MGIC INVESTMENT CORP - FORM 10-Q

MGIC INVESTMENT CORP - FORM 10-Q - August 4, 2017

Attached files

Attached files

file	filename
EX-32 - EXHIBIT 32 - MGIC INVESTMENT CORP	exhibit32q2_2017.htm
EX-99 - EXHIBIT 99 - MGIC INVESTMENT CORP	exhibit99q2_2017.htm
EX-31.2 - EXHIBIT 31.2 - MGIC INVESTMENT CORP	exhibit312q2_2017.htm
EX-31.1 - EXHIBIT 31.1 - MGIC INVESTMENT CORP	exhibit311q2_2017.htm
EX-12 - EXHIBIT 12 - MGIC INVESTMENT CORP	exhibit12q2_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	June 30, 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.

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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2017



TABLE OF CONTENTS
		Page
PART I — FINANCIAL INFORMATION
Item 1	Financial Statements:
	Consolidated Balance Sheets (Unaudited) - June 30, 2017 and December 31, 2016	7
	Consolidated Statements of Operations (Unaudited) - Three and Six Months Ended June 30, 2017 and 2016	8
	Consolidated Statements of Comprehensive Income (Unaudited) - Three and Six Months Ended June 30, 2017 and 2016	9
	Consolidated Statements of Shareholders’ Equity (Unaudited) - Six Months Ended June 30, 2017 and 2016	10
	Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended June 30, 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	23
	Note 10 - Benefit Plans	24
	Note 11 - Income Taxes	25
	Note 12 - Loss Reserves	26
	Note 13 - Shareholders’ Equity	28
	Note 14 - Share-Based Compensation	29
	Note 15 - Statutory Information	29

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3	Quantitative and Qualitative Disclosures about Market Risk	56
Item 4	Controls and Procedures	56

PART II — OTHER INFORMATION
Item 1A	Risk Factors	57
Item 6	Exhibits	59

SIGNATURES		60
INDEX TO EXHIBITS		61

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 on 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 LAE to NPE

Low down payment loans or mortgages

Loans with less than 20% down payments

LPMI

Lender-paid mortgage insurance

/ M

MBS

Mortgage-backed securities

MD&A

Management's discussion and analysis of financial condition and results of operations

MGIC

Mortgage Guaranty Insurance Corporation, a subsidiary of MGIC Investment Corporation

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 - Q2 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	June 30, 2017			December 31, 2016
ASSETS
Investment portfolio:	7 / 8
Securities, available-for-sale, at fair value:
Fixed income (amortized cost, 2017 - $4,674,965; 2016 - $4,717,211)		$	4,701,211		$	4,685,222
Equity securities		7,209			7,128
Total investment portfolio		4,708,420			4,692,350
Cash and cash equivalents		127,908			155,410
Accrued investment income		44,030			44,073
Reinsurance recoverable on loss reserves	4	44,783			50,493
Reinsurance recoverable on paid losses		6,151			4,964
Premiums receivable		51,344			52,392
Home office and equipment, net		42,212			36,088
Deferred insurance policy acquisition costs		18,677			17,759
Deferred income taxes, net	11	481,389			607,655
Other assets		75,254			73,345
Total assets		$	5,600,168		$	5,734,529

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Loss reserves	12	$	1,187,089		$	1,438,813
Unearned premiums		352,010			329,737
Federal Home Loan Bank advance	3	155,000			155,000
Senior notes	3	417,983			417,406
Convertible senior notes	3	—			349,461
Convertible junior subordinated debentures	3	256,872			256,872
Other liabilities		236,153			238,398
Total liabilities		2,605,107			3,185,687
Contingencies	5
Shareholders’ equity:	13
Common stock (one dollar par value, shares authorized 1,000,000; shares issued 2017 - 370,557; 2016 - 359,400; shares outstanding 2017 - 370,557; 2016 - 340,663)		370,557			359,400
Paid-in capital		1,842,601			1,782,337
Treasury stock at cost (shares 2016 - 18,737)		—			(150,359		)
Accumulated other comprehensive loss, net of tax		(37,494		)	(75,100		)
Retained earnings		819,397			632,564
Total shareholders’ equity		2,995,061			2,548,842
Total liabilities and shareholders’ equity		$	5,600,168		$	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 June 30,						Six Months Ended June 30,
(In thousands, except per share data)	Note	2017			2016			2017			2016
Revenues:
Premiums written:
Direct		$	275,245		$	282,113		$	541,068		$	547,404
Assumed		685			182			1,973			390
Ceded	4	(30,096		)	(32,280		)	(60,505		)	(66,498		)
Net premiums written		245,834			250,015			482,536			481,296
Increase in unearned premiums, net		(14,698		)	(18,559		)	(22,297		)	(28,499		)
Net premiums earned		231,136			231,456			460,239			452,797
Investment income, net of expenses		29,716			27,248			59,193			55,057
Net realized investment (losses) gains	7	(42		)	836			(164		)	3,892
Other revenue		2,502			3,994			4,924			10,367
Total revenues		263,312			263,534			524,192			522,113

Losses and expenses:
Losses incurred, net	12	27,339			46,590			54,958			131,602
Amortization of deferred policy acquisition costs		2,584			2,245			4,814			4,206
Other underwriting and operating expenses, net		38,511			35,348			79,276			75,125
Interest expense		14,197			12,244			30,506			26,945
Loss on debt extinguishment		65			1,868			65			15,308
Total losses and expenses		82,696			98,295			169,619			253,186
Income before tax		180,616			165,239			354,573			268,927
Provision for income taxes	11	61,994			56,018			146,153			90,515
Net income		$	118,622		$	109,221		$	208,420		$	178,412

Earnings per share:
Basic	6	$	0.32		$	0.32		$	0.59		$	0.52
Diluted	6	$	0.31		$	0.26		$	0.55		$	0.43

Weighted average common shares outstanding - basic	6	366,918			340,678			354,035			340,411
Weighted average common shares outstanding - diluted	6	394,470			446,139			398,302			450,354

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 June 30,						Six Months Ended June 30,
(In thousands)	Note	2017			2016			2017			2016
Net income		$	118,622		$	109,221		$	208,420		$	178,412
Other comprehensive (loss) income, net of tax:	9
Change in unrealized investment gains and losses	7	25,749			56,338			37,870			107,165
Benefit plan adjustments		(142		)	(173		)	(295		)	(481		)
Foreign currency translation adjustment		—			11			31			(964		)
Other comprehensive income, net of tax		25,607			56,176			37,606			105,720
Comprehensive income		$	144,229		$	165,397		$	246,026		$	284,132

See accompanying notes to consolidated financial statements

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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)



		Six Months Ended June 30,
(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
Issuance of common stock	13	10,386			—
Balance, end of period		370,557			341,076

Paid-in capital
Balance, beginning of period		1,782,337			1,670,238
Net common stock issued under share-based compensation plans		(7,494		)	(5,954		)
Issuance of common stock	13	60,903			—
Tax benefit from share-based compensation		—			115
Equity compensation		6,855			6,017
Reacquisition of convertible junior subordinated debentures-equity component		—			(6,337		)
Balance, end of period		1,842,601			1,664,079

Treasury stock
Balance, beginning of period		(150,359		)	(3,362		)
Reissuance of treasury stock, net		150,359			—
Balance, end of period		—			(3,362		)

Accumulated other comprehensive loss
Balance, beginning of period		(75,100		)	(60,880		)
Other comprehensive income, net of tax	9	37,606			105,720
Balance, end of period		(37,494		)	44,840

Retained earnings
Balance, beginning of period	2 / 13	632,717			290,047
Net income		208,420			178,412
Reissuance of treasury stock, net		(21,740		)	—
Balance, end of period		819,397			468,459

Total shareholders’ equity		$	2,995,061		$	2,515,092

See accompanying notes to consolidated financial statements.

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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Six Months Ended June 30,
(In thousands)	2017			2016
Cash flows from operating activities:
Net income	$	208,420		$	178,412
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	33,191			28,477
Deferred tax expense	106,163			88,157
Net realized investment losses (gains)	164			(3,892		)
Loss on debt extinguishment	65			15,308
Change in certain assets and liabilities:
Accrued investment income	43			515
Prepaid insurance premium	25			48
Reinsurance recoverable on loss reserves	5,710			(728		)
Reinsurance recoverable on paid losses	(1,187		)	(1,454		)
Premium receivable	1,048			1,867
Deferred insurance policy acquisition costs	(918		)	(1,439		)
Profit commission receivable	(4,603		)	(2,793		)
Loss reserves	(251,724		)	(261,069		)
Unearned premiums	22,273			28,451
Return premium accrual	(11,900		)	(7,300		)
Income taxes payable - current	32,991			523
Other, net	(14,205		)	(8,090		)
Net cash provided by operating activities	125,556			54,993

Cash flows from investing activities:
Purchases of investments:
Fixed income	(545,281		)	(723,409		)
Equity securities	(38		)	(3,128		)
Proceeds from sales of fixed income	166,606			649,776
Proceeds from maturity of fixed income	390,344			313,484
Proceeds from sale of equity securities	—			2,525
Net increase in payable for securities	3,447			24,519
Additions to property and equipment	(9,659		)	(2,724		)
Net cash provided by investing activities	5,419			261,043

Cash flows from financing activities:
Proceeds from revolving credit facility	150,000			—
Repayment of revolving credit facility	(150,000		)	—
Proceeds from issuance of long-term debt	—			155,000
Purchase or repayment of convertible senior notes	(145,620		)	(182,846		)
Payment of original issue discount - convertible senior notes	(4,504		)	(5,655		)
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	—			(15,308		)
Payment of debt issuance costs	(1,630		)	—
Payment of withholding taxes related to share-based compensation net share settlement	(6,723		)	(4,973		)
Net cash used in financing activities	(158,477		)	(196,182		)

Net (decrease) increase in cash and cash equivalents	(27,502		)	119,854
Cash and cash equivalents at beginning of period	155,410			181,120
Cash and cash equivalents at end of period	$	127,908		$	300,974

See accompanying notes to consolidated financial statements.

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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 have been amended from time to time. 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 June 30, 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.

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 adopted this guidance in the first quarter of 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 six months ended June 30, 2017 related to excess tax benefits upon vesting of share-based awards during the period.


•	We recognized a cumulative effect adjustment related to the recognition of a deferred tax asset related to

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suspended tax benefits from vesting transactions occurring in prior years and from the elimination of our forfeiture estimate on share-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 prior year period 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 prior year period to financing activities.

Prospective Accounting Standards

Stock Compensation - Scope of Modification Accounting

In May 2017, the FASB issued updated guidance related to a change in the terms or conditions (modification) of a share-based award. The updated guidance provides that an entity should account for the effects of a modification unless the fair value and vesting conditions of the modified award and the classification of the award (equity or liability instrument) are the same as the original award immediately before the modification. The updated guidance addresses the current diversity in practice on applying modification accounting, as some entities evaluate whether changes to awards are substantive, which is not prescribed within the current accounting guidance. The updated guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. 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, but do not expect it to have a material impact on our consolidated financial statements or disclosures.

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 financial statements or 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

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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. 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. Further, the updated guidance clarifies that entities should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entities other deferred tax assets. 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. 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. A loss on debt extinguishment of $0.07 million was recognized on the redemption of the $5.1 million of 2% Notes. No gain or loss was recognized from the conversions as the outstanding debt issuance costs associated with the conversions are included in the debt

carrying value, which was 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.

In March, 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

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assets and will be amortized over the term of the Credit Agreement.

5% Notes

On May 1, 2017, our 5% Notes due in 2017 (“5% Notes”) matured and we repaid the outstanding $145 million in aggregate par value, plus accrued interest with cash at our holding company.

First half 2016 debt transactions

5% Notes

During the first six months of 2016, we purchased $188.5 million in aggregate par value of our 5% Notes at an aggregate purchase price of $195.5 million for which we recognized losses on debt extinguishment on our consolidated statements of operations for the three and six months ended June 30, 2016.

9% Debentures

In February 2016, MGIC purchased $132.7 million in aggregate par value of our 9% Debentures at a purchase price of $150.7 million. The purchase of the 9% Debentures resulted in an $8.3 million loss on debt extinguishment on the consolidated statement of operations for the six months ended June 30, 2016, which represents the difference between the fair value and the carrying value of the liability component on the purchase date. 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 equivalents, approximately 9.8 million shares, are not included in the computation of diluted shares.

Debt obligations

The par value of our long-term debt obligations and their aggregate carrying values as of June 30, 2017 and December 31, 2016 were as follows.



(In millions)	June 30, 2017			December 31, 2016
FHLB Advance	$	155.0		$	155.0
5% Notes	—			145.0
2% Notes	—			207.6
5.75% Notes	425.0			425.0
9% Debentures⁽¹⁾	256.9			256.9
Long-term debt, par value	836.9			1,189.5
Debt issuance costs	(7.0		)	(10.8		)
Long-term debt, carrying value	$	829.9		$	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”) 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.



	Six Months Ended June 30,
(In millions)	2017		2016
Revolving credit facility	$	0.5	$	—
FHLB Advance	1.5		0.9
5% Notes	3.6		6.9
2% Notes	2.1		5.0
5.75% Notes	12.9		—
9% Debentures	11.6		15.9
Total interest payments	$	32.2	$	28.7

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 June 30,						Six Months Ended June 30,
(In thousands)	2017			2016			2017			2016
Premiums earned:
Direct	$	261,180		$	263,566		$	520,608		$	518,953
Assumed	62			182			160			390
Ceded	(30,106		)	(32,292		)	(60,529		)	(66,546		)
Net premiums earned	$	231,136		$	231,456		$	460,239		$	452,797

Losses incurred:
Direct	$	31,396		$	54,863		$	63,809		$	147,295
Assumed	61			339			166			440
Ceded	(4,118		)	(8,612		)	(9,017		)	(16,133		)
Losses incurred, net	$	27,339		$	46,590		$	54,958		$	131,602

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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.

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 and six months ended June 30, 2017 and 2016.



	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2017		2016		2017		2016
Ceded premiums written and earned, net of profit commission ⁽¹⁾	$	28,917	$	29,961	$	57,812	$	61,627
Ceded losses incurred	4,424		6,070		9,111		14,583
Ceding commissions ⁽²⁾	12,248		11,946		24,251		23,522
Profit commission	32,325		29,767		63,442		55,982


⁽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 $33.1 million as of June 30, 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 $12.0 million as of June 30, 2017, which was supported by $86.0 million of trust assets, while as of December 31, 2016, the reinsurance recoverable on loss reserves related to captive agreements was $19.0 million, which was supported by $91.0 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

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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 half 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 estimates of the potential liability. We estimate the maximum exposure associated with matters where a loss is reasonably possible to be approximately $291 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 half 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. During the quarter ended June 30, 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

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issued upon any debt conversion. For purposes of calculating basic and diluted EPS, vested restricted stock and restricted stock units ("RSUs") are considered outstanding.

The following table reconciles the numerators and denominators used to calculate basic and diluted EPS.



	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share data)	2017		2016		2017		2016
Basic earnings per share:
Net income	$	118,622	$	109,221	$	208,420	$	178,412
Weighted average common shares outstanding - basic	366,918		340,678		354,035		340,411
Basic earnings per share	$	0.32	$	0.32	$	0.59	$	0.52

Diluted earnings per share:
Net income	$	118,622	$	109,221	$	208,420	$	178,412
Interest expense, net of tax ⁽¹⁾:
2% Notes	84		1,982		907		3,964
5% Notes	427		1,728		1,709		4,406
9% Debentures	3,757		3,757		7,514		8,379
Diluted income available to common shareholders	$	122,890	$	116,688	$	218,550	$	195,161

Weighted average common shares outstanding - basic	366,918		340,678		354,035		340,411
Effect of dilutive securities:
Unvested RSUs	1,140		1,209		1,314		1,444
2% Notes	3,827		71,917		16,771		71,917
5% Notes	3,557		13,307		7,154		15,449
9% Debentures	19,028		19,028		19,028		21,133
Weighted average common shares outstanding - diluted	394,470		446,139		398,302		450,354
Diluted earnings per share	$	0.31	$	0.26	$	0.55	$	0.43


⁽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 June 30, 2017 and December 31, 2016 are shown below.



June 30, 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	$	64,043	$	364	$	(478	)	$	63,929
Obligations of U.S. states and political subdivisions	2,131,471		42,983		(9,165		)	2,165,289
Corporate debt securities	1,823,823		12,699		(8,897		)	1,827,625
ABS	21,988		10		(11		)	21,987
RMBS	209,874		78		(7,612		)	202,340
CMBS	310,997		1,548		(5,467		)	307,078
CLOs	112,769		332		(138		)	112,963
Total debt securities	4,674,965		58,014		(31,768		)	4,701,211
Equity securities	7,183		41		(15		)	7,209
Total investment portfolio	$	4,682,148	$	58,055	$	(31,783	)	$	4,708,420



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 June 30, 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 June 30, 2017 that collateral is included in our total investment portfolio amount shown above with a total fair value of $165.9 million.

The amortized cost and fair values of debt securities at June 30, 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.



June 30, 2017
(In thousands)	Amortized Cost		Fair Value
Due in one year or less	$	341,831	$	342,028
Due after one year through five years	1,356,023		1,362,799
Due after five years through ten years	1,026,851		1,030,223
Due after ten years	1,294,632		1,321,793
	$	4,019,337	$	4,056,843

ABS	21,988		21,987
RMBS	209,874		202,340
CMBS	310,997		307,078
CLOs	112,769		112,963
Total as of June 30, 2017	$	4,674,965	$	4,701,211

At June 30, 2017 and December 31, 2016, the investment portfolio had gross unrealized losses of $31.8 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:



June 30, 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	$	52,769	$	(471	)	$	993	$	(7	)	$	53,762	$	(478	)
Obligations of U.S. states and political subdivisions	622,767		(8,595		)	17,400		(570		)	640,167		(9,165		)
Corporate debt securities	649,134		(7,664		)	27,241		(1,233		)	676,375		(8,897		)
ABS	3,362		(11		)	—		—			3,362		(11		)
RMBS	43,815		(885		)	155,030		(6,727		)	198,845		(7,612		)
CMBS	172,505		(5,439		)	7,237		(28		)	179,742		(5,467		)
CLOs	7,275		(138		)	—		—			7,275		(138		)
Equity securities	455		(7		)	139		(8		)	594		(15		)
Total	$	1,552,082	$	(23,210	)	$	208,040	$	(8,573	)	$	1,760,122	$	(31,783	)



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	)

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The unrealized losses in all categories of our investments at June 30, 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 404 and 607 securities in an unrealized loss position at June 30, 2017 and December 31, 2016, respectively.

During each of the three and six months ended June 30, 2017 and 2016 there were no other-than-temporary impairments (“OTTI”) recognized. The net realized investment gains (losses) on the investment portfolio are as follows:



	Three Months Ended June 30,					Six Months Ended June 30,
(In thousands)	2017			2016		2017			2016
Realized investment gains (losses) on investments:
Fixed maturities	$	(52	)	$	831	$	(177	)	$	3,886
Equity securities	10			5		13			6
Net realized investments (losses) gains	$	(42	)	$	836	$	(164	)	$	3,892



	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2017			2016			2017			2016
Realized investment gains (losses) on investments:
Gains on sales	$	644		$	1,404		$	829		$	5,509
Losses on sales	(686		)	(568		)	(993		)	(1,617		)
Net realized investments (losses) gains	$	(42	)	$	836		$	(164	)	$	3,892

Note 8. Fair Value Measurements

Under the authoritative guidance, fair value is disclosed using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value and categorizes assets and liabilities into Levels 1, 2, and 3 based on inputs available to determine their fair values. 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

CLASS OF STOCK

NUMBER OF SHARES

Common stock

July 31, 2017