recoverable on paid losses		5,129			4,964
Premiums receivable		51,907			52,392
Home office and equipment, net		38,314			36,088
Deferred insurance policy acquisition costs		18,236			17,759
Deferred income taxes, net	11	552,469			607,655
Other assets		71,034			73,345
Total assets		$	5,903,888		$	5,734,529

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Loss reserves	12	$	1,335,042		$	1,438,813
Unearned premiums		337,322			329,737
Revolving credit facility	3	150,000			—
Federal Home Loan Bank advance	3	155,000			155,000
Senior notes	3	417,695			417,406
Convertible senior notes	3	349,848			349,461
Convertible junior subordinated debentures	3	256,872			256,872
Other liabilities		254,578			238,398
Total liabilities		3,256,357			3,185,687
Contingencies	5
Shareholders’ equity:	13
Common stock (one dollar par value, shares authorized 1,000,000; shares issued 2017 - 360,171; 2016 - 359,400; shares outstanding 2017 - 341,434; 2016 - 340,663)		360,171			359,400
Paid-in capital		1,778,305			1,782,337
Treasury stock at cost (shares 2017 and 2016 - 18,737)		(150,359		)	(150,359		)
Accumulated other comprehensive loss, net of tax		(63,101		)	(75,100		)
Retained earnings		722,515			632,564
Total shareholders’ equity		2,647,531			2,548,842
Total liabilities and shareholders’ equity		$	5,903,888		$	5,734,529

See accompanying notes to consolidated financial statements.

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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



		Three Months Ended March 31,
(In thousands, except per share data)	Note	2017			2016
Revenues:
Premiums written:
Direct		$	265,823		$	265,291
Assumed		1,288			208
Ceded	4	(30,409		)	(34,218		)
Net premiums written		236,702			231,281
Increase in unearned premiums, net		(7,599		)	(9,940		)
Net premiums earned		229,103			221,341
Investment income, net of expenses		29,477			27,809
Net realized investment (losses) gains		(122		)	3,056
Other revenue		2,422			6,373
Total revenues		260,880			258,579

Losses and expenses:
Losses incurred, net	12	27,619			85,012
Amortization of deferred policy acquisition costs		2,230			1,961
Other underwriting and operating expenses, net		40,765			39,777
Interest expense		16,309			14,701
Loss on debt extinguishment		—			13,440
Total losses and expenses		86,923			154,891
Income before tax		173,957			103,688
Provision for income taxes	11	84,159			34,497
Net income		$	89,798		$	69,191

Earnings per share:
Basic	6	$	0.26		$	0.20
Diluted	6	$	0.24		$	0.17

Weighted average common shares outstanding - basic	6	341,009			340,144
Weighted average common shares outstanding - diluted	6	402,175			431,365

See accompanying notes to consolidated financial statements.

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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



		Three Months Ended March 31,
(In thousands)	Note	2017			2016
Net income		$	89,798		$	69,191
Other comprehensive (loss) income, net of tax:	9
Change in unrealized investment gains and losses	7	12,121			50,827
Benefit plan adjustments		(153		)	(308		)
Foreign currency translation adjustment		31			(975		)
Other comprehensive income, net of tax		11,999			49,544
Comprehensive income		$	101,797		$	118,735

See accompanying notes to consolidated financial statements

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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)



		Three Months Ended March 31,
(In thousands)	Note	2017			2016
Common stock
Balance, beginning of period		$	359,400		$	340,097
Net common stock issued under share-based compensation plans		771			979
Balance, end of period		360,171			341,076

Paid-in capital
Balance, beginning of period		1,782,337			1,670,238
Net common stock issued under share-based compensation plans		(7,493		)	(5,949		)
Tax benefit from share-based compensation		—			115
Equity compensation		3,461			3,129
Reacquisition of convertible junior subordinated debentures-equity component		—			(6,337		)
Balance, end of period		1,778,305			1,661,196

Treasury stock
Balance, beginning of period		(150,359		)	(3,362		)
Balance, end of period		(150,359		)	(3,362		)

Accumulated other comprehensive loss
Balance, beginning of period		(75,100		)	(60,880		)
Other comprehensive income, net of tax	9	11,999			49,544
Balance, end of period		(63,101		)	(11,336		)

Retained earnings
Balance, beginning of period	2 / 13	632,717			290,047
Net income		89,798			69,191
Balance, end of period		722,515			359,238

Total shareholders’ equity		$	2,647,531		$	2,346,812

See accompanying notes to consolidated financial statements.

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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Three Months Ended March 31,
(In thousands)	2017			2016
Cash flows from operating activities:
Net income	$	89,798		$	69,191
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	17,079			14,109
Deferred tax expense	48,932			33,270
Net realized investment losses (gains)	122			(3,056		)
Loss on debt extinguishment	—			13,440
Change in certain assets and liabilities:
Accrued investment income	287			1,205
Prepaid insurance premium	15			34
Reinsurance recoverable on loss reserves	3,835			3,368
Reinsurance recoverable on paid losses	(165		)	(536		)
Premium receivable	485			1,284
Deferred insurance policy acquisition costs	(477		)	(705		)
Profit commission receivable	(3,395		)	760
Loss reserves	(103,771		)	(140,013		)
Unearned premiums	7,585			9,906
Return premium accrual	(4,800		)	(4,850		)
Income taxes payable - current	34,654			289
Other, net	(12,715		)	5,840
Net cash provided by operating activities	77,469			3,536

Cash flows from investing activities:
Purchases of investments:
Fixed income	(187,077		)	(288,273		)
Equity securities	(19		)	(3,109		)
Proceeds from sales of fixed income	33,980			315,927
Proceeds from maturity of fixed income	199,234			139,863
Proceeds from sale of equity securities	—			2,525
Net increase in payable for securities	10,336			44,289
Additions to property and equipment	(4,014		)	(1,916		)
Net cash provided by investing activities	52,440			209,306

Cash flows from financing activities:
Proceeds from revolving credit facility	150,000			—
Proceeds from issuance of long-term debt	—			155,000
Purchase of convertible senior notes	—			(134,105		)
Payment of original issue discount - convertible senior notes	—			(4,148		)
Purchase of convertible junior subordinated debentures	—			(100,860		)
Payment of original issue discount - convertible junior subordinated debentures	—			(41,540		)
Cash portion of loss on debt extinguishment	—			(13,440		)
Payment of debt issuance costs	(1,523		)	—
Payment of withholding taxes related to share-based compensation net share settlement	(6,722		)	(4,971		)
Net cash provided by (used in) financing activities	141,755			(144,064		)

Net increase in cash and cash equivalents	271,664			68,778
Cash and cash equivalents at beginning of period	155,410			181,120
Cash and cash equivalents at end of period	$	427,074		$	249,898

See accompanying notes to consolidated financial statements.

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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(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 (“GSEs”) 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, 2016 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, 2017.

Substantially all of our insurance written since 2008 has been for loans purchased by the GSEs. We operate under the Private Mortgage Insurer Eligibility Requirements ("PMIERs") of the GSEs that became effective December 31, 2015, and were most recently revised in December 2016. The financial requirements of the PMIERs require a mortgage insurer’s "Available Assets" (generally only the most liquid assets of an insurer) to equal or exceed its "Minimum Required Assets" (which are based on an insurer's book 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, as of March 31, 2017, MGIC’s Available Assets are in excess of its Minimum Required Assets; and MGIC is in compliance with the financial requirements of the PMIERs and eligible to insure loans purchased by the GSEs.

Reclassifications

Certain reclassifications to 2016 amounts have been made in the accompanying financial statements to conform to the 2017 presentation.

Subsequent events

We have considered subsequent events through the date of this filing. See Note 3 - “Debt” and Note 13 - “Shareholders’ Equity” for information regarding the conversion of our 2% Notes into shares of our common stock, and partial cash redemption, in April 2017.

Note 2. New Accounting Pronouncements

Adopted Accounting Standards

Improvements to Employee Share-Based Compensation Accounting

In March 2016, the Financial Accounting Standards Board (“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 previous guidance required excess tax benefits to be recognized in paid-in capital. 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 tax withholding is to be applied on a modified retrospective approach. This updated guidance became effective January 1, 2017. We have adopted this guidance for the period ending March 31, 2017 and as a result of the adoption:


•	We recognized discrete tax benefits of $1.5 million in the provision for income taxes on our statement of operations for the three months ended March 31, 2017

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related to excess tax benefits upon vesting of stock-based awards during the period.


•	We recognized a cumulative effect adjustment related to the recognition of a deferred tax asset related to suspended tax benefits from vesting transactions occurring in prior years and from the elimination of our forfeiture estimate on stock-based awards, which was previously applied only to awards with service conditions.


•	Prior to adoption, cash flows related to excess tax benefits from share-based compensation were included in financing activities. We have reclassified excess tax benefits related to share-based compensation for the three months ended March 31, 2016 to operating activities.


•	Prior to adoption, cash flows related to employee taxes paid for withheld shares were included in operating activities. We have reclassified employee taxes paid for withheld shares for the three months ended March 31, 2016 to financing activities.

Prospective Accounting Standards

Premium Amortization on Purchased Callable Debt Securities

In March 2017, the FASB issued updated guidance to amend the amortization period for certain purchased callable debt securities held at a premium shortening the amortization period to the earliest call date. Under current GAAP, there is diversity in practice in the amortization period for premiums of callable debt securities and in how the potential for exercise of a call is factored into current impairment assessments. This updated guidance aligns with how callable debt securities, in the United States, are generally quoted, priced, and traded assuming a model that incorporates consideration of calls (also referred to as “yield-to-worst” pricing). The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. 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. We currently account for premium amortization on our purchased callable debt securities on a yield-to-worst basis, which generally aligns with the earliest call date.

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

In March 2017, the FASB issued updated guidance that improves the reporting of net benefit cost in the financial statements. The updated guidance requires that an employer report the service cost component in the same financial statement caption as other compensation costs arising from services rendered by employees during the period. The other components of net benefit cost are

required to be presented in the statement of operations separately from the service cost component and outside a subtotal of income from operations, if one is presented. Current guidance does not prescribe where the amount of net benefit cost should be presented in an employer’s statement of operations and does not require entities to disclose by line item the amount of net benefit cost that is included in the statement of operations. The updated guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. 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 statement of operations or financial statement disclosures.

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.

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.

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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.

Note 3. Debt

2017 debt transactions

2% Notes

On March 21, 2017, we issued an irrevocable notice of redemption in respect of our outstanding 2% Notes, with a redemption date of April 21, 2017. As of March 31, 2017, we had outstanding approximately $207.6 million aggregate principal amount of our 2% Notes.

Subsequent event

Subsequent to our notice of redemption, in April, holders of approximately $202.5 million of the outstanding principal exercised their rights to convert their notes into shares of our common stock. The remaining $5.1 million of outstanding principal was redeemed for cash. The conversions of the 2% Notes at a rate of 143.8332 shares per $1,000 principal amount resulted in the issuance of approximately 29.1 million shares of our common stock in April. The conversions and cash redemption eliminated our debt obligation. No gain or loss will be recognized from the conversions as the outstanding debt issuance costs associated with the conversions are included in the debt carrying value, which is credited to shareholders’ equity at the time of conversion.

Credit Facility

On March 21, 2017, we entered into a Credit Agreement with various lenders which provides for a $175 million unsecured revolving credit facility maturing on March 21, 2020. Revolving credit borrowings bear interest at a floating rate, which will be, at our option, either a eurocurrency rate or a base rate, in each case plus an applicable margin. The applicable margins are subject to adjustment based on our senior unsecured long-term debt rating, or if we do not have such a rating, our corporate or issuer rating. Amounts under the facility may be borrowed, repaid and reborrowed from time to time until the maturity of the revolving credit facility. Voluntary

prepayments and commitment reductions are permitted at any time without fee subject to a minimum dollar requirement and, for outstanding eurocurrency loans, customary breakage costs.

We are required under the Credit Agreement to pay commitment fees on the average daily amount of the unused revolving commitments of the lenders, and an annual administrative fee to the Administrative Agent. The Credit Agreement contains affirmative, negative and financial covenants which are customary for financings of this type, including, among other things, limits on the creation of liens, limits on the incurrence of indebtedness, restrictions on dispositions, maximum debt-to-capital ratio, minimum consolidated stockholders' equity, minimum policyholder's position of MGIC, and compliance with the financial requirements of the PMIERs. The Credit Agreement includes customary events of default for facilities of this type (with customary grace periods, as applicable) and provides that, upon the occurrence of an event of default, payments of all outstanding loans may be accelerated and/or the lenders' commitments may be terminated. Upon the occurrence of certain insolvency or bankruptcy related events of default, all amounts payable under the Credit Agreements shall automatically become immediately due and payable, and the lenders' commitments will automatically terminate. In addition, upon the occurrence of certain insolvency or bankruptcy related events of default, or the failure to pay interest, principal or fees, the interest rates on all outstanding obligations will be increased.

As of March 31, 2017, we borrowed $150 million under the revolving credit facility, to fund a portion of the redemption price of the 2% Notes if holders did not elect to convert their 2% Notes. In April, we repaid the amount borrowed under the revolving credit facility because most holders elected to convert their notes. Costs incurred to enter into the Credit Agreement have been deferred and recorded as Other assets and will be amortized over the term of the Credit Agreement.

5% Notes

As of March 31, 2017, we had outstanding $145.0 million aggregate principal amount of our 5% Notes due in 2017 (“5% Notes”). These notes matured on May 1, 2017 and the principal and accrued interest were settled with cash at our holding company.

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Debt obligations

The par value of our long-term debt obligations and their aggregate carrying values and borrowings under our revolving credit facility as of March 31, 2017 and December 31, 2016 were as follows.



(In millions)	March 31, 2017			December 31, 2016
FHLB Advance	$	155.0		$	155.0
5% Notes	145.0			145.0
2% Notes	207.6			207.6
5.75% Notes	425.0			425.0
9% Debentures⁽¹⁾	256.9			256.9
Long-term debt, par value	1,189.5			1,189.5
Less: Debt issuance costs	(10.1		)	(10.8		)
Long-term debt, carrying value	1,179.4			1,178.7
Revolving credit facility	150.0			n/a
Total debt, carrying value	$	1,329.4		$	1,178.7

⁽¹⁾

Convertible at any time prior to maturity at the holder’s option, at an initial conversion rate, which is subject to adjustment, of 74.0741 shares per $1,000 principal amount, representing an initial conversion price of approximately $13.50 per share. 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.

The 5.75% Senior Notes due 2023 (“5.75% Notes”) and 9% Convertible Junior Subordinated Debentures due in 2063 (“9% Debentures”) that remain outstanding as of the date of this filing are obligations of our holding company, MGIC Investment Corporation, and not of its subsidiaries. The Federal Home Loan Bank Advance (the “FHLB Advance”) is an obligation of MGIC.

Interest payments on our debt obligations appear below.



	Three Months Ended March 31,
(In millions)	2017		2016
FHLB Advance	$	0.7	$	0.2
5% Notes	—		1.8
5.75% Notes	12.9		—
9% Debentures	—		4.3
Total interest payments	$	13.6	$	6.3

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 March 31,
(In thousands)	2017			2016
Premiums earned:
Direct	$	259,428		$	255,387
Assumed	98			208
Ceded	(30,423		)	(34,254		)
Net premiums earned	$	229,103		$	221,341

Losses incurred:
Direct	$	32,413		$	92,432
Assumed	105			101
Ceded	(4,899		)	(7,521		)
Net losses incurred	$	27,619		$	85,012

Quota share reinsurance

In March 2017, we entered into a quota share reinsurance agreement (“2017 QSR Transaction”) with an effective date of January 1, 2017 with a group of unaffiliated reinsurers, each with a financial strength rating of A- or better by Standard and Poor’s, A.M. Best or both. We utilize quota share reinsurance to manage our exposure to losses resulting from our mortgage guaranty insurance policies and to provide reinsurance capital credit under the PMIERs. Our 2017 QSR Transaction provides coverage on new business written January 1, 2017 through December 29, 2017 that meets certain eligibility requirements. Under the agreement we cede losses incurred and premiums on or after the effective date through December 31, 2028, at which time the agreement expires. Early termination of the agreement can be elected by us effective December 31, 2021 for a fee, or under specified scenarios for no fee upon prior written notice including if we will receive less than 90% of the full credit amount under the PMIERs for the risk ceded in any required calculation period.

Our 2015 quota share reinsurance agreement (“2015 QSR Transaction”), which became effective on July 1, 2015, covers eligible risk in force written before 2017. The group of unaffiliated reinsurers under our 2015 QSR Transaction 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 cedes losses incurred and premiums 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 PMIERs for the risk ceded in any required calculation period.

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The structure of both the 2017 QSR Transaction and 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 QSR Transactions, 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 discussed below, for the three months ended March 31, 2017 and 2016.



	Three Months Ended March 31,
(In thousands)	2017	2016
Ceded premiums written and earned, net of profit commission ⁽¹⁾	28,895	31,666
Ceded losses incurred	4,687	8,513
Ceding commissions ⁽²⁾	12,003	11,576
Profit commission	31,117	26,215


⁽¹⁾	Under our QSR Transactions, premiums are ceded on an earned and received basis as defined in the agreements.


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

Under the terms of QSR Transactions, 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.

The reinsurance recoverable on loss reserves related to our QSR Transactions was $32.7 million as of March 31, 2017 and $31.8 million as of December 31, 2016. 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 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 $14 million as of March 31, 2017, which was supported by $86 million of trust assets, while as of December 31, 2016, the reinsurance recoverable on loss reserves related to captive agreements was $19 million, which was supported by $91 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 an insurance claim, we review the loan and servicing files to determine the appropriateness of the claim amount. When reviewing the files, we may determine that we have the right to rescind coverage on the loan. In our SEC reports, we refer to insurance rescissions and denials of claims collectively as “rescissions” and variations of that term. In addition, 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 recent quarters, an immaterial percentage of claims received in a quarter have been resolved by rescissions. In each of 2016 and the first quarter of 2017, curtailments reduced our average claim paid by approximately 5.5%.

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

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

Under ASC 450-20, 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 and do not accrue an estimated loss. Where we have determined that a loss is probable and can be reasonably estimated, we have recorded our best estimate of our probable loss. 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

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estimates of the potential liability. We estimate the maximum exposure associated with matters where a loss is reasonably possible to be approximately $306 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. While these proceedings in the aggregate have not resulted in material liability for MGIC, there can be no assurance that the outcome of future proceedings, if any, under these laws would not have a material adverse affect 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.

Through a non-insurance subsidiary, we utilize our underwriting skills to provide an outsourced underwriting service to our customers known as contract underwriting. As part of the contract underwriting activities, that subsidiary is responsible for the quality of the underwriting decisions in accordance with the terms of the contract underwriting agreements with customers. That subsidiary may be required to provide certain remedies to its customers if certain standards relating to the quality of our underwriting work are not met, and we have an established reserve for such future obligations. Claims for remedies may be made a number of years after the underwriting work was performed. The underwriting remedy expense for 2016 and the first quarter of 2017 was immaterial to our consolidated financial statements.

In addition to the matters described above, we are involved in other legal proceedings in the ordinary course of business. In our opinion, based on the facts known at this time, the ultimate resolution of these ordinary course legal proceedings will not have a material adverse effect on our financial position or 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 shares of common stock outstanding. Diluted EPS includes the components of basic EPS and also gives effect to dilutive common stock equivalents. We calculate diluted EPS using the treasury stock method and if-converted method. Under the if-converted method, diluted EPS reflects the potential dilution that could occur if our convertible debt instruments result in the issuance of common stock. The determination of potentially issuable shares does not consider the satisfaction of the conversion requirements and the shares are included in the determination of diluted EPS as of the beginning of the period, if dilutive. As of March 31, 2017, we had several debt issuances that could result in contingently issuable shares and consider each potential issuance of shares separately to reflect the maximum potential dilution. Nonetheless, our dilutive common stock equivalents may not reflect all of the contingently issuable shares that could be required to be issued upon any debt conversion. See Note 3 - “Debt’ for a discussion of subsequent events affecting our debt issuances that could result in contingently issuable shares. For purposes of calculating basic and diluted EPS, vested restricted stock and restricted stock units ("RSUs") are considered outstanding.

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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 March 31,
(In thousands, except per share data)	2017		2016
Basic earnings per share:
Net income	$	89,798	$	69,191
Weighted average common shares outstanding	341,009		340,144
Basic income per share	$	0.26	$	0.20

Diluted earnings per share:
Net income	$	89,798	$	69,191
Interest expense, net of tax ⁽¹⁾:
2% Notes	823		1,982
5% Notes	1,282		2,678
9% Debentures	3,757		—
Diluted income available to common shareholders	$	95,660	$	73,851

Weighted average shares - basic	341,009		340,144
Effect of dilutive securities:
Unvested RSUs	1,488		1,679
2% Notes	29,859		71,917
5% Notes	10,791		17,625
9% Debentures	19,028		—
Weighted average shares - diluted	402,175		431,365
Diluted income per share	$	0.24	$	0.17

Antidilutive securities (in millions)	—		23.3


⁽¹⁾	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 March 31, 2017 and December 31, 2016 are shown below.



March 31, 2017
(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	$	61,035	$	387	$	(604	)	$	60,818
Obligations of U.S. states and political subdivisions	2,161,765		25,893		(19,208		)	2,168,450
Corporate debt securities	1,753,470		7,594		(13,724		)	1,747,340
ABS	37,107		29		(19		)	37,117
RMBS	220,739		93		(7,923		)	212,909
CMBS	300,185		1,038		(7,106		)	294,117
CLOs	121,156		380		(168		)	121,368
Total debt securities	4,655,457		35,414		(48,752		)	4,642,119
Equity securities	7,163		20		(21		)	7,162
Total investment portfolio	$	4,662,620	$	35,434	$	(48,773	)	$	4,649,281



December 31, 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	$	73,847	$	407	$	(724	)	$	73,530
Obligations of U.S. states and political subdivisions	2,147,458		20,983		(25,425		)	2,143,016
Corporate debt securities	1,756,461		6,059		(18,610		)	1,743,910
ABS	59,519		74		(28		)	59,565
RMBS	231,733		102		(7,626		)	224,209
CMBS	327,042		769		(7,994		)	319,817
CLOs	121,151		226		(202		)	121,175
Total debt securities	4,717,211		28,620		(60,609		)	4,685,222
Equity securities	7,144		8		(24		)	7,128
Total investment portfolio	$	4,724,355	$	28,628	$	(60,633	)	$	4,692,350


⁽¹⁾	At March 31, 2017 and December 31, 2016, there were no other-than-temporary impairment losses recorded in other comprehensive income.

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The FHLB Advance is secured by eligible collateral whose fair value must be maintained at 102% of the outstanding principal balance. As of March 31, 2017 that collateral is included in our total investment portfolio amount shown above with a total fair value of $165.0 million.

The amortized cost and fair values of debt securities at March 31, 2017, 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.



March 31, 2017
(In thousands)	Amortized Cost		Fair Value
Due in one year or less	$	338,124	$	338,309
Due after one year through five years	1,318,577		1,323,558
Due after five years through ten years	1,091,184		1,082,035
Due after ten years	1,228,385		1,232,706
	$	3,976,270	$	3,976,608

ABS	37,107		37,117
RMBS	220,739		212,909
CMBS	300,185		294,117
CLOs	121,156		121,368
Total as of March 31, 2017	$	4,655,457	$	4,642,119

At March 31, 2017 and December 31, 2016, the investment portfolio had gross unrealized losses of $48.8 million and $60.6 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:



March 31, 2017	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	$	51,602	$	(604	)	$	—	$	—		$	51,602	$	(604	)
Obligations of U.S. states and political subdivisions	830,978		(18,391		)	22,930		(817		)	853,908		(19,208		)
Corporate debt securities	802,288		(12,157		)	34,552		(1,567		)	836,840		(13,724		)
ABS	2,998		(19		)	—		—			2,998		(19		)
RMBS	46,425		(985		)	162,729		(6,938		)	209,154		(7,923		)
CMBS	165,771		(6,994		)	16,453		(112		)	182,224		(7,106		)
CLOs	7,276		(168		)	—		—			7,276		(168		)
Equity securities	527		(12		)	138		(9		)	665		(21		)
Total	$	1,907,865	$	(39,330	)	$	236,802	$	(9,443	)	$	2,144,667	$	(48,773	)

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December 31, 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	$	48,642	$	(724	)	$	—	$	—		$	48,642	$	(724	)
Obligations of U.S. states and political subdivisions	1,136,676		(24,918		)	13,681		(507		)	1,150,357		(25,425		)
Corporate debt securities	915,777		(16,771		)	35,769		(1,839		)	951,546		(18,610		)
ABS	3,366		(28		)	656		—			4,022		(28		)
RMBS	46,493		(857		)	171,326		(6,769		)	217,819		(7,626		)
CMBS	205,545		(7,529		)	38,587		(465		)	244,132		(7,994		)
CLOs	13,278		(73		)	34,760		(129		)	48,038		(202		)
Equity securities	568		(15		)	137		(9		)	705		(24		)
Total	$	2,370,345	$	(50,915	)	$	294,916	$	(9,718	)	$	2,665,261	$	(60,633	)

The unrealized losses in all categories of our investments at March 31, 2017 and December 31, 2016 were primarily caused by the difference in interest rates at each respective period, compared to interest rates at the time of purchase. There were 495 and 607 securities in an unrealized loss position at March 31, 2017 and December 31, 2016, respectively.

During each of the three months ended March 31, 2017 and 2016 there were no other-than-temporary impairments (“OTTI”) recognized. The net realized investment (losses) gains on the investment portfolio are as follows:



	Three Months Ended March 31,
(In thousands)	2017			2016
Realized investment (losses) gains on investments:
Fixed maturities	$	(125	)	$	3,054
Equity securities	3			2
Net realized investment (losses) gains	$	(122	)	$	3,056



	Three Months Ended March 31,
(In thousands)	2017			2016
Realized investment (losses) gains on investments:
Gains on sales	$	185		$	4,104
Losses on sales	(307		)	(1,048		)
Net realized investment (losses) gains	$	(122	)	$	3,056

Note 8. Fair Value Measurements

The authoritative guidance around fair value established a framework for measuring fair value. Fair value is disclosed using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value and includes Levels 1, 2, and 3. 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. This model combines all inputs to arrive at a value assigned to each security. Quality controls are performed by the independent pricing sources throughout this process, which include reviewing tolerance reports, trading information, data changes, and directional moves compared to market moves. In addition, on a quarterly basis, we perform quality controls over values received from the pricing sources which also include reviewing tolerance reports, trading information, data changes, and directional moves compared to market

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moves. We have not made any adjustments to the prices obtained from the independent pricing sources.

In accordance with fair value accounting 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.

Level 2 - Quoted prices for similar instruments in active markets that we can access; 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 instrument. The observable inputs are used in valuation models to calculate the fair value of the instruments. Financial assets utilizing Level 2 inputs primarily include obligations of U.S. government corporations and agencies, corporate bonds, mortgage-backed securities, asset-backed securities, and most municipal bonds.

The independent pricing sources utilize these approaches to determine the fair value of the instruments in Level 2 of the fair value hierarchy based on type of instrument:

Corporate Debt & U.S. Government and Agency Bonds are evaluated by surveying the dealer community, obtaining relevant trade data, benchmark quotes and spreads and incorporating this information into the evaluation process.

Obligations of U.S. States & Political Subdivisions are evaluated by tracking, capturing, and analyzing quotes for active issues and trades reported via the Municipal Securities Rulemaking Board records. Daily briefings and reviews of current economic conditions, trading levels, spread relationships, and the slope of the yield curve provide further data for evaluation.

Residential Mortgage-Backed Securities (“RMBS) are evaluated by monitoring interest rate movements, and other pertinent data daily. Incoming market data is enriched to derive spread, yield and/or price data as appropriate, enabling known data points to be extrapolated for valuation application across a range of related securities.

Commercial Mortgage-Backed Securities (“CMBS”) are evaluated using valuation techniques that reflect

market participants’ assumptions and maximize the use of relevant observable inputs including quoted prices for similar assets, benchmark yield curves and market corroborated inputs. Evaluation utilizes regular reviews of the inputs for securities covered, including executed trades, broker quotes, credit information, collateral attributes and/or cash flow waterfall as applicable.

Asset-Backed Securities (“ABS”) are evaluated using spreads and other information solicited from market buy- and sell-side sources, including primary and secondary dealers, portfolio managers, and research analysts. Cash flows are generated for each tranche, benchmark yields are determined, and deal collateral performance and tranche level attributes including trade activity, bids, and offer are applied, resulting in tranche-specific prices.

Collateralized loan obligations ("CLO") are evaluated by manager rating, seniority in the capital structure, assumptions about prepayment, default and recovery and their impact on cash flow generation. Loan level net asset values are determined and aggregated for tranches and as a final step, prices are checked against available recent trade activity.

Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or value drivers are unobservable or from par values for equity securities restricted in their ability to be redeemed or sold. The inputs used to derive the fair value of Level 3 securities 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 a state premium tax credit investment. The state premium tax credit investment has an average maturity of less than 2 years, a credit rating of AAA, and its balance reflects its remaining scheduled payments discounted at an average annual rate of 7.1%. 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.

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Fair value measurements for assets measured at fair value included the following as of March 31, 2017 and December 31, 2016:

March 31, 2017

(In thousands)	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	60,818	$	12,431	$	48,387	$	—
Obligations of U.S. states and political subdivisions	2,168,450		—		2,167,767		683
Corporate debt securities	1,747,340		—		1,747,340		—
ABS	37,117		—		37,117		—
RMBS	212,909		—		212,909		—
CMBS	294,117		—		294,117		—
CLOs	121,368		—		121,368		—
Total debt securities	4,642,119		12,431		4,629,005		683
Equity securities ⁽¹⁾	7,162		2,894				4,268
Total investment portfolio	$	4,649,281	$	15,325	$	4,629,005	$	4,951
Real estate acquired ⁽²⁾	$	10,730	$	—	$	—	$	10,730


⁽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.

December 31, 2016

(In thousands)	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Treasury securities and obligations of U.S. government corporations and agencies	$	73,530	$	30,690	$	42,840	$	—
Obligations of U.S. states and political subdivisions	2,143,016		—		2,142,325		691
Corporate debt securities	1,743,910		—		1,743,910		—
ABS	59,565		—		59,565		—
RMBS	224,209		—		224,209		—
CMBS	319,817		—		319,817		—
CLOs	121,175		—		121,175		—
Total debt securities	4,685,222		30,690		4,653,841		691
Equity securities ⁽¹⁾	7,128		2,860		—		4,268
Total investment portfolio	$	4,692,350	$	33,550	$	4,653,841	$	4,959
Real estate acquired ⁽²⁾	$	11,748	$	—	$	—	$	11,748


⁽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.

MGIC Investment Corporation - Q1 2017 | 22

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For assets measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the three months ended March 31, 2017 and 2016 is shown in the following tables. There were no transfers into or out of Level 3 in those periods and there were no losses included in earnings for those periods attributable to the change in unrealized losses on assets still held at the end of the applicable period.



Three Months Ended March 31, 2017
(In thousands)	Debt Securities			Equity Securities		Total Investments			Real Estate Acquired
Balance at December 31, 2016	$	691		$	4,268	$	4,959		$	11,748
Total realized/unrealized gains (losses):
Included in earnings and reported as losses incurred, net	—			—		—			(163		)
Purchases	—			—		—			8,683
Sales	(8		)	—		(8		)	(9,538		)
Balance at March 31, 2017	$	683		$	4,268	$	4,951		$	10,730

CLASS OF STOCK

NUMBER OF SHARES

Common stock

April 28, 2017