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

☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| For the quarterly period ended | March 31, 2020
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| For the transition period from ______ to ______
| Commission file number | 1-10816

MGIC Investment Corp oration
(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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class |  | Trading Symbol |  | Name of each exchange on which registered
Common stock |  | MTG |  | New York Stock Exchange

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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
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 | ☒ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company | ☐ | (Do not check if a smaller reporting company)
Emerging growth company | ☐ | 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 ☐ NO x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of May 1, 2020, there were 338,567,022 shares of common stock of the registrant, par value $1.00 per share, outstanding.

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.
MGIC Investment Corporation - Q1 2020 | 2

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2020

Table of contents
|  | Page
PART I — FINANCIAL INFORMATION
Item 1 | Financial Statements: |
| Consolidated Balance Sheets - March 31, 2020 (Unaudited) and December 31, 2019 | 7
| Consolidated Statements of Operations (Unaudited) - Three Months Ended March 31, 2020 and 2019 | 8
| Consolidated Statements of Comprehensive Income (Unaudited) - Three Months Ended March 31, 2020 and 2019 | 9
| Consolidated Statements of Shareholders’ Equity (Unaudited) - Three Months Ended March 31, 2020 and 2019 | 10
| Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended March 31, 2020 and 2019 | 11
| Notes to Consolidated Financial Statements (Unaudited) | 12
| Note 1 - Nature of Business and Basis of Presentation | 12
| Note 2 - Significant Accounting Policies | 12
| Note 3 - Debt | 14
| Note 4 - Reinsurance | 14
| Note 5 - Litigation and Contingencies | 17
| Note 6 - Earnings Per Share | 18
| Note 7 - Investments | 18
| Note 8 - Fair Value Measurements | 22
| Note 9 - Other Comprehensive Income | 25
| Note 10 - Benefit Plans | 25
| Note 11 - Loss Reserves | 26
| Note 12 - Shareholders’ Equity | 28
| Note 13 - Share-Based Compensation | 29
| Note 14 - Statutory Information | 29
Item 2 | Management's Discussion and Analysis of Financial Condition and Results of Operations | 31
Item 3 | Quantitative and Qualitative Disclosures about Market Risk | 55
Item 4 | Controls and Procedures | 55
PART II — OTHER INFORMATION
Item 1 | Legal Proceedings | 56
Item 1A | Risk Factors | 56
Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 66
Item 6 | Exhibits | 67
INDEX TO EXHIBITS | 67
SIGNATURES | 68

MGIC Investment Corporation - Q1 2020 | 3

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
CARES Act
The Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020
CECL
Current expected credit losses
CFPB
Consumer Financial Protection Bureau
CLO
Collateralized loan obligations
CMBS
Commercial mortgage-backed securities
COVID-19 Pandemic
An outbreak of the novel coronavirus disease, later named COVID-19, that has spread globally, causing significant adverse effects on populations and economies. The outbreak of COVID-19 was declared a pandemic by the World Health Organization and a national emergency in the United States in March 2020.
CRT
Credit risk transfer. The transfer of a portion of mortgage credit risk to the private sector through different forms of transactions and structures
/ D
DAC
Deferred insurance policy acquisition costs
Debt-to-income (“DTI”) ratio
The ratio, expressed as a percentage, of a borrower’s total debt payments to gross income
Direct
Direct means before giving effect to reinsurance
/ E
EPS
Earnings per share
/ 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
Home Re Transactions
Excess-of-loss reinsurance transactions with unaffiliated special purpose insurers domiciled in Bermuda
MGIC Investment Corporation - Q1 2020 | 4

HOPA
Homeowners Protection Act
HUD
Housing and Urban Development
/ 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
ILN
Insurance-linked notes
/ L
LAE
Loss adjustment expenses
Loan-to-value ("LTV") ratio
The ratio, expressed as a percentage, of the dollar amount of the first mortgage loan to the value of the property at the time the loan became insured and does not reflect subsequent housing price appreciation or depreciation. Subordinate mortgages may also be present.
Long-term debt:
5.75% Notes
5.75% Senior Notes due on August 15, 2023, with interest payable semi-annually on February 15 and August 15 of each year
9% Debentures
9% Convertible Junior Subordinated Debentures due on April 1, 2063, with interest payable semi-annually on April 1 and October 1 of each year
FHLB Advance or the Advance
1.91% Fixed rate advance from the FHLB due on February 10, 2023, with interest payable monthly
Loss ratio
The ratio, expressed as a percentage, of the sum of incurred losses and loss adjustment expenses to NPE
Low down payment loans or mortgages
Loans with less than 20% down payments
LPMI
Lender-paid mortgage insurance
/ M
MBS
Mortgage-backed securities
MD&A
Management's discussion and analysis of financial condition and results of operations
MGIC
Mortgage Guaranty Insurance Corporation, a subsidiary of MGIC Investment Corporation
MAC
MGIC Assurance Corporation, a subsidiary of MGIC
Minimum Required Assets
The minimum amount of Available Assets that must be held under the PMIERs which is based on an insurer’s book of IIF and is calculated from tables of factors with several risk dimensions, reduced for credit given for risk ceded under reinsurance transactions, and subject to a floor of $400 million.
MPP
Minimum Policyholder Position, as required under certain state requirements. The “policyholder position” of a mortgage insurer is its net worth or surplus, contingency reserve and a portion of the reserves for unearned premiums
/ N
N/A
Not applicable for the period presented
NAIC
The National Association of Insurance Commissioners
NIW
New Insurance Written, is the aggregate original principal amount of the mortgages that are insured during a period
N/M
Data, or calculation, deemed not meaningful for the period presented
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
MGIC Investment Corporation - Q1 2020 | 5

/ O
OCI
Office of the Commissioner of Insurance of the State of Wisconsin
OTTI
Other than temporary impairment
/ 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 each of Fannie Mae and Freddie Mac to set forth requirements that an approved insurer must meet and maintain to provide mortgage guaranty insurance on loans delivered to or acquired by Fannie Mae or Freddie Mac, as applicable.
Premium Yield
The ratio of NPE divided by the average IIF outstanding for the period measured
Premium Rate
The contractual rate charged for coverage under our insurance policies.
Primary Insurance
Insurance that provides mortgage default protection on individual loans. Primary insurance may be written on a "flow" basis, in which loans are insured in individual, loan-by-loan transactions, or on a "bulk" basis, in which each loan in a portfolio of loans is individually insured in a single bulk transaction
/ Q
QSR Transaction
Quota share reinsurance transaction with a group of unaffiliated reinsurers
QM
A mortgage loan that satisfies the “qualified mortgage” loan characteristics pursuant to the Consumer Financial Protection Bureau’s ability-to-repay under the Truth in Lending Act. Originating a QM loan may provide a lender with legal protection from lawsuits that claim the lender failed to verify a borrower’s ability to repay.
/ R
RESPA
Real Estate Settlement Procedures Act
RIF
Risk in force, which for an individual loan insured by us, is equal to the unpaid loan principal balance, as reported to us, multiplied by the insurance coverage percentage. RIF is sometimes referred to as exposure.
Risk-to-capital
Under certain state regulations, the ratio of RIF, net of reinsurance and exposure on policies currently in default and for which loss reserves have been established, to the level of statutory capital
RMBS
Residential mortgage-backed securities
/ S
State Capital Requirements
Under certain state regulations, the minimum amount of statutory capital relative to risk in force (or similar measure)
/ T
TILA
Truth in Lending Act
/ U
Underwriting expense ratio
The ratio, expressed as a percentage, of the underwriting and operating expenses, net and amortization of DAC of our combined insurance operations (which excludes underwriting and operating expenses of our non-insurance subsidiaries) to NPW
Underwriting profit
NPE minus incurred losses and underwriting and operating expenses
USDA
U.S. Department of Agriculture
/ V
VA
U.S. Department of Veterans Affairs
VIE
Variable interest entity
MGIC Investment Corporation - Q1 2020 | 6

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands) |  | Note |  | March 31, 2020 |  | December 31, 2019
ASSETS |  |  |  |  |  |
Investment portfolio: |  | 7 / 8 |  |  |  |
Fixed income, available-for-sale, at fair value (amortized cost 2020 - $5,375,382; 2019 - $5,562,550) |  |  |  | $ | 5,458,846 |  |  | $ | 5,737,892 |
Equity securities, at fair value (cost 2020 - $29,559; 2019 - $17,188) |  | 2 / 7 / 8 |  | 28,892 |  |  | 17,328 |
Other invested assets, at cost |  | 2 / 7 / 8 |  | 3,100 |  |  | 3,100 |
Total investment portfolio |  |  |  | 5,490,838 |  |  | 5,758,320 |
Cash and cash equivalents |  |  |  | 365,303 |  |  | 161,847 |
Restricted cash and cash equivalents |  |  |  | 4,223 |  |  | 7,209 |
Accrued investment income |  |  |  | 46,942 |  |  | 49,705 |
Reinsurance recoverable on loss reserves |  | 2/4 |  | 25,756 |  |  | 21,641 |
Reinsurance recoverable on paid losses |  | 2 |  | 1,691 |  |  | 1,521 |
Premiums receivable |  | 2 |  | 53,440 |  |  | 55,587 |
Home office and equipment, net |  |  |  | 49,010 |  |  | 50,121 |
Deferred insurance policy acquisition costs |  |  |  | 19,514 |  |  | 18,531 |
Deferred income taxes, net |  |  |  | 8,867 |  |  | 5,742 |
Other assets |  |  |  | 89,703 |  |  | 99,347 |
Total assets |  |  |  | $ | 6,155,287 |  |  | $ | 6,229,571 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |  |  |  |
Liabilities: |  |  |  |  |  |
Loss reserves |  | 11 |  | $ | 574,753 |  |  | $ | 555,334 |
Unearned premiums |  |  |  | 365,408 |  |  | 380,302 |
Federal Home Loan Bank advance |  | 3 |  | 155,000 |  |  | 155,000 |
Senior notes |  | 3 |  | 421,155 |  |  | 420,867 |
Convertible junior subordinated debentures |  | 3 |  | 256,872 |  |  | 256,872 |
Other liabilities |  |  |  | 140,271 |  |  | 151,962 |
Total liabilities |  |  |  | 1,913,459 |  |  | 1,920,337 |
Contingencies |  | 5 |  |  |  |  |  |
Shareholders’ equity: |  | 12 |  |  |  |
Common stock (one dollar par value, shares authorized 1,000,000; shares issued 2020 - 371,353; 2019 - 371,353; shares outstanding 2020 - 338,567; 2019 - 347,308) |  |  |  | 371,353 |  |  | 371,353 |
Paid-in capital |  |  |  | 1,855,371 |  |  | 1,869,719 |
Treasury stock at cost (shares 2020 - 32,786; 2019 - 24,045) |  |  |  | (393,425 | ) |  | (283,196 | )
Accumulated other comprehensive income, net of tax |  |  |  | 1,224 |  |  | 72,708 |
Retained earnings |  |  |  | 2,407,305 |  |  | 2,278,650 |
Total shareholders’ equity |  |  |  | 4,241,828 |  |  | 4,309,234 |
Total liabilities and shareholders’ equity |  |  |  | $ | 6,155,287 |  |  | $ | 6,229,571 |

See accompanying notes to consolidated financial statements.
MGIC Investment Corporation - Q1 2020 | 7

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
|  |  |  | Three Months Ended March 31,
(In thousands, except per share data) |  | Note |  | 2020 |  | 2019
Revenues: |  |  |  |  |  |
Premiums written: |  |  |  |  |  |
Direct |  |  |  | $ | 274,724 |  |  | $ | 273,897 |
Assumed |  |  |  | 2,859 |  |  | 1,107 |
Ceded |  | 4 |  | (31,576 | ) |  | (30,723 | )
Net premiums written |  |  |  | 246,007 |  |  | 244,281 |
Decrease in unearned premiums, net |  |  |  | 14,894 |  |  | 5,480 |
Net premiums earned |  |  |  | 260,901 |  |  | 249,761 |
Investment income, net of expenses |  |  |  | 41,347 |  |  | 40,585 |
Net realized investment gains (losses) |  | 7 |  | 1,891 |  |  | (526 | )
Other revenue |  |  |  | 2,754 |  |  | 1,830 |
Total revenues |  |  |  | 306,893 |  |  | 291,650 |
Losses and expenses: |  |  |  |  |  |
Losses incurred, net |  | 11 |  | 60,956 |  |  | 39,063 |
Amortization of deferred policy acquisition costs |  |  |  | 2,510 |  |  | 2,478 |
Other underwriting and operating expenses, net |  |  |  | 42,262 |  |  | 45,940 |
Interest expense |  |  |  | 12,926 |  |  | 13,233 |
Total losses and expenses |  |  |  | 118,654 |  |  | 100,714 |
Income before tax |  |  |  | 188,239 |  |  | 190,936 |
Provision for income taxes |  |  |  | 38,434 |  |  | 38,995 |
Net income |  |  |  | $ | 149,805 |  |  | $ | 151,941 |
Earnings per share: |  |  |  |  |  |
Basic |  | 6 |  | $ | 0.44 |  |  | $ | 0.43 |
Diluted |  | 6 |  | $ | 0.42 |  |  | $ | 0.42 |
Weighted average common shares outstanding - basic |  | 6 |  | 344,053 |  |  | 355,653 |
Weighted average common shares outstanding - diluted |  | 6 |  | 365,216 |  |  | 376,667 |

See accompanying notes to consolidated financial statements.
MGIC Investment Corporation - Q1 2020 | 8

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
|  |  |  | Three Months Ended March 31,
(In thousands) |  | Note |  | 2020 |  | 2019
Net income |  |  |  | $ | 149,805 |  |  | $ | 151,941 |
Other comprehensive (loss) income, net of tax: |  | 9 |  |  |  |
Change in unrealized investment gains and losses |  | 7 |  | (72,585 | ) |  | 81,071 |
Benefit plan adjustments |  |  |  | 1,101 |  |  | 1,650 |
Other comprehensive (loss) income, net of tax |  |  |  | (71,484 | ) |  | 82,721 |
Comprehensive income |  |  |  | $ | 78,321 |  |  | $ | 234,662 |

See accompanying notes to consolidated financial statements.
MGIC Investment Corporation - Q1 2020 | 9

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
|  |  |  | Three Months Ended March 31,
(In thousands) |  | Note |  | 2020 |  | 2019
Common stock |  |  |  |  |  |
Balance, beginning and end of period |  |  |  | $ | 371,353 |  |  | $ | 371,353 |
Paid-in capital |  |  |  |  |  |
Balance, beginning of period |  |  |  | 1,869,719 |  |  | 1,862,536 |
Reissuance of treasury stock, net under share-based compensation plans |  |  |  | (18,667 | ) |  | (11,582 | )
Equity compensation |  |  |  | 4,319 |  |  | 5,282 |
Balance, end of period |  |  |  | 1,855,371 |  |  | 1,856,236 |
Treasury stock |  |  |  |  |  |
Balance, beginning of period |  |  |  | (283,196 | ) |  | (175,059 | )
Reissuance of treasury stock, net under share-based compensation plans |  |  |  | 9,768 |  |  | 5,930 |
Repurchase of common stock |  | 12 |  | (119,997 | ) |  | — |
Balance, end of period |  |  |  | (393,425 | ) |  | (169,129 | )
Accumulated other comprehensive income (loss) |  |  |  |  |  |
Balance, beginning of period |  |  |  | 72,708 |  |  | (124,214 | )
Other comprehensive (loss) income, net of tax |  | 9 |  | (71,484 | ) |  | 82,721 |
Balance, end of period |  |  |  | 1,224 |  |  | (41,493 | )
Retained earnings |  |  |  |  |  |
Balance, beginning of period |  |  |  | 2,278,650 |  |  | 1,647,275 |
Net income |  |  |  | 149,805 |  |  | 151,941 |
Cash dividends |  | 12 |  | (21,150 | ) |  | — |
Balance, end of period |  |  |  | 2,407,305 |  |  | 1,799,216 |
Total shareholders’ equity |  |  |  | $ | 4,241,828 |  |  | $ | 3,816,183 |

See accompanying notes to consolidated financial statements.
MGIC Investment Corporation - Q1 2020 | 10

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|  | Three Months Ended March 31,
(In thousands) |  | 2020 |  | 2019
Cash flows from operating activities: |  |  |  |
Net income |  | $ | 149,805 |  |  | $ | 151,941 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |
Depreciation and amortization |  | 13,052 |  |  | 11,908 |
Deferred tax expense |  | 15,877 |  |  | 7,755 |
Net realized investment (gains) losses |  | (1,891 | ) |  | 526 |
Change in certain assets and liabilities: |  |  |  |
Accrued investment income |  | 2,763 |  |  | 1,302 |
Reinsurance recoverable on loss reserves |  | (4,115 | ) |  | 1,453 |
Reinsurance recoverable on paid losses |  | (170 | ) |  | (121 | )
Premium receivable |  | 2,147 |  |  | 3,494 |
Deferred insurance policy acquisition costs |  | (983 | ) |  | 258 |
Profit commission receivable |  | 1,121 |  |  | (2,836 | )
Loss reserves |  | 19,419 |  |  | (18,755 | )
Unearned premiums |  | (14,894 | ) |  | (5,481 | )
Return premium accrual |  | (400 | ) |  | (3,100 | )
Current income taxes |  | 22,527 |  |  | 30,983 |
Other, net |  | (19,934 | ) |  | (14,446 | )
Net cash provided by operating activities |  | 184,324 |  |  | 164,881 |
Cash flows from investing activities: |  |  |  |
Purchases of investments |  | (280,614 | ) |  | (348,746 | )
Proceeds from sales of investments |  | 224,803 |  |  | 106,010 |
Proceeds from maturity of fixed income securities |  | 222,544 |  |  | 202,929 |
Additions to property and equipment |  | (580 | ) |  | (308 | )
Net cash provided by (used in) investing activities |  | 166,153 |  |  | (40,115 | )
Cash flows from financing activities: |  |  |  |
Repurchase of common stock |  | (119,997 | ) |  | (11,640 | )
Dividends paid |  | (21,111 | ) |  | — |
Payment of withholding taxes related to share-based compensation net share settlement |  | (8,899 | ) |  | (5,652 | )
Net cash used in financing activities |  | (150,007 | ) |  | (17,292 | )
Net increase in cash and cash equivalents and restricted cash and cash equivalents |  | 200,470 |  |  | 107,474 |
Cash and cash equivalents and restricted cash and cash equivalents at beginning of period |  | 169,056 |  |  | 155,038 |
Cash and cash equivalents and restricted cash and cash equivalents at end of period |  | $ | 369,526 |  |  | $ | 262,512 |

See accompanying notes to consolidated financial statements.
MGIC Investment Corporation - Q1 2020 | 11

MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(Unaudited)
Note 1. Nature of Business and Basis of Presentation
MGIC Investment Corporation is a holding company which, through Mortgage Guaranty Insurance Corporation (“MGIC”), is principally engaged in the mortgage insurance business. We provide mortgage insurance to lenders throughout the United States and to government sponsored entities to protect against loss from defaults on low down payment residential mortgage loans. MGIC Assurance Corporation (“MAC”) and MGIC Indemnity Corporation (“MIC”), insurance subsidiaries of MGIC, provide insurance for certain mortgages under Fannie Mae and Freddie Mac (the “GSEs”) credit risk transfer programs.
The accompanying unaudited consolidated financial statements of MGIC Investment Corporation and its wholly-owned subsidiaries have been prepared in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission (“SEC”) for interim reporting and do not include all of the other information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2019 included in our 2019 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, 2020.
The vast majority of our insurance written since 2008 has been for loans purchased by the GSEs. The current private mortgage insurer eligibility requirements ("PMIERs") of the GSEs include financial requirements, as well as business, quality control and certain transactional approval requirements. The financial requirements of the PMIERs require a mortgage insurer’s "Available Assets" (generally only the most liquid assets of an insurer) to equal or exceed its "Minimum Required Assets" (which are based on an insurer's book of insurance in force, calculated from tables of factors with several risk dimensions). Based on our application of PMIERs, as of March 31, 2020, 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 2019 amounts have been made in the accompanying financial statements to conform to the 2020 presentation.
Recent Developments
While uncertain, the impact of the COVID-19 pandemic on the Company’s business, financial results, liquidity and/or financial condition may be material. We expect that the increase in unemployment and economic uncertainty resulting from initiatives to reduce the transmission of COVID-19 (including “shelter-in-place” restrictions), as well as COVID-19-related illnesses and deaths, will negatively impact our business. Among other things, the negative impact is expected to include an increase in new defaults, which will increase our capital requirements under PMIERs and increase losses incurred, which will negatively affect our financial results. The magnitude of the impact will be influenced by various factors, including the length and severity of the pandemic in the United States, the length of time that measures intended to reduce the transmission of COVID-19 remain in place, the resulting level of unemployment, and the impact of various government initiatives (including the enactment of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act")) and actions taken by the GSEs (including implementation of mortgage forbearance and modification programs) to mitigate the economic harm caused by the COVID-19 pandemic and efforts to reduce its transmission.
Subsequent events
We have considered subsequent events through the date of this filing.
Note 2. Significant Accounting Policies
Investments
Each quarter we perform reviews of our investments to assess declines in the fair value of available-for-sale securities. Effective January 1, 2020, we adopted Accounting Standards Board (FASB) ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and related amendments, which created a new comprehensive credit loss standard, FASB Accounting Standards Codification (ASC) 326, Financial Instruments - Credit Losses. Upon adoption of ASC 326, any impairment losses on available-for-sale securities are recorded as an allowance, subject to reversal, rather than as a reduction to amortized cost, as was required under the previous other-than-temporary impairment (OTTI) model. Our evaluation of determining whether a decline below fair value requires an allowance does not consider the duration of the decline as was considered under the previous OTTI review. In accordance with the ASU, prior periods have not been restated.
Reinsurance Recoverables
Each quarter, we perform a review of our reinsurance recoverable to assess collectability. ASC 326 requires immediate recognition of estimated credit losses expected to occur over the remaining life of a reinsurance recoverable. Upon adoption of ASC 326, our analysis of the collectability included, at least quarterly, reviewing the credit ratings of individual reinsurers of the QSR transactions, investor reports
MGIC Investment Corporation - Q1 2020 | 12

for both Home Re Transactions, collateral held in trust accounts in which MGIC is the sole beneficiary, and aging of outstanding reinsurance recoverable balances.
Premium Receivable
ASC 326 requires immediate recognition of estimated credit losses expected to occur over the remaining life of premium receivable. In applying the CECL requirement to premium receivable, consideration is given to the life of the premium receivable asset, areas of potential credit loss, and incorporating forward-looking predictive indicators.
Income Taxes
The CARES Act became law on March 27, 2020. It was a response to the market volatility and instability resulting from the coronavirus pandemic, and includes individuals and businesses in the form of loans, grants, and tax changes, among other types of relief. The tax changes in the CARES
Act do not materially impact our financial results.
Recent accounting and reporting developments
Accounting standards effective in 2020, or early adopted, and relevant to our financial statements
Measurement of Credit Losses on Financial Instruments: ASU 2016-13
Effective January 1, 2020, we adopted ASC 326, Financial Instruments - Credit Losses. This new standard replaced the incurred loss impairment methodology with a methodology that reflects lifetime expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Under CECL, allowances are established by incorporating the forecast of future economic conditions into our loss estimate unless such forecast is not reasonable and supportable, in which case we revert to historical loss experience. Application of the CECL model impacts our reinsurance recoverables and premium receivable. ASC 326 also replaced the OTTI model with an impairment allowance model, subject to reversal, for available-for-sale investments, which are measured at fair value. Our mortgage insurance policies are outside the scope of ASC 326. The new guidance is not prescriptive about certain aspects of estimating expected credit losses, including the specific methodology to use, and therefore requires significant judgment in application. As a result of adopting ASC 326 we have determined that an allowance for credit losses related to our premium receivables, reinsurance recoverables, or available-for-sale securities was not necessary as of March 31, 2020. We continue to apply the previous guidance to 2019 and prior periods.
Changes to the Disclosure Requirements for Fair Value Measurement: ASU 2018-13
In August 2018, the FASB issued updated guidance that changes the disclosure requirements for fair value measurements. The updated guidance removed the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The updated guidance will require disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value
measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The adoption of the updated guidance did not have a material effect on our consolidated results of operations or liquidity.
Prospective Accounting Standards
Table 2.1 shows the relevant new amendments to accounting standards, which are not yet effective or adopted.

Standard / Interpretation
Table | 2.1 |  |
Amended Standards | Effective date
ASC 321, 323, 815 | Investments |
| • | ASU 2020-01 - Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) | January 1, 2021
ASC 740 | Income Taxes |
| • | ASU 2019-12 - Simplifying the Accounting for Income Taxes | January 1, 2021
ASC 715 | Compensation - Retirement Benefits |
| • | ASU 2018-14 - Changes to the Disclosure Requirements for Defined Benefit Plans | January 1, 2021
ASC 848 | Reference Rate |
| • | ASU 2020-04 - Reference Rate Reform | March 12, 2020

MGIC Investment Corporation - Q1 2020 | 13

Reference Rate Reform: ASU 2020-04
In March 2020, the FASB issued guidance which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting over concerns of the cessation of LIBOR. The updated guidance is effective for all entities as of March 12 2020 through December 31, 2022, as applicable, for contracts that are expected to be discontinued due to reference rate reform. We are currently evaluating the impacts the adoption of this guidance would have on our consolidated financial statement disclosures, but do not expect it to have a material impact.
Clarification of Accounting for Equity Securities: ASU 2020-01
In January 2020, the FASB issued guidance which clarifies certain interactions of accounting for equity securities under Topic 321, under the equity method of accounting in Topic 323, and accounting of certain forward contracts and purchased options in Topic 815. The amendment clarifies the consideration of observable transactions before applying or discounting the equity method of accounting. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statement disclosures, but do not expect it to have a material impact.
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued guidance which simplifies Accounting for Income Taxes (Topic 740). The ASU intends to reduce complexity through clarification and amendments of existing guidance. The updated guidance is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted in any interim periods for which financial statements have not been issued. 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.
Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued amendments to modify the disclosure requirements for defined benefit plans. The updated guidance removed the requirements to identify amounts that are expected to be reclassified out of accumulated other comprehensive income and recognized as components of net periodic benefit cost in the coming year and the effects of a one-percentage-point change in assumed health care cost trend rates on service and interest cost and on the postretirement benefit obligation. The updated guidance added disclosures for the weighted-average interest crediting rates for cash balance plans and other plans with interest crediting rates and explanations for significant gains and losses related to changes in the benefit obligation for the period. The updated guidance is effective for annual periods beginning after December 15, 2020. Early adoption is permitted. An entity should apply the amendments on a retrospective basis to all periods presented. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statement disclosures, but do not expect it to have a material impact.
Note 3. Debt
Debt obligations
The par value of our long-term debt obligations and their aggregate carrying values as of March 31, 2020 and December 31, 2019 are presented in table 3.1 below.

Long-term debt obligations
Table | 3.1 |  |  |  |
(In millions) |  | March 31, 2020 |  | December 31, 2019
FHLB Advance - 1.91%, due February 2023 |  | $ | 155.0 |  |  | $ | 155.0 |
5.75% Notes, due August 2023 (par value: $425 million) |  | 421.2 |  |  | 420.8 |
9% Debentures, due April 2063 (1) |  | 256.9 |  |  | 256.9 |
Long-term debt, carrying value |  | $ | 833.1 |  |  | $ | 832.7 |

(1) | Convertible at any time prior to maturity at the holder’s option, at a conversion rate, which is subject to adjustment, of 74.4718 shares per $1,000 principal amount, representing a conversion price of approximately $13.43 per share.

The 5.75% Senior Notes (“5.75% Notes”), 9% Convertible Junior Subordinated Debentures (“9% Debentures”) are obligations of our holding company, MGIC Investment Corporation, and not of its subsidiaries. The Federal Home Loan Bank Advance (the “FHLB Advance”) is an obligation of MGIC.
Interest payments
Interest payments for the three months ended March 31, 2020 and 2019 were $13.0 million and $13.1 million, respectively.
See Note 7 “Debt” in our Annual Report on Form 10-K for the year ended December 31, 2019 for additional information pertaining to our debt obligations. As of March 31, 2020 we are in compliance with all of our debt covenants.
MGIC Investment Corporation - Q1 2020 | 14

Note 4. Reinsurance
The reinsurance agreements to which we are a party, excluding captive agreements (which were immaterial), are discussed below. The effect of all of our reinsurance agreements on premiums earned and losses incurred is shown in table 4.1 below.

Reinsurance
Table | 4.1 |  |  |  |
|  |  | Three Months Ended March 31,
(In thousands) |  | 2020 |  | 2019
Premiums earned: |  |  |  |
Direct |  | $ | 289,868 |  |  | $ | 279,613 |
Assumed |  | 2,609 |  |  | 872 |
Ceded |  | (31,576 | ) |  | (30,724 | )
Net premiums earned |  | $ | 260,901 |  |  | $ | 249,761 |
Losses incurred: |  |  |  |
Direct |  | $ | 66,562 |  |  | $ | 40,804 |
Assumed |  | 166 |  |  | (67 | )
Ceded |  | (5,772 | ) |  | (1,674 | )
Losses incurred, net |  | $ | 60,956 |  |  | $ | 39,063 |

Quota share reinsurance
Each of the reinsurers under our quota share reinsurance agreements described below has an insurer financial strength rating of A- or better (or a comparable rating) by Standard and Poor's Rating Services, A.M. Best, Moody's, or a combination of the three.
2020 QSR Coverage. We entered into QSR agreements with a group of unaffiliated reinsurers with an effective date of January 1, 2020 (“2020 QSR Transaction”), which provides coverage on eligible NIW in 2020. Under the 2020 QSR Transaction, we will cede losses and premiums on or after the effective date through December 31, 2031, at which time the agreement expires. Early termination of the agreement can be elected by us effective December 31, 2022 and bi-annually thereafter, for a fee, or under specified scenarios for no fee upon prior written notice, including if we will receive less than 90% of the full credit amount under the PMIERs full financial statement credit or full credit under applicable regulatory capital requirements for the risk ceded in any required calculation period.
The structure of the 2020 QSR Transaction is a 30% quota share, with a one-time option, elected by us, to reduce the cede rate to either 25% or 20% effective July 1, 2021, or bi-annually thereafter, for a fee, for all policies covered, with a 20% ceding commission as well as a profit commission. Generally, under the 2020 QSR Transaction, we will receive an annual profit commission provided the annual loss ratio on the loans covered under the transactions remains below 62%.
2021 QSR Coverage. I n addition, one of the 2020 agreements also provides coverage on eligible NIW in 2021. ("2021 QSR Transaction").
Under the 2021 QSR Transaction, we cede losses incurred and premiums on or after the effective date through December 31, 2032 for 2021 NIW, at which time the agreement expires. Early termination of the agreement can be elected by us effective December 31, 2023, and bi-annually thereafter, for a fee, or under specified scenarios for no fee upon prior written notice, including if we will receive less than 90% of the full credit amount under the PMIERs for the risk ceded in any required calculation period.
The structure of the 2021 QSR Transaction is a 17.5% quota share on 2021 NIW, with an option to reduce the cede rate to either 14.5% or 12% effective July 1, 2022 or semiannually thereafter. Generally, under the 2021 QSR Transaction, we will receive an annual profit commission provided the annual loss ratio on the loans covered under the transactions remains below 62%.
2019 and prior QSR Transactions. See Note 9 of Notes to Consolidated Financial Statements in our 2019 Form 10-K for more information about our QSR Transactions entered into prior to 2020.
Our quota share reinsurance transactions typically have annual loss ratio caps of 300% and lifetime loss ratio caps of 200%.
MGIC Investment Corporation - Q1 2020 | 15

Table 4.2 below provides a summary of our quota share reinsurance agreements, excluding captive agreements, for the three months ended March 31, 2020 and 2019.

Quota Share Reinsurance
Table | 4.2 |  |  |  |
|  |  | Three Months Ended March 31,
(In thousands) |  | 2020 |  | 2019
Ceded premiums written and earned, net of profit commission (1) |  | $ | 26,846 |  |  | $ | 28,164 |
Ceded losses incurred |  | 5,804 |  |  | 1,676 |
Ceding commissions (2) |  | 11,365 |  |  | 13,409 |
Profit commission |  | 29,979 |  |  | 38,881 |

(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 our QSR Transactions, currently in effect, reinsurance premiums, ceding commission and profit commission are settled net on a quarterly basis. The ceded premiums 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 $25.8 million as of March 31, 2020 and $21.6 million as of December 31, 2019. The reinsurance recoverable balance is secured by funds on deposit from the reinsurers, the amount of which is based on the funding requirements of PMIERs.
Excess of loss reinsurance
We have aggregate excess of loss reinsurance agreements (“Home Re Transactions”) with unaffiliated special purpose insurers domiciled in Bermuda (“Home Re Entities”). For the reinsurance coverage periods, we retain the first layer of the respective aggregate losses, and a Home Re special purpose entity will then provide second layer coverage up to the outstanding reinsurance coverage amount. We retain losses in excess of the outstanding reinsurance coverage amount. The aggregate excess of loss reinsurance coverage decreases over a ten-year period, subject to certain conditions, as the underlying covered mortgages amortize or are repaid, or mortgage insurance losses are paid. MGIC has rights to terminate the Home Re Transactions under certain circumstances. The Home Re entities financed the coverages by issuing mortgage insurance-linked notes (“ILNs”) to unaffiliated investors in an aggregate amount equal to the initial reinsurance coverage amounts. The ILNs each have ten-year legal maturities and are non-recourse to any assets of MGIC or affiliates. The proceeds of the ILNs, which were deposited into reinsurance trusts for the benefit of MGIC, will be the source of reinsurance claim payments to MGIC and principal repayments on the ILNs.
Table 4.3 provides a summary of our excess of loss reinsurance agreements as of March 31, 2020 and December 31, 2019.

Excess of Loss Reinsurance |  |  |
Table | 4.3 |  |  |  |  |  |  |  |  |  |
(In thousands) |  |  |  |  |  | March 31, 2020 |  | December 31, 2019
Home Re Entity (Issue Date) |  | Policy Inforce Dates |  | Termination Option Date (1) |  | Remaining First Layer Retention | Remaining Excess of Loss Reinsurance Coverages |  | Remaining First Layer Retention | Remaining Excess of Loss Reinsurance Coverages
Home Re 2018-1 Ltd. (Oct. - 2018) |  | July 1, 2016 - December 31, 2017 |  | October 25, 2025 |  | $ | 167,328 |  | $ | 233,626 |  |  | $ | 167,779 |  | $ | 260,957 |
Home Re 2019-1 Ltd. (May - 2019) |  | January 1, 2018 - March 31, 2019 |  | May 25, 2026 |  | 185,297 |  | 229,649 |  |  | 185,636 |  | 271,021 |
Total |  |  |  |  |  | $ | 352,625 |  | $ | 463,275 |  |  | $ | 353,415 |  | $ | 531,978 |

(1) | We have the right to terminate the excess-of-loss reinsurance agreements under certain circumstances and on any payment date on or after the respective termination option date.

MGIC Investment Corporation - Q1 2020 | 16

The reinsurance premiums ceded to each Home Re Entity are composed of coverage, initial expense and supplemental premiums. The coverage premiums are generally calculated as the difference between the amount of interest payable by the Home Re Entity on the unpaid portion of the ILNs it issued to raise funds to collateralize its reinsurance obligations to us, and the investment income collected on the collateral assets. The amount of monthly reinsurance coverage premium ceded will fluctuate due to changes in one-month LIBOR, (or the fallback reference rate, as applicable) and changes in money market rates that affect investment income collected on the assets in the reinsurance trust. As a result, we concluded that each reinsurance agreement contains an embedded derivative that is accounted for separately as a freestanding derivative. The fair values of the derivatives at March 31, 2020, were not material to our consolidated balance sheet, and the change in fair value during the three months ended March 31, 2020 was not material to our consolidated statements of operations. Total ceded premiums were $4.7 million and $2.5 million for the three months ended March 31, 2020 and March 31, 2019, respectively.
At the time the Home Re Transactions were entered into, we concluded that each Home Re Entity is a variable interest entity (“VIE”). A VIE is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support or is structured such that equity investors lack the ability to make sufficient decisions relating to the entity’s operations through voting rights or do not substantively participate in gains and losses of the entity. Given that MGIC (1) does not have the unilateral power to direct the activities that most significantly affect each Home Re Entity’s economic performance and (2) does not have the obligation to absorb losses or the right to receive benefits of each Home Re Entity, consolidation of neither Home Re Entity is required.
We are required to disclose our maximum exposure to loss, which we consider to be an amount that we could be required to record in our statements of operations, as a result of our involvement with the VIEs under our Home Re Transactions. As of March 31, 2020, and December 31, 2019, we did not have material exposure to the VIEs as we have no investment in the VIEs and had no reinsurance claim payments due from either VIE under our reinsurance agreements. We are unable to determine the timing or extent of claims from losses that are ceded under the reinsurance agreements. The VIE assets are deposited in reinsurance trusts for the benefit of MGIC that will be the source of reinsurance claim payments to MGIC. The purpose of the reinsurance trusts is to provide security to MGIC for the obligations of the VIEs under the reinsurance agreements. The trustee of the reinsurance trusts, a recognized provider of corporate trust services, has established segregated accounts within the reinsurance trusts for the benefit of MGIC, pursuant to the trust agreements. The trust agreements are governed by, and construed in accordance with, the laws of the State of New York. If the trustee of the reinsurance trusts failed to distribute claim payments to us as provided in the reinsurance trusts, we would incur a loss related to our losses ceded under the reinsurance agreements and deemed unrecoverable. We are also unable to determine the impact such possible failure by the trustee to perform pursuant to the reinsurance trust agreements may have on our consolidated financial statements. As a result, we are unable to quantify our maximum exposure to loss related
to our involvement with the VIEs. MGIC has certain termination rights under the reinsurance agreements should its claims not be paid. We consider our exposure to loss from our reinsurance agreements with the VIEs to be remote.
Table 4.4 presents the total assets of the Home Re Entities as of March 31, 2020 and December 31, 2019.

Home Re total assets
Table | 4.4 |  |
(In thousands) |  |
Home Re Entity (Issue date) |  | Total VIE Assets
March 31, 2020 |  |
Home Re 2018-01 Ltd. (Oct - 2018) |  | $ | 245,314 |
Home Re 2019-01 Ltd. (May - 2019) |  | 247,276 |
December 31, 2019 |  |
Home Re 2018-01 Ltd. (Oct - 2018) |  | $ | 269,451 |
Home Re 2019-01 Ltd. (May - 2019) |  | 283,150 |

The reinsurance trust agreements provide that the trust assets may generally only be invested in certain money market funds that (i) invest at least 99.5% of their total assets in cash or direct U.S. federal government obligations, such as U.S. Treasury bills, as well as other short-term securities backed by the full faith and credit of the U.S. federal government or issued by an agency of the U.S. federal government, (ii) have a principal stability fund rating of “AAAm” by S&P or a money market fund rating of “Aaa-mf” by Moody’s as of the Closing Date and thereafter maintain any rating with either S&P or Moody’s, and (iii) are permitted investments under the applicable credit for reinsurance laws and applicable PMIERs credit for reinsurance requirements.
The assets of the Home Re Entities provide capital credit under the PMIERs financial requirements (see Note 1 - “Nature of Business and Basis of Presentation”). A decline in the assets available to pay claims and principal repayments reduces the capital credit available to MGIC.
Note 5. Litigation and Contingencies
Before paying an insurance claim, we review the loan and servicing files to determine the appropriateness of the claim amount. When reviewing the files, we may determine that we have the right to rescind coverage on the loan. We refer to insurance rescissions and denials of claims collectively as “rescissions” and variations of that term. In addition, our insurance policies generally provide that we can reduce or deny a claim if the servicer did not comply with its obligations under our insurance policy. We call such reduction of claims “curtailments.” In recent quarters, an immaterial percentage of claims received in a quarter have been resolved by rescissions. In 2019, and the first three months of 2020, curtailments reduced our average claim paid by approximately 5.0% and 4.4%, respectively.
Our loss reserving methodology incorporates our estimates of future rescissions, curtailments, and reversals of rescissions and curtailments. A variance between ultimate actual rescission, curtailment and reversal rates and our estimates, as a result of the outcome of litigation, settlements or other factors, could materially affect our losses.
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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 may be determined by legal proceedings.
Under ASC 450-20, until a loss 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. When we determine that a loss is probable and can be reasonably estimated, we record our best estimate of our probable loss. In those cases, until settlement negotiations or legal proceedings are concluded; (including the receipt of any necessary GSE approvals), it is reasonably possible that we will record an additional loss. We are currently involved in discussions and/or proceedings with respect to our claims paying practices. Although it is reasonably possible that when resolved we will not prevail on all matters, we are unable to make a reasonable estimate or range of estimates of the potential liability. We estimate the maximum exposure where a loss is reasonably possible to be approximately $47 million. This estimate of maximum exposure is based upon currently available information; is subject to significant judgment, numerous assumptions and known and unknown uncertainties; will include an amount for matters for which we have recorded a probable loss until such matters are concluded; will include different matters from time to time; and does not include interest or consequential or exemplary damages.
In addition to the matters described above, we are involved in other legal proceedings in the ordinary course of business. In our opinion, based on the facts known at this time, the ultimate resolution of these ordinary course legal proceedings will not have a material adverse effect on our financial position or consolidated results of operations.
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. For purposes of calculating basic EPS, vested restricted stock and restricted stock units (“RSUs”) are considered 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 treasury stock method, diluted EPS reflects the potential dilution that could occur if unvested RSUs result in the issuance of common stock. Under the if-converted method, diluted EPS reflects the potential dilution that could occur if our 9% Debentures 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.
Table 6.1 reconciles the numerators and denominators used to calculate basic and diluted EPS.

Earnings per share
Table | 6.1 |  |  |  |
|  |  | Three Months Ended March 31,
(In thousands, except per share data) |  | 2020 |  | 2019
Basic earnings per share: |  |  |  |
Net income |  | $ | 149,805 |  |  | $ | 151,941 |
Weighted average common shares outstanding - basic |  | 344,053 |  |  | 355,653 |
Basic earnings per share |  | $ | 0.44 |  |  | $ | 0.43 |
Diluted earnings per share: |  |  |
Net income |  | $ | 149,805 |  |  | $ | 151,941 |
Interest expense, net of tax (1): |  |  |  |
9% Debentures |  | 4,566 |  |  | 4,566 |
Diluted income available to common shareholders |  | $ | 154,371 |  |  | $ | 156,507 |
Weighted average common shares outstanding - basic |  | 344,053 |  |  | 355,653 |
Effect of dilutive securities: |  |  |  |
Unvested RSUs |  | 2,033 |  |  | 1,986 |
9% Debentures |  | 19,130 |  |  | 19,028 |
Weighted average common shares outstanding - diluted |  | 365,216 |  |  | 376,667 |
Diluted earnings per share |  | $ | 0.42 |  |  | $ | 0.42 |

(1) | The periods ended March 31, 2020 and 2019 were tax-effected at a rate of 21%.

MGIC Investment Corporation - Q1 2020 | 18

Note 7. Investments
Fixed income securities
The amortized cost, gross unrealized gains and losses, and fair value of investments in fixed income securities classified as available-for-sale at March 31, 2020 and December 31, 2019 are shown in tables 7.1a and 7.1b below.

Details of fixed income securities by category as of March 31, 2020
Table | 7.1a |  |  |  |  |  |  |  |
(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 |  | $ | 197,330 |  |  | $ | 2,408 |  |  | $ | (21 | ) |  | $ | 199,717 |
Obligations of U.S. states and political subdivisions |  | 1,614,562 |  |  | 99,532 |  |  | (3,258 | ) |  | 1,710,836 |
Corporate debt securities |  | 2,508,051 |  |  | 44,386 |  |  | (41,335 | ) |  | 2,511,102 |
Asset backed securities (“ABS”) |  | 210,930 |  |  | 2,031 |  |  | (6,311 | ) |  | 206,650 |
Residential mortgage backed securities (“RMBS”) |  | 259,641 |  |  | 6,032 |  |  | (758 | ) |  | 264,915 |
Commercial mortgage backed securities (“CMBS”) |  | 268,598 |  |  | 3,161 |  |  | (3,172 | ) |  | 268,587 |
Collateralized loan obligations (“CLOs”) |  | 316,270 |  |  | — |  |  | (19,231 | ) |  | 297,039 |
Total fixed income securities |  | $ | 5,375,382 |  |  | $ | 157,550 |  |  | $ | (74,086 | ) |  | $ | 5,458,846 |

Details of fixed income securities by category as of December 31, 2019
Table | 7.1b |  |  |  |  |  |  |  |
(In thousands) |  | Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized (Losses) (2) |  | Fair Value
U.S. Treasury securities and obligations of U.S. government corporations and agencies |  | $ | 195,176 |  |  | $ | 1,237 |  |  | $ | (210 | ) |  | $ | 196,203 |
Obligations of U.S. states and political subdivisions |  | 1,555,394 |  |  | 99,328 |  |  | (857 | ) |  | 1,653,865 |
Corporate debt securities |  | 2,711,910 |  |  | 76,220 |  |  | (3,008 | ) |  | 2,785,122 |
ABS |  | 227,376 |  |  | 2,466 |  |  | (178 | ) |  | 229,664 |
RMBS |  | 271,384 |  |  | 429 |  |  | (3,227 | ) |  | 268,586 |
CMBS |  | 274,234 |  |  | 5,531 |  |  | (779 | ) |  | 278,986 |
CLOs |  | 327,076 |  |  | 33 |  |  | (1,643 | ) |  | 325,466 |
Total fixed income securities |  | $ | 5,562,550 |  |  | $ | 185,244 |  |  | $ | (9,902 | ) |  | $ | 5,737,892 |

(1) | At March 31, 2020 there was no allowance established on available-for-sale securities.

(2) | At December 31, 2019 there was no other-than-temporary impairment losses recorded in other comprehensive income.

We had $14.2 million and $13.9 million of investments at fair value on deposit with various states as of March 31, 2020 and December 31, 2019, respectively, due to regulatory requirements of those state insurance departments.
MGIC Investment Corporation - Q1 2020 | 19

The amortized cost and fair values of fixed income securities at March 31, 2020, by contractual maturity, are shown in table 7.2 below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most ABS, RMBS, CMBS, and CLOs provide for periodic payments throughout their lives, they are listed in separate categories.

Fixed income securities maturity schedule
Table | 7.2 |  |  |  |
|  | March 31, 2020
(In thousands) |  | Amortized cost |  | Fair Value
Due in one year or less |  | $ | 421,097 |  |  | $ | 421,290 |
Due after one year through five years |  | 1,774,678 |  |  | 1,782,206 |
Due after five years through ten years |  | 994,134 |  |  | 1,021,561 |
Due after ten years |  | 1,130,034 |  |  | 1,196,598 |
|  | 4,319,943 |  |  | 4,421,655 |
ABS |  | 210,930 |  |  | 206,650 |
RMBS |  | 259,641 |  |  | 264,915 |
CMBS |  | 268,598 |  |  | 268,587 |
CLOs |  | 316,270 |  |  | 297,039 |
Total as of March 31, 2020 |  | $ | 5,375,382 |  |  | $ | 5,458,846 |

Proceeds from sales of fixed income securities classified as available-for-sale were $212.8 million and $106.0 million during the three months ended March 31, 2020 and 2019, respectively. During the three months ended March 31, 2020, gross gains and gross losses of $5.1 million and $1.3 million, respectively, were realized on those sales, and we recorded realized losses of $0.3 million related to our intent to sell certain securities. During the three months ended March 31, 2019, gross gains and gross losses of $0.7 million and gross losses of $1.3 million were realized on those sales, and we recorded OTTI losses of $0.1 million.
Equity securities
The cost and fair value of investments in equity securities at March 31, 2020 and December 31, 2019 are shown in tables 7.3a and 7.3b below.

Details of equity security investments as of March 31, 2020
Table | 7.3a |  |  |  |  |  |  |  |
(In thousands) |  | Cost |  | Gross Gains |  | Gross Losses |  | Fair Value
Equity securities |  | $ | 29,559 |  |  | $ | 99 |  |  | $ | (766 | ) |  | $ | 28,892 |

Details of equity security investments as of December 31, 2019
Table | 7.3b |  |  |  |  |  |  |  |
(In thousands) |  | Cost |  | Gross Gains |  | Gross Losses |  | Fair Value
Equity securities |  | $ | 17,188 |  |  | $ | 154 |  |  | $ | (14 | ) |  | $ | 17,328 |

For the three months ended March 31, 2020, we recognized $(0.8) million of net losses on equity securities still held as of March 31, 2020. For the three months ended March 31, 2019, we recognized $0.1 million of net gains on equity securities still held as of March 31, 2019.
Other invested assets
Other invested assets include an investment in Federal Home Loan Bank ("FHLB") stock that is carried at cost, which due to its nature approximates fair value. Ownership of FHLB stock provides access to a secured lending facility, and our current FHLB Advance amount is secured by eligible collateral whose fair value is maintained at a minimum of 102% of the outstanding principal balance of the FHLB Advance. As of March 31, 2020, that collateral consisted of fixed income securities included in our total investment portfolio, and cash and cash equivalents, with a total fair value of $164.9 million.
MGIC Investment Corporation - Q1 2020 | 20

Unrealized investment losses
Tables 7.4a and 7.4b below summarize, for all available-for-sale investments in an unrealized loss position at March 31, 2020 and December 31, 2019, the aggregate fair value and gross unrealized loss by the length of time those securities have been continuously in an unrealized loss position. The fair value amounts reported in tables 7.4a and 7.4b are estimated using the process described in Note 8 - “Fair Value Measurements” to these consolidated financial statements and in Note 3 - “Significant Accounting Policies” of the notes to the consolidated financial statements in our 2019 Annual Report on Form 10-K.

Unrealized loss aging for securities by type and length of time as of March 31, 2020
Table | 7.4a |  |  |  |  |  |  |  |  |  |  |  |
|  | 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 |  | $ | 12,558 |  |  | $ | (21 | ) |  | $ | — |  |  | $ | — |  |  | $ | 12,558 |  |  | $ | (21 | )
Obligations of U.S. states and political subdivisions |  | 99,354 |  |  | (3,255 | ) |  | 2,017 |  |  | (3 | ) |  | 101,371 |  |  | (3,258 | )
Corporate debt securities |  | 1,034,108 |  |  | (41,208 | ) |  | 907 |  |  | (127 | ) |  | 1,035,015 |  |  | (41,335 | )
ABS |  | 64,104 |  |  | (6,311 | ) |  | — |  |  | — |  |  | 64,104 |  |  | (6,311 | )
RMBS |  | 7,664 |  |  | (60 | ) |  | 62,645 |  |  | (698 | ) |  | 70,309 |  |  | (758 | )
CMBS |  | 133,290 |  |  | (3,086 | ) |  | 7,593 |  |  | (86 | ) |  | 140,883 |  |  | (3,172 | )
CLOs |  | 186,582 |  |  | (10,075 | ) |  | 110,457 |  |  | (9,156 | ) |  | 297,039 |  |  | (19,231 | )
Total |  | $ | 1,537,660 |  |  | $ | (64,016 | ) |  | $ | 183,619 |  |  | $ | (10,070 | ) |  | $ | 1,721,279 |  |  | $ | (74,086 | )

Unrealized loss aging for securities by type and length of time as of December 31, 2019
Table | 7.4b |  |  |  |  |  |  |  |  |  |  |  |
|  |  | 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 |  | $ | 57,301 |  |  | $ | (200 | ) |  | $ | 5,806 |  |  | $ | (10 | ) |  | $ | 63,107 |  |  | $ | (210 | )
Obligations of U.S. states and political subdivisions |  | 74,859 |  |  | (847 | ) |  | 6,957 |  |  | (10 | ) |  | 81,816 |  |  | (857 | )
Corporate debt securities |  | 221,357 |  |  | (2,847 | ) |  | 43,505 |  |  | (161 | ) |  | 264,862 |  |  | (3,008 | )
ABS |  | 21,542 |  |  | (118 | ) |  | 3,851 |  |  | (60 | ) |  | 25,393 |  |  | (178 | )
RMBS |  | 105,443 |  |  | (461 | ) |  | 110,452 |  |  | (2,766 | ) |  | 215,895 |  |  | (3,227 | )
CMBS |  | 62,388 |  |  | (728 | ) |  | 11,852 |  |  | (51 | ) |  | 74,240 |  |  | (779 | )
CLOs |  | 81,444 |  |  | (225 | ) |  | 196,988 |  |  | (1,418 | ) |  | 278,432 |  |  | (1,643 | )
Total |  | $ | 624,334 |  |  | $ | (5,426 | ) |  | $ | 379,411 |  |  | $ | (4,476 | ) |  | $ | 1,003,745 |  |  | $ | (9,902 | )

Based on current facts and circumstances, we believe the unrealized losses as of March 31, 2020 presented in table 7.4a above are not indicative of the ultimate collectability of the current amortized cost of the securities. We believe the gross unrealized losses are primarily attributable to widening credit spreads over risk free rates beyond historic norms, as a result of market uncertainties arising from the COVID-19 pandemic, which includes demand shocks in multiple sectors that originated in the first quarter of 2020.
The unrealized losses in all categories of our investments at December 31, 2019 were primarily caused by changes in interest rates between the time of purchase and December 31, 2019.
There were 321 and 217 securities in an unrealized loss position at March 31, 2020 and December 31, 2019, respectively.
We report accrued investment income separately from fixed income, available-for-sale, securities and we have elected not to measure an allowance for credit losses for accrued investment income. Accrued investment income is written off through net realized investment gains (losses) at the time the issuer of the security defaults or is expected to default on payment s.
MGIC Investment Corporation - Q1 2020 | 21

Note 8. Fair Value Measurements
Recurring fair value measurements
The following describes the valuation methodologies generally used by the independent pricing sources, or by us, to measure financial instruments at fair value, including the general classification of such financial instruments pursuant to the valuation hierarchy.
Level 1 measurements

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

• | Equity securities: Consist of actively traded, exchange-listed equity securities, including exchange traded funds (“ETFs”), with valuations derived from quoted prices for identical assets in active markets that we can access.

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

Level 2 measurements

• | Fixed income securities:

Corporate Debt & U.S. Government and Agency Bonds are valued by surveying the dealer community, obtaining relevant trade data, benchmark quotes and spreads and incorporating this information into the valuation process.
Obligations of U.S. States & Political Subdivisions are valued by tracking, capturing, and analyzing quotes for active issues and trades reported via the Municipal Securities Rulemaking Board records. Daily briefings and reviews of current economic conditions, trading levels, spread relationships, and the slope of the yield curve provide further data for evaluation.
Residential Mortgage-Backed Securities ("RMBS") are valued by monitoring interest rate movements, and other pertinent data daily. Incoming market data is enriched to derive spread, yield and/or price data as appropriate, enabling known data points to be extrapolated for valuation application across a range of related securities.
Commercial Mortgage-Backed Securities ("CMBS") are valued using techniques that reflect market participants’ assumptions and maximize the use of relevant observable inputs including quoted prices for similar assets, benchmark yield curves and market corroborated inputs. Evaluation uses regular reviews of the inputs for securities covered, including executed trades, broker quotes, credit information, collateral attributes and/or cash flow waterfall as applicable.
Asset-Backed Securities ("ABS") are valued using spreads and other information solicited from market buy-and-sell-side sources, including primary and secondary dealers, portfolio managers, and research analysts. Cash flows are generated for each tranche, benchmark yields are determined, and deal collateral performance and tranche level attributes including trade activity, bids, and offers are applied, resulting in tranche specific prices.
Collateralized loan obligations ("CLOs") are valued by evaluating manager rating, seniority in the capital structure, assumptions about prepayment, default and recovery and their impact on cash flow generation. Loan level net asset values are determined and aggregated for tranches and as a final step prices are checked against available recent trade activity.
Level 3 measurements

• | Real estate acquired is valued at the lower of our acquisition cost or a percentage of the appraised value. The percentage applied to the appraised value is based upon our historical sales experience adjusted for current trends.

MGIC Investment Corporation - Q1 2020 | 22

Assets measured at fair value, by hierarchy level, as of March 31, 2020 and December 31, 2019 are shown in tables 8.1a and 8.1b below. The fair value of the assets is estimated using the process described above, and more fully in Note 3 - “Significant Accounting Policies” of the notes to the consolidated financial statements in our 2019 Annual Report on Form 10-K.

Assets carried at fair value by hierarchy level as of March 31, 2020
Table | 8.1a |  |  |  |  |  |  |  |
(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 |  | $ | 199,717 |  |  | $ | 42,091 |  |  | $ | 157,626 |  |  | $ | — |
Obligations of U.S. states and political subdivisions |  | 1,710,836 |  |  | — |  |  | 1,710,836 |  |  | — |
Corporate debt securities |  | 2,511,102 |  |  | — |  |  | 2,511,102 |  |  | — |
ABS |  | 206,650 |  |  | — |  |  | 206,650 |  |  | — |
RMBS |  | 264,915 |  |  | — |  |  | 264,915 |  |  | — |
CMBS |  | 268,587 |  |  | — |  |  | 268,587 |  |  | — |
CLOs |  | 297,039 |  |  | — |  |  | 297,039 |  |  | — |
Total fixed income securities |  | 5,458,846 |  |  | 42,091 |  |  | 5,416,755 |  |  | — |
Equity securities |  | 28,892 |  |  | 28,892 |  |  | — |  |  | — |
Other (1) |  | 365,519 |  |  | 364,517 |  |  | 1,002 |  |  | — |
Real estate acquired (2) |  | 6,226 |  |  | — |  |  | — |  |  | 6,226 |
Total |  | $ | 5,859,483 |  |  | $ | 435,500 |  |  | $ | 5,417,757 |  |  | $ | 6,226 |

Assets carried at fair value by hierarchy level as of December 31, 2019
Table | 8.1b |  |  |  |  |  |  |  |
(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 |  | $ | 196,203 |  |  | $ | 34,240 |  |  | $ | 161,963 |  |  | $ | — |
Obligations of U.S. states and political subdivisions |  | 1,653,865 |  |  | — |  |  | 1,653,865 |  |  | — |
Corporate debt securities |  | 2,785,122 |  |  | — |  |  | 2,785,122 |  |  | — |
ABS |  | 229,664 |  |  | — |  |  | 229,664 |  |  | — |
RMBS |  | 268,586 |  |  | — |  |  | 268,586 |  |  | — |
CMBS |  | 278,986 |  |  | — |  |  | 278,986 |  |  | — |
CLOs |  | 325,466 |  |  | — |  |  | 325,466 |  |  | — |
Total fixed income securities |  | 5,737,892 |  |  | 34,240 |  |  | 5,703,652 |  |  | — |
Equity securities |  | 17,328 |  |  | 17,328 |  |  | — |  |  | — |
Other (1) |  | 164,693 |  |  | 164,693 |  |  | — |  |  | — |
Real estate acquired (2) |  | 7,252 |  |  | — |  |  | — |  |  | 7,252 |
Total |  | $ | 5,927,165 |  |  | $ | 216,261 |  |  | $ | 5,703,652 |  |  | $ | 7,252 |

(1) | Consists of money market funds included in “Cash and Cash Equivalents” and “Restricted Cash and Cash Equivalents” on the consolidated balance sheets.

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

Certain financial instruments, including insurance contracts, are excluded from 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.”
MGIC Investment Corporation - Q1 2020 | 23

Reconciliations of Level 3 assets
For assets measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the three months ended March 31, 2020 and 2019 is shown in tables 8.2a and 8.2b below. 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.

Fair value roll-forward for financial instruments classified as Level 3 for the three months ended March 31, 2020
Table | 8.2a |  |  |  |
(In thousands) |  | Fixed income |  | Real Estate Acquired
Balance at December 31, 2019 |  | $ | — |  |  | $ | 7,252 |
Purchases |  | — |  |  | 4,115 |
Sales |  | — |  |  | (5,198 | )
Included in earnings and reported as losses incurred, net |  | — |  |  | 57 |
Balance at March 31, 2020 |  | $ | — |  |  | $ | 6,226 |

Fair value roll-forward for financial instruments classified as Level 3 for the three months ended March 31, 2019
Table | 8.2b |  |  |  |
(In thousands) |  | Fixed income |  | Real Estate Acquired
Balance at December 31, 2018 |  | $ | 13 |  |  | $ | 14,535 |
Purchases |  | — |  |  | 8,084 |
Sales |  | (13 | ) |  | (10,872 | )
Included in earnings and reported as losses incurred, net |  | — |  |  | (108 | )
Balance at March 31, 2019 |  | $ | — |  |  | $ | 11,639 |

Financial assets and liabilities not measured at fair value
Other invested assets include an investment in FHLB stock that is carried at cost, which due to restrictions that require it to be redeemed or sold only to the security issuer at par value, approximates fair value. The fair value of other invested assets is categorized as Level 2.
Financial liabilities include our outstanding debt obligations. The fair values of our 5.75% Notes and 9% Debentures were based on observable market prices. The fair value of the FHLB Advance was estimated using cash flows discounted at current incremental borrowing rates for similar borrowing arrangements. In all cases the fair values of the financial liabilities below are categorized as Level 2.
Table 8.3 presents the carrying value and fair value of our financial assets and liabilities disclosed, but not carried, at fair value at March 31, 2020 and December 31, 2019.

Financial assets and liabilities not measured at fair value
Table | 8.3 |  |  |  |  |  |  |  |
|  | March 31, 2020 |  | December 31, 2019
(In thousands) |  | Carrying Value |  | Fair Value |  | Carrying Value |  | Fair Value
Financial assets |  |  |  |  |  |  |  |
Other invested assets |  | $ | 3,100 |  |  | $ | 3,100 |  |  | $ | 3,100 |  |  | $ | 3,100 |
Financial liabilities |  |  |  |  |  |  |  |
FHLB Advance |  | $ | 155,000 |  |  | $ | 161,575 |  |  | $ | 155,000 |  |  | $ | 156,422 |
5.75% Senior Notes |  | 421,155 |  |  | 395,025 |  |  | 420,867 |  |  | 471,827 |
9% Convertible Junior Subordinated Debentures |  | 256,872 |  |  | 334,252 |  |  | 256,872 |  |  | 346,289 |
Total financial liabilities |  | $ | 833,027 |  |  | $ | 890,852 |  |  | $ | 832,739 |  |  | $ | 974,538 |

MGIC Investment Corporation - Q1 2020 | 24

Note 9. Other Comprehensive Income
The pretax and related income tax benefit (expense) components of our other comprehensive (loss) income for the three months ended March 31, 2020 and 2019 are included in table 9.1 below.

Components of other comprehensive income (loss)
Table | 9.1 |  |  |  |
|  | Three Months Ended March 31,
(In thousands) |  | 2020 |  | 2019
Net unrealized investment (losses) gains arising during the period |  | $ | (91,880 | ) |  | $ | 102,621 |
Income tax benefit (expense) |  | 19,295 |  |  | (21,550 | )
Net of taxes |  | (72,585 | ) |  | 81,071 |
Net changes in benefit plan assets and obligations |  | 1,394 |  |  | 2,089 |
Income tax expense |  | (293 | ) |  | (439 | )
Net of taxes |  | 1,101 |  |  | 1,650 |
Total other comprehensive (loss) income |  | (90,486 | ) |  | 104,710 |
Total income tax benefit (expense) |  | 19,002 |  |  | (21,989 | )
Total other comprehensive (loss) income, net of tax |  | $ | (71,484 | ) |  | $ | 82,721 |

The pretax and related income tax (expense) benefit components of the amounts reclassified from our accumulated other comprehensive income (loss) (“AOCI”) to our consolidated statements of operations for the three months ended March 31, 2020 and 2019 are included in table 9.2 below.

Reclassifications from AOCI
Table | 9.2 |  |  |  |
|  | Three Months Ended March 31,
(In thousands) |  | 2020 |  | 2019
Reclassification adjustment for net realized gains (losses) (1) |  | $ | 4,714 |  |  | $ | (2,679 | )
Income tax (expense) benefit |  | (990 | ) |  | 563 |
Net of taxes |  | 3,724 |  |  | (2,116 | )
Reclassification adjustment related to benefit plan assets and obligations (2) |  | (1,394 | ) |  | (2,089 | )
Income tax benefit |  | 293 |  |  | 439 |
Net of taxes |  | (1,101 | ) |  | (1,650 | )
Total reclassifications |  | 3,320 |  |  | (4,768 | )
Total income tax (expense) benefit |  | (697 | ) |  | 1,002 |
Total reclassifications, net of tax |  | $ | 2,623 |  |  | $ | (3,766 | )

(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.

A rollforward of AOCI for the three months ended March 31, 2020, including amounts reclassified from AOCI, are included in table 9.3 below.

Rollforward of AOCI
Table | 9.3 |  |  |  |  |  |
|  |  | Three Months Ended March 31, 2020
(In thousands) |  | Net unrealized gains and (losses) on available-for-sale securities |  | Net benefit plan assets and (obligations) recognized in shareholders' equity |  | Total accumulated other comprehensive income (loss)
Balance at December 31, 2019, net of tax |  | 138,521 |  |  | (65,813 | ) |  | 72,708 |
Other comprehensive income before reclassifications |  | (68,861 | ) |  | — |  |  | (68,861 | )
Less: Amounts reclassified from AOCI |  | 3,724 |  |  | (1,101 | ) |  | 2,623 |
Balance, March 31, 2020, net of tax |  | $ | 65,936 |  |  | $ | (64,712 | ) |  | $ | 1,224 |

MGIC Investment Corporation - Q1 2020 | 25

Note 10. Benefit Plans
Table 10.1 provide the components of net periodic benefit cost for our pension, supplemental executive retirement and other postretirement benefit plans for the three months ended March 31, 2020 and 2019.

Components of net periodic benefit cost
Table | 10.1 |  |  |  |  |  |  |  |
|  | Three Months Ended March 31,
|  | Pension and Supplemental Executive Retirement Plans |  | Other Postretirement Benefit Plans
(In thousands) |  | 2020 |  | 2019 |  | 2020 |  | 2019
Service cost |  | $ | 1,821 |  |  | $ | 1,996 |  |  | $ | 309 |  |  | $ | 312 |
Interest cost |  | 3,414 |  |  | 3,955 |  |  | 214 |  |  | 291 |
Expected return on plan assets |  | (5,580 | ) |  | (4,908 | ) |  | (1,852 | ) |  | (1,445 | )
Amortization of net actuarial losses/(gains) |  | 1,634 |  |  | 2,167 |  |  | (190 | ) |  | — |
Amortization of prior service cost/(credit) |  | (62 | ) |  | (70 | ) |  | 13 |  |  | (8 | )
Net periodic benefit cost (benefit) |  | $ | 1,227 |  |  | $ | 3,140 |  |  | $ | (1,506 | ) |  | $ | (850 | )

We currently intend to make contributions totaling $12.5 million to our qualified pension plan and supplemental executive retirement plan in 2020.
Note 11. Loss Reserves
We establish case reserves and loss adjustment expenses (“LAE”) reserves when we receive notices of delinquency on insured mortgage loans. Notices of delinquency are typically reported to us when loans are two payments past due. Case 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.
IBNR reserves are established for estimated losses from delinquencies occurring prior to the close of an accounting period on notices of delinquency not yet reported to us. IBNR reserves are also established using estimated claim rates and claim severities.
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 delinquency and claim 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 consolidated results of operations and financial position, even in a stable economic environment.
The “Losses incurred” section of table 11.1 below shows losses incurred on delinquencies that occurred in the current year and in prior years. The amount of losses incurred relating to delinquencies that occurred in the current year represents the
estimated amount to be ultimately paid on such delinquencies. The amount of losses incurred relating to delinquencies that occurred in prior years represents the difference between the actual claim rate and severity associated with those delinquencies resolved in the current year compared to the estimated claim rate and severity at the prior year-end, as well as a re-estimation of amounts to be ultimately paid on delinquencies 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 delinquent inventory, such as percentages of delinquencies that have resulted in a claim, the amount of the claims relative to the average loan exposure, changes in the relative level of delinquencies by geography and changes in average loan exposure.
Losses incurred on delinquencies that occurred in the current year increased in the first three months of 2020 compared to the same period in 2019, due to an increase in the claim rate and severity due to the current macroeconomic environment related to the COVID-19 pandemic. This was offset by a decrease of approximately 9% fewer new delinquency notices received in 2020, compared to the same period last year. In the first quarter of 2020, we also increased our IBNR reserve by $7.8 million.
The “Losses paid” section of table 11.1 below shows the amount of losses paid on delinquencies that occurred in the current year and losses paid on delinquencies that occurred in prior years. For several years, the average time it took to receive a claim associated with a delinquency had increased significantly from our historical experience of approximately twelve months. This was, 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. In recent quarters, we have experienced a decline in the average time it takes servicers to process foreclosures, which has reduced the average time to receive a claim associated with new delinquent notices that do not cure. All else being equal, the longer the period between delinquency and claim filing, the greater the severity
MGIC Investment Corporation - Q1 2020 | 26

In light of the uncertainty caused by the COVID-19 pandemic, specifically the foreclosure moratoriums, the average time it takes to receive a claim may increase.
Premium refunds
Our estimate of premiums to be refunded on expected claim payments is accrued for separately in “Other Liabilities” on our consolidated balance sheets and approximated $29 million and $30 million at March 31, 2020 and December 31, 2019, respectively.
Table 11.1 provides a reconciliation of beginning and ending loss reserves as of and for the three months ended March 31, 2020 and 2019.

Development of reserves for losses and loss adjustment expenses
Table | 11.1 |  |  |  |
|  |  | Three Months Ended March 31,
(In thousands) |  | 2020 |  | 2019
Reserve at beginning of period |  | $ | 555,334 |  |  | $ | 674,019 |
Less reinsurance recoverable |  | 21,641 |  |  | 33,328 |
Net reserve at beginning of period |  | 533,693 |  |  | 640,691 |
Losses incurred: |  |  |  |
Losses and LAE incurred in respect of delinquency notices received in: |  |  |  |
Current year |  | 59,799 |  |  | 47,488 |
Prior years (1) |  | 1,157 |  |  | (8,425 | )
Total losses incurred |  | 60,956 |  |  | 39,063 |
Losses paid: |  |  |  |
Losses and LAE paid in respect of delinquency notices received in: |  |  |  |
Current year |  | 39 |  |  | — |
Prior years |  | 45,633 |  |  | 56,365 |
Reinsurance terminations |  | (20 | ) |  | — |
Total losses paid |  | 45,652 |  |  | 56,365 |
Net reserve at end of period |  | 548,997 |  |  | 623,389 |
Plus reinsurance recoverables |  | 25,756 |  |  | 31,875 |
Reserve at end of period |  | $ | 574,753 |  |  | $ | 655,264 |

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

The prior year development of the reserves in the first three months of 2020 and 2019 is reflected in table 11.2 below.

Reserve development on previously received delinquencies
Table | 11.2 |  |  |  |
|  |  | Three Months Ended March 31,
(In millions) |  | 2020 |  | 2019
Decrease in estimated claim rate on primary defaults |  | $ | — |  |  | $ | (31 | )
Increase in estimated severity on primary defaults |  | 3 |  |  | — |
Change in estimates related to pool reserves, LAE reserves, reinsurance, and other |  | (2 | ) |  | 23 |
Total prior year loss development (1) |  | $ | 1 |  |  | $ | (8 | )

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

Delinquent inventory
A rollforward of our primary delinquent inventory for the three months ended March 31, 2020 and 2019 appears in table 11.3 below. 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.
MGIC Investment Corporation - Q1 2020 | 27

Delinquent inventory rollforward
Table | 11.3 |  |  |  |
|  | Three Months Ended March 31,
|  | 2020 |  | 2019
Delinquent inventory at beginning of period |  | 30,028 |  |  | 32,898 |
New notices |  | 12,398 |  |  | 13,611 |
Cures |  | (14,113 | ) |  | (14,348 | )
Paid claims |  | (897 | ) |  | (1,188 | )
Rescissions and denials |  | (32 | ) |  | (52 | )
Delinquent inventory at end of period |  | 27,384 |  |  | 30,921 |

The decrease in the primary delinquent inventory experienced during 2020 was generally across all markets and primarily in books years 2008 and prior. Historically as a delinquency ages it becomes more likely to result in a claim.
The CARES Act and other related actions includes payment forbearance on mortgages to borrowers experiencing a hardship during the COVID-19 pandemic. Forbearance allows for mortgage payments to be suspended for up to 360 days. Loans in forbearance are included in our delinquent inventory.
Table 11.4 below shows the number of consecutive months a borrower is delinquent. Historically as a delinquency ages it becomes more likely to result in a claim.

Primary delinquent inventory - consecutive months delinquent
Table | 11.4 |  |  |
| March 31, 2020 | December 31, 2019 | March 31, 2019
3 months or less | 7,567 |  | 9,447 |  | 8,568 |
4-11 months | 9,535 |  | 9,664 |  | 9,997 |
12 months or more (1) | 10,282 |  | 10,917 |  | 12,356 |
Total | 27,384 |  | 30,028 |  | 30,921 |
3 months or less | 28 | % | 32 | % | 28 | %
4-11 months | 35 | % | 32 | % | 32 | %
12 months or more | 37 | % | 36 | % | 40 | %
Total | 100 | % | 100 | % | 100 | %
Primary claims received inventory included in ending delinquent inventory | 472 |  | 538 |  | 665 |

(1) | Approximately 34%, 36%, and 38% of the primary delinquent inventory delinquent for 12 consecutive months or more has been delinquent for at least 36 consecutive months as of March 31, 2020, December 31, 2019, and March 31, 2019, respectively.

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. Our estimate of premiums to be refunded on expected future rescissions is accrued for separately and is 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 12. Shareholders’ Equity
Share repurchase programs
During the three months ended March 31, 2020 we repurchased approximately 9.6 million shares of our common stock at a weighted average cost per share of $12.47, which included commissions. We may repurchase up to an additional $291 million of our common stock through the end of 2021 under a share repurchase program approved by our Board of Directors in the January 2020. Repurchases may be made from time to time on the open market or through privately negotiated transactions. The repurchase program may be suspended for periods or discontinued at any time, and in light of the uncertainty caused by the COVID-19 pandemic, we have temporarily suspended stock repurchases.
Cash dividends
In February 2020, we paid a quarterly cash dividend of $0.06 per share to shareholders which totaled $21 million. On April 23, 2020, the Board of Directors declared a quarterly cash dividend to holders of the company’s common stock of $0.06 per share payable on May 29, 2020, to shareholders of record at the close of business on May 11, 2020.
MGIC Investment Corporation - Q1 2020 | 28

Note 13. 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.
Table 13.1 shows the number of restricted stock units (RSUs) granted to employees and the weighted average fair value per share during the periods presented (shares in thousands).

Restricted stock unit grants
Table | 13.1 |  |  |  |  |
|  | Three months ended March 31,
|  | 2020 |  | 2019
|  | RSUs Granted (in thousands) | Weighted Average Share Fair Value |  | RSUs Granted (in thousands) | Weighted Average Share Fair Value
RSUs subject to performance conditions | 1,282 |  | $ | 12.87 |  |  | 1,378 |  | $ | 11.76 |
RSUs subject only to service conditions | 373 |  | 13.11 |  |  | 412 |  | 11.76 |

Note 14. 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 RIF (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, 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, 2020, MGIC’s risk-to-capital ratio was 10.2 to 1, below the maximum allowed by the jurisdictions with State Capital Requirements, and its policyholder position was $2.8 billion above the required MPP of $1.7 billion. The calculation of our risk-to-capital ratio and MPP reflect credit for the risk ceded under our QSR Transactions and Home Re 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 financial requirements of 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, you should read the rest of these financial statement footnotes for information about matters that could negatively affect such compliance.
At March 31, 2020, the risk-to-capital ratio of our combined insurance operations was 10.2 to 1.
The NAIC has previously announced plans to revise the minimum capital and surplus requirements for mortgage insurers that are provided for in its Mortgage Guaranty Insurance Model Act. In December 2019, a working group of state regulators released an exposure draft of a revised Mortgage Guaranty Insurance Model Act and 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 and certain items have not yet been completely addressed by the framework, including the treatment of ceded risk and minimum capital floors. Currently, we believe that the PMIERs contain more restrictive capital requirements than the draft Mortgage Guaranty Insurance Model Act in most circumstances.
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 a particular 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
MGIC Investment Corporation - Q1 2020 | 29

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.
Dividend restrictions
In the first quarter of 2020, MGIC paid a $390 million in dividends to our holding company. MGIC is not planning to request a dividend to be paid to our holding company in the second quarter. 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 principles prescribed, or practices 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 their contingency reserves through their income statement as a change in underwriting deduction. As a result, in periods in which MGIC is increasing contingency reserves, statutory net income is reduced.
Statutory Financial Information
The statutory net income, policyholders’ surplus, and contingency reserve liability of the insurance subsidiaries of our holding company are shown in table 14.1. The surplus amounts included in the following table are the combined policyholders’ surplus of our insurance operations as utilized in our risk-to-capital calculations.

Statutory financial information of holding company and insurance subsidiaries
Table 14.1 |  |  |  |
|  | As of and for the Three Months Ended
(In thousands) |  | March 31, 2020 |  | March 31, 2019
Statutory net income |  | $ | 55,746 |  |  | $ | 65,561 |
Statutory policyholders' surplus |  | 1,271,244 |  |  | 1,667,058 |
Contingency reserve |  | 3,166,180 |  |  | 2,583,429 |

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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 2020. The COVID-19 pandemic did not have a material impact to our first quarter financial results, liquidity and/or financial condition. While the magnitude of the impact of the COVID-19 pandemic on future financial results, liquidity and/or financial condition is uncertain, we expect it will negatively impact our business. 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, 2019. See the “Glossary of terms and acronyms” for definitions and descriptions of terms used throughout this MD&A. The Risk Factors referred to under “Forward Looking Statements and Risk Factors” below, discuss trends and uncertainties affecting us and are an integral part of the 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. These forward looking statements, including the discussion of the impact of the COVID-19 pandemic, speak only as of the date of this filing and are subject to change without notice as the Company cannot predict all risks relating to this evolving set of events. 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.
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Overview

Summary financial results of MGIC Investment Corporation
|  | Three Months Ended March 31,
(In millions, except per share data, unaudited) |  | 2020 |  | 2019 |  | % Change
Selected statement of operations data |  |  |  |  |  |
Total revenues |  | $ | 306.9 |  |  | $ | 291.7 |  |  | 5 |
Losses incurred, net |  | 61.0 |  |  | 39.1 |  |  | 56 |
Other underwriting and operating expenses, net |  | 42.3 |  |  | 45.9 |  |  | (8 | )
Income before tax |  | 188.2 |  |  | 190.9 |  |  | (1 | )
Provision for income taxes |  | 38.4 |  |  | 39.0 |  |  | (2 | )
Net income |  | 149.8 |  |  | 151.9 |  |  | (1 | )
Diluted income per share |  | $ | 0.42 |  |  | $ | 0.42 |  |  | — |
Non-GAAP Financial Measures (1)
Adjusted pre-tax operating income |  | $ | 185.4 |  |  | $ | 191.6 |  |  | (3 | )
Adjusted net operating income |  | 147.5 |  |  | 152.4 |  |  | (3 | )
Adjusted net operating income per diluted share |  | $ | 0.42 |  |  | $ | 0.42 |  |  | — |

(1) See “Explanation and reconciliation of our use of Non-GAAP financial measures.”
Summary of first quarter 2020 results
Comparative quarterly results
We recorded first quarter 2020 net income of $149.8 million, or $0.42 per diluted share. Net income decreased by $2.1 million (1%) from net income of $151.9 million in the prior year, primarily reflecting an increase in losses incurred, net, partially offset by an increase in revenues. Net premiums earned increased due to higher average insurance in force and an increase in accelerated premiums from single premium policy cancellations, partially offset by lower premium rates. Diluted income per share was unchanged as a decrease in our weighted average shares outstanding offset the decline in net income.
Adjusted net operating income for the first quarter 2020 was $147.5 million (Q1 2019: $152.4 million) and adjusted net operating income per diluted share was $0.42 (Q1 2019: $0.42). Adjusted net operating income per diluted share was unchanged from the prior year period as a decrease in our diluted weighted average shares outstanding offset the decline in adjusted net operating income.
Losses incurred, net for the first quarter of 2020 were $61.0 million, an increase of $21.9 million compared to the prior year. In the first quarter of 2020, we received approximately 9% fewer new delinquency notices than we did in the same period last year. Over the past several quarters we had recorded favorable reserve development including $31 million in favorable development in the first quarter of 2019. In the first quarter of 2020, our re-estimation of reserves on previous delinquencies resulted in minimal adverse loss reserve development. The first quarter of 2020 also reflects an increase in our incurred but not reported reserve, or IBNR, from $22 million to $30 million, as well as an increased claim rate on new notices due to the COVID-19 pandemic and the current macroeconomic environment.
The decrease in our provision for income taxes in the first quarter of 2020 as compared to the prior year was due to a decrease in income before tax.
Capital
MGIC dividend payments to our holding company
In the first three months of 2020, MGIC paid a total of $390 million in dividends to our holding company. MGIC is not planning to request a dividend from its regulator, the Wisconsin OCI, to be paid in the second quarter. We ask the Wisconsin OCI not to object before MGIC pays dividends to the holding company. Future dividend payments from MGIC to the holding company will continue to be determined on a quarterly basis in consultation with the board, and after considering any updated estimates about the length and severity of the economic impacts of the COVID-19 pandemic on our business.
Share repurchase programs
In the first quarter of 2020, we repurchased approximately 9.6 million shares of our common stock, using approximately $120 million of our holding company resources. We may repurchase up to an additional $291 million of our common stock through the end of 2021 under a share repurchase program approved by our Board of Directors in January 2020. Repurchases may be made from time to time on the open market or through privately negotiated transactions. The repurchase programs may be suspended for periods or discontinued at any time, and in light of the uncertainty caused by the COVID-19 pandemic, we have temporarily suspended stock repurchases. As of March 31, 2020, we had approximately 339 million shares of common stock outstanding.
Dividends to shareholders
In February 2020, MGIC paid a dividend of $0.06 per common share totaling $21 million to its shareholders. On April 23, 2020, our Board of Directors declared a quarterly cash dividend of $0.06 per common share to shareholders of record on May 11, 2020, payable on May 29, 2020.
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GSEs
We must comply with a GSE’s PMIERs to be eligible to insure loans delivered to or purchased by that GSE. 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” (generally only the most liquid assets of an insurer) to equal or exceed its “Minimum Required Assets” (which are generally based on an insurer’s book of insurance in force and are calculated from tables of factors with several risk dimensions, reduced for credit given for risk ceded under reinsurance transactions).
While loans that were current at the time a COVID-19 pandemic-related forbearance was initiated are not to be reported as delinquent for consumer credit reporting purposes, they may be reported to the mortgage insurers and the GSEs as delinquent and are treated as delinquent for purposes of the PMIERs. Loans that were delinquent at the time such a forbearance was initiated are expected to be reported as delinquent to mortgage insurers and the GSEs. The PMIERs generally require us to maintain significantly more Minimum Required Assets for delinquent loans than for performing loans. However, delinquent loans whose borrowers have been affected by the COVID-19 pandemic may be given the same treatment under PMIERS as delinquent loans in areas that the Federal Emergency Management Agency ("FEMA") has declared major disaster areas in connection with hurricanes. Specifically, the Minimum Required Assets required for a COVID-19 pandemic-related delinquent loan would be reduced by 70% for at least 120 days from the date the loan becomes delinquent, and longer if the loan is subject to a forbearance plan that meets certain requirements.
Under the current PMIERs, to be eligible for the 70% reduction, the loan must be backed by a property located in a FEMA Declared Major Disaster Area and either 1) or 2) below must apply. FEMA has declared all states and territories in which we conduct business to be Major Disaster Areas as a result of the impact of the COVID-19 pandemic. Absent a forbearance plan described in 1) below, the 70% reduction may be applied no longer than 120 days from the initial default date.

1) | The loan is subject to a forbearance plan executed in response to a FEMA Declared Major Disaster Area eligible for Individual Assistance, the terms of which are materially consistent with terms of forbearance plans offered by Freddie Mac or Fannie Mae. As of the date of this report, not all states have delegated eligible individual assistance.

2) | The loan has an initial default date occurring up to either (i) 30 days prior to or (ii) 90 days following the Major Disaster event. [It is uncertain how the date of the "Major Disaster event" will be determined for the COVID-19 pandemic.

The mortgage insurance industry has asked the FHFA and the GSEs to consider revisions to the PMIERs in light of the differences between FEMA declarations associated with hurricanes and those associated with the COVID-19 pandemic. Among other things, the industry asked the FHFA and GSEs to specify how "Major Disaster event" will be determined and to not limit the forbearance plans described in 1) above to those executed in response to a FEMA Declared Major Disaster Area eligible for Individual Assistance. We applied the 70% reduction discussed above when calculating our PMIERs Minimum Required Assets for March 31, 2020. We expect to receive
guidance from the GSEs before we calculate our PMIERs Minimum Required Assets for June 30, 2020.
Although we have requested servicers to provide us with information about the forbearance status of loans, we may not
receive such reporting and, therefore, may not be able to take advantage of the 70% reduction after a loan has been
delinquent 120 days.
It is possible that, despite reducing the Minimum Required Assets for certain delinquent loans by 70%, the increasing number of delinquent loans caused by the COVID-19 pandemic may cause our Available Assets to be less than our Minimum Required Assets. As of March 31, 2020 and April 30, 2020, there were 27,834 and 30,243 loan in our delinquent inventory, respectively. We expect that the majority of COVID-19 pandemic-related delinquencies have not yet been reported; however, we are unable to predict the number of loans that will become delinquent as a result of the COVID-19 pandemic.
If our Available Assets are less than our Minimum Required Assets, then we would not be in compliance with the PMIERs. At the extreme, the GSEs may suspend or terminate eligibility If MGIC ceases to be eligible to insure loans purchased by one or both of the GSEs. Such suspension or termination, would significantly reduce the volume of our new business writings; the vast majority of our NIW since 2008 has been for loans delivered to or purchased by the GSEs. In addition to the increase in Minimum Required Assets associated with delinquent loans whose borrowers are affected by the COVID-19 pandemic, factors that may negatively impact MGIC’s ability to continue to comply with the financial requirements of the PMIERs include the following:

è | The GSEs may make the PMIERs more onerous in the future. The PMIERs provide that the factors that determine Minimum Required Assets will be updated periodically, or as needed if there is a significant change in macroeconomic conditions or loan performance. We do not anticipate that the regular periodic updates will occur more frequently than once every two years. The PMIERs state that the GSEs will provide notice 180 days prior to the effective date of updates to the factors; however, the GSEs may amend any portion of the PMIERs at any time. It is possible that the GSEs will not agree to the COVID-19-specific changes requested by the mortgage insurance industry or that they will revise the PMIERs to provide that there is no reduction in the Minimum Required Assets for COVID-19-related delinquencies.
è | There may be future implications for PMIERs based upon forthcoming regulatory capital requirements for the GSEs. In 2018, the FHFA issued a proposed capital rule for the GSEs, which included a framework for determining the capital relief allowed to the GSEs for loans with private mortgage insurance. A re-proposed capital rule is expected to be released; however, the timing and content of the re-proposal are uncertain. Further, any changes to the GSEs' capital and liquidity requirements resulting from the Treasury Housing Reform Plan could have future implications for PMIERs.
è | 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.
è | 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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Our reinsurance transactions enable us to earn higher returns on our business than we would without them because fewer Available Assets are required to be held under PMIERs. However, reinsurance may not always be available to us or available on similar terms and our quota share reinsurance subjects us to counterparty credit risk. The total credit under the PMIERs for risk ceded under our reinsurance transactions is subject to a modest reduction. Our existing reinsurance transactions are subject to periodic review by the GSEs and there is a risk we will not receive our current level of credit in future periods for the risk ceded under them. In addition, we may not receive the same level of credit under future transactions that we receive under existing transactions.
State Regulations
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 its RIF (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. The “policyholder position” of a mortgage insurer is its net worth or surplus, contingency reserve, and a portion of the reserve for unearned premiums
At March 31, 2020, MGIC’s risk-to-capital ratio was 10.2 to 1, below the maximum allowed by the jurisdictions with State Capital Requirements, and its policyholder position was $2.8 billion above the required MPP of $1.7 billion. The calculation of our risk-to-capital ratio and MPP reflect credit for the risk ceded under our QSR Transactions and Home Re Transactions. 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.
At March 31, 2020, the risk-to-capital ratio of our combined insurance operations (which includes a reinsurance affiliate) was 10.2 to 1.
The NAIC has previously announced plans to revise the minimum capital and surplus requirements for mortgage insurers that are provided for in its Mortgage Guaranty Insurance Model Act. In December 2019, a working group of state regulators released an exposure draft of a revised Mortgage Guaranty Insurance Model Act and 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 and certain items have not yet been completely addressed by the framework, including the treatment of ceded risk and minimum capital floors. Currently we believe
that the PMIERs contain more restrictive capital requirements than the draft Mortgage Guaranty Insurance Model Act 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, including through administrative action, in ways that have a material adverse effect on us and that the charters of the GSEs are changed by new federal legislation.
In September 2019, at the direction of President Trump, the U.S. Treasury Department (“Treasury”) released the “Treasury Housing Reform Plan” (the “Plan”). The Plan recommends administrative and legislative reforms for the housing finance system, with such reforms intended to achieve the goals of ending conservatorships of the GSEs; increasing competition and participation by the private sector in the mortgage market including by authorizing the FHFA to approve additional guarantors of conventional mortgages in the secondary market, simplifying the qualified mortgage (“QM”) rule of the Consumer Financial Protection Bureau (“CFPB”), transferring risk to the private sector, and eliminating the GSE Patch (discussed below); establishing regulation of the GSEs that safeguards their safety and soundness and minimizes the risks they pose to the financial stability of the United States; and providing that the Federal Government is properly compensated for any explicit or implicit support it provides to the GSEs or the secondary housing finance market. Also, in September 2019, the Treasury and FHFA entered into a letter agreement that will allow the GSEs to remit less of their earnings to the government, which will help them rebuild their capital.
The impact of the Plan on private mortgage insurance is unclear. The plan does not refer to mortgage insurance explicitly; however, it refers to a requirement for credit enhancement on high LTV ratio loans, which is a requirement of the current GSE charters. The Plan also indicates that the FHFA should continue to support efforts to expand credit risk transfer (“CRT”) programs and should encourage the GSEs to continue to engage in a diverse mix of economically sensible CRT programs, including by increasing reliance on institution-level capital (presumably, as distinguished from capital obtained in the capital markets). For more information about CRT programs, see our risk factor titled "The amount of insurance we write could be adversely affected if lenders and investors select alternatives to private mortgage insurance."
The current GSE Patch expands the definition of QM under the Truth in Lending Act (Regulation Z) ("TILA") to include mortgages eligible to be purchased by the GSEs, even if the mortgages do not meet the debt-to-income ("DTI") ratio limit of 43% that is included in the standard QM definition. Originating a QM may provide a lender with legal protection from lawsuits that claim the lender failed to verify a borrower’s ability to repay. The GSE Patch is scheduled to expire no later than January 2021. Approximately 23% and 21% of our NIW in the first quarter of 2020 and fourth quarter of 2019, respectively, was on loans with DTI ratios greater than 43%. However, it is possible that expiration of the GSE Patch will be delayed and that not all future loans with DTI ratios greater than 43% will be affected by such
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expiration. In this regard, we note that the CFPB recently indicated that it expects to issue for comment, no later than May 2020, a proposed new "ability-to-repay" ("ATR") rule that would replace the use of DTI ratio in the definition of QM with an alternative measure, such as a pricing threshold. The CFPB also indicated that it would extend the expiration of the GSE Patch until the earlier of the effective date of the proposed alternative or until one of the GSEs exits conservatorship.
We insure loans that do not qualify as QMs, however, we are unsure the extent to which lenders will make non-QM loans because they will not be entitled to the presumptions about compliance with the ATR rule that the law allows with respect to QM loans. We are also unsure the extent to which lenders will purchase private mortgage insurance for loans that cannot be sold to the GSEs. Finally, certain lenders have suspended their non-QM lending due to COVID-19 pandemic-related concerns.
The QM definition for loans insured by the FHA, which issued by the Department of Housing and Urban Development (“HUD”) is less restrictive than the CFPB’s definition in certain respects, including that (i) it has no DTI ratio limit, and (ii) it allows lenders certain presumptions about compliance with the ATR rule on higher priced loans. It is possible that, in the future, lenders will prefer FHA-insured loans to loans insured by private mortgage insurance as a result of the FHA’s less restrictive QM definition.
However, in September 2019, HUD released its Housing Reform Plan and indicated that of the FHA should refocus on its mission of providing housing finance support to low and moderate-income families that cannot be fulfilled through traditional underwriting. In addition, Treasury’s Plan indicated that the FHFA and HUD should develop and implement a specific understanding as to the appropriate roles and overlap between the GSEs and FHA, including with respect to the GSEs’ acquisitions of high LTV ratio and high DTI ratio loans.
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.”
COVID-19 Pandemic
While uncertain, the impact of the COVID-19 pandemic on the Company’s business, financial results, liquidity and/or financial condition may be material. We expect that the increase in unemployment and economic uncertainty resulting from initiatives to reduce the transmission of COVID-19 (including "shelter-in-place" restrictions), as well as COVID-19‑related illnesses and deaths, will negatively impact our business. The magnitude of the impact will be influenced by various factors, including the length and severity of the pandemic in the United States, the length of time that measures intended to reduce the transmission of COVID-19 remain in place, the resulting level of unemployment, and the impact of various government initiatives (including the enactment of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act")) and actions taken by Fannie Mae and Freddie Mac (the "GSEs") (including implementation of mortgage forbearance and modification programs) to mitigate the economic harm caused by the COVID-19 pandemic and efforts to reduce its transmission.
The programs contained in the CARES Act and actions taken by the GSEs include, among many others:

• | Payment forbearance on federally-backed mortgages (including those delivered to or purchased by the GSEs) to borrowers experiencing a hardship during the COVID-19 pandemic. Forbearance allows for mortgage payments to be suspended for up to 360 days. Approximately 82% of our insurance in force that was written in 2019 and before was delivered to or purchased by the GSEs. While servicers of some non-GSE loans may not be required to offer forbearance to borrowers, we allow servicers to apply GSE loss mitigation programs to non-GSE loans. In addition, the Consumer Financial Protection Bureau ("CFPB") requires substantial loss mitigation efforts be made prior to servicers initiating foreclosure, therefore, servicers of non-GSE loans may have an incentive to offer forbearance or deferment.

• | For those mortgages that are not subject to forbearance, a suspension of foreclosures and evictions for at least 60 days from March 18, 2020, on mortgages purchased or securitized by the GSEs.

• | Direct aid to individuals in the form of refundable tax credit rebates paid in April 2020.

• | "Paycheck Protection Program" to provide small businesses with funds to pay up to eight weeks of payroll costs, and certain other expenses.

• | Enhanced unemployment benefits.

• | Increased flexibility under retirement plans.

Loans subject to a COVID-19 pandemic-related forbearance are reported to the mortgage insurers and the GSEs as delinquent. As a result, we expect our losses incurred to increase in future periods.
The foreclosure moratoriums in place under the CARES act and GSE initiatives may delay the receipt of claims and slow down our claim payments.
The tax changes in the CARES Act do not materially impact our financial results.
Factors affecting our results
The COVID-19 pandemic may adversely affect our business, results of operations, and financial condition. The extent of the adverse effects will depend on the duration and continued severity of the COVID-19 pandemic and its effects on the U.S. economy and housing market. We have addressed some of the potential impacts throughout this document.
Our results of operations are generally affected by:
Premiums written and earned
Premiums written and earned in a year are influenced by:

• | NIW, which increases IIF. Many factors affect NIW, including the volume of low down payment home mortgage originations and competition to provide credit enhancement on those mortgages from the FHA, the VA, other mortgage insurers, and other alternatives to mortgage insurance, including GSE programs that may reduce or eliminate the demand for 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

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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. Cancellations of single premium policies, which are generally non-refundable, result in immediate recognition of any remaining unearned premium.

• | Premium rates, which are affected by product type, competitive pressures, the risk characteristics of the insured loans, the percentage of coverage on the insured loans, and PMIERs capital requirements. 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 rate resets to a lower rate 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 our QSR Transactions, and premiums ceded under our Home Re Transactions. See Note 4 - “Reinsurance” to our consolidated financial statements for a discussion of our reinsurance transactions.

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, stock issuances or repurchases, or dividends.
Losses incurred
Losses incurred are the current expense that reflects estimated payments that will ultimately be made as a result of delinquencies on insured loans. As explained under “Critical Accounting Policies” in our 2019 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. Pandemics, including COVID-19, and other natural disasters may result in delinquencies not following the typical pattern. 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 losses incurred.

• | The rate at which we rescind policies or curtail claims. Our estimated loss reserves incorporate our estimates of future rescissions of policies and curtailments of claims, and reversals of rescissions and curtailments. We collectively refer to rescissions and denials as “rescissions” and variations of this term. We call reductions to claims “curtailments.”

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

Underwriting and other expenses
Underwriting and other expenses includes items such as employee compensation, fees for professional services, depreciation and maintenance expense, and premium taxes, and are reported net of ceding commissions associated with our reinsurance transactions. Employee compensation expenses are variable due to share-based compensation, changes in benefits, and headcount (which can fluctuate due to volume). See Note 4 - “Reinsurance” to our consolidated financial
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statements for a discussion of the ceding commission on our reinsurance transactions.
Interest expense
Interest expense primarily reflects the interest associated with our outstanding debt obligations discussed in Note 3 - “Debt” to our consolidated financial statements and under “Liquidity and Capital Resources” below.
Other
Certain activities that we do not consider part of our fundamental operating activities may also impact our results of operations and include the following.
Net realized investment gains (losses)

• | Fixed income securities. Realized investment gains and losses are a function of the difference between the amount received on the sale of a fixed income security and the fixed income security’s cost basis, as well as any credit allowances 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.

• | Equity securities. Realized investment gains and losses are a function of the periodic change in fair value, as well as any credit allowances recognized in earnings.

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 may result in either underwriting profit or underwriting losses. This pattern of results typically occurs because relatively few of the incurred losses on delinquencies 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. Pandemics, including COVID-19, and other natural disasters may result in delinquencies not following the typical pattern.
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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 adjusted pre-tax operating income (loss), adjusted net operating income (loss) and adjusted net operating income (loss) per diluted share facilitate the evaluation of the company's core financial performance thereby providing relevant information to investors. These measures are not recognized in accordance with GAAP and should not be viewed as alternatives to GAAP measures of performance.
Adjusted pre-tax 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.
Adjusted 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 components of pre-tax operating income (loss) are tax effected using a federal statutory tax rate of 21%.
Adjusted net operating income (loss) per diluted share is calculated in a manner consistent with the accounting standard regarding earnings per share by dividing (i) adjusted net operating income (loss) after making adjustments for interest expense on convertible debt, whenever the impact is dilutive by (ii) diluted weighted average common shares outstanding, which reflects share dilution from unvested restricted stock units and from convertible debt when dilutive under the “if-converted” method.
Although adjusted pre-tax operating income (loss) and adjusted net operating income (loss) exclude certain items that have occurred in the past and are expected to occur in the future, the excluded items represent items that are: (1) not viewed as part of the operating performance of our primary activities; or (2) impacted by both discretionary and other economic or regulatory factors and are not necessarily indicative of operating trends, or both. These adjustments, along with the reasons for their treatment, are described below. Trends in the profitability of our fundamental operating activities can be more clearly identified without the fluctuations of these adjustments. Other companies may calculate these measures differently. 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.

(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/or reduce potential dilution from our outstanding convertible debt.

(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.

Non-GAAP reconciliations
Reconciliation of Income before tax / Net income to Adjusted pre-tax operating income / Adjusted net operating income |
|  | Three Months Ended March 31, |
|  | 2020 |  | 2019 |
(In thousands, except per share amounts) |  | Pre-tax |  | Tax effect |  | Net (after-tax) |  | Pre-tax |  | Tax effect |  | Net (after-tax) |
Income before tax / Net income |  | $ | 188,239 |  |  | $ | 38,434 |  |  | $ | 149,805 |  |  | $ | 190,936 |  |  | $ | 38,995 |  |  | $ | 151,941 |  |
Adjustments: |  |  |  |  |  |  |  |  |  |  |  |  |
Net realized investment (gains) losses |  | (2,875 | ) |  | (604 | ) |  | (2,271 | ) |  | 620 |  |  | 130 |  |  | 490 |  |
Adjusted pre-tax operating income / Adjusted net operating income |  | $ | 185,364 |  |  | $ | 37,830 |  |  | $ | 147,534 |  |  | $ | 191,556 |  |  | $ | 39,125 |  |  | $ | 152,431 |  |
Reconciliation of Net income per diluted share to Adjusted net operating income per diluted share |
Weighted average diluted shares outstanding |  |  |  |  |  | 365,216 |  |  |  |  |  |  | 376,667 |  |
Net income per diluted share |  |  |  |  |  | $ | 0.42 |  |  |  |  |  |  | $ | 0.42 |  |
Net realized investment (gains) losses |  |  |  |  |  | — |  |  |  |  |  |  | — |  |
Adjusted net operating income per diluted share |  |  |  |  |  | $ | 0.42 |  |  |  |  |  |  | $ | 0.42 |  |

MGIC Investment Corporation - Q1 2020 | 38

Mortgage Insurance Portfolio
New insurance written
The total amount of mortgage originations is generally influenced by the level of new and existing home sales, the percentage of homes purchased for cash, and the level of refinance activity. PMI market share of total mortgage originations is influenced by the mix of purchase and refinance originations as PMI market share is typically 3-4 times higher for purchase originations than refinance originations. PMI market share is also impacted by the market share of total originations of the FHA, VA, USDA, and other alternatives to mortgage insurance, including GSE programs that may reduce or eliminate the demand for mortgage insurance.
The COVID-19 pandemic, including the related restrictions on business in most parts of the U.S., and its effect on unemployment and consumer confidence, could affect the number of purchase mortgage originations. The GSEs have temporarily changed various underwriting guidelines in response to COVID-19. In some instances the requirements have been eased, for example allowing bank statements and pay checks to be used to verify income versus IRS forms, to facilitate mortgage lending, while other requirements have been tightened, for example certain documents can only be 60 days old versus 120 days old, which restricts mortgage lending activity. Certain lenders have also increased the minimum credit score or increased the minimum down payment that they will lend on irrespective of GSEs or our guidelines. It is unclear what, if any, impact these changes will have on the volume of low down payment home mortgage originations.
NIW for the first quarter of 2020 was $17.9 billion (Q1 2019: $10.1 billion). The increase is primarily driven by higher NIW from refinances in Q1 2020 compared to Q1 2019.
The following tables present characteristics of our primary NIW for the three months ended March 31, 2020 and 2019.

Primary NIW by FICO score
|  | Three Months Ended March 31,
(% of primary NIW) |  | 2020 |  | 2019
760 and greater |  | 45.8 | % |  | 41.4 | %
740 - 759 |  | 19.9 | % |  | 17.2 | %
720 - 739 |  | 13.9 | % |  | 14.5 | %
700 - 719 |  | 10.4 | % |  | 12.1 | %
680 - 699 |  | 7.0 | % |  | 7.5 | %
660 - 679 |  | 1.7 | % |  | 4.0 | %
640 - 659 |  | 0.9 | % |  | 2.3 | %
639 and less |  | 0.4 | % |  | 1.0 | %

Primary NIW by loan-to-value
|  | Three Months Ended March 31,
(% of primary NIW) |  | 2020 |  | 2019
95.01% and above |  | 8.4 | % |  | 17.5 | %
90.01% to 95.00% |  | 43.0 | % |  | 41.9 | %
85.01% to 90.00% |  | 30.7 | % |  | 28.6 | %
80.01% to 85% |  | 17.9 | % |  | 12.0 | %

Primary NIW by debt-to-income ratio
|  |  | Three Months Ended March 31,
(% of primary NIW) |  | 2020 |  | 2019
45.01% and above |  | 12.8 | % |  | 18.4 | %
38.01% to 45.00% |  | 32.5 | % |  | 34.3 | %
38.00% and below |  | 54.7 | % |  | 47.3 | %

The percentage of our NIW on loans with DTI ratios greater than 45% has declined in 2020, which we believe is due in part to changes in GSE underwriting guidelines and our pricing for loans with such DTI ratios. We are continuing to monitor our exposure to such loans and may take further action.

Primary NIW by policy payment type
|  | Three Months Ended March 31,
(% of primary NIW) |  | 2020 |  | 2019
Monthly premiums |  | 85.1 | % |  | 83.9 | %
Single premiums |  | 14.8 | % |  | 16.0 | %
Annual premiums |  | 0.1 | % |  | 0.1 | %

Primary NIW by type of mortgage
|  | Three Months Ended March 31,
(% of primary NIW) |  | 2020 |  | 2019
Purchases |  | 65.3 | % |  | 91.7 | %
Refinances |  | 34.7 | % |  | 8.3 | %

Insurance and risk in force
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.
MGIC Investment Corporation - Q1 2020 | 39

Persistency. Our persistency was 73.0% at March 31, 2020 compared to 75.8% at December 31, 2019 and 81.7% at March 31, 2019. 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.

IIF and RIF
|  | Three Months Ended March 31,
(In billions) |  | 2020 |  | 2019
NIW |  | $ | 17.9 |  |  | $ | 10.1 |
Cancellations |  | (14.7 | ) |  | (8.4 | )
Increase in primary IIF |  | $ | 3.2 |  |  | $ | 1.7 |
Direct primary IIF as of March 31, |  | $ | 225.5 |  |  | $ | 211.4 |
Direct primary RIF as of March 31, |  | $ | 57.9 |  |  | $ | 54.5 |

Credit profile of our primary RIF
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 risk characteristics when compared to our 2005-2008 books. The credit profile of our pre-2009 RIF has benefited from modification and refinance programs making outstanding loans more affordable to borrowers with the goal of reducing the number of foreclosures. These programs included HAMP and HARP, which expired at the end of 2016 and 2018, respectively, but have been replaced by other GSE modification programs. HARP allowed borrowers who were not delinquent, but who may not otherwise have been 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 our HARP modifications were current as of March 31, 2020. The aggregate of our 2009 and later books and our HARP modifications accounted for approximately 92% of our total primary RIF at March 31, 2020.
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.
The composition of our primary RIF as of March 31, 2020, December 31, 2019, and March 31, 2019 is shown below:

Primary RIF
($ in millions) |  | March 31, 2020 |  | December 31, 2019 |  | March 31, 2019
Policy Year |  | RIF | % of RIF |  | RIF | % of RIF |  | RIF | % of RIF
2009+ |  | $ | 51,066 |  | 88 | % |  | $ | 50,044 |  | 88 | % |  | $ | 45,947 |  | 84 | %
2005 - 2008 (HARP) |  | 2,367 |  | 4 | % |  | 2,485 |  | 4 | % |  | 2,979 |  | 6 | %
Other years (HARP) |  | 154 |  | — | % |  | 165 |  | — | % |  | 213 |  | 1 | %
Subtotal |  | 53,588 |  | 92 | % |  | 52,694 |  | 92 | % |  | 49,139 |  | 91 | %
2005- 2008 (Non-HARP) |  | 3,692 |  | 6 | % |  | 3,868 |  | 7 | % |  | 4,588 |  | 8 | %
Other years (Non-HARP) |  | 626 |  | 2 | % |  | 651 |  | 1 | % |  | 810 |  | 1 | %
Subtotal |  | 4,318 |  | 8 | % |  | 4,519 |  | 8 | % |  | 5,398 |  | 9 | %
Total Primary RIF |  | $ | 57,906 |  | 100 | % |  | $ | 57,213 |  | 100 | % |  | $ | 54,537 |  | 100 | %

Pool and other insurance
MGIC has written no new pool insurance since 2008; 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 $368 million ($212.0 million on pool policies with aggregate loss limits and $156.0 million on pool policies without aggregate loss limits) at March 31, 2020 compared to $376 million ($213.0 million on pool policies with aggregate loss limits and $163.0 million on pool policies without aggregate loss limits) at December 31, 2019. If claim payments associated with a specific pool reach the aggregate loss limit, the remaining IIF within the pool would be cancelled and any remaining delinquencies under the pool would be removed from our delinquent inventory.
In connection with the GSEs' CRT programs, an insurance subsidiary of MGIC provide insurance and reinsurance covering portions of the credit risk related to certain reference pools of mortgages acquired by the GSEs. Our RIF, as reported to us, related to these programs was approximately $263 million and $182 million as of March 31, 2020 and December 31, 2019, respectively.
MGIC Investment Corporation - Q1 2020 | 40

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, 2020 and 2019.
Revenues

Revenues
|  | Three Months Ended March 31,
(in millions) |  | 2020 |  | 2019 |  | % Change
Net premiums written |  | $ | 246.0 |  |  | $ | 244.3 |  |  | 1
Net premiums earned |  | $ | 260.9 |  |  | $ | 249.8 |  |  | 4
Investment income, net of expenses |  | 41.3 |  |  | 40.6 |  |  | 2
Net realized investment gains (losses) |  | 1.9 |  |  | (0.5 | ) |  | N/M
Other revenue |  | 2.8 |  |  | 1.8 |  |  | N/M
Total revenues |  | $ | 306.9 |  |  | $ | 291.7 |  |  | 5

Net premiums written and earned
Comparative quarterly results
NPW and NPE increased for the three months ended March 31, 2020 compared with the prior year due to higher average insurance in force and an increase in accelerated premiums from single premium policy cancellations, partially offset by lower premium rates on our insurance in force.
See “Overview - Factors Affecting Our Results” above for additional factors that influenced the amount of net premiums written and earned during the periods.
Premium yields
Premium yield is NPE divided by average IIF during year and is influenced by a number of key drivers. The following table presents the key drivers of our net premium yield for the three months ended March 31, 2020 and from the respective prior year period

Premium Yield
|  | Three Months Ended March 31,
(in basis points) |  | 2020 | 2019
In force portfolio yield | (1 | ) | 49.2 |  | 52.5 |
Premium refunds |  | (0.7 | ) | (0.5 | )
Accelerated earnings on single premium policies |  | 3.3 |  | 1.1 |
Total direct premium yield |  | 51.8 |  | 53.1 |
Ceded premiums earned, net of profit commission and assumed premiums | (2 | ) | (5.2 | ) | (5.7 | )
Net premium yield |  | 46.6 |  | 47.4 |

(1) Total direct premiums earned, excluding premium refunds and accelerated premiums from single premium policy cancellations divided by average primary insurance in force.
(2) Ceded premiums earned, net of profit commissions and assumed premiums. Assumed premiums include those from our participation
in GSE CRT programs, of which the impact on the net premium yield was 0.5 bps at March 31, 2020 compared to 0.2 bps at March 31, 2019.
Changes in our premium yields when compared to the respective prior year periods reflect the following:

In force Portfolio Yield
è | A larger percentage of our IIF from book years with lower premium rates due to a decline in premium rates in recent years resulting from pricing competition, insuring mortgages with lower risk characteristics, certain policies undergoing premium rate resets on their ten-year anniversaries, and the availability of reinsurance.
Premium Refunds
è | Premium refunds adversely impact our premium yield and are primarily driven by claim activity and our estimate of refundable premiums on our delinquent inventory.
Accelerated earnings on single premium policies
è | Greater amounts of accelerated earned premium from cancellation of single premium policies prior to their estimated policy life, primarily due to increased refinancing activity.
Ceded premiums earned, net of profit commission and assumed premiums
è | Ceded premiums earned, net of profit commission adversely impact our premium yield. Ceded premiums earned, net of profit commission, consist primarily of the QSR Transactions and the Home Re Transactions. Assumed premiums consists primarily of premiums from GSE CRT programs. See “Reinsurance agreements “ below for further discussion on our reinsurance transactions.

As discussed in our Risk Factor titled “ Competition or changes in our relationships with our customers could reduce our revenues, reduce our premium yields and / or increase our losses,” the private mortgage insurance industry is highly competitive and premium rates have declined over the past several years. We expect our net premium yield to continue to decline as older insurance policies with higher premium rates run off or have their premium rates reset, and new insurance policies with lower premium rates are written.
Reinsurance agreements
Quota share reinsurance
Our quota share reinsurance affects various lines of our statements of operations and therefore we believe it should be analyzed by reviewing its total effect on our pre-tax income, described as follows.
MGIC Investment Corporation - Q1 2020 | 41

è |  | We cede a fixed percentage of premiums on insurance covered by the agreements.
è |  | 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 can be eliminated at loss levels significantly higher than we are currently experiencing. 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).
è |  | 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).
è |  | We cede a fixed percentage of losses incurred on insurance covered by the agreements.

The following table provides information related to our quota share reinsurance agreements for 2020 and 2019.

Quota Share Reinsurance
|  | As of and For the Three Months Ended March 31,
(Dollars in thousands) |  | 2020 |  | 2019
Ceded premiums written and earned, net of profit commission |  | $ | 26,846 |  |  | $ | 28,164 |
% of direct premiums written |  | 10 | % |  | 12 | %
% of direct premiums earned |  | 9 | % |  | 11 | %
Profit commission |  | $ | 29,979 |  |  | $ | 38,881 |
Ceding commissions | $ | 11,365 |  |  | $ | 13,409 |
Ceded losses incurred |  | $ | 5,804 |  |  | $ | 1,676 |
Ceded RIF (in millions) |  | $ | 11,713 |  |  | $ | 13,034 |

Covered risk
The amount of our NIW, new risk written, IIF, and RIF subject to our QSR Transactions as shown in the following table will vary from period to period in part due to the mix of our risk written during the period.

Quota Share Reinsurance
|  | As of and For the Three Months Ended March 31,
|  | 2020 |  | 2019
NIW subject to QSR Transactions |  | 72 | % |  | 84 | %
New Risk Written subject to QSR Transactions |  | 82 | % |  | 90 | %
IIF subject to QSR Transactions |  | 78 | % |  | 78 | %
RIF subject to QSR Transactions |  | 81 | % |  | 91 | %

The NIW subject to quota share reinsurance decreased in the first three months of 2020 when compared to the same period of the prior year primarily due to an increase in NIW with LTV’s less than or equal to 85% and amortization terms less than or equal to 20 years, which are excluded from the QSR Transactions.
As of March 31, 2020, our total RIF was reduced by a weighted average of approximately 20% for risk ceded under our QSR transactions.
We terminated a portion of our 2015 QSR Transaction effective June 30, 2019 and entered into an amended quota share reinsurance agreement that effectively reduces the quota share cede rate from 30% to 15% on the remaining eligible insurance. The lower cede rate reduced our ceded RIF but does not impact our determination of the amount of IIF or RIF subject to quota share reinsurance agreements.
Excess-of-loss reinsurance
Our excess-of-loss reinsurance provides $463.3 million of loss coverage on an existing portfolio of inforce policies having an inforce date on or after July 1, 2016 and before April 1, 2019. As of March 31, 2020, the aggregate exposed principal balances under the Home Re 2018-01 and 2019-01 transactions were approximately $5.5 billion and $5.4 billion, respectively, which take into account the mortgage insurance coverage percentage, net retained risk after quota share reinsurance, and the reinsurance inclusion percentage of the unpaid principal balance. We ceded premiums of $4.7 million and $2.5 million for the three months ended March 31, 2020 and March 31, 2019, respectively. We expect that we may enter into other ILN transactions if the capital market conditions are favorable; however, the market volatility caused by the COVID-19 pandemic has caused a disruption of uncertain duration in the market for new ILN transactions.
Investment income
Comparative quarterly and year to date results
Net investment income in the first quarter of 2020 was $41.3 million and $40.6 million in the prior year. The increases in investment income were due to an increase in the average balance of the investment portfolio.
Losses and expenses

Losses and expenses
|  | Three Months Ended March 31,
(In millions) |  | 2020 |  | 2019
Losses incurred, net |  | $ | 61.0 |  |  | $ | 39.1 |
Amortization of deferred policy acquisition costs |  | 2.5 |  |  | 2.5 |
Other underwriting and operating expenses, net |  | 42.3 |  |  | 45.9 |
Interest expense |  | 12.9 |  |  | 13.2 |
Total losses and expenses |  | $ | 118.7 |  |  | $ | 100.7 |

Losses incurred, net
As discussed in “Critical Accounting Policies” in our 2019 10-K MD&A and consistent with industry practices, we establish case loss reserves for future claims when notices of delinquency on insured mortgage loans are received. The terms “delinquent” and “default” are used interchangeably by us. Notices of delinquency are typically reported to us when loans are two payments past due. Case loss reserves are established based on estimating the number of loans in our delinquent inventory that will result in a claim payment, which is referred to as the claim rate, and further
MGIC Investment Corporation - Q1 2020 | 42

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.
As discussed in our Risk Factors titled “Because we establish loss reserves only upon a loan delinquency rather than based on estimates of our ultimate losses on risk in force, losses may have a disproportionate adverse effect on our earnings in certain periods” and “Because loss reserve estimates are subject to uncertainties, paid claims may be substantially different than our loss reserves” the COVID-19 pandemic will negatively impact the number of delinquencies and our loss incurred and may be material.
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 financial position, even in a stable economic environment.
Comparative quarterly results
Losses incurred, net in the first quarter of 2020 were $61.0 million compared to $39.1 million in the prior year. In the first quarter of 2020, we received approximately 9% fewer new delinquency notices than we did in the same period last year. Over the past several quarters we had recorded favorable reserve development including $31 million in favorable development in the first quarter of 2019. In the first quarter of 2020, our re-estimation of reserves on previous delinquencies resulted in minimal adverse loss reserve development. The first quarter of 2020 also reflects an increase in IBNR estimates from $22 million to $30 million, as well as an increased estimate of claim rates on new notices due to the COVID-19 pandemic and the current macroeconomic environment.

Composition of losses incurred
|  | Three Months Ended March 31,
(in millions) |  | 2020 |  | 2019 |  | % Change
Current year / New notices | $ | 59.8 |  |  | $ | 47.5 |  |  | 26 |
Prior year reserve development | 1.2 |  |  | (8.4 | ) |  | (114 | )
Losses incurred, net | $ | 61.0 |  |  | $ | 39.1 |  |  | 56 |

Loss ratio
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 increase in the loss ratio for the three months ended March 31, 2020 compared to the respective prior year periods was primarily due to an increase in losses incurred, net, offset in part by an increase in net premiums earned.

|  | Three Months Ended March 31,
|  | 2020 |  | 2019
Loss ratio |  | 23.4 | % |  | 15.6 | %

New notice claim rate
New notice activity continues to be primarily driven by loans insured in 2008 and prior, 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, results in significant judgment in establishing the estimated claim rate. The increase in the new notice claim rate for the three months ended March 31, 2020 is primarily due to the uncertainty of the COVID-19 pandemic and the current macroeconomic environment.

New notice claim rate |  |
|  | Three Months Ended March 31,
|  | 2020 |  | 2019
New notices - 2008 and prior (1) |  | 7,117 |  |  | 57 | % |  | 8,882 |  |  | 65 | %
New notices - 2009 and later |  | 5,281 |  |  | 43 | % |  | 4,729 |  |  | 35 | %
Total |  | 12,398 |  |  | 100 | % |  | 13,611 |  |  | 100 | %
Claim rate |  | 9.0 | % |  |  |  | 8.0 | % |  |
(1) previously delinquent % |  | 95.0 | % |  |  |  | 94.0 | % |  |

MGIC Investment Corporation - Q1 2020 | 43

Claims severity
Factors that impact claim severity include:

è |  | exposure to the loan, which is the unpaid principal balance of the loan times our insurance coverage percentage,
è |  | length of time between delinquency and claim filing (which impacts the amount of interest and expenses, with a longer time between default and claim filing generally increasing severity), and
è |  | curtailments.

As discussed in Note 11 - “Loss Reserves,” the average time for servicers to process foreclosures has recently shortened. In light of the uncertainty caused by the COVID-19 pandemic, the average number of missed payments at the time a claim is received and expected to be received will increase in 2020. Our loss reserves estimates take into consideration trends over time, because the development of the delinquencies may vary from period to period without establishing a meaningful trend.
The majority of loans from 2005 through 2008 (which represent 53% of the 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. Under our current master policy terms, an insured can include accumulated interest when filing a claim only for the first three years the loan is delinquent. In each case, the insured must comply with its obligations under the terms of the applicable master policy.

Claims severity trend for claims paid during the period
Period |  | Average exposure on claim paid |  | Average claim paid |  | % Paid to exposure |  | Average number of missed payments at claim received date
Q1 2020 |  | $ | 46,247 |  |  | $ | 47,222 |  |  | 102.1 | % |  | 33 |
Q4 2019 |  | 46,076 |  |  | 46,302 |  |  | 100.5 | % |  | 34 |
Q3 2019 |  | 42,821 |  |  | 44,388 |  |  | 103.7 | % |  | 35 |
Q2 2019 |  | 46,950 |  |  | 46,883 |  |  | 99.9 | % |  | 34 |
Q1 2019 |  | 42,277 |  |  | 43,930 |  |  | 103.9 | % |  | 35 |
Q4 2018 |  | 45,366 |  |  | 47,980 |  |  | 105.8 | % |  | 35 |
Q3 2018 |  | 43,290 |  |  | 47,230 |  |  | 109.1 | % |  | 35 |
Q2 2018 |  | 44,522 |  |  | 50,175 |  |  | 112.7 | % |  | 38 |
Q1 2018 |  | 45,597 |  |  | 51,069 |  |  | 112.0 | % |  | 38 |
Note: Table excludes material settlements. Settlements include amounts paid in settlement disputes for claims paying practices and/or commutations of policies.

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, as of March 31, 2020, assuming all other factors remain constant, a $1,000 increase/decrease in the average severity reserve factor would change the reserve amount by approximately +/- $10 million. A 1 percentage point increase/decrease in the average claim rate reserve factor would change the reserve amount by approximately +/- $16 million.
See Note 11 – “Loss Reserves” to our consolidated financial statements for a discussion of our losses incurred and claims paying practices (including curtailments).
MGIC Investment Corporation - Q1 2020 | 44

The length of time a loan is in the delinquent inventory (see Note 11- “Loss Reserves,” table 11.4) 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 following table.

Delinquent inventory - number of payments delinquent
| March 31, 2020 |  | December 31, 2019 |  | March 31, 2019
3 payments or less | 12,961 |  |  | 14,895 |  |  | 14,129 |
4-11 payments | 8,178 |  |  | 8,519 |  |  | 8,833 |
12 payments or more (1) | 6,245 |  |  | 6,614 |  |  | 7,959 |
Total | 27,384 |  |  | 30,028 |  |  | 30,921 |
3 payments or less | 47 | % |  | 50 | % |  | 46 | %
4-11 payments | 30 | % |  | 28 | % |  | 28 | %
12 payments or more | 23 | % |  | 22 | % |  | 26 | %
Total | 100 | % |  | 100 | % |  | 100 | %

(1) | Approximately 34%, 33%, and 36% of the primary delinquent inventory with 12 payments or more delinquent has at least 36 payments delinquent as of March 31, 2020, December 31, 2019, and March 31, 2019, respectively.

Net losses and LAE paid
Net losses and LAE paid in the three months ended March 31, 2020 declined 19% compared to the same period in the prior year due to lower claim activity on our primary business.
Due to the foreclosure moratoriums and payment forbearance in place under the CARES act, net losses and LAE paid are expected to decrease in the short term. We expect net losses and LAE paid to increase, however, the magnitude and timing are uncertain.
The following table presents our net losses and LAE paid for the three months ended March 31, 2020 and 2019.

Net losses and LAE paid
|  | Three Months Ended March 31,
(In millions) |  | 2020 |  | 2019
Total primary (excluding settlements) |  | $ | 42 |  |  | $ | 52 |
Pool |  | 1 |  |  | 1 |
Direct losses paid |  | 43 |  |  | 53 |
Reinsurance |  | (1 | ) |  | (3 | )
Net losses paid |  | 42 |  |  | 50 |
LAE |  | 4 |  |  | 7 |
Net losses and LAE paid |  | $ | 46 |  |  | $ | 57 |

Primary claims paid for the top 15 jurisdictions (based on 2020 losses paid) and all other jurisdictions for the three months ended March 31, 2020 and 2019 appears in the following table.

Paid losses by jurisdiction
|  |  | Three Months Ended March 31,
(In millions) |  | 2020 |  | 2019
Florida * |  | $ | 7 |  |  | $ | 8 |
New York * |  | 5 |  |  | 8 |
New Jersey * |  | 4 |  |  | 5 |
Illinois * |  | 3 |  |  | 2 |
Maryland |  | 3 |  |  | 2 |
Puerto Rico * |  | 3 |  |  | 4 |
Pennsylvania * |  | 2 |  |  | 3 |
California |  | 1 |  |  | 1 |
Ohio * |  | 1 |  |  | 2 |
Massachusetts |  | 1 |  |  | 1 |
Virginia |  | 1 |  |  | 1 |
Texas |  | 1 |  |  | 1 |
Michigan |  | 1 |  |  | 1 |
Missouri |  | 1 |  |  | — |
Louisiana |  | 1 |  |  | — |
All other jurisdictions |  | 7 |  |  | 13 |
Total primary (excluding settlements) | $ | 42 |  |  | $ | 52 |

Note: Asterisk denotes jurisdictions in the table above that predominately use a judicial foreclosure process, which generally increases the amount of time it takes for a foreclosure to be completed
The primary average claim paid for the top 5 states (based on 2020 losses paid) for the three months ended March 31, 2020 and 2019 appears in the following table.

Primary average claim paid
|  | Three Months Ended March 31,
|  | 2020 |  | 2019
Florida * | $ | 67,372 |  |  | $ | 67,958 |
New York * | 115,387 |  |  | 109,064 |
New Jersey * | 104,728 |  |  | 70,351 |
Illinois * | 44,121 |  |  | 33,461 |
Maryland | 70,655 |  |  | 45,213 |
All other jurisdictions | 34,541 |  |  | 33,280 |
All jurisdictions | 47,222 |  |  | 43,930 |

Note: Asterisk denotes jurisdictions in the table above that predominately use a judicial foreclosure process, which generally increases the amount of time it takes for a foreclosure to be completed.
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 delinquency and claim filing, and our loss mitigation efforts on loans for which claims are paid.
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The primary average RIF on delinquent loans at March 31, 2020, December 31, 2019 and March 31, 2019 and for the top 5 jurisdictions (based on 2020 losses paid) appears in the following table.

Primary average RIF - delinquent loans
| March 31, 2020 |  | December 31, 2019 |  | March 31, 2019
Florida | $ | 54,036 |  |  | $ | 52,566 |  |  | $ | 53,015 |
New York | 72,800 |  |  | 72,188 |  |  | 72,453 |
New Jersey | 63,743 |  |  | 64,444 |  |  | 67,208 |
Illinois | 38,874 |  |  | 38,740 |  |  | 40,566 |
Maryland | 65,595 |  |  | 64,028 |  |  | 65,526 |
All other jurisdictions | 42,456 |  |  | 41,754 |  |  | 41,800 |
All jurisdictions | 45,698 |  |  | 45,028 |  |  | 45,127 |

The primary average RIF on all loans was $53,433, $52,995, and $51,464 at March 31, 2020, December 31, 2019, and March 31, 2019, respectively.
Loss reserves
Our primary delinquency rate at March 31, 2020 was 2.53% (YE 2019: 2.78%, March 31, 2019: 2.92%). Our primary delinquent inventory was 27,384 loans at March 31, 2020, representing a decrease of 9% from December 31, 2019 and 11% from March 31, 2019. The reduction in our primary delinquent inventory is the result of the total number of delinquent 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 of claims paying disputes or commutations of policies, collectively, exceeding the total number of new delinquencies on insured loans. In recent periods, we have experienced improved cure rates and the number of delinquencies in inventory with twelve or more missed payments has been declining. Generally, a defaulted loan with fewer missed payments is less likely to result in a claim.
The gross reserves at March 31, 2020, December 31, 2019, and March 31, 2019 appear in the table below.

Gross reserves
|  | March 31, 2020 | December 31, 2019 | March 31, 2019
Primary: |  |  |  |  |  |  |
Direct loss reserves (in millions) |  | $ | 501 |  |  | $ | 490 |  |  | $ | 574 |  |
IBNR and LAE |  | 65 |  |  | 56 |  |  | 68 |  |
Total primary loss reserves |  | $ | 566 |  |  | $ | 546 |  |  | $ | 642 |  |
Ending delinquent inventory |  |  | 27,384 |  |  | 30,028 |  |  | 30,921 |
Percentage of loans delinquent (delinquency rate) |  |  | 2.53 | % |  | 2.78 | % |  | 2.92 | %
Average total primary loss reserves per delinquency |  |  | $ | 20,658 |  |  | $ | 18,171 |  |  | $ | 20,014 |
Primary claims received inventory included in ending delinquent inventory |  |  | 472 |  |  | 538 |  |  | 665 |
Pool (1): |  |  |  |  |  |  |  |  |  |
Direct loss reserves (in millions): |  |  |  |  |  |  |  |  |
With aggregate loss limits |  | $ | 6 |  |  | $ | 7 |  |  | $ | 9 |  |
Without aggregate loss limits |  | 2 |  |  | 2 |  |  | 3 |  |
Total pool direct loss reserves |  | $ | 8 |  |  | $ | 9 |  |  | $ | 12 |  |
Ending default inventory: |  |  |  |  |  |  |  |  |  |
With aggregate loss limits |  |  | 373 |  |  | 430 |  |  | 483 |
Without aggregate loss limits |  |  | 203 |  |  | 223 |  |  | 240 |
Total pool ending delinquent inventory |  |  | 576 |  |  | 653 |  |  | 723 |
Pool claims received inventory included in ending delinquent inventory |  |  | 13 |  |  | 11 |  |  | — |
Other gross reserves (in millions) |  | $ | 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 delinquency for our pool business.

MGIC Investment Corporation - Q1 2020 | 46

The primary delinquent inventory for the top 15 jurisdictions (based on 2020 losses paid) at March 31, 2020, December 31, 2019 and March 31, 2019 appears in the following table.

Primary delinquent inventory by jurisdiction
| March 31, 2020 |  | December 31, 2019 |  | March 31, 2019
Florida * | 2,250 |  |  | 2,504 |  |  | 2,635 |
New York * | 1,551 |  |  | 1,634 |  |  | 1,756 |
New Jersey * | 897 |  |  | 992 |  |  | 1,080 |
Illinois * | 1,657 |  |  | 1,749 |  |  | 1,656 |
Maryland | 743 |  |  | 796 |  |  | 801 |
Puerto Rico * | 1,089 |  |  | 1,122 |  |  | 1,397 |
Pennsylvania * | 1,598 |  |  | 1,755 |  |  | 1,786 |
California | 1,138 |  |  | 1,213 |  |  | 1,237 |
Ohio * | 1,326 |  |  | 1,498 |  |  | 1,498 |
Massachusetts | 486 |  |  | 544 |  |  | 538 |
Virginia | 504 |  |  | 580 |  |  | 603 |
Texas | 1,974 |  |  | 2,251 |  |  | 2,220 |
Michigan | 831 |  |  | 921 |  |  | 980 |
Missouri | 478 |  |  | 564 |  |  | 533 |
Louisiana | 580 |  |  | 628 |  |  | 620 |
All other jurisdictions | 10,282 |  |  | 11,277 |  |  | 11,581 |
Total | 27,384 |  |  | 30,028 |  |  | 30,921 |

Note: Asterisk denotes jurisdictions in the table above that predominately use a judicial foreclosure process, which generally increases the amount of time it takes for a foreclosure to be completed.
The primary delinquent inventory by policy year at March 31, 2020, December 31, 2019 and March 31, 2019 appears in the following table.

Primary delinquent inventory by policy year
| March 31, 2020 |  | December 31, 2019 |  | March 31, 2019
Policy year: |  |  |  |  |
2004 and prior | 4,121 |  |  | 4,686 |  |  | 5,565 |
2004 and prior % | 15 | % |  | 16 | % |  | 18 | %
2005 | 2,526 |  |  | 2,799 |  |  | 3,089 |
2006 | 4,166 |  |  | 4,582 |  |  | 4,905 |
2007 | 6,316 |  |  | 7,096 |  |  | 8,034 |
2008 | 1,638 |  |  | 1,798 |  |  | 2,178 |
2005 - 2008 % | 53 | % |  | 54 | % |  | 59 | %
2009 | 118 |  |  | 148 |  |  | 167 |
2010 | 87 |  |  | 115 |  |  | 135 |
2011 | 125 |  |  | 143 |  |  | 163 |
2012 | 202 |  |  | 231 |  |  | 272 |
2013 | 498 |  |  | 521 |  |  | 532 |
2014 | 956 |  |  | 1,101 |  |  | 1,131 |
2015 | 1,299 |  |  | 1,388 |  |  | 1,343 |
2016 | 1,423 |  |  | 1,578 |  |  | 1,460 |
2017 | 1,824 |  |  | 1,989 |  |  | 1,374 |
2018 | 1,602 |  |  | 1,521 |  |  | 573 |
2019 | 482 |  |  | 332 |  |  | — |
2020 | 1 |  |  | — |  |  | — |
2009 and later % | 32 | % |  | 30 | % |  | 23 | %
Total | 27,384 |  |  | 30,028 |  |  | 30,921 |

We expect that delinquencies will increase from their current level as a result of the COVID-19 pandemic, including the increase in unemployment associated with initiatives intended to reduce the transmission of COVID-19. As of April 30, 2020 there were 30,243 loans in our delinquency inventory.
The losses we have incurred on our 2005 through 2008 books have exceeded our premiums from those books. Although uncertainty remains with respect to the ultimate losses we may experience on those books, as we continue to write new insurance, those books have become a smaller percentage of our total mortgage insurance portfolio. Our 2005 through 2008 books represented approximately 10% and 11% of our total primary RIF at March 31, 2020 and December 31, 2019, respectively. Approximately 39% of the remaining primary RIF on our 2005 through 2008 books of business benefited from HARP at both March 31, 2020 and December 31, 2019.
On our primary business, the highest claim frequency years have typically been the third and fourth year after loan origination. However, the pattern of claim frequency can be affected by many factors, including persistency and deteriorating economic conditions. Deteriorating economic conditions can result in increasing claims following a period of declining claims. As of March 31, 2020, 47% of our primary RIF was written subsequent to December 31, 2017, 61% of our primary RIF was written subsequent to December 31, 2016, and 73% of our primary RIF was written subsequent to December 31, 2015.
MGIC Investment Corporation - Q1 2020 | 47

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 for the three months ended March 31, 2020 were $42.3 million, a decrease from $45.9 million in the prior year period primarily due to decreases in professional and deferred compensation expenses.

|  | Three Months Ended March 31,
|  | 2020 |  | 2019
Underwriting expense ratio |  | 17.3 | % |  | 18.9 | %

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 subsidiaries) to NPW. The underwriting expense ratio in the three months ended March 31, 2020 decreased due to decrease in underwriting expenses and an increase in NPW.
Provision for income taxes and effective tax rate

Income tax provision and effective tax rate
|  | Three Months Ended March 31,
(In millions, except rate) |  | 2020 |  | 2019
Income before tax |  | $ | 188.2 |  |  | $ | 190.9 |
Provision for income taxes |  | $ | 38.4 |  |  | $ | 39.0 |
Effective tax rate |  | 20.4 | % |  | 20.4 | %

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Balance Sheet Review
Total assets, liabilities, and shareholders’ equity
As of March 31, 2020, total assets were $6.2 billion, a slight decrease from December 31, 2019 , and total liabilities were $1.9 billion, flat compared to December 31, 2019. Shareholders’ equity decreased approximately $0.1 billion primarily due to the repurchases of our common stock and dividends paid, offset by net income in the first three months of 2020 .
The following sections mainly focus on our cash and cash equivalents, investments and loss reserves as these reflect the major developments in our assets and liabilities since December 31, 2019.
Consolidated balance sheets - Assets
as of March 31, 2020 (In thousands)

● | Cash and cash equivalents | $ | 369,526 |
● | Investments | 5,490,838 |
● | Premiums receivable | 53,440 |
● | Other assets | 241,483 |

Cash and cash equivalents (including restricted) - Our cash and cash equivalents balance increased to $370 million as of March 31, 2020, from $169 million as of December 31, 2019, as net cash generated from operating and investing activities was only partly offset by net cash used in financing activities.
Consolidated balance sheets - Liabilities and equity
as of March 31, 2020 (In thousands)

● | Loss reserves | $ | 574,753 |
● | Unearned premiums | 365,408 |
● | Long-term debt | 833,027 |
● | Other liabilities | 140,271 |
● | Shareholders’ equity | 4,241,828 |

Loss reserves - Our loss reserves include estimates of losses and settlement expenses on (1) reported delinquencies known as case reserves, (2) IBNR, and (3) LAE reserves. Our gross reserves are reduced by reinsurance recoverable on our estimated losses and settlement expenses to calculate a net reserve balance. The net reserve balance increased by 3% to $549 million as of March 31, 2020, from $534 million as of December 31, 2019. Reinsurance recoverables on our estimated losses and settlement expenses were $26 million and $22 million as of March 31, 2020 and December 31, 2019, respectively. The overall increase in our net loss reserves during the first three months of 2020 was due to reserves established on new notices in the quarter, including IBNR, exceeding claims paid in the quarter.
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Investment portfolio
The average duration and investment yield of our investment portfolio as of March 31, 2020, December 31, 2019, and March 31, 2019 are shown in the table below.

Portfolio duration and embedded investment yield
|  | March 31, 2020 |  | December 31, 2019 |  | March 31, 2019
Duration (in years) |  | 4.0 |  | 3.9 |  | 4.0
Pre-tax yield (1) |  | 3.1% |  | 3.1% |  | 3.2%
After-tax yield (1) |  | 2.5% |  | 2.5% |  | 2.6%

(1) | Embedded investment yield is calculated on a yield-to-worst basis.

The security ratings of our fixed income investments as of March 31, 2020, December 31, 2019, and March 31, 2019 are shown in the following table.

Fixed income security ratings
| Security Ratings (1)
Period | AAA | AA | A | BBB
March 31, 2020 | 22% | 20% | 35% | 22%
December 31, 2019 | 21% | 20% | 34% | 24%
March 31, 2019 | 21% | 23% | 32% | 24%

(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.

Off-Balance Sheet Arrangements
Home Re 2018-1 Ltd. and Home Re 2019-1 Ltd. are special purpose variable interest entities that are not consolidated in our consolidated financial statements because we do not have the unilateral power to direct those activities that are significant to their economic performance. See Note 4 - “Reinsurance,” to our consolidated financial statements for additional information.
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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, interest expense and operating expenses, (2) investing cash flows related to the purchase, sale and maturity of investments and purchases of property and equipment and (3) financing cash flows generally from activities that impact our capital structure, such as changes in debt and shares outstanding, and dividend payouts. The following table summarizes our consolidated cash flows from operating, investing and financing activities:

Summary of consolidated cash flows
|  | Three Months Ended March 31,
(In thousands) |  | 2020 |  | 2019
Total cash provided by (used in): |  |  |  |
Operating activities |  | $ | 184,324 |  |  | $ | 164,881 |
Investing activities |  | 166,153 |  |  | (40,115 | )
Financing activities |  | (150,007 | ) |  | (17,292 | )
Increase in cash and cash equivalents and restricted cash and cash equivalents |  | $ | 200,470 |  |  | $ | 107,474 |

Net cash provided by operating activities for the three months ended March 31, 2020 increased compared to the same period of 2019 primarily due to lower level of losses paid, net, an increase in investment income, and an increase in net premiums written.
Net cash provided by investing activities for the three months ended March 31, 2020 primarily reflects sales and maturities of fixed income and equity securities in amounts that exceeded our purchases of fixed income and equity securities during the period.
Net cash used in investing activities for the three months ended March 31, 2019 reflects purchases of fixed income securities in an amount that exceeded our proceeds from the sales and maturities of fixed income securities during the period as cash from operations was available for additional investment.
Net cash used in financing activities for the three months ended March 31, 2020 primarily reflects share repurchases during the period in , cash dividends paid to shareholders, and the payment of withholding taxes related to share-based compensation net share settlement.
Net cash used in financing activities for the three months ended March 31, 2019 reflects share repurchases and the payment of withholding taxes related to share-based compensation net share settlement.
Capitalization
Debt - holding company
As of March 31, 2020, our holding company’s debt obligations were $815 million in aggregate principal consisting of our 5.75% Notes and 9% Debentures. MGIC’s ownership of $132.7 million
of our holding company’s 9% Debentures is eliminated in consolidation, but they remain outstanding obligations owed by our holding company to MGIC.
Liquidity analysis - holding company
As of March 31, 2020, we had approximately $562.5 million in cash and investments at our holding company. These resources are maintained primarily to service our debt interest expense, pay debt maturities, repurchase shares, pay dividends to shareholders, and to settle intercompany obligations. While these assets are held, we generate investment income that serves to offset a portion of our interest expense. Investment income and the payment of dividends from our insurance subsidiaries are the principal sources of holding company cash inflow. MGIC is the principal source of dividends, and their payment is restricted by insurance regulation. See Note 14 - “Statutory Information” to our consolidated financial statement for additional information about MGIC’s dividend restrictions. The payment of dividends from MGIC is also influenced by our view of the appropriate level of PMIERs Available Assets to maintain an excess over Minimum Required Assets. Other sources of holding company liquidity include raising capital in the public markets. 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 2020 we used $120 million of holding company cash to repurchase shares. In light of the uncertainty caused by the COVID-19 pandemic, we have temporarily suspended stock repurchases. See “Overview - Capital” of this MD&A for a discussion of the additional share repurchase program authorized in January 2020.
In the first quarter of 2020 we used $21 million to pay cash dividends to shareholders. On April 23, 2020, our Board of Directors declared a quarterly cash dividend of $0.06 per common share to shareholders of record on May 11, 2020, payable on May 29, 2020.
In the first three months of 2020, our holding company cash and investments increased by $238 million, to $563 million as of March 31, 2020.
Significant cash and investments inflows during the first three months:

• | $390 million of dividends received from MGIC and

• | $4 million of investment income.

Significant cash outflows during the first three months:

• | $120 million of share repurchase transactions,

• | $21 million in cash dividends paid to shareholders, and

• | $12 million of interest payments on our 5.75% Notes and 9% Debentures,

MGIC is not planning to request a dividend from its regulator, the Wisconsin OCI, to be paid in the second quarter. We ask the Wisconsin OCI not to object before MGIC pays dividends to the holding company. Future dividend payments from MGIC to the
MGIC Investment Corporation - Q1 2020 | 51

holding company will be determined on a quarterly basis, in consultation with the board, and after considering any updated estimates about the length and severity of the economic impacts of the COVID-19 pandemic on our business.
The net unrealized losses on our holding company investment portfolio were approximately $1.7 million at March 31, 2020 and the portfolio had a modified duration of approximately 1.3 years.
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, 2019 for additional information about the conversion terms of our 9% Debentures and the terms of our indebtedness, including our option to defer interest on our 9% Debentures. 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 for other possible uses of holding company resources.
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 borrowed $155 million 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 is maintained at a minimum of 102% of the outstanding principal balance. MGIC provided eligible collateral from its investment portfolio.
Capital Adequacy
PMIERs
As of March 31, 2020, MGIC’s Available Assets under the PMIERs totaled approximately $4.3 billion, an excess of approximately $1.0 billion over its Minimum Required Assets; and MGIC is in compliance with the requirements of the PMIERs and eligible to insure loans delivered to or purchased by the GSEs. Maintaining a sufficient level of Available Assets will allow MGIC to remain in compliance with the PMIERs financial requirements. Our reinsurance transactions provided an aggregate of approximately $1.3 billion of capital credit under the PMIERs as of March 31, 2020. Refer to Note 4 - “Reinsurance” to our consolidated financial statements for additional information on our QSR and Home Re Transactions.
We anticipate an increase to our delinquency inventory caused by the COVID-19 pandemic. The PMIERs generally require us to maintain significantly more Minimum R equired Assets for delinquent loans than for performing loans; however, delinquent loans whose borrowers have been affected by the COVID-19 pandemic may be given the same treatment under the PMIERs as delinquent loans in areas that the Federal Emergency Management Agency ("FEMA") has declared major disaster areas in connection with hurricanes. Specifically, the Minimum Required Assets would be reduced by 70% for at least 120 days from the date the loan becomes delinquent, and longer if the loan is subject to a forbearance plan that meets certain requirements.
Refer to “Overview - Capital - GSEs” and our risk factor ti tled “We may not continue to meet the GSEs’ private mortgage insurer eligibility requirements and our returns may decrease if we are required to maintain more capital in order to maintain our eligibility” of this MD&A for further discussion of PMIERs.
Risk-to-capital
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 its RIF (or a similar measure) in order for the mortgage insurer to continue to write new business. While they vary among jurisdictions, the most common State Capital Requirements allow for a maximum risk-to-capital ratio of 25 to 1.
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.
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MGIC’s separate company risk-to-capital calculation is shown in the table below.

Risk-to-capital - MGIC separate company
(In millions, except ratio) |  | March 31, 2020 |  | December 31, 2019
RIF - net (1) |  | $ | 44,772 |  |  | $ | 44,338 |
Statutory policyholders’ surplus |  | 1,268 |  |  | 1,619 |
Statutory contingency reserve |  | 3,106 |  |  | 2,963 |
Statutory policyholders’ position |  | $ | 4,374 |  |  | $ | 4,582 |
Risk-to-capital |  | 10.2 |  |  | 9.7:1 |

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

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

Risk-to-capital - Combined insurance companies
(In millions, except ratio) |  | March 31, 2020 |  | December 31, 2019
RIF - net (1) |  | $ | 45,069 |  |  | $ | 44,550 |
Statutory policyholders’ surplus |  | 1,271 |  |  | 1,619 |
Statutory contingency reserve |  | 3,166 |  |  | 3,021 |
Statutory policyholders’ position |  | $ | 4,437 |  |  | $ | 4,640 |
Risk-to-capital |  | 10.2 |  |  | 9.6:1 |

(1) | RIF – net, as shown in the table above, is net of reinsurance and exposure on policies currently delinquent ($1.5 billion at March 31, 2020 and December 31, 2019) for which loss reserves have been established.

The increase in MGIC's risk-to-capital and our combined insurance companies’ risk to capital in the first three months of 2020 was due to a decrease in the statutory policyholders’ position, offset by an increase in our RIF, net of reinsurance. The decrease in statutory policyholder’s position is primarily due to dividends paid to our holding company in the first three months of 2020 of $390 million. For additional information on dividends paid from MGIC to the holding company refer to “Overview - Capital” of this MD&A”
Our RIF, net of reinsurance, increased in the first three months of 2019, due to an increase in our IIF, offset by an increase in our ceded RIF under our QSR Transactions. Our risk-to-capital ratio will increase if the percentage increase in net insured risk exceeds the percentage increase in capital.
For additional information regarding regulatory capital see Note 14 – “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

MGIC financial strength ratings
Rating Agency |  | Rating |  | Outlook
Moody’s Investor Services |  | Baa1 |  | Stable
Standard and Poor’s Rating Services |  | BBB+ |  | Negative
A.M. Best |  | A- |  | Stable

Standard and Poor's recently revised its outlook for the U.S. Mortgage Insurers market segment to "negative,” due to the risks associated with the COVID-19 pandemic. A.M. Best recently revised its outlook for the U.S. Mortgage Insurers market segment to "negative," but did not change MGIC's or MAC’s outlook at that time. 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 increase our losses.”

MAC financial strength ratings
Rating Agency |  | Rating |  | Outlook
A.M. Best |  | A- |  | Stable

MGIC Investment Corporation - Q1 2020 | 53

Contractual Obligations
The following table summarizes, as of March 31, 2020, the approximate future payments under our contractual obligations and estimated claim payments on established loss reserves.

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 |  | $ | 1,936.7 |  |  | $ | 50.6 |  |  | $ | 255.7 |  |  | $ | 483.5 |  |  | $ | 1,146.9 |
Operating lease obligations |  | 2.0 |  |  | 1.1 |  |  | 0.9 |  |  | — |  |  | — |
Purchase obligations |  | 8.9 |  |  | 5.4 |  |  | 3.5 |  |  | — |  |  | — |
Other long-term liabilities |  | 574.8 |  |  | 215.6 |  |  | 260.9 |  |  | 98.3 |  |  | — |
Total |  | $ | 2,522.4 |  |  | $ | 272.7 |  |  | $ | 521.0 |  |  | $ | 581.8 |  |  | $ | 1,146.9 |

Our long-term debt obligations as of March 31, 2020 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, 2019. Purchase obligations consist primarily of agreements to purchase items related to our corporate headquarters update and continued investment in our information technology infrastructure in the normal course of business.
Our other long-term liabilities represent the case and LAE loss reserves established to recognize the liability for losses and LAE related to existing delinquencies on insured mortgage loans. The timing of the future claim payments associated with the established case loss reserves was determined primarily based on two key assumptions: the length of time it takes for a notice of delinquency 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 differently than this estimate, in part, due to uncertainty regarding the impact of certain factors, such as impacts from the COVID-19 pandemic, 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.
See Note 11 – “Loss Reserves” to our consolidated financial statements. In accordance with GAAP for the mortgage insurance industry, we establish case loss reserves only for delinquent loans. 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 business, results of operations, and financial condition 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. These risk factors, including the discussion of the impact of the COVID-19 pandemic, speak only as of the date of this press release and are subject to change without notice as the Company cannot predict all risks relating to this evolving set of events. W e 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.
While we communicate with security analysts from time to time, it is against our policy to disclose to them any material non-public information or other confidential information. Accordingly, investors should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report, and such reports are not our responsibility.
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, 2019, as supplemented by Part II, Item 1 A of our 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, 2019.
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, 2020, the modified duration of our fixed income investment portfolio was 4.0 years, which means that an instantaneous parallel shift in the yield curve of 100 basis points would result in a change of 4.0% 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 2020 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. Legal Proceedings
Certain legal proceedings arising in the ordinary course of business may be filed or pending against us from time to time. For information about such legal proceedings, you should review our risk factor titled “We are involved in legal proceedings and are subject to the risk of additional legal proceedings in the future” in Exhibit 99.
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, 2019. 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.
The impact of the COVID-19 pandemic on our business and financial condition may be material.
While uncertain, the impact of the COVID-19 pandemic on the Company’s business, financial results, liquidity and/or financial condition may be material. We expect that the increase in unemployment and economic uncertainty resulting from initiatives to reduce the transmission of COVID-19 (including "shelter-in-place" restrictions), as well as COVID-19‑related illnesses and deaths, will negatively impact our business. The magnitude of the impact will be influenced by various factors, including the length and severity of the pandemic in the United States, the length of time that measures intended to reduce the transmission of COVID-19 remain in place, the resulting level of unemployment, and the impact of various government initiatives (including the enactment of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act")) and actions taken by Fannie Mae and Freddie Mac (the "GSEs") (including implementation of mortgage forbearance and modification programs) to mitigate the economic harm caused by COVID-19 and efforts to reduce its transmission.
The COVID-19 pandemic has impacted and may continue to impact our business in various ways, including the following:

• | Our incurred losses will increase as the number of insured mortgage delinquencies increase. We establish case reserves for insurance losses when delinquency notices are received and for loans we estimate are delinquent prior to the close of the accounting period but for which delinquency notices have not yet been reported to us (this is often referred to as “IBNR”). For information about our loss reserving methodology, see our risk factors titled "Because we establish loss reserves only upon a loan delinquency rather than based on estimates of our ultimate losses or risk in force, losses may have a disproportionate adverse effect on our earnings in certain periods," and "Because loss reserve estimates are subject to uncertainties, paid claims may be substantially different than our loss reserves."

• | We will be required to maintain more capital under the private mortgage insurer eligibility requirements ("PMIERs") of the GSEs, which generally require more capital to be held

for delinquent loans than for performing loans. For more information about the capital requirements of the PMIERs, see our risk factor titled "We may not continue to meet the GSEs' private mortgage insurer eligibility requirements and our returns may decrease if we are required to maintain more capital in order to maintain our eligibility."

• | Over time, as the number of delinquencies increases, the number of claims that we must pay is likely to increase. For more information, see our risk factor titled "Downturns in the domestic economy or declines in the value of borrowers' homes from their value at the time their loans closed may result in more homeowners defaulting and our losses increasing, with a corresponding decrease in our returns."

• | As the number of purchase mortgage originations decreases, and if the number of refinance mortgage originations decreases, the number of mortgages available for us to insure in the near term will also decrease. For more information, see our risk factor titled "If the volume of low down payment home mortgage originations declines, the amount of insurance that we write could decline."

• | We may be unable to secure excess of loss reinsurance through insurance-linked notes transactions in the near term. For more information, see our risk factor titled "Reinsurance may not always be available or affordable."

• | Our receipt of premiums may be delayed. For more information, see our risk factor titled "We are susceptible to disruptions in the servicing of mortgage loans that we insure and we rely on third-party reporting for information regarding the mortgage loans we insure."

• | Our operations may be impacted if our management or other employees are unable to perform their duties as a result of COVID-19-related illnesses. For more information, see our risk factor titled "We rely on our management team and our business could be harmed if we are unable to retain qualified personnel or successfully develop and/or recruit their replacements."

Downturns in the domestic economy or declines in the value of borrowers’ homes from their value at the time their loans closed may result in more homeowners defaulting and our losses increasing, with a corresponding decrease in our returns.
Losses result from events that reduce a borrower’s ability or willingness to continue to make mortgage payments, such as unemployment, health issues, family status, and whether the home of a borrower who defaults on his mortgage can be sold for an amount that will cover unpaid principal and interest and the expenses of the sale. In general, favorable economic conditions reduce the likelihood that borrowers will lack sufficient income to pay their mortgages and also favorably affect the value of homes, thereby reducing and in some cases even eliminating a loss from a mortgage default. A deterioration in economic conditions, including an increase in unemployment, generally increases the likelihood that borrowers will not have sufficient income to pay their mortgages and can also adversely affect home prices, which in turn can influence the willingness of borrowers with sufficient resources to make mortgage
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payments to do so when the mortgage balance exceeds the value of the home. Home prices may decline even absent a deterioration in economic conditions due to declines in demand for homes, which in turn may result from changes in buyers’ perceptions of the potential for future appreciation, restrictions on and the cost of mortgage credit due to more stringent underwriting standards, higher interest rates generally, changes to the deductibility of mortgage interest for income tax purposes, decreases in the rate of household formations, or other factors.
The unemployment rate rose from 3.5% as of December 31, 2019, to 4.4 % as of March 31, 2020, and, on May 3, 2020, The Wall Street Journal reported that economists it surveyed forecast that unemployment rose to 16.1% as of April 30, 2020. We expect increasing unemployment to result in an increasing number of mortgage delinquencies and insurance claims; however, the increases are difficult to predict given the uncertainty in the current market environment, including uncertainty about the length and severity of the COVID-19 pandemic; the length of time that measures intended to reduce the transmission of COVID-19 remain in place; effects of forbearance programs enacted by the GSEs, various states and municipalities; and effects of stimulus programs, including those contained in the CARES Act. The programs contained in the CARES Act include, among many others:

• | Payment forbearance on federally-backed mortgages (including those delivered to or purchased by the GSEs) to borrowers experiencing a hardship during the COVID-19 pandemic. Forbearance allows for mortgage payments to be suspended for up to 360 days. Approximately 82% of our insurance in force that was written in 2019 and before was delivered to or purchased by the GSEs. While servicers of some non-GSE loans may not be required to offer forbearance to borrowers, we allow servicers to apply GSE loss mitigation programs to non-GSE loans. In addition, the Consumer Financial Protection Bureau ("CFPB") requires substantial loss mitigation efforts be made prior to servicers initiating foreclosure, therefore, servicers of non-GSE loans may have an incentive to offer forbearance or deferment.

• | For those mortgages that are not subject to forbearance, a suspension of foreclosures and evictions for at least 60 days from March 18, 2020, on mortgages purchased or securitized by the GSEs.

• | Direct aid to individuals in the form of refundable tax credit rebates paid in April 2020.

• | "Paycheck Protection Program " to provide small businesses with funds to pay up to eight weeks of payroll costs, and certain other expenses.

• | Enhanced unemployment benefits.

• | Increased flexibility under retirement plans.

We may not continue to meet the GSEs’ private mortgage insurer eligibility requirements and our returns may decrease if we are required to maintain more capital in order to maintain our eligibility.
We must comply with a GSE's PMIERs to be eligible to insure loans delivered to or purchased by that GSE. 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” (generally only the most liquid assets of an insurer) to equal or exceed its “Minimum Required Assets” (which are generally based on an insurer’s book of insurance in force and calculated from tables of factors with several risk dimensions, reduced for credit given for risk ceded under reinsurance agreements).
Based on our interpretation of the PMIERs, as of March 31, 2020, MGIC’s Available Assets totaled $4.3 billion, or $1.0 billion in excess of its Minimum Required Assets. MGIC is in compliance with the PMIERs and eligible to insure loans purchased by the GSEs. In calculating these "Minimum Required Assets," the total credit for risk ceded under our reinsurance transactions is subject to a modest reduction. Our reinsurance transactions are discussed in our risk factor titled "The mix of business we write affects our Minimum Required Assets under the PMIERs, our premium yields and the likelihood of losses occurring." Our existing reinsurance transactions are subject to periodic review by the GSEs and there is a risk we will not receive our current level of credit in future periods for the risk ceded under them. In addition, we may not receive the same level of credit under future reinsurance transactions that we receive under existing transactions. If MGIC is not allowed certain levels of credit under the PMIERs, under certain circumstances, MGIC may terminate the reinsurance transactions, without penalty.
While loans that were current at the time a COVID-19 pandemic-related forbearance was initiated are not to be reported as delinquent for consumer credit reporting purposes, they may be reported to mortgage insurers and the GSEs as delinquent, and are treated as delinquent for purposes of the PMIERs. Loans that were delinquent at the time such a forbearance was initiated are expected to be reported as delinquent to mortgage insurers and the GSEs. The PMIERs generally require us to maintain significantly more Minimum Required Assets for delinquent loans than for performing loans; however, delinquent loans whose borrowers have been affected by the COVID-19 pandemic may be given the same treatment under the PMIERs as delinquent loans in areas that the Federal Emergency Management Agency ("FEMA") has declared major disaster areas in connection with hurricanes. Specifically, the Minimum Required Assets would be reduced by 70% for at least 120 days from the date the loan becomes delinquent, and longer if the loan is subject to a forbearance plan that meets certain requirements.
Under the current PMIERs, to be eligible for the 70% reduction, the loan must be backed by a property located in a FEMA Declared Major Disaster Area and either 1) or 2) below must apply. FEMA has declared all states and territories in which we conduct business to be Major Disaster Areas as a result of the impact of the COVID-19 pandemic. Absent a forbearance plan described in 1) below, the 70% reduction may be applied no longer than 120 days from the initial default date.
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1) | The loan is subject to a forbearance plan executed in response to a FEMA Declared Major Disaster Area eligible for Individual Assistance, the terms of which are materially consistent with terms of forbearance plans offered by Freddie Mac or Fannie Mae. As of the date of this report, not all states have delegated eligible individual assistance.

2) | The loan has an initial default date occurring up to either (i) 30 days prior to or (ii) 90 days following the Major Disaster event. It is uncertain how the date of the "Major Disaster event" will be determined for the COVID-19 pandemic.

The mortgage insurance industry has asked the Federal Housing Finance Agency (the "FHFA") and the GSEs to consider revisions to the PMIERs in light of the differences between FEMA declarations associated with hurricanes and those associated with the COVID-19 pandemic. Among other things, the industry asked the FHFA and GSEs to specify how "Major Disaster event" will be determined and to not limit the forbearance plans described in 1) above to those executed in response to a FEMA Declared Major Disaster Area eligible for Individual Assistance. We applied the 70% reduction discussed above when calculating our PMIERs Minimum Required Assets for March 31, 2020. We expect to receive guidance from the GSEs before we calculate our PMIERs Minimum Required Assets for June 30, 2020.
Although we have requested servicers to provide us with information about the forbearance status of loans, we may not receive such reporting and, therefore, may not be able to take advantage of the 70% reduction after a loan has been delinquent 120 days.
It is possible that, despite reducing the Minimum Required Assets for certain delinquent loans by 70%, the increasing number of delinquent loans caused by the COVID-19 pandemic will cause our Available Assets to be less than our Minimum Required Assets. As of March 31, 2020 and April 30, 2020, there were 27,384 and 30,243 loans in our delinquency inventory, respectively. We expect that the majority of COVID-19 pandemic-related delinquencies have not yet been reported; however, we are unable to predict the number of loans that will become delinquent as a result of the COVID-19 pandemic. We estimate that, as of March 31, 2020, our delinquency inventory would have had to have grown by approximately 235,000 loans to cause our Available Assets to be less than our Minimum Required Assets. This estimation was based on several simplifying assumptions, including that all incremental delinquencies were associated with the COVID-19 pandemic (and, therefore, receive the 70% reduction in Minimum Required Assets discussed above), reflect the same mix of book years and risk characteristics as our remaining risk-in force, and are subject to 21% quota share reinsurance (the weighted average quota share reinsurance on our risk in force).
If our Available Assets are less than our Minimum Required Assets, then we would not be in compliance with the PMIERs. The PMIERs provide a list of remediation actions for a mortgage insurer's non-compliance, with additional actions possible in the GSEs' discretion. At the extreme, the GSEs may suspend or terminate eligibility to insure loans purchased by them. Such suspension or termination would significantly reduce the volume of our new business writings; the vast majority of our NIW since 2008 has been for loans delivered to or purchased by the GSEs.
In addition to the increase in Minimum Required Assets associated with delinquent loans whose borrowers are affected by the COVID-19 pandemic, factors that may negatively impact MGIC’s ability to continue to comply with the financial requirements of the PMIERs include the following:

• | The GSEs may make the PMIERs more onerous in the future. The PMIERs provide that the factors that determine Minimum Required Assets will be updated periodically, or as needed if there is a significant change in macroeconomic conditions or loan performance. We do not anticipate that the regular periodic updates will occur more frequently than once every two years. The PMIERs state that the GSEs will provide notice 180 days prior to the effective date of updates to the factors; however, the GSEs may amend any portion of the PMIERs at any time. It is possible that the FHFA and GSEs will not agree to the COVID-19-specific changes requested by the mortgage insurance industry or that they will revise the PMIERs to provide that there is no reduction in the Minimum Required Assets for COVID-19-related delinquencies.

• | There may be future implications for PMIERs based upon forthcoming regulatory capital requirements for the GSEs. In 2018, the FHFA issued a proposed capital rule for the GSEs, which included a framework for determining the capital relief allowed to the GSEs for loans with private mortgage insurance. A re-proposed capital rule is expected to be released; however, the timing and content of the re-proposal are uncertain. Further, any changes to the GSEs' capital and liquidity requirements resulting from the Treasury Housing Reform Plan could have future implications for PMIERs.

• | Our future operating results may be negatively impacted by the matters discussed in the rest of these 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.

Because we establish loss reserves only upon a loan delinquency rather than based on estimates of our ultimate losses on risk in force, losses may have a disproportionate adverse effect on our earnings in certain periods.
In accordance with accounting principles generally accepted in the United States, we establish case reserves for insurance losses and loss adjustment expenses only when notices of default on insured mortgage loans are received and for loans we estimate are in default but for which notices of default have not yet been reported to us by the servicers (this is often referred to as “IBNR”). Because our reserving method does not take consider losses that could occur from loans that are not delinquent, such losses are not reflected in our financial statements, except in the case where a premium deficiency exists. A premium deficiency exists when the present value of expected future losses and expenses exceed the present value of expected future premiums and already established loss
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reserves on the applicable loans. As a result, future losses on loans that are not currently delinquent may have a material impact on future results as such losses emerge. As of March 31, 2020, we had established case reserves and reported losses incurred for 27,384 loans in our delinquency inventory and increased our IBNR reserve from $22 million at December 31, 2019 to $30 million at March 31, 2020. Though not reflected in our March 31, 2020 financial results, as of April 30, 2020, our delinquency inventory had increased to 30,243 loans. We expect that delinquencies will increase from that level as a result of the COVID-19 pandemic, including as a result of the increase in unemployment associated with initiatives intended to reduce the transmission of COVID-19. As a result, we expect our losses incurred to increase in future periods. The impact of the COVID-19 pandemic on the number of delinquencies and our losses incurred will be influenced by various factors, including those discussed in our risk factor titled "The impact of the COVID-19 pandemic on our business and financial condition may be material."
Because loss reserve estimates are subject to uncertainties, paid claims may be substantially different than our loss reserves.
When we establish case reserves, we estimate the ultimate loss on delinquent loans 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. The estimated claim rate and claim severity represent our best estimates of what we will actually pay on the loans in default as of the reserve date and incorporate anticipated mitigation from rescissions and curtailments. The establishment of loss reserves is subject to inherent uncertainty and requires judgment by management. The actual amount of the claim payments may be substantially different than our loss reserve estimates. Our estimates could be affected by several factors, including a change in regional or national economic conditions, the impact of various government actions (including the enactment of the CARES Act) and actions taken by the GSEs (including implementation of mortgage forbearance and modification programs) to mitigate the economic harm caused by the COVID-19 pandemic and efforts to reduce the transmission of COVID-19, and a change in the length of time loans are delinquent before claims are received. The change in conditions may include changes in unemployment, including prolonged unemployment as a result of the COVID-19 pandemic, affecting borrowers’ income and thus their ability to make mortgage payments, and changes in home prices, which may affect borrower willingness to continue to make mortgage payments when the value of the home is below the mortgage balance. The economic effects of the COVID-19 pandemic may be disproportionately concentrated in certain geographic regions. Information about the geographic dispersion of our insurance in force can be found in our Annual Reports on Form 10-K and our Quarterly Reports on Form 10-Q filed with the SEC. Changes to our claim rate and claim severity estimates could have a material impact on our future results, even in a stable economic environment. In addition, 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 default notice activity and a lower cure rate.
The premiums we charge may not be adequate to compensate us for our liabilities for losses and as a result any inadequacy could materially affect our financial condition and results of operations.
We set premiums at the time a policy is issued based on our expectations regarding likely performance of the insured risks over the long term. Our premiums are subject to approval by state regulatory agencies, which can delay or limit our ability to increase our premiums. In addition, our customized rate plans may delay our ability to increase our premiums on the NIW covered by such plans. Generally, we cannot cancel mortgage insurance coverage or adjust renewal premiums during the life of a mortgage insurance policy. As a result, higher than anticipated claims generally cannot be offset by premium increases on policies in force or mitigated by our non-renewal or cancellation of insurance coverage. The premiums we charge, the investment income we earn and the amount of reinsurance we carry may not be adequate to compensate us for the risks and costs associated with the insurance coverage provided to customers. An increase in the number or size of claims, compared to what we anticipated when we set the premiums, could adversely affect our results of operations or financial condition. Our premium rates are also based in part on the amount of capital we are required to hold against the insured risk. If the amount of capital we are required to hold increases from the amount we were required to hold when a policy was written, we cannot adjust premiums to compensate for this and our returns may be lower than we assumed. For a discussion of the effect of the COVID-19 pandemic on the amount of capital we are required to hold, see our risk factor titled "We may not continue to meet the GSEs’ private mortgage insurer eligibility requirements and our returns may decrease if we are required to maintain more capital in order to maintain our eligibility."
The losses we have incurred on our 2005-2008 books of business have exceeded our premiums from those books. The incurred losses from those books, although declining, continue to generate a material portion of our total incurred losses. The ultimate amount of these losses will depend in part on general economic conditions, including unemployment, and the direction of home prices.
Competition or changes in our relationships with our customers could reduce our revenues, reduce our premium yields and / or increase our losses.
The private mortgage insurance industry is highly competitive and is expected to remain so. We believe we currently compete with other private mortgage insurers based on premium rates, underwriting requirements, financial strength (including based on credit or financial strength ratings), customer relationships, name recognition, reputation, strength of management teams and field organizations, the ancillary products and services provided to lenders and the effective use of technology and innovation in the delivery and servicing of our mortgage insurance products.
Our relationships with our customers, which may affect the amount of our NIW, could be adversely affected by a variety of factors, including if our premium rates are higher than those of our competitors, our underwriting requirements are more restrictive than those of our competitors, or our customers are
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dissatisfied with our claims-paying practices (including insurance policy rescissions and claim curtailments).
Much of the competition in the industry in the last few years has centered on pricing practices which have included: (i) reductions in standard filed rates; (ii) use of customized rate plans (typically lower than standard rates) that are made available to lenders that meet certain criteria; and (iii) use of a spectrum of filed rates to allow for formulaic, risk-based pricing that may be quickly adjusted within certain parameters (referred to as "risk-based pricing systems"). While our increased use of reinsurance over the past several years has helped to mitigate the negative effect of declining premium rates on our returns, refer to our risk factor titled "Reinsurance may not always be available or affordable" for a discussion of the risks associated with the availability of reinsurance.
In 2019, we introduced MiQ, our risk-based pricing system that establishes our premium rates based on more risk attributes than were considered in 2018. The widespread use of risk-based pricing systems by the private mortgage insurance industry makes it more difficult to compare our rates to those offered by our competitors. We may not be aware of industry rate changes until we observe that our volume of new insurance written ("NIW") has changed. In addition, business under customized rate plans is awarded by certain customers for only limited periods of time. As a result, our NIW may fluctuate more than it had in the past. Regarding the concentration of our new business, our top ten customers accounted for approximately 26% and 25% of our NIW, in each of the twelve months ended March 31, 2020 and 2019.
We monitor various competitive and economic factors while seeking to balance both profitability and market share considerations in developing our pricing strategies. Premium rates on NIW will change our premium yield (net premiums earned divided by the average insurance in force) over time as older insurance policies run off and new insurance policies with different premium rates are written. Our premium rates are subject to approval by state regulatory agencies, which can delay or limit our ability to change them, outside of the parameters already approved. In addition, our customized rate plans may delay our ability to increase our premiums on the NIW covered by such plans.
There can be no assurance that our premium rates adequately reflect the risk associated with the underlying mortgage insurance policies. For additional information, see our risk factors titled “The premiums we charge may not be adequate to compensate us for our liabilities for losses and as a result any inadequacy could materially affect our financial condition and results of operations" and "If our risk management programs are not effective in identifying, or adequate in controlling or mitigating, the risks we face, or 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."
Certain of our competitors have access to capital at a lower cost than we do (including, through off-shore reinsurance vehicles, which are tax-advantaged). As a result, they may be able to achieve higher after-tax rates of return on their NIW compared to us, which could allow them to leverage reduced premium rates to gain market share, and they may be better positioned to
compete outside of traditional mortgage insurance, including by participating in alternative forms of credit enhancement pursued by Fannie Mae and Freddie Mac (the "GSEs") discussed in our risk factor titled "The amount of insurance we write could be adversely affected if lenders and investors select alternatives to private mortgage insurance."
The vast majority of our insurance written since 2008 has been for loans purchased by the GSEs. The current private mortgage insurer eligibility requirements ("PMIERs") of each of the GSEs require a mortgage insurer to maintain a minimum amount of assets to support its insured risk, as discussed in our risk factor titled “We may not continue to meet the GSEs’ private mortgage insurer eligibility requirements and our returns may decrease if we are required to maintain more capital in order to maintain our eligibility.” The PMIERs do not require an insurer to maintain minimum financial strength ratings; however, our financial strength ratings can affect us in the following ways:

• | A downgrade in our financial strength ratings could result in increased scrutiny of our financial condition by the GSEs and/or our customers, potentially resulting in a decrease in the amount of our NIW. Standard and Poor's recently revised its outlook, to "negative," for MGIC and other U.S. mortgage insurers due to the risks associated with the COVID-19 pandemic. A.M. Best recently revised its outlook for the U.S. Private Mortgage Insurers market segment to "negative," but did not change MGIC's outlook at that time.

• | Our ability to participate in the non-GSE mortgage market (the size of which has been limited since 2008, but may grow in the future), could depend on our ability to maintain and improve our investment grade ratings for our insurance subsidiaries. We could be competitively disadvantaged with some market participants because the financial strength ratings of our insurance subsidiaries are lower than those of some competitors. MGIC's financial strength rating from A.M. Best is A- (with a stable outlook), from Moody’s is Baa1 (with a stable outlook) and from Standard & Poor’s is BBB+ (with a negative outlook).

• | Financial strength ratings may also play a greater role if the GSEs no longer operate in their current capacities, for example, due to legislative or regulatory action. In addition, although the PMIERs do not require minimum financial strength ratings, the GSEs consider financial strength ratings to be important when using forms of credit enhancement other than traditional mortgage insurance, as discussed in our risk factor titled "The amount of insurance we write could be adversely affected if lenders and investors select alternatives to private mortgage insurance."

If we are unable to compete effectively in the current or any future markets as a result of the financial strength ratings assigned to our insurance subsidiaries, our future new insurance written could be negatively affected.
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Reinsurance may not always be available or affordable.
As discussed in our risk factor titled "The mix of business we write affects our Minimum Required Assets under the PMIERs, our premium yields and the likelihood of losses occurring," we have in place quota share and excess of loss reinsurance transactions providing various amounts of coverage on 86% of our risk in force. These reinsurance transactions enable us to earn higher returns on our business than we would without them because fewer Available Assets are required to be held under PMIERs. However, reinsurance may not always be available to us or available on similar terms, the quota share reinsurance transactions subject us to counterparty credit risk, and the GSEs may change the credit they allow under the PMIERs for risk ceded under our reinsurance transactions. If we are unable to obtain reinsurance for NIW, our returns may decrease absent an increase in premium rates. An increase in our premium rates may lead to a decrease in our NIW.
We have in place quota share reinsurance ("QSR") transactions with unaffiliated reinsurers that cover most of our insurance written from 2013 through 2021, and a portion of our insurance written prior to 2013. The quota share reinsurance coverage percentages range from 15% to 30%. We also have in place reinsurance agreements that provide excess-of-loss reinsurance coverage for a portion of the risk associated with certain mortgage insurance policies having an insurance coverage in force date on or after July 1, 2016 and before April 1, 2019. The transactions were entered into with special purpose insurers that issued notes linked to the reinsurance coverage ("Insurance Linked Notes" or "ILNs"). The market volatility caused by the COVID-19 pandemic has caused a disruption of uncertain duration in the market for new ILN transactions. The most recent ILN transaction in the market closed on February 3, 2020.
If our risk management programs are not effective in identifying, or adequate in controlling or mitigating, the risks we face, or 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.
Our enterprise risk management program, described in "Business - Our Products and Services - Risk Management" in Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2019, may not be effective in identifying, or adequate in controlling or mitigating, the risks we face in our business.
We employ proprietary and third party models to project returns, price products (including through our risk-based pricing system), determine the techniques used to underwrite insurance, estimate reserves, generate projections used to estimate future pre-tax income and to evaluate loss recognition testing, evaluate risk, determine internal capital requirements, perform stress testing, and for other uses. These models rely on estimates and projections that are inherently uncertain and may not operate as intended, especially in unprecedented circumstances such as those surrounding the COVID-19 pandemic. 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.
We rely on our management team and our business could be harmed if we are unable to retain qualified personnel or successfully develop and/or recruit their replacements.
Our success depends, in part, on the skills, working relationships and continued services of our management team and other key personnel. The unexpected departure of key personnel could adversely affect the conduct of our business. In such event, we would be required to obtain other personnel to manage and operate our business. In addition, we will be required to replace the knowledge and expertise of our aging workforce as our workers retire. In either case, there can be no assurance that we would be able to develop or recruit suitable replacements for the departing individuals; that replacements could be hired, if necessary, on terms that are favorable to us; or that we can successfully transition such replacements in a timely manner. We currently have not entered into any employment agreements with our officers or key personnel. Volatility or lack of performance in our stock price may affect our ability to retain our key personnel or attract replacements should key personnel depart. Without a properly skilled and experienced workforce, our costs, including productivity costs and costs to replace employees may increase, and this could negatively impact our earnings.
The Company has activated its business continuity program by transitioning to a remote worker virtual workforce model with certain essential activities supported by limited staff in controlled office environments. This transition was made to responsibly provide for the safety of employees related to the COVID-19 pandemic and to continue to serve customers across our businesses. We have established a temporary succession plan for each of our key executives, should an executive be unable to perform his or her duties due to a COVID-19 related illness; however, it is uncertain what impact COVID-19-related illnesses may have on our operations in the future.
If the volume of low down payment home mortgage originations declines, the amount of insurance that we write could decline.
The factors that may affect the volume of low down payment mortgage originations include:

• | the health of the domestic economy as well as conditions in regional and local economies and the level of consumer confidence,

• | restrictions on mortgage credit due to more stringent underwriting standards, liquidity issues or risk-retention and/or capital requirements affecting lenders,

• | the level of home mortgage interest rates,

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• | housing affordability,

• | new and existing housing availability,

• | the rate of household formation, which is influenced, in part, by population and immigration trends,

• | homeownership rates,

• | the rate of home price appreciation, which in times of heavy refinancing can affect whether refinanced loans have LTV ratios that require private mortgage insurance, and

• | government housing policy encouraging loans to first-time homebuyers.

A decline in the volume of low down payment home mortgage originations could decrease demand for mortgage insurance and limit our NIW. The COVID-19 pandemic, including the related restrictions on business in most parts of the U.S., and its effect on unemployment and consumer confidence, may affect the number of purchase mortgage originations. Underwriting standards have become more stringent as a result of the economic uncertainty caused by the COVID-19 pandemic and that may also cause a decline in the volume of low down payment home mortgage originations. For other factors that could decrease the demand for mortgage insurance, see our risk factor titled “The amount of insurance we write could be adversely affected if lenders and investors select alternatives to private mortgage insurance.”
The mix of business we write affects our Minimum Required Assets under the PMIERs, our premium yields and the likelihood of losses occurring.
The Minimum Required Assets under the PMIERs are, in part, a function of the direct risk-in-force and the risk profile of the loans we insure, considering LTV ratio, credit score, vintage, Home Affordable Refinance Program ("HARP") status and delinquency status; and whether the loans were insured under lender-paid mortgage insurance policies or other policies that are not subject to automatic termination consistent with the Homeowners Protection Act requirements for borrower paid mortgage insurance. Therefore, if our direct risk-in-force increases through increases in NIW, or if our mix of business changes to include loans with higher LTV ratios or lower FICO scores, for example, or if we insure a higher percentage of loans under lender-paid mortgage insurance policies, all other things equal, we will be required to hold more Available Assets in order to maintain GSE eligibility.
The minimum capital required by the risk-based capital framework contained in the exposure draft released by the NAIC in December 2019 would be, in part, a function of certain loan and economic factors, including property location, LTV ratio and credit score; general underwriting quality in the market at the time of loan origination; the age of the loan; and the premium rate we charge. Depending upon the provisions of the capital requirements when they are released in final form and become effective, our mix of business may affect the minimum capital we are required to hold under the new framework.
The percentage of our NIW from all single-premium policies has ranged from approximately 10% in 2013 to 19% in 2017 and was 15% in the first quarter of 2020 and 16% in 2019. Depending upon the actual life of a single premium policy and its premium rate relative to that of a monthly premium policy, a single premium policy may generate more or less premium than a monthly premium policy over its life.
We have in place quota share reinsurance ("QSR") transactions with unaffiliated reinsurers that cover most of our insurance written from 2013 through 2021, and a portion of our insurance written prior to 2013. Although the transactions reduce our premiums, they have a lesser impact on our overall results, as losses ceded under the transactions reduce our losses incurred and the ceding commissions we receive reduce our underwriting expenses. The effect of the QSR transactions on the various components of pre-tax income will vary from period to period, depending upon the level of ceded losses.
In 2018 and 2019, MGIC entered into reinsurance agreements that provide excess-of-loss reinsurance coverage for a portion of the risk associated with certain mortgage insurance policies having an insurance coverage in force date on or after July 1, 2016 and before April 1, 2019. The transactions were entered into with special purpose insurers that issued notes linked to the reinsurance coverage ("Insurance Linked Notes" or "ILNs"). We expect that we may enter into other ILN transactions if capital market conditions are favorable. However, the market volatility caused by the COVID-19 pandemic has caused a disruption of uncertain duration in the market for new ILN transactions. The most recent ILN transaction in the market closed on February 3, 2020.
In addition to the effect of reinsurance on our premiums, we expect a decline in our premium yield because an increasing percentage of our insurance in force is from recent book years whose premium rates had been trending lower.
Our ability to rescind insurance coverage became more limited for insurance we wrote beginning in mid-2012. As a result of revised PMIERs requirements, we have revised our master policy effective for new insurance written beginning March 1, 2020. Our ability to rescind insurance coverage will become further limited for insurance we write under the new master policy, potentially resulting in higher losses than would be the case under our existing master policies. In addition, our rescission rights temporarily have become more limited due to accommodations we have made in connection with the COVID-19 pandemic. We have waived our rescission rights in certain circumstances where the failure to make payments was associated with a COVID-19 pandemic-related forbearance.
From time to time, in response to market conditions, we change the types of loans that we insure and the requirements under which we insure them. We also change our underwriting guidelines, in part through aligning most of them with the GSEs for loans that receive and are processed in accordance with certain approval recommendations from a GSE automated underwriting system. We also make exceptions to our underwriting requirements on a loan-by-loan basis and for certain customer programs. Our underwriting requirements are available on our website at http://www.mgic.com/underwriting/index.html.
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Even when home prices are stable or rising, mortgages with certain characteristics have higher probabilities of claims. As of March 31, 2020, mortgages with these characteristics in our primary risk in force included mortgages with LTV ratios greater than 95% (15.1%), loans with borrowers having FICO scores below 620 (1.9%), mortgages with borrowers having FICO scores of 620-679 (8.7%), mortgages with limited underwriting, including limited borrower documentation (1.6%), and mortgages with borrowers having DTI ratios greater than 45% (or where no ratio is available) (14.1%), each attribute as determined at the time of loan origination. An individual loan may have more than one of these attributes.
Beginning in 2017, the percentage of NIW that we have written on mortgages with LTV ratios greater than 95% and mortgages with DTI ratios greater than 45% has increased, although the percentage of NIW that we have written on mortgages with DTI ratios greater than 45% has declined in 2019 and the first quarter of 2020 from its 2018 level. In 2018, we started considering DTI ratios when setting our premium rates, and we changed our methodology for calculating DTI ratios for pricing and eligibility purposes to exclude the impact of mortgage insurance premiums. As a result of this change, loan originators may have changed the information they provide to us. Although we have revised our operational procedures to account for this possibility, we cannot be sure that the DTI ratio we report for each loan beginning in late 2018 includes the related mortgage insurance premiums in the calculation. In addition, we expect to insure certain loans that would not have previously met our guidelines and to offer premium rates for certain loans lower than would have been offered under our previous methodology.
The widespread use of risk-based pricing systems by the private mortgage insurance industry (discussed in our risk factor titled "Competition or changes in our relationships with our customers could reduce our revenues, reduce our premium yields and / or increase our losses") makes it more difficult to compare our premium rates to those offered by our competitors. We may not be aware of industry rate changes until we observe that our mix of new insurance written has changed and our mix may fluctuate more as a result.
If state or federal regulations or statutes are changed in ways that ease mortgage lending standards and/or requirements, or if lenders seek ways to replace business in times of lower mortgage originations, it is possible that more mortgage loans could be originated with higher risk characteristics than are currently being originated, such as loans with lower FICO scores and higher DTI ratios. Lenders could pressure mortgage insurers to insure such loans, which are expected to experience higher claim rates. Although we attempt to incorporate these higher expected claim rates into our underwriting and pricing models, there can be no assurance that the premiums earned and the associated investment income will be adequate to compensate for actual losses even under our current underwriting requirements.
We are susceptible to disruptions in the servicing of mortgage loans that we insure and we rely on third-party reporting for information regarding the mortgage loans we insure.
We depend on reliable, consistent third-party servicing of the loans that we insure. As discussed below, the increase in
delinquent loans expected to be caused by the COVID-19 pandemic may result in liquidity issues and operational burdens for servicers, which may result in a delay in our receipt of premiums and disruptions in servicing.
The CARES Act provides for payment forbearance on loans purchased or secured by the GSEs to borrowers experiencing a hardship during the COVID-19 pandemic. During the forbearance period, mortgage servicers are required to pay four months of principal and interest to investors in the securities backed by the loans, even though the servicers are not receiving payments from borrowers. This may cause liquidity issues for especially non-bank servicers (who service approximately 40% of the loans underlying our insurance in force) because they do not have the same sources of liquidity that bank servicers have.
While there has been no disruption in our premium receipts through the end of April 2020, we expect that if servicers experience future liquidity issues, they may be less likely to advance premiums to us on policies covering delinquent loans because they are not receiving payments from borrowers. Servicers experiencing liquidity issues may also be less likely to remit our premiums on policies covering loans that are not delinquent. Our policies allow us to cancel coverage on loans that are not delinquent if the premiums are not paid within a grace period. However, in response to the COVID-19 pandemic, many states have enacted moratoriums on the cancellation of insurance due to non-payment. The specific provisions of the moratoriums vary from state-to-state.
The increased operational burdens associated with the likely increase in delinquent loans caused by the COVID-19 pandemic, as well as the possible transfer of servicing resulting from liquidity issues, may cause a disruption in the servicing of delinquent loans and reduce servicers’ ability to undertake mitigation efforts that could help limit our losses.
The information presented in this report and on our website with respect to the mortgage loans we insure is based on information reported to us by third parties, including the servicers and originators of the mortgage loans. Consequently, information presented may be subject to lapses or inaccuracies in reporting from such third parties. In many cases, we may not be aware that information reported to us by third parties is incorrect until such time as a claim is made against us under the relevant insurance policy. We do not receive monthly information from servicers for single premium policies, and may not be aware that the mortgage loans insured by such policies have been repaid. We periodically attempt to determine if coverage is still in force on such policies by asking the last servicer of record or through the periodic reconciliation of loan information with certain servicers. It may be possible that our reports continue to reflect, as active, policies on mortgage loans that have been repaid.
Our holding company debt obligations materially exceed our holding company cash and investments.
At March 31, 2020, we had approximately $563 million in cash and investments at our holding company and our holding company’s debt obligations were $815 million in aggregate principal amount, consisting of $425 million of 5.75% Senior Notes due in 2023 ("5.75% Notes") and $390 million of 9% Debentures due in 2063 (of which approximately $133 million
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was purchased, and is held, by MGIC, and is eliminated on the consolidated balance sheet). Annual debt service on the 5.75% Notes and 9% Debentures outstanding as of March 31, 2020, 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 5.75% Senior Notes and 9% Debentures 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 dividends, and in the first quarter of 2020 and in the full year 2019, it paid a total of $390 million and $280 million, respectively, in dividends to our holding company. We ask the OCI not to object before MGIC pays dividends and, due to the uncertainty surrounding the COVID-19 pandemic, we do not expect MGIC to pay a dividend to the holding company in the second quarter of 2020.
In the first quarter of 2020 and in 2019, we repurchased approximately 9.6 million and 8.7 million shares of our common stock, respectively, using approximately $120 million and $114 million of holding company resources, respectively. As of March 31, 2020, we had $291 million of authorization remaining to repurchase our common stock through the end of 2021 under a share repurchase program approved by our Board of Directors in January 2020. Repurchases may be made from time to time on the open market (including through 10b5-1 plans) or through privately negotiated transactions. The repurchase program may be suspended for periods or discontinued at any time, and due to the uncertainty caused by the COVID-19 pandemic, we have temporarily suspended stock repurchases. 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.
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 if 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 debt capital or to raise additional equity or equity-linked 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, 2020, 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, and is held, by MGIC, and is eliminated on the consolidated balance sheet). The principal amount of the 9% Debentures is currently convertible, at the holder’s option, at a conversion rate, which is subject to adjustment, of 74.4718 common shares per $1,000 principal amount of debentures. This represents a conversion price of approximately $13.43 per share. The payment of dividends by our holding company results in an adjustment to the conversion rate and price, with such adjustment generally deferred until the end of the year.
We may redeem the 9% Debentures in whole or in part from time to time, at our option, at a redemption price equal to 100% of the principal amount of the 9% Debentures being redeemed, plus any accrued and unpaid interest, if the closing sale price of our common stock exceeds $17.46 for at least 20 of the 30 trading days preceding notice of the redemption.
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. For more information about the 9% Debentures, including additional requirements resulting from the deferral of interest, see Note 7 – “Debt” to our consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2019.
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 Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2019. As noted above, in the first quarter of 2020 and in 2019, we repurchased shares of our common stock and may do so in the future. In addition, we have in the past purchased, and may in the future purchase, our debt securities.
We could be adversely affected if personal information on consumers that we maintain is improperly disclosed, and damage to, or interruption in, our information technology systems may disrupt our operations.
As part of our business, we maintain large amounts of personal information on consumers. Federal and state laws designed to promote the protection of personal information of consumers require businesses that collect or maintain consumer information to adopt information security programs, notify individuals, and in some jurisdictions, regulatory authorities, of security breaches involving personally identifiable information. Those laws may require free credit monitoring services to be provided to individuals affected by security breaches. While we believe we have appropriate information security policies and systems to prevent unauthorized disclosure, there can be no assurance that unauthorized disclosure, either through the actions of third parties or employees, will not occur. Unauthorized disclosure could adversely affect our reputation, result in a loss of business and expose us to material claims for damages.
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We rely on the efficient and uninterrupted operation of complex information technology systems. All information technology systems are potentially vulnerable to damage or interruption from a variety of sources, including through the actions of third parties. Due to our reliance on information technology systems, including ours and those of our customers and third party service providers, their damage or interruption could severely disrupt our operations, which could have a material adverse effect on our business, business prospects and results of operations.
In response to the COVID-19 pandemic, the Company activated its business continuity program by transitioning to a remote worker virtual workforce model with certain essential activities supported by limited staff in controlled office environments. While we continue to maintain our full operations, the virtual workforce model may be more vulnerable to security breaches, damage or disruption.
In addition, we are in the process of upgrading certain of our information systems that have been in place for a number of years and continue to deploy and enhance our risk-based pricing system. The implementation of these technological improvements, as well as their integration with customer and third party systems when applicable, is complex, expensive and time consuming. If we fail to timely and successfully implement and integrate the new technology systems, or if the systems do not operate as expected, it could have an adverse impact on our business, business prospects and results of operations.
Pandemics, hurricanes and other natural disasters may impact our incurred losses, the amount and timing of paid claims, our inventory of notices of default and our Minimum Required Assets under PMIERs.
Pandemics and other natural disasters, such as hurricanes, tornadoes, earthquakes, wildfires and floods, or other events related to changing climatic conditions, could trigger an economic downturn in the affected areas, which could result in a decline in our business and an increased claim rate on policies in those areas. Natural disasters, rising sea levels and increased cost of flood insurance could lead to a decrease in home prices in the affected areas, or in areas with similar risks, which could result in an increase in claim severity on policies in those areas. If we were to attempt to limit our new insurance written in disaster-prone areas, lenders may be unwilling to procure insurance from us anywhere.
Pandemics and other natural disasters could also lead to increased reinsurance rates or reduced availability of reinsurance. This may cause us to retain more risk than we otherwise would retain and could negatively affect our compliance with the financial requirements of the PMIERs.
The PMIERs require us to maintain significantly more "Minimum Required Assets" for delinquent loans than for performing loans; however, the increase in Minimum Required Assets is not as great for certain delinquent loans in areas that the Federal Emergency Management Agency has declared major disaster areas. An increase in delinquency notices resulting from a pandemic, such as the COVID-19 pandemic, or other natural disaster may result in an increase in "Minimum Required Assets" and a decrease in the level of our excess "Available Assets" which is discussed in our risk factor titled "We may not continue to meet
the GSEs’ private mortgage insurer eligibility requirements and our returns may decrease if we are required to maintain more capital in order to maintain our eligibility."
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Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides information about purchases of MGIC Investment Corporation common stock by us during the three months ended March 31, 2020.

Share repurchases
Period Beginning |  | Period Ending |  | Total number of shares purchased |  | Average price paid per share |  | Total number of shares purchased as part of publicly announced plans or programs |  | Approximate dollar value of shares that may yet be purchased under the programs (1)
January 1, 2020 |  | January 1, 2020 |  | — |  |  | $ | — |  |  | — |  |  | $ | 410,815,326 |
February 1, 2020 |  | February 29, 2020 |  | 5,849,932 |  |  | $ | 13.28 |  |  | 5,849,932 |  |  | $ | 333,132,019 |
March 1, 2020 |  | March 31, 2020 |  | 3,762,014 |  |  | $ | 11.25 |  |  | 3,762,014 |  |  | $ | 290,818,024 |
|  |  |  | 9,611,946 |  |  | $ | 12.47 |  |  | 9,611,946 |  |  |

(1) | On January 28, 2020, our Board of Directors authorized a share repurchase program under which we may repurchase up to an additional $300 million of our common stock through the end of 2021. Repurchases may be made from time to time on the open market (including through 10b5-1 plans) or through privately negotiated transactions. The repurchase program may be suspended for periods or discontinued at any time.

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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.
(Part II, Item 6)
Index to exhibits

Exhibit Number |  | Description of Exhibit | Form | Exhibit(s) | Filing Date
3.2 |  | Amended and Restated Bylaws, as amended. | 8-K | 3.2 | March 25, 2020
4.2 |  | Amended and Restated Bylaws, as amended (included as Exhibit 3.2) | 8-K | 3.2 | March 25, 2020
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, 2019, as supplemented by Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, and through updating of various statistical and other information † |  |  |
99.28 |  | Mortgage Guaranty Insurance Corporation’s “Flow” Master Insurance Policy for loans with a mortgage insurance application date on or after March 1, 2020 † |  |  |
99.29 |  | State Variations Endorsement (for other than Maine and Puerto Rico) to Mortgage Guaranty Insurance Corporation’s “Flow” Master Insurance Policy for loans with a mortgage insurance application date on or after March 1, 2020 † |  |  |
101.INS |  | Inline XBRL Instance Document |  |  |
101.SCH |  | Inline XBRL Taxonomy Extension Schema Document |  |  |
101.CAL |  | Inline XBRL Taxonomy Extension Calculation Linkbase Document |  |  |
101.DEF |  | Inline XBRL Taxonomy Extension Definition Linkbase Document |  |  |
101.LAB |  | Inline XBRL Taxonomy Extension Label Linkbase Document |  |  |
101.PRE |  | Inline XBRL Taxonomy Extension Presentation Linkbase Document |  |  |
104 |  | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |  |  |

* Denotes a management contract or compensatory plan.
† Filed herewith.
†† Furnished herewith.
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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 7, 2020.

| MGIC INVESTMENT CORPORATION
| /s/ Nathaniel H. Colson
| Nathaniel H. Colson
| 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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