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Fair Value Measurements

12 Months Ended

Dec. 31, 2020


NOTE 6						Fair Value Measurements

The following describes the valuation methodologies generally used by the independent pricing sources, or by us, to measure financial instruments at fair value, including the general classification of such financial instruments pursuant to the valuation hierarchy.

Level 1 measurements

•Fixed income securities: Consist of primarily U.S. Treasury securities with valuations derived from quoted prices for identical instruments in active markets that we can access.

•Equity securities: Consist of actively traded, exchange-listed equity securities with valuations derived from quoted prices for identical assets in active markets that we can access.

•Cash Equivalents: Consists of money market funds and treasury bills with valuations derived from quoted prices for identical assets in active markets that we can access. The remaining instruments in this category are valued using market data for comparable instruments and are classified as Level 2.

Level 2 measurements

•Fixed income securities:

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

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

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

Commercial Mortgage-Backed Securities ("CMBS") are valued using techniques that reflect market participants’ assumptions and maximize the use of relevant observable inputs including quoted prices for similar assets, benchmark yield curves and market corroborated inputs. Evaluation uses regular reviews of the inputs for securities covered, including executed trades, broker quotes, credit information, collateral attributes and/or cash flow waterfall as applicable.

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

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

Other Investments. These securities primarily consist of commercial paper which are valued using market data for comparable instruments of similar maturity and average yield.

Level 3 measurements

•Real estate acquired is valued at 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.

RECURRING FAIR VALUE MEASUREMENTS

Assets carried at fair value included those listed, by hierarchy level, in the following tables as of December 31, 2020 and 2019:


Assets carried at fair value by hierarchy level as of December 31, 2020
Table	6.1a
(In thousands)		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		$	265,693	$	149,339	$	116,354	$	—
Obligations of U.S. states and political subdivisions		2,249,869		—		2,249,869		—
Corporate debt securities		2,844,288		—		2,844,288		—
ABS		206,686		—		206,686		—
RMBS		431,166		—		431,166		—
CMBS		327,502		—		327,502		—
CLOs		310,490		—		310,490		—
Debt foreign government		4,709		—		4,709		—
Other Investments (1)		21,193		—		21,193		—
Total fixed income securities		6,661,596		149,339		6,512,257		—
Equity securities		18,215		18,215		—		—
Cash Equivalents		288,941		275,668		13,273		—
Real estate acquired (2)		1,092		—		—		1,092
Total		$	6,969,844	$	443,222	$	6,525,530	$	1,092


Assets carried at fair value by hierarchy level as of December 31, 2019
Table	6.1b
(In thousands)		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		$	196,203	$	34,240	$	161,963	$	—
Obligations of U.S. states and political subdivisions		1,653,865		—		1,653,865		—
Corporate debt securities		2,785,122		—		2,785,122		—
ABS		229,664		—		229,664		—
RMBS		268,586		—		268,586		—
CMBS		278,986		—		278,986		—
CLOs		325,466		—		325,466		—
Total fixed income securities		5,737,892		34,240		5,703,652		—
Equity securities		17,328		17,328		—		—
Cash Equivalents		164,693		164,693		—		—
Real estate acquired (2)		7,252		—		—		7,252
Total		$	5,927,165	$	216,261	$	5,703,652	$	7,252

(1)Consists of commercial paper included in "Investment Portfolio: Fixed income" with original maturities greater than ninety days.

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

Certain financial instruments, including insurance contracts, are excluded from fair value disclosure requirements. The carrying values of cash and cash equivalents (Level 1) and accrued investment income (Level 2) approximated their fair values.

RECONCILIATIONS OF LEVEL 3 ASSETS

For assets measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the years ended December 31, 2020 and 2019 is shown in tables 6.2a and 6.2b below. There were no losses included in earnings for the years ended December 31, 2020 and 2019 attributable to the change in unrealized losses on assets still held at the end of each applicable year.


Fair value roll-forward for financial instruments classified as Level 3 for the year ended December 31, 2020
Table	6.2a
(In thousands)		Debt Securities		Real Estate Acquired
Balance at December 31, 2019		$	—	$	7,252

Total realized/unrealized gains (losses):

Included in earnings and reported as losses incurred, net		—		660
Acquisitions		—		8,609
Sales		—		(15,429)
Balance at December 31, 2020		$	—	$	1,092


Fair value roll-forward for financial instruments classified as Level 3 for the year ended December 31, 2019
Table	6.2b
(In thousands)		Debt Securities		Real Estate Acquired
Balance at December 31, 2018		$	13	$	14,535
Total realized/unrealized gains (losses):
Included in earnings and reported as losses incurred, net		—		(476)
Acquisitions		—		24,204
Sales		(13)		(31,011)
Balance at December 31, 2019		$	—	$	7,252

Additional fair value disclosures related to our investment portfolio are included in Note 5 – “Investments.”

FINANCIAL LIABILITIES NOT CARRIED AT FAIR VALUE

Other invested assets include an investment in FHLB stock that is carried at cost, which due to restrictions that require it to be redeemed or sold only to the security issuer at par value, approximates fair value. The fair value of other invested assets is categorized as Level 2.

Financial liabilities include our outstanding debt obligations. The fair values of our 5.75% Notes 5.25% Notes, and 9% Debentures were based on observable market prices. The fair value of the FHLB Advance was estimated using cash flows discounted at current incremental borrowing rates for similar borrowing arrangements, and in all cases they are categorized as Level 2. See Note 7 - "D ebt" for a description of the financial liabilities in table 6.3.

Table 6.3 compares the carrying value and fair value of our financial liabilities disclosed, but not carried, at fair value as of December 31, 2020 and 2019.


Financial liabilities not carried at fair value
Table	6.3
		December 31, 2020				December 31, 2019
(In thousands)		Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets
Other invested assets		$	3,100	$	3,100	$	3,100	$	3,100
Financial liabilities
FHLB Advance		$	155,000	$	160,865	$	155,000	$	156,422
5.75% Notes		240,597		261,752		420,867		471,827
5.25% Notes		638,782		696,449		—		—
9% Debentures		208,814		273,569		256,872		346,289
Total financial liabilities		$	1,243,193	$	1,392,635	$	832,739	$	974,538

The 5.75% Notes, 5.25% Notes, and 9% Debentures are obligations of our holding company, MGIC Investment Corporation.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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