10-Q 1 mtg-033117x10q.htm 10-Q

FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended | March 31, 2017 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from ______ to ______ |
| Commission file number 1-10816 |

(Exact name of registrant as specified in its charter)

WISCONSIN |  | 39-1486475
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
250 E. KILBOURN AVENUE |  | 53202
MILWAUKEE, WISCONSIN |  | (Zip Code)
(Address of principal executive offices) |  |

(414) 347-6480
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES x | NO o

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

YES x | NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | (Do not check if a smaller reporting company)
Emerging growth company o | If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

YES o | NO x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

CLASS OF STOCK |  | PAR VALUE |  | DATE |  | NUMBER OF SHARES
Common stock |  | $1.00 |  | April 28, 2017 |  | 370,556,561

Forward Looking and Other Statements
All statements in this report that address events, developments or results that we expect or anticipate may occur in the future are “forward looking statements.” Forward looking statements consist of statements that relate to matters other than historical fact. In most cases, forward looking statements may be identified by words such as “believe,” “anticipate” or “expect,” or words of similar import. The risk factors referred to in “Forward Looking Statements and Risk Factors – Location of Risk Factors” in Management’s Discussion and Analysis of Financial Condition and Results of Operations below, may cause our actual results to differ materially from the results contemplated by forward looking statements that we may make. We are not undertaking any obligation to update any forward looking statements or other statements we may make in this document even though these statements may be affected by events or circumstances occurring after the forward looking statements or other statements were made. Therefore no reader of this document should rely on these statements being current as of any time other than the time at which this document was filed with the Securities and Exchange Commission.

Table of contents
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2017

TABLE OF CONTENTS
|  | Page
PART I — FINANCIAL INFORMATION
Item 1 | Financial Statements: |
| Consolidated Balance Sheets (Unaudited) - March 31, 2017 and December 31, 2016 | 7
| Consolidated Statements of Operations (Unaudited) - Three Months Ended March 31, 2017 and 2016 | 8
| Consolidated Statements of Comprehensive Income (Unaudited) - Three Months Ended March 31, 2017 and 2016 | 9
| Consolidated Statements of Shareholders’ Equity (Unaudited) - Three Months Ended March 31, 2017 and 2016 | 10
| Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended March 31, 2017 and 2016 | 11
| Notes to Consolidated Financial Statements (Unaudited) | 12
| Note 1 - Nature of Business and Basis of Presentation | 12
| Note 2 - New Accounting Pronouncements | 12
| Note 3 - Debt | 14
| Note 4 - Reinsurance | 15
| Note 5 - Litigation and Contingencies | 16
| Note 6 - Earnings Per Share | 17
| Note 7 - Investments | 18
| Note 8 - Fair Value Measurements | 20
| Note 9 - Other Comprehensive Income | 24
| Note 10 - Benefit Plans | 24
| Note 11 - Income Taxes | 24
| Note 12 - Loss Reserves | 25
| Note 13 - Shareholders’ Equity | 28
| Note 14 - Stock-Based Compensation | 28
| Note 15 - Statutory Information | 28
Item 2 | Management's Discussion and Analysis of Financial Condition and Results of Operations | 30
Item 3 | Quantitative and Qualitative Disclosures about Market Risk | 53
Item 4 | Controls and Procedures | 53
PART II — OTHER INFORMATION
Item 1A | Risk Factors | 54
Item 6 | Exhibits | 56
SIGNATURES | 57
INDEX TO EXHIBITS | 58

Table of contents
GLOSSARY OF TERMS AND ACRONYMS
/ A
ARMs
Adjustable rate mortgages
ABS
Asset-backed securities
ASC
Accounting Standards Codification
Available Assets
Assets, as designated under the PMIERs, that are readily available to pay claims, and include the most liquid investments
/ B
Book or book year
A group of loans insured in a particular calendar year
BPMI
Borrower-paid mortgage insurance
/ C
CFPB
Consumer Financial Protection Bureau
CLO
Collateralized loan obligations
CMBS
Commercial mortgage-backed securities
/ D
DAC
Deferred insurance policy acquisition costs
/ F
Fannie Mae
Federal National Mortgage Association
FCRA
Fair Credit Reporting Act
FHA
Federal Housing Administration
FHFA
Federal Housing Finance Agency
FHLB
Federal Home Loan Bank of Chicago, of which MGIC is a member
FICO score
A measure of consumer credit risk provided by credit bureaus, typically produced from statistical models by Fair Isaac Corporation utilizing data collected by the credit bureaus
Freddie Mac
Federal Home Loan Mortgage Corporation
/ G
GAAP
Generally Accepted Accounting Principles in the United States
GSEs
Collectively, Fannie Mae and Freddie Mac
/ H
HAMP
Home Affordable Modification Program
HARP
Home Affordable Refinance Program
HOPA
Homeowners Protection Act
/ I
IBNR
Losses incurred but not reported
IIF
Insurance in force, which for loans insured by us, is equal to the unpaid principal balance, as reported to us
/ J
JCT
Joint Committee on Taxation
/ L
LAE
Loss adjustment expenses
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Legacy book
Mortgage insurance policies written prior to 2009
Loan-to-value ("LTV") ratio
The ratio, expressed as a percentage, of the dollar amount of the first mortgage loan to the value of the property at the time the loan became insured and does not reflect subsequent housing price appreciation or depreciation. Subordinate mortgages may also be present.
Long-term debt:
5% Notes
5% Convertible Senior Notes due May 1, 2017, with interest payable semi-annually on May 1 and November 1 of each year
2% Notes
2% Convertible Senior Notes due on April 1, 2020, with interest payable semi-annually on April 1 and October 1 of each year
5.75% Notes
5.75% Senior Notes due on August 15, 2023, with interest payable semi-annually on February 15 and August 15 of each year
9% Debentures
9% Convertible Junior Subordinated Debentures due on April 1, 2063, with interest payable semi-annually on April 1 and October 1 of each year
FHLB Advance or the Advance
1.91% Fixed rate advance from the FHLB due on February 10, 2023, with interest payable monthly
Loss ratio
The ratio, expressed as a percentage, of the sum of incurred losses and loss adjustment expenses to NPE
Low down payment loans or mortgages
Loans with less than 20% down payments
LPMI
Lender-paid mortgage insurance
/ M
MBS
Mortgage-backed securities
MD&A
Management's discussion and analysis
MGIC
Mortgage Guaranty Insurance Corporation, a subsidiary of MGIC Investment Corporation
MIC
MGIC Indemnity Corporation, a subsidiary of MGIC
Minimum Required Assets
The minimum amount of Available Assets that must be held under the PMIERs, which is generally the greater of $400 million or an amount based upon a percentage of RIF weighted by certain risk attributes
MPP
Minimum Policyholder Position, as required under certain state requirements. The “policyholder position” of a mortgage insurer is its net worth or surplus, contingency reserve and a portion of the reserves for unearned premiums
/ N
N/A
Not applicable for the period presented
NAIC
The National Association of Insurance Commissioners
NIW
New Insurance Written
N/M
Data, or calculation, deemed not meaningful for the period presented
NPE
The amount of premiums earned, net of premiums assumed and ceded under reinsurance agreements
NPL
Non-performing loan, which is a delinquent loan, at any stage in its delinquency
NPW
The amount of premiums written, net of premiums assumed and ceded under reinsurance agreements
/ O
OCI
Office of the Commissioner of Insurance of the State of Wisconsin
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/ P
Persistency
The percentage of our insurance remaining in force from one year prior
PMI
Private Mortgage Insurance (as an industry or product type)
PMIERs
Private Mortgage Insurer Eligibility Requirements issued by the GSEs
Premium Yield
The ratio of NPE divided by the average IIF outstanding for the period measured
/ Q
QSR Transaction
Quota share reinsurance transaction
/ R
REMIC
Real Estate Mortgage Investment Conduit
RESPA
Real Estate Settlement Procedures Act
RIF
Risk in force, which for an individual loan insured by us, is equal to the unpaid loan principal balance, as reported to us, multiplied by the insurance coverage percentage. RIF is sometimes referred to as exposure
Risk-to-capital
The ratio of RIF, net of reinsurance and exposure on policies currently in default and for which loss reserves have been established, to the level of statutory capital
RMBS
Residential mortgage-backed securities
/ U
Underwriting Expense ratio
The ratio, expressed as a percentage, of the underwriting and operating expenses, net and amortization of DAC of our combined insurance operations (which excludes underwriting and operating expenses of our non-insurance operations) to NPW
Underwriting profit
NPE minus incurred losses
/ V
VA
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
(Unaudited)

(In thousands) |  | Note |  | March 31, 2017 |  | December 31, 2016
ASSETS |  |  |  |  |  |
Investment portfolio: |  | 7 / 8 |  |  |  |
Securities, available-for-sale, at fair value: |  |  |  |  |  |
Fixed income (amortized cost, 2017 - $4,655,457; 2016 - $4,717,211) |  |  |  | $ | 4,642,119 |  |  | $ | 4,685,222 |
Equity securities |  |  |  | 7,162 |  |  | 7,128 |
Total investment portfolio |  |  |  | 4,649,281 |  |  | 4,692,350 |
Cash and cash equivalents |  |  |  | 427,074 |  |  | 155,410 |
Accrued investment income |  |  |  | 43,786 |  |  | 44,073 |
Reinsurance recoverable on loss reserves |  | 4 |  | 46,658 |  |  | 50,493 |
Reinsurance recoverable on paid losses |  |  |  | 5,129 |  |  | 4,964 |
Premiums receivable |  |  |  | 51,907 |  |  | 52,392 |
Home office and equipment, net |  |  |  | 38,314 |  |  | 36,088 |
Deferred insurance policy acquisition costs |  |  |  | 18,236 |  |  | 17,759 |
Deferred income taxes, net |  | 11 |  | 552,469 |  |  | 607,655 |
Other assets |  |  |  | 71,034 |  |  | 73,345 |
Total assets |  |  |  | $ | 5,903,888 |  |  | $ | 5,734,529 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |  |  |  |
Liabilities: |  |  |  |  |  |
Loss reserves |  | 12 |  | $ | 1,335,042 |  |  | $ | 1,438,813 |
Unearned premiums |  |  |  | 337,322 |  |  | 329,737 |
Revolving credit facility |  | 3 |  | 150,000 |  |  | — |
Federal Home Loan Bank advance |  | 3 |  | 155,000 |  |  | 155,000 |
Senior notes |  | 3 |  | 417,695 |  |  | 417,406 |
Convertible senior notes |  | 3 |  | 349,848 |  |  | 349,461 |
Convertible junior subordinated debentures |  | 3 |  | 256,872 |  |  | 256,872 |
Other liabilities |  |  |  | 254,578 |  |  | 238,398 |
Total liabilities |  |  |  | 3,256,357 |  |  | 3,185,687 |
Contingencies |  | 5 |  |  |  |  |  |
Shareholders’ equity: |  | 13 |  |  |  |
Common stock (one dollar par value, shares authorized 1,000,000; shares issued 2017 - 360,171; 2016 - 359,400; shares outstanding 2017 - 341,434; 2016 - 340,663) |  |  |  | 360,171 |  |  | 359,400 |
Paid-in capital |  |  |  | 1,778,305 |  |  | 1,782,337 |
Treasury stock at cost (shares 2017 and 2016 - 18,737) |  |  |  | (150,359 | ) |  | (150,359 | )
Accumulated other comprehensive loss, net of tax |  |  |  | (63,101 | ) |  | (75,100 | )
Retained earnings |  |  |  | 722,515 |  |  | 632,564 |
Total shareholders’ equity |  |  |  | 2,647,531 |  |  | 2,548,842 |
Total liabilities and shareholders’ equity |  |  |  | $ | 5,903,888 |  |  | $ | 5,734,529 |

See accompanying notes to consolidated financial statements.
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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

|  |  |  | Three Months Ended March 31,
(In thousands, except per share data) |  | Note |  | 2017 |  | 2016
Revenues: |  |  |  |  |  |
Premiums written: |  |  |  |  |  |
Direct |  |  |  | $ | 265,823 |  |  | $ | 265,291 |
Assumed |  |  |  | 1,288 |  |  | 208 |
Ceded |  | 4 |  | (30,409 | ) |  | (34,218 | )
Net premiums written |  |  |  | 236,702 |  |  | 231,281 |
Increase in unearned premiums, net |  |  |  | (7,599 | ) |  | (9,940 | )
Net premiums earned |  |  |  | 229,103 |  |  | 221,341 |
Investment income, net of expenses |  |  |  | 29,477 |  |  | 27,809 |
Net realized investment (losses) gains |  |  |  | (122 | ) |  | 3,056 |
Other revenue |  |  |  | 2,422 |  |  | 6,373 |
Total revenues |  |  |  | 260,880 |  |  | 258,579 |
Losses and expenses: |  |  |  |  |  |
Losses incurred, net |  | 12 |  | 27,619 |  |  | 85,012 |
Amortization of deferred policy acquisition costs |  |  |  | 2,230 |  |  | 1,961 |
Other underwriting and operating expenses, net |  |  |  | 40,765 |  |  | 39,777 |
Interest expense |  |  |  | 16,309 |  |  | 14,701 |
Loss on debt extinguishment |  |  |  | — |  |  | 13,440 |
Total losses and expenses |  |  |  | 86,923 |  |  | 154,891 |
Income before tax |  |  |  | 173,957 |  |  | 103,688 |
Provision for income taxes |  | 11 |  | 84,159 |  |  | 34,497 |
Net income |  |  |  | $ | 89,798 |  |  | $ | 69,191 |
Earnings per share: |  |  |  |  |  |
Basic |  | 6 |  | $ | 0.26 |  |  | $ | 0.20 |
Diluted |  | 6 |  | $ | 0.24 |  |  | $ | 0.17 |
Weighted average common shares outstanding - basic |  | 6 |  | 341,009 |  |  | 340,144 |
Weighted average common shares outstanding - diluted |  | 6 |  | 402,175 |  |  | 431,365 |

See accompanying notes to consolidated financial statements.
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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

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

See accompanying notes to consolidated financial statements
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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)

|  |  |  | Three Months Ended March 31,
(In thousands) |  | Note |  | 2017 |  | 2016
Common stock |  |  |  |  |  |
Balance, beginning of period |  |  |  | $ | 359,400 |  |  | $ | 340,097 |
Net common stock issued under share-based compensation plans |  |  |  | 771 |  |  | 979 |
Balance, end of period |  |  |  | 360,171 |  |  | 341,076 |
Paid-in capital |  |  |  |  |  |
Balance, beginning of period |  |  |  | 1,782,337 |  |  | 1,670,238 |
Net common stock issued under share-based compensation plans |  |  |  | (7,493 | ) |  | (5,949 | )
Tax benefit from share-based compensation |  |  |  | — |  |  | 115 |
Equity compensation |  |  |  | 3,461 |  |  | 3,129 |
Reacquisition of convertible junior subordinated debentures-equity component |  |  |  | — |  |  | (6,337 | )
Balance, end of period |  |  |  | 1,778,305 |  |  | 1,661,196 |
Treasury stock |  |  |  |  |  |
Balance, beginning of period |  |  |  | (150,359 | ) |  | (3,362 | )
Balance, end of period |  |  |  | (150,359 | ) |  | (3,362 | )
Accumulated other comprehensive loss |  |  |  |  |  |
Balance, beginning of period |  |  |  | (75,100 | ) |  | (60,880 | )
Other comprehensive income, net of tax |  | 9 |  | 11,999 |  |  | 49,544 |
Balance, end of period |  |  |  | (63,101 | ) |  | (11,336 | )
Retained earnings |  |  |  |  |  |
Balance, beginning of period |  | 2 / 13 |  | 632,717 |  |  | 290,047 |
Net income |  |  |  | 89,798 |  |  | 69,191 |
Balance, end of period |  |  |  | 722,515 |  |  | 359,238 |
Total shareholders’ equity |  |  |  | $ | 2,647,531 |  |  | $ | 2,346,812 |

See accompanying notes to consolidated financial statements.
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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

|  | Three Months Ended March 31,
(In thousands) |  | 2017 |  | 2016
Cash flows from operating activities: |  |  |  |
Net income |  | $ | 89,798 |  |  | $ | 69,191 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |
Depreciation and amortization |  | 17,079 |  |  | 14,109 |
Deferred tax expense |  | 48,932 |  |  | 33,270 |
Net realized investment losses (gains) |  | 122 |  |  | (3,056 | )
Loss on debt extinguishment |  | — |  |  | 13,440 |
Change in certain assets and liabilities: |  |  |  |
Accrued investment income |  | 287 |  |  | 1,205 |
Prepaid insurance premium |  | 15 |  |  | 34 |
Reinsurance recoverable on loss reserves |  | 3,835 |  |  | 3,368 |
Reinsurance recoverable on paid losses |  | (165 | ) |  | (536 | )
Premium receivable |  | 485 |  |  | 1,284 |
Deferred insurance policy acquisition costs |  | (477 | ) |  | (705 | )
Profit commission receivable |  | (3,395 | ) |  | 760 |
Loss reserves |  | (103,771 | ) |  | (140,013 | )
Unearned premiums |  | 7,585 |  |  | 9,906 |
Return premium accrual |  | (4,800 | ) |  | (4,850 | )
Income taxes payable - current |  | 34,654 |  |  | 289 |
Other, net |  | (12,715 | ) |  | 5,840 |
Net cash provided by operating activities |  | 77,469 |  |  | 3,536 |
Cash flows from investing activities: |  |  |  |
Purchases of investments: |  |  |  |
Fixed income |  | (187,077 | ) |  | (288,273 | )
Equity securities |  | (19 | ) |  | (3,109 | )
Proceeds from sales of fixed income |  | 33,980 |  |  | 315,927 |
Proceeds from maturity of fixed income |  | 199,234 |  |  | 139,863 |
Proceeds from sale of equity securities |  | — |  |  | 2,525 |
Net increase in payable for securities |  | 10,336 |  |  | 44,289 |
Additions to property and equipment |  | (4,014 | ) |  | (1,916 | )
Net cash provided by investing activities |  | 52,440 |  |  | 209,306 |
Cash flows from financing activities: |  |  |  |
Proceeds from revolving credit facility |  | 150,000 |  |  | — |
Proceeds from issuance of long-term debt |  | — |  |  | 155,000 |
Purchase of convertible senior notes |  | — |  |  | (134,105 | )
Payment of original issue discount - convertible senior notes |  | — |  |  | (4,148 | )
Purchase of convertible junior subordinated debentures |  | — |  |  | (100,860 | )
Payment of original issue discount - convertible junior subordinated debentures |  | — |  |  | (41,540 | )
Cash portion of loss on debt extinguishment |  | — |  |  | (13,440 | )
Payment of debt issuance costs |  | (1,523 | ) |  | — |
Payment of withholding taxes related to share-based compensation net share settlement |  | (6,722 | ) |  | (4,971 | )
Net cash provided by (used in) financing activities |  | 141,755 |  |  | (144,064 | )
Net increase in cash and cash equivalents |  | 271,664 |  |  | 68,778 |
Cash and cash equivalents at beginning of period |  | 155,410 |  |  | 181,120 |
Cash and cash equivalents at end of period |  | $ | 427,074 |  |  | $ | 249,898 |

See accompanying notes to consolidated financial statements.
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MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)
Note 1. Nature of Business and Basis of Presentation
MGIC Investment Corporation is a holding company which, through Mortgage Guaranty Insurance Corporation (“MGIC”) is principally engaged in the mortgage insurance business. We provide mortgage insurance to lenders throughout the United States and to government sponsored entities (“GSEs”) to protect against loss from defaults on low down payment residential mortgage loans.
The accompanying unaudited consolidated financial statements of MGIC Investment Corporation and its wholly-owned subsidiaries have been prepared in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission (“SEC”) for interim reporting and do not include all of the other information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2016 included in our Annual Report on Form 10-K. As used below, “we,” “our” and “us” refer to MGIC Investment Corporation’s consolidated operations or to MGIC Investment Corporation, as the context requires.
In the opinion of management the accompanying financial statements include all adjustments, consisting primarily of normal recurring accruals, necessary to fairly state our consolidated financial position and consolidated results of operations for the periods indicated. The consolidated results of operations for the interim period may not be indicative of the results that may be expected for the year ending December 31, 2017.
Substantially all of our insurance written since 2008 has been for loans purchased by the GSEs. We operate under the Private Mortgage Insurer Eligibility Requirements ("PMIERs") of the GSEs that became effective December 31, 2015, and were most recently revised in December 2016. The financial requirements of the PMIERs require a mortgage insurer’s "Available Assets" (generally only the most liquid assets of an insurer) to equal or exceed its "Minimum Required Assets" (which are based on an insurer's book and are calculated from tables of factors with several risk dimensions and are subject to a floor amount). Based on our interpretation of the PMIERs, as of March 31, 2017, MGIC’s Available Assets are in excess of its Minimum Required Assets; and MGIC is in compliance with the financial requirements of the PMIERs and eligible to insure loans purchased by the GSEs.
Reclassifications
Certain reclassifications to 2016 amounts have been made in the accompanying financial statements to conform to the 2017 presentation.
Subsequent events
We have considered subsequent events through the date of this filing. See Note 3 - “Debt” and Note 13 - “Shareholders’ Equity” for information regarding the conversion of our 2% Notes into shares of our common stock, and partial cash redemption, in April 2017.
Note 2. New Accounting Pronouncements
Adopted Accounting Standards
Improvements to Employee Share-Based Compensation Accounting
In March 2016, the Financial Accounting Standards Board (“FASB”) issued updated guidance that simplifies several aspects of the accounting for employee share-based compensation including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows. The updated guidance requires that, prospectively, all tax effects related to share-based compensation be made through the statement of operations at the time of settlement. In contrast, the previous guidance required excess tax benefits to be recognized in paid-in capital. The updated guidance also removes the requirement to delay recognition of a tax benefit until it reduces current taxes payable. This change is required to be applied on a modified retrospective basis, with a cumulative effect adjustment to opening retained earnings. Additionally, all tax related cash flows resulting from share-based compensation are to be reported as operating activities on the statement of cash flows, a change from the existing requirement to present tax benefits as an inflow from financing activities and an outflow from operating activities. Finally, for tax withholding purposes, entities will be allowed to withhold an amount of shares up to the employee’s maximum individual tax rate (as opposed to the minimum statutory tax rate) in the relevant jurisdiction without resulting in liability classification of the award. The change in tax withholding is to be applied on a modified retrospective approach. This updated guidance became effective January 1, 2017. We have adopted this guidance for the period ending March 31, 2017 and as a result of the adoption:

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

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

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

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

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

Prospective Accounting Standards
Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued updated guidance to amend the amortization period for certain purchased callable debt securities held at a premium shortening the amortization period to the earliest call date. Under current GAAP, there is diversity in practice in the amortization period for premiums of callable debt securities and in how the potential for exercise of a call is factored into current impairment assessments. This updated guidance aligns with how callable debt securities, in the United States, are generally quoted, priced, and traded assuming a model that incorporates consideration of calls (also referred to as “yield-to-worst” pricing). The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statements, but do not expect it to have a material impact on our consolidated financial statements or disclosures. We currently account for premium amortization on our purchased callable debt securities on a yield-to-worst basis, which generally aligns with the earliest call date.
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued updated guidance that improves the reporting of net benefit cost in the financial statements. The updated guidance requires that an employer report the service cost component in the same financial statement caption as other compensation costs arising from services rendered by employees during the period. The other components of net benefit cost are
required to be presented in the statement of operations separately from the service cost component and outside a subtotal of income from operations, if one is presented. Current guidance does not prescribe where the amount of net benefit cost should be presented in an employer’s statement of operations and does not require entities to disclose by line item the amount of net benefit cost that is included in the statement of operations. The updated guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statements, but do not expect it to have a material impact on our consolidated statement of operations or financial statement disclosures.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued updated guidance that requires immediate recognition of estimated credit losses expected to occur over the remaining life of many financial instruments. Entities will be required to utilize a current expected credit losses (“CECL”) methodology that incorporates their forecasts of future economic conditions into their loss estimate unless such forecast is not reasonable and supportable, in which case the entity will revert to historical loss experience. Any allowance for CECL reduces the amortized cost basis of the financial instrument to the amount an entity expects to collect. Credit losses relating to available-for-sale fixed maturity securities are to be recorded through an allowance for credit losses, rather than a write-down of the asset, with the amount of the allowance limited to the amount by which fair value is less than amortized cost. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists. The updated guidance is not prescriptive about certain aspects of estimating expected credit losses, including the specific methodology to use, and therefore will require significant judgment in application. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted for annual and interim periods in fiscal years beginning after December 15, 2018. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statements, but do not expect it to have a material impact on our consolidated financial statements or disclosures.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued updated guidance to address the recognition, measurement, presentation, and disclosure of certain financial instruments. The updated guidance requires equity investments, except those accounted for under the equity method of accounting, that have a readily determinable fair value to be measured at fair value with changes in fair value recognized in net income.
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Equity investments that do not have readily determinable fair values may be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. A qualitative assessment for impairment is required for equity investments without readily determinable fair values. The updated guidance also eliminates the requirement to disclose the method and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet. The updated guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods and will require recognition of a cumulative effect adjustment at adoption. We do not currently expect the adoption of this guidance to impact our consolidated financial position or liquidity.
Note 3. Debt
2017 debt transactions
2% Notes
On March 21, 2017, we issued an irrevocable notice of redemption in respect of our outstanding 2% Notes, with a redemption date of April 21, 2017. As of March 31, 2017, we had outstanding approximately $207.6 million aggregate principal amount of our 2% Notes.
Subsequent event
Subsequent to our notice of redemption, in April, holders of approximately $202.5 million of the outstanding principal exercised their rights to convert their notes into shares of our common stock. The remaining $5.1 million of outstanding principal was redeemed for cash. The conversions of the 2% Notes at a rate of 143.8332 shares per $1,000 principal amount resulted in the issuance of approximately 29.1 million shares of our common stock in April. The conversions and cash redemption eliminated our debt obligation. No gain or loss will be recognized from the conversions as the outstanding debt issuance costs associated with the conversions are included in the debt carrying value, which is credited to shareholders’ equity at the time of conversion.
Credit Facility
On March 21, 2017, we entered into a Credit Agreement with various lenders which provides for a $175 million unsecured revolving credit facility maturing on March 21, 2020. Revolving credit borrowings bear interest at a floating rate, which will be, at our option, either a eurocurrency rate or a base rate, in each case plus an applicable margin. The applicable margins are subject to adjustment based on our senior unsecured long-term debt rating, or if we do not have such a rating, our corporate or issuer rating. Amounts under the facility may be borrowed, repaid and reborrowed from time to time until the maturity of the revolving credit facility. Voluntary
prepayments and commitment reductions are permitted at any time without fee subject to a minimum dollar requirement and, for outstanding eurocurrency loans, customary breakage costs.
We are required under the Credit Agreement to pay commitment fees on the average daily amount of the unused revolving commitments of the lenders, and an annual administrative fee to the Administrative Agent. The Credit Agreement contains affirmative, negative and financial covenants which are customary for financings of this type, including, among other things, limits on the creation of liens, limits on the incurrence of indebtedness, restrictions on dispositions, maximum debt-to-capital ratio, minimum consolidated stockholders' equity, minimum policyholder's position of MGIC, and compliance with the financial requirements of the PMIERs. The Credit Agreement includes customary events of default for facilities of this type (with customary grace periods, as applicable) and provides that, upon the occurrence of an event of default, payments of all outstanding loans may be accelerated and/or the lenders' commitments may be terminated. Upon the occurrence of certain insolvency or bankruptcy related events of default, all amounts payable under the Credit Agreements shall automatically become immediately due and payable, and the lenders' commitments will automatically terminate. In addition, upon the occurrence of certain insolvency or bankruptcy related events of default, or the failure to pay interest, principal or fees, the interest rates on all outstanding obligations will be increased.
As of March 31, 2017, we borrowed $150 million under the revolving credit facility, to fund a portion of the redemption price of the 2% Notes if holders did not elect to convert their 2% Notes. In April, we repaid the amount borrowed under the revolving credit facility because most holders elected to convert their notes. Costs incurred to enter into the Credit Agreement have been deferred and recorded as Other assets and will be amortized over the term of the Credit Agreement.
5% Notes
As of March 31, 2017, we had outstanding $145.0 million aggregate principal amount of our 5% Notes due in 2017 (“5% Notes”). These notes matured on May 1, 2017 and the principal and accrued interest were settled with cash at our holding company.
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Debt obligations
The par value of our long-term debt obligations and their aggregate carrying values and borrowings under our revolving credit facility as of March 31, 2017 and December 31, 2016 were as follows.

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

(1) | Convertible at any time prior to maturity at the holder’s option, at an initial conversion rate, which is subject to adjustment, of 74.0741 shares per $1,000 principal amount, representing an initial conversion price of approximately $13.50 per share. If a holder elects to convert their debentures, deferred interest owed on the debentures being converted is also converted into shares of our common stock. The conversion rate for any deferred interest is based on the average price that our shares traded at during a 5-day period immediately prior to the election to convert. In lieu of issuing shares of common stock upon conversion of the debentures, we may, at our option, make a cash payment to converting holders for all or some of the shares of our common stock otherwise issuable upon conversion.

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

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

Note 4. Reinsurance
The reinsurance agreements we have entered into are discussed below. The effect of all of our reinsurance agreements on premiums earned and losses incurred is as follows:

|  | Three Months Ended March 31,
(In thousands) |  | 2017 |  | 2016
Premiums earned: |  |  |  |
Direct |  | $ | 259,428 |  |  | $ | 255,387 |
Assumed |  | 98 |  |  | 208 |
Ceded |  | (30,423 | ) |  | (34,254 | )
Net premiums earned |  | $ | 229,103 |  |  | $ | 221,341 |
Losses incurred: |  |  |  |
Direct |  | $ | 32,413 |  |  | $ | 92,432 |
Assumed |  | 105 |  |  | 101 |
Ceded |  | (4,899 | ) |  | (7,521 | )
Net losses incurred |  | $ | 27,619 |  |  | $ | 85,012 |

Quota share reinsurance
In March 2017, we entered into a quota share reinsurance agreement (“2017 QSR Transaction”) with an effective date of January 1, 2017 with a group of unaffiliated reinsurers, each with a financial strength rating of A- or better by Standard and Poor’s, A.M. Best or both. We utilize quota share reinsurance to manage our exposure to losses resulting from our mortgage guaranty insurance policies and to provide reinsurance capital credit under the PMIERs. Our 2017 QSR Transaction provides coverage on new business written January 1, 2017 through December 29, 2017 that meets certain eligibility requirements. Under the agreement we cede losses incurred and premiums on or after the effective date through December 31, 2028, at which time the agreement expires. Early termination of the agreement can be elected by us effective December 31, 2021 for a fee, or under specified scenarios for no fee upon prior written notice including if we will receive less than 90% of the full credit amount under the PMIERs for the risk ceded in any required calculation period.
Our 2015 quota share reinsurance agreement (“2015 QSR Transaction”), which became effective on July 1, 2015, covers eligible risk in force written before 2017. The group of unaffiliated reinsurers under our 2015 QSR Transaction each has an insurer financial strength rating of A- or better by Standard and Poor’s Rating Services, A.M. Best or both. The 2015 QSR Transaction cedes losses incurred and premiums through December 31, 2024, at which time the agreement expires. Early termination of the agreement can be elected by us effective December 31, 2018 for a fee, or under specified scenarios for no fee upon prior written notice, including if we will receive less than 90% of the full credit amount under the PMIERs for the risk ceded in any required calculation period.
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The structure of both the 2017 QSR Transaction and 2015 QSR Transaction is a 30% quota share for all policies covered, with a 20% ceding commission as well as a profit commission. Generally, under the QSR Transactions, we will receive a profit commission provided that the loss ratio on the loans covered under the agreement remains below 60%.
Following is a summary of our quota share reinsurance agreements, excluding captive agreements discussed below, for the three months ended March 31, 2017 and 2016.

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

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

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

Under the terms of QSR Transactions, ceded premiums, ceding commission and profit commission are settled net on a quarterly basis. The ceded premium due after deducting the related ceding commission and profit commission is reported within “Other liabilities” on the consolidated balance sheets.
The reinsurance recoverable on loss reserves related to our QSR Transactions was $32.7 million as of March 31, 2017 and $31.8 million as of December 31, 2016. The reinsurance recoverable balance is secured by funds on deposit from the reinsurers which are based on the funding requirements of PMIERs that address ceded risk.
Captive reinsurance
In the past, MGIC also obtained captive reinsurance. In a captive reinsurance arrangement, the reinsurer is affiliated with the lender for whom MGIC provides mortgage insurance. As part of our settlement with the Consumer Financial Protection Bureau (“CFPB”) in 2013 and with the Minnesota Department of Commerce in 2015, MGIC has agreed to not enter into any new captive reinsurance agreement or reinsure any new loans under any existing captive reinsurance agreement for a period of ten years subsequent to the respective settlements. In accordance with the CFPB settlement, all of our active captive arrangements were placed into run-off. In addition, the GSEs will not approve any future reinsurance or risk sharing transaction with a mortgage enterprise or an affiliate of a mortgage enterprise.
The reinsurance recoverable on loss reserves related to captive agreements was $14 million as of March 31, 2017, which was supported by $86 million of trust assets, while as of December 31, 2016, the reinsurance recoverable on loss reserves related to captive agreements was $19 million, which was supported by $91 million of trust assets. Each captive reinsurer is required to maintain a separate trust account to support its combined reinsured risk on all annual books. MGIC is the sole beneficiary of the trusts.
Note 5. Litigation and Contingencies
Before paying an insurance claim, we review the loan and servicing files to determine the appropriateness of the claim amount. When reviewing the files, we may determine that we have the right to rescind coverage on the loan. In our SEC reports, we refer to insurance rescissions and denials of claims collectively as “rescissions” and variations of that term. In addition, all of our insurance policies provide that we can reduce or deny a claim if the servicer did not comply with its obligations under our insurance policy. We call such reduction of claims “curtailments.” In recent quarters, an immaterial percentage of claims received in a quarter have been resolved by rescissions. In each of 2016 and the first quarter of 2017, curtailments reduced our average claim paid by approximately 5.5%.
Our loss reserving methodology incorporates our estimates of future rescissions, curtailments, and reversals of rescissions and curtailments. A variance between ultimate actual rescission, curtailment and reversal rates and our estimates, as a result of the outcome of litigation, settlements or other factors, could materially affect our losses.
When the insured disputes our right to rescind coverage or curtail claims, we generally engage in discussions in an attempt to settle the dispute. If we are unable to reach a settlement, the outcome of a dispute ultimately would be determined by legal proceedings.
Under ASC 450-20, until a liability associated with settlement discussions or legal proceedings becomes probable and can be reasonably estimated, we consider our claim payment or rescission resolved for financial reporting purposes and do not accrue an estimated loss. Where we have determined that a loss is probable and can be reasonably estimated, we have recorded our best estimate of our probable loss. If we are not able to implement settlements we consider probable, we intend to defend MGIC vigorously against any related legal proceedings.
In addition to matters for which we have recorded a probable loss, we are involved in other discussions and/or proceedings with insureds with respect to our claims paying practices. Although it is reasonably possible that when these matters are resolved we will not prevail in all cases, we are unable to make a reasonable estimate or range of
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estimates of the potential liability. We estimate the maximum exposure associated with matters where a loss is reasonably possible to be approximately $306 million, although we believe (but can give no assurance that) we will ultimately resolve these matters for significantly less than this amount. This estimate of our maximum exposure does not include interest or consequential or exemplary damages.
Mortgage insurers, including MGIC, have been involved in litigation and regulatory actions related to alleged violations of the anti-referral fee provisions of the Real Estate Settlement Procedures Act, which is commonly known as RESPA, and the notice provisions of the Fair Credit Reporting Act, which is commonly known as FCRA. While these proceedings in the aggregate have not resulted in material liability for MGIC, there can be no assurance that the outcome of future proceedings, if any, under these laws would not have a material adverse affect on us. In addition, various regulators, including the CFPB, state insurance commissioners and state attorneys general may bring other actions seeking various forms of relief in connection with alleged violations of RESPA. The insurance law provisions of many states prohibit paying for the referral of insurance business and provide various mechanisms to enforce this prohibition. While we believe our practices are in conformity with applicable laws and regulations, it is not possible to predict the eventual scope, duration or outcome of any such reviews or investigations nor is it possible to predict their effect on us or the mortgage insurance industry.
Through a non-insurance subsidiary, we utilize our underwriting skills to provide an outsourced underwriting service to our customers known as contract underwriting. As part of the contract underwriting activities, that subsidiary is responsible for the quality of the underwriting decisions in accordance with the terms of the contract underwriting agreements with customers. That subsidiary may be required to provide certain remedies to its customers if certain standards relating to the quality of our underwriting work are not met, and we have an established reserve for such future obligations. Claims for remedies may be made a number of years after the underwriting work was performed. The underwriting remedy expense for 2016 and the first quarter of 2017 was immaterial to our consolidated financial statements.
In addition to the matters described above, we are involved in other legal proceedings in the ordinary course of business. In our opinion, based on the facts known at this time, the ultimate resolution of these ordinary course legal proceedings will not have a material adverse effect on our financial position or results of operations.
See Note 11 – “Income Taxes” for a description of federal income tax contingencies.
Note 6. Earnings per Share
Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of shares of common stock outstanding. Diluted EPS includes the components of basic EPS and also gives effect to dilutive common stock equivalents. We calculate diluted EPS using the treasury stock method and if-converted method. Under the if-converted method, diluted EPS reflects the potential dilution that could occur if our convertible debt instruments result in the issuance of common stock. The determination of potentially issuable shares does not consider the satisfaction of the conversion requirements and the shares are included in the determination of diluted EPS as of the beginning of the period, if dilutive. As of March 31, 2017, we had several debt issuances that could result in contingently issuable shares and consider each potential issuance of shares separately to reflect the maximum potential dilution. Nonetheless, our dilutive common stock equivalents may not reflect all of the contingently issuable shares that could be required to be issued upon any debt conversion. See Note 3 - “Debt’ for a discussion of subsequent events affecting our debt issuances that could result in contingently issuable shares. For purposes of calculating basic and diluted EPS, vested restricted stock and restricted stock units ("RSUs") are considered outstanding.
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The following table reconciles the numerators and denominators used to calculate basic and diluted EPS and also indicates the number of antidilutive securities.

|  | Three Months Ended March 31,
(In thousands, except per share data) |  | 2017 |  | 2016
Basic earnings per share: |  |  |  |
Net income |  | $ | 89,798 |  |  | $ | 69,191 |
Weighted average common shares outstanding |  | 341,009 |  |  | 340,144 |
Basic income per share |  | $ | 0.26 |  |  | $ | 0.20 |
Diluted earnings per share: |  |  |  |
Net income |  | $ | 89,798 |  |  | $ | 69,191 |
Interest expense, net of tax (1): |  |  |  |
2% Notes |  | 823 |  |  | 1,982 |
5% Notes |  | 1,282 |  |  | 2,678 |
9% Debentures |  | 3,757 |  |  | — |
Diluted income available to common shareholders |  | $ | 95,660 |  |  | $ | 73,851 |
Weighted average shares - basic |  | 341,009 |  |  | 340,144 |
Effect of dilutive securities: |  |  |  |
Unvested RSUs |  | 1,488 |  |  | 1,679 |
2% Notes |  | 29,859 |  |  | 71,917 |
5% Notes |  | 10,791 |  |  | 17,625 |
9% Debentures |  | 19,028 |  |  | — |
Weighted average shares - diluted |  | 402,175 |  |  | 431,365 |
Diluted income per share |  | $ | 0.24 |  |  | $ | 0.17 |
Antidilutive securities (in millions) |  | — |  |  | 23.3 |

(1) | Tax effected at a rate of 35%.

Note 7. Investments
The amortized cost, gross unrealized gains and losses and fair value of the investment portfolio at March 31, 2017 and December 31, 2016 are shown below.

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

December 31, 2016
(In thousands) |  | Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses (1) |  | Fair Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies |  | $ | 73,847 |  |  | $ | 407 |  |  | $ | (724 | ) |  | $ | 73,530 |
Obligations of U.S. states and political subdivisions |  | 2,147,458 |  |  | 20,983 |  |  | (25,425 | ) |  | 2,143,016 |
Corporate debt securities |  | 1,756,461 |  |  | 6,059 |  |  | (18,610 | ) |  | 1,743,910 |
ABS |  | 59,519 |  |  | 74 |  |  | (28 | ) |  | 59,565 |
RMBS |  | 231,733 |  |  | 102 |  |  | (7,626 | ) |  | 224,209 |
CMBS |  | 327,042 |  |  | 769 |  |  | (7,994 | ) |  | 319,817 |
CLOs |  | 121,151 |  |  | 226 |  |  | (202 | ) |  | 121,175 |
Total debt securities |  | 4,717,211 |  |  | 28,620 |  |  | (60,609 | ) |  | 4,685,222 |
Equity securities |  | 7,144 |  |  | 8 |  |  | (24 | ) |  | 7,128 |
Total investment portfolio |  | $ | 4,724,355 |  |  | $ | 28,628 |  |  | $ | (60,633 | ) |  | $ | 4,692,350 |

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

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The FHLB Advance is secured by eligible collateral whose fair value must be maintained at 102% of the outstanding principal balance. As of March 31, 2017 that collateral is included in our total investment portfolio amount shown above with a total fair value of $165.0 million.
The amortized cost and fair values of debt securities at March 31, 2017, by contractual maturity, are shown in the following table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most asset-backed and mortgage-backed securities and collateralized loan obligations provide for periodic payments throughout their lives, they are listed in separate categories.

March 31, 2017 |  |  |  |
(In thousands) |  | Amortized Cost |  | Fair Value
Due in one year or less |  | $ | 338,124 |  |  | $ | 338,309 |
Due after one year through five years |  | 1,318,577 |  |  | 1,323,558 |
Due after five years through ten years |  | 1,091,184 |  |  | 1,082,035 |
Due after ten years |  | 1,228,385 |  |  | 1,232,706 |
|  | $ | 3,976,270 |  |  | $ | 3,976,608 |
ABS |  | 37,107 |  |  | 37,117 |
RMBS |  | 220,739 |  |  | 212,909 |
CMBS |  | 300,185 |  |  | 294,117 |
CLOs |  | 121,156 |  |  | 121,368 |
Total as of March 31, 2017 |  | $ | 4,655,457 |  |  | $ | 4,642,119 |

At March 31, 2017 and December 31, 2016, the investment portfolio had gross unrealized losses of $48.8 million and $60.6 million, respectively. For those securities in an unrealized loss position, the length of time the securities were in such a position, as measured by their month-end fair values, is as follows:

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

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December 31, 2016 |  | Less Than 12 Months |  | 12 Months or Greater |  | Total
(In thousands) |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
U.S. Treasury securities and obligations of U.S. government corporations and agencies |  | $ | 48,642 |  |  | $ | (724 | ) |  | $ | — |  |  | $ | — |  |  | $ | 48,642 |  |  | $ | (724 | )
Obligations of U.S. states and political subdivisions |  | 1,136,676 |  |  | (24,918 | ) |  | 13,681 |  |  | (507 | ) |  | 1,150,357 |  |  | (25,425 | )
Corporate debt securities |  | 915,777 |  |  | (16,771 | ) |  | 35,769 |  |  | (1,839 | ) |  | 951,546 |  |  | (18,610 | )
ABS |  | 3,366 |  |  | (28 | ) |  | 656 |  |  | — |  |  | 4,022 |  |  | (28 | )
RMBS |  | 46,493 |  |  | (857 | ) |  | 171,326 |  |  | (6,769 | ) |  | 217,819 |  |  | (7,626 | )
CMBS |  | 205,545 |  |  | (7,529 | ) |  | 38,587 |  |  | (465 | ) |  | 244,132 |  |  | (7,994 | )
CLOs |  | 13,278 |  |  | (73 | ) |  | 34,760 |  |  | (129 | ) |  | 48,038 |  |  | (202 | )
Equity securities |  | 568 |  |  | (15 | ) |  | 137 |  |  | (9 | ) |  | 705 |  |  | (24 | )
Total |  | $ | 2,370,345 |  |  | $ | (50,915 | ) |  | $ | 294,916 |  |  | $ | (9,718 | ) |  | $ | 2,665,261 |  |  | $ | (60,633 | )

The unrealized losses in all categories of our investments at March 31, 2017 and December 31, 2016 were primarily caused by the difference in interest rates at each respective period, compared to interest rates at the time of purchase. There were 495 and 607 securities in an unrealized loss position at March 31, 2017 and December 31, 2016, respectively.
During each of the three months ended March 31, 2017 and 2016 there were no other-than-temporary impairments (“OTTI”) recognized. The net realized investment (losses) gains on the investment portfolio are as follows:

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

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

Note 8. Fair Value Measurements
The authoritative guidance around fair value established a framework for measuring fair value. Fair value is disclosed using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value and includes Levels 1, 2, and 3. To determine the fair value of securities available-for-sale in Level 1 and Level 2 of the fair value hierarchy, independent pricing sources have been utilized. One price is provided per security based on observable market data. To ensure securities are appropriately classified in the fair value hierarchy, we review the pricing techniques and methodologies of the independent pricing sources and believe that their policies adequately consider market activity, either based on specific transactions for the issue valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. A variety of inputs are utilized by the independent pricing sources including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers and reference data including data published in market research publications. Inputs may be weighted differently for any security, and not all inputs are used for each security evaluation.
Market indicators, industry and economic events are also considered. This information is evaluated using a multidimensional pricing model. This model combines all inputs to arrive at a value assigned to each security. Quality controls are performed by the independent pricing sources throughout this process, which include reviewing tolerance reports, trading information, data changes, and directional moves compared to market moves. In addition, on a quarterly basis, we perform quality controls over values received from the pricing sources which also include reviewing tolerance reports, trading information, data changes, and directional moves compared to market
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moves. We have not made any adjustments to the prices obtained from the independent pricing sources.
In accordance with fair value accounting guidance, we applied the following fair value hierarchy in order to measure fair value for assets and liabilities:
Level 1 - Quoted prices for identical instruments in active markets that we can access. Financial assets utilizing Level 1 inputs primarily include U.S. Treasury securities, equity securities.
Level 2 - Quoted prices for similar instruments in active markets that we can access; quoted prices for identical or similar instruments in markets that are not active; and inputs, other than quoted prices, that are observable in the marketplace for the instrument. The observable inputs are used in valuation models to calculate the fair value of the instruments. Financial assets utilizing Level 2 inputs primarily include obligations of U.S. government corporations and agencies, corporate bonds, mortgage-backed securities, asset-backed securities, and most municipal bonds.
The independent pricing sources utilize these approaches to determine the fair value of the instruments in Level 2 of the fair value hierarchy based on type of instrument:
Corporate Debt & U.S. Government and Agency Bonds are evaluated by surveying the dealer community, obtaining relevant trade data, benchmark quotes and spreads and incorporating this information into the evaluation process.
Obligations of U.S. States & Political Subdivisions are evaluated by tracking, capturing, and analyzing quotes for active issues and trades reported via the Municipal Securities Rulemaking Board records. Daily briefings and reviews of current economic conditions, trading levels, spread relationships, and the slope of the yield curve provide further data for evaluation.
Residential Mortgage-Backed Securities (“RMBS) are evaluated by monitoring interest rate movements, and other pertinent data daily. Incoming market data is enriched to derive spread, yield and/or price data as appropriate, enabling known data points to be extrapolated for valuation application across a range of related securities.
Commercial Mortgage-Backed Securities (“CMBS”) are evaluated using valuation techniques that reflect
market participants’ assumptions and maximize the use of relevant observable inputs including quoted prices for similar assets, benchmark yield curves and market corroborated inputs. Evaluation utilizes regular reviews of the inputs for securities covered, including executed trades, broker quotes, credit information, collateral attributes and/or cash flow waterfall as applicable.
Asset-Backed Securities (“ABS”) are evaluated using spreads and other information solicited from market buy- and sell-side sources, including primary and secondary dealers, portfolio managers, and research analysts. Cash flows are generated for each tranche, benchmark yields are determined, and deal collateral performance and tranche level attributes including trade activity, bids, and offer are applied, resulting in tranche-specific prices.
Collateralized loan obligations ("CLO") are evaluated by manager rating, seniority in the capital structure, assumptions about prepayment, default and recovery and their impact on cash flow generation. Loan level net asset values are determined and aggregated for tranches and as a final step, prices are checked against available recent trade activity.
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or value drivers are unobservable or from par values for equity securities restricted in their ability to be redeemed or sold. The inputs used to derive the fair value of Level 3 securities reflect our own assumptions about the assumptions a market participant would use in pricing an asset or liability. Financial assets utilizing Level 3 inputs primarily include equity securities that can only be redeemed or sold at their par value and only to the security issuer and a state premium tax credit investment. The state premium tax credit investment has an average maturity of less than 2 years, a credit rating of AAA, and its balance reflects its remaining scheduled payments discounted at an average annual rate of 7.1%. Our non-financial assets that are classified as Level 3 securities consist of real estate acquired through claim settlement. The fair value of real estate acquired is the lower of our acquisition cost or a percentage of the appraised value. The percentage applied to the appraised value is based upon our historical sales experience adjusted for current trends.
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Fair value measurements for assets measured at fair value included the following as of March 31, 2017 and December 31, 2016:

March 31, 2017
(In thousands) |  | Total Fair Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
U.S. Treasury securities and obligations of U.S. government corporations and agencies |  | $ | 60,818 |  |  | $ | 12,431 |  |  | $ | 48,387 |  |  | $ | — |
Obligations of U.S. states and political subdivisions |  | 2,168,450 |  |  | — |  |  | 2,167,767 |  |  | 683 |
Corporate debt securities |  | 1,747,340 |  |  | — |  |  | 1,747,340 |  |  | — |
ABS |  | 37,117 |  |  | — |  |  | 37,117 |  |  | — |
RMBS |  | 212,909 |  |  | — |  |  | 212,909 |  |  | — |
CMBS |  | 294,117 |  |  | — |  |  | 294,117 |  |  | — |
CLOs |  | 121,368 |  |  | — |  |  | 121,368 |  |  | — |
Total debt securities |  | 4,642,119 |  |  | 12,431 |  |  | 4,629,005 |  |  | 683 |
Equity securities (1) |  | 7,162 |  |  | 2,894 |  |  |  |  |  | 4,268 |
Total investment portfolio |  | $ | 4,649,281 |  |  | $ | 15,325 |  |  | $ | 4,629,005 |  |  | $ | 4,951 |
Real estate acquired (2) |  | $ | 10,730 |  |  | $ | — |  |  | $ | — |  |  | $ | 10,730 |

(1) | Equity securities in Level 3 are carried at cost, which approximates fair value.

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

December 31, 2016
(In thousands) |  | Total Fair Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
U.S. Treasury securities and obligations of U.S. government corporations and agencies |  | $ | 73,530 |  |  | $ | 30,690 |  |  | $ | 42,840 |  |  | $ | — |
Obligations of U.S. states and political subdivisions |  | 2,143,016 |  |  | — |  |  | 2,142,325 |  |  | 691 |
Corporate debt securities |  | 1,743,910 |  |  | — |  |  | 1,743,910 |  |  | — |
ABS |  | 59,565 |  |  | — |  |  | 59,565 |  |  | — |
RMBS |  | 224,209 |  |  | — |  |  | 224,209 |  |  | — |
CMBS |  | 319,817 |  |  | — |  |  | 319,817 |  |  | — |
CLOs |  | 121,175 |  |  | — |  |  | 121,175 |  |  | — |
Total debt securities |  | 4,685,222 |  |  | 30,690 |  |  | 4,653,841 |  |  | 691 |
Equity securities (1) |  | 7,128 |  |  | 2,860 |  |  | — |  |  | 4,268 |
Total investment portfolio |  | $ | 4,692,350 |  |  | $ | 33,550 |  |  | $ | 4,653,841 |  |  | $ | 4,959 |
Real estate acquired (2) |  | $ | 11,748 |  |  | $ | — |  |  | $ | — |  |  | $ | 11,748 |

(1) | Equity securities in Level 3 are carried at cost, which approximates fair value.

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

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

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

Three Months Ended March 31, 2016
(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 losses incurred, net |  | — |  |  | — |  |  | — |  |  | (293 | )
Purchases |  | — |  |  | 3,091 |  |  | 3,091 |  |  | 12,267 |
Sales |  | (36 | ) |  | (2,525 | ) |  | (2,561 | ) |  | (11,274 | )
Balance at March 31, 2016 |  | $ | 1,192 |  |  | $ | 3,421 |  |  | $ | 4,613 |  |  | $ | 12,849 |

Authoritative guidance over disclosures about the fair value of financial instruments requires additional disclosure for financial instruments not measured at fair value. Certain financial instruments, including insurance contracts, are excluded from these fair value disclosure requirements. The carrying values of cash and cash equivalents (Level 1) and accrued investment income (Level 2) approximated their fair values. Additional fair value disclosures related to our investment portfolio are included in Note 7 – “Investments.”
Financial Liabilities Not Measured at Fair Value
We incur financial liabilities in the normal course of our business. The following table presents the carrying value and fair value of our financial liabilities disclosed, but not carried, at fair value at March 31, 2017 and December 31, 2016. The fair values of our 5% Notes, 2% Notes, 5.75% Notes, and 9% Debentures were based on observable market prices. The fair value of the FHLB Advance was estimated using discounted cash flows on current incremental borrowing rates for similar borrowing arrangements. The fair value of the amount borrowed under our credit facility approximates its carrying value. In all cases the fair values of the financial liabilities below are categorized as Level 2.

|  | March 31, 2017 |  | December 31, 2016
(In thousands) |  | Carrying Value |  | Fair Value |  | Carrying Value |  | Fair Value
Financial liabilities: |  |  |  |  |  |  |
Revolving credit facility |  | $ | 150,000 |  |  | $ | 150,000 |  |  | n/a |  |  | n/a |
FHLB Advance |  | 155,000 |  |  | 152,757 |  |  | $ | 155,000 |  |  | $ | 151,905 |
5% Notes |  | 144,948 |  |  | 145,051 |  |  | 144,789 |  |  | 147,679 |
2% Notes |  | 204,900 |  |  | 302,165 |  |  | 204,672 |  |  | 308,605 |
5.75% Notes |  | 417,695 |  |  | 448,906 |  |  | 417,406 |  |  | 445,987 |
9% Debentures |  | 256,872 |  |  | 332,436 |  |  | 256,872 |  |  | 323,040 |
Total financial liabilities |  | $ | 1,329,415 |  |  | $ | 1,531,315 |  |  | $ | 1,178,739 |  |  | $ | 1,377,216 |

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Note 9. Other Comprehensive Income
The pretax and related income tax (expense) benefit components of our other comprehensive income (loss) for the three months ended March 31, 2017 and 2016 are included in the following table.

|  | Three Months Ended March 31,
(In thousands) |  | 2017 |  | 2016
Net unrealized investment gains arising during the period |  | $ | 18,647 |  |  | $ | 78,383 |
Income tax expense |  | (6,526 | ) |  | (27,556 | )
Net of taxes |  | 12,121 |  |  | 50,827 |
Net changes in benefit plan assets and obligations |  | (234 | ) |  | (474 | )
Income tax benefit |  | 81 |  |  | 166 |
Net of taxes |  | (153 | ) |  | (308 | )
Net changes in unrealized foreign currency translation adjustment |  | 45 |  |  | (1,496 | )
Income tax (expense) benefit |  | (14 | ) |  | 521 |
Net of taxes |  | 31 |  |  | (975 | )
Total other comprehensive income |  | 18,458 |  |  | 76,413 |
Total income tax expense |  | (6,459 | ) |  | (26,869 | )
Total other comprehensive income, net of tax |  | $ | 11,999 |  |  | $ | 49,544 |

The pretax and related income tax (expense) benefit components of the amounts reclassified from our accumulated other comprehensive loss (“AOCL”) to our consolidated statements of operations for the three months ended March 31, 2017 and 2016 are included in the following table.

|  | Three Months Ended March 31,
(In thousands) |  | 2017 |  | 2016
Reclassification adjustment for net realized (losses) gains (1) |  | $ | (747 | ) |  | $ | 612 |
Income tax benefit (expense) |  | 261 |  |  | (92 | )
Net of taxes |  | (486 | ) |  | 520 |
Reclassification adjustment related to benefit plan assets and obligations (2) |  | 234 |  |  | 474 |
Income tax expense |  | (81 | ) |  | (166 | )
Net of taxes |  | 153 |  |  | 308 |
Reclassification adjustment related to foreign currency (3) |  | — |  |  | (1,467 | )
Income tax benefit |  | — |  |  | 513 |
Net of taxes |  | — |  |  | (954 | )
Total reclassifications |  | (513 | ) |  | (381 | )
Total income tax benefit |  | 180 |  |  | 255 |
Total reclassifications, net of tax |  | $ | (333 | ) |  | $ | (126 | )

(1) | Increases (decreases) Net realized investment (losses) gains on the consolidated statements of operations.

(2) | Decreases (increases) Other underwriting and operating expenses, net on the consolidated statements of operations.

(3) | Increases (decreases) Other revenue on the consolidated statements of operations.

__________________________
A rollforward of AOCL for the three months ended March 31, 2017, including amounts reclassified from AOCL, are included in the table below.

|  | Three Months Ended March 31, 2017
(In thousands) |  | Net unrealized gains and losses on available-for-sale securities |  | Net benefit plan assets and obligations recognized in shareholders' equity |  | Net unrealized foreign currency translation |  | Total AOCL
Balance, December 31, 2016, net of tax | $ | (20,797 | ) |  | $ | (54,272 | ) |  | $ | (31 | ) |  | $ | (75,100 | )
Other comprehensive income before reclassifications | 11,635 |  |  | — |  |  | 31 |  |  | 11,666 |
Less: Amounts reclassified from AOCL |  | (486 | ) |  | 153 |  |  | — |  |  | (333 | )
Balance, March 31, 2017, net of tax | $ | (8,676 | ) |  | $ | (54,425 | ) |  | $ | — |  |  | $ | (63,101 | )

Note 10. Benefit Plans
The following tables provide the components of net periodic benefit cost for our pension, supplemental executive retirement and other postretirement benefit plans for three months ended March 31, 2017 and 2016:

|  | Three Months Ended March 31,
|  | Pension and Supplemental Executive Retirement Plans |  | Other Postretirement Benefit Plans
(In thousands) |  | 2017 |  | 2016 |  | 2017 |  | 2016
Service cost |  | $ | 2,294 |  |  | $ | 2,163 |  |  | $ | 187 |  |  | $ | 175 |
Interest cost |  | 3,858 |  |  | 3,929 |  |  | 167 |  |  | 172 |
Expected return on plan assets |  | (5,036 | ) |  | (4,889 | ) |  | (1,312 | ) |  | (1,222 | )
Recognized net actuarial loss |  | 1,535 |  |  | 1,361 |  |  | — |  |  | — |
Amortization of prior service cost |  | (107 | ) |  | (172 | ) |  | (1,662 | ) |  | (1,662 | )
Net periodic benefit cost (benefit) |  | $ | 2,544 |  |  | $ | 2,392 |  |  | $ | (2,620 | ) |  | $ | (2,537 | )

We currently intend to make contributions totaling $9.2 million to our qualified pension plan and supplemental executive retirement plan in 2017.
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Note 11. Income Taxes
We have approximately $1.3 billion of net operating loss (“NOL”) carryforwards on a regular tax basis and $0.5 billion of NOL carryforwards for computing the alternative minimum tax as of March 31, 2017. Any unutilized carryforwards are scheduled to expire at the end of tax years 2030 through 2033.
We evaluate the realizability of our deferred tax assets including our NOL carryforwards on a quarterly basis. Based on our analysis, we have concluded that all of our deferred tax assets are fully realizable and therefore no valuation allowance existed at March 31, 2017 and December 31, 2016.
Tax Contingencies
As previously disclosed, the Internal Revenue Service (“IRS”) completed examinations of our federal income tax returns for the years 2000 through 2007 and issued proposed assessments for taxes, interest and penalties related to our treatment of the flow-through income and loss from an investment in a portfolio of residual interests of Real Estate Mortgage Investment Conduits (“REMICs”). The IRS indicated that it did not believe that, for various reasons, we had established sufficient tax basis in the REMIC residual interests to deduct the losses from taxable income. We appealed these assessments within the IRS and in August 2010, we reached a tentative settlement agreement with the IRS which was not finalized.
In 2014, we received Notices of Deficiency (commonly referred to as “90 day letters”) covering the 2000-2007 tax years. The Notices of Deficiency reflect taxes and penalties related to the REMIC matters of $197.5 million and at March 31, 2017, there would also be interest related to these matters of approximately $191.2 million. In 2007, we made a payment of $65.2 million to the United States Department of the Treasury which will reduce any amounts we would ultimately owe. The Notices of Deficiency also reflect additional amounts due of $261.4 million, which are primarily associated with the disallowance of the carryback of the 2009 net operating loss to the 2004-2007 tax years. We believe the IRS included the carryback adjustments as a precaution to keep open the statute of limitations on collection of the tax that was refunded when this loss was carried back, and not because the IRS actually intends to disallow the carryback permanently. Depending on the outcome of this matter, additional state income taxes and state interest may become due when a final resolution is reached. As of March 31, 2017, those state taxes and interest would approximate $80.9 million. In addition, there could also be state tax penalties. Our total amount of unrecognized tax benefits as of March 31, 2017 is $139.9 million, which represents the tax benefits generated by the REMIC portfolio included in our tax returns that we have not taken benefit for in our financial statements, including any related interest.
We filed a petition with the U.S. Tax Court contesting most of the IRS' proposed adjustments reflected in the Notices of Deficiency and the IRS filed an answer to our petition which continued to assert their claim. The case has twice been scheduled for trial and in each instance, the parties jointly filed, and the U.S. Tax Court approved (most recently in February 2016), motions for continuance to postpone the trial date. Also in February 2016, the U.S. Tax Court approved a joint motion to consolidate for trial, briefing and opinion, our case with similar cases of Radian Group, Inc., as successor to Enhance Financial Services Group, Inc., et al. In January 2017, the parties informed the Tax Court that they had reached a basis for settlement of the major issues in the case. Any agreed settlement terms will ultimately be subject to review by the Joint Committee on Taxation ("JCT") before a settlement can be completed and there is no assurance that a settlement will be completed. Based on information that we currently have regarding the status of our ongoing dispute, we recorded a provision for additional taxes and interest of $27.2 million in the first quarter of 2017.
Should a settlement not be completed, ongoing litigation to resolve our dispute with the IRS could be lengthy and costly in terms of legal fees and related expenses. We would need to make further adjustments, which could be material, to our tax provision and liabilities if our view of the probability of success in this matter changes, and the ultimate resolution of this matter could have a material negative impact on our effective tax rate, results of operations, cash flows, available assets and statutory capital. In this regard, see Note 15 - “Statutory Information.”
The total amount of the unrecognized tax benefits, related to our aforementioned REMIC issue that would affect our effective tax rate is $118.4 million. We recognize interest accrued and penalties related to unrecognized tax benefits in income taxes. As of March 31, 2017 and December 31, 2016, we had accrued $49.1 million and $28.9 million, respectively, for the payment of interest.
Note 12. Loss Reserves
We establish reserves to recognize the estimated liability for losses and loss adjustment expenses (“LAE”) related to defaults on insured mortgage loans. Loss reserves are established by estimating the number of loans in our inventory of delinquent loans that will result in a claim payment, which is referred to as the claim rate, and further estimating the amount of the claim payment, which is referred to as claim severity.
Estimation of losses is inherently judgmental. The conditions that affect the claim rate and claim severity include the current and future state of the domestic economy, including unemployment and the current and future strength of local housing markets; exposure on insured loans; the amount of time between default and claim
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filing; and curtailments and rescissions. The actual amount of the claim payments may be substantially different than our loss reserve estimates. Our estimates could be adversely affected by several factors, including a deterioration of regional or national economic conditions, including unemployment, leading to a reduction in borrowers’ income and thus their ability to make mortgage payments, and a drop in housing values which may affect borrower willingness to continue to make mortgage payments when the value of the home is below the mortgage balance. Changes to our estimates could result in a material impact to our results of operations and capital position, even in a stable economic environment.
The “Losses incurred” section of the table below shows losses incurred on defaults that occurred in the current year and in prior years. The amount of losses incurred relating to defaults that occurred in the current year represents the estimated amount to be ultimately paid on such defaults. The amount of losses incurred relating to defaults that occurred in prior years represents the actual claim rate and severity associated with those defaults resolved in the current year differing from the estimated liability at the prior year-end, as well as a re-estimation of amounts to be ultimately paid on defaults continuing from the end of the prior year. This re-estimation of the claim rate and severity is the result of our review of current trends in the default inventory, such as percentages of defaults that have resulted in a claim, the amount of the claims relative to the average loan exposure, changes in the relative level of defaults by geography and changes in average loan exposure.
Losses incurred on defaults that occurred in the current year decreased in the first three months of 2017 compared to the same period in 2016, primarily due to a decrease in the estimated claim rate on recently reported defaults and a decrease in the number of new defaults, net of related cures.
For the three months ended March 31, 2017 and 2016 we experienced favorable prior year loss reserve development. This development was, in part, due to the resolution of approximately 29% and 28% of the prior year default inventory during the three months ended March 31, 2017 and 2016, respectively. During the first three months of 2017 and 2016, we experienced improved cure rates on prior year defaults, which was offset in part by an increase in severity on the prior year defaults in both periods.
The “Losses paid” section of the table below shows the breakdown between claims paid on new default notices in the current year and claims paid on defaults from prior years. Until a few years ago, it took, on average, approximately twelve months for a default that is not cured to develop into a paid claim. Over the past several years, the average time it takes to receive a claim associated with a default has increased. This is, in part, due to new loss mitigation protocols established by servicers and to changes in some
state foreclosure laws that may include, for example, a requirement for additional review and/or mediation processes. It is difficult to estimate how long it may take for current and future defaults that do not cure to develop into paid claims.
During the first three months of 2016, our losses paid included $47 million associated with settlements for claims paying practices and a nonperforming loan settlement. These settlements reduced our delinquent inventory by 1,138 notices. These settlements had no material impact on our losses incurred, net.
The liability associated with our estimate of premiums to be refunded on expected claim payments is accrued for separately at March 31, 2017 and December 31, 2016 and approximated $81 million and $85 million, respectively. This liability was included in “Other liabilities” on our consolidated balance sheets.
The following table provides a reconciliation of beginning and ending loss reserves as of and for the three months ended March 31, 2017 and 2016:

|  | Three months ended March 31,
(In thousands) |  | 2017 |  | 2016
Reserve at beginning of period |  | $ | 1,438,813 |  |  | $ | 1,893,402 |
Less reinsurance recoverable |  | 50,493 |  |  | 44,487 |
Net reserve at beginning of period |  | 1,388,320 |  |  | 1,848,915 |
Losses incurred: |  |  |  |
Losses and LAE incurred in respect of default notices received in: |  |  |  |
Current year |  | 80,416 |  |  | 92,479 |
Prior years (1) |  | (52,797 | ) |  | (7,467 | )
Total losses incurred |  | 27,619 |  |  | 85,012 |
Losses paid: |  |  |  |
Losses and LAE paid in respect of default notices received in: |  |  |  |
Current year |  | 331 |  |  | 204 |
Prior years |  | 127,224 |  |  | 221,457 |
Reinsurance terminations |  | — |  |  | (4 | )
Total losses paid |  | 127,555 |  |  | 221,657 |
Net reserve at end of period |  | 1,288,384 |  |  | 1,712,270 |
Plus reinsurance recoverables |  | 46,658 |  |  | 41,119 |
Reserve at end of period |  | $ | 1,335,042 |  |  | $ | 1,753,389 |

(1) | A negative number for prior year losses incurred indicates a redundancy of prior year loss reserves. See the following table for more information about prior year loss development.

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The prior year development of the reserves in the first three months of 2017 and 2016 is reflected in the following table.

|  | Three months ended March 31,
(In millions) |  | 2017 |  | 2016
Decrease in estimated claim rate on primary defaults |  | $ | (54 | ) |  | $ | (26 | )
Increase in estimated severity on primary defaults |  | 4 |  |  | 22 |
Change in estimates related to pool reserves, LAE reserves and reinsurance |  | (3 | ) |  | (3 | )
Total prior year loss development (1) |  | $ | (53 | ) |  | $ | (7 | )

(1) | A negative number for prior year loss development indicates a redundancy of prior year loss reserves.

Default inventory
A rollforward of our primary default inventory for the three months ended March 31, 2017 and 2016 appears in the following table. The information concerning new notices and cures is compiled from monthly reports received from loan servicers. The level of new notice and cure activity reported in a particular month can be influenced by, among other things, the date on which a servicer generates its report, the number of business days in a month and transfers of servicing between loan servicers.

|  | Three months ended March 31,
|  | 2017 |  | 2016
Default inventory at beginning of period |  | 50,282 |  |  | 62,633 |
New notices |  | 14,939 |  |  | 16,731 |
Cures |  | (17,128 | ) |  | (19,053 | )
Paids (including those charged to a deductible or captive) |  | (2,635 | ) |  | (3,373 | )
Rescissions and denials |  | (95 | ) |  | (210 | )
Other items removed from inventory |  | (14 | ) |  | (1,138 | )
Default inventory at end of period |  | 45,349 |  |  | 55,590 |

The decrease in the primary default inventory experienced during 2017 and 2016 was generally across all markets and primarily in book years 2008 and prior. Historically as a default ages it becomes more likely to result in a claim.

Consecutive months in default
| March 31, 2017 |  | December 31, 2016 |  | March 31, 2016
3 months or less | 9,184 |  |  | 20 | % |  | 12,194 |  |  | 24 | % |  | 10,120 |  |  | 18 | %
4 - 11 months | 13,617 |  |  | 30 | % |  | 13,450 |  |  | 27 | % |  | 15,319 |  |  | 28 | %
12 months or more (1) | 22,548 |  |  | 50 | % |  | 24,638 |  |  | 49 | % |  | 30,151 |  |  | 54 | %
Total primary default inventory | 45,349 |  |  | 100 | % |  | 50,282 |  |  | 100 | % |  | 55,590 |  |  | 100 | %
Primary claims received inventory included in ending default inventory | 1,390 |  |  | 3 | % |  | 1,385 |  |  | 3 | % |  | 2,267 |  |  | 4 | %

(1) | Approximately 48%, 47%, and 49% of the primary default inventory in default for 12 consecutive months or more has been in default for at least 36 consecutive months as of March 31, 2017, December 31, 2016, and March 31, 2016, respectively.

The number of months a loan is in the default inventory can differ from the number of payments that the borrower has not made or is considered delinquent. These differences typically result from a borrower making monthly payments that do not result in the loan becoming fully current. The number of payments that a borrower is delinquent is shown in the table below.

Number of payments delinquent
| March 31, 2017 |  | December 31, 2016 |  | March 31, 2016
3 payments or less | 15,692 |  |  | 35 | % |  | 18,419 |  |  | 36 | % |  | 16,864 |  |  | 30 | %
4 - 11 payments | 12,275 |  |  | 27 | % |  | 12,892 |  |  | 26 | % |  | 14,595 |  |  | 26 | %
12 payments or more | 17,382 |  |  | 38 | % |  | 18,971 |  |  | 38 | % |  | 24,131 |  |  | 44 | %
Total primary default inventory | 45,349 |  |  | 100 | % |  | 50,282 |  |  | 100 | % |  | 55,590 |  |  | 100 | %

Pool insurance default inventory decreased to 1,714 at March 31, 2017 from 1,883 at December 31, 2016. and 2,247 at March 31, 2016.
Claims paying practices
Our loss reserving methodology incorporates our estimates of future rescissions. A variance between ultimate actual rescission rates and our estimates, as a result of the outcome of litigation, settlements or other factors, could materially affect our losses.
The liability associated with our estimate of premiums to be refunded on expected future rescissions is accrued for separately. At both March 31, 2017 and December 31, 2016
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the estimate of this liability totaled $5 million. This liability was included in “Other liabilities” on our consolidated balance sheets.
For information about discussions and legal proceedings with customers with respect to our claims paying practices see Note 5 – “Litigation and Contingencies.”
Note 13. Shareholders’ Equity
Change in accounting principle
As described in Note 2 - “New Accounting Pronouncements,” during the first quarter of 2017 we adopted the updated guidance of “Improvements to Employee Share-Based Compensation Accounting.” The adoption of this guidance resulted in an immaterial cumulative effect adjustment to our beginning retained earnings for the quarter ended March 31, 2017.
2% Notes
As described in Note 3 - “Debt,” 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. Subsequent to our notice of redemption, in April, holders of approximately $202.5 million of the outstanding principal amount exercised their rights to convert their notes into shares of our common stock. As a result, we issued approximately 29.1 million shares of our common stock, of which 18.7 million shares were reissued from our treasury stock and 10.4 million were newly issued shares. The conversions of the notes increase our shareholders’ equity by the carrying value, which includes outstanding debt issuance costs, at the time of conversion.
Shareholders Rights Agreement
Our Amended and Restated Rights Agreement dated July 23, 2015 seeks to diminish the risk that our ability to use our NOLs to reduce potential future federal income tax obligations may become substantially limited and to deter certain abusive takeover practices. The benefit of the NOLs would be substantially limited, and the timing of the usage of the NOLs could be substantially delayed, if we were to experience an “ownership change” as defined by Section 382 of the Internal Revenue Code.
Under the Agreement each outstanding share of our Common Stock is accompanied by one Right. The “Distribution Date” occurs on the earlier of ten days after a public announcement that a person has become an “Acquiring Person,” or ten business days after a person announces or begins a tender offer in which consummation of such offer would result in a person becoming an “Acquiring Person.” An “Acquiring Person” is any person that becomes, by itself or together with its affiliates and associates, a beneficial owner of 5% or more of the shares of our Common Stock then outstanding, but excludes, among others, certain exempt and grandfathered persons
as defined in the Agreement. The Rights are not exercisable until the Distribution Date. Each Right will initially entitle shareholders to buy one-tenth of one share of our Common Stock at a Purchase Price of $45 per full share (equivalent to $4.50 for each one-tenth share), subject to adjustment. Each exercisable Right (subject to certain limitations) will entitle its holder to purchase, at the Rights’ then-current Purchase Price, a number of our shares of Common Stock (or if after the Shares Acquisition Date, we are acquired in a business combination, common shares of the acquiror) having a market value at the time equal to twice the Purchase Price. The Rights will expire on August 1, 2018, or earlier as described in the Agreement. The Rights are redeemable at a price of $0.001 per Right at any time prior to the time a person becomes an Acquiring Person. Other than certain amendments, the Board of Directors may amend the Rights in any respect without the consent of the holders of the Rights.
Note 14. Share-Based Compensation
We have certain share-based compensation plans. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period which generally corresponds to the vesting period. Awards under our plans generally vest over periods ranging from one to three years.
The number of shares granted to employees and the weighted average fair value per share during the periods presented were (shares in thousands):

| Three months ended March 31,
| 2017 |  | 2016
| Shares Granted |  | Weighted Average Share Fair Value |  | Shares Granted |  | Weighted Average Share Fair Value
RSUs subject to performance conditions | 1,237 |  |  | $ | 10.41 |  |  | 1,257 |  |  | $ | 5.66 |
RSUs subject only to service conditions | 395 |  |  | 10.41 |  |  | 433 |  |  | 5.67 |

Note 15. Statutory Information
Statutory Capital Requirements
The insurance laws of 16 jurisdictions, including Wisconsin, our domiciliary state, require a mortgage insurer to maintain a minimum amount of statutory capital relative to the risk in force (or a similar measure) in order for the mortgage insurer to continue to write new business. We refer to these requirements as the “State Capital Requirements” and, together with the GSE Financial Requirements, the “Financial Requirements.” While they vary among jurisdictions, the most common State Capital Requirements allow for a maximum risk-to-capital ratio of 25 to 1. A risk-to-capital ratio will increase if (i) the percentage decrease in capital exceeds the percentage decrease in insured risk,
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or (ii) the percentage increase in capital is less than the percentage increase in insured risk. Wisconsin does not regulate capital by using a risk-to-capital measure but instead requires a minimum policyholder position (“MPP”). The “policyholder position” of a mortgage insurer is its net worth or surplus, contingency reserve and a portion of the reserves for unearned premiums.
At March 31, 2017, MGIC’s risk-to-capital ratio was 10.4 to 1, below the maximum allowed by the jurisdictions with State Capital Requirements, and its policyholder position was $1.7 billion above the required MPP of $1.1 billion. In calculating our risk-to-capital ratio and MPP, we are allowed full credit for the risk ceded under our reinsurance transactions with a group of unaffiliated reinsurers. It is possible that under the revised State Capital Requirements discussed below, MGIC will not be allowed full credit for the risk ceded to the reinsurers. If MGIC is not allowed an agreed level of credit under either the State Capital Requirements or the PMIERs, MGIC may terminate the reinsurance agreement, without penalty. At this time, we expect MGIC to continue to comply with the current State Capital Requirements; however, you should read the rest of these financial statement footnotes for information about matters that could negatively affect such compliance.
At March 31, 2017, the risk-to-capital ratio of our combined insurance operations (which includes a reinsurance affiliate) was 11.6 to 1. Reinsurance agreements with an affiliate permit MGIC to write insurance with a higher coverage percentage than it could on its own under certain state-specific requirements. A higher risk-to-capital ratio on a combined basis may indicate that, in order for MGIC to continue to utilize reinsurance agreements with its affiliate, additional capital contributions to the reinsurance affiliate could be needed.
We ask the Commissioner of Insurance of the State of Wisconsin (the “OCI”) not to object before MGIC pays dividends. In the first quarter of 2017, MGIC paid a $20 million dividend to our holding company. MGIC is subject to statutory regulations as to payment of dividends. The maximum amount of dividends that MGIC may pay in any twelve-month period without regulatory approval by the OCI is the lesser of adjusted statutory net income or 10% of statutory policyholders’ surplus as of the preceding calendar year end. Adjusted statutory net income is defined for this purpose to be the greater of statutory net income, net of realized investment gains, for the calendar year preceding the date of the dividend or statutory net income, net of realized investment gains, for the three calendar years preceding the date of the dividend less dividends paid within the first two of the preceding three calendar years. The OCI recognizes only statutory accounting practices prescribed or permitted by the State of Wisconsin for determining and reporting the financial condition and results of operations of an insurance company. The OCI has adopted certain prescribed accounting practices that differ from those
found in other states. Specifically, Wisconsin domiciled companies record changes in the contingency reserves through the income statement as a change in underwriting deduction. As a result, in periods in which MGIC is increasing contingency reserves, statutory net income is lowered. For the year ended December 31, 2016, MGIC’s statutory net income was reduced by $490 million to account for the increase in contingency reserves.
The NAIC previously announced that it plans to revise the minimum capital and surplus requirements for mortgage insurers that are provided for in its Mortgage Guaranty Insurance Model Act. In May 2016, a working group of state regulators released an exposure draft of a risk-based capital framework to establish capital requirements for mortgage insurers, although no date has been established by which the NAIC must propose revisions to the capital requirements. We are currently evaluating the impact of the framework contained in the exposure draft, including the potential impact of certain items that have not yet been completely addressed by the framework which include: the treatment of ceded risk, minimum capital floors, and action level triggers.
While MGIC currently meets the State Capital Requirements of Wisconsin and all other jurisdictions, it could be prevented from writing new business in the future in all jurisdictions if it fails to meet the State Capital Requirements of Wisconsin, or it could be prevented from writing new business in another jurisdiction if it fails to meet the State Capital Requirements of that jurisdiction, and in each case MGIC does not obtain a waiver of such requirements. It is possible that regulatory action by one or more jurisdictions, including those that do not have specific State Capital Requirements, may prevent MGIC from continuing to write new insurance in such jurisdictions.
If we are unable to write business in all jurisdictions, lenders may be unwilling to procure insurance from us anywhere. In addition, a lender’s assessment of the future ability of our insurance operations to meet the State Capital Requirements or the PMIERs may affect its willingness to procure insurance from us. A possible future failure by MGIC to meet the State Capital Requirements or the PMIERs will not necessarily mean that MGIC lacks sufficient resources to pay claims on its insurance liabilities. While we believe MGIC has sufficient claims paying resources to meet its claim obligations on its insurance in force on a timely basis, you should read the rest of these financial statement footnotes for information about matters that could negatively affect MGIC’s claims paying resources.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following is management’s discussion and analysis of the financial condition and results of operations of MGIC Investment Corporation for the first quarter of 2017. As used below, “we” and “our” refer to MGIC Investment Corporation’s consolidated operations. This form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2016. See the “Glossary of terms and acronyms” for definitions and descriptions of terms used throughout this MD&A.
Forward Looking and Other Statements
As discussed under “Forward Looking Statements and Risk Factors” below, actual results may differ materially from the results contemplated by forward looking statements. We are not undertaking any obligation to update any forward looking statements or other statements we may make in the following discussion or elsewhere 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.
Through our subsidiary MGIC, we are a leading provider of PMI in the United States, as measured by $183.5 billion of primary IIF at March 31, 2017.
Overview

Summary Financial Results of MGIC Investment Corporation
|  | Three Months Ended March 31,
(In millions, except per share data, unaudited) |  | 2017 |  | 2016 |  | % Change
Selected statement of operations data |  |  |  |  |  |
Total revenues |  | $ | 260.9 |  |  | $ | 258.6 |  |  | 1 |
Losses incurred, net |  | 27.6 |  |  | 85.0 |  |  | (68 | )
Loss on debt extinguishment |  | — |  |  | 13.4 |  |  | N/M |
Income before tax |  | 174.0 |  |  | 103.7 |  |  | 68 |
Provision for income taxes |  | 84.2 |  |  | 34.5 |  |  | 144 |
Net income |  | 89.8 |  |  | 69.2 |  |  | 30 |
Diluted income per share |  | $ | 0.24 |  |  | $ | 0.17 |  |  | 41 |
Non-GAAP Financial Measures (1)
Pretax operating income |  | $ | 174.1 |  |  | $ | 114.1 |  |  | 53 |
Net operating income |  | 117.1 |  |  | 76.1 |  |  | 54 |
Net operating income per diluted share |  | $ | 0.31 |  |  | $ | 0.19 |  |  | 63 |

(1) See “Explanation and Reconciliation of our use of Non-GAAP Financial Measures.”
SUMMARY OF FIRST QUARTER 2017 RESULTS
We recorded first quarter 2017 net income of $89.8 million, or $0.24 per diluted share. Net income increased by $20.6 million compared with net income of $69.2 million in 2016, primarily due to a decrease in losses incurred, net and the loss on debt extinguishment in the prior year period, partially offset by an increase in our tax provision related to our expected settlement with the IRS.
Net operating income for the first quarter 2017 was $117.1 million (Q1 2016: $76.1 million) and net operating income per diluted share was $0.31 (Q1 2016: $0.19). The 54% increase in net operating income was driven primarily by lower losses incurred, net.
Losses incurred, net were $27.6 million, down 68% compared to the prior year period driven by a higher amount of favorable development and fewer new delinquency notices combined with a lower estimated claim rate on the new notices received in the first quarter of 2017 when compared to the prior year period. The claim rate on new notices received in the first quarter of 2017 was approximately 10.5% compared to approximately 12.0% in the prior year period.
Loss on debt extinguishment in the prior year period reflects the repurchase of a portion of our outstanding 5% Notes at amounts above the carrying value and MGIC’s purchase of a portion of our 9% Debentures above the fair value on the
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purchase date resulting in the recognition of losses. There was no debt transaction activity in the first quarter of 2017 that resulted in a loss on debt extinguishment.
The increase in our provision for income taxes in the first quarter of 2017 as compared to the same period in the prior year was due to an increase in our income before tax and to the additional provision recorded for the expected settlement of our IRS litigation as more fully described in Note 11 - “Income taxes” to our consolidated financial statements. Excluding the additional provision related to our IRS litigation, the effective tax rate was approximately 32.7% in the first quarter of 2017, compared to 33.3% in the first quarter of 2016.
See “Consolidated Results of Operations” below for additional discussion of our results for the first three months of 2017 compared to the respective prior year period.
In March 2017, MGIC paid a dividend of $20 million to our holding company and we expect to continue to pay quarterly dividends through the remainder of the year.
CAPITAL
Q1 and Q2 2017 Debt Activity
On March 21, 2017, we issued an irrevocable notice of redemption in respect of our outstanding 2% Notes, with a redemption date of April 21, 2017. As of March 31, 2017, we had outstanding approximately $207.6 million aggregate principal amount of our 2% Notes. Subsequent to our notice of redemption, in April, holders of approximately $202.5 million of the outstanding principal amount exercised their rights to convert their notes into shares of our common stock. The remaining $5.1 million of outstanding principal amount 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 for the 2% Notes and the conversions increased our shareholders’ equity by the carrying value of the converted notes, including outstanding debt issuance costs.
Also on March 21, 2017, we entered into a Credit Agreement and subsequently borrowed $150 million under the revolving credit facility provided by the agreement. The initial proceeds were drawn to fund, as necessary, the redemption price of our 2% Notes. In April, we repaid the amount borrowed under the revolving credit facility because most of the holders elected to convert their notes. The Credit Agreement has a three year term and the revolving credit facility is available to provide additional liquidity to our holding company.
On May 1, 2017 our 5% Notes matured and the outstanding $145.0 million of aggregate principal was settled with holding company cash.
The maturity of our 5% Notes and cash redemption of a portion of our 2% Notes eliminated approximately 11.5 million of potentially dilutive shares, which will be reflected in our second quarter computation of weighted average shares - diluted. These shares had previously been included in our calculation of diluted weighted average shares and diluted EPS.
GSEs
We must comply with the PMIERs to be eligible to insure loans purchased by the GSEs. The PMIERs include financial requirements, as well as business, quality control and certain transaction approval requirements. The financial requirements of the PMIERs require a mortgage insurer’s Available Assets to equal or exceed its Minimum Required Assets. Based on our interpretation of the PMIERs, as of March 31, 2017, MGIC’s Available Assets are $4.7 billion and its Minimum Required Assets are $4.0 billion. MGIC is in compliance with the PMIERs and eligible to insure loans purchased by the GSEs.
If MGIC ceases to be eligible to insure loans purchased by one or both of the GSEs, it would significantly reduce the volume of our new business writings. Factors that may negatively impact MGIC’s ability to continue to comply with the financial requirements of the PMIERs include the following:

• | The GSEs could make the PMIERs more onerous in the future; in this regard, the PMIERs provide that the tables of factors that determine Minimum Required Assets will be updated every two years and may be updated more frequently to reflect changes in macroeconomic conditions or loan performance. The GSEs will provide notice 180 days prior to the effective date of table updates. In addition, the GSEs may amend the PMIERs at any time.

• | The GSEs may reduce the amount of credit they allow under the PMIERs for the risk ceded under our quota share reinsurance transactions. The GSEs’ ongoing approval of those transactions is subject to several conditions and the transaction will be reviewed under the PMIERs at least annually by the GSEs. For more information about these transactions, see Note 4 - “Reinsurance” to our consolidated financial statements.

• | Our future operating results may be negatively impacted by the matters discussed in our risk factors. Such matters could decrease our revenues, increase our losses or require the use of assets, thereby creating a shortfall in Available Assets.

• | Should capital be needed by MGIC in the future, capital contributions from our holding company may not be available due to competing demands on holding company resources, including for repayment of debt.

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While on an overall basis, the amount of Available Assets MGIC must hold in order to continue to insure GSE loans increased under the PMIERs over what state regulation currently requires, our reinsurance transactions mitigate the negative effect of the PMIERs on our returns. In this regard, see the second bullet point above.
State Regulations
The insurance laws of 16 jurisdictions, including Wisconsin, MGIC’s domiciliary state, require a mortgage insurer to maintain a minimum amount of statutory capital relative to its risk in force (or a similar measure) in order for the mortgage insurer to continue to write new business. We refer to these requirements as the “State Capital Requirements.” While they vary among jurisdictions, the most common State Capital Requirements allow for a maximum risk-to-capital ratio of 25 to 1. A risk-to-capital ratio will increase if (i) the percentage decrease in capital exceeds the percentage decrease in insured risk, or (ii) the percentage increase in capital is less than the percentage increase in insured risk. Wisconsin does not regulate capital by using a risk-to-capital measure but instead requires an MPP.
At March 31, 2017, MGIC’s risk-to-capital ratio was 10.4 to 1, below the maximum allowed by the jurisdictions with State Capital Requirements, and its policyholder position was $1.7 billion above the required MPP of $1.1 billion. In calculating our risk-to-capital ratio and MPP, we are allowed full credit for the risk ceded under our reinsurance transactions with a group of unaffiliated reinsurers. It is possible that under the revised State Capital Requirements discussed below, MGIC will not be allowed full credit for the risk ceded to the reinsurers. If MGIC is not allowed an agreed level of credit under either the State Capital Requirements or the PMIERs, MGIC may terminate the reinsurance transactions, without penalty. At this time, we expect MGIC to continue to comply with the current State Capital Requirements; however, refer to our risk factor titled “State capital requirements may prevent us from continuing to write new insurance on an uninterrupted basis” for more information about matters that could negatively affect such compliance.
The NAIC plans to revise the minimum capital and surplus requirements for mortgage insurers that are provided for in its Mortgage Guaranty Insurance Model Act. In May 2016, a working group of state regulators released an exposure draft of a risk-based capital framework to establish capital requirements for mortgage insurers, although no date has been established by which the NAIC must propose revisions to the capital requirements. We continue to evaluate the impact of the framework contained in the exposure draft, including the potential impact of certain items that have not yet been completely addressed by the framework which include: the treatment of ceded risk, minimum capital floors, and action level triggers. Currently we believe that the
PMIERs contain the more restrictive capital requirements in most circumstances.
GSE REFORM
The FHFA has been the conservator of the GSEs since 2008 and has the authority to control and direct their operations. The increased role that the federal government has assumed in the residential housing finance system through the GSE conservatorship may increase the likelihood that the business practices of the GSEs change in ways that have a material adverse effect on us and that the charters of the GSEs are changed by new federal legislation. In the past, members of Congress have introduced several bills intended to change the business practices of the GSEs and the FHA; however, no legislation has been enacted. The Administration has indicated that the conservatorship of the GSEs should end; however, it is unclear whether and when that would occur and how that would impact us. As a result of the matters referred to above, it is uncertain what role the GSEs, FHA and private capital, including private mortgage insurance, will play in the residential housing finance system in the future or the impact of any such changes on our business. In addition, the timing of the impact of any resulting changes on our business is uncertain. Most meaningful changes would require Congressional action to implement and it is difficult to estimate when Congressional action would be final and how long any associated phase-in period may last.
For additional information about the business practices of the GSEs, see our risk factor titled “Changes in the business practices of the GSEs, federal legislation that changes their charters or a restructuring of the GSEs could reduce our revenues or increase our losses.”
LOAN MODIFICATIONS AND OTHER SIMILAR PROGRAMS
The federal government, including through the U.S. Department of the Treasury and the GSEs, and several lenders have modification and refinance programs to make loans more affordable to borrowers with the goal of reducing the number of foreclosures. These programs have included HAMP, which expired at the end of 2016, and HARP, which is scheduled to expire at the end of September 2017. The GSEs have introduced the "Flex Modification" program to replace HAMP effective in October 2017. Until it becomes effective, loan servicers must still evaluate borrowers for other GSE modification programs.
During 2016 and the first quarter of 2017, we were notified of modifications that cured delinquencies that had they become paid claims would have resulted in approximately $0.5 billion and $0.1 billion, respectively, of estimated claim payments. These levels are down from a high of $3.2 billion in 2010.
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We cannot determine the total benefit we may derive from loan modification programs, particularly given the uncertainty around the re-default rates for defaulted loans that have been modified. Our loss reserves do not account for potential re-defaults of current loans.
As shown in the following table, as of March 31, 2017 approximately 19% of our primary RIF has been modified.

Policy year |  | HARP Modifications (1) |  | HAMP & Other Modifications
2003 and prior |  | 11.0 | % |  | 37.1 | %
2004 |  | 18.5 | % |  | 36.8 | %
2005 |  | 25.3 | % |  | 36.8 | %
2006 |  | 28.4 | % |  | 36.5 | %
2007 |  | 39.2 | % |  | 29.9 | %
2008 |  | 53.6 | % |  | 17.5 | %
2009 |  | 30.9 | % |  | 4.0 | %
2010 - Q1 2017 |  | — | % |  | 0.1 | %
Total |  | 9.9 | % |  | 8.6 | %

(1) | Includes proprietary programs that are substantially the same as HARP.

As of March 31, 2017 based on loan count, the loans associated with 97.7% of HARP modifications and 77.2% of HAMP and other modifications were current.
FACTORS AFFECTING OUR RESULTS
Our results of operations are affected by:
Premiums written and earned
Premiums written and earned in a year are influenced by:

• | NIW, which increases IIF, is the aggregate principal amount of the mortgages that are insured during a period. Many factors affect NIW, including the volume of low down payment home mortgage originations and competition to provide credit enhancement on those mortgages, including competition from the FHA, the VA, other mortgage insurers, GSE programs that may reduce or eliminate the demand for mortgage insurance and other alternatives to mortgage insurance. NIW does not include loans previously insured by us that are modified, such as loans modified under HARP.

• | Cancellations, which reduce IIF. Cancellations due to refinancings are affected by the level of current mortgage interest rates compared to the mortgage coupon rates throughout the in force book, current home values compared to values when the loans in the in force book were insured and the terms on which mortgage credit is available. Home price appreciation can give homeowners the right to cancel mortgage insurance on their loans if sufficient home equity is achieved. Cancellations also result from policy rescissions, which require us to return any premiums

received on the rescinded policies and claim payments, which require us to return any premium received on the related policies from the date of default on the insured loans.

• | Premium rates, which are affected by product type, competitive pressures, the risk characteristics of the insured loans and the percentage of coverage on the insured loans. The substantial majority of our monthly and annual mortgage insurance premiums are under premium plans for which, for the first ten years of the policy, the amount of premium is determined by multiplying the initial premium rate by the original loan balance; thereafter, the premium resets and a lower premium rate is used for the remaining life of the policy. However, for loans that have utilized HARP, the initial ten-year period resets as of the date of the HARP transaction. The remainder of our monthly and annual premiums are under premium plans for which premiums are determined by a fixed percentage of the loan’s amortizing balance over the life of the policy.

• | Premiums ceded, net of a profit commission, under reinsurance agreements. See Note 4 - “Reinsurance” to our consolidated financial statements for a discussion of our reinsurance agreements.

Premiums are generated by the insurance that is in force during all or a portion of the period. A change in the average IIF in the current period compared to an earlier period is a factor that will increase (when the average in force is higher) or reduce (when it is lower) premiums written and earned in the current period, although this effect may be enhanced (or mitigated) by differences in the average premium rate between the two periods as well as by premiums that are returned or expected to be returned in connection with claim payments and rescissions, and premiums ceded under reinsurance agreements. Also, NIW and cancellations during a period will generally have a greater effect on premiums written and earned in subsequent periods than in the period in which these events occur.
Investment income
Our investment portfolio is composed principally of investment grade fixed income securities. The principal factors that influence investment income are the size of the portfolio and its yield. As measured by amortized cost (which excludes changes in fair value, such as from changes in interest rates), the size of the investment portfolio is mainly a function of cash generated from (or used in) operations, such as NPW, investment income, net claim payments and expenses, and cash provided by (or used for) non-operating activities, such as debt or stock issuances or repurchases.
Losses incurred
Losses incurred are the current expense that reflects estimated payments that will ultimately be made as a result
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of delinquencies on insured loans. As explained under “Critical Accounting Policies” in our 10-K MD&A, except in the case of a premium deficiency reserve, we recognize an estimate of this expense only for delinquent loans. The level of new delinquencies has historically followed a seasonal pattern, with new delinquencies in the first part of the year lower than new delinquencies in the latter part of the year, though this pattern can be affected by the state of the economy and local housing markets. Losses incurred are generally affected by:

• | The state of the economy, including unemployment and housing values, each of which affects the likelihood that loans will become delinquent and whether loans that are delinquent cure their delinquency.

• | The product mix of the in force book, with loans having higher risk characteristics generally resulting in higher delinquencies and claims.

• | The size of loans insured, with higher average loan amounts tending to increase losses incurred.

• | The percentage of coverage on insured loans, with deeper average coverage tending to increase incurred losses.

• | The rate at which we rescind policies. Our estimated loss reserves reflect mitigation from rescissions of policies and denials of claims. We collectively refer to such rescissions and denials as “rescissions” and variations of this term.

• | The distribution of claims over the life of a book. Historically, the first few years after loans are originated are a period of relatively low claims, with claims increasing substantially for several years subsequent and then declining, although persistency, the condition of the economy, including unemployment and housing prices, and other factors can affect this pattern. For example, a weak economy or housing value declines can lead to claims from older books increasing, continuing at stable levels or experiencing a lower rate of decline. See further information under “Mortgage Insurance Earnings and Cash Flow Cycle” below.

• | Losses ceded under reinsurance agreements. See Note 4 - “Reinsurance” to our consolidated financial statements for a discussion of our reinsurance agreements.

Underwriting and other expenses
The majority of our operating expenses are fixed, with some variability due to contract underwriting volume. Contract underwriting generates fee income included in “Other revenue.” Underwriting and other expenses are net of any ceding commission associated with our reinsurance agreements. See Note 4 - “Reinsurance” to our consolidated financial statements for a discussion of our reinsurance agreements.
Interest expense
Interest expense reflects the interest associated with our outstanding debt obligations. For information about our outstanding debt obligations, see Note 3 - “Debt” to our consolidated financial statements and under “Liquidity and Capital Resources” below.
Other
Certain activities that we do not consider to be part of our fundamental operating activities, may also impact our results of operations and are described below.
Net realized investment gains (losses)
Realized gains and losses are a function of the difference between the amount received on the sale of a security and the security’s cost basis, as well as any “other than temporary” impairments (“OTTI”) recognized in earnings. The amount received on the sale of fixed income securities is affected by the coupon rate of the security compared to the yield of comparable securities at the time of sale.
Loss on debt extinguishment
At times, we may undertake activities to improve our debt profile and/or reduce potential dilution from our outstanding convertible debt. Extinguishing our outstanding debt obligations early through these discretionary activities may result in losses primarily driven by the payment of consideration in excess of our carrying value, and the write off of unamortized debt issuance costs on the extinguished portion of the debt.
Refer to “Explanation and reconciliation of our use of Non-GAAP financial measures” below to understand how these items impact our evaluation of our core financial performance.
MORTGAGE INSURANCE EARNINGS AND CASH FLOW CYCLE
In general, the majority of any underwriting profit that a book generates occurs in the early years of the book, with the largest portion of any underwriting profit realized in the first year following the year the book was written. Subsequent years of a book generally result in either underwriting profit or underwriting losses. This pattern of results typically occurs because relatively few of the claims that a book will ultimately experience typically occur in the first few years of the book, when premium revenue is highest, while subsequent years are affected by declining premium revenues, as the number of insured loans decreases (primarily due to loan prepayments) and increasing losses. The typical pattern is also a function of premium rates generally resetting to lower levels after ten years.
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EXPLANATION AND RECONCILIATION OF OUR USE OF NON-GAAP FINANCIAL MEASURES
Non-GAAP financial measures
We believe that use of the Non-GAAP measures of pretax operating income (loss), net operating income (loss) and net operating income (loss) per diluted share facilitate the evaluation of the company's core financial performance thereby providing relevant information. These measures are not recognized in accordance with GAAP and should not be viewed as alternatives to GAAP measures of performance. The measures described below have been established to increase transparency for the purpose of evaluating our fundamental operating trends.
Pretax operating income (loss) is defined as GAAP income (loss) before tax, excluding the effects of net realized investment gains (losses), gain (loss) on debt extinguishment, net impairment losses recognized in income (loss) and infrequent or unusual non-operating items where applicable.
Net operating income (loss) is defined as GAAP net income (loss) excluding the after-tax effects of net realized investment gains (losses), gain (loss) on debt extinguishment, net impairment losses recognized in income (loss), and infrequent or unusual non-operating items where applicable. The amounts of adjustments to net income (loss) are tax effected using a federal statutory tax rate of 35%.
Net operating income (loss) per diluted share is calculated by dividing (i) net operating income (loss) adjusted for interest expense on convertible debt, share dilution from convertible debt, and the impact of stock-based compensation arrangements consistent with the accounting standard regarding earnings per share, whenever the impact is dilutive by (ii) diluted weighted average common shares outstanding.
Although pretax operating income (loss) and net operating income (loss) exclude certain items that have occurred in the past and are expected to occur in the future, the excluded items are: (1) not viewed as part of the operating performance of our primary activities; or (2) impacted by both discretionary and other economic factors and are not necessarily indicative of operating trends. These adjustments, along with the reasons for their treatment, are described below. Other companies may calculate these measures differently, and, therefore, their measures may not be comparable to those used by us.

(1) | Net realized investment gains (losses). The recognition of net realized investment gains or losses can vary significantly across periods as the timing of individual

securities sales is highly discretionary and is influenced by such factors as market opportunities, our tax and capital profile, and overall market cycles.
Trends in the profitability of our fundamental operating activities can be more clearly identified without the fluctuations of these realized gains and losses. We do not view them to be indicative of our fundamental operating activities. Therefore, these items are excluded from our calculation of net operating income (loss).

(2) | Gains and losses on debt extinguishment. Gains and losses on debt extinguishment result from discretionary activities that are undertaken to enhance our capital position, improve our debt profile, and reduce potential dilution from our outstanding convertible debt issuances; therefore, these activities are not viewed as part of our fundamental operating activities and their results and are excluded from our calculation of net operating income (loss).

(3) | Net impairment losses recognized in earnings. The recognition of net impairment losses on investments can vary significantly in both size and timing, depending on market credit cycles, individual issuer performance, and general economic conditions. We do not view these impairment losses to be indicative of fundamental operating activities and we exclude them from our calculation of net operating income (loss).

(4) | Infrequent or unusual non-operating items. We do not view certain infrequent or unusual items to be indicative of fundamental operating activities and we exclude them from our calculation of net operating income (loss). This includes additional income tax expense related to our IRS dispute, which is related to past transactions which are non-recurring in nature and are not part of our primary operating activities.

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Non-GAAP Reconciliations

Reconciliation of Income before tax to pretax operating income and calculation of Net operating income
|  | Three Months Ended March 31,
(In thousands) |  | 2017 |  | 2016
Income before tax per Statement of Operations |  | $ | 173,957 |  |  | $ | 103,688 |
Adjustments: |  |  |  |
Net realized investment gains |  | 122 |  |  | (3,056 | )
Loss on debt extinguishment |  | — |  |  | 13,440 |
Pretax operating income |  | 174,079 |  |  | 114,072 |
Income taxes: |  |  |  |
Provision for income taxes(1) |  | 56,978 |  |  | 37,942 |
Net operating income |  | $ | 117,101 |  |  | $ | 76,130 |
(1) Income before tax within operating income is tax effected at our effective tax rate. The effective tax rate for the three months ended March 31, 2017 excludes the $27.2 million income tax provision recorded for the expected settlement of our IRS litigation. Adjustments are tax effected at the Federal Statutory Rate of 35%.
Reconciliation of Net income to Net operating income
|  | Three Months Ended March 31,
(In thousands) |  | 2017 |  | 2016
Net income |  | $ | 89,798 |  |  | $ | 69,191 |
Additional income tax provision related to our IRS litigation |  | 27,224 |  |  | 189 |
Adjustments, net of tax(1): |  |  |  |
Net realized investment gains |  | 79 |  |  | (1,986 | )
Loss on debt extinguishment |  | — |  |  | 8,736 |
Net operating income |  | $ | 117,101 |  |  | $ | 76,130 |
(1) Adjustments are tax effected at the Federal Statutory Rate of 35%.
Reconciliation of Net operating income per diluted share to Net income per diluted share
|  | Three Months Ended September 30,
|  | 2017 |  | 2016
Net income per diluted share |  | $ | 0.24 |  |  | $ | 0.17 |
Additional income tax provision related to our IRS litigation |  | 0.07 |  |  | — |
Net realized investment gains |  | — |  |  | — |
Loss on debt extinguishment |  | — |  |  | 0.02 |
Net operating income per diluted share |  | $ | 0.31 |  |  | $ | 0.19 |

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Mortgage Insurance Portfolio
NEW INSURANCE WRITTEN
According to Inside Mortgage Finance and GSE estimates, while total mortgage originations for the first quarter of 2017 are estimated to be similar to the same period in the prior year (with an increase in purchase originations offset by a decrease in refinance originations), the high LTV segment of the overall market is estimated to have increased approximately 7%, including a 13% increase in the amount of NIW by PMI. The increase in PMI volume is primarily due to 1) the market share of private mortgage insurers being approximately 3-4 times higher for purchase originations than refinance originations and, 2) an increase in the market share of PMI, when compared to the FHA and VA from the same period last year, that was partially impacted by an increase in the utilization by lenders of the GSEs' 97% LTV programs.
The NIW in the quarter, which continued to have what we believe are strong risk characteristics (see tables 01 and 02), increased approximately 12% from the same period last year. The percentage of purchase mortgages insured increased compared to the same period last year primarily due to higher mortgage interest rates (see table 04).

01 | PRIMARY NIW BY FICO SCORE IN BILLIONS

|  | Three Months Ended March 31,
|  | 2017 |  | 2016
740 and greater |  | $ | 5.5 |  |  | $ | 4.6 |
700-739 |  | 2.4 |  |  | 2.2 |
660-699 |  | 1.1 |  |  | 1.2 |
659 and less |  | 0.3 |  |  | 0.3 |
Total Primary |  | $ | 9.3 |  |  | $ | 8.3 |

02 | LOAN-TO-VALUE % OF PRIMARY NIW

|  | Three Months Ended March 31,
|  | 2017 |  | 2016
95.01% and above |  | 7.9 | % |  | 4.7 | %
90.01% to 95.00% |  | 47.2 | % |  | 50.6 | %
85.01% to 90.00% |  | 30.3 | % |  | 32.2 | %
80.01% to 85% |  | 14.6 | % |  | 12.5 | %

03 | POLICY PAYMENT TYPE % OF PRIMARY NIW

|  | Three Months Ended March 31,
|  | 2017 |  | 2016
Monthly premiums |  | 83.1 | % |  | 78.0 | %
Single premiums |  | 16.6 | % |  | 21.7 | %
Annual premiums |  | 0.3 | % |  | 0.3 | %

04 | TYPE OF MORTGAGE % OF PRIMARY NIW

|  | Three Months Ended March 31,
|  | 2017 |  | 2016
Purchases |  | 83.4 | % |  | 82.1 | %
Refinances |  | 16.6 | % |  | 17.9 | %

INSURANCE AND RISK IN FORCE (see table 05)
The amount of our IIF and RIF is impacted by the amount of NIW and cancellations of primary IIF during the period. Cancellation activity is primarily due to refinancing activity, but is also impacted by rescissions, cancellations due to claim payment, and policies cancelled when borrowers achieve the required amount of home equity. Refinancing activity has historically been affected by the level of mortgage interest rates and the level of home price appreciation. Cancellations generally move inversely to the change in the direction of interest rates, although they generally lag a change in direction.
Persistency
Our persistency was 76.9% at March 31, 2017 compared to 76.9% at December 31, 2016 and 79.9% at March 31, 2016. Since 2000, our year-end persistency ranged from a high of 84.7% at December 31, 2009 to a low of 47.1% at December 31, 2003. We expect our persistency to trend higher during 2017 from the level experienced at the end of 2016 as interest rates increased in the fourth quarter of 2016 and they remain elevated compared to recent historical lows.
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05 | INSURANCE AND RISK IN FORCE IN BILLIONS

|  | Three Months Ended March 31,
(In billions) |  | 2017 |  | 2016
NIW |  | $ | 9.3 |  |  | $ | 8.3 |
Cancellations |  | (7.8 | ) |  | (7.8 | )
Increase in primary IIF |  | $ | 1.5 |  |  | $ | 0.5 |
Direct primary IIF as of March 31, |  | $ | 183.5 |  |  | $ | 175.0 |
Direct primary RIF as of March 31, |  | $ | 47.5 |  |  | $ | 45.6 |

CREDIT PROFILE OF OUR PRIMARY RIF (see table 06)
The proportion of our total primary RIF written after 2008 has been steadily increasing in proportion to our total primary RIF. Our 2009 and later books possess significantly improved credit characteristics when compared to our 2005-2008 origination years. The loans we insured beginning in 2009, on average, have substantially higher FICO scores and lower LTVs than those insured in 2005-2008. The credit profile of our RIF has also benefited from programs such as HARP. HARP allows borrowers who are not delinquent, but who may not otherwise be able to refinance their loans under the current GSE underwriting standards, due to, for example, the current LTV exceeding 100%, to refinance and lower their note rate. Loans associated with 97.7% of all of our HARP modifications were current as of March 31, 2017. The aggregate of our 2009-2017 book years and our HARP modifications accounted for approximately 82% of our total primary RIF at March 31, 2017 (see table 06).

06 | PRIMARY RIF IN BILLIONS

|  | March 31, 2017 |  | December 31, 2016 |  | March 31, 2016
Policy Year |  | RIF | % of RIF |  | RIF | % of RIF |  | RIF | % of RIF
2009+ |  | $ | 34,298 |  | 72 | % |  | $ | 33,368 |  | 71 | % |  | $ | 29,260 |  | 64 | %
2005 - 2008 (HARP) |  | 4,353 |  | 9 | % |  | 4,489 |  | 9 | % |  | 5,115 |  | 11 | %
Other years (HARP) |  | 378 |  | 1 | % |  | 396 |  | 1 | % |  | 485 |  | 1 | %
Subtotal |  | 39,029 |  | 82 | % |  | 38,253 |  | 81 | % |  | 34,860 |  | 76 | %
Other years (Non-HARP) |  | 1,399 |  | 3 | % |  | 1,475 |  | 3 | % |  | 1,808 |  | 4 | %
2005- 2008 (Non-HARP) |  | 7,093 |  | 15 | % |  | 7,467 |  | 16 | % |  | 8,955 |  | 20 | %
Subtotal |  | 8,492 |  | 18 | % |  | 8,942 |  | 19 | % |  | 10,763 |  | 24 | %
Total Primary RIF | $ | 47,521 |  | 100 | % |  | $ | 47,195 |  | 100 | % |  | $ | 45,623 |  | 100 | %

Pool insurance
MGIC has written no new pool insurance since 2009, however, for a variety of reasons, including responding to capital market alternatives to PMI and customer demands, MGIC may write pool risk in the future. Our direct pool risk in force was $526 million ($242 million on pool policies with aggregate loss limits and $284 million on pool policies without aggregate loss limits) at March 31, 2017 compared to $547 million ($244 million on pool policies with aggregate loss limits and $303 million on pool policies without aggregate loss limits) at December 31, 2016. If claim payments associated with a specific pool reach the aggregate loss limit, the remaining IIF force within the pool would be cancelled and any remaining defaults under the pool would be removed from our default inventory.
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Consolidated Results of Operations
The following section of the MD&A provides a comparative discussion of MGIC Investment Corporation’s Consolidated Results of Operations for the three months ended March 31, 2017 and 2016.

Revenues
|  | Three Months Ended March 31,
(In millions) |  | 2017 |  | 2016 |  | % Change
Net premiums written |  | $ | 236.7 |  |  | $ | 231.3 |  |  | 2 |
Net premiums earned |  | $ | 229.1 |  |  | $ | 221.3 |  |  | 4 |
Investment income, net of expenses |  | 29.5 |  |  | 27.8 |  |  | 6 |
Net realized investment (losses) gains |  | (0.1 | ) |  | 3.1 |  |  | N/M |
Other revenue |  | 2.4 |  |  | 6.4 |  |  | (63 | )
Total revenues |  | $ | 260.9 |  |  | $ | 258.6 |  |  | 1 |

NET PREMIUMS WRITTEN AND EARNED
NPW was up 2% primarily reflecting lower ceded premiums due to a higher profit commission as ceded losses declined under our QSR Transactions. NPE increased 4%, primarily due to lower ceded premiums, as well as lower premium refunds due to a decline in claim activity.
See “Overview - Factors Affecting Our Results” above for additional factors that influenced the amount of net premiums written and earned during the period.
Premium Yield (see table 07)
Premium yield (NPE divided by average IIF) decreased to 50.1 basis points for Q1 2017 (Q1 2016: 50.6) and is influenced by a number of key drivers, which have a varying impact from period to period.
The decline in our premium yield compared to the prior year period reflects:

• | A larger percentage of our earned premiums generated from IIF book years with lower premium rates due to a decline in premium rates in recent periods and a portion of our book years undergoing premium rate resets on their ten-year anniversary, as well as less positive impact from acceleration of premium recognition upon cancellation of single premium policies; offset in part by,

• | less of an adverse impact from premium refunds and reinsurance, each primarily due to lower claim activity. Premium refunds in the first quarter of 2016 also included refunds under our settlement agreements.

The following table reconciles our premium yield for the three months ended March 31, 2017 from the prior year period.

07 | PREMIUM YIELD IN BASIS POINTS

|  | 2017
Premium yield - quarter ended March 31, 2016 |  | 50.6 |
Reconciliation: |  |
Change in premium rates |  | (3.5 | )
Change in premium refunds and accruals |  | 2.2 |
Single premium policy persistency |  | (0.4 | )
Reinsurance |  | 1.2 |
Premium yield - quarter ended March 31, 2017 |  | 50.1 |

Reinsurance agreements (see tables 08 and 09)
Our reinsurance affects various lines of our statements of operations and therefore we believe it should be analyzed by reviewing its effect on our net income, described as follows.

• | We cede a fixed percentage of premiums on insurance covered by the agreements.

• | We receive the benefit of a profit commission through a reduction in the premiums we cede. The profit commission varies directly and inversely with the level of losses on a “dollar for dollar” basis and is eliminated at levels of losses that we do not expect to occur. As a result, lower levels of losses result in a higher profit commission and less benefit from ceded losses; higher levels of losses result in more benefit from ceded losses and a lower profit commission (or for levels of losses we do not expect, its elimination).

• | We receive the benefit of a ceding commission through a reduction in underwriting expenses equal to 20% of premiums ceded (before the effect of the profit commission).

• | We cede a fixed percentage of losses incurred on insurance covered by the agreements.

The effects described above result in a net cost of the reinsurance, with respect to a covered loan, of 6% (but can be lower if losses are materially higher than we expect). This cost is derived by dividing the reduction in our pre-tax net income from such loans with reinsurance by our direct (that is, without reinsurance) premiums from such loan. Although the net cost of the reinsurance is generally constant at 6%, the effect of the reinsurance on the various components of
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pre-tax income discussed above will vary from period to period, depending on the level of ceded losses.
The amount of our NIW subject to our QSR Transactions (see table 08) will vary from period to period due to loan level exclusion terms. For example, our 2017 QSR Transaction excludes NIW with amortization terms of 20 years or less, but allows higher limits on debt-to-income and loan levels than our 2015 QSR Transaction. In addition, the QSR Transactions contain coverage thresholds that may be triggered depending on the mix of our risk written during the period.
The following table provides additional information related to our premiums written and earned and RIF subject to reinsurance agreements for 2017 and 2016.

08 | QUOTA SHARE REINSURANCE

|  | As of and For the Three Months Ended March 31,
($ in thousands, unless otherwise stated) |  | 2017 |  | 2016
NIW subject to quota share reinsurance agreements |  | 87 | % |  | 89 | %
IIF subject to quota share reinsurance agreements |  | 77 | % |  | 74 | %
Statements of operations: |  |  |  |
Ceded premiums written, net |  | $ | 28,895 |  |  | $ | 31,666 |
% of direct premiums written |  | 11 | % |  | 12 | %
Ceded premiums earned, net |  | $ | 28,895 |  |  | $ | 31,666 |
% of direct premiums earned |  | 11 | % |  | 12 | %
Profit commission |  | $ | 31,117 |  |  | $ | 26,215 |
Ceding commissions |  | $ | 12,003 |  |  | $ | 11,576 |
Ceded losses incurred |  | $ | 4,687 |  |  | $ | 8,513 |
Mortgage insurance portfolio: |  |  |  |
Ceded RIF (in millions) |  | $ | 10,924 |  |  | $ | 10,037 |

09 | CAPTIVE REINSURANCE

|  | As of and For the Three Months Ended March 31,
($ in thousands) |  | 2017 |  | 2016
IIF subject to captive reinsurance agreements |  | 1 | % |  | 3 | %
Statements of operations: |  |  |  |
Ceded premiums written |  | $ | 1,424 |  |  | $ | 2,425 |
% of direct premiums written |  | 1 | % |  | 1 | %
Ceded premiums earned |  | $ | 1,438 |  |  | $ | 2,460 |
% of direct premiums earned |  | 1 | % |  | 1 | %

INVESTMENT INCOME
Our investment portfolio generated net investment income of $29.5 million in the first quarter of 2017, an increase of 6% from that reported for the same period in 2016. The increase in investment income was due to an increase in the average balance of the investment portfolio along with higher investment yields (see chart 10) over the period.

10 | PORTFOLIO DURATION IN YEARS INVESTMENT YIELD % OF AVERAGE INVESTMENT PORTFOLIO ASSETS

NET REALIZED INVESTMENT (LOSSES) GAINS
Net realized losses for the first quarter of 2017 were $0.1 million compared to net realized gains of $3.1 million for the first quarter of 2016.
The net unrealized losses position of our investment portfolio (see chart 11) as of March 31, 2017 and December 31, 2016 is as follows.

11 | NET UNREALIZED INVESTMENT LOSSES IN MILLIONS

OTHER REVENUE
Other revenue for the first quarter of 2017 was $2.4 million, down from $6.4 million in the first quarter of 2016. The prior year quarter includes approximately $4 million of gains related to changes in foreign currency exchange rates recognized upon the substantial liquidation of our Australian operations.
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Losses and expenses
|  | Three Months Ended March 31,
(in millions) |  | 2017 |  | 2016
Losses incurred, net |  | 27.6 |  |  | 85.0 |
Amortization of deferred policy acquisition costs |  | 2.2 |  |  | 2.0 |
Other underwriting and operating expenses, net |  | 40.8 |  |  | 39.8 |
Interest expense |  | 16.3 |  |  | 14.7 |
Loss on debt extinguishment |  | — |  |  | 13.4 |
Total losses and expenses |  | $ | 86.9 |  |  | $ | 154.9 |

LOSSES INCURRED, NET
As discussed in “Critical Accounting Policies” in our 10-K MD&A and consistent with industry practices, we establish loss reserves for future claims only for loans that are currently delinquent. The terms “delinquent” and “default” are used interchangeably by us. We consider a loan in default when it is two or more payments past due. Loss reserves are established based on estimating the number of loans in our default inventory that will result in a claim payment, which is referred to as the claim rate, and further estimating the amount of the claim payment, which is referred to as claim severity.
Estimation of losses is inherently judgmental. The conditions that affect the claim rate and claim severity include the current and future state of the domestic economy, including unemployment, and the current and future strength of local housing markets. The actual amount of the claim payments may be substantially different than our loss reserve estimates. Our estimates could be adversely affected by several factors, including a deterioration of regional or national economic conditions, including unemployment, leading to a reduction in borrower income and thus their ability to make mortgage payments, and a drop in housing values that could result in, among other things, greater losses on loans, and may affect borrower willingness to continue to make mortgage payments when the value of the home is below the mortgage balance. Historically, losses incurred have followed a seasonal trend in which the second half of the year has weaker credit performance than the first half, with higher new notice activity and a lower cure rate. Our estimates are also affected by any agreements we enter into regarding our claims paying practices, such as the settlement agreements discussed in Note 5 – “Litigation and Contingencies” to our consolidated financial statements. Changes to our estimates could result in a material impact to our consolidated results of operations and capital position, even in a stable economic environment.
Losses incurred, net
Losses incurred, net in the first quarter of 2017 decreased 68% to $28 million compared to $85 million in the same period of the prior year. The decrease was primarily due to higher favorable development on defaults that occurred in the prior years. Favorable development on prior year defaults occurred in the first quarter of 2017 and 2016 due to a lower claim rate on previously reported defaults, offset in part, by increases in our expected severity assumption (see table 16) on prior year defaults in both periods. Current year losses declined due to a lower new notice claim rate along with an 11% reduction in new notices received.

12 | COMPOSITION OF LOSSES INCURRED $ IN MILLIONS

|  | Three Months Ended March 31,
|  | 2017 |  | 2016 |  | Change
Current year / New notices |  | $ | 80.4 |  |  | $ | 92.5 |  |  | (13 | )%
Prior year reserve development |  | (52.8 | ) |  | (7.5 | ) |  | 607 | %
Losses incurred, net |  | $ | 27.6 |  |  | $ | 85.0 |  |  | (68 | )%

Loss Ratio (see chart 13)
The loss ratio is the ratio, expressed as a percentage, of the sum of incurred losses and loss adjustment expenses to net premiums earned. The decline in the loss ratio in the first quarter of 2017 compared to the prior year period was primarily due to a decline in losses incurred, net and an increase in NPE.

13 | LOSS RATIO

New Notice Claim Rate (see chart 14)

• | Q1 2017 ~10.5% compared to Q1 2016: ~12.0%

• | First quarter claim rates on new notices are historically affected by seasonal factors that result in better cure rates early in the year. We expect the new notice claim rate in subsequent quarters of 2017 to be higher than the rate experienced in the first quarter. The quarterly new notice claim rate during 2016 generally ranged from 12% to 13% and we expect our new notice claim rates during 2017 to be lower than the comparable 2016 rates.

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• | New notice activity continues to be driven by loans insured in 2008 and prior (see chart 15), which continue to experience a cycle whereby many loans default, cure, and re-default. This cycle, along with the duration that defaults may ultimately remain in our notice inventory, result in significant judgment in establishing the claim rate.

14 | PRIMARY NEW NOTICES IN VOLUME NEW NOTICE CLAIM RATE (1) %

(1) | Claim rate is the approximate quarterly rate.

15 | NEW NOTICES FROM BOOK YEARS 2008 AND PRIOR IN VOLUME PREVIOUSLY DELINQUENT %

Claims Severity (see table 16)
Factors that impact claim severity include the exposure on the loan, the amount of time between default and claim filing (which impacts the amount of interest and expenses) and curtailments. All else being equal, the longer the period between default and claim filing, the greater the severity. The majority of loans from 2005-2008 (which represent the majority of loans in the delinquent inventory) are covered by master policy terms that, except under certain circumstances, do not limit the number of years that an insured can include interest when filing a claim if they
comply with their obligations under the terms of the master policy.
Changes in our severity estimates resulted in unfavorable development on defaults that occurred in prior years in each of the three months ended March 31, 2017 and 2016, with a higher amount of unfavorable development in the 2016 period. As shown in the following table, the average paid claim, expressed as a percentage of our exposure (the unpaid principal balance of the loan time our insurance coverage percentage), following periods of stability increased resulting in a higher severity estimates.

16 | CLAIMS SEVERITY TREND

Note: Table excludes material settlements(1).
Period |  | Average exposure on claim paid |  | Average claim paid |  | % Paid to exposure |  | Average number of missed payments at claim received date
Q1 2017 |  | $ | 44,238 |  |  | $ | 49,110 |  |  | 111.0 | % |  | 35 |
Q4 2016 |  | 43,200 |  |  | 48,297 |  |  | 111.8 | % |  | 35 |
Q3 2016 |  | 43,747 |  |  | 48,050 |  |  | 109.8 | % |  | 34 |
Q2 2016 |  | 43,709 |  |  | 47,953 |  |  | 109.7 | % |  | 35 |
Q1 2016 |  | 44,094 |  |  | 49,281 |  |  | 111.8 | % |  | 34 |
Q4 2015 |  | 44,342 |  |  | 49,134 |  |  | 110.8 | % |  | 35 |
Q3 2015 |  | 44,159 |  |  | 48,156 |  |  | 109.1 | % |  | 33 |
Q2 2015 |  | 44,683 |  |  | 48,587 |  |  | 108.7 | % |  | 34 |
Q1 2015 |  | 44,403 |  |  | 47,366 |  |  | 106.7 | % |  | 33 |
(1) - Settlements include amounts paid in settlement disputes for claims paying practices and NPL settlements.

In considering the potential sensitivity of the factors underlying our estimate of loss reserves, it is possible that even a relatively small change in our estimated claim rate or severity could have a material impact on reserves and, correspondingly, on our consolidated results of operations even in a stable economic environment. For example, assuming all other factors remain constant, a $1,000 increase/decrease in the average severity reserve factor would change the reserve amount by approximately +/- $24 million. A 1 percentage point increase/decrease in the average claim rate reserve factor would change the reserve amount by approximately +/- $25 million as of March 31, 2017.
See Note 12 – “Loss Reserves” to our consolidated financial statements for a discussion of our losses incurred and claims paying practices (including curtailments).
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Net losses and LAE paid
Net losses and LAE paid decreased 42% in the three months ended March 31, 2017 compared to the prior year primarily due to the absence of settlement payments in 2017 and lower claim activity on our primary business as the credit profile of our RIF continued to improve. In the first quarter of 2016, our loss payments included settlements of disputes for claims paying practices and an NPL settlement. In addition, the first quarter of 2016 included losses paid under our 2011 settlement with Freddie Mac; our final payment under this settlement was made on December 1, 2016. We believe paid claims will continue to decline in 2017 compared to 2016.
The following table presents our net losses and LAE paid for the three months ended March 31, 2017 and 2016.

Net Losses and LAE Paid
|  | Three Months Ended March 31,
(In millions) |  | 2017 |  | 2016
Total primary (excluding settlements) |  | $ | 130 |  |  | $ | 166 |
Claims paying practices and NPL settlements(1) |  | — |  |  | 47 |
Pool (2) |  | 2 |  |  | 14 |
Direct losses paid |  | 132 |  |  | 227 |
Reinsurance |  | (9 | ) |  | (10 | )
Net losses paid |  | 123 |  |  | 217 |
LAE |  | 5 |  |  | 5 |
Net losses and LAE paid |  | $ | 128 |  |  | $ | 222 |

(1) | See Note 12 - “Loss Reserves” for additional information on our settlements of disputes for claims paying practices and NPL settlements.

(2) | The three months ended March 31, 2016 includes $11 million paid under the terms of the settlement with Freddie Mac. The final payment under this settlement was made on December 1, 2016.

Primary claims paid for the top 15 jurisdictions (based on 2017 losses paid) and all other jurisdictions for the three months ended March 31, 2017 and 2016 appears in the following table.

Paid Losses by Jurisdiction
|  | Three Months Ended March 31,
(In millions) |  | 2017 |  | 2016
New Jersey |  | $ | 17 |  |  | $ | 16 |
Florida |  | 16 |  |  | 27 |
New York |  | 10 |  |  | 8 |
Illinois |  | 8 |  |  | 11 |
Pennsylvania |  | 8 |  |  | 8 |
Maryland |  | 7 |  |  | 9 |
Puerto Rico |  | 5 |  |  | 4 |
Ohio |  | 4 |  |  | 5 |
Massachusetts |  | 4 |  |  | 4 |
Georgia |  | 4 |  |  | 4 |
California |  | 3 |  |  | 8 |
Virginia |  | 3 |  |  | 4 |
Connecticut |  | 3 |  |  | 3 |
Washington |  | 3 |  |  | 4 |
Indiana |  | 3 |  |  | 3 |
All other jurisdictions |  | 32 |  |  | 48 |
Total primary (excluding settlements) | $ | 130 |  |  | $ | 166 |

The primary average claim paid can vary materially from period to period based upon a variety of factors, including the local market conditions, average loan amount, average coverage percentage, the amount of time between default and claim filing, and our loss mitigation efforts on loans for which claims are paid.
The primary average claim paid for the top 5 states (based on 2017 losses paid) for the three months ended March 31, 2017 and 2016 appears in the following table.

Primary Average Claim Paid
| Three Months Ended March 31,
| 2017 |  | 2016
New Jersey | $ | 86,900 |  |  | $ | 86,199 |
Florida | 66,904 |  |  | 64,163 |
New York | 86,417 |  |  | 65,289 |
Illinois | 49,785 |  |  | 48,388 |
Pennsylvania | 46,702 |  |  | 42,556 |
All other jurisdictions | 39,982 |  |  | 43,262 |
All jurisdictions | 49,110 |  |  | 49,281 |

Note: Jurisdictions in italics in the table above are those that predominately use a judicial foreclosure process, which generally increases the amount of time it takes for a foreclosure to be completed.
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The primary average exposure of our primary risk in force at March 31, 2017, December 31, 2016 and March 31, 2016 and for the top 5 jurisdictions (based on 2017 losses paid) appears in the following table.

Primary Average Exposure
| March 31, 2017 |  | December 31, 2016 |  | March 31, 2016
New Jersey | $ | 63,443 |  |  | $ | 63,351 |  |  | $ | 62,603 |
Florida | 50,052 |  |  | 49,908 |  |  | 49,367 |
New York | 52,139 |  |  | 52,006 |  |  | 51,299 |
Illinois | 40,898 |  |  | 40,696 |  |  | 40,487 |
Pennsylvania | 44,521 |  |  | 44,213 |  |  | 43,188 |
All other jurisdictions | 47,442 |  |  | 47,038 |  |  | 45,783 |
All jurisdictions | 47,633 |  |  | 47,276 |  |  | 46,153 |

Loss reserves
Our primary default rate at March 31, 2017 was 4.55% (YE 2016: 5.04%, Q1 2016: 5.62%). Our primary default inventory was 45,349 loans at March 31, 2017, representing a decrease of 10% from December 31, 2016 and 18% from March 31, 2016. The reduction in our primary default inventory is the result of the total number of defaulted loans: (1) that have cured; (2) for which claim payments have been made; or (3) that have resulted in rescission, claim denial, or removal from inventory due to settlements, collectively exceeding the total number of new defaults on insured loans. In recent periods we have experienced improved cure rates and the overall mix of our default inventory, as represented by the number of missed payments, has improved compared to the prior years. As of March 31, 2017, the percentage of our default inventory that has 12 or more missed payments was 38% (YE 2016: 38%, Q1 2016: 44%). Generally, the fewer missed payments a defaulted loan has the lower the likelihood it will result in a claim. We expect our default inventory to continue to decline in 2017 from 2016 levels; however, the pace of decline is expected to moderate as our more recent book years naturally season.
The gross reserves at March 31, 2017, December 31, 2016 and March 31, 2016 appear in the table below.

Gross Reserves |  | March 31, 2017 | December 31, 2016 | March 31, 2016
Primary: |  |  |  |  |  |  |
Direct loss reserves (in millions) |  | $ | 1,236 |  |  | $ | 1,334 |  |  | $ | 1,595 |  |
IBNR and LAE |  | 75 |  |  | 79 |  |  | 88 |  |
Total primary loss reserves |  | $ | 1,311 |  |  | $ | 1,413 |  |  | $ | 1,683 |  |
Ending default inventory |  |  | 45,349 |  |  | 50,282 |  |  | 55,590 |
Percentage of loans delinquent (default rate) |  |  | 4.55 | % |  | 5.04 | % |  | 5.62 | %
Average total primary loss reserves per default |  |  | 28,911 |  |  | $ | 28,104 |  |  | $ | 30,268 |
Primary claims received inventory included in ending default inventory |  |  | 1,390 |  |  | 1,385 |  |  | 2,267 |
Pool(1): |  |  |  |  |  |  |  |  |  |
Direct loss reserves (in millions): |  |  |  |  |  |  |  |
With aggregate loss limits |  | $ | 17 |  |  | $ | 18 |  |  | $ | 31 |  |
Without aggregate loss limits |  | 6 |  |  | 7 |  |  | 7 |  |
Reserve related to Freddie Mac Settlement(2) |  | — |  |  | — |  |  | 31 |  |
Total pool direct loss reserves |  | $ | 23 |  |  | $ | 25 |  |  | $ | 69 |  |
Ending default inventory: |  |  |  |  |  |  |  |  |  |
With aggregate loss limits |  |  | 1,252 |  |  | 1,382 |  |  | 1,666 |
Without aggregate loss limits |  |  | 462 |  |  | 501 |  |  | 581 |
Total pool ending default inventory |  |  | 1,714 |  |  | 1,883 |  |  | 2,247 |
Pool claims received inventory included in ending default inventory |  |  | 64 |  |  | 72 |  |  | 72 |
Other gross reserves (in millions) |  | $ | 1 |  |  | $ | 1 |  |  | $ | 1 |  |

(1) | Since a number of our pool policies include aggregate loss limits and/or deductibles, we do not disclose an average direct reserve per default for our pool business.

(2) | See our Form 8-K filed with the Securities and Exchange Commission on November 30, 2012 for a discussion of our settlement with Freddie Mac regarding a pool policy. As of December 31, 2016 we had completed our obligation under this settlement agreement.

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The primary default inventory for the top 15 jurisdictions (based on 2017 losses paid) at March 31, 2017, December 31, 2016 and March 31, 2016 appears in the following table.

Primary Default Inventory by Jurisdiction
| March 31, 2017 |  | December 31, 2016 |  | March 31, 2016
New Jersey | 2,337 |  |  | 2,586 |  |  | 3,139 |
Florida | 3,738 |  |  | 4,150 |  |  | 5,063 |
New York | 2,935 |  |  | 3,171 |  |  | 3,562 |
Illinois | 2,411 |  |  | 2,649 |  |  | 2,899 |
Pennsylvania | 2,722 |  |  | 2,984 |  |  | 3,148 |
Maryland | 1,195 |  |  | 1,312 |  |  | 1,433 |
Puerto Rico | 1,713 |  |  | 1,844 |  |  | 2,107 |
Ohio | 2,308 |  |  | 2,614 |  |  | 2,795 |
Massachusetts | 1,018 |  |  | 1,108 |  |  | 1,277 |
Georgia | 1,628 |  |  | 1,853 |  |  | 1,945 |
California | 1,498 |  |  | 1,590 |  |  | 1,761 |
Virginia | 776 |  |  | 885 |  |  | 1,036 |
Connecticut | 641 |  |  | 690 |  |  | 752 |
Washington | 665 |  |  | 754 |  |  | 944 |
Indiana | 1,340 |  |  | 1,532 |  |  | 1,622 |
All other jurisdictions | 18,424 |  |  | 20,560 |  |  | 22,107 |
Total primary default inventory | 45,349 |  |  | 50,282 |  |  | 55,590 |

Note: Jurisdictions in italics in the table above are those that predominately use a judicial foreclosure process, which generally increases the amount of time it takes for a foreclosure to be completed.
The primary default inventory by policy year at March 31, 2017, December 31, 2016 and March 31, 2016 appears in the following table.

Primary Default Inventory by Policy Year
| March 31, 2017 |  | December 31, 2016 |  | March 31, 2016
Policy year: |  |  |  |  |
2004 and prior | 10,032 |  |  | 11,116 |  |  | 12,971 |
2005 | 5,173 |  |  | 5,826 |  |  | 7,005 |
2006 | 8,156 |  |  | 9,267 |  |  | 10,518 |
2007 | 14,167 |  |  | 15,816 |  |  | 17,490 |
2008 | 3,755 |  |  | 4,140 |  |  | 4,738 |
2009 | 372 |  |  | 421 |  |  | 436 |
2010 | 190 |  |  | 222 |  |  | 241 |
2011 | 214 |  |  | 246 |  |  | 262 |
2012 | 349 |  |  | 364 |  |  | 357 |
2013 | 645 |  |  | 686 |  |  | 590 |
2014 | 1,071 |  |  | 1,142 |  |  | 730 |
2015 | 886 |  |  | 814 |  |  | 25 1 |
2016 | 339 |  |  | 222 |  |  | 1 |
2017 | — |  |  | — |  |  | — |
Total primary default inventory | 45,349 |  |  | 50,282 |  |  | 55,590 |

Our results of operations continue to be negatively impacted by the mortgage insurance we wrote during 2005 through 2008 (see chart 17). Although uncertainty remains with respect to the ultimate losses we may experience on these books of business, as we continue to write new insurance on high-quality mortgages, those books have become a smaller percentage of our total portfolio, and we expect this trend to continue. Our 2005 through 2008 books of business represented approximately 24% and 25% of our total primary RIF at March 31, 2017 and December 31, 2016, respectively. Approximately 38% of the remaining primary RIF on our 2005-2008 books of business benefited from HARP as of March 31, 2017, compared to 36% as of December 31, 2016.

17 | DEFAULT INVENTORY MIX BY BOOK YEAR % OF TOTAL INVENTORY

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On our primary business, the highest claim frequency years have typically been the third and fourth year after the year of loan origination. However, the pattern of claim frequency can be affected by many factors, including persistency and deteriorating economic conditions. Low persistency can accelerate the period in the life of a book during which the highest claim frequency occurs. Deteriorating economic conditions can result in increasing claims following a period of declining claims. As of March 31, 2017, 46% of our primary RIF was written subsequent to December 31, 2014, 57% of our primary RIF was written subsequent to December 31, 2013, and 64% of our primary RIF was written subsequent to December 31, 2012.
UNDERWRITING AND OTHER EXPENSES, NET
Underwriting and other expenses includes items such as employee compensation costs, fees for professional services, depreciation and maintenance expense, and premium taxes, and are reported net of ceding commissions. Underwriting and other expenses, net increased for the first quarter of 2017 compared to the prior year primarily due to an increase in depreciation and maintenance expense on property and equipment.
Underwriting expense ratio (see chart 18). The underwriting expense ratio is 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. The underwriting expense ratio in the first quarter of 2017 was relatively consistent with the prior year period. The percentage increase in our underwriting and other expenses, net and amortization of DAC in the first quarter of 2017 compared to the prior year period was largely offset by the percentage increase in our NPW. The increase in our NPW was driven by lower ceded premiums due to a higher profit commission from our QSR Transactions in the first quarter of 2017 compared to the prior year period.

18 | UNDERWRITING EXPENSE RATIO

INTEREST EXPENSE
Interest expense increased $1.6 million from the prior year due to interest expense incurred on our 5.75% Notes, which offset the reduction in interest expense on our 2% and 5% Notes and 9% Debentures from the prior year due to debt extinguishment activity during 2016.
See Note 3 - “Debt” for debt transaction activity in 2017 pertaining to our 2% and 5% Notes and revolving credit facility that will impact the comparability of our interest expense in 2017 relative to 2016.
LOSS ON DEBT EXTINGUISHMENT
Loss on debt extinguishment in the first quarter of 2016 reflects the debt transaction activity we executed to reposition the maturity profile of our debt and reduce potentially dilutive shares. During the prior year quarter we repurchased a portion of our 5% Notes at amounts above our carrying value and MGIC purchased a portion of our 9% Debentures at an amount above fair value, with each transaction resulting in losses.
PROVISION FOR INCOME TAXES AND EFFECTIVE TAX RATE

|  | Three Months Ended March 31,
(In millions, except rate) |  | 2017 |  | 2016 |  | % Change
Income before tax |  | $ | 174.0 |  |  | $ | 103.7 |  |  | 68 | %
Provision for income taxes |  | $ | 84.2 |  |  | $ | 34.5 |  |  | 144 | %
Effective tax rate |  | 48.4 | % |  | 33.3 | % |  | N/M |

The difference between our statutory tax rate of 35% and our effective tax rate of 48.4% for the first quarter of 2017 was primarily due to the $27.2 million additional provision recorded for the expected settlement of our IRS litigation. Excluding this additional provision, our effective tax rate was approximately 32.7%. The difference between our statutory tax rate of 35% and our effective tax rate of 33.3% for the first quarter of 2016 was primarily due to the benefits of tax preferenced securities.
See Note 11 – “Income Taxes” to our consolidated financial statements for a discussion of our tax position.
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Balance Sheet Review
Total assets and total liabilities
As of March 31, 2017, total assets amounted to $5.9 billion and total liabilities were $3.3 billion. Compared to the year-end 2016, this represented an increase of $169.4 million for total assets and of $70.7 million for total liabilities.
The following sections mainly focus on our cash and cash equivalents and deferred income taxes, net, as these reflect the major developments in our asset base and loss reserves and debt as these reflect the major developments in our liabilities since December 31, 2016.
ASSETS
Cash and cash equivalents - The increase in our cash and cash equivalents reflects $150 million borrowed under our revolving credit facility during the first quarter of 2017 and a higher retention of cash and cash equivalents to settle the outstanding principal and interest due on our 5% Notes maturing on May 1, 2017.
Deferred income taxes, net - The decrease in our deferred income taxes, net was primarily due to the utilization of federal net operating loss carryforwards as we generated net income during the first quarter of 2017.
As of March 31, 2017, our deferred tax asset is recorded at $552.5 million. A decrease in the federal statutory rate will result in a one-time reduction in the amount at which our deferred tax asset is recorded, thereby reducing our net income and book value; however, such a decrease will also reduce our effective tax rate in future periods, thereby increasing net income. We estimate that every 1 percentage point reduction in the federal statutory rate would result in a one-time reduction in our deferred tax asset of $15.6 million.
Investment portfolio
Our overall investment portfolio asset allocation (see table 19), total fair value, and modified duration, remained relatively unchanged, compared to December 31, 2016. Our lower level of invested assets was offset in part by an increase in their fair values during the first quarter of 2017.

19 | FIXED INCOME SECURITY RATINGS (1) % OF FIXED INCOME SECURITIES AT FAIR VALUE

| Security Ratings
Period | AAA | AA | A | BBB
March 31, 2017 | 24 | % | 29 | % | 33 | % | 14 | %
December 31, 2016 | 25 | % | 28 | % | 32 | % | 15 | %
March 31, 2016 | 23 | % | 27 | % | 33 | % | 17 | %

(1) | Ratings are provided by one or more of: Moody's, Standard & Poor's and Fitch Ratings. If three ratings are available, the

middle rating is utilized; otherwise the lowest rating is utilized.

LIABILITIES
Loss reserves - Our loss reserves can be split into two parts: (1) reserves representing estimates of losses and settlement expenses on known delinquencies and (2) IBNR. Our gross liability for both is reduced by reinsurance balances recoverable on our estimated losses and settlement expenses to calculate a net reserve balance. The net reserve balance decreased by 7% to $1.29 billion as of March 31, 2017, from $1.39 billion as of December 31, 2016. Reinsurance balances recoverable on our estimated losses and settlement expenses were $46.7 million and $50.5 million as of March 31, 2017 and December 31, 2016, respectively. The overall decrease in our loss reserves during the first quarter of 2017 was due to a higher level of losses paid ($127.6 million) relative to losses incurred ($27.6 million).
Debt - The increase in our consolidated debt was due to the $150 million borrowed under our revolving credit facility during the first quarter of 2017 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. The revolving credit facility is available until March 21, 2020, with a limit of $175 million.
Our 2% Notes were eliminated in April 2017 through a combination of conversions and cash redemption and our 5% Notes were repaid on May 1, 2017 with holding company cash. As a result of these transactions, and the repayment of our revolving credit facility borrowings, our debt obligations declined by approximately $502.6 million since March 31, 2017. See Note 3 - “Debt” for further information.
Total shareholders’ equity
As of March 31, 2017, total shareholders’ equity amounted to $2.6 billion, an increase of $98.7 million compared to December 31, 2016. The increase in our total shareholders’ equity was due to net income and an increase in the fair value of our investment portfolio during the first quarter of 2017.
As described in Note 3 - “Debt”, approximately $202.5 million of principal outstanding on our 2% Notes was converted to shares of common stock in April. This debt conversion results in an increase to our shareholders’ equity for the carrying value of the notes, which includes outstanding debt issuance costs, at the time of conversion.
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Liquidity and Capital Resources
Consolidated Cash Flow Analysis
We have three primary types of cash flows: (1) operating cash flows, which consist mainly of cash generated by our insurance operations and income earned on our investment portfolio, less amounts paid for claims, debt repurchase activity, interest expense and operating expenses, (2) investing cash flows related to the purchase, sale and maturity of investments and (3) financing cash flows generally from activities that impact our capital structure, such as changes in debt and shares outstanding. The following table summarizes our consolidated cash flows from operating, investing and financing activities:

|  | Three Months Ended March 31,
(In thousands) |  | 2017 |  | 2016
Total cash provided by: |  |  |  |
Operating activities |  | 77,469 |  |  | 3,536 |
Investing activities |  | 52,440 |  |  | 209,306 |
Financing activities |  | 141,755 |  |  | (144,064 | )
Increase in cash and cash equivalents | $ | 271,664 |  |  | $ | 68,778 |

Net cash provided by operating activities for the three months ended March 31, 2017 increased compared to the same period of 2016 primarily due to a lower level of losses paid, net, offset in part by increases in payments for interest and other expenses.
Net cash from investing activities for the three months ended March 31, 2017 decreased when compared to the same period of 2016, primarily due to a decrease in the percentage of proceeds from the maturity and sales of fixed income securities that were reinvested, a decrease in unsettled investment purchase activity, and an increase in amounts spent on property and equipment.
Net cash provided by financing activities for the three months ended March 31, 2017 includes the proceeds from amounts borrowed under our revolving credit facility, offset in part by expenses paid to establish the revolving credit facility and cash payment of employee taxes paid for withheld shares.
Net cash used by financing activities for the three months ended March 31, 2016 reflects the repurchase of a portion of our 5% Notes and MGIC’s purchase of a portion of our 9% Debentures and cash payment of employee taxes paid for withheld shares. These cash uses were offset, in part, by a
borrowing from the FHLB.
Capitalization
DEBT AT OUR HOLDING COMPANY AND HOLDING COMPANY LIQUIDITY
Debt - holding company (see charts 20 and 21)
The 5.75% Notes, 2% Notes, 5% Notes, 9% Debentures, and borrowings under our revolving credit facility are obligations of our holding company, MGIC Investment Corporation, and not of its subsidiaries. As of March 31, 2017, our holding company’s debt obligations were $1,317 million in aggregate principal, As discussed in Note 3 - “Debt” to our consolidated financial statements, we entered into a Credit Agreement that provides an unsecured revolving credit facility under which we borrowed $150 million to fund a portion of the redemption price of the 2% Notes if holders did not elect to convert their Notes. In April 2017, prior to the redemption date of the 2% Notes, holders of approximately $202.5 million of the outstanding principal exercised their rights to convert their notes into shares of our common stock and we repaid the outstanding amount borrowed under our credit facility plus interest incurred. The remaining $5.1 million of our 2% Notes that did not convert was settled with holding company cash. The conversion of our 2% Notes into shares of our common stock, along with the cash redemption, eliminated our debt obligation. Our 5% Notes matured on May 1, 2017 and we repaid the outstanding principal with holding company cash. The 5% Notes and revolving credit facility repayments, combined with the elimination of our 2% Notes debt obligation, all of which occurred subsequent to March 31, 2017, reduced our holding company debt obligations by $502.6 million.

20 | HOLDING COMPANY DEBT IN MILLIONS

|  | March 31, 2017 |  | December 31, 2016 |

* | MGIC owns approximately $132.7 million of our 9% Debentures, which are eliminated in consolidation, but they remain outstanding obligations owed by our holding company to MGIC.

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21 | REMAINING TIME TO MATURITY OF HOLDING COMPANY DEBT IN MILLIONS

|  | March 31, 2017 |  | December 31, 2016 |

* | As discussed in Note 3 - “Debt,” we issued an irrevocable notice of redemption in respect of our 2% Notes which, absent any conversion by holders of the notes, would have resulted in our payment of the outstanding principal on the notes on April 21, 2017.

Liquidity analysis - holding company
As of March 31, 2017, we had approximately $451 million in cash and investments at our holding company. These resources are maintained primarily to service our debt interest expense, pay debt maturities, repurchase outstanding debt obligations from time to time, and to settle intercompany obligations. We may also use available holding company cash to repurchase shares of our common stock. While these assets are held, we generate investment income that serves to offset a portion of our interest expense. In addition to investment income, the payment of dividends from our insurance subsidiaries and/or raising capital in the public markets are the principal sources of holding company cash inflow. MGIC is the principal source of dividend-paying capacity, which is restricted by insurance regulation. The ability to raise capital in the public markets is subject to prevailing market conditions, investor demand for the securities to be issued, and our deemed creditworthiness.
In the first quarter of 2017, our holding company cash and investments increased by $168 million, to $451 million as of March 31, 2017. Cash outflows during the quarter at our holding company were primarily for interest payments approximating $13 million, while cash inflows included $150 million borrowed under our revolving credit facility, $20 million of dividends received from MGIC, $10 million of unsettled investment transactions, and other inflows of $1 million.
We expect MGIC to continue to pay quarterly dividends. We
ask the OCI not to object before MGIC pays dividends. We notified the OCI of a proposed second quarter 2017 dividend of $30 million to which we understand the OCI will not object.
The net unrealized losses on our holding company investment portfolio were approximately $2 million at March 31, 2017 and the portfolio had a modified duration of approximately 1.8 years.
As discussed in “Debt - holding company” above, subsequent to March 31, 2017 we settled our 5% Notes at maturity, redeemed $5.1 million of our 2% Notes for cash, and repaid the amount borrowed under our revolving credit facility, each with holding company cash. These transactions reduced our holding company cash and investments by approximately $300 million. In addition, subsequent to March 31, 2017, we made interest payments of approximately $24 million on our debt obligations (of which $6 million was paid to MGIC), which reduced our holding company cash.
We may from time to time continue to seek to acquire our debt obligations through cash purchases and/or exchanges for other securities. We may also from time to time seek to acquire our common stock through cash purchases, including with funds provided by debt. We may make such acquisitions in open market purchases, privately negotiated acquisitions or other transactions. The amounts involved may be material.
Subject to certain limitations and restrictions, holders of each of the 9% Debentures may convert their notes into shares of our common stock at their option prior to certain dates under the terms of their issuance, in which case our corresponding obligation will be eliminated.
See Note 7 – “Debt” to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016 for additional information about our convertible debt, including our option to defer interest on our 9% Debentures. Any deferred interest compounds at the stated rate of 9%. The description in Note 7 - “Debt” to our consolidated financial statements in our Annual Report on Form 10-K is qualified in its entirety by the terms of the notes and debentures.
Although not anticipated in the near term, we may also contribute funds to our insurance operations to comply with the PMIERs or the State Capital Requirements. See “Overview - Capital” above for a discussion of these requirements. See discussion of our non-insurance contract underwriting services in Note 5 – “Litigation and Contingencies” to our consolidated financial statements.
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DEBT AT SUBSIDIARIES
MGIC is a member of the FHLB, which provides MGIC access to an additional source of liquidity via a secured lending facility. MGIC has $155.0 million of debt outstanding in the form of a fixed rate advance from the FHLB. Interest on the Advance is payable monthly at an annual rate, fixed for the term of the Advance, of 1.91%. The principal of the Advance matures on February 10, 2023. MGIC may prepay the Advance at any time. Such prepayment would be below par if interest rates have risen after the Advance was originated, or above par if interest rates have declined. The Advance is secured by eligible collateral whose fair value must be maintained at 102% of the outstanding principal balance. MGIC provided eligible collateral from its investment portfolio.
Capital Adequacy
PMIERs
We operate under the PMIERs of the GSEs that became effective December 31, 2015. The most recent revision to the PMIERS, in December 2016, had had no impact on our calculation of Available Assets or Minimum Required Assets, or our operations. The GSEs may further amend the PMIERs at any time, and they have broad discretion to interpret the requirements, which could impact the calculation of our Available Assets and/or Minimum Required Assets. The PMIERS specifically provided that the tables of factors used to determine Minimum Required Assets will be updated every two years following a minimum of 180 days' notice and may be updated more frequently to reflect changes in macroeconomic conditions or loan performance. We expect the GSEs to perform a more comprehensive review of the PMIERs, including their financial requirements, in 2017.
As of March 31, 2017, MGIC’s Available Assets under PMIERs totaled approximately $4.7 billion, an excess of approximately $740 million over its Minimum Required Assets of approximately $4.0 billion; and MGIC is in compliance with the requirements of the PMIERs and eligible to insure loans purchased by the GSEs. Maintaining a sufficient level of excess Available Assets will allow MGIC to remain in compliance with the PMIERs financial requirements, including, we believe, to the extent they are modified further in the next scheduled review; and will also allow us flexibility to participate in additional business opportunities as they may arise. Our QSR Transactions provided an aggregate of approximately $741 million of PMIERs capital credit as of March 31, 2017.
We plan to continuously comply with the PMIERs through our operational activities or through the contribution of funds from our holding company, subject to demands on the
holding company's resources, as outlined above.
RISK-TO-CAPITAL
We compute our risk-to-capital ratio on a separate company statutory basis, as well as on a combined insurance operation basis. The risk-to-capital ratio is our net RIF divided by our policyholders’ position. Our net RIF includes both primary and pool risk in force, and excludes risk on policies that are currently in default and for which loss reserves have been established, and those covered by reinsurance. The risk amount includes pools of loans with contractual aggregate loss limits and without these limits. Policyholders’ position consists primarily of statutory policyholders’ surplus (which increases as a result of statutory net income and decreases as a result of statutory net loss and dividends paid), plus the statutory contingency reserve, and a portion of the reserves for unearned premiums. The statutory contingency reserve is reported as a liability on the statutory balance sheet. A mortgage insurance company is required to make annual additions to the contingency reserve of approximately 50% of net earned premiums. These contributions must generally be maintained for a period of ten years. However, with regulatory approval a mortgage insurance company may make early withdrawals from the contingency reserve when incurred losses exceed 35% of net earned premiums in a calendar year.
MGIC’s separate company risk-to-capital calculation appears in the table below.

(In millions, except ratio) |  | March 31, 2017 |  | December 31, 2016
RIF - net (1) |  | $ | 29,227 |  |  | $ | 28,668 |
Statutory policyholders’ surplus |  | 1,521 |  |  | 1,505 |
Statutory contingency reserve |  | 1,296 |  |  | 1,181 |
Statutory policyholders’ position |  | $ | 2,817 |  |  | $ | 2,686 |
Risk-to-capital |  | 10.4:1 |  |  | 10.7:1 |

(1) | RIF – net, as shown in the table above is net of reinsurance and exposure on policies currently in default for which loss reserves have been established.

Our combined insurance companies’ risk-to-capital calculation appears in the table below.

(In millions, except ratio) |  | March 31, 2017 |  | December 31, 2016
RIF - net (1) |  | $ | 34,814 |  |  | $ | 34,465 |
Statutory policyholders’ surplus |  | 1,522 |  |  | 1,507 |
Statutory contingency reserve |  | 1,491 |  |  | 1,360 |
Statutory policyholders’ position |  | $ | 3,013 |  |  | $ | 2,867 |
Risk-to-capital |  | 11.6:1 |  |  | 12.0:1 |

(1) | RIF – net, as shown in the table above, is net of reinsurance and exposure on policies currently in default ($2.4 billion at March 31, 2017 and $2.6 billion at December 31, 2016) for which loss reserves have been established.

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The reductions in MGIC's and our combined insurance companies’ risk-to-capital in the first three months of 2017 were primarily due to an increase in statutory policyholders’ position due to an increase in statutory contingency reserves, partially offset by an increase in net RIF in both calculations. Our RIF, net of reinsurance, increased in the first three months of 2017, due to an increase in our IIF. Our risk-to-capital ratio will decrease if the percentage increase in capital exceeds the percentage increase in insured risk.
For additional information regarding regulatory capital see Note 15 – “Statutory Information” to our consolidated financial statements as well as our risk factor titled “State Capital requirements may prevent us from continuing to write new insurance on an uninterrupted basis.”
Financial Strength Ratings
The financial strength of MGIC, our principal mortgage insurance subsidiary, is as follows:

Rating Agency |  | Rating |  | Outlook
Moody’s Investor Services |  | Baa3 |  | Stable
Standard and Poor’s Rating Services’ |  | BBB+ |  | Stable

For further information about the importance of MGIC’s ratings, see our risk factor titled “Competition or changes in our relationships with our customers could reduce our revenues, reduce our premium yields and/or, or increase our losses.”
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Contractual Obligations
At March 31, 2017, the approximate future payments under our contractual obligations of the type described in the table below are as follows:

Contractual Obligations
|  | Payments due by period
(In millions) |  | Total |  | Less than 1 year |  | 1-3 years |  | 3-5 years |  | More than 5 years
Long-term debt obligations(1) (2) |  | $ | 2,597.0 |  |  | $ | 409.3 |  |  | $ | 251.1 |  |  | $ | 101.1 |  |  | $ | 1,835.5 |
Operating lease obligations |  | 2.6 |  |  | 0.7 |  |  | 1.4 |  |  | 0.5 |  |  | — |
Tax obligations |  | 52.0 |  |  | 52.0 |  |  | — |  |  | — |  |  | — |
Purchase obligations |  | 12.1 |  |  | 10.0 |  |  | 2.1 |  |  | — |  |  | — |
Pension, SERP and other post-retirement plans |  | 287.1 |  |  | 22.7 |  |  | 52.4 |  |  | 57.0 |  |  | 155.0 |
Other long-term liabilities |  | 1,335.1 |  |  | 627.5 |  |  | 534.0 |  |  | 173.6 |  |  | — |
Total |  | $ | 4,285.9 |  |  | $ | 1,122.2 |  |  | $ | 841.0 |  |  | $ | 332.2 |  |  | $ | 1,990.5 |

(1) | As discussed in Note 3 - “Debt,” we issued an irrevocable notice of redemption in respect of our 2% Notes which, absent any conversion by holders of the notes, would have resulted in our payment of the outstanding principal on the notes on April 21, 2017. As such, we have reported the outstanding principal, and expected interest to be paid, in the less than 1 year period above.

(2) | As discussed in Note 3 - “Debt,” we entered into a Credit Agreement that provides for an unsecured, revolving, credit facility that has a maturity term of three years from the effective date. Our revolving credit facility borrowing as of March 31, 2017 is included in the 1-3 years period in the table above. We repaid the full amount borrowed under the revolving credit facility in April.

____________________
Our long-term debt obligations as of March 31, 2017 include their related interest and are discussed in Note 3 - “Debt” to our consolidated financial statements and under “Liquidity and Capital Resources” above. Our operating lease obligations include operating leases on certain office space, data processing equipment and autos, as discussed in Note 16 – “Leases” to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016. Tax obligations primarily relate to our current dispute with the IRS, as discussed in Note 11 – “Income Taxes.” Purchase obligations consist primarily of agreements to purchase items related to our ongoing infrastructure projects and information technology investments in the normal course of business. See Note 11 – “Benefit Plans” to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016 for a discussion of expected benefit payments under our benefit plans.
Our other long-term liabilities represent the loss reserves established to recognize the liability for losses and LAE related to existing defaults on insured mortgage loans. The timing of the future claim payments associated with the established loss reserves was determined primarily based on two key assumptions: the length of time it takes for a notice of default to develop into a received claim and the length of time it takes for a received claim to be ultimately paid. The future claim payment periods are estimated based on historical experience, and could emerge significantly different than this estimate. Due to the uncertainty regarding how certain factors, such as loss mitigation protocols established by servicers and changes in some state foreclosure laws that may include, for example, a requirement for additional review and/or mediation process, will affect our future paid claims it is difficult to estimate the amount and timing of future claim payments. See Note 12 – “Loss Reserves” to our consolidated financial statements. In accordance with GAAP for the mortgage insurance industry, we establish loss reserves only for loans in default. Because our reserving method does not take account of the impact of future losses that could occur from loans that are not delinquent, our obligation for ultimate losses that we expect to occur under our policies in force at any period end is not reflected in our consolidated financial statements or in the table above.
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Forward Looking Statements and Risk Factors
General: Our revenues and losses could be affected by the risk factors referred to under “Location of Risk Factors” below. These risk factors are an integral part of Management’s Discussion and Analysis.
These factors may also cause actual results to differ materially from the results contemplated by forward looking statements that we may make. Forward looking statements consist of statements which relate to matters other than historical fact. Among others, statements that include words such as we “believe,” “anticipate” or “expect,” or words of similar import, are forward looking statements. We are not undertaking any obligation to update any forward looking statements we may make even though these statements may be affected by events or circumstances occurring after the forward looking 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.
Location of Risk Factors: The risk factors are in Item 1 A of our Annual Report on Form 10-K for the year ended December 31, 2016, as supplemented by Part II, Item 1 A of this Quarterly Report on Form 10-Q. The risk factors in the 10-K, as supplemented by this 10-Q and through updating of various statistical and other information, are reproduced in Exhibit 99 to this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our investment portfolio is essentially a fixed income portfolio and is exposed to market risk. Important drivers of the market risk are credit spread risk and interest rate risk.
Credit spread risk is the risk that we will incur a loss due to adverse changes in credit spreads. Credit spread is the additional yield on fixed income securities above the risk-free rate (typically referenced as the yield on U.S. Treasury securities) that market participants require to compensate them for assuming credit, liquidity and/or prepayment risks.
We manage credit risk via our investment policy guidelines which primarily place our investments in investment grade securities and limit the amount of our credit exposure to any one issue, issuer and type of instrument. Guideline and investment portfolio detail is available in "Business – Section C, Investment Portfolio" in Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2016.
Interest rate risk is the risk that we will incur a loss due to adverse changes in interest rates relative to the characteristics of our interest bearing assets.
One of the measures used to quantify this exposure is modified duration. Modified duration measures the price
sensitivity of the assets to the changes in spreads. At March 31, 2017, the modified duration of our fixed income investment portfolio was 4.6 years, which means that an instantaneous parallel shift in the yield curve of 100 basis points would result in a change of 4.6% in the fair value of our fixed income portfolio. For an upward shift in the yield curve, the fair value of our portfolio would decrease and for a downward shift in the yield curve, the fair value would increase. See Note 7 – “Investments” to our consolidated financial statements for additional disclosure surrounding our investment portfolio.
Item 4. Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer concluded that such controls and procedures were effective as of the end of such period. There was no change in our internal control over financial reporting that occurred during the first quarter of 2017 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1 A. Risk Factors
With the exception of the changes described and set forth below, there have been no material changes in our risk factors from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The risk factors in the 10-K, as supplemented by this 10-Q, and through updating of various statistical and other information, are reproduced in their entirety in Exhibit 99 to this Quarterly Report on Form 10-Q.
If the models used in our businesses are inaccurate, it could have a material adverse impact on our business, results of operations and financial condition.
We employ proprietary and third party models to, among other uses, project returns, price products, calculate reserves, generate projections used to estimate future pre-tax income and to evaluate loss recognition testing, evaluate risk, determine internal capital requirements and perform stress testing. These models rely on estimates and projections that are inherently uncertain and may not operate as intended. In addition, from time to time we seek to improve certain models, and the conversion process may result in material changes to assumptions, including those about returns, and financial results. The models we employ are complex, which increases our risk of error in their design, implementation or use. Also, the associated input data, assumptions and calculations may not be correct, and the controls we have in place to mitigate that risk may not be effective in all cases. The risks related to our models may increase when we change assumptions and/or methodologies, or when we add or change modeling platforms. We have enhanced, and we intend to continue to enhance, our modeling capabilities. Moreover, we may use information we receive through enhancements to refine or otherwise change existing assumptions and/or methodologies.
Your ownership in our company may be diluted by additional capital that we raise or if the holders of our outstanding convertible debt convert that debt into shares of our common stock.
As noted above under our risk factor titled “We may not continue to meet the GSEs’ private mortgage insurer eligibility requirements and our returns may decrease as we are required to maintain more capital in order to maintain our eligibility,” although we are currently in compliance with the requirements of the PMIERs, there can be no assurance that we would not seek to issue non-dilutive debt capital or to raise additional equity capital to manage our capital position under the PMIERs or for other purposes. Any future issuance of equity securities may dilute your ownership interest in our company. In addition, the market price of our common stock could decline as a result of sales of a large
number of shares or similar securities in the market or the perception that such sales could occur.
At March 31, 2017, we had outstanding $390 million principal amount of 9% Convertible Junior Subordinated Debentures due in 2063 ("9% Debentures") (of which approximately $133 million was purchased by and is held by MGIC, and is eliminated on the consolidated balance sheet), $145 million principal amount of 5% Convertible Senior Notes due in 2017 ("5% Notes") and $208 million principal amount of 2% Convertible Senior Notes due in 2020 ("2% Notes").
The 5% Notes were repaid on May 1, 2017 with holding company cash.
On March 21, 2017, the Company issued an irrevocable redemption notice for all of the 2% Notes, with a redemption date of April 21, 2017. In April 2017, holders of approximately $202.5 million principal amount of the 2% Notes exercised their rights to convert their notes into shares of our common stock. The remaining $5.1 million of outstanding principal amount was redeemed for cash. The conversions of the 2% Notes resulted in the issuance of approximately 29.1 million shares of our common stock in April. Those shares were previously considered dilutive securities in the Company’s calculation of diluted share count and their issuance will result in their being considered shares outstanding. The conversions and cash redemption eliminated our debt obligation under the 2% Notes in April 2017 and the conversions increased our shareholders’ equity. No gain or loss will be recognized from the conversions.
The principal amount of the 9% Debentures is currently convertible, at the holder’s option, at an initial conversion rate, which is subject to adjustment, of 74.0741 common shares per $1,000 principal amount of debentures. This represents an initial conversion price of approximately $13.50 per share. We have the right, and may elect, to defer interest payable under the debentures in the future. If a holder elects to convert its debentures, the interest that has been deferred on the debentures being converted is also convertible into shares of our common stock. The conversion rate for such 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 the associated debentures. We may elect to pay cash for some or all of the shares issuable upon a conversion of the debentures.
In March 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. We borrowed $150 million under the 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 2017, we repaid the loan because most of the holders elected to convert their notes.
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For a discussion of the dilutive effects of our convertible securities on our earnings per share, see Note 4 – “Earnings Per Share” to our consolidated financial statements in our Annual Report on Form 10-K filed with the SEC on February 21, 2017. We currently have no plans to repurchase common stock but regularly consider appropriate uses for resources of our holding company. In addition, we have in the past, and may in the future , purchase our debt securities.
Our holding company debt obligations materially exceed our holding company cash and investments.
At March 31, 2017, we had approximately $451 million in cash and investments at our holding company and our holding company’s debt obligations were $1,318 million in aggregate principal amount, consisting of $145 million of 5% Notes, $208 million of 2% Notes, $425 million of 5.75% Senior Notes due in 2023 ("5.75% Notes"), $390 million of 9% Debentures (of which approximately $133 million was purchased by and is held by MGIC, and is eliminated on the consolidated balance sheet) and $150 million under the revolving credit agreement. As noted above, in April 2017, we repaid the borrowing under the revolving credit facility, using approximately $150 million of holding company cash and investments, and holders of approximately $202.5 million principal amount of the 2% Notes elected to convert their notes into our common stock. On May 1, 2017, we repaid our 5% Notes, including interest due, using approximately $149 million of holding company cash and investments. Annual debt service on the 5.75% Notes and 9% Debentures outstanding as of March 31, 2017, is approximately $60 million (of which approximately $12 million will be paid to MGIC and will be eliminated on the consolidated statement of operations).
The Senior Notes, Convertible Junior Subordinated Debentures and borrowings under the revolving credit facility are obligations of our holding company, MGIC Investment Corporation, and not of its subsidiaries. The payment of dividends from our insurance subsidiaries which, other than investment income and raising capital in the public markets, is the principal source of our holding company cash inflow, is restricted by insurance regulation. MGIC is the principal source of dividend-paying capacity. In 2016, MGIC paid a total of $64 million in dividends to our holding company, its first dividends since 2008, and it paid a dividend of $20 million to our holding company in the first quarter of 2017. We expect MGIC to continue to pay quarterly dividends. We ask the OCI not to object before MGIC pays dividends. We notified the OCI of a proposed second quarter 2017 dividend of $30 million to which we understand the OCI will not object. If any additional capital contributions to our subsidiaries were required, such contributions would decrease our holding company cash and investments. As described in our Current Report on Form 8-K filed on February 11, 2016, MGIC borrowed $155
million from the Federal Home Loan Bank of Chicago. This is an obligation of MGIC and not of our holding company.
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Item 6. Exhibits
The accompanying Index to Exhibits is incorporated by reference in answer to this portion of this Item, and except as otherwise indicated in the next sentence, the Exhibits listed in such Index are filed as part of this Form 10-Q. Exhibit 32 is not filed as part of this Form 10-Q but accompanies this Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on May 5, 2017.

| MGIC INVESTMENT CORPORATION
| /s/ Timothy J. Mattke
| Timothy J. Mattke
| Executive Vice President and
| Chief Financial Officer
| /s/ Julie K. Sperber
| Julie K. Sperber
| Vice President, Controller and Chief Accounting Officer

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INDEX TO EXHIBITS
(Part II, Item 6)

Exhibit Number | Description of Exhibit
12 | Ratio of Earnings to Fixed Charges
31.1 | Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002
31.2 | Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002
32 | Certification of CEO and CFO under Section 906 of Sarbanes-Oxley Act of 2002 (as indicated in Item 6 of Part II, this Exhibit is not being “filed”)
99 | Risk Factors included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016, as supplemented by Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, and through updating of various statistical and other information
99.27 | Credit Agreement dated as of March 21, 2017 among MGIC Investment Corporation, as Borrower; U.S. Bank National Association, as Administrative Agent; and the lenders party thereto
101.INS | XBRL Instance Document
101.SCH | XBRL Taxonomy Extension Schema Document
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document
101.LAB | XBRL Taxonomy Extension Label Linkbase Document
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document

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