

NOTE 6		Fair Value Measurements

The following table 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.


•	Other: Consists of money market funds with valuations derived from quoted prices for identical assets in active markets that we can access.

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") Collateralized Loan Obligations 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.

Level 3 measurements


•	Equity securities (2017): FHLB stock valued at par value due to restrictions that require it to be redeemed or sold only to the security issuer at par value.

RECURRING FAIR VALUE MEASUREMENTS

Assets carried at fair value included those listed, by hierarchy level, in the following tables as of December 31, 2018 and 2017:



Assets carried at fair value by hierarchy level as of December 31, 2018
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		$	167,176	$	42,264	$	124,912	$	—
Obligations of U.S. states and political subdivisions		1,720,100		—		1,720,087		13
Corporate debt securities		2,400,762		—		2,400,762		—
ABS		112,033		—		112,033		—
RMBS		178,961		—		178,961		—
CMBS		267,660		—		267,660		—
CLOs		305,295		—		305,295		—
Total fixed income securities		5,151,987		42,264		5,109,710		13
Equity securities		3,932		3,932		—		—
Other ⁽¹⁾		96,403		96,403		—		—
Real estate acquired ⁽²⁾		14,535		—		—		14,535
Total		$	5,266,857	$	142,599	$	5,109,710	$	14,548



Assets carried at fair value by hierarchy level as of December 31, 2017
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		$	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		—		181,849		—
CMBS		297,312		—		297,312		—
CLOs		101,023		—		101,023		—
Total fixed income securities		4,983,315		81,598		4,901,446		271
Equity securities ⁽³⁾		7,246		2,978		—		4,268
Real estate acquired ⁽²⁾		12,713		—		—		12,713
Total		$	5,003,274	$	84,576	$	4,901,446	$	17,252


⁽¹⁾	Consists of money market funds included in "Cash and Cash Equivalents" and "Restricted Cash and Cash Equivalents" on the consolidated balance sheet.


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


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

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 and liabilities measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the years ended December 31, 2018, 2017, and 2016 is shown in tables 6.2a, 6.2b and 6.2c below. As described in Note 3 - "Significant Accounting Policies," under updated guidance regarding the "Recognition and Measurement of Financial Assets and Financial Liabilities" which became effective on January 1, 2018, our investment in FHLB stock is no longer presented with equity securities. Prior to the updated guidance, the FHLB stock was included in our Level 3 equity securities. As shown in table 6.2a below, for the year ended December 31, 2018, we have transferred the FHLB stock out of Level 3 assets, and it is carried at cost, which approximates fair value, on our consolidated balance sheet in "Other invested assets" as of December 31, 2018. There were no transfers into or out of Level 3 for the years ending December 31, 2017 and 2016. There were no losses included in earnings for the years ended December 31, 2018, 2017, and 2016 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, 2018
Table	6.2a
(In thousands)		Debt Securities			Equity Securities			Total Investments			Real Estate Acquired
Balance at December 31, 2017		$	271		$	4,268		$	4,539		$	12,713
Transfers out of Level 3		—			(3,100		)	(3,100		)	—
Total realized/unrealized gains (losses):
Included in earnings and reported as net realized investment gains		—			3,663			3,663			—
Included in earnings and reported as losses incurred, net		—			—			—			(1,995		)
Purchases		—			—			—			33,912
Sales		(258		)	(4,831		)	(5,089		)	(30,095		)
Balance at December 31, 2018		$	13		$	—		$	13		$	14,535



Fair value roll-forward for financial instruments classified as Level 3 for the year ended December 31, 2017
Table	6.2b
(In thousands)		Debt Securities			Equity Securities		Total Investments			Real Estate Acquired
Balance at December 31, 2016		$	691		$	4,268	$	4,959		$	11,748
Total realized/unrealized gains (losses):
Included in earnings and reported as losses incurred, net		—			—		—			(1,315		)
Purchases		—			—		—			34,749
Sales		(420		)	—		(420		)	(32,469		)
Balance at December 31, 2017		$	271		$	4,268	$	4,539		$	12,713



Fair value roll-forward for financial instruments classified as Level 3 for the year ended December 31, 2016
Table	6.2c
(In thousands)		Debt Securities			Equity Securities			Total Investments			Real Estate Acquired
Balance at December 31, 2015		$	1,228		$	2,855		$	4,083		$	12,149
Total realized/unrealized gains (losses):
Included in earnings and reported as net realized investment gains		—			3,579			3,579			—
Included in earnings and reported as losses incurred, net		—			—			—			(1,142		)
Purchases		—			4,258			4,258			36,859
Sales		(537		)	(6,424		)	(6,961		)	(36,118		)
Balance at December 31, 2016		$	691		$	4,268		$	4,959		$	11,748

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

FINANCIAL LIABILITIES NOT CARRIED AT FAIR VALUE

Financial liabilities are incurred in the normal course of our business. 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, 2018 and 2017. The fair values of our 5.75% 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 - "Debt" for a description of the financial liabilities in table 6.3.



Financial liabilities not carried at fair value
Table	6.3
		December 31, 2018				December 31, 2017
(In thousands)		Carrying Value		Fair Value		Carrying Value		Fair Value
Liabilities
FHLB Advance		$	155,000	$	150,551	$	155,000	$	152,124
5.75% Notes		419,713		425,791		418,560		465,473
9% Debentures		256,872		338,069		256,872		353,507
Total financial liabilities		$	831,585	$	914,411	$	830,432	$	971,104

The 5.75% Notes and 9% Debentures are obligations of our holding company, MGIC Investment Corporation, and not of its subsidiaries.