MGIC INVESTMENT CORP - FORM 10-Q

MGIC INVESTMENT CORP - FORM 10-Q - May 8, 2018

Attached files

Attached files

file	filename
EX-99 - EXHIBIT 99 - MGIC INVESTMENT CORP	exhibit99q1_2018.htm
EX-32 - EXHIBIT 32 - MGIC INVESTMENT CORP	exhibit32q1_2018.htm
EX-31.2 - EXHIBIT 31.2 - MGIC INVESTMENT CORP	exhibit312q1_2018.htm
EX-31.1 - EXHIBIT 31.1 - MGIC INVESTMENT CORP	exhibit311q1_2018.htm
EX-12 - EXHIBIT 12 - MGIC INVESTMENT CORP	exhibit12q1_2018.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, 2018
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ______ to ______
	Commission file number 1-10816

MGIC Investment Corporation

(Exact name of registrant as specified in its charter)



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

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

(414) 347-6480

(Registrant’s telephone number, including area code)

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



YES x	NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).



YES x	NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “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, 2018



Table of contents
		Page
PART I — FINANCIAL INFORMATION
Item 1	Financial Statements:
	Consolidated Balance Sheets - March 31, 2018 (Unaudited) and December 31, 2017	7
	Consolidated Statements of Operations (Unaudited) - Three Months Ended March 31, 2018 and 2017	8
	Consolidated Statements of Comprehensive Income (Unaudited) - Three Months Ended March 31, 2018 and 2017	9
	Consolidated Statements of Shareholders’ Equity (Unaudited) - Three Months Ended March 31, 2018 and 2017	10
	Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended March 31, 2018 and 2017	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	15
	Note 4 - Reinsurance	15
	Note 5 - Litigation and Contingencies	17
	Note 6 - Earnings Per Share	18
	Note 7 - Investments	19
	Note 8 - Fair Value Measurements	22
	Note 9 - Other Comprehensive Income	25
	Note 10 - Benefit Plans	26
	Note 11 - Income Taxes	26
	Note 12 - Loss Reserves	27
	Note 13 - Shareholders’ Equity	31
	Note 14 - Share-Based Compensation	32
	Note 15 - Statutory Information	32

Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3	Quantitative and Qualitative Disclosures about Market Risk	65
Item 4	Controls and Procedures	65

PART II — OTHER INFORMATION
Item 1	Legal Proceedings	67
Item 1A	Risk Factors	67
Item 6	Exhibits	76
INDEX TO EXHIBITS		76
SIGNATURES		77

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

CECL

Current expected credit losses

CFPB

Consumer Financial Protection Bureau

CLO

Collateralized loan obligations

CMBS

Commercial mortgage-backed securities

/ D

DAC

Deferred insurance policy acquisition costs

Debt-to-income (“DTI”) ratio

The ratio, expressed as a percentage, of a borrowers’ total debt payments to gross income

Direct

When referring to insurance or risk written or in force, “direct” means before giving effect to reinsurance

/ F

Fannie Mae

Federal National Mortgage Association

FCRA

Fair Credit Reporting Act

FEMA

Federal Emergency Management Agency

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

IADA

Individual Assistance Disaster Area

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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

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:

5.75% 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 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 greater of $400 million or the total of the minimum amount of Available Assets that must be held under the PMIERs 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, is the aggregate original principal amount of the mortgages that are insured during a period

N/M

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

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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

/ 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

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

RMBS

Residential mortgage-backed securities

/ S

State Capital Requirements

Under certain state regulations, the minimum amount of statutory capital relative to risk in force (or similar measure)

/ T

Tax Act

The U.S. tax reform enacted on December 22, 2017 and commonly referred to as the “Tax Cuts and Jobs Act”

/ U

Underwriting expense ratio

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

Underwriting profit

NPE minus incurred losses and underwriting expenses

USDA

U.S. Department of Agriculture

/ V

U.S. Department of Veterans Affairs

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements



MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(In thousands)	Note	March 31, 2018			December 31, 2017
ASSETS		(Unaudited)
Investment portfolio:	7 / 8
Fixed income, available for sale, at fair value (amortized cost, 2018 - $4,974,616; 2017 - $4,946,278)		$	4,930,063		$	4,983,315
Equity securities, at fair value (cost, 2018 - $4,143; 2017 - $7,223)	2 / 7 / 8	4,099			7,246
Other invested assets, at cost	2 / 7 / 8	3,100			—
Total investment portfolio		4,937,262			4,990,561
Cash and cash equivalents		177,488			99,851
Accrued investment income		45,123			46,060
Reinsurance recoverable on loss reserves	4	45,474			48,474
Reinsurance recoverable on paid losses		3,718			3,872
Premiums receivable		52,701			54,045
Home office and equipment, net		48,382			44,936
Deferred insurance policy acquisition costs		18,928			18,841
Deferred income taxes, net	11	211,994			234,381
Other assets		75,273			78,478
Total assets		$	5,616,343		$	5,619,499

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Loss reserves	12	$	924,171		$	985,635
Unearned premiums		397,688			392,934
Federal Home Loan Bank advance	3	155,000			155,000
Senior notes	3	418,848			418,560
Convertible junior subordinated debentures	3	256,872			256,872
Other liabilities		232,361			255,972
Total liabilities		2,384,940			2,464,973
Contingencies	5
Shareholders’ equity:	13
Common stock (one dollar par value, shares authorized 1,000,000; shares issued 2018 - 371,348; 2017 - 370,567; shares outstanding 2018 - 371,348; 2017 - 370,567)		371,348			370,567
Paid-in capital		1,847,000			1,850,582
Accumulated other comprehensive loss, net of tax		(107,760		)	(43,783		)
Retained earnings		1,120,815			977,160
Total shareholders’ equity		3,231,403			3,154,526
Total liabilities and shareholders’ equity		$	5,616,343		$	5,619,499

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	2018			2017
Revenues:
Premiums written:
Direct		$	270,034		$	265,823
Assumed		92			1,288
Ceded	4	(33,220		)	(30,409		)
Net premiums written		236,906			236,702
Increase in unearned premiums, net		(4,799		)	(7,599		)
Net premiums earned		232,107			229,103
Investment income, net of expenses		32,121			29,477
Net realized investment losses	7	(329		)	(125		)
Other revenue		1,871			2,425
Total revenues		265,770			260,880

Losses and expenses:
Losses incurred, net	12	23,850			27,619
Amortization of deferred policy acquisition costs		2,572			2,230
Other underwriting and operating expenses, net		46,090			40,765
Interest expense		13,233			16,309
Total losses and expenses		85,745			86,923
Income before tax		180,025			173,957
Provision for income taxes	11	36,388			84,159
Net income		$	143,637		$	89,798

Earnings per share:
Basic	6	$	0.39		$	0.26
Diluted	6	$	0.38		$	0.24

Weighted average common shares outstanding - basic	6	370,908			341,009
Weighted average common shares outstanding - diluted	6	391,562			402,175

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	2018			2017
Net income		$	143,637		$	89,798
Other comprehensive (loss) income, net of tax:	9
Change in unrealized investment gains and losses	7	(64,453		)	12,121
Benefit plan adjustments		494			(153		)
Foreign currency translation adjustment		—			31
Other comprehensive (loss) income, net of tax		(63,959		)	11,999
Comprehensive income		$	79,678		$	101,797

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	2018			2017
Common stock
Balance, beginning of period		$	370,567		$	359,400
Net common stock issued under share-based compensation plans		781			771
Balance, end of period		371,348			360,171

Paid-in capital
Balance, beginning of period		1,850,582			1,782,337
Net common stock issued under share-based compensation plans		(8,854		)	(7,493		)
Equity compensation		5,272			3,461
Balance, end of period		1,847,000			1,778,305

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

Accumulated other comprehensive (loss) income
Balance, beginning of period	2	(43,801		)	(75,100		)
Other comprehensive income, net of tax	9	(63,959		)	11,999
Balance, end of period		(107,760		)	(63,101		)

Retained earnings
Balance, beginning of period	2	977,178			632,717
Net income		143,637			89,798
Balance, end of period		1,120,815			722,515

Total shareholders’ equity		$	3,231,403		$	2,647,531

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)	2018			2017
Cash flows from operating activities:
Net income	$	143,637		$	89,798
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	15,833			17,079
Deferred tax expense	39,388			48,932
Net realized investment losses	329			125
Change in certain assets and liabilities:
Accrued investment income	937			287
Reinsurance recoverable on loss reserves	3,000			3,835
Reinsurance recoverable on paid losses	154			(165		)
Premium receivable	1,344			485
Deferred insurance policy acquisition costs	(87		)	(477		)
Profit commission receivable	377			(3,395		)
Loss reserves	(61,464		)	(103,771		)
Unearned premiums	4,754			7,585
Return premium accrual	(5,500		)	(4,800		)
Income taxes payable - current	(3,117		)	34,654
Other, net	(5,619		)	(12,703		)
Net cash provided by operating activities	133,966			77,469

Cash flows from investing activities:
Purchases of investments:
Fixed income securities	(209,477		)	(187,077		)
Equity securities	(20		)	(19		)
Proceeds from sales of fixed income securities	10,844			33,980
Proceeds from maturity of fixed income securities	155,605			199,234
Net increase in payable for securities	—			10,336
Additions to property and equipment	(5,208		)	(4,014		)
Net cash (used in) provided by investing activities	(48,256		)	52,440

Cash flows from financing activities:
Proceeds from revolving credit facility	—			150,000
Payment of debt issuance costs	—			(1,523		)
Payment of withholding taxes related to share-based compensation net share settlement	(8,073		)	(6,722		)
Net cash (used in) provided by financing activities	(8,073		)	141,755
Net increase in cash and cash equivalents	77,637			271,664
Cash and cash equivalents at beginning of period	99,851			155,410
Cash and cash equivalents at end of period	$	177,488		$	427,074

See accompanying notes to consolidated financial statements.

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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2018

(Unaudited)

Note 1. Nature of Business and Basis of Presentation

MGIC Investment Corporation is a holding company which, through Mortgage Guaranty Insurance Corporation (“MGIC”) is principally engaged in the mortgage insurance business. We provide mortgage insurance to lenders throughout the United States and to government sponsored entities to protect against loss from defaults on low down payment residential mortgage loans. An insurance subsidiary of MGIC provides credit insurance for certain mortgages under Fannie Mae and Freddie Mac (the “GSEs”) credit risk transfer programs.

The accompanying unaudited consolidated financial statements of MGIC Investment Corporation and its wholly-owned subsidiaries have been prepared in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission (“SEC”) for interim reporting and do not include all of the other information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2017 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, 2018.

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 which 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 of insurance in force, calculated from tables of factors with several risk dimensions and subject to a floor amount). Based on our interpretation of the PMIERs, as of March 31, 2018, 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 2017 amounts have been made in the accompanying financial statements to conform to the 2018 presentation.

Subsequent events

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

Share repurchase program

On April 26, 2018, our Board of Directors authorized a share repurchase program under which we may repurchase up to $200 million of our common stock through the end of 2019. Repurchases may be made from time to time on the open market or through privately negotiated transactions. The repurchase program may be suspended for periods or discontinued at any time.

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Note 2. New Accounting Pronouncements

Accounting standards effective in 2018, or early adopted, and relevant to our financial statements

Table 2.1 shows the relevant amendments to accounting standards that have been implemented for the fiscal year beginning January 1, 2018; none had a material impact on our consolidated financial statements or disclosures.



	Table	2.1
Standard / Interpretation					Effective date
Standard / Interpretation	Amended Standards
	ASC 718		Compensation - Stock Compensation
			•	ASU 2017-09 - Scope of Modification Accounting	January 1, 2018
	ASC 310		Receivables - Nonrefundable Fees and Other Costs
			•	ASU 2017-08 - Premium Amortization on Purchased Callable Debt Securities	January 1, 2019
	ASC 715		Compensation - Retirement Benefits
			•	ASU 2017-07 - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost	January 1, 2018
	ASC 825		Financial Instruments - Overall
			•	ASU 2016-01 - Recognition and Measurement of Financial Assets and Financial Liabilities	January 1, 2018

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.


◦	Adoption impact: The adoption of this guidance had no 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.


◦	Adoption impact: We adopted this guidance as of January 1, 2018 with no impact to our consolidated financial statements or disclosures as our accounting practice adhered to the updated guidance.

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

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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.

◦

Adoption impact: The adoption of this guidance had no impact on our consolidated financial statements or disclosures as the service cost component is reported in the same financial statement caption as other compensation costs and we do not present a subtotal of income outside of income from operations. The service cost component of our benefit plans is disclosed in Note 10 - “Benefit Plans” to our consolidated financial statements.

Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued updated guidance to address the recognition, measurement, presentation, and disclosure of certain financial instruments. The updated guidance requires equity investments, except those accounted for under the equity method of accounting, that have a readily determinable fair value to be measured at fair value with changes in fair value recognized in net income. Equity investments that do not have readily determinable fair values may be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. A qualitative assessment for impairment is required for equity investments without readily determinable fair values. The updated guidance also eliminates the requirement to disclose the method and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet. 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.

◦

Adoption impact: The adoption of this guidance resulted in an immaterial cumulative effect adjustment to our 2018 beginning accumulated other comprehensive (loss) income and retained earnings to recognize unrealized gains on equity investments. At December 31, 2017, equity investments were classified as available-for-sale on the consolidated balance sheet. Upon adoption the updated guidance eliminated the available-for-sale balance sheet classification for equity securities.

In February 2018, the FASB issued a separate update for technical corrections and improvements to clarify certain aspects of the guidance issued above. This update clarifies the presentation of investments in Federal Home Loan Bank stock and prohibits the investment from being shown with equity securities.


◦	Adoption impact: As of March 31, 2018, the value of our investment in Federal Home Loan Bank of Chicago (“FHLB”) stock, which is carried at cost, is presented within “Other invested assets” on our consolidated balance sheet.

Prospective Accounting Standards

Table 2.2 shows the relevant new amendments to accounting standards, which are not yet effective or adopted.



	Table	2.2
Standard / Interpretation					Effective date
Standard / Interpretation	Amended Standards
	ASC 326		Financial Instruments - Credit Losses
			•	ASU 2016-13 - Measurement of Credit Losses on Financial Instruments	January 1, 2020

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

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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.

Note 3. Debt

Debt obligations

The par value of our long-term debt obligations and their aggregate carrying values as of March 31, 2018 and December 31, 2017 are presented in table 3.1 below.



	Table	3.1
Long-term debt obligations	(In millions)		March 31, 2018			December 31, 2017
	FHLB Advance		$	155.0		$	155.0
	5.75% Notes		425.0			425.0
	9% Debentures ⁽¹⁾		256.9			256.9
	Long-term debt, par value		836.9			836.9
	Debt issuance costs		(6.2		)	(6.5		)
	Long-term debt, carrying value		$	830.7		$	830.4

⁽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% Notes, 9% Debentures, and any amounts drawn on our revolving credit facility, are obligations of our holding company, MGIC Investment Corporation, and not of its subsidiaries. In addition to interest on amounts drawn, the unused portion of our revolving credit facility is subject to recurring commitment fees, which is charged to interest expense. The Federal Home Loan Bank Advance (the “FHLB Advance”) is an obligation of MGIC.

Table 3.2 below presents interest payments on our debt obligations.



	Table	3.2
Interest payments on debt obligations			Three Months Ended March 31,
	(In millions)		2018		2017
	Revolving credit facility		$	0.2	$	—
	FHLB Advance		0.7		0.7
	5.75% Notes		12.2		12.9
	Total interest payments		$	13.1	$	13.6

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Note 4. Reinsurance

The reinsurance agreements we have entered into, excluding captive agreements (which were immaterial), are discussed below. The effect of all of our reinsurance agreements on premiums earned and losses incurred is shown in table 4.1 below.



	Table	4.1
Reinsurance			Three Months Ended March 31,
	(In thousands)		2018			2017
	Premiums earned:
	Direct		$	265,251		$	259,428
	Assumed		121			98
	Ceded		(33,265		)	(30,423		)
	Net premiums earned		$	232,107		$	229,103

	Losses incurred:
	Direct		$	31,501		$	32,413
	Assumed		90			105
	Ceded		(7,741		)	(4,899		)
	Losses incurred, net		$	23,850		$	27,619

Quota share reinsurance

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. Each of the reinsurers under our QSR Transactions has an insurer financial strength rating of A- or better by Standard and Poor’s Rating Services, A.M. Best or both.

2018 QSR Transaction. We entered into a 2018 QSR Transaction with a group of unaffiliated reinsurers to manage our exposure to losses resulting from the covered mortgage guaranty insurance policies and to provide reinsurance capital credit under the PMIERs. The 2018 QSR Transaction has an effective date of January 1, 2018, and provides coverage on new business written in 2018 that meets certain eligibility requirements. Under the 2018 QSR Transaction, we will cede losses incurred and premiums on or after the effective date through December 31, 2029, at which time the agreement expires. Early termination of the agreement can be elected by us effective December 31, 2021, and annually thereafter, for a fee, or under specified scenarios for no fee upon prior written notice, including if we will receive less than 90% of the full credit amount under the PMIERs for the risk ceded in any required calculation period.

The structure of the 2018 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 2018 QSR Transaction, we will receive a profit commission provided that the loss ratio on the loans covered under the agreement remains below 62%.

2015 and 2017 QSR Transactions.

Our 2017 quota share reinsurance agreement (“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”) covers eligible risk in force written before 2017. 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,

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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%.

Table 4.2 below presents a summary of our quota share reinsurance agreements, excluding captive agreements (which were immaterial), for the three months ended March 31, 2018 and 2017.



	Table	4.2
Quota share reinsurance			Three Months Ended March 31,
Quota share reinsurance	(In thousands)		2018		2017
	Ceded premiums written and earned, net of profit commission ⁽¹⁾		$	33,036	$	28,895
	Ceded losses incurred		7,788		4,687
	Ceding commissions ⁽²⁾		12,645		12,003
	Profit commission		30,189		31,117


⁽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 $43.5 million as of March 31, 2018 and $39.3 million as of December 31, 2017. 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.

Note 5. Litigation and Contingencies

Before paying an insurance claim, we review the loan and servicing files to determine the appropriateness of the claim amount. When reviewing the files, we may determine that we have the right to rescind coverage on the loan. We refer to insurance rescissions and denials of claims collectively as “rescissions” and variations of that term. In addition, our insurance policies generally provide that we can reduce 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 2017 and the first quarter of 2018, curtailments reduced our average claim paid by approximately 5.6% and 7.3%, respectively.

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

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

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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 $282 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 2017 and the first three months of 2018 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 consolidated 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 March 31, 2018, we had 9% Debentures outstanding that could result in potentially 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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Table 6.1 reconciles the numerators and denominators used to calculate basic and diluted EPS.



	Table	6.1
Earnings per share			Three Months Ended March 31,
	(In thousands, except per share data)		2018		2017
	Basic earnings per share:
	Net income		$	143,637	$	89,798
	Weighted average common shares outstanding - basic		370,908		341,009
	Basic earnings per share		$	0.39	$	0.26

	Diluted earnings per share:
	Net income		$	143,637	$	89,798
	Interest expense, net of tax ⁽¹⁾:
	2% Notes		—		823
	5% Notes		—		1,282
	9% Debentures		4,566		3,757
	Diluted income available to common shareholders		$	148,203	$	95,660

	Weighted average common shares outstanding - basic		370,908		341,009
	Effect of dilutive securities:
	Unvested RSUs		1,626		1,488
	2% Notes		—		29,859
	5% Notes		—		10,791
	9% Debentures		19,028		19,028
	Weighted average common shares outstanding - diluted		391,562		402,175
	Diluted earnings per share		$	0.38	$	0.24


⁽¹⁾	The three months ended March 31, 2018 and 2017 were tax effected at a rate of 21% and 35%, respectively.

Note 7. Investments

Fixed maturities

The amortized cost, gross unrealized gains and losses, and fair value of investments in fixed income securities classified as available-for-sale at March 31, 2018 and December 31, 2017 are shown in tables 7.1a and 7.1b below.



	Table	7.1a
Details of fixed income investments by category - current year			March 31, 2018
	(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		$	191,018	$	256	$	(2,212	)	$	189,062
	Obligations of U.S. states and political subdivisions		2,093,901		27,926		(19,130		)	2,102,697
	Corporate debt securities		2,087,977		1,921		(33,819		)	2,056,079
	Asset backed securities (“ABS”)		9,451		—		(29		)	9,422
	Residential mortgage backed securities (“RMBS”)		182,050		48		(10,558		)	171,540
	Commercial mortgage backed securities (“CMBS”)		302,434		722		(9,800		)	293,356
	Collateralized loan obligations (“CLO”)		107,785		163		(41		)	107,907
	Total fixed income securities		4,974,616		31,036		(75,589		)	4,930,063

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	Table	7.1b
Details of fixed income investments by category - prior year-end			December 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		$	179,850	$	274	$	(1,278	)	$	178,846
	Obligations of U.S. states and political subdivisions		2,105,063		56,210		(8,749		)	2,152,524
	Corporate debt securities		2,065,475		10,532		(9,169		)	2,066,838
	ABS		4,925		—		(2		)	4,923
	RMBS		189,153		60		(7,364		)	181,849
	CMBS		301,014		1,204		(4,906		)	297,312
	CLOs		100,798		304		(79		)	101,023
	Total fixed income securities		4,946,278		68,584		(31,547		)	4,983,315


⁽¹⁾	At March 31, 2018 and December 31, 2017, there were no other-than-temporary impairment losses recorded in other comprehensive income.

The amortized cost and fair values of fixed income securities at March 31, 2018, by contractual maturity, are shown in table 7.2 below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most ABS, RMBS, CMBS, and CLOs provide for periodic payments throughout their lives, they are listed in separate categories.



	Table	7.2
Fixed income securities maturity schedule			March 31, 2018
	(In thousands)		Amortized Cost		Fair Value
	Due in one year or less		$	650,415	$	649,088
	Due after one year through five years		1,507,245		1,487,678
	Due after five years through ten years		909,711		893,329
	Due after ten years		1,305,525		1,317,743
			$	4,372,896	$	4,347,838

	ABS		9,451		9,422
	RMBS		182,050		171,540
	CMBS		302,434		293,356
	CLOs		107,785		107,907
	Total as of March 31, 2018		$	4,974,616	$	4,930,063

Proceeds from sales of fixed income securities classified as available-for-sale were $10.8 million and $34.0 million during the three months ended March 31, 2018 and 2017, respectively. Gross gains of $0.1 million and $0.2 million and gross losses of $0.3 million and $0.3 million were realized on those sales during the three months ended March 31, 2018 and 2017, respectively.

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Equity securities

The cost and fair value of investments in equity securities at March 31, 2018 and December 31, 2017 are shown in tables 7.3a and 7.3b below. As described in Note 2 - “New Accounting Pronouncements,” updated guidance regarding the “Recognition and Measurement of Financial Assets and Financial Liabilities” became effective on January 1, 2018, which prohibits our investment in FHLB stock from being presented with equity securities. The amount of our FHLB stock investment has been reclassified and presented in “Other invested assets” on our consolidated balance sheet as of March 31, 2018.



	Table	7.3a
Details of equity security investments - current year			March 31, 2018
	(In thousands)		Cost		Gross Gains		Gross Losses			Fair Value
	Equity securities		$	4,143	$	8	$	(52	)	$	4,099



	Table	7.3b
Details of equity security investments - prior year-end			December 31, 2017
	(In thousands)		Cost		Gross Gains		Gross Losses			Fair Value
	Equity securities		$	7,223	$	39	$	(16	)	$	7,246

For the three months ended March 31, 2018, we recognized $0.1 million of net losses on equity securities still held as of March 31, 2018.

Other invested assets

Other invested assets include an investment in FHLB stock that is carried at cost, which due to its nature approximates fair value. Ownership of FHLB stock provides access to a secured lending facility, and our current FHLB Advance amount is secured by eligible collateral whose fair value is maintained at least at 102% of the outstanding principal balance. As of March 31, 2018, that collateral consisting of fixed income securities is included in our total investment portfolio amount with a total fair value of $165.6 million.

Unrealized investment losses

Tables 7.4a and 7.4b below summarize, for all available-for-sale investments in an unrealized loss position at March 31, 2018 and December 31, 2017, the aggregate fair value and gross unrealized loss by the length of time those securities have been continuously in an unrealized loss position. The fair value amounts reported in tables 7.4a and 7.4b are estimated using the process described in Note 8 - “Fair Value Measurements” to these consolidated financial statements and in Note 3 - “Significant Accounting Policies” of the notes to the consolidated financial statements in our 2017 Annual Report on Form 10-K.



	Table	7.4a
Investments unrealized losses - current year			March 31, 2018
			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		$	77,510	$	(1,532	)	$	31,491	$	(680	)	$	109,001	$	(2,212	)
	Obligations of U.S. states and political subdivisions		905,755		(11,622		)	201,094		(7,508		)	1,106,849		(19,130		)
	Corporate debt securities		1,743,627		(26,797		)	148,468		(7,022		)	1,892,095		(33,819		)
	ABS		9,423		(29		)	—		—			9,423		(29		)
	RMBS		14,226		(416		)	156,842		(10,142		)	171,068		(10,558		)
	CMBS		114,206		(2,162		)	126,941		(7,638		)	241,147		(9,800		)
	CLOs		—		—			1,936		(41		)	1,936		(41		)
	Total		$	2,864,747	$	(42,558	)	$	666,772	$	(33,031	)	$	3,531,519	$	(75,589	)

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	Table	7.4b
Investments unrealized losses - prior year-end			December 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		$	144,042	$	(796	)	$	31,196	$	(482	)	$	175,238	$	(1,278	)
	Obligations of U.S. states and political subdivisions		505,311		(3,624		)	211,684		(5,125		)	716,995		(8,749		)
	Corporate debt securities		932,350		(4,288		)	200,716		(4,881		)	1,133,066		(9,169		)
	ABS		4,923		(2		)	—		—			4,923		(2		)
	RMBS		14,979		(280		)	166,329		(7,084		)	181,308		(7,364		)
	CMBS		51,096		(358		)	138,769		(4,548		)	189,865		(4,906		)
	CLOs		14,243		(7		)	3,568		(72		)	17,811		(79		)
	Equity securities		226		(2		)	431		(14		)	657		(16		)
	Total		$	1,667,170	$	(9,357	)	$	752,693	$	(22,206	)	$	2,419,863	$	(31,563	)

The unrealized losses in all categories of our investments at March 31, 2018 and December 31, 2017 were primarily caused by changes in interest rates between the time of purchase and the respective fair value measurement date. There were 788 and 586 securities in an unrealized loss position at March 31, 2018 and December 31, 2017, respectively. During each of the three months ended March 31, 2018 and 2017 there were no other-than-temporary impairments (“OTTI”) recognized.

Note 8. Fair Value Measurements

Recurring fair value measurements

In accordance with fair value accounting guidance, we applied the following fair value hierarchy 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 and 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 based on the type of instrument. 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.

Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. 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. 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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Assets measured at fair value, by hierarchy level, as of March 31, 2018 and December 31, 2017 as shown in tables 8.1a and 8.1b below are estimated using the process described above, and more fully in Note 3 - “Significant Accounting Policies” of the notes to the consolidated financial statements in our 2017 Annual Report on Form 10-K.



	Table	8.1a
Fair value hierarchy - current year			March 31, 2018
Fair value hierarchy - current year	(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		$	189,062	$	81,418	$	107,644	$	—
	Obligations of U.S. states and political subdivisions		2,102,697		—		2,102,443		254
	Corporate debt securities		2,056,079		—		2,056,079		—
	ABS		9,422		—		9,422		—
	RMBS		171,540		—		171,540		—
	CMBS		293,356		—		293,356		—
	CLOs		107,907		—		107,907		—
	Total fixed income securities		4,930,063		81,418		4,848,391		254
	Equity securities ⁽¹⁾		4,099		2,931		—		1,168
	Total investments at fair value		$	4,934,162	$	84,349	$	4,848,391	$	1,422
	Real estate acquired ⁽²⁾		$	10,078	$	—	$	—	$	10,078


⁽¹⁾	Equity securities in Level 3 are carried at cost, which approximates fair value. See “Reconciliations of Level 3 assets” below for information regarding a change in presentation of amounts previously included in Level 3 Equity securities.


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



	Table	8.1b
Fair value hierarchy - prior year-end			December 31, 2017
Fair value hierarchy - prior year-end	(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		$	178,846	$	81,598	$	97,248	$	—
	Obligations of U.S. states and political subdivisions		2,152,524		—		2,152,253		271
	Corporate debt securities		2,066,838		—		2,066,838		—
	ABS		4,923		—		4,923		—
	RMBS		181,849

CLASS OF STOCK

NUMBER OF SHARES

Common stock

April 30, 2018